Friday, September 10, 2010

September 10 2010: No economic growth for years to come


John Vachon Fast Food October 1938
A quick bite somewhere in Nebraska


Ilargi: There is no shortage of analysts and experts out there who see and recognize some part of what’s ailing our economies. There is, however, a huge shortage of those who can connect the parts. Often the American people themselves look to be better judges of reality than all those who make a good living telling them what that reality is.

Still, Ian Bremmer & Nouriel Roubini start out promising enough:

Paradise Lost: Why Fallen Markets Will Never Be the Same
Crises breed denial. Whether a crisis concerns an individual’s health, career or marriage, a company’s reputation or market share, or a nation’s place in the global pecking order, powerful incentives exist within the stricken entity to aspire to a return to normalcy - and to proceed as if that result represents the only option. However, as we all know from human experience, some setbacks are irreversible. We believe the recent meltdown suffered by the U.S. and its partners on the liberal side of the global economy is one of them.

Still, many policymakers and economic thinkers in the U.S., Europe and Japan remain shrouded in denial. They assume that after a period of healing, high growth will return and the rules of global capitalism will restore the preeminence of the U.S. economy and the appeal of a chastened (yet only slightly less freewheeling) laissez-faire Anglo-Saxon model.

Such thinking is either dangerously naive or the result of epistemological blindness. A scenario can be charted in which the U.S. and its liberal market adherents not only return to precrisis "potential growth" but even exceed it. But the political, economic, financial and psychological hurdles standing in the way of this scenario suggest it would require divine intervention to make it so. [..]

After a few more years of lackluster growth — unavoidable due to the deleveraging needs of households and the business sector — financial institutions and governments will seek a return to growth and even demand that national governments move, or move out of the way, to increase it. This will be a dangerous moment — one that war correspondents refer to as "survivor’s euphoria." The illusion, of course, is of invulnerability, and too often lessons learned in previous brushes with mortality are cast aside.


Ilargi: "A scenario in which the U.S. not only returns to precrisis "potential growth" but even exceeds it"? If you have enough fantasy, well, perhaps. But what about all the other scenarios, why not talk about those? Roubini's problem is he can't shake off the notion of growth, in this case posing as "lackluster growth". And everything he says, and presumably thinks, falls in that light. Maybe he’s so happy to be invited and celebrated everywhere in the world as Dr. Doom that he doesn't want to take the risk of scaring his benefactors away. "Doom" thus comes to mean low growth, while flat-out contraction is off the agenda.

But how realistic is that? Even allowing for the fact that the GDP is "not a very accurate" way to measure growth, it's already "officially" at 1.6% and heading down short term (a correction to 1.2% is in the works). So what are the short to mid-term prospects? Well, 70% of GDP is the American consumer, so there's where to look. The 91-day trailing Growth Index of the Consumer Metrics Institute has gone all the way down to -5.79%, while official GDP remains at 1.6% for the moment. That’s a difference of 7.39% that will have to be explained away somehow.

10 days ago, when I last discussed the CMI Growth Index in One more time: GDP and CMI, it was at -5.43%. It is therefore sinking at roughly 1% per month. And this, don't forget, is a leading indicator, for which I devised the following graph back then, based on Doug Short's great work:



No matter where you stand, that graph provides at the very least a very stark warning. Then again, it’s just a graph, and perhaps somewhat crudely juxtaposed at that.

What will actually drive the real US economy, 70% of which is driven by consumers, forward? The latest report from Comstock Partners lifts part of the veil:

The Significance of Consumer Deleveraging
Consumers have only begun to cut back on their severe debt burdens, and the process will take a number of years.  Household debt relative to GDP soared from a range of 43% to 49% in the 20-year period between 1965 and 1985 to a peak of 97.3% in 2009.  As of March 31st (the latest data point) this dropped only slightly to 92.7%.  To provide some more perspective, Ned Davis Research estimates the mean to be 54.2% over the past 58 years.  The percentage climbed gradually to 65% in 1998, and then really accelerated to its recent peak.

To be conservative, let's assume that the household debt/GDP ratio falls back only to the 65% level of 1998 rather than to the lower level between 1965 and 1985 or to the long-term mean.  Under that assumption household debt would have to be pared back by about $ 4 trillion (from the present total of $13.5 trillion), an amount that constitutes about 40% of current consumer expenditures.[..]

.... last week the ECRI Weekly Leading Indicator was down 4.11% from a year earlier.  We searched the historical data to determine what happened to the economy at other times when the index was down 4.11% or more year-over-year.  Over the last 42 years this has occurred seven times, and in all seven instances a recession started shortly before or shortly after the signal.  We also note that all of these instances were accompanied by bear markets in stocks.  Although no indicator is certain in economics or stock markets, seven for seven is nothing to sneeze at.


Ilargi: That is to say, even under a rather rosy scenario, which ignores the long term trend in favor of a short term one, households will have to decrease their debt levels by $4 trillion. Under the long term trend, it would be more like $6 trillion. The question then of course arises how much time households have to pare back this debt.

Jim Quinn, below, says that under the rosy scenario, a drop in household debt to GDP from 92.7% to 65%, this would force consumer spending down by $800 billion per year; Jim assumes consumers will have 5 years to wind down their debt. But this could easily be 4 years, and we could hit the $6 trillion long term trend, which would mean a forced deleveraging of $1.5 trillion per year. How you would get a positive GDP growth number under these circumstances is, frankly, beyond me.

Quinn writes on a topic that we easily overlook, but one that defines our communities in many ways, jobs being a big one among them: retail. And you guessed it: it ain't looking good. Not at all. If consumers have to get rid of some $1 trillion in debt per year over the next few years, that means they have much less money to spend in stores. So scores of those will close, and scores more will lay off scores of people. Who will then have less money to spend in stores. You’ll be hard pressed to find a more vicious circle. And with nothing in sight to stop it.

Retailers – Reality Check Time
The population of the US has grown from 281 million in 2000 to approximately 308 million today. We’ve had a 10% population increase in 10 years. Consumer expenditures have grown from $6.7 trillion in 2000 to $10.3 trillion today. This is a 54% increase over the course of the decade. Amazingly, real average weekly earnings have only gone up by 6% in the last decade. [..]

Consumer credit has advanced from $1.5 trillion in 2000 to $2.4 trillion today. This 60% increase in consumer debt has allowed workers who have barely increased their earnings to spend like they made a lot more money. This debt fueled consumption binge led major retailers to expand in order to keep up with the delusional consumers. [..]

Retail America has run directly into a brick wall. [..] Lowes grew their store count from 600 to 1,700 over the course of the decade, a 183% increase. Wal-Mart grew their store count from 4,000 to 8,500, a 113% increase. Target grew their store count from 1,000 to 1,750, a 75% increase. Kohl’s grew their store count from 300 to 1,050, a 250% increase. [..]

Lowes has 500 more stores today than it had in 2005, $4 billion more sales, and $1 billion less profits. Target has 340 more stores today than it had in 2005, $12 billion more sales, and the same profit. Kohl’s has 240 more stores than it had in 2006, $1.6 billion more sales, and $100 million less profit. Only Wal-Mart has kept the profits flowing, mostly due to its international expansion. The tough times have only just begun for these retailers. [..]

Using your home as an ATM is history. Home equity is at an all-time low and 25% of homeowners are underwater. Home prices are destined to fall another 20%. There are 15 million people unemployed. Consumer expenditures still account for 70% of GDP. In order for the US economy to achieve equilibrium, consumer spending will need to regress back to 65% of GDP. This will require an annual reduction in consumer spending of $800 billion. [..]

There are three major errors that have been committed by every retailer in America. They failed to recognize that the spending per household was 30% over inflated due to debt financed demand. They then extrapolated the spending per household using a 5% to 10% growth rate. Lastly, they ignored the fact that their competitors had the same strategy. [..]

Lowes, Wal-Mart, Target, and Kohl’s have yet to recognize their predicament. They are still blinded by their hubris. The point of recognition will occur within the next year. Each of these retailers will be closing hundreds of underperforming stores in the next two years.


Ilargi: We're talking thousands of additional retail outlets that are bound to shut their doors. There are already plenty malls in the US that have huge amounts of vacancies. There'll be many more.

The number one driver behind all this deleveraging is consumer debt, and most of that is mortgage debt. Incidentally, when you read that US savings rates are up, don't imagine someone with money in the bank. Paying down debt is included in savings numbers, and Americans pay down a lot, voluntarily or not.

The mortgage situation is bound to get a whole lot worse. Michael David White does an admirable job of keeping inventory, even if he's still probably way too positive:

HousingStory.net predicts a 9% fall in property prices nationwide in 2010
A stat which may be of great interest is the prediction by the average of the indexes that our fall in prices is only half-way accomplished – a forecast which, if true, will elicit fear in the hearts of homeowners, buyers, bankers and government officials.

A natural fall-back in prices is a matter of the highest gravity to the Federal Reserve Bank and the Treasury and to current and future homeowners. The federal government has massively intervened in the housing market. It funds nearly 100 percent of new mortgage loans originated today.

Fed and Treasury are attempting to preserve bubble values for homeowners and save mortgage investors. Absent government intervention, housing prices would have fallen 50 percent or 75 percent by now. Probably one-of-three or one-of-two mortgages would be in default. Global depression would surely have followed such a fall.

We believe an ambitious destruction of credit-bubble debt investments would and will allow the economy to roar back to life. This camp says the creative destruction of debt following a credit bubble is the silver bullet, the radical magic, the Holy Grail, the gift of life.


Ilargi: White's last point sounds reasonable, if daring. Why not aggressively take on the project of debt destruction, so we can have a clean start and build our world back up again? Well, he sort of provides the answer himself, doesn't he? "Absent government intervention, housing prices would have fallen 50 percent or 75 percent by now. [..] Global depression would surely have followed such a fall."

It's easier to understand such an apparent contradiction coming from Michael David White than it is from someone like Joseph Stiglitz, who's after all an eminent economist. Still, Stiglitz says essentially the same, after an excellent analysis of the economy. Which, by the way, makes it even harder to see where he gets lost along the way:

A better way to fix the US housing crisis
[..] Curiously, there is a growing consensus on both the left and the right that the government will have to continue propping up the housing market for the foreseeable future. This stance is perplexing and possibly dangerous.

It is perplexing because in conventional analyses of which activities should be in the public domain, running the national mortgage market is never mentioned. Mastering the specific information related to assessing creditworthiness and monitoring the performance of loans is precisely the kind of thing at which the private sector is supposed to excel.

It is, however, an understandable position: both US political parties supported policies that encouraged excessive investment in housing and excessive leverage, while free-market ideology dissuaded regulators from intervening to stop reckless lending. If the government were to walk away now, real-estate prices would fall even further, banks would come under even greater financial stress, and the economy's short-run prospects would become bleaker.

But that is precisely why a government-managed mortgage market is dangerous. Distorted interest rates, official guarantees and tax subsidies encourage continued investment in real estate, when what the economy needs is investment in, say, technology and clean energy. Moreover, continuing investment in real estate makes it all the more difficult to wean the economy off its real-estate addiction, and the real-estate market off its addiction to government support. [..]

The Federal Reserve Board is no longer the lender of last resort, but the lender of first resort. Credit risk in the mortgage market is being assumed by the government, and market risk by the Fed. No one should be surprised at what has now happened: the private market has essentially disappeared. The government has announced that these measures, which work (if they do work) by lowering interest rates, are temporary. But that means that when intervention comes to an end, interest rates will rise – and any holder of mortgage-backed bonds would experience a capital loss – potentially a large one.

No private party would buy such an asset. By contrast, the Fed doesn't have to recognise the loss; while free-market advocates might talk about the virtues of market pricing and "price discovery", the Fed can pretend that nothing has happened. With the government assuming credit risk, mortgages become as safe as government bonds of comparable maturity.

... government policies to support the housing market not only have failed to fix the problem, but are prolonging the deleveraging process and creating the conditions for Japanese-style malaise. Avoiding this dismal "new normal" will be difficult, but there are alternative policies with far better prospects of returning the US and the global economy to prosperity.

Corporations have learned how to take bad news in stride, write down losses, and move on, but our governments have not. For one out of four US mortgages, the debt exceeds the home's value. Evictions merely create more homeless people and more vacant homes. What is needed is a quick write-down of the value of the mortgages. Banks will have to recognise the losses and, if necessary, find the additional capital to meet reserve requirements. This, of course, will be painful for banks , but their pain will be nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy.


Ilargi: Yeah, banks will have to recognize losses, and that will be painful. Stiglitz manages to give it all such a benign veneer.

The reality is though, and it's sort of hard to believe Stiglitz doesn't see this, that if mortgage values are written down to realistic levels, i.e. levels that a nation of debt ridden consumers would buy a home at, it wouldn't just be painful to the banks, it would kill them outright. As it would the US government, which has untold trillions in both mortgages and securities bet on the notion that it can keep those levels up. Neither the government nor the banks, assuming there’s -much of- a difference, have any intention of letting that happen. That is, until and unless it becomes inevitable. By which time they wager they’ll have secured as much and as many of their own interests at the cost of the American people as they possibly can.

And the American people feel this coming, whether they know about it or not. StrategyOne has a survey out:

65% of Americans Expect Double-Dip Recession, Brace for 2nd Hit Worse Than the 1st
Almost two in three Americans (65%) say a double-dip recession — defined as a recession followed by a short-lived recovery, followed by another recession — is now likely to happen. Among those who expect a double-dip recession, nearly half (44%) fear it will be worse than the first one, with 21% worried it will be "much more severe." Just 24% think the second recession will be less severe. [..]

... Americans are certainly not holding their breath for a full recovery coming anytime soon. Just 5% think there will be a full economic recovery by the end of this year, and only another 21% see recovery taking place by the end of 2011.  Half of all Americans polled (50%) see a recovery not coming until sometime after the end of 2011, and about a quarter (23%) doubt our economy will ever fully recover.[..]

... fundamental doubts and concerns are being raised about America. The country is split on whether America's best days lie ahead of us or behind. A slim majority, 52%, say they are ahead of us, while 48% say they are behind us.  There is however consensus around another point –  71% agree that America is fundamentally broken and not working.[..]

Facing a scary and uncertain financial future, Americans are watching their wallets:
  • 41% are planning to cut back on their spending over the next 3–4 months, compared with 8% who plan to increase it.
  • 35% say they will plan to cut back their online spending over the next to 3–4 months, compared with 12% who plan to increase it.
  • 79% say they are planning to spend less money for Christmas this year.
  • 87% say they do not plan to make a big-ticket purchase (such as a house or car) in the next 3–4 months.
  • 49% have already delayed making a big-ticket purchase during the past few months.
  • 26% of Americans don't expect their personal finances to fully recover from the downturn until after 2011, and just as many (26%) think their personal finances won't ever fully recover.


