Thursday, July 1, 2010

July 1 2010: The End of the Age of Credit


Dorothea Lange On The Road September 1939
On the road with her family one month from South Dakota. Tulelake, Siskiyou County, California


Ilargi: The picture becomes increasingly clearer as Washington lifts its veil. A financial overhaul that was supposed to be a momentous effort has finally been voted in, only to reveal that none of the Wall Street banks will be effectively affected until 2022, which is the sort of number that you can read as meaning: "never". At the same time, Capitol Hill has thrown out a proposal to provide emergency support for millions of Americans who remain unemployed for more than 26 weeks, while those who haven't found a job for 99 weeks or more are in the indefinite doghouse.

It truly is a matter of bail the banks and screw the people. What remains to be seen is how those people will react. All the more so when they find out that those same Wall Street banks will soon come calling again for more bailouts, which is now inevitable and guaranteed to happen. Our fine leaders may try to find a creative way to do it, one that won't attract too much attention, but you can bet there’ll be more taxpayer money flowing to Lower Manhattan, while for "ordinary" citizens services will be cut, taxes raised, and jobs disappeared.

Nor is this an exclusively American phenomenon. European countries face the same fate, even though it's not as easy over there as a Republican filibuster to condemn citizens to abject poverty.

The options are dead(ly) simple. We will find out over the next few months that our banks are screamingly underfunded, and that not bailing them out will lead to bank runs and panics. How bad the situation already is becomes obvious through for instance Reuters' James Saft, who writes that in the next three years,
Global banks face $5 trillion rollover
Banks around the world must refinance more than $5 trillion of debts in the coming three years[..]

For banks in the UK, according to the Bank of England Financial Stability Report, the refinancings amount to about $1.2 trillion by the end of 2012. If banks in Britain raise funds at the same pace they have been this year, they will only collect half of their needs in time. [..]

U.S. banks have issued $230 billion of debts in the first five months of the year, about 60 percent of the rate they need to achieve over the three year period. Euro zone banks have issued $133 billion, or about 70 percent of their needed run rate. One easy to see consequence is that, all things being equal, the cost for banks to issue debt should rise, as should competition among banks for consumer deposits. [..]

The track record of the past three years tells us one thing is likely: the banks will get their money, courtesy of government support if needed. Unless there is a profound sovereign debt crisis, we can count on governments taking the needed steps to see that the banking system does not fall over for lack of funding. So, if liquidity or support schemes need to be extended or invented anew, they will be.[..]

The BOE used an assumption that for every 7 basis points of additional lending spread charged by banks should create a 0.1 percent permanent reduction of GDP. On their estimates upping capital in banking by one percent then equates to present value cost of about 4.0 percent of UK GDP. This puts into perspective not just how challenging it will be to create growth going forward, but just how artificially growth during the boom was goosed by very loose and easy lending.

For the UK and for Europe, this will be happening at the same time that fiscal austerity programmes will be dampening growth. Something has to give, and it will probably be monetary policy. Look for extraordinarily low rates for a very long time, and for new and bigger quantitative easing programmes.


Ilargi: In short: banks have enormous funding problems, and even if they can sell debt, they’ll have to pay a lot more to do so, in the same marketplace that's already drowning in sovereign and municipal debt. The ultimate consequence is going to be that not only will your wages, pensions, health care and other services fade and slowly vanish, what's left of your wealth will increasingly be confiscated and handed to a bunch of rich gamblers with political clout.

The BBC’s Robert Peston chimes in:
The risks of forcing banks off welfare
There are always moments of anxiety when benefit claimants are weaned off their welfare support. One such is today, as eurozone banks face up to the refusal of the European Central Bank to roll over €442 billion of exceptional one-year loans provided to them by the central bank.

Eurozone banks are hooked on credit provided by - in effect - the public sector. And are fearful of having to fend for themselves. To be clear, the ECB is not exactly throwing them on to the streets with its decision to demand repayment tomorrow of that €442 billion: it is today offering banks as much three-month money as they want. Which may seem bizarre, in that inevitably the ECB will tomorrow be repaid in part with funds it is providing today.[..]

For Spanish banks - and also for Greek and Portuguese ones - that real world looks scary right now. Spain's banks are finding it tough to tap commercial sources of wholesale finance, because of growing fears about potential losses stemming from the weakness of its property sector. And more-or-less the whole eurozone banking sector - including big German and French banks - is under the dark shadow cast by their huge holdings of eurozone government bonds, because of deep-seated fears that Greece and perhaps other overstretched eurozone states will eventually default on their sizeable debts.

But it would be quite wrong to see the welfare dependency of banks as a purely eurozone phenomenon. You'll recall that at the peak of the financial crisis in late 2008, public-sector support for the worlds' banks - in the form of loans, guarantees, insurance and investment - was equivalent to a quarter of everything the world produces, or more than $12 trillion. In the UK, support reached a maximum of around £1.3 trillion, almost 100% of GDP. These weren't just a few handouts. This was the biggest co-ordinated financial rescue operation the world had ever seen.

But to avoid a permanent fusing of the balance sheets of banks and the balance sheets of sovereign states, all that emergency financial support has to be unwound. In the UK, for example, UK banks face a deadline of the end of 2012 to repay £165 billion of high-quality liquid assets supplied to them by the Bank of England under the Special Liquidity Scheme. And over the same timescale, British banks will have to find £120 billion to pay back debt that has been guaranteed by the Treasury under the Credit Guarantee Scheme (there is an option to roll over a third of these government guarantees to 2014).

Now as bad luck would have it, this schedule for repaying the Bank of England and the Treasury coincides with a spike in repayments on other substantial debts of British banks, in the form of bonds and residential mortgage-backed securities. What this means, according to the Bank of England, is that banks need to refinance or replace up to £800 billion of term funding and liquid assets over the coming 30 months.

Here's the troubling news: what's required is 66% more debt issuance per month on average by banks than actually took place during the boom years of 2001-7. And banks are currently issuing (selling) less than half the debt that's needed. Now if you think there's safety in numbers, you might be reassured that French, German and Italian banks also face substantial increases in debts falling due for repayment.

And wherever you look in the rich West, from the US to the eurozone, banks are currently borrowing substantially less on debt markets than they require simply to replace their maturing debts. It has all the hallmarks of a second credit crunch.

Ilargi: Now that last line is of course grossly misleading: the first credit crunch simply never stopped. It's an ongoing process. And "..the biggest co-ordinated financial rescue operation the world had ever seen", the one that hid reality for a while, has now spectacularly failed. It’ll be interesting to see how various countries and their citizens react to the upcoming new rounds of cuts on the one hand and bailouts on the other, interesting but in all likelihood not particularly pleasant.

The banks have two additional Achilles heels that everyone conveniently fails to address these days.

First, as stock markets continue their way on the downward slope, financial institutions will see their shares tumble to precarious levels, which will bring along a whole new set of negative issues.

Second, they all still have huge amounts of ever more worthless paper on their books and balance sheets, much of it at face value while its real worth is pennies on the dollar. The term "toxic assets" will return with a vengeance, since you can't mark to fantasy forever. The resistance to mark to market valuations has thus far been defended with the magical everlasting growth line of "reasoning" (and the paper will be valuable again), but one day we will truly need to realize that it is but a mirage. The bond markets will make sure we do.

And don't be surprised if in the meantime these markets will suffer a complete breakdown. If every country, city and company needs to sell more debt in order to survive, there must inevitably come a point when there are no buyers. Prior to that, though, there'll first be sharp increases in interest rates on the debt, and volunteering to pay those rates appears utterly futile when you realize that for instance in the US, every dollar of additional debt only returns a few pennies.

A fine messy web we weave. Welcome to the end of the age of credit. This baby's going to hurt.









Global banks face $5 trillion rollover
by James Saft - Reuters

Banks around the world must refinance more than $5 trillion of debts in the coming three years, a massive rollover that poses threats to financial stability and growth. The need to replace these debts, which are medium and long term, will place pressure on bank profit spreads and in turn may either prompt deleveraging, where banks sell assets that they can no longer economically finance, or simply lead to a bout of credit rationing, where borrowers must pay more to borrow, thus crimping investment and economic growth.

For banks in the UK, according to the Bank of England Financial Stability Report, the refinancings amount to about $1.2 trillion by the end of 2012. If banks in Britain raise funds at the same pace they have been this year, they will only collect half of their needs in time. This is even before the fact that the banks need desperately to turn some of their riskier short-term funding into more reliable funding with a longer maturity.

"If funding costs increase dramatically, which is perfectly possible in what could be pretty febrile market conditions, that will hit profitability (and the banks ability to raise capital organically) until they are able to re-price loans and facilities," according to Richard Barwell, an economist at the Royal Bank of Scotland in London. "And to the extent that banks are unwilling or unable to roll over funds that would trigger forced deleveraging. Both outcomes imply a sharp contraction in credit conditions for those within and outside financial markets, putting considerable downward pressure on activity and asset prices."

Banks outside of Britain are perhaps doing marginally better in meeting their needs, but still face an uphill struggle. U.S. banks have issued $230 billion of debts in the first five months of the year, about 60 percent of the rate they need to achieve over the three year period. Euro zone banks have issued $133 billion, or about 70 percent of their needed run rate. One easy to see consequence is that, all things being equal, the cost for banks to issue debt should rise, as should competition among banks for consumer deposits. It is possible that a global desire to save more helps to blunt this effect, but even so the macroeconomic effect and the effect on asset prices will both be strongly downward.

Banks Will Have Their Funds
The track record of the past three years tells us one thing is likely: the banks will get their money, courtesy of government support if needed. Unless there is a profound sovereign debt crisis, we can count on governments taking the needed steps to see that the banking system does not fall over for lack of funding. So, if liquidity or support schemes need to be extended or invented anew, they will be. But a banking system that has not fallen over, while a precondition for strong economic growth, is not in and of it self sufficient to cause strong economic growth. Expensive funding and a rising term premium will stunt growth and they will impose a haircut on risk asset prices.

Viewed another way, however, higher funding costs for banks is really nothing other than the market demanding a different capital structure from banks. It is not simply that a lot of money needs raising all at the same time, but rather that the people who have in the past supplied the money have a new appreciation of the risks in lending to banks, or should that simply be of the risks of lending. The Financial Stability Report also looks at the costs and benefits of higher amounts of capital in banking. The benefits are straightforward: a reduced chance of systemic crises. Costs are thornier, but also quite high.

The BOE used an assumption that for every 7 basis points of additional lending spread charged by banks should create a 0.1 percent permanent reduction of GDP. On their estimates upping capital in banking by one percent then equates to present value cost of about 4.0 percent of UK GDP. This puts into perspective not just how challenging it will be to create growth going forward, but just how artificially growth during the boom was goosed by very loose and easy lending.

For the UK and for Europe, this will be happening at the same time that fiscal austerity programmes will be dampening growth. Something has to give, and it will probably be monetary policy. Look for extraordinarily low rates for a very long time, and for new and bigger quantitative easing programmes.




The risks of forcing banks off welfare
by Robert Peston - BBC

There are always moments of anxiety when benefit claimants are weaned off their welfare support. One such is today, as eurozone banks face up to the refusal of the European Central Bank to roll over €442 billion of exceptional one-year loans provided to them by the central bank.

Eurozone banks are hooked on credit provided by - in effect - the public sector. And are fearful of having to fend for themselves. To be clear, the ECB is not exactly throwing them on to the streets with its decision to demand repayment tomorrow of that €442 billion: it is today offering banks as much three-month money as they want. Which may seem bizarre, in that inevitably the ECB will tomorrow be repaid in part with funds it is providing today.

But central bankers take the view that the rehabilitation of banks requires that they become less dependent on longer term loans provided by the authorities. See it as the equivalent of moving the long-term unemployed off disability payments and on to a jobseeker's allowance: it's a message to the banks that they have to start to prepare for life back in the real world, where all but their short-term unexpected liquidity needs must come from depositors, wholesale creditors and investors.

For Spanish banks - and also for Greek and Portuguese ones - that real world looks scary right now. Spain's banks are finding it tough to tap commercial sources of wholesale finance, because of growing fears about potential losses stemming from the weakness of its property sector. And more-or-less the whole eurozone banking sector - including big German and French banks - is under the dark shadow cast by their huge holdings of eurozone government bonds, because of deep-seated fears that Greece and perhaps other overstretched eurozone states will eventually default on their sizeable debts.

But it would be quite wrong to see the welfare dependency of banks as a purely eurozone phenomenon. You'll recall that at the peak of the financial crisis in late 2008, public-sector support for the worlds' banks - in the form of loans, guarantees, insurance and investment - was equivalent to a quarter of everything the world produces, or more than $12trillion. In the UK, support reached a maximum of around £1.3trillion, almost 100% of GDP. These weren't just a few handouts. This was the biggest co-ordinated financial rescue operation the world had ever seen.

But to avoid a permanent fusing of the balance sheets of banks and the balance sheets of sovereign states, all that emergency financial support has to be unwound. In the UK, for example, UK banks face a deadline of the end of 2012 to repay £165bn of high-quality liquid assets supplied to them by the Bank of England under the Special Liquidity Scheme. And over the same timescale, British banks will have to find £120bn to pay back debt that has been guaranteed by the Treasury under the Credit Guarantee Scheme (there is an option to roll over a third of these government guarantees to 2014).

Now as bad luck would have it, this schedule for repaying the Bank of England and the Treasury coincides with a spike in repayments on other substantial debts of British banks, in the form of bonds and residential mortgage-backed securities. What this means, according to the Bank of England, is that banks need to refinance or replace up to £800bn of term funding and liquid assets over the coming 30 months. The Bank of England estimates that simply to replace this finance, British banks need to sell about £25bn of new bonds and asset-backed securities every month.

Here's the troubling news: what's required is 66% more debt issuance per month on average by banks than actually took place during the boom years of 2001-7. And banks are currently issuing (selling) less than half the debt that's needed. Now if you think there's safety in numbers, you might be reassured that French, German and Italian banks also face substantial increases in debts falling due for repayment.

And wherever you look in the rich West, from the US to the eurozone, banks are currently borrowing substantially less on debt markets than they require simply to replace their maturing debts. It has all the hallmarks of a second credit crunch. Not a short sharp financial crisis in this case (although that can't be ruled out as a possibility), but a squeeze on the funding available to banks that - barring a miracle - will also squeeze the volume of credit they're able to make available to households and businesses, or to all of us. As I said, coming off welfare is always painful. And as and when the banks feel pain, we're going to feel it too.

Update, 12:40: Eurozone banks have borrowed 131.9bn euros of three-month money from the ECB, which is about a third less than analysts were predicting. It certainly implies that strains in the wholesale funding market are less acute than some feared, and that fewer banks than it was thought are being deprived of finance from commercial sources. That said, 131.9bn euros is a non-trivial sum of money.

And with the market rate for bank-to-bank money on average 25 basis points - or 0.25% - cheaper than ECB money, it would be foolish to argue that eurozone banks are in tip-top condition: no bank would choose to borrow from the ECB, given the financial and reputational cost of doing so, unless it had to do so. Eurozone banks are still on welfare support.




Bank fragility means recovery remains precarious
by John Plender - Financial Times

After the Group of 20 meeting in Toronto and the passage of the US Financial Reform Bill, global economic recovery ought by rights to be in the bag. Yet the reality is otherwise. Like the fabled plane in the second world war, the global economy is limping along on a wing and a prayer, not least because the world’s debtor and creditor countries cannot agree on the way out of the present bind. In the meantime the financial system remains perilously fragile. 

The onset of the Greek sovereign debt drama and the renewed funding difficulties of European banks has taken the crisis into new and challenging territory where, to change the metaphor, there is precious little left in the policymakers’ locker. As the newly published annual report from the Bank for International Settlements points out, Greece highlights the possibility that heavily indebted governments may not be able to act as buyers of last resort to save banks in a new crisis. If the debt of the government itself becomes unmarketable, the BIS adds, any future bail-out of the banking system would have to rely on external help. Yet where will the help come from?

Surely not from Germany, where taxpayer patience has already been exhausted after the €750bn ($914bn) "shock and awe" package for southern Europe. Whatever becomes of Angela Merkel’s troubled coalition, it is a safe bet that German policymakers will show little appetite for further public sector stimulus. Since those same policymakers seem to think they can export their way out of trouble while simultaneously demanding that their trading partners don a fiscal hair shirt, the prognosis for the eurozone looks dismal. The financial orthodoxy of the 1930s is back with a vengeance. The picture of the banking system painted by the BIS is also disturbing. While banks have returned to profit and strengthened their capital ratios, new capital injected into banks has not quite matched losses revealed during the crisis.

The profits are overly dependent on poor quality revenue from fixed income and currency trading, while in Europe there are doubts whether all crisis-related losses have been recognised. Meanwhile, the default risk on sovereign debt is not confined to Greece. The European banking system would need more capital even if there were no uplift in the regulatory capital requirements in prospect from the impending Basel III regime. Yet too many investors, from sovereign wealth funds to conventional institutions, have burned their fingers advancing fresh capital to banks to be willing to put up more for such shaky prospects. Nor will fiscally stretched governments rush to pump more money into the political equivalent of a leper colony.

It is an unfortunate fact that the global economy remains hostage to the bankers. A variety of worthy reforms are now in place in the US and Europe, not all of them relevant to the causes of the crisis, not all of them tried and tested. And policymakers have conspicuously failed to take the measure of the big issue that matters: banks that are too important to fail, in a market that has become even more concentrated because of shotgun marriages and bail-outs. The new regulatory framework will probably place disproportionate reliance on tougher capital ratios to address this, though there remains a big question mark over how tough and over what period tougher ratios will come in. The lobbying power of the banks will continue to be deployed to dilute the whole re-regulatory agenda. 

So where does this leave us? In the middle of an unprecedented and unnerving global experiment is the short answer. The reluctance of the world’s largest current account surplus countries to rebalance their economies towards consumption means that the deficit countries cannot put their balance sheets in order without subtracting from global demand. The split on fiscal management within the G20 between the US and the rest suggests the US may continue to impart some stimulus to the world economy, but at the cost of continuing global imbalance and potential currency turmoil.

The dollar’s role as the pre-eminent reserve currency is not at issue. Yet as Francis Warnock points out in a paper for the Council On Foreign Relations, the US now confronts a dilemma first identified in 1961 by the Belgian economist Robert Triffin.* To supply the world’s risk-free asset, the country at the heart of the international monetary system has to run a current account deficit. In doing so, it becomes more indebted to foreigners until the risk-free asset ceases to be risk-free. The end-game to Triffin’s paradox is a global wholesale dumping of US Treasuries.

The tipping point is inherently impossible to forecast. Given the lack of alternatives to the dollar, as I argued here two weeks ago, it is probably some way off. It is nonetheless surprising, given the high-wire nature of this global experiment, that investors’ risk appetite in general remains relatively robust.




US banks off the hook until 2022
by Andrew Clark - Guardian

It was billed by Barack Obama as the toughest crackdown on Wall Street since the great depression. But top US banks could be given until 2022 to comply with the so-called Volcker rule, which is supposed to restrict financial institutions' risker trading activities. A string of delays and extension periods written into a final version of Congress's financial regulation reform bill means that firms such as Citigroup and Goldman Sachs could exploit loopholes until 2022 before withdrawing from "illiquid" funds such as private equity. The long gestation period is an example of the degree of compromise inserted into the package following months of lobbying on Capitol Hill by powerful banks.

"You can't just say 'stop', you can't just say 'unwind,'" said Lawrence Kaplan, a lawyer at Paul, Hastings, Janofsky & Walker in Washington, who said the delay was a dose of political reality. "These things have contracts and detailed legal frameworks. You can't undo them without doing considerable harm." The Volcker rule, championed by formed Federal Reserve boss Paul Volcker, stops banks from engaging in "proprietary trading" whereby they trade with their own capital, rather than clients' money. It also severely restricts their investments in high-risk hedge funds and private equity ventures.

Language in the act, according to Bloomberg News, allows for a six-month study and a further nine months of rule-making. The measure is supposed to become effective 12 months after the final rule is laid, then banks have two years to conform. But if they need to, they can apply for a three-year extension. On top of that, a five-year moratorium is available for "illiquid" funds that are hard to unwind. Complicated caveats in the bill are subject to interpretation. A spokesman for Jeff Merkley, a Democrat who proposed various changes to the rule, told Bloomberg that the maximum delay was supposed to be nine years.

Other measures in Obama's reforms include the creation of a consumer protection agency, the introduction of a vote by shareholders' on boardroom pay and new powers for authorities to seize troubled financial institutions. For Wall Street, the Volcker rule and curbs on derivatives trading are the most contentious changes. In a research note, analyst Jason Goldberg of Barclays Capital said JP Morgan, Bank of America and Citigroup would be most affected by a ban on proprietary trading. Taken together with the rest of the regulatory reform bill, Goldberg estimated that Obama's crackdown could cut earnings at 26 leading banks by 14% in 2013, eliminating nearly $18bn of profit.




Preparing for Next Big One
by Andrew Ross Sorkin - New York Times

The next Great Crash is coming. Guaranteed. Maybe not today and maybe not tomorrow. But, in all likelihood, sooner than we think. How can I be so sure? Because the history of modern markets is a story of meltdowns. The stock market crashed in 1987, the bond market in 1994. Mexico tanked in 1994, East Asia in 1997. Long-Term Capital Management blew up in 1998, Russia that same year. Dot-coms dot-bombed in 2000. In 2007 — well, you know the rest. And that was just the last 20 years or so. The stagflation of the 1970s, the Depression of the 1930s, the panics in the 1900s ... and back and back and back it goes, all the way to the Dutch and their tulip bulbs. 

In those giddy years before the Great Recession, it seemed as if we had grown accustomed to the wild ride. Wall Street certainly had. Jamie Dimon, the chairman and chief executive of JPMorgan Chase and Company, likes to say that when his daughter came home from school one day and asked what a financial crisis was, he told her: ‘It’s the kind of thing that happens every five to seven years.’ " No one should be surprised, Mr. Dimon insists, that booms go bust. That’s the way markets work. Most Americans probably find that answer unsatisfying, to put it politely. After all, millions have lost their homes, their jobs, their savings. But now here comes the Dodd-Frank Act, which is supposed to ensure that we never repeat that 2008 finale of Wall Street Gone Wild.

The bill, if signed into law, might help us avoid another sorry episode like that. But one thing it won’t do is prevent another crisis — if only because the next one probably won’t be like the last one. So amid all the back-and-forth over this bill, keep in mind one of the most important aspects of the act: it would give Washington policy makers a powerful tool to mitigate the next too-big-to-fail blowup, however that blowup manifests itself. For the first time, Washington would have what is known as resolution authority, that is, the power to wind down a giant financial institution that runs into trouble. If policy makers had had that power during the tumultuous autumn of 2008, they might have averted the catastrophic failure of Lehman Brothers.

They might have placed the teetering American International Group into conservatorship. And they might have taken over Bank of America andCitigroup, and possibly even Goldman Sachs and Morgan Stanley. Senior management would have been tossed out. "We will have a financial crisis again — it’s just a question of the frequency," said the economist Kenneth Rogoff, who, with Carmen M. Reinhart, wrote a terrific book titled "This Time Is Different: Eight Centuries of Financial Folly." The title says it all. We’ve been through this before and will go through it again. While Dodd-Frank might avert another crisis in the short term, Mr. Rogoff says the legislation itself is less important than how regulators act on it — and keep acting on it over the years. Before World War II, "banking crises were epidemic," Mr. Rogoff said.

Then things settled down because "regulation had become pretty draconian" and laws were actually enforced. But memories fade. "Having a deep financial crisis is the best vaccination for another right away," Mr. Rogoff said. Down the road, a lot will depend on the regulators. Ten or 15 years after a crisis, and sometimes a lot less, the watchdogs start to doze. Political winds change. Regulators loosen up. Many on Capitol Hill insist Dodd-Frank means the end of the "too big to fail" culture, period. Many on Wall Street insist it means the end of American finance. Bankers and their lobbyists argue that American businesses and consumers will ultimately suffer, since all these rules will end up throttling the vital flow of credit through the economy.

Neither side is entirely correct. Businesses in general, and Wall Street in particular, often overreach in search of profits. And regulators, however stringent the laws, often struggle to keep up. We haven’t found a way to legislate around that sober reality. Consider the 2002 Sarbanes-Oxley law, which sought to reform corporate America after the Enron and WorldCom scandals. The Supreme Court upheld the constitutionality of Sarbanes-Oxley on Monday. It is a strong law that sought to hold executives accountable for accounting shenanigans. Many business people screamed that the law was too strict. Few experts ever argued that the law was too lax. Have companies engaged in financial fraud since? You bet. After the Exxon Valdez oil spill in 1989, the government enacted the Oil Pollution Act. Did that legislate away oil spills? Of course not. 

Strong regulation is important. And Dodd-Frank goes a long way toward cracking down on some of the worst practices that led to this financial crisis. But my bet is that next time, the culprit won't be C.D.O.'s or swaps, or shady subprime mortgages. No, the culprit will be some other financial instruments something someone somewhere is probably dreaming up right now.In his memoir,Henry M. Paulson Jr., the former Treasurysecretary, recalled telling President George W. Bush in 2006 that it was impossible to spot a coming financial blowup."We can't predict when the next crisis will come," Mr. Paulson told the president. "But we need to be prepared." Dodd-Frank, whatever its pros and cons, helps prepare us for the next Big One — whatever that might be. But it won’t stop it.




Unemployment Extension Fails: Senate Rejects Jobless Benefits 58-38
by Arthur Delaney - Huffington Post

The Senate rejected Wednesday -- for the fourth time -- a bill that would have reauthorized extended benefits for the long-term unemployed, by a vote of 58 to 38. Democrats will not make another effort to break the Republican filibuster before adjourning for the July 4 recess. By the time lawmakers return to Washington, more than 2 million people who've been out of work for longer than six months will have missed checks they would have received if they'd been laid off closer to the beginning of the recession.

Only two Republicans, Sens. Olympia Snowe and Susan Collins of Maine, crossed the aisle to support the measure. That gave Democrats 59 of the 60 votes they needed to break the GOP filibuster, but without the late Sen. Robert Byrd (D-W.Va.), Nebraska Democrat Ben Nelson's nay vote was enough to kill the bill. (The final tally shows only 58 yea votes due to arcane rules of Senate procedure, which require Senate Majority Leader Harry Reid (D-Nev.) to vote against the bill in order to allow for another vote on it in the future.)

"We will vote on this measure again once there is a replacement named for the late Senator Byrd," Reid said in a statement after the vote. "In the meantime, I sincerely hope that Republicans will finally listen to the millions of unemployed Americans who need this assistance to support their families in these tough times. These Americans and millions more demand that Republicans stop filibustering support for unemployed workers." Already, more than 1.2 million people out of work for longer than six months have missed checks since federally-funded extended benefits lapsed at the beginning of June.

"Senators had a chance to put election year posturing aside and one too few rose to that challenge," said Judy Conti, a lobbyist for the National Employment Law Project. "It's a sad night, especially for the over one million workers and their families who will have little cause to celebrate this holiday weekend. It is a disgrace and an absolute slap in the face to basic human decency." During the past several weeks, in an effort to appease deficit hawks, Reid and Sen. Max Baucus (D-Mont.) trimmed a broader spending bill that included the benefits among a host of other domestic aid programs. They reduced the bill's 10-year deficit impact from $134 billion to $33 billion -- the cost of reauthorizing extended unemployment benefits through November -- but to no avail.

This week, Reid and Baucus pulled out the unemployment benefits as a $33-billion standalone bill, attaching an extension of the homebuyer tax credit, yet it wasn't enough of a sweetener to overcome the deficit demands of most Republicans and Ben Nelson. After the vote, the Senate unanimously consented to the extension of the tax credit, as Reid said would happen if the vote failed. Though there is some talk within their caucus of offsetting the cost of unemployment benefits to keep them from adding to the deficit, Democratic leaders refused to cave; they argued that because the cost of federally-funded extended benefits has never been offset, deficit neutrality shouldn't suddenly become a requirement for emergency aid.

Republicans offered alternative bills that would have paid for extended benefits with unused stimulus funds. "The only reason the unemployment extension hasn't passed is because our friends on the other side have refused to pass a bill that doesn't add to the debt," Senate Minority Leader Mitch McConnell (R-Ky.) said after the vote. Republicans and some Democrats are uneasy about the unprecedented duration of benefits made available to the unemployed by last year's stimulus bill and subsequent acts of Congress, which in some states reaches 99 weeks. Without those provisions, layoff victims are currently eligible for only 26 weeks of benefits in most states, while the average unemployment spell is 34 weeks.

Lurking beneath the deficit concerns for some members is the suspicion that the extended benefits discourage people from looking for work -- even though there are five people vying for every available job and a full third of the 15 million unemployed don't actually receive the benefits. If Congress eventually does reauthorize the aid, people eligible for extended benefits during the lapse will be paid retroactively. Failure to do so would be unprecedented: Since the 1950s extended federal benefits have never been allowed to expire with a national unemployment rate above 7.2 percent. The current rate stands at 9.7 percent. Reid vowed earlier on Wednesday that the Senate would try again. "We're not moving away from this issue," he said. "We'll be back to haunt [Republicans] for what they're doing to people who are in such desperate shape."




Middle class families face a triple whammy
by Edmund Conway - Telegraph

You don't usually expect radical neo-Marxism from the International Monetary Fund – the last great bastion of capitalism, spreading the gospel about the free market to the furthest reaches of the world. And yet, hidden away in an obscure IMF report a few years back is a short sentence that explains precisely the problems that Britain, and the rest of the Western world, have been sleepwalking towards for years.

The claim made by the IMF's Financial Stability Report in 2005, in a seemingly throwaway remark, was that households had become the financial system's "shock absorber of last resort". In other words, whereas in previous eras, much of the pain of recession and financial crisis was borne by businesses or governments, with families afforded some degree of protection by the pensions system or welfare state, it was now households who were far more likely to face the music.
 
At the time, the idea received little attention. But it has truly radical implications for economics and politics around the world. This is not merely about the financial crisis, but something more deep-seated: the way in which wealth is distributed around society. It is about the middle classes, and why they have become the biggest victims of all. The problem is that families face a threefold threat to their prosperity. The first issue – the one that the IMF was originally focusing on – is pensions. Not so long ago, households were lucky enough to receive gold-plated pensions that would guarantee a certain pay-out upon retirement. Most companies have closed their schemes after realising they are simply unaffordable. The public sector at last looks like following suit, if the BBC's decision this week to reduce the generosity of its pension plan is anything to go by.

This is, in the IMF's words, a "quantum leap". Suddenly households have gone from being able to rely on a constant stream of legally protected income from their employer to having to manage their own investments (as they technically do under the new breed of pensions). This would be fine if one could be assured that most people would have either the time or the inclination to understand these new responsibilities. But every piece of evidence – academic and anecdotal – suggests that they do not. The result is that the majority of households are heading blindly towards a future of relative poverty.

The second issue is that the welfare state has become unaffordable, and yet many of Britain's poorest families have become overly reliant on it. Here, too, there is to be a reckoning. Whereas Gordon Brown used his first Budget to save money by grabbing an annual £6 billion from pension funds (and the middle class), George Osborne used last month's emergency Budget for a similar-sized grab on the welfare class. Re-indexing tax credits against a lower measure of inflation will cost Britain's poorest families billions by the end of this parliament.

And it is not merely that the middle class and the poorest have found themselves squeezed so hard: it is that so much of the extra cash generated during the boom years (and even after them) has been actively funnelled towards the most wealthy. The median wage in the US, adjusted for inflation, has been stagnant for pretty much three decades. But the figures at the high end of the scale have soared; whereas in 1970 the average US chief executive made $25 for every dollar of their typical employee's salary, today the figure is more like $90.

Much of this disparity is down to globalisation. When the world is changing fast, those qualified to deal with the technology du jour (be it the steam engine or the internet) will earn more than their peers. But the fact remains that not only is inequality at the highest level since the Thirties, the pension and welfare systems set up then for the express purpose of levelling this divide are in an exponential decline, threatening to widen the gulf further.

Moreover, there is good reason to suspect, as Raghuram Rajan points out in his new book, Fault Lines, that policy-makers have only been able to persuade people to live with this manifestly unfair situation by pumping up ever bigger booms in the property and stock markets to give them the impression that they are actually making money. Now that the bubble has burst and debt is harder to procure, that illusion has evaporated.

All this before one even takes into account the third problem for households – that they are having to bear the costs of the clean-up for the financial crisis. The austerity budgets being imposed across Europe will mean that families are taxed more and receive less in the way of welfare and public services. Police numbers will be cut; university fees are likely to rise further. In other words, the cost of trying to live a stable, contented middle-class life will balloon.

So I have one simple question: when do the politicians intend to let the public know about the fate that awaits them? The longer they put it off, the nastier the reaction, the bigger the strikes and the greater the chance that governments will fall. Don't say you weren't warned.




Central banks warn of new crisis if exit left too late
by Sven Egenter and Ian Chua - Reuters

Governments must slash budget deficits decisively and central banks should not wait too long to raise borrowing costs as side effects from measures prescribed to tackle the global recession may create the next crisis, the Bank for International Settlements said. The global economy as well as financial markets were on the mend, though the recovery remained fragile in the advanced economies and in the euro zone the debt crisis put the recovery at risk, the BIS said in its annual report, published on Monday. Global leaders meeting in Toronto agreed to take different paths for shrinking budget deficits and making banking systems safer and Washington in particular has warned against cutting too fast. 

The head of the BIS said there was no time to waste. "We cannot wait for the resumption of strong growth to begin the process of policy correction," BIS general manager Jaime Caruana told the bank's annual general meeting. "In particular, delaying fiscal policy adjustment would only risk renewed financial volatility, market disruptions and funding stress." Caruana later told a news conference that recently announced fiscal consolidation in some countries together with the publication of bank stress tests in Europe and the support of the G20 for regulatory reforms were important steps forward. The BIS, which acts as a bank to central banks and a discussion platform for policymakers, said reforms of the financial system remained key to prevent further crises. 

Caruana said the benefit of making the financial system more resilient through tighter regulation outweighed any short-term growth losses. Top central bankers met at the BIS annual meeting June 26-28 in Basel, following the G20 summit where leaders acknowledged the uneven and fragile economic recovery in many countries. In a reversal from the unity of the past three crisis-era Group of 20 summits, the leaders left room to move at their own pace and adopt "differentiated and tailored" policies. But the BIS warned powerful support measures had strong side effects and said their dangers were starting to emerge. "To put it bluntly, the combination of remaining vulnerabilities in the financial system and the side effects of such a long period of intensive care threaten to send the patient into relapse," the BIS report said.

Fine Line
The BIS said if the extraordinary measures were kept in place for too long, policymakers ran the risk of creating "zombie" banks or companies, dependent on direct support. But it acknowledged the tricky situation for policymakers as the stakes were high and the risks from capping lifelines too early loomed large. Central banks especially were walking a fine line. The banking system was still far from sound, as recent profits from fixed income and currency trading and the low interest rate environment were hard to repeat and not all crisis-related losses may have been booked. "But the longer that policy rates in the major advanced economies remain low, the larger will be the distortions they create, both domestically and internationally," the BIS said. 

Extremely low real or inflation-adjusted rates altered investment decisions, postponed the recognition of losses, increased risk-taking in the search for yield and encouraged high levels of borrowing, the BIS said. In addition, central bankers may underestimate inflation risks as the crisis may have lowered potential growth rate.  Markets have pushed back expectations for rate increases in the United States and in the euro zone in the wake of the Greek debt crisis, and central bankers urged Europe to solve the crisis so as not to endanger uneven global recovery. 

Speaking to Reuters on Monday, Jassim Al-Mannai, director general of the Abu Dhabi-based Arab Monetary Fund, said banks and policymakers had to beware of fuelling bubbles. "We have to avoid, every economic authority, not to see bubbles. Our economic policy needs to be prudent, especially monetary and even fiscal policy," he said. Challenges for emerging economies were different as they were recovering strongly and inflation was picking up, the BIS said. "Some EMEs could rely more on exchange rate flexibility and on monetary policy tightening," the BIS said. The Greek debt crisis had highlighted that many governments had to consolidate their finances immediately as highly indebted countries would not be able to rescue banks as a buyer of last resort in another crisis.




Global markets on 'cliff edge' amid fears over European banks
by Jill Treanor and Nick Fletcher - Guardian

• Value of top 100 UK firms fell by £100bn in six days
• US consumer confidence lowest for seven months


Fears that government austerity packages will hinder global growth have combined with fresh anxiety about the health of European banks to hammer investor confidence. Shares on both sides of the Atlantic dropped heavily amid warnings that markets were on a "cliff edge". In jittery trading ahead of a crucial repayment by Europe's banks of a €442bn (£362bn) European Central Bank loan on Thursday the rates at which banks lend to each other in euros rose to their highest levels in eight months as rumours swirled that some banks were finding it difficult to raise funds in the money markets.

The FTSE 100 has now fallen 14% since its April peak after losing 157.46 points to close at 4914.22, a 3% decline on the day and its lowest level since September last year. French and German markets lost about 3%. Wall Street was down 235 points by the time London closed, about 100 points below the 10,000 level. Analysts will be looking tomorrowfor an indication of whether banks are becoming less reliant on their taxpayer lifeline when the ECB offers a way to refinance the €442bn one-year loan hours before the repayment is due. If banks ask for more than €300bn to repay their existing loans with the more expensive three-month money being provided by the ECB, then concerns about the health of the banking system will escalate, analysts said.

Spanish finance minister Elena Salgado added to anxiety about the loan repayment by urging the central bank to heed the problems facing some Spanish banks. "The ECB says it doesn't like governments to tell it what to do. I simply say I hope that on this occasion, as in others, the ECB will be aware of the needs of the Spanish financial system," she told Spanish radio. The publication of European-wide stress tests on major banks in a fortnight was also adding to the nerves while a bigger than expected fall in consumer confidence in the US prompted a debate about whether economies were heading for a double-dip recession. Oil prices fell 3% and the Baltic dry freight index, which measures demand, fell to its lowest level for nine months.

Robert Talbut, chief investment officer at Royal London Asset Management, said: "The European banks' funding issue is a real issue and it is coming to a head in part because the ECB is trying to withdraw some longer term facilities. A number of European banks, it is rumoured, are struggling to get funding in the wholesale markets and that is evoking memories of the dog days of 2008/9. Simultaneously it's unhelpful that [the economic] data is sending more mixed messages leading to more questions on the durability of the recovery".

Today's fall means that in the past six trading days the FTSE 100 has lost about 380 points, wiping almost £100bn off the value of Britain's top companies. Worries that European austerity measures would hamper recovery were augmented by signs that the Chinese economy – which economists hoped would take up some of the slack – was also cooling off while the fall in the widely followed confidence index in the US, to its worst level for seven months, comes ahead of important non-farm payroll figures on Friday – a gauge of the strength of the US jobs market. Investors were seeking safety as rates fell in the US bond market. The yield on the 10-year note dropped to 2.97%, the first time it has fallen below 3% since April 2009.

Analysts at Royal Bank of Scotland were urging clients to position themselves for a economic downturn. "We strongly believe that a cliff-edge may be around the corner, for the global banking system, particularly in Europe, and for the global economy, particularly in the US and Europe" said Andrew Roberts, head of European rates strategy at RBS. Nick Parsons, head of UK and European research at National Australia Bank, said the scene was being set for a "bout of great nervousness". "It is inconceivable that tests on 100 banks can be published with the conclusion that all one hundred are fundamentally robust unless the assumptions behind the tests are relaxed to the point of nonsensical," Parsons said.

Amid the market anxiety, the UK pulled off its largest ever offering of government debt through a syndicate prompting Robert Stheeman, chief executive of the Debt Management Office, to insist that the market for gilts remained attractive.




Warning signals of a double-dip recession flash brightly across the world
by by Ambrose Evans-Pritchard - Telegraph

Global bond markets are flashing warning signals of a sharp slowdown in growth across the world and a possible slide toward a double-dip recession and outright deflation. The yield on two-year US Treasuries has fallen to a record low of 0.61pc in a flight to safety, a level not seen during the depths of the Great Depression. Ten-year yields dropped below the psychologically sensitive level of 3pc to 2.96pc. Such levels are clearly incompatible with assumptions on Wall Street for 3pc growth in the second half of this year. "If the bond market is correct then this recovery could be dead in the water," said Jim Reid, credit strategist at Deutsche Bank. The credit markets tend to sniff out trouble first and have acted as an early warning alert at every stage of the financial crisis over the past three years.
 
Mr Reid said deflation has emerged as the dominant risk in the West and will force central banks to renew quantitative easing, the Americans "pre-emptively" and the Europeans "only when their backs are against the world". Triple tremors from the banking crisis in Spain, crumbling confidence in the US, and a setback in China’s leading economic indicator all combined with a vengeance on Tuesday. "The market in risky assets has capitulated ?today amid fears that the global recovery is petering out," said Gavan Nolan, head of credit at Markit.

Rumbling in the background are influential voices warning of a global slide into economic quagmire. Nobel Laureate Paul Krugman said premature tightening in much of the North Atlantic region at the same time would lead to disaster. "We are now, I fear, in the early stages of a third depression, primarily a failure of policy. Both the United States and Europe are well on their way toward Japan-style deflationary traps. The Fed seems aware of these deflationary risks, but what it proposes to do is, well, nothing," he wrote.

China’s Shanghai composite index of equities fell 4pc on Tuesday and is now 55pc below its peak in late 2008. The authorities have been tightening this year to slow inflation and curb property speculation as home prices in Shanghai and Beijing reach 13 times incomes, but it is unclear whether they can engineer a soft-landing in an economy where state-owned banks have built up huge hidden debts. The Baltic Dry Index that measures freight rates for bulk goods – and watched as a proxy for the ups and downs of the Chinese economy – has dropped by 40pc over the past month.

In Europe, investors remain jittery as the European Central Bank prepares to shut its emergency facility of €442bn (£361bn) of one-year loans, the largest sum ever lent by a central bank. A report in the Financial Times that Spanish banks have been begging the ECB to extend the one-year scheme has heightened fears that they are totally shut out of the interbank markets. The shares of BBVA fell 7pc and Santander fell 7pc. The ECB is offering a three-month tender on Wednesday, which will indicate how many banks are under strain. Hans Redeker, curency chief at BNP Paribas, said this facility is unlikely to reassure the markets. "This just builds up a tidal wave of short-term funding needs that all need to be rolled over at the same time," he said.