Ilargi: Now you tell me how a nation of people who feel that way will turn around an economy that's based to such an extent (70%) on their spending habits. It's just very simply not going to happen. Which is why a government made up of wiser, smarter and less conflicted people would take, and have taken, completely different measures from the one you have in front of you now. But that's a subject we’ll leave till next time. And by government I mean all of them. White House, Congress, Senate, what have you, Republicans as well as Democrats. They're one and the same side of the same coin, trying hard to look distinguishable for power and monetary related purposes. Not an interesting distinction, not when you’re out of a job and homeless or close to getting there.

America's economy is the accumulative spending power of its people. And the American people are broke. That's the whole story.

And as long as we continue on the present path, all that will happen is they get more broke.

Economic growth, for better or for worse, is not in the picture, not for years to come. Paying off debt is. For goverments, companies and individuals. And since their respective debts are so high, many will go bankrupt trying to pay for them. Impossible to grow an economy in the face of that.

You may claim that nobody can foresee the future, but you'd be no more than partially right. As Marguerite Yourcenar said a long time ago:

"On the whole, however, it is only out of pride or gross ignorance, or cowardice, that we refuse to see in the present the lineaments of times to come."












The Significance of Consumer Deleveraging
by Comstock Partners

For some time it has been our view that the recent recession, unlike all other post-war recessions, was caused by a credit crisis, and that it would therefore be followed by a series of weak recoveries and frequent recessions until consumers successfully deleveraged their exceedingly heavy debt loads.  That scenario now seems to be happening in accordance with our projections.  A statistical economic recovery that was already far weaker than average has decelerated even further and the ECRI weekly leading indicator index strongly suggests that another recession may be in store.

Consumers have only begun to cut back on their severe debt burdens, and the process will take a number of years.  Household debt relative to GDP soared from a range of 43% to 49% in the 20-year period between 1965 and 1985 to a peak of 97.3% in 2009.  As of March 31st (the latest data point) this dropped only slightly to 92.7%.  To provide some more perspective, Ned Davis Research estimates the mean to be 54.2% over the past 58 years.  The percentage climbed gradually to 65% in 1998, and then really accelerated to its recent peak.

To be conservative, let's assume that the household debt/GDP ratio falls back only to the 65% level of 1998 rather than to the lower level between 1965 and 1985 or to the long-term mean.  Under that assumption household debt would have to be pared back by about $ 4 trillion (from the present total of $13.5 trillion), an amount that constitutes about 40% of current consumer expenditures.  While this could be accomplished over a number of years, it can readily be seen that the deleveraging would create a highly significant drag on consumer outlays for an extended period.  Since such spending accounts for some 70% of GDP, this creates a serious drag on the overall economy as well.

As we expected, consumer spending has been weak despite the massive stimulus provided by the Fed, the White House and congress.  In addition, with mortgage debt accounting for a majority of total household debt, the housing market has remained under pressure as well.  The statistical economic recovery to date has been far weaker than the post-war average.  Over the first four quarters of the so-called recovery GDP growth has averaged only 3.0% quarterly, compared to growth of 5.9% over the last nine recoveries from recession.  Furthermore growth in the last quarter was only 1.6%, far under the average of 5.9% for the 4th quarters of previous expansions. 

More recently the economy has slowed even more as indicated by data released over the last few months.  This development has now been recognized by most economists.  The consensus of economists has now reduced their projected growth rates for three consecutive months.  The Fed Beige Book released yesterday referred to "widespread signs of deceleration".  ISI's Ed Hyman stated that their weekly company surveys "suggest slowdown is broadening and intensifying".  Overall the economy seems in danger of slowing down to "stall speed", airplane terminology referring to the minimum speed necessary to keep from crashing.

Over the past week or so the market has been somewhat encouraged by a few indicators that came in above expectations.  However, the data was still very soft, and merely indicated that the economy may still be growing at an extremely low rate.  Moreover, these indicators are coincident with the economy at a time when the leading indicators with a good record of prediction are strongly suggesting the distinct possibility of recession. 

For instance, last week the ECRI Weekly Leading Indicator was down 4.11% from a year earlier.  We searched the historical data to determine what happened to the economy at other times when the index was down 4.11% or more year-over-year.  Over the last 42 years this has occurred seven times, and in all seven instances a recession started shortly before or shortly after the signal.  We also note that all of these instances were accompanied by bear markets in stocks.  Although no indicator is certain in economics or stock markets, seven for seven is nothing to sneeze at.  We note that ECRI Managing Director Lakshman Achuthan has not yet officially called a recession, although he has stated that, based on his index, there was more than a 50% chance of one.

In our view the market is in a volatile trading range that is part of a topping formation much like the topping process in early 2000 and late 2007.  The trading range is likely to be violated on the downside when the economic recovery fails to accelerate and companies begin to bring down their revenue and earnings guidance.  




Retailers – Reality Check Time
by Jim Quinn - Burning Platform

Having worked for a big box retailer for 14 years, I understand the dynamics of a high growth rollout of stores as a key to increasing market share and profits. Some of the best retail names in the US have practiced the identical strategy of concentrating many stores in each market to drive the small competitors out of business. This strategy worked wonders for Lowes, Wal-Mart, Target and Kohl’s during the early part of this decade. The combination of solid same store sales and opening new stores is a fantastic combination during good times. The results actually make the CEOs of these companies think they are brilliant. Their store expansion models based on rosy assumptions are followed like they can’t go wrong.

What these CEOs didn’t realize was that their expansion plans were based on lies and frauds. If they had advisors who could give them a reality check, they could have avoided the massive downsizing that awaits them. Their hubris didn’t leave room for a reality check. The population of the US has grown from 281 million in 2000 to approximately 308 million today. We’ve had a 10% population increase in 10 years. Consumer expenditures have grown from $6.7 trillion in 2000 to $10.3 trillion today. This is a 54% increase over the course of the decade. Amazingly, real average weekly earnings have only gone up by 6% in the last decade.

The chart below tells the story that retail CEOs have been ignoring for a decade. Consumer credit has advanced from $1.5 trillion in 2000 to $2.4 trillion today. This 60% increase in consumer debt has allowed workers who have barely increased their earnings to spend like they made a lot more money. This debt fueled consumption binge led major retailers to expand in order to keep up with the delusional consumers.   

Graph: Total Consumer Credit Outstanding

Retail America has run directly into a brick wall. Below are charts detailing the expansion history of four of the most admired retailers in America. Lowes grew their store count from 600 to 1,700 over the course of the decade, a 183% increase. Wal-Mart grew their store count from 4,000 to 8,500, a 113% increase. Target grew their store count from 1,000 to 1,750, a 75% increase. Kohl’s grew their store count from 300 to 1,050, a 250% increase. Same store sales are the true measure of a retailer’s health. When comp store sales are +5% or better, retailers make substantial profits and confidently build new stores. As the charts below clearly show, comp store sales have been in a substantial downtrend since 2006. The new stores that have been built in existing markets are over cannibalizing their existing stores.

Lowes has 500 more stores today than it had in 2005, $4 billion more sales, and $1 billion less profits. Target has 340 more stores today than it had in 2005, $12 billion more sales, and the same profit. Kohl’s has 240 more stores than it had in 2006, $1.6 billion more sales, and $100 million less profit. Only Wal-Mart has kept the profits flowing, mostly due to its international expansion. The tough times have only just begun for these retailers.


Lowe's - Annual Sales Growth


Walmart - Annual Sales Growth

Target - Annual Store Count Growth

Target - Annual Sales Growth

Kohl's - Annual Store Count Growth

Kohl's - Annual Sales Growth

The American consumer is still heavily indebted. Much of the retail spending in the last decade came from mortgage equity withdrawals. Using your home as an ATM is history. Home equity is at an all-time low and 25% of homeowners are underwater. Home prices are destined to fall another 20%. There are 15 million people unemployed. Consumer expenditures still account for 70% of GDP. In order for the US economy to achieve equilibrium, consumer spending will need to regress back to 65% of GDP. This will require an annual reduction in consumer spending of $800 billion. The CEOs of these retailers have not grasped the implications of this coming adjustment in our consumer society.


There are three major errors that have been committed by every retailer in America. They failed to recognize that the spending per household was 30% over inflated due to debt financed demand. They then extrapolated the spending per household using a 5% to 10% growth rate. Lastly, they ignored the fact that their competitors had the same strategy. There are 1.5 million retail establishments in the US. Thousands of these stores are going out of business every year.

Lowes, Wal-Mart, Target, and Kohl’s have yet to recognize their predicament. They are still blinded by their hubris. The point of recognition will occur within the next year. Each of these retailers will be closing hundreds of underperforming stores in the next two years. Time for a reality check.





Roubini talks to Maria Bartiromo: We're in a process of deleveraging
















65% of Americans Expect Double-Dip Recession, Brace for 2nd Hit Worse Than the 1st
by PRNewswire-USNewswire

48% see America's 'best days' behind us, 71% agree country is 'fundamentally broken and not working'

Almost two in three Americans (65%) say a double-dip recession — defined as a recession followed by a short-lived recovery, followed by another recession — is now likely to happen. Among those who expect a double-dip recession, nearly half (44%) fear it will be worse than the first one, with 21% worried it will be "much more severe." Just 24% think the second recession will be less severe. These findings come from a recently conducted survey of 1,043 Americans by the polling firm StrategyOne, a Daniel J. Edelman company.

As they are bracing for a second downturn, Americans are certainly not holding their breath for a full recovery coming anytime soon. Just 5% think there will be a full economic recovery by the end of this year, and only another 21% see recovery taking place by the end of 2011.  Half of all Americans polled (50%) see a recovery not coming until sometime after the end of 2011, and about a quarter (23%) doubt our economy will ever fully recover.

But beyond feelings about where the economy is today and where it is heading next, fundamental doubts and concerns are being raised about America. The country is split on whether America's best days lie ahead of us or behind. A slim majority, 52%, say they are ahead of us, while 48% say they are behind us.  There is however consensus around another point –  71% agree that America is fundamentally broken and not working.

"The American public — characteristically optimistic and resilient — is looking around and seeing more and more dark storm clouds approaching on the horizon," said Bradley Honan, senior vice president of StrategyOne. "Not only has confidence in the economy been severely undermined, there are now real, significant doubts emerging about our country. The clearest implication is that going forward, consumers are expected to be a lot more frugal.   With consumers accounting for nearly two-thirds of economic activity in the country, this is indeed a worrisome trend.

Facing a scary and uncertain financial future, Americans are watching their wallets:
  • 41% are planning to cut back on their spending over the next 3–4 months, compared with 8% who plan to increase it.
  • 35% say they will plan to cut back their online spending over the next to 3–4 months, compared with 12% who plan to increase it.
  • 79% say they are planning to spend less money for Christmas this year.
  • 87% say they do not plan to make a big-ticket purchase (such as a house or car) in the next 3–4 months.
  • 49% have already delayed making a big-ticket purchase during the past few months.
  • 26% of Americans don't expect their personal finances to fully recover from the downturn until after 2011, and just as many (26%) think their personal finances won't ever fully recover.


"As we enter the 34th month since the 'Great Recession' began, we see the mind-set of consumers turning even more cautious and conservative than what we have seen previously," said Honan. "The consumer economic engine which drives our growth is either stalled or stuck in first gear. Until consumers feel more confident and are willing to spend more freely, growth will likely be anemic at best."




HousingStory.net predicts a 9% fall in property prices nationwide in 2010
by Michael David White

We make the call for a new decline in prices despite positive signals of higher prices including a gain of seven percent nationwide by Case-Shiller 10-City index from its post-crash bottom in April 2009.

HousingStory.net surveys and averages the data of four major property price indexes including Case-Shiller, the Federal Housing Finance Agency (FHFA), First American, and Freddie Mac (Please see the results immediately below.).


Our projections are based upon the assumption that values broke into bubble gains starting in 2000. We project a pre-bubble trend using values predating 2000 and going as far back as possible in each data series. We then project a second trend: It follows prices from the fall of the height of the boom.

You will understand this method as soon as you view any of the forecast charts (Please see Case-Shiller immediately below. The other three price charts follow this post.).



You will observe in the charts of the four data sets remarkable likenesses in the nature of the rise and fall. While the pattern is the same in the rise and fall, the numbers which describe those changes are very different from one data set to the next.

We are estimating, for example, a total fall in prices of 55 percent nationwide based upon Case-Shiller 10-City, but we estimate a fall of only 21 percent using FHFA. Case-Shiller remains the bearish measure today with values down 29 percent from the peak. FHFA says prices have fallen only 11 percent.

***

A stat which may be of great interest is the prediction by the average of the indexes that our fall in prices is only half-way accomplished – a forecast which, if true, will elicit fear in the hearts of homeowners, buyers, bankers and government officials.

A natural fall-back in prices is a matter of the highest gravity to the Federal Reserve Bank and the Treasury and to current and future homeowners. The federal government has massively intervened in the housing market. It funds nearly 100 percent of new mortgage loans originated today.

Fed and Treasury are attempting to preserve bubble values for homeowners and save mortgage investors. Absent government intervention, housing prices would have fallen 50 percent or 75 percent by now. Probably one-of-three or one-of-two mortgages would be in default. Global depression would surely have followed such a fall.

We believe an ambitious destruction of credit-bubble debt investments would and will allow the economy to roar back to life. This camp says the creative destruction of debt following a credit bubble is the silver bullet, the radical magic, the Holy Grail, the gift of life.

It is an open question whether the fall in prices has ended. In the aftermath of a great American property bubble which blew up inside of a great worldwide property bubble, the Fed may meet its match and win defeat. Only then can we be saved.





Paradise Lost: Why Fallen Markets Will Never Be the Same
by Ian Bremmer & Nouriel Roubini - Institutional Investor

Crises breed denial. Whether a crisis concerns an individual’s health, career or marriage, a company’s reputation or market share, or a nation’s place in the global pecking order, powerful incentives exist within the stricken entity to aspire to a return to normalcy — and to proceed as if that result represents the only option. However, as we all know from human experience, some setbacks are irreversible. We believe the recent meltdown suffered by the U.S. and its partners on the liberal side of the global economy is one of them.

Still, many policymakers and economic thinkers in the U.S., Europe and Japan remain shrouded in denial. They assume that after a period of healing, high growth will return and the rules of global capitalism will restore the preeminence of the U.S. economy and the appeal of a chastened (yet only slightly less freewheeling) laissez-faire Anglo-Saxon model.

Such thinking is either dangerously naive or the result of epistemological blindness. A scenario can be charted in which the U.S. and its liberal market adherents not only return to precrisis "potential growth" but even exceed it. But the political, economic, financial and psychological hurdles standing in the way of this scenario suggest it would require divine intervention to make it so. An extended period of anemic, subpar growth is the much more likely scenario as there is a painful deleveraging by households, financial sectors and governments. One cannot even rule out the risk of a double-dip recession in the U.S. and other advanced economies.