The Spanish cajas or savings banks are clearly in trouble, relying on the ECB for 21pc of their funding. There were signs of an incipient run on Spanish banks on May 7, an episode described by ECB president Jean-Claude Trichet as perhaps the most serious crisis since the First World War. These pressures linger. The Spanish daily Expansion reports that the Bank of Spain has ordered inspectors to track capital flows abroad after the haemorrhage of €18bn in the first half of the year, mostly to accounts in Switzerland, Luxembourg and Ireland. "Foreign capital flight is under way. This can only make matters worse given the climate of insecurity and the country’s lack of credibility," said Borja Duran from Wealth Solutions in Madrid.

The latest twist is a rise in credit default swaps on Italian debt, which jumped 16 basis points to 203 yesterday. An auction of Italian bonds this week went badly, with low bid-to-cover ratios. The Bank of New York Mellon said its flow data had picked up a relentless flight from both Greek and Italian debt. It is clear evidence that the EU’s €750bn shield with the IMF for eurozone debtors has failed to restore the confidence of global investors, who fear that the EU’s austerity strategy risks setting off a self-defeating downward spiral. Spreads on Greek debt have jumped 350 basis points since the EU announced its plan in early May. Portuguese and Spanish yields have both jumped sharply despite direct action by the European Central Bank to force down yields. Private buyers are clearly dumping their holdings onto the ECB as fast they can.

Mr Redeker said Japanese life insurers and institutional investors are slashing their estimated $700bn holdings of European debt. The funds are being recycled into yen, which reached ¥107 against the euro yesterday, the strongest in nine years. The flight to safety in Tokyo depressed yields on Japanese 10-year bonds to 1.11pc. There are concerns in any case that Japan itself may be sliding back into deflationary deep freeze. Japan’s unemployment rose in May for the third straight month to 5.2pc. Industrial output fell slightly. Production of capital goods – a leading indicator – fell 4.4pc.

Italy has been largely immune to Europe’s bond crisis until now, thanks to high savings. None of its banks have required a rescue. However, fresh threats of secession by the Lega Nord and last week’s general strike over austerity measures have revived fears about the stability of the political system. Italy’s public debt is the third largest in the world after the US and Japan. Everybody knows that if the crisis ever reaches Rome, the game is up for monetary union.




EU agrees tough new bonus guidelines
by Nikki Tait and Brooke Masters

European Union lawmakers and member states backed the toughest restrictions on bankers bonuses seen so far on Wednesday, sowing confusion across an already jittery financial services sector. Under legislation expected to pass the European parliament next week, between 40 and 60 per cent of bonuses would have to be deferred for three to five years and half the upfront bonus would have to be paid in shares or in other securities linked to the bank’s performance.

As a result, the cash portion would be limited to between 20 per cent and 30 per cent, far tighter the limits currently used by most members of the 27-nation bloc. The agreement caught bankers and regulators by surprise and left them scrambling to figure out how the rules would work. The UK Financial Services Authority, which already has a remuneration code in place, said it was studying how the proposed directive would affect its practices.

Treasury officials in the UK said the proposal were in line with last weekend’s G20 communique and Basel agreements but that it was important that they were implemented "in a co-ordinated manner in all major financial centres". "These requirements will be implemented across Europe from next year after further detailed consultation," said one official.

National regulators will have some discretion in applying the rules to their own countries but the overall percentages appear to be fixed. Regulators would be able to impose financial or non-financial penalties on groups with risky remuneration policies. The legislation would also force banks to link bonuses more closely to salaries – with the aim of reducing the importance of such payments in the financial sector. Any banks bailed out by taxpayers must rebuild their capital first and repay those funds before focusing on employee pay.

On Wednesday, lawmakers and EU officials welcomed the agreement and said it should help to reduce the "bonus culture" in the banking sector. "This EU-wide law will... end incentives for excessive risk-taking," said Arlene McCarthy, the MEP steering the legislation through the European parliament. European Union internal market commissioner Michel Barnier described the new rules as "a step in the right direction".

Senior bankers contacted were reluctant to comment but said they believed the instruments would be difficult to design and warned that tough pay rules could drive business to Asia and the US, which have shunned strict limits on bonuses. Angela Knight, of the British Bankers’ Association, said politicians should realise most banks have already changed their pay practices and keep in mind that "this is an international and mobile business",




BIS plays with fire, demands double-barrelled monetary and fiscal tightening
by Ambrose Evans-Pritchard - Telegraph

The Bank for International Settlements has warned authorities across the developed world that they cannot rely on ultra-low interest rates to cushion the blow of austerity measures. Both fiscal and monetary policy may have to be tightened at the same time and before recovery is entrenched, a chilling possibility for asset markets. "Macroeconomic support has its limits," said the bank's annual report.

The Swiss-based "bank for central bankers" said ultra-low rates and massive fiscal stimulus saved the world from an economic meltdown during the credit crisis, but the balance of advantage has since shifted. "Such powerful measures have strong side-effects, and their dangers are becoming apparent. The time has come to ask how they can be phased out," it said. "There are limits to how long monetary policy can remain expansionary. Keeping interest rates near zero for too long, with abundant liquidity, leads to distortions and creates risks for financial stability. We cannot wait for the resumption of strong growth to begin the process of policy correction."

The clarion call for higher rates and an end to quantitative easing is controversial and pits the BIS against the International Monetary Fund in an epochal policy battle. If wrong, the BIS strategy risks pushing the global economy into depression. Dominique Strauss-Kahn, the IMF chief, warned against zealous self-flagellation at the G20 summit. "It could be a catastrophe if all the countries were tightening, it could totally destroy the recovery."

Gabriel Stein, of Lombard Street Research, said the BIS is playing with fire. "Fiscal and monetary tightening were tried in tandem in the early 1930s and it didn't work then. The BIS ought to know better," he said. The bank said the US and Europe made the fatal error of holding rates too low after the dotcom bust, fearing a slide towards deflation. The effect was to fuel asset bubbles and depress credit yields, pressuring lenders to chase risk. "Our recent experience with exactly these consequences a mere five years ago should make us extremely wary this time around," it said.

The BIS warned that central banks are luring banks into a fresh trap by shoring up lenders with cheap access to short-term funding, which is then used to buy long-dated bonds at higher yield – the so-called sovereign "carry trade". Some have already been caught out badly in Greek debt. "Financial institutions may underestimate the risk associated with this maturity exposure. They might face difficulty rolling over their short-term debt. An unexpected tightening of monetary policy might cause serious repercussions," it said.

The parallel with post dotcom errors is likely to rile critics. Housing markets and banks were robust at the time, whereas the damage now is deeply structural in the US, Britain and Europe. Yet the BIS has clearly concluded that it is better for indebted economies to take their punishment early rather than dragging out the ordeal as in Japan. On the spending side, the bank called for "immediate front-loaded fiscal consolidation" in key industrial states. "Public debt-to-GDP ratios are on unsustainable trajectories," rising from 76pc of GDP in 2007 to 100pc in 2011. The picture is worse than it looks since the crisis has "permanently" reduced output, and aging costs are soaring.

Yet fiscal austerity may be less of a drag on recovery than presumed. Denmark slashed its primary deficit by 13.4pc of GDP from 1983-1986, yet eked out growth of 3.9pc a year. Sweden grew by 3.7pc during its hair-shirt episode in the 1990s, Canada by 2.8pc, and Belgium by 2.3pc. These cases do not tell us what would happen if half the world tightens at the same time, feeding on each other. Even so, the BIS data challenges Keynesian claims about fiscal stimulus. State spending merely "crowds out" private activity. Besides, governments have no choice. They must retrench to appease the bond vigilantes in the new era of sovereign frailty. "A sudden loss in market confidence would be far worse," said the BIS.




Goldman admits it had bigger role in AIG deals
by Greg Gordon - McClatchy Newspapers

Reversing its oft-repeated position that it was acting only on behalf of its clients in its exotic dealings with the American International Group, Goldman Sachs now says that it also used its own money to make secret wagers against the U.S. housing market. A senior Goldman executive disclosed the "bilateral" wagers on subprime mortgages in an interview with McClatchy, marking the first time that the Wall Street titan has conceded that its dealings with troubled insurer AIG went far beyond acting as an "intermediary" responding to its clients' demands.

The official, who Goldman made available to McClatchy on the condition he remain anonymous, declined to reveal how much money Goldman reaped from its trades with AIG. However, the wagers were part of a package of deals that had a face value of $3 billion, and in a recent settlement, AIG agreed to pay Goldman between $1.5 billion and $2 billion. AIG's losses on those deals, for which Goldman is thought to have paid less than $10 million, were ultimately borne by taxpayers as part of the government's bailout of the insurer.

Goldman's proprietary trades with AIG in 2005 and 2006 are among those that many members of Congress sought unsuccessfully to ban during recent negotiations for tougher federal regulation of the financial industry. A McClatchy examination, including a review of public records and interviews with present and former Wall Street executives, casts doubt on several of Goldman's claims about its dealings with AIG, which at the time was the world's largest insurer.
For example:
  • The latest disclosure undercuts Goldman's repeated insistence during the past year that it acted merely on behalf of clients when it bought $20 billion in exotic insurance from AIG.
  • Although Goldman has steadfastly maintained that it had "no material exposure" to AIG if the insurer had gone bankrupt, in fact the firm could have lost money if the government hadn't allowed the insurer to pay $92 billion of American taxpayers' money to U.S. and European financial institutions whose risky business practices helped cause the global financial collapse.
  • Goldman took several aggressive steps — including demanding billions in cash collateral — against AIG that suggest to some experts that it had inside information about AIG's shaky financial condition and therefore an edge over its competitors. While former Bush administration officials said AIG was financially sound and merely faced a cash squeeze at the time of the bailout, McClatchy has reported that the insurer was swamped with massive liabilities and was a candidate for bankruptcy.

A spokesman for Goldman, Michael DuVally, said that the firm followed its "standard approach to risk management" in its dealings with AIG. "We had no special insight into AIG's financial condition but, as we do with all exposure, we acted prudently to protect our firm and its shareholders from the risk of a loss. Most right-thinking people would surely believe that this was an appropriate way for a bank to manage its affairs." He said that Goldman didn't have "direct economic exposure to AIG."

The relationship between Goldman and AIG has drawn intense scrutiny over the past year because several Goldman alumni held senior Treasury Department jobs when the Bush administration guaranteed as much as $182 billion to bail out AIG, $12.9 billion of which AIG paid to Goldman, the most money it paid any U.S. bank.

On Wednesday and Thursday, a congressional panel investigating the causes of the financial crisis plans to question current and former senior Goldman and AIG officials, including Joseph Cassano, the former head of the London-based AIG unit that covered $72 billion in bets against risky home mortgages — wagers that cost U.S. taxpayers tens of billions of dollars when the housing bubble burst. The proprietary trades at issue were carried out using private contracts known as credit-default swaps, essentially bets on the performance of designated securities and traded in murky, loosely regulated markets with little disclosure about who placed wagers, who won and who lost.

Documents emerging from the AIG bailout and a Senate investigation of Goldman's secret bets against the housing market while it sold off tens of billions of dollars in mortgage-backed securities — first reported by McClatchy in November — have provided a window into some of these dealings. Until now, however, Goldman has said that the insurance-like contracts it bought from AIG from 2004 to 2006 — deals that have cost the insurer some $15 billion — were made to offset similar swaps the investment bank had written for clients who wanted to bet on a housing downturn.

The companies have revealed few details of some $6 billion in so-called synthetic deals, in which the parties bet on the performance of designated securities that neither side purchased. A person familiar with the matter, who declined to be identified because of its sensitivity, said that additional synthetic swap contracts between AIG and Goldman with a face value of $3 billion have yet to be unwound by the teams of specialists tasked with scaling down AIG's more than $2 trillion in exotic risks.

The proprietary trades occurred in the same Abacus series of synthetic securities that Goldman bundled offshore, according to the senior Goldman official. Another one of those 16 deals prompted the government to sue Goldman on civil fraud charges in April. Goldman also has long asserted that it was holding $10 billion in collateral and "hedges" and thus had "no material exposure" in the event that the government had allowed AIG's parent to go bankrupt in the fall of 2008, rather rescuing it. The emerging details of Goldman's offshore dealings, however, also call that into question.

AIG doled out tens of billions of dollars of the bailout money to pay off mortgage-related swaps with U.S. and European financial institutions at their full face value, a decision made by the Federal Reserve Bank of New York that triggered a public furor. The bailout enabled major financial institutions to honor billions of dollars in swap bets that they'd made with each other, especially in offshore deals that were pegged to the performance of loans to homebuyers with shaky credit. DuVally declined to say how much money Goldman had at stake if the value of these securities sank further and the big banks couldn't make good on their bets amid frozen credit markets.

According to court documents and a person who's seen records of some of the offshore deals, investment banks Morgan Stanley and Merrill Lynch, as well as large European banks, wrote protection for Goldman on these deals totaling hundreds of millions of dollars. In addition, The New York Times reported earlier this year that Goldman cut a deal with the Societe Generale in which the French bank paid Goldman a portion of the $11 billion it collected from the AIG bailout.

DuVally denied that Societe Generale and Goldman had a deal regarding the French bank's payout from AIG, but he declined to say whether Goldman collected a large sum from the French bank. Because Goldman was holding $7.5 billion in collateral from AIG and had placed $2.5 billion in other hedges, DuVally said, it "did not have direct economic exposure to AIG" in the event that the insurer's parent had been left to bankruptcy. "That said, we have always acknowledged that if a failure of AIG had resulted in the collapse of the financial system, we would have suffered just like every other financial institution," he said. DuVally declined to say who selected the securities for Goldman's Abacus deals with AIG.

AIG's chief executive, Robert Benmosche, was asked at the company's recent annual meeting whether it would seek to sue any banks for loading swap deals with securities on junk mortgages likely to default. Benmosche said that the firm is reviewing "all activities from that period" and, "to the extent we find something wrong that harmed AIG inappropriately, our legal staff will take appropriate action."

It's unclear when Goldman first suspected that AIG was at risk of a colossal meltdown, but the storied investment bank moved more nimbly than any other financial institution to shield itself. As the home mortgage securities lost value over a 14-month period beginning in the summer of 2007, Goldman's huge swap portfolio gained value. Under the terms of the contracts, Goldman began in July 2007 to demand that AIG post billions of dollars in cash as collateral.

DuVally said that Goldman had no inside information about AIG's finances, and merely protected itself by enforcing contract language that required the insurer to post cash whenever the mortgage securities underlying the bets lost value. "Our direct knowledge of AIG's financial condition was limited to the company's public disclosures," DuVally said. However, some experts are skeptical of that, especially because Goldman responded to AIG's refusal to meet all its demands for $10 billion in collateral by placing $2.5 billion in hedges — most of them bets on an AIG bankruptcy.

Sylvain Raynes, an expert on structured securities of the types that AIG insured, said it's "implausible that Goldman can say 'I had no idea that AIG was in dire straits or in weak financial condition.'" Raynes, a co-author of the newly published book "Elements of Structured Finance" and a former Goldman employee, said that a standard clause in the swaps contracts left open to discussion whether the company writing protection must post collateral. The buyer of coverage typically could demand to see financial information, including the number of similar positions held, he said.

"If you see the (company) has entered into 150 credit-default swaps totaling $65 billion, and that all of them are the same type as your credit-default swaps, you know that they have taken huge amounts of risk and have very little capital to back that up," Raynes said. "Unless you really want to close your eyes, you have to know what their condition is. If you don't know, then you're not doing your job, and I have too much respect for Goldman to say they are not doing their job."

DuVally said, however, that Goldman wasn't told about other swaps that AIG had written and didn't have access to AIG's internal financial information. Goldman had served as an investment adviser for the insurer since as far back as 1987 and as recently as 2006, setting up offshore companies affiliated with AIG that served as loosely regulated reinsurers. AIG's insurance subsidiaries shined up their balance sheets by shifting hundreds of millions of dollars in liabilities to reinsurers, including some of those formed with Goldman's assistance.

Federal prosecutors and state regulators eventually nailed AIG for falsifying its financial statements and for using so-called "sidecar" companies to help Pittsburgh-based PNC Financial Corp. and an Indiana firm, Brightpoint Inc., hide liabilities. AIG paid more than $1.7 billion on to settle those and other charges in 2004 and 2006. Goldman wasn't implicated. For years, Goldman and AIG have shared the same auditor, PricewaterhouseCoopers, a firm that AIG retained even after the SEC in 2006 directed it to find "an independent auditor."

They're also represented by the same New York law firm, Sullivan & Cromwell, which boasted on its website of its "significant experience in offshore reinsurance matters." The firm's senior chairman, Rodgin Cohen, is known as one of Wall Street's most formidable attorneys.

In August 2008, weeks before the rescue, AIG's newly installed chief executive, Robert Willumstad, invited senior officials of several major banks, including Goldman, Deutsche Bank, Lehman Brothers and Credit Suisse, to a meeting to see whether there was any way to reduce the insurer's huge portfolio of mortgage-related swaps. Documents from Blackrock, a financial services firm that was assisting the Federal Reserve Bank of New York with the bailout, show that Goldman offered to negotiate a settlement on some of the swaps, but the two sides were too far apart on valuation of the securities to cut a deal.

DuVally said that Goldman offered only to settle for payment of its estimate of the market value of the swaps, which had appreciated sharply due to the securities' decline in value. To do so would have required AIG to book a massive loss. On Aug. 18, 2008, Goldman's equity research department delivered another blow to AIG, issuing a sharply negative report on the insurer and lowering its target price for AIG shares to $23 from $30. The Goldman report heightened concerns among credit ratings agencies about AIG's condition, Willumstad said in an interview.

By September 2008, AIG was besieged with a chorus of collateral demands from other banks and a threat from credit ratings agencies to downgrade the insurer, an action that triggered more collateral calls and prompted Treasury Secretary Henry Paulson, a former Goldman chief executive, and Federal Reserve Chairman Ben Bernanke to initiate a bailout to prevent a meltdown of the global financial markets.




Goldman can't say how much it made from housing crash
by Greg Gordon - McClatchy Newspapers

A congressional commission pressed Goldman Sachs executives Wednesday to spell out how much their company has earned from its exotic bets against the housing market, including $20 billion in wagers that helped force a $162 billion taxpayer bailout of the American International Group. However, Goldman's president and chief risk officer told members of the Financial Crisis Inquiry Commission that their company never breaks out its figures that way. "We can dig and dig and dig," Goldman President Gary Cohn said in sworn testimony. "We won't find that report."

Many of Goldman's trades with AIG offset protection it wrote for clients on mortgage securities, but McClatchy reported Tuesday that Goldman wagered its own money on some swaps purchased from AIG. A special Senate investigations panel disclosed in April that Goldman bet billions of dollars of its own money on a housing downturn. The panel, which opened two days of hearings into Goldman's dealings with AIG, has been seeking information since February on how much the Wall Street giant reaped from bets against the housing market. Overall, Goldman posted profits of $2.32 billion in 2008, despite the meltdown, and $13.4 billion in 2009. Earlier in June, commission leaders subpoenaed Goldman, accusing the Wall Street giant of deluging them with 2.5 billion documents.

The commission also heard Wednesday from the man who oversaw AIG's disastrous decision to insure nearly $80 billion in subprime mortgage securities. Joseph Cassano, who recently was cleared of criminal wrongdoing after lengthy FBI and Securities and Exchange Commission inquiries, emerged publicly for the first time since the economic meltdown and said that his ouster might have cost taxpayers tens of billions of dollars. Cassano contended that his departure as the head of London-based AIG Financial Products in March 2008 apparently left no one with the expertise to fend off Goldman's demands for billions of dollars in collateral — demands that helped put AIG into a cash squeeze.

"The taxpayers would have been served better," Cassano said, if the company's chief executive hadn't requested his resignation. Cassano said that he'd succeeded for months in paring Goldman's demands for cash and would have continued to assert the insurer's "rights and remedies" in private contracts, known as credit-default swaps, that effectively insured Goldman against losses on risky home mortgages. The commission, which faces a December deadline to deliver a comprehensive report to Congress on the causes of the nation's financial crisis, has intensified its focus on Goldman and AIG while examining the role of swaps in mushrooming the dimensions of the economic collapse.

The panel released internal AIG e-mails and other documents tracing Goldman's demands for collateral, which ballooned from $1.8 billion in July 2007 to $10 billion, which stunned AIG executives. The two firms haggled for more than a year over the value of underlying mortgage securities as credit markets froze and the market for the securities shrank and all but disappeared. Cohn said, however, that the parties' trading agreements stated "very specifically" that if there were declines in "fair value" on the insured securities, AIG would have to post cash collateral to make up for the loss. As the securities lost value, he said, eventually trades occurred and "we used those actual real-live trades as reference points."

Commission members, however, questioned Goldman's motives in pushing AIG. When then-Treasury Secretary Henry Paulson, a former Goldman chief executive, and other Bush administration officials committed as much as $182 billion for a taxpayer bailout, Goldman collected $12.9 billion, the most of any U.S. bank. In an e-mail on Sept. 11, 2007, an AIG official reported after speaking with a representative of the French bank Societe Generale that Goldman had shared its "marks," or estimated values of offshore mortgage securities, with SocGen.

At first, SocGen disputed Goldman's estimates, which were lower than those of most banks, but by November, it, too, was demanding collateral from AIG. Goldman's value estimates ultimately proved accurate as the housing market continued to slide. In pressing for more information from Goldman, Commission Chairman Phil Angelides told Cohn and Craig Broderick, the firm's chief risk officer: "It's pretty clear that you (Goldman) helped build the bomb. It's pretty clear that you built a bomb shelter. Now the question I want to get to is, did you light the fuse?"

The panel detailed one Goldman bet with AIG, dating to 2004, in which Goldman paid the insurer $2.1 million annually for $1.7 billion in insurance coverage on a so-called synthetic deal in which neither party actually bought any mortgage securities. In the deal, one of the first in a series known as Abacus, Goldman wound up collecting $806 million in a negotiated settlement with AIG, the commission said. Cohn likened Goldman's bet to buying a fire insurance policy on a home. Such deals, he said, are "leveraged on the probability your house is going to burn down."

Cassano defended AIG's swap-writing on mortgage securities, saying that none of the securities acquired on behalf of taxpayers by the Federal Reserve Bank of New York has yet soured. "I still think that the underwriting standards we had set will support those transactions," he said. Cassano, who was flanked by former AIG President and Chief Executive Martin Sullivan and current chief risk officer Robert Lewis, noted that AIG stopped writing swaps on securities backed by subprime mortgages to marginally qualified borrowers. The commission noted that AIG's swap exposure tripled that year from $17 billion to $54 billion and reached $78 billion by 2007.

The federal inquiries into the behavior of Cassano and two other AIG executives related to whether the company illegally failed to disclose the declining value of the insured securities to shareholders.
Commissioner Byron Georgiou traced the events surrounding a Dec. 5, 2007, investor conference in which Sullivan played down AIG's housing-related risks, despite a $1.5 billion adjustment due to collateral calls. Georgiou said commission investigators were told that Sullivan, Cassano and other executives had discussed risks reaching $5 billion days earlier, prompting Sullivan to remark at the time that he was "going to have a heart attack." Sullivan testified that he didn't recall making such a comment.

After a review by AIG's auditor, PricewaterhouseCoopers, the insurer restated earnings two months later, making an $11.1 billion adjustment for mortgage risks. AIG's stock fell from $50 a share to $44. Angelides told Sullivan that he found his "lack of knowledge, lack of recognition disturbing" and reflective of the "failure of leadership and management" at AIG.




Europe's banks are still on 'life support', BIS warns
by Ambrose Evans-Pritchard - Telegraph

Europe's banks have yet to come clean over bad loans and may struggle to refinance short-term debt unless the region's bond crisis subsides soon, the Bank for International Settlements (BIS) has warned. The BIS said in its annual report that banks on both sides of the Atlantic remain "highly leveraged and still appear to be on life support. The essential task of reducing leverage and repairing balance sheets is simply not finished. The Greek sovereign debt crisis shows just how fragile the financial system still is. "Losses on European bank balance sheets are expected to mount over the next few years. Some banks are rolling over existing loans rather than inducing foreclosures, thus delaying loss recognition."

The BIS said ultra-low rates and fiscal stimulus by governments is exacerbating matters, causing moral hazard and leading to the sort of "zombie banks" seen Japan during its so-called "Lost Decade". "Such powerful measures have strong side-effects, and their dangers are becoming apparent. The time has come to ask how they can be phased out," it said. The bank called for both monetary and fiscal tightening to restore discipline, brushing aside concerns that recovery is still fragile. "Keeping interest rates near zero for too long, with abundant liquidity, leads to distortions and creates risks for financial stability. There are limits to how long monetary policy can remain expansionary," it said.

The BIS said lenders had become reliant on an unstable sources of funding, taking on short-term debt to buy longer-dated bonds for higher yield. Some already face big losses on Greek, Portuguese and Spanish debt. "Financial institutions may underestimate the risk associated with this maturity exposure," it said. "An unexpected tightening of monetary policy might cause serious repercussions." The BIS said low rates were playing havoc with the money markets, a crucial credit tool. They have encouraged "evergreening", or rolling over, loans that are not fundamentally viable.

The warnings come as the Bundesbank and Germany's BaFin regulator call banks to discuss the results of stress tests. Some German public banks may be forced to accept state aid on harsh terms to beef up asset ratios. BaFin said last year that German banks may face write-downs of €800bn (£653bn). The EU is conducting tests on up to 100 European banks to help restore confidence in frozen inter-bank markets. The results will be released in late July.




With federal stimulus funds running out, economic worries grow
by Alana Semuels - Los Angeles Times

Much of the $787-billion stimulus has been spent, creating jobs and extending jobless benefits. But with lawmakers reluctant to approve more funding, concerns are rising about staving off another recession. With home sales sliding, employers reluctant to hire and world stock markets gyrating wildly, the U.S. economy is in danger of stalling. Now one of its only reliable sources of fuel is running out: federal stimulus spending.

Funds flowing from the $787-billion legislation passed last year have helped create hundreds of thousands of jobs and propped up social programs such as unemployment benefits. But with much of that money spent and lawmakers reluctant to approve another big round of spending, concerns are rising about what will replace it in the short term to keep the economy moving. Jitters about a global slowdown pounded world markets Tuesday after an index forecasting Chinese economic activity was revised downward and Greek workers walked off the job to protest government budget cuts. In the U.S., the Dow Jones industrial average plunged 268 points on news from the Conference Board that consumer confidence fell in June after three straight months of gains.

Economists worry that the weak labor market will spook U.S. consumers, whose spending fuels the economy. Dwindling federal stimulus funds are only heightening those fears. California's $85-billion share of stimulus funding has repaired bridges and highways, built new barracks on military bases and renovated crumbling infrastructure. Disabled veteran Bill Vaughn says his biggest job this year was a stimulus project repairing a pipe at the VA Greater Los Angeles Healthcare System. Since that job ended in January, he hasn't found additional work for his firm, BCV Construction. "My company's on the verge of closing," said Vaughn, who lives with his in-laws in Northridge.

In addition to infrastructure improvement, about $18 billion of California's share of stimulus funds has been spent on social programs such as Medicaid, unemployment insurance and food stamps. Billions more flowed to schools and job centers. But with those funds now gone, officials are preparing for another round of belt-tightening. "It was unbelievable feast one year and famine the very next," said Blake Konczal, director of the Fresno Regional Workforce Investment Board, which used stimulus funds to help more than 2,000 unemployed people attend job retraining. The office's budget doubled thanks to $16.4 million in stimulus funds but will contract again in the new fiscal year, which begins July 1.

The American Recovery and Reinvestment Act has been contentious since Congress approved it in February 2009 to aid an economy mired in a deep recession. Republicans have been particularly critical of the program and its price tag, and the final bill was billions of dollars smaller than the one President Obama had originally proposed. But seventeen months later, those stimulus jobs, along with temporary government positions created for the 2010 census, are among the few bright spots in a dismal employment market. The nation's unemployment rate is 9.7% and companies have shown little willingness to hire. Private-sector employers added just 41,000 jobs in May, out of a total of 431,000 jobs created.

The government has few levers left to pull to produce quick growth. Interest rates are already at rock-bottom levels. Concerns about swelling U.S. deficits have many on Capitol Hill opposed to the idea of another stimulus. That has some economists worried. "There's an uncomfortably high probability that we slip back into recession," said Mark Zandi, chief economist of Moody's Analytics. "If we slip back, there's no policy response. We won't have the resources to respond."

To be sure, there are still thousands of ongoing stimulus projects and billions of dollars to be spent. The Obama administration is calling this "Recovery Summer" and will spotlight dozens of stimulus projects in the coming weeks. But many important programs are losing funding. Among the most crucial is unemployment insurance. Benefits vary from state to state, but the federal government has helped pay for five extensions that have boosted the duration of payments in states including California to as much as 99 weeks from the standard 26 weeks. Stimulus funds have also helped subsidize health benefits through the Consolidated Omnibus Budget Reconciliation Act, or COBRA, which gives jobless workers an opportunity to continue their coverage at group rates for a limited time.

Efforts to extend those provisions are stalled in Congress. The National Employment Law Project estimates that 1.63 million workers will exhaust their benefits by the end of this week, and at least 140,000 workers will lose COBRA coverage. In California, which has the nation's third-highest unemployment rate at 12.4%, the Employment Development Department estimates that 205,000 unemployed workers will not receive further benefits without congressional action. About 2 million Californians are unemployed; nearly half of them have been out of work for 27 weeks or more.

"There's nothing out there," said Jennifer Tilt, a 52-year-old resident of Bloomington, a town in San Bernardino County, whose unemployment benefits will expire soon. Tilt, who has a bachelor's degree, said she's applied for jobs at fast-food restaurants to no avail. She's dependent on her two grown children and her mother's Social Security check to pay the bills. Other programs are in jeopardy as well. The federal government temporarily increased the amount it contributed to state Medi-Cal payments by 11.6%. Without further congressional action, those contributions will end Jan. 1, halfway through the state's fiscal year. The state will have to find the money for Medi-Cal elsewhere, probably through $1.8 billion in further cuts, according to the governor's office.

"The human impact of requiring us to find another $1.8 billion in spending cuts to replace federal funding that was designed to help states avoid deep cuts … is both cruel and counterproductive," Gov. Arnold Schwarzenegger wrote to the state congressional delegation earlier this month. Republicans say extending benefits and other provisions of the stimulus bill will add to the country's trillion-dollar deficit. "Here's another idea Democrats should consider, one that Americans have been proposing loudly and clearly: Stop spending money you don't have," Republican leader Mitch McConnell of Kentucky said last week on the Senate floor.

But Democrats — and some economists — say that spending money now to create jobs and fund unemployment benefits is the only way to stave off another recession. "What worries me the most is this idea that austerity is going to be helpful," said Michael Reich, a professor of economics at UC Berkeley, who said that ending unemployment benefits could drive more people to file for disability and hamper long-term growth. "When you make an economy shrink, it makes it harder to pay back debt in the future."

The nation's construction industry provides a window into the tough choices facing lawmakers. Federal tax credits have helped drive home sales while stimulus spending on infrastructure has put laborers back to work. Such subsidies are unsustainable in the long run. But when to pull the plug? New-home sales dropped 33% in May as home-buyer tax credits ended. Construction employment declined in 25 states that same month, according to the Associated General Contractors of America.

"In the next few months, unless some other kind of work comes along, we're not feeling very optimistic," said Ken Simonson, chief economist for the contractors trade group. That's not what unemployed construction worker Hector Cardozo, 38, wants to hear. His hair has grayed from the stress of looking for work, and he's thinking of going on disability. "I can't find work, and the government doesn't have work for me," said the Corona resident. "What more can I do, put a gun to my head?"




Munis Underperform Treasuries as Default Speculation Mounts
by Darrell Preston - Bloomberg

Municipal bonds underperformed U.S. Treasuries in the first half as default speculation drove state and local government yields to the highest level relative to government bonds in 13 months. Ten-year municipal bond yields rose to 100 percent of Treasuries for the first time since May 2009, from 80 percent six months ago, according to Municipal Market Advisors data. Investors bought Treasuries, pushing two-year yields to a record low this week, on signs of slowing global economic growth and amid protests in Europe over austerity measures. The cost of contracts insuring against losses in municipal bonds almost doubled in the past two months, led by Illinois.

Greece and Spain led a surge in the cost of protecting sovereign debt. "The Treasury market rallied its brains out," said Brian Battle, vice president of trading for Performance Trust Capital, a Chicago-based institutional portfolio adviser. "Munis haven’t followed as much." Financial pressure on states and municipalities has built as revenue fell in the wake of the recession. More than two- thirds of states had a drop in revenue last quarter over the same period in 2009, the Nelson A. Rockefeller Institute of Government said this month. States will have confronted $296.6 billion of budget deficits from 2009 to 2012, the National Governors Association and National Association of State Budget Officers said.

Pennsylvania Capital
Harrisburg, Pennsylvania, capital of the sixth most- populous U.S. state, has considered filing for bankruptcy protection in the face of $68 million in debt payments tied to an incinerator project. Illinois, whose $13 billion deficit is about half its budget, had the cost of insuring its debt against default more than double since early April, to a record of 370 basis points, or $370,000 to protect $10 million of debt, according to CMA DataVision. A basis point is 0.01 percentage point. 

"You’ve gotten a lot of negative press about municipal bonds," said J.R. Rieger, vice president of fixed-income indexes at S&P in New York. "Yields have been driven down on U.S. Treasury bonds due to a flight to quality." Investors in the $2.8 trillion municipal-bond market on average earned 3.13 percent this year through June 28, compared with about 7.3 percent in the same period of 2009, according to S&P’s Investortools Municipal Bond Main Index. Treasuries brought in about 5 percent, according to S&P. Corporate bonds returned 5.8 percent, Credit Suisse’s Liquid U.S. Corporate Bond Indexshows.

Municipal investors may be worrying unduly given the debt’s low default ratio relative to other asset classes, said Battle at Performance Trust and Jim Colby, a senior municipal strategist for New York-based Van Eck Associates, which has about $515 million of municipal bonds. Companies are 98 times more likely to default than muni issuers over a 10-year period, data from Moody’s Investors Service show. The volume of municipal defaults has also declined. Nineteen issuers have defaulted on about $1 billion of municipal debt this year, the Distressed Debt Securities Newsletter reported in its June issue.

In the two previous years a combined $14.5 billion defaulted, a rate of $3.6 billion every six months. There is a limit to how much municipal yields will fall as Treasury yields decline, said Matt Fabian, a managing director at Concord, Massachusetts-based MMA. Ten-year top-rated municipal bonds yield 3.08 percent, or about 60 basis points below their five-year average, according to MMA data. "Must municipal buyers are income buyers, and if there is no income, there are no buyers," said Fabian. "Yields can’t go much lower." Following are descriptions of pending sales of municipal debt in the U.S.:

DELAWARE RIVER PORT AUTHORITY, the regional transportation agency that owns and operates four toll bridges linking Pennsylvania and New Jersey, plans to offer $320 million in Build America Bonds tomorrow to finance capital improvements. The bonds, rated fourth-lowest at A3 and A- by Moody’s and S&P, respectively, will be used for capital-improvement projects and to refinance debt. Citigroup Inc. will lead a group of underwriters in marketing the securities. (Updated June 30)

LOS ANGELES COMMUNITY COLLEGE DISTRICT, the nation’s largest two-year system, with about 141,000 students, is scheduled to offer $125 million in taxable bonds today. The district is rated second highest at Aa1 by Moody’s and one step lower, at AA, by S&P. Citigroup will lead marketing of the securities, which will be used for improvements on the district’s nine campuses, including a green-technology student union at Los Angeles City College and a performing-arts center at Los Angeles Valley College. (Updated June 30)

NEW YORK LIBERTY DEVELOPMENT CORP., a state arm created to finance loans for lower Manhattan construction, will sell $650 million in tax-exempt municipal bonds today to refinance debt from the Bank of America Tower project at One Bryant Park. Bank of America Merrill Lynch and JPMorgan Chase & Co. will underwrite the securities, which are top-rated by Fitch and Moody’s. (Updated June 30)

U.S. VIRGIN ISLANDS, whose rum shipments to the mainland in 2009 reached 8 million "proof gallons," a measure for calculating federal excise tax, plans to offer about $396 million of tax-exempt debt through its public finance authority as soon as next week. About $308 million of the issue is senior obligations rated BBB+ by Fitch, third-lowest. The remaining subordinate bonds are rated BBB, second-lowest. Underwriters led by Jefferies & Co. will market the securities to investors.




New proposal would push US retirement age to 70 for Social Security benefits
by KMov

You could be forced to work until you're 70 just to cash in your Social Security retirement benefits. It's an attempt to make up for the Social Security budget crisis. The current age to retire and receive Social Security benefits is 65, but House Republican Leader John Boehner proposed pushing the retirement age back to 70. If approved, the new age would only affect those not set to retire for another 20 years. The proposal is being made to make up for the Social Security Administration's budget crisis.




Time to shut down the US Federal Reserve?
by Ambrose Evans-Pritchard

Like a mad aunt, the Fed is slowly losing its marbles. Kartik Athreya, senior economist for the Richmond Fed, has written a paper condemning economic bloggers as chronically stupid and a threat to public order. Matters of economic policy should be reserved to a priesthood with the correct post-doctoral credentials, which would of course have excluded David Hume, Adam Smith, and arguably John Maynard Keynes (a mathematics graduate, with a tripos foray in moral sciences).  

"Writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy." Don’t you just love that throw-away line "decent"? Dr Athreya hails from the University of Iowa. "The response of the untrained to the crisis has been startling. The real issue is that there is an extremely low likelihood that the speculations of the untrained, on a topic almost pathologically riddled by dynamic considerations and feedback effects, will offer anything new. Moreover, there is a substantial likelihood that it will instead offer something incoherent or misleading."

You couldn’t make it up, could you? "Economics is hard. Really hard. You just won’t believe how vastly hugely mind-boggingly hard it is. I mean you may think doing the Sunday Times crossword is difficult, but that’s just peanuts compared to economics. And because it is so hard, people shouldn’t blithely go shooting their mouths off about it, and pretending like it’s so easy. In fact, we would all be better off if we just ignored these clowns." I hold my hand up Dr Athreya and plead guilty. I am grateful to Bruce Krasting’s blog for bringing this stinging rebuke to my attention. However, Dr Athreya’s assertions cannot be allowed to pass. The current generation of economists have led the world into a catastrophic cul de sac.

And if they think we are safely on the road to recovery, they still fail to understand what they did. Central banks were the ultimate authors of the credit crisis since it is they who set the price of credit too low, throwing the whole incentive structure of the capitalist system out of kilter, and more or less forcing banks to chase yield and engage in destructive behaviour. They ran ever-lower real interests with each cycle, allowed asset bubbles to run unchecked (Ben Bernanke was the cheerleader of that particular folly), blamed Anglo-Saxon over-consumption on excess Asian savings (half true, but still the silliest cop-out of all time), and believed in the neanderthal doctrine of "inflation targeting". Have they all forgotten Keynes’s cautionary words on the "tyranny of the general price level" in the early 1930s? Yes they have.

They allowed the M3 money supply to surge at double-digit rates (16pc in the US and 11pc in euroland), and are now allowing it to collapse (minus 5.5pc in the US over the last year). Have they all forgotten the Friedman-Schwartz lessons on the quantity theory of money? Yes, they have. Have they forgotten Irving Fisher’s "Debt Deflation causes of Great Depressions"? Yes, most of them have. And of course, they completely failed to see the 2007-2009 crisis coming, or to respond to it fast enough when it occurred. 

The Fed has since made a hash of quantitative easing, largely due to Bernanke’s ideological infatuation with "creditism". QE has been large enough to horrify everybody (especially the Chinese) by its sheer size – lifting the balance sheet to $2.4 trillion – but it has been carried out in such a way that it does not gain full traction. This is the worst of both worlds. So much geo-political capital wasted to such modest and distorting effect. The error was for the Fed to buy the bonds from the banking system (and we all hate the banks, don’t we) rather than going straight to the non-bank private sector. How about purchasing a herd of Texas Longhorn cattle? That would do it. The inevitable result of this is a collapse of money velocity as banks allow their useless reserves to swell. And now the Fed tells us all to shut up. Fie to you sir.

The 20th Century was a horrible litany of absurd experiments and atrocities committed by intellectuals, or by elite groupings that claimed a higher knowledge. Simple folk usually have enough common sense to avoid the worst errors. Sometimes they need to take very stern action to stop intellectuals leading us to ruin. The root error of the modern academy is to pretend (and perhaps believe, which is even less forgiveable), that economics is a science and answers to Newtonian laws. 

In any case, Newton was wrong. He neglected the fourth dimension of time, as Einstein called it, and that is exactly what the new classical school of economics has done by failing to take into account the intertemporal effects of debt – now 360pc of GDP across the OECD bloc, if properly counted. There has been a cosy self-delusion that rising debt is largely benign because it is merely money that society owes to itself. This is a bad error of judgement, one that the intuitive man in the street can see through immediately. Debt draws forward prosperity, which leads to powerful overhang effects that are not properly incorporated into Fed models. That is the key reason why Ben Bernanke’s Fed was caught flat-footed when the crisis hit, and kept misjudging it until the events started to spin out of control.

Economics should never be treated as a science. Its claims are not falsifiable, which is why economists can disagree so violently among themselves: a rarer spectacle in science, where disputes are usually resolved one way or another by hard data. It is a branch of anthropology and psychology, a moral discipline if you like. Anybody who loses sight of this is a public nuisance, starting with Dr Athreya. As for the Fed, I venture to say that a common jury of 12 American men and women placed on the Federal Open Market Committee would have done a better job of setting monetary policy over the last 20 years than Doctors Bernanke and Greenspan. 

Actually, Greenspan never got a Phd. His honourary doctorate was awarded later for political reasons. (He had been a Nixon speech-writer). But never mind.