Clearer-minded souls understand that the world of the bubbles is gone and that hard work looms ahead if the advanced economies are to emerge from this period with any hope of keeping pace with the developing world. The policymakers of the market liberal bloc — and yes, in this grave new world, that’s how we should think of the old Group of Seven — would need to be willing to take bold action.

Even if there is growth after the current anemic period, the ancien régime (that is, the G-7) is on a trajectory to be overtaken by the rising powers of the emerging world as the century unfolds. Because of this, the U.S. and the rest of the free-market economies must use the political leverage they have today to lock in rational safeguards and agreements that will govern the global economy of tomorrow.

After a few more years of lackluster growth — unavoidable due to the deleveraging needs of households and the business sector — financial institutions and governments will seek a return to growth and even demand that national governments move, or move out of the way, to increase it. This will be a dangerous moment — one that war correspondents refer to as "survivor’s euphoria." The illusion, of course, is of invulnerability, and too often lessons learned in previous brushes with mortality are cast aside.

One thing the U.S. could do for itself, and for the world, is forgo the seemingly inevitable hand-wringing and political posturing that are already ramping up over the question of the country’s declining influence. It has become increasingly clear to all but the most ideological of analysts over the past several years that U.S. strength is on the wane. Conventional wisdom has it that a U.S.-dominated unipolar global system is giving way to a multipolar order, one in which various emerging powers advance competing ideas for how the world should be run and act to further their agendas. Conventional wisdom has it wrong. The financial crisis and global market meltdown have created conditions for a "nonpolar" order — one in which America’s chief competitors remain much too busy with problems at home and along their borders to bear heavy international burdens.

Read on




A better way to fix the US housing crisis
by Joseph Stiglitz - Guardian

Government policies to prop up the housing market not only have failed to fix the problem, they are prolonging the agony

A sure sign of a dysfunctional market economy is the persistence of unemployment. In the United States today, one out of six workers who would like a full-time job can't find one. It is an economy with huge unmet needs and yet vast idle resources. The housing market is another US anomaly: there are hundreds of thousands of homeless people (more than 1.5 million Americans spent at least one night in a shelter in 2009), while hundreds of thousands of houses sit vacant.

Indeed, the foreclosure rate is increasing. Two million Americans lost their homes in 2008, and 2.8 million more in 2009, but the numbers are expected to be even higher in 2010. Financial markets performed dismally – well-performing, "rational" markets do not lend to people who cannot or will not repay – and yet those running these markets were rewarded as if they were financial geniuses.

None of this is news. What is news is the Obama administration's reluctant and belated recognition that its efforts to get the housing and mortgage markets working again have largely failed. Curiously, there is a growing consensus on both the left and the right that the government will have to continue propping up the housing market for the foreseeable future. This stance is perplexing and possibly dangerous.

It is perplexing because in conventional analyses of which activities should be in the public domain, running the national mortgage market is never mentioned. Mastering the specific information related to assessing creditworthiness and monitoring the performance of loans is precisely the kind of thing at which the private sector is supposed to excel.

It is, however, an understandable position: both US political parties supported policies that encouraged excessive investment in housing and excessive leverage, while free-market ideology dissuaded regulators from intervening to stop reckless lending. If the government were to walk away now, real-estate prices would fall even further, banks would come under even greater financial stress, and the economy's short-run prospects would become bleaker.

But that is precisely why a government-managed mortgage market is dangerous. Distorted interest rates, official guarantees and tax subsidies encourage continued investment in real estate, when what the economy needs is investment in, say, technology and clean energy. Moreover, continuing investment in real estate makes it all the more difficult to wean the economy off its real-estate addiction, and the real-estate market off its addiction to government support. Supporting further real-estate investment would make the sector's value even more dependent on government policies, ensuring that future policymakers face greater political pressure from interest groups like real-estate developers and bonds holders.

Current US policy is befuddled, to say the least. The Federal Reserve Board is no longer the lender of last resort, but the lender of first resort. Credit risk in the mortgage market is being assumed by the government, and market risk by the Fed. No one should be surprised at what has now happened: the private market has essentially disappeared. The government has announced that these measures, which work (if they do work) by lowering interest rates, are temporary. But that means that when intervention comes to an end, interest rates will rise – and any holder of mortgage-backed bonds would experience a capital loss – potentially a large one.

No private party would buy such an asset. By contrast, the Fed doesn't have to recognise the loss; while free-market advocates might talk about the virtues of market pricing and "price discovery", the Fed can pretend that nothing has happened. With the government assuming credit risk, mortgages become as safe as government bonds of comparable maturity. Hence, the Fed's intervention in the housing market is really an intervention in the government bond market; the purported "switch" from buying mortgages to buying government bonds is of little significance. The Fed is engaged in the difficult task of trying to set not just the short-term interest rate, but longer-term rates as well.

Resuscitating the housing market is all the more difficult for two reasons. First, the banks that used to do conventional mortgage lending are in bad financial shape. Second, the securitisation model is badly broken and not likely to be replaced anytime soon. Unfortunately, neither the Obama administration nor the Fed seems willing to face these realities.

Securitisation – putting large numbers of mortgages together to be sold to pension funds and investors around the world – worked only because there were rating agencies that were trusted to ensure that mortgage loans were given to people who would repay them. Today, no one will or should trust the rating agencies, or the investment banks that purveyed flawed products (sometimes designing them to lose money).

In short, government policies to support the housing market not only have failed to fix the problem, but are prolonging the deleveraging process and creating the conditions for Japanese-style malaise. Avoiding this dismal "new normal" will be difficult, but there are alternative policies with far better prospects of returning the US and the global economy to prosperity.

Corporations have learned how to take bad news in stride, write down losses, and move on, but our governments have not. For one out of four US mortgages, the debt exceeds the home's value. Evictions merely create more homeless people and more vacant homes. What is needed is a quick write-down of the value of the mortgages. Banks will have to recognise the losses and, if necessary, find the additional capital to meet reserve requirements. This, of course, will be painful for banks, but their pain will be nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy.




The Bears and the State of Housing
by David Leonhardt - New York Times

Of all the uncertainties in our halting economic recovery, the housing market may be the most confusing of all. At times, real estate seems to be in the early stages of a severe double dip. Home sales plunged in July, and some analysts are now predicting that the market will struggle for years, if not decades. Others argue that the worst is over. As Karl Case, the eminent real estate economist (and the Case in the Case-Shiller price index), recently wrote, "Buying a house now can make a lot of sense."

I can’t claim to clear up all the uncertainty. But I do want to suggest a framework for figuring out whether you lean bearish or less bearish: do you believe that housing is a luxury good and that societies spend more on it as they get richer? Or do you think it’s more like food, clothing and other staples that account for an ever smaller share of consumer spending over time?
If you believe housing resembles a luxury good, then you’ll end up thinking house prices will rise nearly as fast as incomes in the long run and that houses today aren’t terribly overvalued. If housing is a staple, though, prices will rise more slowly — with general inflation, as food tends to. The difference between these two views ends up being huge, and it’s become the subject of an intriguing debate. After digging into it, I come down closer to the luxury good side, which is to say the less bearish one. To me, housing does not rank with unemployment, the trade deficit, the budget deficit or consumer debt as one of the economy’s biggest problems. But you may disagree.

No one doubts that prices rose roughly with incomes from 1970 to 2000. The issue is whether that period was an exception. Housing bears like Barry Ritholtz, an investment researcher and popular blogger, say it was. The government was adding new tax breaks for homeownership, and interest rates were falling. These trends won’t repeat themselves, the bears say. As evidence, they can point to a historical data series collected by Mr. Case’s longtime collaborator, Robert Shiller. It suggests that house prices rose no faster than inflation for much of the last century.

The pattern makes some intuitive sense, too. As people become richer, they spend a shrinking share of their income on the basics. Think of it this way: someone who gets a big raise doesn’t usually spend it on groceries. You can see how shelter seems as if it might also qualify as a staple and, like food, would account for a shrinking share of consumer spending over time. In that case, house prices should rise at about the same rate as general inflation and well below incomes.

Here’s the scary thing, at least for homeowners: if this view is correct, house prices may still be overvalued by something like 30 percent. That’s roughly the gap between average household income growth and inflation over the last generation. It’s also the overvaluation suggested by Mr. Shiller’s historical index. Today, it is around 130, which is way down from the 2006 bubble peak of 203. But it’s still far above the 1890 to 1970 average of 94. In effect, the bears are arguing that housing was in a multidecade bubble and has now entered a multidecade slump.

The second, less bearish group of economists doesn’t buy this. This group includes Mr. Case, Mark Zandi of Moody’s Analytics and Tom Lawler, a Virginia economist who forecast the end of the housing boom before many others did. They say they believe that house prices rise nearly as fast, if not quite as fast, as incomes, and that real estate is no longer in a bubble. This side can also make a case based on history. Mr. Case points out that all pre-1970 housing statistics are suspect. By necessity, Mr. Shiller’s oft-cited historical index is a patchwork that relies on several sources, like Labor Department surveys. These sources happen to paint a more negative picture of past house prices than some other data.

For example, the Census Bureau has been asking people since 1940 how much they think their houses are worth, as Mr. Lawler noted in one of his newsletters. The answers suggest that house values rose faster than general inflation — and about as fast as incomes — not just from 1970 to 2000, but from 1940 to 1970, as well. Likewise, Mr. Case has dug up sales records for houses in the Boston area that were built in the late 19th century and are still around. The records show prices rising 2.5 percentage points a year faster than inflation, which is just about what income has done.

Perhaps most persuasive is a statistic that Mr. Shiller sent me when I asked him about this debate. It shows that the share of consumer spending — and, by extension, of income — devoted to housing has not fallen over time. It has hovered around 14 or 15 percent for the last 60 years. The share of spending devoted to food, by contrast, has dropped to 13 percent, from 25 percent. These numbers make a pretty strong argument that the post-1970 period is not one long aberration. As societies get richer, they do spend more and more on housing.

Some of this spending, Mr. Shiller notes, comes in the form of bigger, more expensive houses. These houses don’t do anything to lift the value of a smaller, older house — which is what matters to individual homeowners. But McMansions are not the only factor. To see this, you can look at the share of consumer spending devoted to things inside houses, like furniture. As with houses, they have become fancier. But they haven’t become so much fancier that they make up anywhere near as large a share of consumer spending today as in the past. That’s a strong clue that the upgrading of houses themselves isn’t enough to explain the increased spending on housing. What is? The value of the underlying land. Those Boston-area houses that Mr. Case studied did not change much over time. Yet their value did.

For a house whose location has any value — in a major city or a nearby suburb, where a builder can’t simply put up a similar house down the street — the land is a big part of the equation. Over time, Mr. Zandi says, the value of that land should grow almost as fast as the local area’s economic output or, in other words, with incomes. The best advice for homeowners and would-be buyers may be to think of a house not as an investment, first and foremost, but as a place to live. If there is a good chance you will move in the next three years or so, you should probably rent. The hassles of buying and the one-time costs are just too big. Plus, house prices are not low in most places today.

The ratio of median house price to income is about 3.4, compared with a prebubble average of about 3.2. Given the economy’s weak condition and the still high number of foreclosures, prices may well fall more in the next year or two. They look especially high in places where rents are comparatively cheap, like San Diego and San Francisco. And maybe income growth will remain weak for years, holding down home-price growth.

But if you can imagine staying much longer than a few years, you should take some comfort in the fact that the bubble seems mostly deflated. Sometime soon, prices should begin rising again. They may not quite keep up with incomes, but they will probably outpace the price of food and clothing. Now, if only it were possible to be as sanguine about the economy’s other problems.




As Recovery Boosts Big Banks, Smaller Lenders Are Still Struggling
by Robin Sidel - Wall Street Journal

While large banks are showing signs of recovering from the financial crisis, many of the country's small banks are still in big trouble. Small banks' efforts to clean up portfolios stuffed with bad loans are forcing them to sell branches, tap investors for fresh capital and restrict lending. Some have fallen out of compliance with stock-exchange requirements, and others have gotten delisted altogether as a result of their woes. Scores have missed dividend payments owed to the government, which has injected billions of dollars into the banking industry through the Troubled Asset Relief Program.

"I think we have a very bifurcated industry. There are the haves, the have-nots and the walking wounded," said Dory Wiley, president and chief executive of Dallas-based Commerce Street Capital LLC, a firm that invests in banks and also advises them. BankAtlantic Bancorp is one of the latest institutions to announce plans to raise fresh capital, filing a prospectus with the Securities and Exchange Commission on Friday to sell as much as $125 million of stock. The bank, based in Fort Lauderdale, Fla., has about 100 branches, and it will sell 19 branches in Tampa. It recently cut 7% of its work force.

The community-banking industry's troubles were evident in the Federal Deposit Insurance Corp.'s latest quarterly report, issued last week. The FDIC said the pace of declines in loan charge-offs is slower at community banks than at banks that have more than $1 billion in assets. Smaller banks also released fewer reserves in the second quarter than did large banks, meaning they still think they need to keep extra money stashed away to cover loans that go sour. The amount of loan balances that are 90 days past due rose 0.3% at community banks, while the larger banks reported a 5.3% decline.

Though the big banks wield the most power among consumer and business customers, community institutions represent most of the nation's 7,830 banks. Last year, 91% of all banks had assets of less than $1 billion, and 36% had assets of less than $100 million, according to the FDIC. Such banks represent the bulk of the 829 institutions that are on the FDIC's "problem" list. They also make up the majority of the 118 banks that have failed so far this year.

Unlike the behemoth banks that pitch credit cards, trade securities for clients and provide merger advice, small-town banks are still largely in the basic business of collecting deposits and making loans, including mortgages. Faced with slow growth and competition from big banks that have sprawling automated-teller-machine networks and sophisticated cash-management products for business customers, many of these small banks pumped earnings in recent years by expanding into new regions and loading up on loans to commercial-real-estate developers. Such growth has come back to haunt many of them now.

"Community banks increased their risk profile and credit exposure significantly and are now really reeling from that," said Michael Alley, chief executive of Integra Bank Corp., a community bank based in Evansville, Ind., that has more than 50 branches. Though larger than many community banks, Integra is under orders from regulators to raise capital, and it is selling some branches. The bank recently was notified by the Nasdaq Stock Market that it is out of compliance because its stock price has been less than $1 a share for 30 consecutive days. The shares have been trading at about 72 cents this week.