New York Governor David Paterson Vetoes Spending
by Jacob Gershman - Wall Street Journal

Seeking to regain the upper hand in the latest round of budget brinkmanship, Gov. David Paterson on Monday vetoed hundreds of millions of dollars of spending on education that had been approved hours earlier by Democratic lawmakers. The governor threatened to reject as much as $1 billion of spending, including politically valuable earmarks for nonprofits, unless lawmakers yielded on several key areas. Topping the list is the governor's demand that lawmakers account for the likelihood that Washington won't bail out the state with extra Medicaid money that had been counted on by Albany.

"It breaks my heart to do it. The only reason why I'm doing this is, otherwise, we're proverbially kicking the can down the road," Mr. Paterson told reporters in Albany, after signing a veto. "But the reality is the day of reckoning for this state has come." While lawmakers have technically passed a budget, approving the last remaining spending bills for a fiscal year that started three months ago, negotiations haven't drawn to a close. Since Senate Republicans are signaling they won't supply votes needed for an override, which requires a two-thirds majority in both houses, it appears Democrats will have to bargain with the governor to secure the education money.

Lawmakers voted to restore 40% of Mr. Paterson's proposed cut to public-school aid, adding about $600 million on a school-year basis to the governor's original plan. New York City's share of that increase is about $177 million. The vote was a close call in the Senate, where conservative-leaning Democrats uneasy with the Senate's alliance with the Assembly threatened to block the bill unless it steered more property-tax relief to suburban and upstate homeowners. To appease them, the two houses changed the bill so that it forces hundreds of school districts outside of New York City to use the extra dollars to lower property tax bills.

Lawmakers are wrapping up a revenue bill, which is expected to pass later this week. The governor has already accepted most of it, including a reduction in tax benefits for wealthy donors to charities, higher sales taxes on clothing under $110, and a provision that allows the state to borrow billions of dollars from its pension fund. Lawmakers also want to defer dozens of tax credits for three years, including ones benefiting developers of subsidized housing. All told, spending by the state will probably top off at around $136 billion this year, 1% to 2% more than last year.

For weeks, lawmakers settled into a defensive crouch, as the governor pressed ahead with a series of emergency spending bills that presented the Legislature with a Hobson's choice: Either they accepted the appropriations in their entirety or state government would grind to a halt. The tactic had never been attempted by past governors. But when the governor tried to push ahead with a property tax cap and an overhaul of public university tuition policy, Assembly Speaker Sheldon Silver struck back, boxing out the governor by brokering a deal with Senate Democrats.




Fiscal 2011 could be hardest yet for states
by Lisa Lambert - Reuters

U.S. states in fiscal 2011 could be facing the worst budget situation since the recession began in 2007, according to a think-tank report released on Tuesday. States' cumulative budget shortfall "will likely reach $140 billion in the coming year, the largest shortfall yet in a string of huge annual gaps that date back to the beginning of the recession," said the Center on Budget and Policy Priorities. Fiscal 2011 begins on Thursday for most states, which have turned to another round of cuts and tax increases to try to wipe out the gap. All states with the exception of Vermont must balance their budgets.

An estimated 10,000 families in Arizona will lose eligibility for temporary cash assistance and 284 workers who help low-income families enroll in assistance programs such as food stamps will be let go in Georgia, according to the report. The report also found many states are cutting public school funding and money for higher education. Meanwhile, Kansas, New Mexico, Arizona, and Colorado are raising their sales taxes.

State and local government spending cuts have been so severe that they reduced the country's Gross Domestic Product by half of a percentage point in the first quarter, CBPP said, citing the U.S. Bureau of Economic Analysis. The U.S. Congress has considered measures to ameliorate the effects of the deep recession on the states, but fiscal conservatives have raised concerns over adding to the deficit to help states maintain employees and assistance programs.

Last week, a measure that would send states additional money for Medicaid, the healthcare program for the poor administered by the states with federal reimbursements, stalled in the Senate. On Tuesday, members of the House of Representatives said they would soon introduce legislation that would send $10 billion to states for schools.




LA braces for pink slips
by  Rick Orlov and C.J. Lin - LA Daily News

Thousands of government workers throughout Los Angeles could begin losing their jobs this week with the start of the new fiscal year, even as officials make last-minute bids to save positions through further service cuts, tax hikes and union concessions. Up to 4,300 jobs could be cut next fiscal year from local government agencies, including the city, county and schools, if officials and unions fail to reach deals to slash spending. Los Angeles Unified School District alone could shed up to 2,500 jobs this year, although that number is expected to fluctuate through the fall as officials negotiate with unions and monitor the state revenue picture. Among those who have already fallen victim to the district's budget woes is Steve Nairin, who was a fifth-grade teacher at San Jose Elementary School in Mission Hills last year. 

Nairin received a pink slip in March, but has been offered a long-term substitute position at another local school. The father of three boys, each younger than 5 years old, said having a temporary job is better than nothing, but his pay will be less than half of what he made as a full-time teacher. "There are big-time concerns," Nairin said. "My wife is not working and I have three young boys at home. My concern is being able to make ends meet for them." Workers throughout the region are facing similar anxieties. At the Los Angeles city level, officials and union leaders were engaged in last-minute negotiations Tuesday to try to avoid the immediate layoff of 372 city workers starting Thursday.

A hard line
Several City Council members – led by Richard Alarcón and Paul Koretz – were fighting to delay the layoffs until October, hoping enough revenue will come in later to city coffers to save their jobs. But Mayor Antonio Villaraigosa and several other council members drew a hard line to go ahead with the layoffs to show the unions how serious the issue is and extract concessions in the current contract. In adopting its $6.07 billion budget for 2010-11, the Los Angeles City Council said the city will need to lay off at least 761 workers – and possibly 1,000 more, depending on revenue from the lease of city-owned garages. 

The city has said it needs to get $51 million in concessions to avert immediate layoffs and another $57 million by the end of the year to keep the additional 1,000 workers. Councilman Dennis Zine, one of the members of the Executive Employee Relations Committee that is involved with the negotiations, said the issue is complicated because unions last year agreed to forego raises to prevent layoffs. "There is a cost to the city if we lay off workers," Zine said. "Last year, they agreed to pass on raises if there were no layoffs. If we lay off these workers we have to pay those raises." More than 300 workers at the city's public libraries have already been laid off even as the City Council on Tuesday ordered a ballot measure drafted for a $39 parcel tax to fund libraries.

The budget cuts are also forcing libraries to close a second day each week - Mondays - beginning July 18. Opening hours have been shortened on remaining days. Some librarians across the city have been wearing pink slips with the names of coworkers who had been laid off until the union could send them black armbands. "It's just very sad," said West Hills resident Doris Lichter, whose children go to the Woodland Hills branch several times a week. "The educational portion of everything is being cut." A total of 828 workers are left to staff the city's libraries after 328 were laid off this month based on seniority. 

Carmen Nigro, who curated the science and technology section at Central Library, was one of them. "I hate to see it just gutted and desecrated," Nigro said. "There's a lot of harm being done in terms of service to the community." Although Nigro had worked as a part-time messenger clerk at the Sherman Oaks branch since 2005, she didn't become a full-time employee until September 2008. She was one of the hundreds whose last day on the job was June 17 although she had worked in the system for five years.

'Too early to predict'
Los Angeles County, which employs more than 100,000 people, is not planning any layoffs at this time, as officials look at savings through other methods, including a target of saving $115 million through a joint labor-management effort. But officials are still concerned about the possibility that the state could withhold even more money from the county as lawmakers look to close a $19 billion budget shortfall. The county estimates it could lose up to an additional $1.25 billion once the state budget is approved. "We are still very concerned about the budgetary actions the state might take," said county Deputy Chief Executive Officer Brence Culp.

"And whenever we know what those are we'll have to respond accordingly, but it's too early to predict the outcome of those actions yet." The Los Angeles County Office of Education, a state-funded public agency that is associated with but not part of the county government system, will see some reductions. On Thursday, LACOE is expected to eliminate about 70 of 397 positions, including teaching posts, in its Division of Alternative Education. The division runs community day schools and other alternative schools throughout the county.

LAUSD, facing a deficit of about $640 million for the 2010-11 school year, is looking at laying off 682 teachers, counselors, nurses and librarians and about 1,800 nonteaching employees such as janitors and office workers. But that is an improvement from the 6,300 jobs that the district was considering cutting earlier this year, and officials say the current figure could continue to change before the start of the school year. To save jobs, the district struck a deal with local unions that called for 12 furlough days – and a shorter school calendar – over the next two years, restoring about 2,000 positions. The district saved additional jobs and programs through increases in attendance, spending cuts and some additional state funding. 

For example, originally district officials expected to cut elementary arts and music programs in half but scaled back the cut to only a third. Also, the number of schools that will be closed dropped from 11 to 3. Anne Young-Havens, LAUSD's interim deputy personnel director, said exactly which workers will lose their jobs is still unclear. Part of the problem is that while some jobs have been eliminated, some have been bought back by local schools during their local budgeting process. Young-Havens also said that the district is still negotiating with employee unions, and those negotiations could also result in additional jobs being saved or spared.




House Extends Deadline to Sept. for Homebuyer Tax Credit
by Lorraine Woellert - Bloomberg

The U.S. House of Representatives voted to give homebuyers who qualified for a federal tax credit more time to settle on their pending purchases. The House voted 409-5 to extend the deadline for closing home purchases to Sept. 30. The program initially required borrowers who signed contracts before April 30 to complete paperwork by July 1 to get a tax credit of as much as $8,000. The House measure accommodates borrowers at risk of being disqualified for the tax credit because lenders and loan servicers aren’t processing mortgages quickly enough. The Senate is considering similar legislation. "We owe this to the people who have essentially followed the rule who are caught by a closing date," House Ways and Means Committee Chairman Sander Levin, a Michigan Democrat, said before the vote.

As many as 180,000 homebuyers would lose their tax credit if Congress fails to push back the date, according to the National Association of Realtors, which sought the extension. Transactions at risk include as many as 75,000 short sales, or homes being purchased for less than the existing debt on them. The tax credit may have fueled a temporary increase in home sales, which fell after the April deadline passed. New-home sales dropped 33 percent to a record low of 300,000 in May, the Commerce Department reported. Applications for loans to purchase properties fell at the end of May to the lowest level since 1997, according to the Mortgage Bankers Association.




Homeowners 'living on rice' to pay mortgage
by George Roberts - ABC News

There are claims that Australians suffering mortgage stress are living on rice so they can avoid the shame of losing the family home. In a study partly supported by the Reserve Bank, University of Western Sydney researchers interviewed people suffering mortgage distress. University spokesman Professor Phillip O'Neill says shame prevented many people taking part in the study. But he says of those who did participate, some had resorted to eating less so they could keep up with mortgage repayments. 

"This is not in the past tense; people are literally eating the bare minimum - just rice - obviously looking after their children, but putting the repayment of the mortgage above every other thing that they could possibly devote an expenditure to," he said. He says the Federal Government should be careful about overstating how easily Australia got through the crisis when so many people are still struggling. But he says the drastic moves my some homeowners has helped prevent the kind of mass mortgage defaults seen in the United States, during the global financial crisis. "If we did have large-scale defaulting in a neighbourhood in Australia, we would have a toxic affect spreading of negative equity and that would be alarming," he said.




Unemployed dumping car leases
by Mary Ann Milbourn - OC Register

The unemployed are walking away from their car leases in droves as more laid-off workers see their jobless benefits cut off, reports LeaseTrader.com. The company, which helps match up people who want out of their car leases with those looking for a shorter-term lease, said it expects to process 7.3% more listings in June from people whose unemployment benefits have ended or are about to end.

"Unemployment benefits have been keeping millions of Americans afloat since the recession began," said Sergio Stiberman, chief executive of LeaseTrader.com. "When the clock runs out on benefits, people still jobless look to find ways of further cutting their bills. The ability to transfer a car lease contract can save a person more than $500 each month while keeping their credit intact." The company said the majority of its lease listings are in California and other high-unemployment states including Florida, Arizona, Nevada and Michigan. California's unemployment was 12.4% in May, third highest in the nation.

LeaseTrader.com noted the surge in listings coincides with the failure by Congress to approve HB 4213, a bill that would allow extended unemployment benefits through November. One version of the bill was approved by the House just before Memorial Day, but it has gotten bogged down in the Senate in a disagreement over how to pay for the $100 billion cost.  Unemployment aid is just one of a host of issues included in the bill that have delayed its passage. The California Employment Development Department estimates more than 234,000 laid-off workers in this state alone have had their benefits cut off  since the last unemployment extension bill expired in early June.




Japan's economic recovery falters in May
by Tomoko A. Hosaka - AP

 Japan's economic recovery faltered in May as moderating export demand dented factory output, household spending fell and the jobless rate unexpectedly rose for a third straight month. Industrial production dropped 0.1% from the previous month — the first decline in three months, the government said Tuesday. Shipments overseas fell 1.7%. Lower output from automakers such as Toyota and Honda dragged the index south, reflecting softening overseas demand. Factories also made less machinery used for semiconductors and flat-panel displays, according to the Ministry of Economy, Trade and Industry. 

"Production momentum is slowing, and with the index coming in below expectation for a fourth month in a row, it seems to be doing so sooner than expected," said Goldman Sachseconomist Chiwoong Lee in a note to clients. The government predicts output to rebound 0.4% in June and 1% in July — notably smaller gains than in March and April. The results point toward weaker growth in the world's second biggest economy, which has relied on a rebound in exports to underpin recovery. Brisk overseas demand, particularly from Asia, drove annualized economic growth of 5% in the January-March quarter. 

But that momentum is starting to cool as governments roll back stimulus measures and focus instead on controlling spending and debt. Data last week showed that while export growth is still robust, it has slowed every month since February. World leaders who gathered for the Group of 20 meeting in Toronto pledged Sunday to slash government deficits in most industrialized nations in half by 2013, despite warnings from U.S. President Barack Obama and others that overly aggressive austerity measures could derail the global recovery. 

Japan's new Prime Minister Naoto Kan, who has made debt reduction a priority, has a more immediate concern. With upper house elections looming on July 11, he must convince voters that his party can also figure out a way to fuel growth and fight deflation. Separate data Tuesday showed that the country's seasonally adjusted jobless rate climbed to 5.2%, up from 5.1% in April and the highest level since December. The number of jobless stood at 3.47 million, which is unchanged from the previous year, according to the Ministry of Internal Affairs and Communications. Those with jobs fell 0.7% to 62.95 million. The export boom has been slow to translate into sustained improvements for workers and families, which has persistently dampened domestic demand and pushed prices down.

Government incentives for cars and energy-efficient household appliance gave consumption a much-needed boost earlier, but the effects now appear to be fading. Household spending in May fell a 0.7% from a year earlier as incomes retreated, the government said in another report. Average monthly household income fell a 2.4% from a year earlier to $4,714. A picture of the mood in corporate Japan will emerge Thursday when the central bank releases its closely watched "tankan" survey of business sentiment.




1.3 million Brits to lose jobs in 'Austerity Budget'
by Andy Bloxham and James Kirkup - Telegraph

Over a million people will lose their jobs due to the Government’s spending cuts over the next five years, a leaked document projects. George Osborne’s Budget last week said that there would be a net increase of 1.3m jobs by 2015 but the Chancellor did not mention the figures used to arrive at that conclusion. Last night, unpublished Treasury documents disclosed that officials had estimated 2.5m jobs would be created but that a total of 1.2m would be lost in the same period, the Guardian reported. Both the public and private sector are expected to be hit, the analysis concluded, with the losses narrowly greater in the private sector.

The Treasury said it stood by the prediction that the overall number of people in jobs would rise over the next five years. However, experts cast doubt on the private sector’s ability to be able to generate so many jobs in such difficult economic circumstances, meaning that the true gain in employment could be yet more modest. John Philpott, the chief economist at the Chartered Institute for Personnel and Development, said: "There is not a hope in hell’s chance of this [increase] happening: there would have to be extraordinarily strong private sector employment growth in a much less conducive economic environment than it was during the boom."

Brendan Barber, the TUC’s general secretary, said: "It is absurd to think that the private sector will create 2.5m new jobs over the next five years." An extract from a Treasury presentation for Mr Osborne’s budget – seen by the Guardian – said: "100-120,000 public sector jobs and 120-140,000 private sector jobs assumed to be lost per annum for five years through cuts." Alistair Darling, the shadow chancellor, said: "George Osborne failed to tell the country there would be very substantial job losses as a result of his budget.

"Hundreds of thousands of people will pay the price for the poor judgement of the Conservatives, fully supported by the Liberal Democrats." A spokesman for the Treasury said: "The OBR forecast unemployment to fall in every year and employment to rise in every year."




China Leading Index Gain Cut to Smallest in Five Months, Hammering Stocks
by Sophie Leung and Li Yanping - Bloomberg

The Conference Board revised its leading economic index for China to show the smallest gain in five months in April, in a release that contributed to the biggest sell-off in Chinese stocks in more than a month. The gauge of the economy’s outlook compiled by the New York-based research group rose 0.3 percent, less than the 1.7 percent gain it reported June 15. The Conference Board said in an e-mailed statement that the previous reading contained a calculation error for floor space on which construction began. Equities slumped in Asia and Europe as the prospect of a slowdown in the fastest-growing major economy fanned concern that the global recovery may weaken. With American consumers boosting their savings rates and European governments moving to cut spending and restrain fiscal deficits, emerging markets in Asia have led the rebound in the past year.

"We do see some moderation in growth in China, and in many ways that’s a welcome development" because the 11.9 percent annual gain in gross domestic product in the first quarter threatened overheating, said Brian Jackson, an emerging-markets strategist in Hong Kong at Royal Bank of Canada. At the same time, investors are concerned at the implications of slowing Chinese growth for the global economy, he said. Jackson, who previously worked at the U.S. Federal Reserve and U.K. Treasury, predicts Chinese economic growth will slow to an 8 percent pace by year-end. He added that while the Conference Board’s index is dated, as other data have already been released for May, it provides a "useful" composite of indicators for the nation’s economy.

Stocks Drop
The Shanghai Composite Index lost 4.3 percent to 2,427.05 as of 4:25 p.m. local time. The MSCI Asia Pacific index dropped 1.4 percent and the Stoxx Europe 600 Index retreated 1.7 percent. China’s shares were also down as an impending sale of as much as $20.1 billion of Agricultural Bank of China Ltd.stock hurt investor sentiment, said Lu Zhengwei, a Shanghai-based economist at Industrial Bank Co. The Conference Board’s index, published for the first time in May after four years of development, is designed to capture the outlook over the coming six months.

It would have signaled China’s growth slowdown in 2008 and the recession of the late 1980s, according to William Adams, resident economist for the Conference Board in Beijing. "This correction doesn’t affect our outlook for the Chinese economy," Adams said in a telephone interview. "Growth was not likely to accelerate in China, and in fact, a moderation is possible. This correction also supports the same view." Adams said at the time of the original release that new construction work, the key factor pushing up the indicator in April, may not continue to grow so quickly. 

In the U.S., the Conference Board releases a benchmark gauge of consumer confidence. The reading for June is scheduled for later today, and is projected to fall for the first time since February, according to the median estimate in a Bloomberg News survey of economists. American households boosted their savings rate to 4 percent last month, the highest level since September, underscoring a preference to rebuild wealth after home values tumbled the most since the 1930s during the recession. The Commerce Department last week revised its first-quarter U.S. GDP growth estimate to 2.7 percent, from 3 percent previously, reflecting a smaller gain in consumer spending and a bigger trade gap.

Japan Weakens
Government figures today in Japan showed that the world’s second-largest economy is also slowing. Industrial production fell in May for the first time since February, the unemployment rate increased for a third month and household spending declined. Today’s Conference Board revision for China showed that total floor space started in April dropped 0.1 percent, instead of the 1.3 percent gain originally reported. China’s regulators have tightened rules for the property market in an effort to stem speculation and avert an asset bubble in the aftermath of a record credit expansion last year. 

Premier Wen Jiabao’s government has also set a target to shrink new loans to 7.5 trillion yuan ($1.1 trillion) from 9.59 trillion last year. Officials have boosted requirements for the amount of money banks must hold as reserves, and used bill sales to withdraw cash from the financial system. China this month committed to ending its fixed exchange rate peg to the dollar, another step that may cause the expansion to ease. The yuan had been held at 6.83 per dollar since July 2008 after a 21 percent gain the three prior years, in an effort to shield exporters from the global crisis. The shift to a more flexible yuan will slow Chinese exports this year, adding to difficulties that include the European debt crisis and rising costs, Yu Jianhua, a Ministry of Commerce director general, told reporters in Toronto three days ago. 

"The revision may have echoed existing market concern that China’s growth may slow later this year, though economic fundamentals are so far little affected by the European debt crisis," said Lu at Industrial Bank. China remains the world’s fastest growing major economy, and the yuan decision was taken after the government concluded the rebound had "become more solidly based," according to a June 20 People’s Bank of China statement. Indicators for May showed that exports climbed 48.5 percent from a year before, helping yield a $19.5 billion trade surplus for the month. Inflation accelerated to an annual 3.1 percent pace in May, surpassing officials’ target for the full year, retail sales gains quickened to 18.7 percent and industrial production jumped 16.5 percent, government reports showed three weeks ago.

Lending Growth
Lending growth also exceeded economists’ estimates for last month. Banks extended 639.4 billion yuan ($94 billion) of new loans in May, compared with the median forecast of 600 billion in a Bloomberg News survey of economists. The Conference Board’s coincident index for April, which is a measure of current economic activity, was unchanged from the release earlier this month. The coincident gauge increased 1.2 percent following a 0.4 percent increase in March. The error for the leading index was "unfortunate where the group has tried to be as transparent as possible," Adams said. The measure is based on data and surveys from the People’s Bank of China and the statistics bureau.




Europe's poorest send less money home
by Corneliu Rusnac and Alison Mutler - AP

Many of Europe's poorest migrant workers are sending less money home — another blow delivered to the continent's east by global economic and financial turmoil. Probably worst off is Moldova, Europe's poorest country according to the World Bank. There, money sent by people who left to find work made up an astonishing 30 percent of the economy of $6.6 billion (euro5.41 billion) just two years ago but fell last year to 22 percent. The Chicus are a case in point. Like many Moldovans, they realized that they could hardly afford to raise a family from local salaries. 

Mihai Chicu, an engineer in a shoe factory that went bust after Moldova declared independence from the Soviet Union in 1991, left his wife Nina and sons Alexandru and Adrian in 1995. He ended up in Greece, where until recently he earned euro1,300 (US$1,600) a month as a laborer until this spring. Each month he sent home about euro800 (US$975). Nina, who made just $175 (euro145) as a nurse, also left in 2006 as the sons were finishing high school. Despite the economic meltdown in Greece, her host country, she still earns about euro1,000 ($1,220) picking lemons, sending home half of that, or euro500 ($610).

"Now that my father is out of work, we can barely cover utilities, food and basic costs with my mother's income," said Alexandru Chicu, 23, in an interview at three-room family apartment. "The money our parents send us is our only income." The sons live in the family's apartment in downtown Chisinau, purchased in 2007 for euro62,000 (US$75,650) — a feat enabled by the remittances from Greece. The elder son, Alexandru, is studying engineering and mechanics management at the Chisinau polytechnic while younger brother Adrian is studying telecommuncations there. Neither of them work. 

Comfortable by Moldovan standards, the apartment sports a washing machine, computer and refrigerator — luxury items for anyone on the average Moldovan salary of $250 (euro202). It's a story that is playing out all over the region. For decades, workers in Eastern and Southeastern Europe have been a source of cheap labor for Spain, Portugal, Greece and Italy. They picked fruit, washed dishes and got their hands generally dirty in jobs the locals shunned. Now, as the EU's southern members tighten their belt to avoid bankruptcy, the foreign worker is often the first to be let go — and the flow of cash, or remittances as economists call the practice, are dwindling in regions that badly need it.

Migrants' troubles worsened starting with the financial and housing market plunges of 2007-9, followed by this year's debt crisis and resulting cutbacks in government spending. World Bank figures show Moldovan remittances dropped from $1.66 billion in 2008 to $1.18 billion in 2009, with construction workers in Greece, Russia and Spain the hardest hit. As Moldovan workers returned home, unemployment soared from 3.9 percent in 2008 to 9.1 percent in 2010. 

In neighboring Romania, remittances fell by about a quarter, to euro1.1 billion (US$1.35 billion) for the first four months of 2010 compared to the same period last year. Romania's unemployment rate rose to 8 percent this year, nearly double that of two years ago. While it is impossible to pinpoint how many were returnees, there is little doubt that they contributed to the growing number of jobless, which the International Monetary Fund says could rise to 11 percent in the coming months. In Bosnia-Herzegovina, remittances decreased by more than 17 percent from 2008 to 2009 when they were 2.1 billion convertible marks, or around $1.2 billion). Bosnia's central bank said this has contributed to higher levels of poverty, less spending and less investment.

A survey by the International Organization for Migration indicated some 353,000 Moldovans were working abroad but still belonged to a household in Moldova as of March, 2009. The IOM says that considering other estimates, probably around 600,000 Moldovans are living outside the country under various status, or about 15 percent of the entire population of 4 million. The World Bank's Dilip Ratha warns it might get worse. "If the crisis deepens further in Europe, you will see more of an impact of these flows, more workers will come back and fewer will go abroad," said Ratha, a senior economist and manager of the Migration and Remittances Team. 

For now, some of those forced back home by the EU economic downturn are biding their time, waiting for better economic conditions before trying their luck abroad again. But with their incomes a lifeline for whole families, others are trying their luck again, just weeks after being laid off. Romanian air conditioner technician Relu Ciui is looking beyond Spain, from where he had sent home money for the past eight years. "I left Romania because I had no chance here," said Ciui. "In Spain I found a job that allowed me to dream that I could live a better life and that's the way it was. I was earning euro1,500 a month, like a Romanian government minister earns." And Mihai Chicu, the unemployed shoe factory engineer, decided to return to Greece — looking to join his wife harvesting lemons.




French public debt hits 80% of GDP
French public debt has soared to 80.3 percent of its gross domestic product in the first quarter of 2010, invoking the specter of a Greek-style financial breakdown. According to the figures published on Wednesday by the National Institute for Statistics and Economic Studies (INSEE), at the end of March, French gross public debt amounted to 1,535.5 billion euros ($1,877.1 billion), up by 46.5 billion euros ($56.8 billion) from 2009's last quarter, Xinhua reported.

INSEE said by ratio scale, the figure accounted to 80.3 percent of the GDP, 2.2 percent higher from the level of the last quarter. The figures come as the government of French President Nicolas Sarkozy is scrambling to slash its ballooning budget deficit amid growing concerns that the country could plunge into a Greek-style bankruptcy.

Meanwhile, French Finance Minister Christine Lagarede and Budget Minister Francois Baroin said in a statement that the soaring debt was a result of the stimulus policies introduced following global economic crisis. However, the governor of France's central bank said it could take as many as 10 years for Paris to tackle the country's deficit problems. "I think it will take quite some years, perhaps between 5 to 10 years probably... We must work progressively, so this will take at least 5 to 6 years," said Christian Noyer, governor of the Bank of France.

Sarkozy's approval rating has receded significantly over the past months after his government unveiled austerity measures aimed at slashing its huge budget deficit. France's flying budget deficit could make Paris liable for EU-imposed economic sanctions. EU rules say it's necessary for public debt to stay below 60 percent of national output at all times.




Vultures circle BP over fears its days are numbered in US
by Terry Macalister - Guardian

In the past an almost double-digit percentage increase in the BP share price would have signalled a spectacular oil strike. It is a measure of the decline in the company's fortunes that such a surge was triggered by hopes of a takeover or break-up. The company's stock soared 9% to 331p at one point as a growing list of companies from China to Russia were linked with potential mega-mergers that could see the end of independence for what was once Britain's biggest firm.

Investors piled into the troubled oil group amid a growing view that the brand has little future in the US – its biggest single market – and the company will need to reinvent itself through a change of brand, change of boss or change of ownership. The takeover ball started to roll in earnest when a research note released by JP Morgan Cazenove in London boldly declared that "either ExxonMobil or Royal Dutch Shell could consider a bid for BP".

And it gathered pace when figures such as Peter Odell, professor emeritus of energy economics at Erasmus University in Rotterdam, said "everyone was contemplating" what it would be like for their company to buy BP. "If the bad news continues to roll for BP then the feeling will grow that the company has had its day and will either be broken up into pieces or bought up completely," he argued. The speculation was also given momentum by Maxim Barsky, deputy chief executive of BP's Russian joint venture, TNK-BP, saying his company could be interested in acquiring assets from BP outside Russia.

Other Russian groups such as Gazprom and Chinese companies such as PetroChina – now the largest quoted oil company in the world – were also being discussed as potential predators. Analysts believed one of the main stumbling blocks to a merger approach to a company whose share price has more than halved since late April was the difficulty of assessing the scale of its future liabilities, which some think could reach $60bn. But there would also be competition issues and concerns about job losses.

Fred Lucas, the JP Morgan energy analyst, argued that BP could be worth 473p a share to a potential buyer, such as Exxon – a hefty premium to BP's current share price. "The market has lost sight of the intrinsic value that is resident in an asset-rich company like BP," he argued. Odell believed it inconceivable the White House would allow a Russian or Chinese company to buy BP's American assets, which provide the UK-based company with 40% of its profits, but said it might be quite possible for the US business to be bought by a local group and the international operations taken by someone else. A furore over the planned sale of a strategic oil asset in 2005 prevented another large Chinese firm, China National Offshore Oil Company, buying up the locally owned Unocal Corporation.

Not everyone accepts that BP is doomed and some argue it could still rebuild its reputation and brand in the US by quickly capping the oil leak, bringing in a new chief executive and then reverting to the much heavier use of the Amoco name. Many believe chief executive Tony Hayward will go before Christmas, with some of his lieutenants, such as the American head of the oil spill operation, Bob Dudley, or the British refining boss, Iain Conn, tipped as possible successors, while the names of outsiders such as Tony Blair have been linked with the post of chairman.

Meanwhile the rebranding of BP petrol stations would be easy. BP took over Amoco in a $110bn mega-merger over a decade ago and gradually replaced the Amoco brand on petrol stations and refineries with its own. Fadel Gheit, oil analyst with New York brokerage Oppenheimer & Co, argues the sale of BP is far from inevitable, not least because any big tie-up with another local company such as Exxon could cost tens of thousands of jobs. "When Exxon took over Mobil, 50,000 employees left the combined company payroll within three years and this is the last thing that politicians would want to see in the current environment," said Gheit.

Gheit also holds the controversial view that a big political event away from the gulf would be enough to distract attention away from BP and allow the company to rebuild. "The best thing that could happen to BP is an Israeli and US bombing of Iran, which would take the media spotlight off BP and send the oil price racing up to $100 per barrel. I personally believe there is a very high probability of this within three to six months," said Gheit. BP has already said it will suspend dividends to shareholders, reduce its investment programme and sell some of its assets, after agreeing with the US government to set aside $20bn (£13.4bn) to pay for the spill.

Several investment banks have teams reviewing BP's asset portfolio. The company has sizeable operations in Colombia, Algeria, Australia, and South America, none of which are central to the company's future strategy. Barsky said that TNK-BP, responsible for a quarter of BP's output, would be particularly interested in the British oil major's downstream refining and marketing units in Europe and other assets related to unconventional gas and offshore drilling. But the Kremlin, which has already destabilised Hayward by predicting his departure, may have a bigger prize in mind.




Hurricane Alex disrupts oil disaster cleanup
by CNN Wire Staff

Even though Hurricane Alex was more than 600 miles away from the massive BP oil spill Thursday morning, forecasters and officials said the storm could affect cleanup efforts for days. The storm, which made landfall in northeastern Mexico Wednesday night and was moving inland at a speed of around 10 mph, continued to cause heavy seas across the Gulf of Mexico. Coast Guard officials will conduct an aerial survey to assess the storm's impact Thursday, Rear Adm. Paul Zukunft said.

The storm has already disrupted the containment booms meant to limit the amount of oil reaching shore, Zukunft said in a press briefing Wednesday. More than 500 oil skimming ships had to return to shore and efforts to burn oil on the surface and break it down through dispersants were put on hold, he said, along with efforts to position a third ship to collect oil at the spill site. And residual effects from the storm could prohibit skimming and burning of oil in the gulf at least until Saturday or Sunday, CNN meteorologist Chad Myers said. "Until the weather subsides, all we can do is have everything ready to attack and remove this oil once we have weather that's more conducive," Zukunft said Wednesday.

Alex -- the first hurricane of the Atlantic hurricane season -- was producing high seas where the oil is located, Myers said. Winds were 15 to 20 mph at the spill site Wednesday, producing waves 6 to 8 feet high, he said. That poses a problem for the skimmers, Zukunft said. "When seas get over 3 feet high, the skimmers become ineffective. They wind up gathering water and not oil," he said. One thing that has not been affected -- BP's effort to drill relief wells down to the area where oil is leaking. Weather would have to be very severe to affect that, according to Zukunft, and at this point, BP said it is on track to reach the area in August.

The storm also is having an impact on where the massive oil spill is flowing. Previously, some oil had been reaching Pensacola Beach in Florida, but the storm's prevailing southeast winds have drawn it more toward the environmentally sensitive Mississippi and Chandeleur sounds, off the coast of Mississippi and Louisiana, Zukunft said. Myers said that's because the storm winds are moving counterclockwise in a huge arc. The strong winds are expected to blow for about three days, pushing the oil back to shore in the area where there already have been dramatic pictures of oil-drenched birds.

Meanwhile, authorities also were busy preparing for future storms. Planners with the Louisiana governor's Office of Homeland Security and Emergency Preparedness this week created a hurricane evacuation plan with BP, said the office's director, Mark Cooper. The plan, applicable for the entire hurricane season -- which ends November 30 -- calls for BP's thousands of workers to leave the Louisiana coast at least 16 hours before officials begin evacuating residents.

"We can't have BP blocking our roadways with equipment and personnel," said Cooper. The plan calls for BP to be back on the scene combating the spill within 72 hours after a hurricane, Cooper said. Researchers have estimated that between 35,000 barrels (about 1.5 million gallons) and 60,000 barrels (about 2.5 million gallons) of oil are gushing into the gulf every day.




Gulf oil spill could create 'dead zone'
by Sheila McNulty - FT

High concentrations of methane gas - in some cases approaching 1m times the normal level - have been found around the BP oil spill, raising fears it could create an oxygen-depleted "dead zone" where marine life cannot survive. Dead zones are areas in the water where algae blooms as it feeds on nutrients in high concentrations of foreign matter, such as methane, in this case, or, more typically, the components of farmland fertiliser runoff into water. The algae gorge, reproduce quickly and then, in turn, are eaten by bacteria in a process that depletes the immediate area of oxygen.

Fish and other sea life cannot survive in these zones. That the spill could cause a dead zone in the Gulf of Mexico would be yet another negative for the environ-ment, already suffering from destruction of marine nurseries and bird nesting grounds in the wetlands and projections of negative impacts on sea life along the Gulf Coast. The knock-on effect would be a pocket of the Gulf where fishermen would find no fish to harvest. The site where large concentrations of methane has been found is in a six-mile radius around the spill, where John Kessler, assistant professor in the Department of Oceanography at Texas A&M University, has just returned from a 10-day research trip. From a previous trip last year to the same area, he has identified the rise in methane to the Deepwater Horizon accident.

Methane is a key component of natural gas, and it accounts for 40 per cent of the weight of material emanating from BP's leaking well. Last year the concentrations of these gases were at normal levels of one to two parts per million. This year, the concentration of methane dissolved in the seawater is 100,000 times more and, in some places, approaching 1m times more, he said. "There are some drawdowns in oxygen," Kessler said. "It's significant; we notice it. It's there." But whether it will increase enough to cause a dead zone remains to be seen, he said, with factors being how high the concentrations of methane will get and how long they will remain at these enhanced levels.

With BP siphoning increasing amounts of hydrocarbons, there are hopes the amount gushing into the Gulf is on a decline. That said, the leak is expected to continue until the company can complete at least one of the two relief wells it is drilling. BP is hoping that will be in late July or August. The National Oceanic and Atmospheric Administration, the US Environmental Protection Agency and the White House Office of Science and Technology Policy said in its first peer reviewed, analytical summary report about subsea monitoring that "dissolved oxygen levels remained above immediate levels of concern". But it added,

"There is a need to monitor dissolved oxygen levels over time." The Gulf already is home to one of the world's biggest dead zones - averaging about 17,000 square kilometres, the size of Lake Ontario, over the past five years, according to the Louisiana Universities Marine Consortium. But researchers do not know if the site of the spill - more than 100 miles from shore - will link up with the one they have been watching over the years. That long-studied dead zone is close to shore, where the Mississippi River drains.




Monsanto profit falls 45% as Roundup struggles
by Carey Gillam - Reuters

Monsanto Co reported a 45 percent drop in quarterly net income on Wednesday as the global seed leader's Roundup herbicide business continued to struggle. The company, whose shares edged lower, saw a 5 percent jump in net sales of its seeds and genomics, but said net sales of Roundup and other glyphosate-based herbicides fell 56 percent. As a result, net income for the third quarter ended on May 31 fell to $384 million, or 70 cents a share, from $694 million, or $1.25 a share, a year earlier.

Earnings were 81 cents a share on an ongoing basis, which slightly beat analysts' expectations of 79 cents, according to Thomson Reuters I/B/E/S. Still, revenue fell to $2.96 billion from $3.16 billion, missing analysts' forecasts of $3.17 billion. "The operating results were weaker than we were expecting on the corn and soybean side as well as on the glyphosate side," said Jefferies & Co. analyst Laurence Alexander. Alexander said glyphosate price declines were a key pressure point for Monsanto as retail prices for glyphosate are running around $8 to $11 a gallon, down from a peak of above $35 a couple of years ago. But he said competitive concerns in the seed market were also a factor, and the market would be watching Monsanto seed pricing and order patterns going into next year.

Monsanto has said it is making many changes to its product and pricing strategies. The moves come amid industry complaints that prices are too high and that farmers need more product alternatives. The U.S. Department of Justice has also been scrutinizing Monsanto's actions in the U.S. seed industry in response to allegations by competitors and others of unfair pricing and antitrust violations. Monsanto has denied these allegations. "We've made some real changes to our portfolio and business approach, and the positive feedback I'm hearing from our customers tells me we are on the right track," Monsanto chairman Hugh Grant said in a statement on Wednesday.

The St. Louis-based company, which is the world's largest seed producer and a maker of agricultural chemicals, said it still expected free cash flow of $400 million to $500 million for fiscal year 2010, with net cash of $1.3 billion to $1.5 billion provided by operating activities. Monsanto also repeated its fiscal-year earnings forecast of $2.40 to $2.60 per share on an ongoing basis and $2.15 to $2.41 on an as-reported basis. Shares of Monsanto were down 0.3 percent at $47.20 in early New York Stock Exchange trading. At Tuesday's close, the stock had fallen 45 percent in the past year as investors have worried about its problems.


90 comments:

Gravity said...

The end of the age of cities.

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

Seeing as how they can't expand much without credit, the growth of cities has ended complexity- or prosperity-wise, and could end population-wise within a decade, at least in the west, if not everywhere, in a historical inflection of the established multi-millenial megatrend.

Stoneleigh said...

Gravity,

In the third world cities typically expand in hard times, as people migrate from particularly unforgiving rural poverty for a chance in the city. They usually end up living in gigantic slums. Urban slum dwelling is a very common human condition and is likely to persist quite a long time. People will cling to whatever economic opportunities may be left to them, or they may simply come looking for opportunity and find themselves stuck with no further options.

The potential for the spread of disease is huge though, as slum-dwellers typically live surrounded by their own waste. Diseases don't stop at the edges of slums though.

Gravity said...

@Stoneleigh
Fair enough, slums will keep expanding, accelerate even, yet there must be several hard limits on such dynamics somewhere, pestilence for one. I'm just saying that the availability of trustworthy credit seems to be a hard limit on logistical complexity for industrialised cities, ensuring adequate food supplies from outside might not be possible without it.
The growth of cities, in terms of trade complexity, has been intrinsically linked to the circulation of precious metals and later credit, so the end of credit would cause such complexity to fail.

Stoneleigh said...

Gravity,

Agreed - the loss of both credit and energy will cause significant failures of centralized systems. Cities will still exist, and grow, for quite some time, but they won't be nice places to live in general. Some enclaves will retain decent services, as is the case in the third world, but these may become gated and guarded green zones. Slums will exist at a much simplified level, either with no services at all, or with pirated services obtained dangerously. Just look at the electrical connections typical in poor areas - a forest of illegal wires that must kill many people.

Bigelow said...

“On May 6, 2010, when the Dow Jones unexpectedly plunged nearly 1,000 points, some observers blamed the sudden collapse -- which saw some companies' shares plummet to nearly zero within seconds -- on high-frequency trading. Among those advocating that theory was Larry Leibowitz, COO of NYSE Euronext. But some other observers argued that the HFT programs had nothing to do with it, because they were shut down when the market panic set in.”
MSNBC’s Ratigan: Stock market an ‘obviously corrupt’ fraud

“Consider this: In the (not so distant) past the provision of liquidity was piecemeal, as was the withdrawal. It took many traders, many different companies, and many different decisions, all with lags, uncertainty, and general unpredictability. That slack in the system made liquidity unpredictable in some ways, but it also arguably made markets less subject to runs, crashes, and similar Wile E. Coyote episodes.

Markets today don’t work that way. There are quiet links and subterranean connections that didn’t exist before: systems are observing systems, adapting in real-time to algorithms about which they know only what they observe by trading with and against them -- like battle-bots playing a tic-tac-toe variant with savage consequences. The result is that most of the time we have far more liquidity than would have been imaginable even a few years ago – you can do block trades on many equities with scarcely a ripple. But liquidity is also now picosecond switchable, something that can ramp endlessly, even on its own in a machine-to-machine feedback; but can also collapse in a click, like a switch being turned off. Pffft, and it’s gone.”
The Tyranny of the Illiquidity Providers

“Not that this bear won’t be addled by strange occurrences. Since the “flash crash” on May 6, there have been several other bizarre “errors” on major U.S. stock exchanges. It’s a short list… but what’s going on here?:

June 16: Shares of the Washington Post Co. zip up nearly 100% in seconds.
June 28: Boeing crashes 44%, rebounds instantly
June 29: Citigroup falls 12% instantly, on one trade.