Banks that are under pressure to raise capital are finding themselves in a difficult spot because investors are increasingly skeptical about the future of some of these institutions. "Investors need to know that there's enough capital for a healthy institution to emerge after the capital raise," says Jeff Evans, director of global capital markets at Keefe, Bruyette & Woods Inc., an investment bank that specializes in financial institutions

PAB Bankshares Inc., a community bank based in Valdosta, Ga., lost $21 million in the second quarter, added $15 million to its loan-loss reserve and is trying to clean up problem assets on its balance sheet, it has said. Two days after the bank released its quarterly results last month, it canceled plans to raise $80 million, citing "changing market conditions." Representatives of the bank didn't respond to requests for comment. When it canceled the capital-raising plan, the bank said it was analyzing other options to raise capital and liquidate nonperforming assets.

More than 90 financial institutions, most of them community banks, missed May dividend payments on preferred stock they received under the Treasury Department's TARP program, according to SNL Financial LC, a research firm in Charlottesville, Va. That number could grow later this month when the Treasury releases a list of banks that missed August payments. One new name that will be added is Community Bankers Trust Corp., based in Glen Allen, Va. The firm, which is the holding company for the 25-branch Essex Bank, lost $20 million in the second quarter and reported an increase in nonperforming loans.

"Capital is king right now. There is a lot of stress on all of us right now in the community-banking industry," said Bruce Thomas, chief financial officer of Community Bankers Trust.




Wall Street Firms to Cut 80,000 Jobs in 18 Months, Whitney Says
by Yalman Onaran - Bloomberg

Securities firms around the world will cut as many as 80,000 jobs in the next 18 months as revenue growth begins to slow, said Meredith Whitney, the former Oppenheimer & Co. analyst who now runs her own firm. The reductions, about 10 percent of current levels, will come after 2010 compensation payments, Whitney, 40, said in a report dated Aug. 31 and obtained by Bloomberg News today. The industry’s payouts will be "down dramatically," said Whitney, who started New York-based Meredith Whitney Group after correctly predicting Citigroup Inc.’s dividend cut in 2007.

"The key product drivers of Wall Street’s revenues and profits over the past decade have been in a structural decline over the past three years," Whitney said in the report. "2010 marks the first year in many in which Wall Street-centric firms will go through structural changes." Barclays Plc, Credit Suisse Group AG and Royal Bank of Scotland Group Plc may lead a slowdown in hiring in Europe as the fixed-income trading boom fizzles out, recruiters said last month.

Barclays Capital’s income from trading bonds and commodities fell 40 percent in the first half amid the sovereign debt crisis. Fixed-income, currencies and commodities trading was the biggest revenue contributor at investment banks from Deutsche Bank AG to Goldman Sachs Group Inc. While regulatory reform, including higher capital requirements, will force some of these shifts, there will be a "deeper secular change" due to declining revenue in businesses such as securitization, Whitney wrote.

Banks around the world cut 330,000 jobs during the latest financial crisis, according to data compiled by Bloomberg. Some have added employees recently as markets recovered. Barclays Capital hired about 3,600 people in the 12 months through June 30, while Credit Suisse hired 1,800 and RBS’s securities unit increased headcount by about 1,100. Even though emerging markets will continue to expand, they won’t do so fast enough to offset the declines in the U.S. and Europe, Whitney said.




Jobless Claims in U.S. Decreased 27,000 to 451,000 Last Week
by Bob Willis - Bloomberg

 Applications for U.S. unemployment benefits declined more than forecast last week, easing concern that employers will accelerate firings as the world’s largest economy cools. Initial jobless claims dropped by 27,000 to 451,000 in the week ended Sept. 4, Labor Department figures showed today in Washington. The total number of people receiving unemployment insurance was little changed, while those getting extended payments rose. Job creation needs to pick up to prevent a slide in consumer spending, which accounts for 70 percent of the economy, and reduce the risk of a relapse into recession.

The Federal Reserve said yesterday in its latest regional survey that the economy maintained its expansion while showing signs of a "deceleration" from mid-July through August. "We need to see faster job growth in the private sector to really generate a robust recovery," Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, said before the report. "It is going to be a very tepid recovery." Jobless benefits applications were projected to fall to 470,000 from a previously reported 472,000 for the prior week, according to the median forecast of 46 economists in a Bloomberg News survey. Estimates ranged from 460,000 to 482,000. The Labor Department revised the prior week’s figure to 478,000.

Holiday
For the latest reporting week, nine states didn’t file claims data to the Labor Department in Washington because of the federal holiday earlier this week, a Labor Department official told reporters. As a result, California and Virginia estimated their figures and the U.S. government estimated the other seven, the official said. The four-week moving average, a less volatile measure than the weekly figures, declined to 477,750 last week from 487,000, today’s report showed. 

The number of people continuing to receive jobless benefits fell by 2,000 in the week ended Aug. 28 to 4.48 million. They were forecast to drop to 4.45 million. The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs. Those who’ve used up their traditional benefits and are now collectingemergency and extended payments increased by about 29,300 to 5.47 million in the week ended Aug. 21. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 3.5 percent in the week ended Aug. 28.

States, Territories
Thirty-five states and territories reported a decline in claims, while 18 reported an increase. These data are reported with a one-week lag. Initial jobless claims reflect weekly firings and tend to fall as job growth -- measured by the monthly non-farm payrolls report -- accelerates. Companies added 67,000 workers to their payrolls in August, the Labor Department said last week. Overall employment dropped by 54,000 for a second month, as the government let go census workers.

The unemployment rate rose to 9.6 percent from 9.5 percent. Gannett Co.’s USA Today, which lost more than 200,000 daily readers in the past year, plans to cut 130 jobs as part of a restructuring of the newspaper’s business operations, USA Today Publisher David Hunke said in an e-mail Aug. 27. Securities firms around the world will cut as many as 80,000 jobs in the next 18 months as revenue growth begins to slow, said Meredith Whitney, the former Oppenheimer & Co. analyst who now runs her own firm.

‘Structural Changes’
"2010 marks the first year in many in which Wall Street- centric firms will go through structural changes," Whitney wrote in a report dated Aug. 31 and obtained by Bloomberg News this week. Miami is among local governments cutting pay and benefits in order to save jobs while seeking to narrow a budget deficit through a "financial urgency" declared in April. The city last month announced plans to cut base salaries as much as 12 percent, raise health-insurance deductibles and co-payments, and reduce pension payouts. "If we don’t do this today, we go into the doomsday scenario, which is laying off 1,300 workers," Mayor Tomas Regalado said on the sidelines of a special meeting on Aug. 31. "We’re here paying for the sins of the past." 

President Barack Obama is proposing to expand tax relief for businesses and boost federal spending on transportation to help bolster job growth and the economy. In Milwaukee on Sept. 6, Obama called for $50 billion in the first of a six-year program to fix roads, railways and modernize the air-traffic control system. "All of this will not only create jobs now, but will make our economy run better over the long haul," Obama said. The president is also urging Congress to extend permanently and expand a research-and-development tax credit for businesses. The U.S. economy grew at a 1.6 percent annual pace in the second quarter after expanding at a 3.7 percent rate in the first three months of the year and 5 percent at the end of 2009.




Canada trade deficit hits record $2.66 billion, housing slows
by Ka Yan Ng - Reuters

Canada had a record high monthly trade deficit in July and the housing market stalled, data released on Thursday showed, signaling sputtering economic growth as the third quarter got under way. The weaker data came a day after the Bank of Canada raised its key interest rate by a quarter point for a third straight time this year, bringing the rate to 1 percent. But the bank also cautioned that a weak U.S. economy would hamper Canada's recovery. The Canadian dollar held at three-week highs against the U.S. dollar on Thursday, despite the soft data, while bonds stayed lower.

Canada's trade deficit rose more than three times expected to C$2.74 billion ($2.66 billion) in July as exports to the United States sank because of anemic demand, while overall imports surged to their highest level since November 2008, Statistics Canada data showed. The shortfall compared with a deficit of C$810 million that was forecast by analysts in a Reuters poll. Statscan also revised its estimate of the June trade deficit to C$1.81 billion from C$1.13 billion. (Ilargi: That's a 60% revision!)

Exports fell 0.7 percent to C$32.80 billion in July, dragged down by weak demand for machinery and equipment and forestry products. But analysts were heartened by another jump in imports, up 2 percent to C$35.54 billion, led by energy products and autos, and above the forecast of C$34.70 billion. "If anything, the continued surge in real imports of machinery and equipment early in Q3 will reinforce the statement made by the Bank of Canada that sees business investment rising strongly in the coming months," said Stefane Marion, chief economist at National Bank Financial. "Trade will obviously be a drag on growth in Q3, but it is a reflection of resilient domestic demand in Canada."

The Bank of Canada has forecast annualized growth of 2.8 percent in the third quarter, following weaker-than-predicted 2.0 percent growth in the second quarter. The central bank is expected to update its forecast next month. Canada's trade surplus with the United States narrowed to C$1.2 billion in July from C$2.4 billion in June as the stumbling U.S. economic recovery reduced demand for Canadian goods.

"Momentum was already leaning against third quarter GDP growth, and this month's deterioration has all but sealed a very weak Q3 bottom line result," said Peter Hall, chief economist at Export Development Canada. Finance Minister Jim Flaherty said on Thursday he was concerned by the trade deficit and he called on the private sector to step up investment. Still, he said the relatively strong performance of the economy means Canadians have every reason to be confident despite global economic uncertainty.

Housing Sector Slows More
Housing starts fell in August for a fourth straight month and new home prices edged lower in July for the first time in 13 months, demonstrating further slowing in the sector, which had led the country out of recession. Housing starts slipped a greater-than-expected 3 percent in August to a seasonally adjusted rate of 183,300 units from a downwardly revised 188,900 units in July, Canada Mortgage and Housing Corp (CMHC) said. The monthly decline hit both urban single-family homes and multi-unit dwellings, which fell 3.6 percent and 3.7 percent, respectively.

Separately, the introduction in July of a new sales tax, which blends the provincial and federal taxes into one, in Ontario and British Columbia may have caused monthly declines in the housing index in those two provinces, Statscan said. The new housing price index slipped 0.1 percent in July, against forecasts for a 0.1 percent increase. Home prices rose 0.1 percent in June. Both housing measures add to months of data that has shown a less robust housing market, robbing the nation's economic recovery of one of its main drivers.

"Cooling housing markets are a big part of why domestic economic activity is slowing in Canada," said Pascal Gauthier, senior economist at TD Bank, adding homebuilding activity was easing at an orderly pace. Most industry watchers say the once booming sector will avoid a U.S.-style crash, however. On Wednesday, the Conference Board of Canada was the latest to add its voice to the debate, saying the next few months will likely not be "the best in history" for the resale and new housing markets, but that it was not the start of a steep downturn. ($1=$1.03 Canadian)




Tokyo to inquire about Beijing government-debt purchases
by Chris Oliver - MarketWatch

Japan plans to ask China why it's buying large amounts of Japanese-government debt, as concern that such purchases could be behind the yen's recent surge have escalated. "We are paying close attention," Japanese Minister of Finance Yoshihiko Noda told lawmakers on Thursday, referring to the recent increases in Chinese purchases of JGBs. "I don't know the true intention" of China regarding its growing appetite for JGBs, but Tokyo plans to "closely cooperate (with Beijing) and examine its intention." Noda also said he thought it strange that China could buy Japanese debt while reciprocal purchases were not permitted.

China said last month that it would expand plans to open its debt markets to overseas financials institutions, as part of a strategy to broaden the use of the yuan as a currency for trade and settlement. Noda was cited as saying on Thursday there was "room to discuss" these issues with Chinese counterparts, according to a report by Bloomberg News. China purchased a net ¥583 billion ($6.97 billion) of Japanese financial assets in July, adding to the ¥456.7 billion of assets it purchased in June. Almost all these funds are believed to be invested in JGBs.

China became a net purchaser of such bonds in January and has accumulated ¥2.3 trillion of Japanese financial assets, according to the latest figures from Japan's Ministry of Finance. China is seeking to diversify its $2.4 trillion stockpile of foreign-exchange holdings. Among the reasons is uncertainty about the outlook for the U.S. and European economies, regions that tally as the two largest among the currencies that make up its forex basket. Mainland media have reported that China's forex holdings are held 65% in U.S. dollars, 26% in euros, 5% in British pounds and 3% in yen. China does not officially disclose the makeup of its forex holdings.

Currency analysts said the yen's rise to a 15-year high on Wednesday was driven partly by speculators buying the currency after Finance Ministry data showed that China plans to press on with its JGB purchases, according to a Nikkei report. Japanese officials signaled Wednesday they are considering intervening in the foreign-exchange market to curb the yen's rally amid concern that further gains could derail the economic recovery.

The U.S. dollar rebounded against the Japanese currency trade in overnight North American trading, and was at ¥83.75 in Thursday afternoon trade in Tokyo, versus its level of ¥83.94 in late New York. The yen briefly traded at a 15-year high ¥83.32 against the dollar during Tokyo trading hours Wednesday. The dip took out the previous low set Tuesday at ¥83.49. The weaker yen helped support Japanese exporters stocks, many of which had been pummeled in the previous session, with the Nikkei Stock Average rising 0.8% in mid-afternoon trade on Thursday.




What can be done to slow high-frequency trading?
by Gillian Tett - Financial Times

Would it be possible to impose a speed limit on high-frequency trading? That is the question currently hovering in the air, after Mary Schapiro, chairman of the Securities and Exchange Commission, warned this week in New York that the SEC is planning new controls following the May 6 "flash crash". But as the debate intensifies about hyper-fast equity trades, investors and policymakers would do well to remember another point. As a fascinating paper from Andy Haldane, an official at the Bank of England* points, what makes the flash crash interesting is that it was not an isolated incident: on the contrary, it epitomises, in an extreme form, a bigger problem of speed in modern finance.

And while this "speed" issue has not garnered much attention in recent years – partly because most observers assumed that speed was good – it seems that a debate is long overdue. Not only does the financial system seem to have sped up dramatically in recent years, but this trend has caused destabilisation in ways that go well beyond the "flash crash".

The key issue at stake, Mr Haldane argues, lies not so much with computer models, but issues of human behaviour. More specifically, he points out, neurological research suggests that the human brain has two contradictory instincts: part of it is hard-wired to chase instant gratification; however, another part of our brain also has the ability to be "patient", and delay immediate gratification for future gains. Now, one might have expected that during the course of evolution, humans would have moved from impatience to patience. However, Mr Haldane suggests this is not necessarily the case as far as finance is concerned.

On paper, most of the financial innovations in the past two centuries could – theoretically – have encouraged greater patience. The creation of liquid and deep markets, for example, has enabled pools of capital to be deployed to promote long-term investment. Similarly, as corporate transparency has risen and information technology improved this has offered investors the ability to take well-informed, long-term decisions – if they choose.

But in practice innovation also has a darker, impatient side too: as markets have become deeper, and more liquid, that has enabled trading to become more frenetic; similarly, as information has become more frequently available, this has encouraged skittish, herd behaviour. Thus investors are increasingly demanding quicker returns. Equity churning has grown: whereas the average holding period for US equity holdings was around seven years in the 1970s, it is now nearer to seven months.