There are supposed to be new “circuit breakers” installed on major exchanges to keep this from happening. One kicked in yesterday and paused that Citigroup trade, which was eventually called back and canceled.

Citi fell 5% anyway, and now goes for about the price of a large cup of coffee.

It’s getting dicey, isn’t it? With the Dow and S&P teetering on technical precipices, traders wouldn’t stop to ask questions if either exchange were to drop sharply.”
The Next Bear Market

Bigelow said...

“Consider this: In the (not so distant) past the provision of liquidity was piecemeal, as was the withdrawal. It took many traders, many different companies, and many different decisions, all with lags, uncertainty, and general unpredictability. That slack in the system made liquidity unpredictable in some ways, but it also arguably made markets less subject to runs, crashes, and similar Wile E. Coyote episodes.

Markets today don’t work that way. There are quiet links and subterranean connections that didn’t exist before: systems are observing systems, adapting in real-time to algorithms about which they know only what they observe by trading with and against them -- like battle-bots playing a tic-tac-toe variant with savage consequences. The result is that most of the time we have far more liquidity than would have been imaginable even a few years ago – you can do block trades on many equities with scarcely a ripple. But liquidity is also now picosecond switchable, something that can ramp endlessly, even on its own in a machine-to-machine feedback; but can also collapse in a click, like a switch being turned off. Pffft, and it’s gone.”
The Tyranny of the Illiquidity Providers

Bigelow said...

“Not that this bear won’t be addled by strange occurrences. Since the “flash crash” on May 6, there have been several other bizarre “errors” on major U.S. stock exchanges. It’s a short list… but what’s going on here?:

June 16: Shares of the Washington Post Co. zip up nearly 100% in seconds.
June 28: Boeing crashes 44%, rebounds instantly
June 29: Citigroup falls 12% instantly, on one trade.

There are supposed to be new “circuit breakers” installed on major exchanges to keep this from happening. One kicked in yesterday and paused that Citigroup trade, which was eventually called back and canceled.

Citi fell 5% anyway, and now goes for about the price of a large cup of coffee.

It’s getting dicey, isn’t it? With the Dow and S&P teetering on technical precipices, traders wouldn’t stop to ask questions if either exchange were to drop sharply.”
The Next Bear Market

Stoneleigh said...

The financial markets are leading the way lower, and the real economy will follow. I think we're likely to see a market cascade event at some point this year. If that happens, the time lag for the effect on the real economy need not be long. It is possibly that we could see a systemic banking crisis as well, although that does not have to happen so soon. The danger is that when it does happen, it is likely to unfold very quickly, and it is better to be too early than even 5 minutes too late. Beware that the risks are rising.

Tero said...
This comment has been removed by the author.
snuffy said...

[from yesterday]

Hi folks,
I just returned from a trip to central Oregon,where I found the future...

The future seems to be spread around Oregon more and more evenly now...but out in the deep south "high desert" country,Things are getting real,real rough.

Ilargi,homes that were 1.5 years ago selling for 180k are now being picked up...for 30k...or "What ever someone will pay"[!!!]Banks are desperate.If you want a Oregon home cheap,they are there now,mostly from a whole helluva lot of foreclosures from laid off mill workers who walked away.Or others who thought "Land prices always go up"[until they don't].
The trip was to buy bees from a commercial bee guy who I have been doing business with for a couple of years.[Real good guy-old school mountain people].He gave me a evaluation/update on whats really going on out of the central valley/Mt.Hood/tri-county area where I live.

They are hurting.Bad.

His son just got work at a small enviro company that makes[drum roll]oil spill boom.A couple of weeks,or months,they are not sure.Both sons have returned home to live,having lost everything.
His only laugh came from his description of all the men who he had told years ago not to be so quick to refi..and buy those 2 new 30k trucks/cars every year.
Those who are now so far underwater they will lose all they thought they had.
There is ag,and mill work out there...and thats it.Mills shut down a couple of years ago when the housing bubble went bye-bye.

The true impacts are now being felt. Over 50% of the homes in his area are for sale,and he didn't know how many were in,or facing foreclosure,but he thought "Most"

I knew it was rough out there in the sticks,but to hear it from a local brings it home in the clearest manor possible.
[On a amusing note]
When I first met him,we had had a long discussion about the way of things,and I had told him about the true state of Washington Mutual[his bank]and a bunch of stuff about the bailout ect.I found out later that he and his son,at the time,thought I was a "little over the edge"
Then,he said,one day his son [Who had helped us load the bees that purchase],had come to him and said"Remember that wacky guy[!]who told use about all this before it happened?.All he told us is happening the way he said it would."

Vindication [in spades] is wonderful for your credibility.[and ego]
This trip I gave him a update,and pointed him here to read the primers and use one of the best sources I have ever found for understanding just what in the hell is going on these days

I am wasting daylight so I need to get to work setting up my 250k or so workers in their new digs

later folks
Bee good or
Bee careful

snuffy

July 1, 2010 1:43 PM
Delete

Stoneleigh said...

Tero,

Credit is virtual (illusory) capital, and it will disappear on a huge scale. It represents excess claims to underlying real wealth, and excess claims are always extinguished in the collapse of a credit Ponzi. Deleveraging will continue until the (small amount of) remaining credit is acceptably collateralized to the (few) remaining creditors.

What real capital remains will be reused elsewhere, but this amount of real capital will be very small compared to the present amount virtual capital. And the process of fighting over claims to underlying real wealth is likely to result in considerable destruction of real capital. Not to mention that much real capital is destined to become waste in any case once energy limits bite and our fancy structures become useless. Much of our recent development was a giant exercise in negative added value - a waste of perfectly good resources.

Ilargi said...

"No, this is not the end of credit."

And I never said it was.

Tero said...
This comment has been removed by the author.
Ed_Gorey said...

Mish bashes Prechter

Mish just offered his opinion on Prechter's prognostications, and by extension, TAE's as well.

Mish:
"doom and gloomers like Robert Prechter think the Dow will fall to 1,000. To that I say "Poppycock" (pretty harsh language indeed for those who know me well). By my optimistic comparison, I think the Dow's downside is 5,000. That is a stunning 400% more optimistic appraisal of the current state of affairs than Prechter. Furthermore, I freely admit that the DOW, instead of dropping, just may meander around 10,000 for another decade."
----------------------------

My comment: Perhaps Mish doesn't like to dwell on the Prechter and TAE vision of credit collapse because TAE's vision doesn't imply a happy future for folks like Mish (or anyone for that matter). In fact, when the DOW is at 1000, investment managers like Mish will likely join ex-public employees on the dole. Mish loves to thrash out at all the different sectors of the economy that he views as redundant termites and pests.

To Mish I offer a quote that even an agnostic like myself can love:
"Why do you see the speck in your neighbour’s eye, but do not notice the log in your own eye?"

Phil said...

I've never been much impressed by the BBC's Robert Peston. He's forever missing the point, it seems to me.

Much the same can be said for quality of output of their other economics reporter, Stephanie Flanders (daughter of the fabulous Michael Flanders).

But where the BBC does excel, though, is with BBC2's NewsNight economics editor, Paul Mason. He's on Twitter as @paulmasonnews, and also has an insightful BBC blog, Idle Scrawl.

His post on the English defeat in the World Cup is priceless.

Gravity said...

@Stoneleigh
As you're fond of using the centre-periphery dynamic, wouldn't you say that the influx of poverty stricken rural dwellers accumulating in slums indicates that the urban centre is unable to extract any more surplus from its periphery (mostly those same people who end up in slums), either from its own rural parts or from other subordinate cities on the trade network? Or does slum expansion signify a cumulative imbalance caused by excessive extraction of peripheral wealth which cannot be allocated and redistributed within the centre?

I would think that the most industrialised states and cities not only extract from their own rural periphery with several wealth conveyors, but also from the urban centres of less developed nations, intensifying slumming. But if transnational credit breaks down, such conveyors to distant centres could cease or reverse, insofar as they're not reliant on direct taxation.

Gravity said...

Its the end of the age defined or dominated by certain things, not that they'll completely disappear, but they'll become less of a cultural driving force than they've been. I'd say its evidently the end of the age of reason, but that was not particularly dominant of late.

@Tero
"We're just about to release a lot of societal capital so that we can reassemble it somewhere else. And it will be reassembled."

Much of this embodied energy will unfortunately release abruptly and violently for lack of proper channels and timely pressure exhausts, and ultimately dissipate as waste-heat, while overloading and disintegrating parts of the system where it passes through, becoming partially irretrievable for constructive purposes.

I reckon that much of the remaining social capital has already been misallocated several times over, being constricted in the psychokinetic energy tensors of property laws and so hopelessly entangling human and social capital with constructed capital at a set price, thus limiting the available social reconfigurations to several variations of servitude, I fear.

Punxsutawney said...

Stoneleigh,

Regarding urban migration: In the Third World, when an individual goes from what is essentially a peasant barely surviving grinding poverty to living in an urban slum, I would think that there’s not much change in that individuals outlook on life or perception of their place in society.

If and when this starts in the US of A, there will be a lot of people who will have lost what they feel they were entitled to, and have know maybe for generations, and become what they supposedly despise. I don’t expect they will deal with it rationally. And that’s going to result in a lot of anger and other unforeseen consequences which will be all but impossible to predict. This is one of the things that keeps me up at nights so to speak. I believe you see this possibility as well.

To the Romanian poster some days ago, sorry I forgot your name. I know of at least one Romanian couple here in the US that are in complete denial as well. They have already lost everything and are one small step from being homeless, but refuse to face their predicament and continue to alienate those around them.

ex VRWC said...

Stoneleigh,

After I watched the video yesterday I managed to hear one or your Transition presentations. You do a great job of placing things in context. I have been trying to talk to people around here in Phoenix (where we are seeing a lot of effects of the slow-motion slide) and explain to them why I think we are on the edge.

I am interested in the dynamic of 'negative value creation' you cite. My view that I blogged about (follow my username if interested) was that easing and loose monetary policy unleashes a feedback loop into the economy that weakens the credit bond between borrower and seller, weakens the authority and tax bond between government and people, strengthens the unholy alliance between governments and bankers, and drives more people to join the speculative party and drives everyone deeper into debt. Therefore the more loose money policy, the more the feedback loop asserts itself, which of course precipitates the unwind we are experiencing. I would be interested if you think it is a valid model or is my explanation too simplistic?

I also follow the oil drum, and see where deep water drilling seems to be coming in weaker that expected, and of course the Macondo well disaster will only increase the pressure on deep water drilling. Even not considering the economic and environmental catastrophe of this, haven't we really moved the inflection point for hydrocarbon scarcity that much closer with this event?

Thanks for all of yours and Ilargi's work here. I really appreciate the not-speculative focus you bring.

NZSanctuary said...

This came in my inbox today – one of many crappy busnet essays I get through work – but this one really takes the cake!

*sigh*

Chaos said...

Re: slums

Everyone interested in this subject would do well to read Mike Davis' Planet of Slums...if you're not familiar, this book will scare the hell out of you, especially thinking that we're not really that far off from similar conditions (actually he considers Los Angeles one of the examples of slum cities).

Rototillerman said...

I found the Captain Sheeple video to be very moving. Thanks for creating that. I think that there is a typo at the very end, however: the URL given at the end has an extraneous www in front of the address. I would recommend that you edit it to remove that www (although it appears to take you to the home page OK).

Kurt

Wolf at the Door said...

@ Punxsutawney

"If and when this starts in the US of A, there will be a lot of people who will have lost what they feel they were entitled to..."

One of my neighbors is a government employee trapped in a job he despises and every time I get a chance to talk with him for more than a few minutes he gives me the countdown to retirement. Last time it was 34 months to go. The guy is literally living to get to that point....hell I bet it's one of the things that gets him up in the morning. And there are millions just like him waiting to collect and they are all going to get the rug ripped out from underneath them at the exact moment that they are ready to retire.

The almost retirees are going to be furious and feel cheated out of what they feel they have coming, the already retired are going to be furious and feel they are being ripped off and not paid thier due, the young and supposedly up and coming are going to be furious for thier lost opportunities and those in the middle of these groups are going to be furious as they get squeezed from every possible direction. Damn...everyone is just going to be furious. Should be a lot of fun.
BTW this is what keeps me up at nights too. The financial collapse I can handle...half of society snapping from stress and anger... not so much.

M said...
This comment has been removed by the author.
jal said...

@ NZSanctuary

I could use a Tata Nano.
jal

NZSanctuary said...

This article on libraries is retarded, but not surprising for FOX NEWS... the comment section is good though.

ric2 said...

@ Gravity

As you're fond of using the centre-periphery dynamic, wouldn't you say that the influx of poverty stricken rural dwellers accumulating in slums indicates that the urban centre is unable to extract any more surplus from its periphery (mostly those same people who end up in slums), either from its own rural parts or from other subordinate cities on the trade network? Or does slum expansion signify a cumulative imbalance caused by excessive extraction of peripheral wealth which cannot be allocated and redistributed within the centre?

A frequent commenter over at LATOC, OldHorseman, has an extended thread where he speculates on the dynamic of how urban slums (with walled-off Green Zones for the elites) will form in the USA: withdrawal of services from rural and suburban areas, so that the only places where a functional subset of the typical services to which we are currently accustomed exists is certain urban areas. Here is the thread. He uses the term "fedghetto" to describe future US urban megaslums.

By concentrating the population within these slums, the ruling elites will be able to more easily extract labor from the masses. Labor required to fight resource wars, keep what's left of industry running as fossil fuels deplete, etc.

So the center-periphery dynamic will continue, albeit over much smaller geographic scales.

Top Hat Cat said...

From an article at Peak Generation: BP's Deadline to Give Facts on Gulf Oil Spill

Congressman Ed Markey, chairman of the Energy and Environment Subcommittee apparently doesn't like being lied to by scumbag oil CEO's.

When Markey oversaw the June 15 congressional hearings, he remarked about BP:

"• BP said they didn’t think the rig would sink.
It did.

• They said they could handle an Exxon Valdez-sized spill every day.
They couldn’t.

• BP said the spill was 1,000 barrels per day. It wasn’t.
And they knew it."

BP is slime. They could have just gotten out front with this from day one and leveled with the public, the government, their shareholders, but they choose to lie and spin and lie some more, and spin some more and obfuscate because what they did is so terrible it needs to be Covered Up Big Time.
.

Top Hat Cat said...

Part Deux

Markey knows he's been lied to point blank by BP. Markey wants some real answers not more BP BS, and having been slimed by BP once, he is not in a good mood. He actually has what I sarcastically refer to as a 'tad of nads'. Nothing that clinks when he walks but far more than the other gutless cowards of Congress.

Even the hapless Admiral Thad Allen has doubts, “I think that one thing that nobody knows is the condition of the wellbore from below the blow out preventer down to the actual oil field itself..we don’t know if the wellbore has been compromised or not."

The article concludes: "Basically, if BP is silent on this, it would give mainstream credence to the web speculation that their wellbore is fatally compromised and that the relief wells may not be the immediate fix that we all so desperately want to see.."

Hey, maybe Robert from the other day can defend BP in the Congressional hearings, he seemed to be an excellent apologist for BP's lack of transparency throughout the last 60 days or so.

I'd pay good money to see him call Congressman Markey and Admiral Allen 'delusional' to their faces. I guess that would that a "Thad of nads" to do.

Mr. Kowalski said...

The problems in the real economy are not getting better. The Baltic Dry Index, a measurement of shipping traffic, has halved since last October, with last month the steepest decline yet. Housing was down what.. 30% in a month after the tax incentives ended ? Just wait for tomorrow's NFP employment report.. timber !! My honest opinion here is that we're now entering the second wave of the debt tsunami.. be on the lookout for Bernanke and his helicopters to try and save the day ! Remember that in 1929, the stock market crashed.. but throughout 1930 and most of 1931, rose back up. The real crash began in 1932, with deflation leading the way down. Alas, we have arrived at 1932. But Bernanke will, I do believe, unleash a bazillion in newly printed money, writing another chapter (hyperinflation) in the Fractional Reserve Ponzi saga. 2011 will be ugly.

http://themeanoldinvestor.blogspot.com/2010/06/bens-migraine.html

getyourselfconnected said...

Greenspan FINALLY verbalized what we all knew the FED has always thought:
"The stock market is not merely an indicator it is a cause of economic activity."

Nuff said, is there anything else?

Anyone interested in fishing I was out all day doing that for smallmouth bass:
http://economicdisconnect.blogspot.com/2010/07/back-on-dry-solid-land.html

Mr. Kowalski said...

Many posts here deal with life after the crash of the economic system, which I also believe will have to collapse as all ponzi's eventually do. Here's my post on the post crash world:

http://themeanoldinvestor.blogspot.com/2010/05/after-crash.html

DancesWithStapler said...

Man, if they don't extend those unemployment benefits, things could get ugly, fast. What are people supposed to do with no job, and no money even for the bare essentials?

gpp said...

The deflationists don't seem to understand that a deflation is not tolerable in a society up to its ears in debt.

Inflation on the other hand is the solution.

The government has unlimited power
--- and can create additional powers --- to bring such an inflation about.

It already has effectively forestalled the beneficial deflationary purge by propping up insolvent institutions, extending unlimited guarantees and distributing high powered money in exchange for worthless paper.

In a deflation we would have seen liquidations and forced asset sales in order to raise liquidity,
driving down prices, reducing collateralization and forcing in turn more asset sales.

But on the contrary no one was forced to liquidate assets to raise liquidity since vast oceans of liquidity have been created by the federal reserve (take a look at the evolution of bank reserves).

The fact that plastic from China hasn't gone up in price does not mean that we are in a deflation.

The debtors (of which the government is the biggest) must disburden themselves or our society will simply choke.
Deceipt is an important part of the plan of debt relief through
money printing.

You put out the propaganda that whereas the ocean of high powered money is manifestly swelling its velocity is nonetheless decreasing
and it is holding still --- doing no offense.

You spread the notion of balance sheet recessions, double dip evolution, impending depression,
"austerity" (such as bigger mac instead of biggest mac), the weakness of the consumer, credit contraction
and every fall of prices after a bubble has burst becomes evidence
of a deflation.

Emphasized not so much is the astronomical increase in government debt (so how is credit contracting?), the strong life and insatiable appetite of the king of all consumers -- war, the relentless growth of high powered money in the form of bank reserves,
and the steadily rising prices of food, energy and all manner of inflation hedge.

Inflation works best as a solution
if the public is deceived so that it can be fleeced more effectively.

Tero said...
This comment has been removed by the author.
Stoneleigh said...

There is a possibility that I might find myself in Halifax at the end of August. Would there be any interest there in arranging a talk? A couple of Oil Drum readers had asked me to come, but I don't have contact details for them.

Tero said...
This comment has been removed by the author.
Ed_Gorey said...

Paul Krugman has economics.

In his latest Op/ed, Paul Krugman unknowingly undermines the basis for his own macroeconomic modeling and the existence of his profession. Quite an accomplishment -- especially since, by the end of the column, he still seems oblivious to the full implications of his sudden realization.

Paul's light-bulb moment:
"When I was young and naïve, I believed that important people took positions based on careful consideration of the options. Now I know better. Much of what Serious People believe rests on prejudices, not analysis. And these prejudices are subject to fads and fashions. "
-----------------------

My comment:
Boom and bust; greed and fear; blind unthinking irrational herding behavior -- Economics at work for all to see except the professional economists. The psychology of previous investment in a broken profession is indeed quite strong.

Ilargi said...

"Paul's light-bulb moment:
"When I was young and naïve, I believed that important people took positions based on careful consideration of the options. Now I know better. Much of what Serious People believe rests on prejudices, not analysis. And these prejudices are subject to fads and fashions. "


Krugman tries to make you believe that HIS viewpoint is not based on prejudices. Right. Never mind that no-one ever spend their way out of debt. Some analysis.

.

Ilargi said...

"Ilargi says that internet censorship will no longer have the desired inflationary effect."

Excuse me? That's a really out of left field theory, and I certainly never talked about it.

.

Tero said...
This comment has been removed by the author.
Wolf at the Door said...

@ Tero

"That way our children will grow up courageous and will be able to make the world a better place."

One can hope but I doubt it. How can our children grow up courageous when the vast majority of the parents are anything but? Most are busily groveling for scraps at the feet of thier corporate masters on the one hand and/or wailing and knashing their teeth for gov't to save them from all manner of calamity and loss on the other. Not the type of brew conducive for the succesful distilling of a courageous progeny I am afraid.

@ gpp

"The government has unlimited power...to bring such an inflation about."

That's a nice myth but no it does not. IMO.

Ilargi said...

" ... internet censorhip would be a workable strategy for manipulating the velocity of money"

How do these two connect?

Out of left field means totally unexpected, crazy. It comes from baseball.

Tero said...
This comment has been removed by the author.
memphis said...

gpp wrote:

The deflationists don't seem to understand that a deflation is not tolerable in a society up to its ears in debt.

Inflation on the other hand is the solution.

The government has unlimited power
--- and can create additional powers --- to bring such an inflation about.