That appears to have promoted more market volatility: though equity prices were twice as volatile as fundamentals back in the 1960s, they have become between six and 10 times more volatile since 1990, with numerous miscorrelations. And that in turn, has created a bitter irony, Mr Haldane argues: namely that while most of western society has long assumed that speed was tantamount to progress and efficiency, in truth these rising levels of speed, impatience – and short-termism – might have actually made the system less efficient, and rational than before.

Now, that conclusion will not come as a surprise to any investors who experienced the "flash crash" on May 6. Nor will it surprise anyone who has ever read a western lifestyle magazine; these typically rail against the way that life is "speeding up" in all manner of spheres. But the question for an institution such as the Bank of England, or any other regulator, is whether anything can be done about this issue of speed; other than simply taking a luddite sledgehammer to computers?

Some vague ideas are now floating around. Lord Turner, head of the UK’s Financial Services Authority, is one of those who has floated the idea of introducing a "tobin tax", or a tax on trading, to curb frenetic churn. Mr Haldane, for his part, suggests policymakers might introduce incentives to promote long-term investments, such as giving more voting power to shareholders who retain equity stakes for a long period. Ms Schapiro, for her part, raised another, more limited proposal this week: in a speech in New York, she indicated that the SEC is considering introducing a minimum "time in force" for orders, to stop high-frequency traders from frenetically canceling deals.

However, while Lord Turner and Mr Haldane’s ideas seem quite sensible, they stand little chance of flying anytime soon. Meanwhile, the Schapiro proposal barely scratches the surface of the problem. To my mind, the real question which needs to be discussed – but which regulators are still ducking – is why ultra-fast trading is needed at all? What is actually gained by having deals struck at "one thousandth of a second", as Ms Schapiro says? I would be interested to see some convincing answers.




Dutch history student finds world's oldest share
by Aaron Gray-Block - Reuters

A Dutch history student has unearthed the world's oldest share, dating back to 1606 and issued by the sea trading firm Dutch East India Company. Locked away in forgotten city archives, the share was made out to Pieter Harmensz, a male resident of the Dutch city Enkhuizen who served as an assistant to the city's mayors.

After his death in 1638, Harmensz left the share to his widow and their daughter Ada and the document eventually ended up in Enkhuizen archives, kept in the northwestern city Hoorn. As the Netherlands' largest trading company in the 17th and 18 centuries, the Dutch East India Company (VOC) was also the world's first company to issue stock. The 'Enkhuizen share' dates back to September 9, 1606, when Harmensz paid the last installment of his 150 Dutch guilders.

Dutch research has shown the VOC faced early financial difficulties and shareholders were not initially paid dividends. The company finally started paying dividends in 1610, partly in money and spices, following strong shareholder pressure. An interesting feature on the Enkhuizen share therefore is a series of notes on the inside relating to dividends up to 1650. The share is to be displayed at the Westfries Museum.




Euro Falls as ECB's Stark Adds to European Financial Concerns
by Matthew Brown and Candice Zachariahs - Bloomberg

The euro fell against the yen on speculation European banks will struggle to raise funds amid signs the recovery in the region is faltering. Europe’s currency weakened versus 11 of its 16 major counterparts after FT Deutschland reported European Central Bank Executive Board member Juergen Stark as saying some German banks need more capital. The yen rose against 12 of its 16 most-traded peers after the Organization for Economic Cooperation and Development said the global recovery is slower than projected.

Australia’s dollar rose to a four-month high against the greenback after a report showed the South Pacific nation added more jobs in August than economists forecast. "The theme of sovereign risk has returned, even though it never went away from a fundamental perspective," said Simon Smith, chief economist at FXPro Financial Services Ltd. in London. "The currency markets are back to worrying about what was troubling them in July, and that’s negative for the euro."

The euro slipped 0.2 percent to 106.48 yen as of 7:09 a.m. in New York. It reached 105.80 yen yesterday, the least since Aug. 24. The 16-nation currency was little changed at $1.2717. The dollar dropped 0.2 percent to 83.73 yen. Australia’s dollar rose 0.8 percent to 92.51 U.S. cents after climbing to 92.61 cents, the highest level since May 4. The pound fell against all of its 16 most-active peers as U.K. Deputy Prime Minister Nick Clegg said the nation’s recovery will probably be "uneven" and Bank of England policy makers kept interest rates at a record low 0.5 percent.

The central bank also maintained its emergency bond- purchase plan to support a recovery that’s showing signs of stalling. Both the bond purchases and the decision to keep rates on hold were anticipated by all economists Bloomberg surveyed. Sterling fell 0.4 percent to $1.5408 and also weakened 0.4 percent against the euro, to 82.56 pence.

Stark told members of Chancellor Angela Merkel’s Christian Democrat party that German savings banks, which weren’t subject to European Union stress tests, and state-owned Landesbanks are particularly at risk, FTD reported. The Association of German Banks said this week the nation’s 10 biggest lenders may need about 105 billion euros in fresh capital. Concern the recovery in Europe’s largest economy may be slowing helped send Germany’s bund yield to a record low last month. Reports this week showed German industrial production rose less than forecast in July and exports unexpectedly fell.

Yen Strength
The yen approached a 15-year high versus the U.S. currency as signs of slowing growth in the U.S. damped demand for dollar- denominated securities amid prospects for lower yields. The U.S. economy maintained its expansion while showing "widespread signs of a deceleration" in mid-July through the end of August, according to a survey by 12 regional Federal Reserve banks released yesterday. "The market is still nervous about prospects for growth in the U.S. and even Europe," said Jim Vrondas, a manager at the online foreign-exchange dealer OzForex Ltd. in Sydney. "The yen looks like it will continue to strengthen."

Recent data suggest the economy of the Group of Seven nations could grow at an annualized rate of about 1.5 percent in the second half, below the 1.7 percent previously envisaged and the 3 percent rate of the first six months of the year, the Paris-based OECD said today. "Recent high-frequency indicators point to a slowdown in the pace of recovery of the world economy that is somewhat more pronounced than previously expected," Pier Carlo Padoan, the OECD’s chief economist, said in the report.

Gains in the yen were limited after Japanese Finance Minister Yoshihiko Noda said the government is examining the effectiveness of intervention and is ready to take bold action on currencies when needed. "Physical intervention is probably something that will stem the tide, but it’s not going to weaken the yen considerably," Vrondas said. Australia’s dollar rose against all of its most-active counterparts as the statistics bureau in Sydney said today that employers added 30,900 workers in August, which may increase pressure on the central bank to raise interest rates.

The median estimate of economists surveyed by Bloomberg was for an increase of 25,000 jobs. The unemployment rate fell to 5.1 percent, The strong employment number will put "real pressure on the Reserve Bank of Australia," said Tony Allen, head of currency trading at ANZ National Bank Ltd. in Wellington. "The Aussie is running out of excuses not to move higher." Benchmark interest rates are 4.5 percent in Australia, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher- yielding assets.




Ireland breaks up Anglo Irish Bank as EMU debt jitters return
by Ambrose Evans-Pritchard - Telegraph

Ireland is to break up the nationalised lender Anglo Irish Bank, hoping to end a disastrous saga that has shattered confidence in Irish finance and left taxpayers with daunting debt. The move came after yields on Irish 10-year bonds rose above 6pc for the first time since the launch of the euro. Spreads over German Bunds rose to a record 379 basis points. Greek debt was pummelled after National Bank of Greece, the country's top lender, announced plans to raise €2.8bn (£2.3bn) in fresh capital, raising concerns that Greek lenders are taking precautions against the risk of debt restructuring on their holdings of government debt.
 
Credit default swaps (CDS) for Portugal, Spain, Italy, and Belgium have all surged this week. Markit's stress gauge for the group is now higher than during the debt crisis, when the EU launched its €440bn bail-out fund and the European Central Bank began buying eurozone bonds. Joachim Fels, chief global economist at Morgan Stanley, said strains had reached a point where "one or several governments" may soon have to tap soon the rescue mechanism. "Neither the European sovereign debt crisis nor the banking sector crisis has been resolved and both continue to mutually reinforce each other," he said, adding that the EU's stress tests for banks had failed to restore confidence.

Investors are bracing for a flood of fresh bond issuance, while concern is mounting that austerity measures in Ireland, Greece, and Spain have left these countries trapped in a downward spiral. Brian Lenihan, Ireland's finance minister, said Anglo Irish would be split between a healthy deposit bank and a bad bank that would sell assets and wind down operations. "In order to restore the reputation of the Irish financial system it is essential to bring finality to the problem of Anglo Irish Bank," he said, without clarifying the likely cost.

The EU greeted the plan as a "positive" step. Default swaps on Anglo Irish jumped 72 points to 785 basis points earlier in the day, reflecting concerns that Dublin may give in to popular pressure and walk away from the bank's debts - as Iceland's government did with its trio of Viking raiders. A column by Fintan O'Toole in the Irish Times said the problem had become too big for Ireland after rescue costs escalated to €25bn, and possibly higher. "The choice is now stark: do we go on being "good Europeans" at the cost of destroying our own society or do we become "bad Europeans", lose the trust of our European partners, but save ourselves?"

"There comes a point of existential crisis when even the meekest of countries has to put its vital national interests (first). We are at that point now," he said, deeming it the job of the ECB to shore up Anglo Irish if it thinks default poses systemic risk. Political doubts are also surfacing in Greece. This week's cabinet shuffle by premier George Papandreou is a tilt to the populist wing of the PASOK party, hinting at austerity fatigue after the economy shrank 1.8pc in the second quarter. The EU debt agency Eurostat said Athens has not yet provided documents on the country's hidden debts.




China bank regulator warns on risk
by Jamil Anderlini - Financial Times

China’s main bank regulator has warned that serious risks are building up in the financial sector and specifically linked improving financial risk management to the "important task" of maintaining social stability in the country. The comments from Liu Mingkang, chairman of the China Banking Regulatory Commission, contrasted with the bullish outlook presented by most state-controlled banks in their interim reports in recent weeks. 

The banks mostly dismissed concerns about risks building up on their balance sheets following an unprecedented credit boom over the last two years. Mr Liu said financial institutions needed to improve the design, implementation and application of "stress tests" conducted recently to assess how vulnerable they are to a downturn in the economy or a crash in the property market. "The risk management system in the Chinese banking sector still has many weaknesses," Mr Liu said in comments published Wednesday. "We must not ignore the hidden systemic risks and dangers."

He said improved capital and risk management in the banking sector was crucial to maintaining the two "important tasks" of economic growth and ensuring social stability. The CBRC has ordered lenders to conduct regular stress tests on an array of business lines since last year, in one case requiring them to predict the impact on their balance sheets and operations in the event of a 60 per cent fall in house prices in major cities. Banks have made sanguine comments about the results, saying their bad loan ratios would only rise by a small amount in such an event but analysts have raised doubts about the accuracy of these results. 

Bank of Communications, the country’s fifth largest lender by assets, said last month that if real estate prices in major cities fell by 50 per cent its non-performing loan ratio would only increase by 1.2 percentage points. The news was greeted with disbelief from many analysts and senior Chinese bankers told the FT they had since been ordered by the regulator not to disclose the detailed results of their stress tests to the public.

After a lending spree that some economists have called the greatest financial and monetary easing in history, China’s banks are currently raising hundreds of billions of renminbi to shore up their balance sheets. In his comments on Wednesday, Mr Liu said the banks urgently needed to switch their focus to the quality of their loans, rather than the quantity. That statement echoed sentiments expressed in a recent editorial by the chairman of Bank of China, Xiao Gang, who criticised the "irrational expansion" of banks’ business. 

"Growing big is the best way for Chinese banks to make more money under the current financial environment," Mr Xiao wrote. "This model of growth, however, neither assures the long-term sustainable development of the banking sector nor satisfies the need of a balanced economic and social structure."




SEC Says Chuck Prince, Robert Rubin Knew of Losses on Assets at Suit’s Focus
by Joshua Gallu and Donal Griffin - Bloomberg

Charles O. "Chuck" Prince and Robert Rubin were among Citigroup Inc. officials who knew 2007 losses were mounting on mortgage assets that U.S. regulators have faulted the bank for not disclosing, a court filing shows. Prince, the bank’s chief executive officer at the time, and Rubin, who was then chairman, knew the highest-rated segments of subprime mortgage-backed securities were the source of about $200 million in new losses in October 2007, the Securities and Exchange Commission said yesterday in a filing at federal court in Washington. In July, the agency accused the bank and two other executives of failing to disclose $40 billion in subprime assets before losses surged. It didn’t target Prince and Rubin.

U.S. District Judge Ellen Huvelle asked the agency last month to explain what senior executives knew as she considers approving Citigroup’s $75 million settlement with the regulator. The agency’s identification of Prince and Rubin may trigger questions from the judge about why the agency didn’t bring claims against more people, said Peter Henning, a professor at Wayne State University Law School in Detroit. "How aware were they is always an open question in these kinds of cases," said Henning, a former SEC lawyer. "The SEC should have provided investors a little more assurance that senior management will be held accountable in these cases."

In a filing, the SEC said two executives it targeted -- former Chief Financial Officer Gary Crittenden, 57, and former investor relations chief Arthur Tildesley -- were "more closely" tied to misleading disclosures than anyone else. "There has been nothing here that is being done to assure anyone that senior management who’s responsible, whatever level of culpability you’re talking about, is going to have any pain here," Huvelle told the SEC at an Aug. 16 hearing on the proposed settlement.

Former Chief Risk Officer David Bushnell, 56, and former Chief Operating Officer Robert Druskin, 63, were among other executives who knew the source of the mounting losses, according to the agency’s filing. Bushnell couldn’t be reached by phone at home, and an attempt to reach Druskin at E*Trade Financial Group, where he is chairman, was unsuccessful. Current Citigroup executives, including Vice Chairman Lewis Kaden, 68, General Counsel Michael Helfer, 65, and CFO John Gerspach, were also aware of the losses, the SEC said. Citigroup’s Bell declined to comment on their behalf.

'Unprecedented Time'
Prince, questioned by the Financial Crisis Inquiry Commission in April about whether the bank fully disclosed potential losses, said estimates were in flux, because the subprime market was rapidly deteriorating. "At the time, the financial people were working very intensely with the fixed-income people to try to determine exposures," Prince said during the April 8 hearing. "This was an unprecedented time in which markets were crashing."

Rubin whose job was to meet with clients and advise on "strategic and managerial issues," told the panel that warning signs of a crisis "were not obvious" and that he didn’t remember learning of the bank’s mortgage-linked collateralized debt obligations until the fall of 2007. "I feel confident that the relevant personnel believed in good faith that more senior level consideration of these particular positions was unnecessary because the positions were AAA-rated and appeared to bear de minimis risk of default," he said.

Federal judges have sought more information or delayed at least two bank settlements with the government since August 2009, questioning whether watchdogs had been aggressive enough.
In February, U.S. District Judge Jed S. Rakoff in Manhattan said he would "reluctantly" sign off on a $150 million SEC settlement with Bank of America Corp., which he criticized as "inadequate and misguided." The regulator had accused the Charlotte, North Carolina-based lender of misleading investors during its acquisition of Merrill Lynch & Co.

Last month, U.S. District Judge Emmet Sullivan in Washington questioned what he called a "sweetheart deal" between the U.S. and Barclays Plc, which was accused of violating financial sanctions against Cuba, Iran, Libya, Sudan, and Burma. Sullivan later signed off. The SEC yesterday urged the court to approve the Citigroup accord. The penalty "takes into account the seriousness of the misconduct," the agency wrote. "It is sufficiently substantial to send a clear message that misleading statements by a corporation on issues of importance to investors cannot go unaddressed."

'Subprime Exposure'
The New York-based bank’s executives repeatedly stated in 2007 that it had reduced exposure to subprime mortgage securities by 45 percent to $13 billion, as investors and analysts clamored for information about the deteriorating market, according to the agency’s July complaint. On an Oct. 15, 2007, conference call with analysts and investors, Crittenden said the company’s "subprime exposure" was $13 billion at the end of second quarter and had declined during the third quarter.

The figure he cited omitted "super-senior" tranches of collateralized debt obligations and financial guarantees known as liquidity puts that allowed customers to sell debt securities back to Citigroup if credit markets froze, the SEC said. Those products added more than $40 billion of subprime risk that the bank didn’t disclose, the SEC said. The bank, once the world’s biggest by assets, got a $45 billion taxpayer bailout in 2008 after losses on subprime mortgages and CDO holdings withered confidence and almost triggered a run on deposits.

Crittenden who left the company last year, agreed to pay $100,000 to settle claims he didn’t disclose the risk after getting internal briefings. Tildesley agreed to pay $80,000 to resolve claims that he helped draft disclosures that misled investors, the SEC said. They and the firm didn’t admit or deny wrongdoing in their settlement agreements.
Huvelle gave Citigroup until Sept. 13 to submit a filing, and scheduled a Sept. 24 hearing.




Pentagon suppliers discount leaner times
by Jim Wolf - Reuters

Pentagon suppliers, facing a U.S. government squeeze on spending for everything from bullets to bombs to bombers, said they generally expected to remain profitable despite the new austerity. The industry is getting leaner, with companies that are increasingly diversified and relatively flush with cash, said Marion Blakey, who heads the Aerospace Industries Association, the industry's chief lobbying group and trade federation.

The fundamentals are sound for now, she added on Wednesday at the annual Reuters Defense and Aerospace summit in Washington, citing less dependence than in the past on the federal government as its customer. She cited growing markets at home and abroad in cybersecurity, industrial security and homeland security. Blakey declined to be drawn, however, on whether the companies could generate sufficient returns over time to satisfy Wall Street in the face of further Pentagon belt-tightening.

'Leaner' Arms Builders
The Defense Department will promote "leaner" arms builders as part of an economy campaign launched by Defense Secretary Robert Gates in June, Frank Kendall, a deputy under secretary of defense, told an industry conference on Wednesday. "We think we have to do more together" with the industry to trim costs across the board, Kendall said. The Pentagon spends about $400 billion a year on goods and services. It is seeking real growth of about 1 percent a year in its base budget over the next few years to fund modernization.

Details of the new austerity plan targeted at suppliers are to be announced in the coming month by Under Secretary Ashton Carter, the Pentagon's top arms buyer. Kendall said Lockheed Martin Corp's F-35 fighter jet, the Pentagon's costliest purchase at up to $382 billion for 2,457 planes, will be one focus of the effort. The chief executive of Northrop Grumman Corp, the Pentagon's No. 3 supplier by sales and a top F-35 subcontractor, shrugged off any threat to the industry's profitability from a new Pentagon squeeze.

"I think this is something that can be very healthy, can make our businesses operate better and can make the department operate more efficiently," Northrop CEO Wes Bush told the Reuters summit. He said he would reserve final judgment until details of the new push are made public. Referring to Gates' efficiency campaign to date, Bush predicted it would be a "positive for the companies that are best aligned with where the services are going" over time. Gates is seeking to free cash for military modernization by attacking bureaucratic bloat, not cut the core defense budget overall.

The head of Airbus parent EADS, which is bidding for a potential $50 billion U.S. refueling-aircraft deal, said demand for arms would never disappear because the world remains dangerous. Although arms builders' shares have sold off since Gates announced his efficiency drive, they will recover, Louis Gallois, the European company's chief executive, told the summit. "We'll be competitive but we intend to be profitable," he said of the current rematch with Boeing Co to sell 179 tankers to the U.S. Air Force.

David Hess, president of United Technologies' Pratt & Whitney aircraft engine-building unit, said he did not expect his company's margins to take a hit from the Pentagon's cost-containment push. "Restructuring is forever," he said, citing headcount reductions, operations consolidation and low-cost sourcing efforts among other responses. "You're never done." He praised Pentagon leaders for working closely with suppliers on the economy drive.

Kendall, addressing the defense conference known as ComDef 2010, said he thought the government was "on a path" to negotiating a deal with Lockheed Martin to buy 85 F-35s at what he described as a previously projected total price for 80 -- a price cut of about 6 percent. Kendall did not spell out his target price for the radar-evading F-35. Lockheed has already said it is working to cut the price for the next group of its F-35 fighters to at least 20 percent below what Pentagon officials had projected a year ago. Kendall's remarks suggested the Pentagon was seeking an even deeper cut.

Robert Stevens, Lockheed's chief executive, said on Tuesday he expects to reach an agreement with the Pentagon "any day now" for a fourth batch of F-35 fighter jets, with no major obstacles in view. The F-35 fighter would account for "a little better than 20" percent of the company's revenues and profits once the plane reaches full production rates, expected in five to seven years, he told the summit. Kendall said the Defense Department was not targeting suppliers' profit margins or profits, but prodding them to use their profits more efficiently. "We're going to reward good performance," he said. "It's, I think, a more enlightened approach."




Japan bank for small businesses fails
by AP

An indebted Japanese bank for small businesses, the Incubator Bank of Japan, has filed for bankruptcy, the government financial watchdog announced Friday. The Financial Services Agency said it immediately suspended operations at the bank. It will also insure up to 10 million yen ($119,200) per depositor by launching the 1971 deposit protection scheme for the first time. The bank was founded in 2004 to specialize in lending for small businesses. Its founder and several other executives were arrested in July for allegedly obstructing the watchdog inspection.

Financial Services Minister Shozaburo Jimi urged bank customers to stay calm and said that the government will do its utmost to secure stability in the financial system in Japan. He said the bank will be managed properly by the financial administrator and that "the failure will not have further effect on the financial system as a whole." "FSA will continue to do its best to secure stability of financial system, protect depositors, and maintain a financial order in Japan," Jimi said in a statement. The bank reported a net loss of 5.1 billion yen ($60.8 million) in fiscal year ended in March. It had about 610 billion yen in deposits as of June and had 118 outlets across Japan.




Australian banks 'at risk'
by Harry Wilson - The Telegraph

Australia's banks could be at risk to many of the factors that caused the near collapse of financial systems in many Western countries. A report published by leading independent research firm CreditSights, shows how despite a fall in business lending over the last year, Australia's banks exposure to housing loans has increased to almost 60pc of the total outstanding credit. From 43pc of total credit in 1999, housing loans now make up 58pc of the Australian banking systems lending, helping fuel a continued boom in house prices, which have doubled since 2002. To fund this lending, Australian banks have come to depend increasingly on the international capital markets.

From 9pc of the Australian banking system's total funding in 1999, international bond issues now account for 18pc, and the country's banks have become among the largest bond issuers on the global markets. With about $150bn (£98bn) of bonds to sell in the next year, CreditSights warns investors may be reaching their capacity. "There is a problem here and it's hard to say where it will all end," said David Marshall, an analyst at CreditSights. "It could lead to higher borrowing costs for the banks, which they would have to pass on to customers, which could lead to house prices slowing, but the general point is that they need to diversify their businesses." Steve Keen, a Sydney-based economist, is one who thinks the Australian banking sector is overdue a crash, and on his blog Debtwatch last month warned that the record profits being generated by some banks were a sign of "economic sickness, not health".




EU Probes Hidden Greek Deals as 400% Yield Gap Shows Doubt
by Alan Katz and Elisa Martinuzzi - Bloomberg

Four months after the 110 billion- euro ($140 billion) bailout for Greece, the nation still hasn’t disclosed the full details of secret financial transactions it used to conceal debt. "We have not seen the real documents," Walter Radermacher, head of the European Union’s statistics agency Eurostat, said in a Sept. 2 interview in his Luxembourg office. Eurostat first requested the contracts in February. Radermacher vows new toughness when officials from his staff head to Greece this month to come up with a "solid estimate" of the total value of debt hidden by the opaque contracts. "This is a new era," he said.

Greece is the only euro country that lied about using these complex swap contracts after Eurostat told countries to report them in 2008, Radermacher, 58, said. It also likely signed a greater number of individual agreements than any other euro member, based on information it has provided to Eurostat, he said. Greece’s debt was 115.1 percent of its total economic output last year, second among the 16 counties that share the euro, behind Italy’s 115.8 percent. "What the Greeks did was an absolute cardinal sin," said Ruairi Quinn, former finance minister of Ireland who presided over the 1996 meeting where debt and deficit limits for countries joining the euro were set. "They deserve to be punished for it. I think they have been severely punished for it."

Doubling Deficit Estimate
Greece has requested technical help from Eurostat for its statistics service, and data from the country now reflects guarantees and swaps that weren’t previously included, Finance Minister George Papaconstantinou said in an interview today. The statistics agency became independent from the finance ministry this year. There is "a clear political will for full transparency in everything," he said. "There is a clear and complete break with past practices." Confidence in Greece’s statistics and its ability to repay debt was shattered in October, when the country more than doubled its 2009 deficit estimate. The euro plunged, sparking questions whether the single European currency could survive. It has lost 15 percent of its value against the dollar since Oct. 20.

Restructuring Debt
Investors still don’t trust Greece. They demand yields more than five times that of Germany to hold 10-year Greek debt - a sign that buyers fear the country will have to reorganize its borrowing. "I think restructuring will be a necessary part of them pulling out of the predicament they are in," said Andrew Bosomworth, Munich-based head of portfolio management at Pacific Investment Management Co., which oversees the world’s largest bond fund. He cited the projection of the International Monetary Fund, which foresees Greece’s debt topping out 149 percent of gross domestic product in 2012. Italy in May estimated that its debt would be 117.2 percent of economic output in 2012.

National Bank of Greece SA Chief Executive Officer Apostolos Tamvakakis said today that the bank "strongly believes" the country will not default on its debt and that Greece is moving in the right direction. The bank yesterday set out plans to raise 2.8 billion euros to bolster capital and help with its expansion in Greece and the region. The shares dropped 7.8 percent to 9.59 euros at 12:24 p.m. in Athens trading today.

Increased Exposure
Banks worldwide increased their total exposure to Greek debt in the first quarter of the year by 7.1 percent, or $20.7 billion, to $297.2 billion, according to a Sept. 6 report by the Basel, Switzerland-based Bank for International Settlements. Norway’s sovereign wealth fund, the world’s second largest, said in August that it had bought Greek bonds, along with those from Spain and Portugal, because of higher yields and as those governments push to reduce their deficits.

Greece received the three-year, 110 billion-euro bailout from the European Union and International Monetary Fund in May after investor concern about the government’s ability to curb the budget deficit led to soaring borrowing costs that pushed the country to the brink of default. Greece pledged to implement austerity measures equivalent to almost 14 percent of GDP in exchange for the rescue funds. The fiscal crisis turned attention to currency swaps arranged by Goldman Sachs Group Inc. that helped Greece hide the extent of its debt.

More Swaps
"There are more, or even many, of this kind of swap operation, which we have to clarify," said Radermacher, the former president of the German Federal Statistics Office who was appointed as the EU’s chief statistician in April 2008. "The Goldman Sachs case was the beginning." Greece has told the agency that the other contracts were each significantly smaller than the ones signed with Goldman Sachs, Radermacher said. Signed in 2000 and 2001, the Goldman swaps reduced the country’s foreign denominated debt in euro terms by 2.367 billion euros and lowered debt as a proportion of GDP to 103.7 percent from 105.3 percent, according to a Feb. 21 statement by Goldman.

In April, Eurostat said it might have to revise Greece’s 2009 debt figure higher by as much as 7 percentage points of GDP, in part because of the use of swap contracts that allowed it to reduce current reported debt in return for greater liabilities in future years. About a third of Greece’s borrowings have swaps attached to them, according to a person with direct knowledge of the operations. Only a portion of those contracts were set up in a way to reduce current reported debt, the person said. Radermacher said he believed Greece stopped using swaps that included up-front payments in 2008, about the same time that Eurostat questioned the country that year.

Greek Prime Minister George Papandreou, elected in October, has pledged to change his country, asking Greeks to pay taxes and accept sacrifices to pull the country through its financial crisis. His slogan is "either we change or we sink." "Our largest deficit was our credibility deficit," Papandreou said in a Sept. 3 speech to his ruling Pasok party. He wasn’t available to comment for this article.

Investigating Statistics
The new government has initiated a series of measures to end opaque financing in Greece. The statistics agency now reports directly to Greece’s parliament, rather than the finance ministry. A parliamentary committee this month will begin investigating the false statistics. Under the rules to join the euro, countries’ debts must not exceed 60 percent of GDP. Interest payments linked to swaps are included in the calculation. That means that until accounting guidance was changed in 2008, upfront payments or lower initial interest payments could initially lower the debt or cause it to rise by a smaller amount than would otherwise be the case, while liabilities could increase down the road.

The problem is that such contracts rely on an estimate that the future debt will be lower or economic activity much greater, allowing a country to meet higher payments, said Yannis Stournaras, director general of the Foundation for Economic and Industrial Research in Athens. He was chairman of Greece’s Council of Economic Advisors from 1994 through 2000. "You might say this is triumph of hope over experience," he said, adding that the blame should be shared with the European Commission, which didn’t intervene despite years of warnings by Eurostat of problems with Greek data. "We addressed the issue several times in meetings of finance ministers and we asked for enhanced powers for Eurostat in 2005, which we didn’t receive at the time," said Amadeu Altafaj, a spokesman for the Commission.

In April 2009, the European Central Bank identified a Greek swap operation of unusual terms, according to a confidential ECB document dated March 3, 2010, obtained by Bloomberg News. The ECB said its executive board prepared internal reports on the swaps. Greece began using this type of contract for the 2001 budget year to avoid recording a spike in debt the first year after it adopted the euro, Stournaras said. It continued to use them after 2001 and increased their use after 2004, he said. Under guidance set out in 2008 by Eurostat, any upfront payments linked to a swap must be counted as a loan.