My understanding is that inflation occurs when too much money chases too few goods.

I fail to understand how, in the current environment, common folk--who certainly don't have TOO MUCH money--can chase goods and services when they can barely get by day to day.

Labor has no bargaining chip--at all. Don't like what's happening at your job? You can be replaced. How can the insecurity on the job front lead to people buying enough to drive up prices?

That's one reason why governmental bodies at all levels cannot, although they're trying, raise taxes and fees as much as they'd like--you can't get money from people who don't have it.

I work a couple of different positions as a nurse. I just heard yesterday that the Meals on Wheels program in the area has a waiting list, as does the Ohio's Passport program for the older indigent to receive support services.

The end of the money is now.

zander said...

@Stoneleigh

Not UK Halifax presumably.

Z.

Linda said...

@ Mr. K.

aftercrash

Liked your post. Russia wasn't so long ago. Here, soon.

Stoneleigh said...

Gravity,

As you're fond of using the centre-periphery dynamic, wouldn't you say that the influx of poverty stricken rural dwellers accumulating in slums indicates that the urban centre is unable to extract any more surplus from its periphery (mostly those same people who end up in slums), either from its own rural parts or from other subordinate cities on the trade network?

Wealth conveyors will definitely break down as peripheral life become so hard that people abandon it. While slum dwellers are still a peripheral phenomenon, they are a difficult one to extract surpluses from as so much of their small amount of economic activity happens unaccountably. Elites who imagine they will remain wealthy tend to forget that their wealth depends on functioning wealth conveyors. Their response tends to be to squeeze any readily discoverable surpluses, or anyone who owns anything they think is indicative of a surplus, like a nice home.

I would think that the most industrialised states and cities not only extract from their own rural periphery with several wealth conveyors, but also from the urban centres of less developed nations, intensifying slumming. But if transnational credit breaks down, such conveyors to distant centres could cease or reverse, insofar as they're not reliant on direct taxation.

Indeed. International wealth conveyors will break down, which will mean elites will intensify the pressure on their domestic field of influence in a vain attempt to maintain their own standard of living.

Stoneleigh said...

Punxsutawney,

I don’t expect they will deal with it rationally. And that’s going to result in a lot of anger and other unforeseen consequences which will be all but impossible to predict. This is one of the things that keeps me up at nights so to speak. I believe you see this possibility as well.

Very much so. Dashed collective expectations are very dangerous. A lot of people are going to end up running about like headless chickens and you don't want to be near them at that point.

Kipling put it well:


IF you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated, don't give way to hating,
And yet don't look too good, nor talk too wise:
If you can dream - and not make dreams your master;

If you can think - and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build 'em up with worn-out tools:

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: 'Hold on!'

If you can talk with crowds and keep your virtue,
' Or walk with Kings - nor lose the common touch,
if neither foes nor loving friends can hurt you,
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds' worth of distance run,
Yours is the Earth and everything that's in it,
And - which is more - you'll be a Man, my son!

Tero said...
This comment has been removed by the author.
Stoneleigh said...

GPP,

The deflationists don't seem to understand that a deflation is not tolerable in a society up to its ears in debt.

What is tolerable and what is not is irrelevant. Nature and Ponzi dynamics do not care what is tolerable.

Inflation on the other hand is the solution.

Trying to force-feed a system choking on excess credit with more of it is no solution. It's like trying to cure a hangover with a few more drinks. Eventually the patient will die of alcohol poisoning.

The government has unlimited power
--- and can create additional powers --- to bring such an inflation about.


Governments and central bankers have far less power than people suppose. The real power rests with the bond market. If a government genuinely attempted to print physical currency, the bond market would send its interest rates through the roof. That would precipitate a wave of debt default that is deflation by definition.

It already has effectively forestalled the beneficial deflationary purge by propping up insolvent institutions, extending unlimited guarantees and distributing high powered money in exchange for worthless paper.

It has not effectively done so. All it had achieved is a brief delay, and at great cost.

In a deflation we would have seen liquidations and forced asset sales in order to raise liquidity,
driving down prices, reducing collateralization and forcing in turn more asset sales.


That is coming. Watch his space.

pasttense said...

Top Cat Hat:
I think you are very naive. Markey is simply a phony. While BP is of course primarily the blame for the oil spill, Congress is second. You need to look at the political contributions made to Markey and everyone else on the various committees regulating energy. I think you will find that Markey and the rest of them have been bought and paid for by Big Oil. Big Oil explained to Congress that it didn't need serious regulation of deep water drilling--so Congress made sure that the Mineral Management Service only goes through the motions of regulating. (as to why Congress is more to blame than the President, it has always been the case that Presidents can only deal with a few dozen priorities--oversight of the rest of the thousands of things governments do is handled by Congress).

Tero said...
This comment has been removed by the author.
Greenpa said...

Man, I am SO dense.

I've been watching closely the change in MSM "tone", since mood is a big part of what happens next. In the past 2 weeks, the pendulum has swung from 85% "Everything Is Great" to 60% "Uh-Oh."

A big enough swing that I'd have to believe it's being orchestrated. So; WHY would the powers WANT the public spooked?

This set of headlines just now from the NYT:

"Losing Steam
The report shows that the economy needs help."

Ah. Oh. Of course!

They're pushing for mood support for- another stimulus. Duh. Which also fits perfectly with the Big Bammer's speeches at Toronto. Duh duh duh.

It'll be interesting watching what form(s) it takes. Very hard to justify more housing stuff- it just ain't working. Where will the imaginary money go?

zander said...

@ Ilargi

Congrats to Holland. Great victory.
Nothing to stop them goin' all the way now - 'cept the Germans ;) - If they do it I'll donate my usual X5
If the Argies win I'll drink the winnings.

@ Stoneleigh

Not Halifax UK no?

Z.

Ahimsa said...

"Oil And Gas Leaks From Cracks In Seabed Confirmed – Videos Show Gulf Oil Spill Leaking From Seafloor"

http://blog.alexanderhiggins.com/2010/06/13/bp-gulf-oil-spill-seafloor-oil-gas-leak-videos-photos/

reb said...

The inevitable end of the Ponzi scheme known as the Federal Reserve System has been presented years ago. Ref. http://usa-the-republic.com/items%20of%20interest/Inherent%20National%20Bankruptcy.html


Every “dollar” in circulation is created as the principal of a federal issued security (bill, bond, or note) with a promise to pay back the principal PLUS the interest. It is impossible. The interest does not exist. The interest for the initial security must be obtained from the principal of the subsequent issues.

The obvious inherent bankruptcy is delayed until no new securities can be foisted upon the patsies. The exponential growth in interest payments is the theme presented by Irargi.

The Mid-east bought the securities so the US would buy oil. Japan bought the securities so the US would import Japanese widgets. China bought so the US would buy more widgets. Government agencies, pension funds, and investment groups bought.

The Fed is requiring recipients of TARP funds to purchase securities which diminishes commercial bank reserves so banks can no longer lend money. Treasury auctions of long-term Fed owned securities have found Primary Dealers reluctant to buy at the low interest rate the Fed wants to maintain---even when the Fed offers the banks free funds that the banks can use to buy securities that pay 4 percent guaranteed.

Irargi comments on the leverage by Goldie, AIG, and others. Shucks. The Fed issues trillions of “Federal Reserve NOTES” (read loans from the Fed) when they receive a promise of payment from Congress (securities). What assets does the Fed have to guarantee their Notes ??? Absolutely nothing.

Where is the written contract between the Fed and Congress that the U.S. government will pay interest to the holders of the government securities ?? I have not seen it.

In 1913, the “financiers” who started the Fed put up some temporary funding but that has long since been repaid. The leverage of the Fed operation is infinite.

Benjamin Ginsberg has documented a history of “financiers” who assisted rulers over hundreds of years to steal the wealth of the people by national usury schemes in FATAL EMBRACE. Ignoring the national origin or religious orientation taunted by Ginsberg, the terminal economic destruction is inescapable.

~J~ said...

http://www.youtube.com/watch?v=6ELEa_xlyxo&NR=1

CopperTheRabbitDog is touring the beaches of NW Florida, Alabama, Mississippi, Louisiana, and finally Texas. This particular video is taken on June 23rd (prior to Alex) at Pensacola. As he says in the video, if you've ever traveled to Pensacola you know that the beaches are/WERE beautiful pristine white sand beaches. I was shocked at what he has captured...not because I didn't expect it, but because I've not seen video like this on the news coverage.

Greenpa said...

As The Empires Crumble Dept.:

http://tinyurl.com/2esv45o

4 foot crack in huge watermain- in DC suburb; and the valves to shut off the broken section won't close tight.

This is a really major limiter on cities. NOT on slums; but on those who think they will maintain any kind of upper level life style in the cities for long. The water supply WILL break, and go down, and not be fixed.

And, here we are- in the capital.

soundOfSilence said...

@~J~

It's a similar principle to "If a tree falls in the forest and there's no one there to hear it does it make a noise?"

If "shat" happens and the MSM doesn't report it ... did "shat" really happen??

bluebird said...

How do you explain to someone who still believes the financial industry won't collapse. But, they say, if the banks do implode, how would they foreclose on so many underwater houses? Who would kick out the homeowners when so many people stop making payments?

Gravity said...

If one assumes that cities compose the spatial core or centres of empire, and usually remain more prosperous than their peripheral surroundings during contractive phases precisely because they extract wealth from there, while generating compound wealth from such extracts, then certain forms of slum expansion could be seen as a symptom of catabolic collapse, as the maximum profitable distance for monetary or kinetic transferral of embodied energy from the periphery to the imperial core and productive allocation or concentration of surplus within said core becomes increasingly constricted by factors of diminishing marginal gain, both the core circumference and peripheral expanse are effectively reduced. This would drive already marginal populations to move closer to a stable source for minimal subsistence and create concurrent predatory, symbiotic and parasitic boundary dynamics between outer slums and inner city surplus.

anon10 said...

Why The Greater Depression Still Lies Ahead

Gravity said...

Gravity is a recursive algorithm and nothing else.

Bigelow said...

George Ure was particularly dark yesterday:

“No, Global Thermonuclear War (GTW) is not in the cards for sure this fall, it’s just that the magnitude of the tipping point Nov. 8-12 is about 4½ days, which dwarfs the 2001 9/11 tipping point which was a matter or only 3-4 hours of ‘tipping’. Moreover, the emotional release period of 9/11 (wailing the loss of lives) was about a week’s worth; this November release period yields a ‘wailing/mourning’ of 2½ and then tapering off.”
Monkeys, markets, and War in the M.E.

Greenpa said...

Fun Prediction: In terms of boosting the "down" moods- it would be useful if today more banks than usual were shut down. A nice number, that can hit the headlines; bank closings are never a good sign. The record for this year is 8, I think, April 16th. How about 10? Nice number; certainly not hard to do. 15 would be better, really noisy. I'll be interested to see.

ben said...

near the top of the section, stoneleigh mentioned a run on the banks is possible this year.

i realize that both serious deflationists, and less fortunately, hyperinflationists, are in on the 'silent run,' if i understand the phenomenon correctly. as are offshore banking, treasuries, and joining 'move your money.org,' no?

can its costs to banks/.gov, due to increasing loss exposure, be estimated, or otherwise characterized (preferably in a downward fashion please)? does its momentum generally fluctuate with market sentiment?

is the noisy flight of capital from greece considered a silent run?

will we see the silent run approaching full speed before it crosses over into a systemic banking crisis?


inchoately yours, ben.

M said...
This comment has been removed by the author.
anon10 said...

The following is an article about the current state of the Canadian economy:

One broken refrigerator away from default

ben said...

“Leaving Texas, fourth day of July
Sun so hot, the clouds so low, the eagles filled the sky
Catch the Detroit Lightning out of Santa Fe
The Great Northern out of Cheyenne, from sea to shining sea”--Robert Hunter

thanks, M. whenever Second Pa got transferred, the four of us would travel to our new city by train. when we left manhattan in the summer of '91 we took amtrak to california's bay area, the greatest part of which was on the empire builder, from chicago to seattle, and formerly run by the great northern railway, sometime during which, at the age of fifteen, i started 'east of eden,' my first book that wasn't written by roald dahl.

Greenpa said...

There is a really really easy way to tell if an oil seep is natural (and there are plenty). If it has been there for any length of time; there will be "cold seep" organisms, highly visible.

http://en.wikipedia.org/wiki/Cold_seep

Showing some of the nifty tube worms and mussels and weird shrimp would be FABULOUS PR for BP. See? Life goes on! Oil is natural!

If there are no cold seepers; you gotta think the seep/leak is new. Which would fit in with BP's silence.

soundOfSilence said...

State jobs in the Golden State are suddenly looking less golden if the goverator gets his way. Well to be fair... the sudden loss of luster is only anticipated to be temporary... probably...



SACRAMENTO, Calif. – A state appellate court on Friday sided with the Schwarzenegger administration in its attempt to temporarily impose the federal minimum wage on tens of thousands of state workers.

Full story

Ed_Gorey said...

Krugman update:

Paul is now threatening to punch all the anti-Keynesian economists who won't stop making fun of him. The poor man is losing his grip on reality while the boundaries of civil discourse are dissolving. This doesn't bode well for events yet to unfold.

Paul lashes out:
"I’m Gonna Haul Out The Next Guy Who Calls Me “Crude” And Punch Him In The Kisser"

Krugman lashes out

anon10 said...

Why Is the Gulf Cleanup So Slow?

There are obvious actions to speed things up, but the government oddly resists taking them.

http://online.wsj.com/article/SB10001424052748703426004575339650877298556.html

Top Hat Cat said...

@pasttense

I'm ultra cynical about Congress, it's a cesspool of corruption. And I'm familiar with Markey and his district, having once upon a time lived in it.

That said, no one else is even going through the motions to look like they want answers to the Gulf Eco-caust so his effort is, as they say in New England, 'better than a poke in the eye with a sharp stick.'

Markey's district is loaded with die-hard yuppie environmentalists who are quite assertive, affluent, and passionate about eco-issues. They would not hesitate to toss him out for someone who does 'go through the motions' on the environment. Markey doesn't like being made to look like a prick in public and BP has certainly managed to do that to him. At least it's a little illumination on the subject, the 'Press' has been worse than useless so far on the whole issue.

When CopperTheRabbitDog (Tourists using GOJO to clean tar balls and oil off of them. Seaside Beach, FL) posts more informative videos of what's going on with Gulf beaches than the vast armada of MSM whores, you know we're in full USA Bubble-Baby cover-up mode.

Tarballs R U.S. is a very bad story to show the Proles on the 4th of July. The public doesn't want to hear anything to rock the "We're Number One" jingoism talking points pumped out by the Ministry of Propaganda.

I hear GoJo can clean up almost anything, except a guilty conscience.

Top Hat Cat said...

And oh, by the bye, (hat tip to Ahimsa) the "Oil And Gas Leaks From Cracks In Seabed Confirmed – Videos Show Gulf Oil Spill Leaking From Seafloor" is a perfect example of 'creeping truthiness' as first practiced and perfected during the Weapons of Mass Destruction Big Lie effort during the lead up to the Iraq 'incursion'.

In the SNL Tommy Flanagan Pathological Liar tradition, BP will now say there was always 'lots' of natural leaks in the sea floor around Deep Water, they just forgot to mention that for the past 60 days or so, yeh, that's the ticket, natural leaks, lots of them, very normal, yeh.

Next, when it's found that the BOP they've been showing the public for weeks is not a source of the majority of leaking oil, BP will simply move the goal post and state that they never said it was the real BOP, it was for education purposes only and they couldn't help it if the audience mistakenly assumed it was the real one.

The Public Herd, which has the attention span of a small nocturnal rodent, will not notice anything inconsistent with the statement.

They will patiently wait for the next BP Big Wopper Lie, which will probably go something like;

"Through no fault of our own, BP accidentally drilled into the Underworld and Satan released his Dark Jisum just to make our stock price go down, and Defile the Gulf with his Evil Man Juice."
.

Wolf at the Door said...

@ Ed Gorey

Krugman piece is funny stuff. As you said, it seems that the "more stimulus" crowd is growing increasingly panicked and shrill by the day. It seems everywhere I go all I read and hear from people is that we need to spend more. These folks really are, for the most part, sincerly baffled by the "deficit hawks" and they really truly believe that if we just borrow more money we can get back to some type of prosperity...I would certainly put this in the same category as some type of brain damage. I don't understand it but it is fascinating to watch. And they are unteachable. The true believers among them will insist to thier dying day that if only we had spent another round of stimulus we could have avoided the pending Depression.

N. Zero said...

Johann Hari: How Goldman gambled on starvation

"Speculators set up a casino where the chips were the stomachs of millions. What does it say about our system that we can so casually inflict so much pain?"

http://www.independent.co.uk/opinion/commentators/johann-hari/johann-hari-how-goldman-gambled-on-starvation-2016088.html

Ed_Gorey said...

Jim Cramer is Mad as hell and he's not going to take it anymore....

Jim Cramer threatens to quit Mad Money unless the SEC bans high-frequency-trading. Those evil banks and hedge funds are making his job too tough.

Long ago Ilargi remarked that Jim's role is to be the Pierrot when the walls come tumbling down -- so very true.

Cramer complains starting minute 6 and 40seconds

Greenpa said...

M - "My question reveals the reasoning: Why use a nuke when a MOAB yields similar amounts of destruction minus the radiation? "

Yes, but; something you already know; LOGIC is not a good guide to the future behavior of any humans. And is almost certainly less useful for guessing what whackos will do.

M said...

Adios all...after reading a few past posts I have made, and cringing inside as I did it, I have come to the realization that this type of forum--actually any type of forum that includes writing--is not the best thing for an obsessive type such as myself...I get too "carried away"

Good luck to all, even the Libertarians :)

thethirdcoast said...

@ Greenpa:

"Yes, but; something you already know; LOGIC is not a good guide to the future behavior of any humans. And is almost certainly less useful for guessing what whackos will do."

Why do I have this sinking feeling that the lunatics in charge are going to try and nuke Deepwater just because, as Beavis used to say, "That would rule! Ahhhhh!!!"?

scandia said...

@ M..." to thine own self be true..." etc.
I have enjoyed your posts, your talent as a writer/artist.
Wishing you well.

soundOfSilence said...

soundOfSilence said...

State jobs in the Golden State are suddenly looking less golden if the goverator gets his way. Well to be fair... the sudden loss of luster is only anticipated to be temporary... probably...

SACRAMENTO, Calif. – A state appellate court on Friday sided with the Schwarzenegger administration in its attempt to temporarily impose the federal minimum wage on tens of thousands of state workers.


Ha... look at that. The article disappeared. Who would have "thunk" such a thing would happen? Slightly different version over at the Palm Beach Post

Greenpa said...

N. Zero said...
"Johann Hari: How Goldman gambled on starvation"

Yes, exactly. And ALL of this was totally obvious to some of us; AT THE TIME. I even wasted a fair amount of time trying to convince legislators to do something about it.

The exact same dynamic is responsible for probably 60% (my guess) of the price of oil.

And here we sit.

All that is really needed, if anyone wanted to improve the situation, is to bar anyone who does not physically handle the material in question from trading in futures on it.

And here we sit.

To me, this is no longer a matter where pointing fingers at someone's laziness or corruptness is valid.

Yes, they are lazy and corrupt; but the entire culture is. It's the culture itself which is physically UNABLE to do anything about the long slide down into universal incompetence.

Unable. Motivations are moot.

And here we sit. Living on the Autolytic Earth.

ogardener said...

A little good news.

A significant number of wild honeybees were observed over the past few days. They were busily extracting pollen from the white clover plants growing on my property. I suppose I could have followed the beeline back to the honeycomb but I chose not to do this. The moral of the story?

Give bees a chance.

Ilargi said...

New post up.


Dollar-Denominated Debt Deflation



.




.

Gravity said...

The destructive force of a massive ordinance air blast relies on atmospheric shockwaves propagating in a low-pressure gaseous medium, the energy release mechanism of known designs may be unfeasible to sufficiently crush rock or vaporise strata when detonated that deep in a non-gaseous medium. Then again, tactical nukes would also have similar problems with constricted or unpredictable blast yields, but a nuclear detonation should produce intenser temperatures which could be used to tightly fuse the surroundings in a way that other thermokinetic delivery systems just can't manage.
The other reason why tactical nukes could be uniquely useful involve predesigned deep penetration delivery systems intended for bunker busting, adapting this concept for deepwater delivery could make lenghty relief well contruction superfluous in some cases, ideally with more suitable geological conditions.

The radiation released by a hypothetical nuclear event capable of sealing the fissures successfully, if at all possible, would actually cause negligible damage to the ecosystems and foodchains when compared to the damage that would otherwise be caused by a prolonged or infinite blowout. The risk of minor or even major contamination would not be a decisive factor when considering that most of the radiation would never reach the surface or would yield far less cumulative damage than the avoided discharge. Still, any procedure equally capable of speedy success without radiation would be preferable.

But again, this whole discussion is largely a neuroleptic incantation, perhaps associated with a bargaining phase, as most conceivable explosions under these unstable conditions, nuclear or otherwise, have an unreasonably high chance of backfiring and precipitating a more acute extinction event by manifold fracturing instead of sealing anything.