Upfront Payments
Germany, Italy, Poland and Belgium, like Greece, received upfront payments from derivatives, Radermacher said at a hearing at the European Parliament in April. The difference, he said in the September interview, was that when Eurostat asked the other countries about the contracts in 2008, they provided the data and adjusted their debt figures. A spokeswoman for Italy’s Finance Ministry in Rome said the country had received upfront payments and revised its debt figures accordingly when the accounting guidelines were revised. Officials from the other three countries’ debt agencies did not return calls for comment.

Eurostat gained new powers effective last month that allow it to audit a country’s financial data if it can show there are clear risks that the statistics aren’t accurate. The visit to Greece this month will include officials from Eurostat, the European Central Bank and the European Commission’s Economic and Financial Affairs directorate, Radermacher said.

‘More Muscles’
"Because we have more muscles, so to say, we are free to ask for an inside look to whatever we find important or relevant," Radermacher said. He said he expects to have sufficient details to present an estimate of the off-market swaps’ impact for its semi-annual report on member states’ debts and deficits on October 22. The transition to providing full and accurate data has been slow, according to Radermacher.

The EU’s statistics agency for months got partial responses to requests for complete records on the country’s use of swaps. Eurostat still doesn’t know the full number of contracts Greece signed that used historical or other non-market interest or currency rates. Nor does it know the total amount of debt covered by those transactions or the effect on the country’s debt-to-GDP ratio. Greece’s statistics office blamed the delay in answers on a lack of staff and expertise in the field, said Eurostat officials.

In August, Greece made a proposal for how to estimate the total effect of the off-market swaps without including any of the contracts themselves, Radermacher said. He likened the task of unraveling Greece’s financial picture to the recent renovation of his house. "You start to renovate and you open up the walls, then you are confronted with some surprises, and this is more or less the case here," he said. In the past few months, Greece has told Eurostat of a "big number" of off-market swaps, Radermacher said.

Eurostat’s ability to untangle the web of transactions and demand accurate records from all euro members is critical to restoring investor confidence in the currency and in Greece, says Edward Scicluna, a member of the European Parliament, which held a hearing in April on swaps. Greek government bonds have lost about 24 percent since October, according to Bloomberg/EFFAS indexes.

‘Smoke and Mirrors’
"The swaps were part of the smoke and mirrors that were part of the mystique of the euro," said Bill Blain, joint head of fixed income at Matrix Corporate Capital LLP in London. "There’s potential for Europe to trip-up again. It needs to provide full information and demonstrate that it’s in control of the situation." Changing Greece from a country that operates on hope to one that relies on hard numbers is Papandreou’s biggest challenge, said Ireland’s Quinn, who lived in Greece for a year in the early 1970s. "Part of becoming modern Europe is shedding that tradition of being economical with the truth and not telling the full story," he said.

The stakes for Greece are significant, Andreas Georgiou, head of the Hellenic Statistics Authority, said in a speech to employees on July 22, the day he took up his position. Providing real, credible figures will mean "to a great degree the success of the country’s economic policy in these difficult times as well as possibly our national interests on a long-term basis." He didn’t comment for this article. "If there’s a feeling that there’s proper due diligence, I’d feel more confident about investing," said Robin Marshall, a director of fixed income at Smith & Williamson Investment Management in London, which manages $20 billion in assets including Greek debt. "For investors, the credibility hinges as much on perception as on the numbers themselves."




EU markets chief Barnier warns the City casino days are over
by Ambrose Evans-Pritchard - Telegraph

The deceptively quiet Phoney War between Brussels and Anglo-Saxon finance is coming to an end. Life is about to change for hedge funds, commodity traders, and the 'prop desks' of global banks in the City of London. "We want to know who is doing what with short-selling," said Michel Barnier, the European single market commissioner and the Frenchman in charge of the EU's new machinery of regulation. "We need markets, and we need financial institutions that create value-added, but everyone has to be able to answer for what they are doing. People taking crazy risks linked to crazy rewards have to be brought back to their senses," he said, in a wide-ranging interview with The Daily Telegraph at the annual Ambrosetti conference on the shores of Lake Como.
 

Mr Barnier said the new European Single Market Authority (ESMA) endorsed in principle last week - along with EU banking and insurance watchdogs - will have sweeping powers to control derivatives.
"The EU authorities are going to look at every product. ESMA can restrict leverage, or in exceptional circumstances even ban a product altogether," he said. The Commission is introducing a text on derivatives next week as part of a new oversight machinery covering the gamut of finance and investment, including controls on private equity, hedge funds, as well as oil and currency trading.

Mr Barnier said there was no plan for a blanket ban on the short-selling of stocks or on the use of derivatives such as credit default swaps (CDS), famously exploited by funds to short Greek, Irish, Portuguese, Spanish bonds during Europe's debt crisis this year. "It is not a question of prohibiting. Short-selling is useful, if used well, but we want to avoid abusive naked short-selling, and be able to take action in emergencies," he said.

Naked short selling is where funds bet against assets they do not own without first borrowing the underlying security, sometimes in an attempt to destroy a company. The distinction is often blurred in real life. Investors use a range of derivative short instruments as a way to hedge other assets that are illiquid Mr Barnier laughs off talk of a Brussels plot to shut down the City of London, the putative ambition of Louis XIV, Napoleon and the French elites for three centuries.

"The City is the foremost financial centre of Europe, and a pillar of our force, and I want it to continue to be so. As French citizen I voted for the UK to be admitted to Europe. But it is in City's own interest that it should be well regulated, by that I mean 'smart regulation'," he said, adding charitably that London was a victim of a US-made crisis than a major contributor to the global banking debacle. "I have been very careful in our negotiations on financial supervision to reach a successful deal with the British. It is a priority that we work together, the British must be on board. We are well aware of George Osborne's red lines," he said, referring to a safeguard clause that any EU decision must not infringe on fiscal sovereignty. "I have found the new government pragmatic and competent, and Vince Cable is a sage."

The promise not to run roughshod over Britain's biggest industry is undoubtedly sincere. Although Mr Barnier is a former French foreign minister and farm minister, he is a lifelong believer in the European ideal. He comes from the mould of Robert Schuman, the French statesman who offered the historic olive branch to a defeated Germany in 1950. Mr Barnier - a Savoyard - is viewed with suspicion by hardliners in Paris as a man too willing to please Perfide Albion. His right-hand man as director-general is Jonathan Faull, a British official with free-market views.
Yet the problem for Britain is that ultimate control over the City is passing from Westminster to Brussels in perpetuity, while commissioners come and go.

"This is irreversible," said David Heathcoat-Amory, Europe Minister in the last Tory government. "This is what the EU calls an 'occupied field': it never relinquishes territory once taken. Britain does have an emergency brake but it is a very flimsy safeguard because it can only be used in extremis, and in any appeal is justiciable before the European Court, which is not impartial." He said the Tories had swallowed the bitter pill because they did not want a clash over Europe to damage the new government. "They couldn't risk a fight on too many fronts," he said.

The three new watchdogs - each made up of one regulator from every EU state - have powers to make binding decisions, mostly by simple majority. This means that Malta and Latvia together have more voting power over the future of the City than the British government. London has no veto. Mats Persson, head of Open Europe, said these bodies will inevitably acrue more powers as fresh EU laws are passed. While British regulators will still be in charge of "day-to-day" matters, this does not disguise the fact that national regulators are reduced to enforcers of EU decisions. It also creates the risk of fresh confusion over exactly who is in charge of what - replicating the weakness of Labour's tripartite system.

Mr Barnier's most fervent regulatory wrath is reserved for those who break the ancient taboo of speculating on food products. "I find that scandalous. I think we as Europeans ought to pay a lot more attention to what is happening in the rest of the world, above all Africa," he said. He said there was evidence that speculators had played a role in pushing up the cost of oil and food during the price spike in 2008, when hunger riots broke out in a string of poor food-importing countries across the world.

Fresh strains have emerged over recent weeks after Russia imposed an export ban on grains, setting off a worldwide scramble for supplies. Food riots killed ten people in Mozambique earlier this last week. Global wheat price have doubled since June. France plans a new world 'governance' for food as part of its G20 presidency next year, as well as further scrutiny of energy and commodity derivatives. It will be pushing on an open door in Brussels.

After twenty years in EU politics, Mr Barnier still believes in uplifting power of the European Project but he learned a hard lesson as a key drafter of the European Constitution, the stillborn treaty rejected by French and Dutch voters in a carthartic protest against EU elitism. "Europe's leaders wasted its vital energy for a decade arguing about institutions. They responded to the angst of their peoples over globalisation by lifting the bonnet of the car and talking about the engine. That is not how you inspire citizens. Besides, China, India, and Brazil are not going to wait for us."




Michael Lewis Talks About the Banks That Brought Down Greece
by Jaime Lalinde - Vanity Fair

In the October issue of Vanity Fair, Michael Lewis investigates the cause of the Greek financial crisis, one that translates to nearly a quarter-million dollars for each working Greek citizen. In V.F.’s April 2009 issue, Lewis examined the financial disaster in Iceland, winning Loeb and Overseas Press Club awards for his report. Lewis differentiates the two crises in this month’s article, writing, "In Greece the banks didn’t sink the country. The country sank the banks." Aside from rampant tax fraud, nefarious number crunching by the Greek government, and more than one riot, Lewis found an affable group of monks living on a peninsula in northeastern Greece. The Vatopaidi order has been the recipient of much of the Greek outrage and the center of a parliamentary inquiry into its real-estate empire, which some speculate to be worth more than $1 billion. Lewis spoke with VF Daily about how Greece is the Pittsburgh Pirates of Europe, why Germany has the right to be self-righteous (for once), and why he is betting against the U.S. Treasury.

VF Daily: From a financial standpoint, would you agree that happy countries are all alike and unhappy countries are each unhappy in their own way?
Michael Lewis
: [Laughs.] Yes, Greece is made for a Jonathan Franzen novel. There are no happy countries any more. Financially speaking, unhappy countries do seem to all be different in their own way. The thing that interests me (in what looks like is going to become a series) is that the raw event seems to be the same in each place: make credit available for people who would never have qualified for it before. How each of the cultures responds to this credit tells you so much about the society in general. Specifically, within the context of Europe, it communicates how different these cultures are that have been glued together by their monetary system. These differences are more riveting than you might have expected, given that global finance has this monocultural flavor to it, where everything seems to be sort of the same from place to place. Although the bankers in Greece kind of look like the bankers in Iceland, who kind of look like the bankers in the United States, in fact they’re not. They are still financially radically different. In a word, yes.

Many people say it is a forgone conclusion that Greece will default. Do you agree with that?
They will probably not call it a default, but yes, I don’t think they are going to pay back the money they owe. What’s going to happen, I think, is it is going to be "restructured." That is the polite name. I think that the people who lent money to the Greek government—which is mainly the European Central Bank, a lot of bankers throughout Europe, and sovereign bond funds around the world—will not get 100 cents on the dollar from Greece. Left to their resources, without a total bailout from the rest of Europe or Germany, there is no way Greece can repay the debt.

The things they need to do to repay it would cause all the wealth production in the country to flee. There would need to be very punitive taxation, and restrictive macro-economic policies, for example. The country could be thrown into a depression if they did what they needed to do. I didn’t really address this issue in the piece because I thought the more interesting question was: Do they even want to? My feeling is that they really would rather take a pass. Paying off the debt implies the sort of resolve and collective purpose that they lack.

Regarding the Germans, I had noticed that they were amongst the biggest buyers of not only U.S. subprime-mortgage-backed C.D.O.’s but also Greek debt. From my perspective, it seems that they were in the worst position to succeed, yet their economy is thriving. How do you account for this?
The Germans have gotten stuffed every which way. They not only bought American subprime-backed securities and Greek government bonds, but they were also buyers of Spanish condos, and lenders into various megalomaniacal Icelandic private-equity deals—they bootstrapped these Icelandic tycoons. I don’t think there was a bad investment that the Germans didn’t make. I think it was their fundamental strength that enabled them to weather all these shitty investments. They have been generating such surpluses and wealth for so long that they can afford to squander some of it. It is also indicative of something that I haven’t really thought through. Whatever it is that makes Germans really good at making cars renders them less capable when dealing with American investment bankers. It’s like global finance and global manufacturing are two different aptitudes and occupy separate headspaces. So they’re really good at the math S.A.T. and not so good at the verbal S.A.T.

So the question is: Why aren’t they suffering more? There has always been this engine of prosperity underneath their financial activity, and although that engine is affected by what is going on in the world, it is not affected in the same way that an economy premised entirely on financial manipulation is affected. The funny thing is, one of the subplots of this slow disintegration of the European Monetary Union [is] that this whole institution was put together to contain Germany. By welding all of Europe together, the general idea was to make Germany less threatening by making them a part of a larger European enterprise.

Instead, it has made Germany more frightening in a couple ways. First, by opening all European markets to German manufactured goods, it created a big market for Germany to sell into, thus making it easier for them to become big and strong. Secondly, and more insidious, by essentially putting Germany in the position of the stiffed creditor of its European counter-parties, it changes the tone of relations between Germany and everybody else. This tone of relations seems to be shifting rather rapidly from still feeling ever so slightly guilty about the Holocaust to being pissed that everyone owes them money and is not paying them back. What we are looking at is a morally indignant Germany, which is kind of a new thing. In my lifetime, I can’t remember a time when the Germans were allowed to be self-righteous. And now they are justifiably self-righteous, because everybody screwed them. It is creating a climate where German politicians tell the Greeks they need to sell the Acropolis.

Which is a good segue to my next question. If you could buy the Acropolis, what would you do with it?
When I went over there, it was one of my missions to figure out what the Acropolis would cost me. I thought I would get a real-estate agent to drag me around and put values on the Greek islands and the various ruins, just to see what Greece could get if they needed to sell them. I got sidetracked, because the actual story got so much more interesting than I thought it was. So I don’t know what I would have to pay for the Acropolis, but assuming I could get my hands on it, I would, of course, turn it into a business.

The problem with the Acropolis is that they don’t manage the flow of people onto it. You get up there and the only thing you can see is the back of the head of the person who is taking the picture in front of you. And you can’t hear anything but the person behind you screaming to get out of the way because you’re standing in the way of their picture.

There is no enjoying the Acropolis. It’s horrible. So if I owned it, I would start by rationing access to it and charging higher prices. I would also have an affirmative-action program where Greeks get in cheaply. I would make it more of a special event to get to the top of the Acropolis and wander around. I would have up-market tour guides, people who were experts in ancient Greece and in that site. It would be a privilege to go to the Acropolis rather than a right. I’m not sure I would make it a money thing. I want people to be able to earn their way up there. If they could demonstrate a proven interest.

Like some kind of entrance exam.
Yes, an entrance exam. I would let them in for free. But people just generally aren’t willing to work, so just assume that half the people that show up would not bother to take the test.

Would the world be better off without Goldman Sachs? It seems that everywhere we turn that they are involved in some kind of sketchy, not really illegal, but gray-area-type behavior.
Yes, the answer is yes. The world would be better off without Goldman Sachs, and I don’t think it is just Goldman Sachs the world would better off without. If you waved a wand and wiped out Goldman Sachs, someone would step in and occupy that place. I think the world would be better off without the idea that Goldman Sachs embodies, which is that financial manipulation is a legitimate way to get really rich. If you look at the story of Goldman Sachs in the last six or seven years, you’ll see that they made an awful lot of money getting people to do stuff that never should have been done.

Since the departure of [former C.E.O.] Henry Paulson?
I would say the beginning of the end of the Goldman Sachs I admired was when it ceased to be a partnership. The minute it becomes a public corporation there is this moral justification for bad behavior. By saying, "We are doing it for our shareholders," you have an excuse to do shitty things to people and do things that are bad for the world. Your job then requires you to generate profits by doing anything short of breaking the law so that you can maximize returns to your shareholders. This is a very dangerous financial attitude. It’s a shame that Goldman drifted into this because it didn’t used to be this way. It used to be "long-term greedy" and now it’s "short-term greedy." It isn’t just Goldman Sachs we need to get rid of; it’s the concept of the public investment bank that is given a license to pursue short-term profits at any cost.

Fusing your two favorite subjects: macro-economic financial issues and Major League Baseball, I thought I would say a European country and you could tell me what team they would be in baseball right now.

Greece.

The Pittsburgh Pirates.
Germany.
The Yankees.
Iceland.
The Mets.
Spain.
The Mariners. Nice guys who have somehow managed to blow huge sums of money in the way not-so-nice people often do.    
Ireland.
The Twins. Actually, no, the Twins are a much more successful enterprise. The Royals.
Italy.
The Marlins. Even though Italy is in financial trouble right now, like the Marlins are always in financial trouble one way or another, it still somehow feels like a successful place. Italy is this giant wild card; they can win the series at any point.

Here the U.S. is dolling out trillions of dollars to automakers, homeowners, and banks. Would there be a scenario where the U.S. Treasury goes bankrupt?
Yes. I say that glibly. It’s not that hard to see us getting to a moment where we are essentially restructuring our debt. I think it is a long way off, but how can it not happen? We are so indulged by our creditors. Even though we have grotesquely mismanaged our financial affairs, people are willing to lend us money on terms that they would not lend on to anybody else in the world. It’s unbelievable to me that the U.S. Treasury can borrow 10-year money at around 2.5 percent.
The Chinese are willing to lend back to us all their surpluses basically for free, and we keep running these deficits. The benefits are just too great to our society for us to turn away. I assume what will happen is that we’ll continue to do it until we get to the moment where we can plausibly say, "Whoops, we can’t pay you back 100 cents on the dollar."

If the movie rights to this article were purchased, whom do you think would be cast as the two top dubious monks, Father Ephraim and Father Arsenios?
I don’t think of them as dubious. I quite like them. It would have to be someone who looks plausible in a beard or totally implausible. There are two ways to go with it. My first choice is John C. Reilly and Will Ferrell. Or, if you play it straight and it’s a dark and mysterious religious psychodrama, then Philip Seymour Hoffman as Father Ephraim and Joaquin Phoenix as Father Arsenios.

What is the significance behind the nine-inch nail we received in your name at Vanity Fair from a Father Matthew?
[Laughs.] I think it was removed from one of the buildings, or it was found in the rubble while they were renovating Vatopaidi. They have a whole bunch of these nails and they give them as gifts. I think it was a gift for Tabitha, my wife. It was just to have a little piece of Vatopaidi with me. I think they sensed that I was not just in awe of what they had done, but also that I was very appreciative that I wasn’t charged for being there.

So it wasn’t a sign that you had given them your confession, then?
No, no. No one even asked me. I think the moment they discovered I was a heathen, they realized there wasn’t going to be any of that. If I had given them my confession, I would still be there.




Beware of Greeks Bearing Bonds
by Michael Lewis - Vanity Fair

As Wall Street hangs on the question "Will Greece default?," the author heads for riot-stricken Athens, and for the mysterious Vatopaidi monastery, which brought down the last government, laying bare the country’s economic insanity. But beyond a $1.2 trillion debt (roughly a quarter-million dollars for each working adult), there is a more frightening deficit. After systematically looting their own treasury, in a breathtaking binge of tax evasion, bribery, and creative accounting spurred on by Goldman Sachs, Greeks are sure of one thing: they can’t trust their fellow Greeks.

After an hour on a plane, two in a taxi, three on a decrepit ferry, and then four more on buses driven madly along the tops of sheer cliffs by Greeks on cell phones, I rolled up to the front door of the vast and remote monastery. The spit of land poking into the Aegean Sea felt like the end of the earth, and just as silent. It was late afternoon, and the monks were either praying or napping, but one remained on duty at the guard booth, to greet visitors. He guided me along with seven Greek pilgrims to an ancient dormitory, beautifully restored, where two more solicitous monks offered ouzo, pastries, and keys to cells. I sensed something missing, and then realized: no one had asked for a credit card.

VOW OF PROPERTY
Father Arsenios at the Vatopaidi monastery, overlooking the Aegean Sea, in Mount Athos, Greece. He is considered by many to be Vatopaidi’s C.F.O., "the real brains of the operation."

Photograph: Jonas Fredwall Karlsson


The monastery was not merely efficient but free. One of the monks then said the next event would be the church service: Vespers. The next event, it will emerge, will almost always be a church service. There were 37 different chapels inside the monastery’s walls; finding the service is going to be like finding Waldo, I thought. "Which church?" I asked the monk. "Just follow the monks after they rise," he said. Then he looked me up and down more closely. He wore an impossibly long and wild black beard, long black robes, a monk’s cap, and prayer beads. I wore white running shoes, light khakis, a mauve Brooks Brothers shirt, and carried a plastic laundry bag that said eagles palace hotel in giant letters on the side. "Why have you come?" he asked.

That was a good question. Not for church; I was there for money. The tsunami of cheap credit that rolled across the planet between 2002 and 2007 has just now created a new opportunity for travel: financial-disaster tourism. The credit wasn’t just money, it was temptation. It offered entire societies the chance to reveal aspects of their characters they could not normally afford to indulge. Entire countries were told, "The lights are out, you can do whatever you want to do and no one will ever know." What they wanted to do with money in the dark varied.

Americans wanted to own homes far larger than they could afford, and to allow the strong to exploit the weak. Icelanders wanted to stop fishing and become investment bankers, and to allow their alpha males to reveal a theretofore suppressed megalomania. The Germans wanted to be even more German; the Irish wanted to stop being Irish. All these different societies were touched by the same event, but each responded to it in its own peculiar way. No response was as peculiar as the Greeks’, however: anyone who had spent even a few days talking to people in charge of the place could see that. But to see just how peculiar it was, you had to come to this monastery. I had my reasons for being here. But I was pretty sure that if I told the monk what they were, he’d throw me out. And so I lied. "They say this is the holiest place on earth," I said.

I'd arrived in Athens just a few days earlier, exactly one week before the next planned riot, and a few days after German politicians suggested that the Greek government, to pay off its debts, should sell its islands and perhaps throw some ancient ruins into the bargain. Greece’s new socialist prime minister, George Papandreou, had felt compelled to deny that he was actually thinking of selling any islands. Moody’s, the ratings agency, had just lowered Greece’s credit rating to the level that turned all Greek government bonds into junk—and so no longer eligible to be owned by many of the investors who currently owned them. The resulting dumping of Greek bonds onto the market was, in the short term, no big deal, because the International Monetary Fund and the European Central Bank had between them agreed to lend Greece—a nation of about 11 million people, or two million fewer than Greater Los Angeles—up to $145 billion. In the short term Greece had been removed from the free financial markets and become a ward of other states.

That was the good news. The long-term picture was far bleaker. In addition to its roughly $400 billion (and growing) of outstanding government debt, the Greek number crunchers had just figured out that their government owed another $800 billion or more in pensions. Add it all up and you got about $1.2 trillion, or more than a quarter-million dollars for every working Greek. Against $1.2 trillion in debts, a $145 billion bailout was clearly more of a gesture than a solution. And those were just the official numbers; the truth is surely worse. "Our people went in and couldn’t believe what they found," a senior I.M.F. official told me, not long after he’d returned from the I.M.F.’s first Greek mission. "The way they were keeping track of their finances—they knew how much they had agreed to spend, but no one was keeping track of what he had actually spent. It wasn’t even what you would call an emerging economy. It was a Third World country."

As it turned out, what the Greeks wanted to do, once the lights went out and they were alone in the dark with a pile of borrowed money, was turn their government into a piñata stuffed with fantastic sums and give as many citizens as possible a whack at it. In just the past decade the wage bill of the Greek public sector has doubled, in real terms—and that number doesn’t take into account the bribes collected by public officials. The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year.

Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greece’s rail passengers into taxicabs: it’s still true. "We have a railroad company which is bankrupt beyond comprehension," Manos put it to me. "And yet there isn’t a single private company in Greece with that kind of average pay." The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finland’s. Greeks who send their children to public schools simply assume that they will need to hire private tutors to make sure they actually learn something.

There are three government-owned defense companies: together they have billions of euros in debts, and mounting losses. The retirement age for Greek jobs classified as "arduous" is as early as 55 for men and 50 for women. As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on. The Greek public health-care system spends far more on supplies than the European average—and it is not uncommon, several Greeks tell me, to see nurses and doctors leaving the job with their arms filled with paper towels and diapers and whatever else they can plunder from the supply closets.

Where waste ends and theft begins almost doesn’t matter; the one masks and thus enables the other. It’s simply assumed, for instance, that anyone who is working for the government is meant to be bribed. People who go to public health clinics assume they will need to bribe doctors to actually take care of them. Government ministers who have spent their lives in public service emerge from office able to afford multi-million-dollar mansions and two or three country homes. Oddly enough, the financiers in Greece remain more or less beyond reproach. They never ceased to be anything but sleepy old commercial bankers. Virtually alone among Europe’s bankers, they did not buy U.S. subprime-backed bonds, or leverage themselves to the hilt, or pay themselves huge sums of money. The biggest problem the banks had was that they had lent roughly 30 billion euros to the Greek government—where it was stolen or squandered. In Greece the banks didn’t sink the country. The country sank the banks.

And They Invented Math!
The morning after I landed I walked over to see the Greek minister of finance, George Papaconstantinou, whose job it is to sort out this fantastic mess. Athens somehow manages to be bright white and grubby at the same time. The most beautiful freshly painted neoclassical homes are defaced with new graffiti. Ancient ruins are everywhere, of course, but seem to have little to do with anything else. It’s Los Angeles with a past.

At the dark and narrow entrance to the Ministry of Finance a small crowd of security guards screen you as you enter—then don’t bother to check and see why you set off the metal detector. In the minister’s antechamber six ladies, all on their feet, arrange his schedule. They seem frantic and harried and overworked … and yet he still runs late. The place generally seems as if even its better days weren’t so great. The furniture is worn, the floor linoleum. The most striking thing about it is how many people it employs. Minister Papaconstantinou ("It’s O.K. to just call me George") attended N.Y.U. and the London School of Economics in the 1980s, then spent 10 years working in Paris for the O.E.C.D. (Organisation for Economic Co-operation and Development). He’s open, friendly, fresh-faced, and clean-shaven, and like many people at the top of the new Greek government, he comes across less as Greek than as Anglo—indeed, almost American.

When Papaconstantinou arrived here, last October, the Greek government had estimated its 2009 budget deficit at 3.7 percent. Two weeks later that number was revised upward to 12.5 percent and actually turned out to be nearly 14 percent. He was the man whose job it had been to figure out and explain to the world why. "The second day on the job I had to call a meeting to look at the budget," he says. "I gathered everyone from the general accounting office, and we started this, like, discovery process." Each day they discovered some incredible omission. A pension debt of a billion dollars every year somehow remained off the government’s books, where everyone pretended it did not exist, even though the government paid it; the hole in the pension plan for the self-employed was not the 300 million they had assumed but 1.1 billion euros; and so on. "At the end of each day I would say, ‘O.K., guys, is this all?’ And they would say ‘Yeah.’ The next morning there would be this little hand rising in the back of the room: ‘Actually, Minister, there’s this other 100-to-200-million-euro gap.’ "

This went on for a week. Among other things turned up were a great number of off-the-books phony job-creation programs. "The Ministry of Agriculture had created an off-the-books unit employing 270 people to digitize the photographs of Greek public lands," the finance minister tells me. "The trouble was that none of the 270 people had any experience with digital photography. The actual professions of these people were, like, hairdressers."

By the final day of discovery, after the last little hand had gone up in the back of the room, a projected deficit of roughly 7 billion euros was actually more than 30 billion. The natural question—How is this possible?—is easily answered: until that moment, no one had bothered to count it all up. "We had no Congressional Budget Office," explains the finance minister. "There was no independent statistical service." The party in power simply gins up whatever numbers it likes, for its own purposes.

Once the finance minister had the numbers, he went off to his regularly scheduled monthly meetings with ministers of finance from all the European countries. As the new guy, he was given the floor. "When I told them the number, there were gasps," he said. "How could this happen? I was like, You guys should have picked up that the numbers weren’t right. But the problem was I sat behind a sign that said GREECE, not a sign that said, THE NEW GREEK GOVERNMENT." After the meeting the Dutch guy came up to him and said, "George, we know it’s not your fault, but shouldn’t someone go to jail?"

As he finishes his story the finance minister stresses that this isn’t a simple matter of the government lying about its expenditures. "This wasn’t all due to misreporting," he says. "In 2009, tax collection disintegrated, because it was an election year." "What?" He smiles. "The first thing a government does in an election year is to pull the tax collectors off the streets." "You’re kidding." Now he’s laughing at me. I’m clearly naïve.

Fraternal Revenue Service
The costs of running the Greek government are only half the failed equation: there’s also the matter of government revenues. The editor of one of Greece’s big newspapers had mentioned to me in passing that his reporters had cultivated sources inside the country’s revenue service. They’d done this not so much to expose tax fraud—which was so common in Greece that it wasn’t worth writing about—but to find drug lords, human smugglers, and other, darker sorts. A handful of the tax collectors, however, were outraged by the systematic corruption of their business; it further emerged that two of them were willing to meet with me. The problem was that, for reasons neither wished to discuss, they couldn’t stand the sight of each other. This, I’d be told many times by other Greeks, was very Greek.

The evening after I met with the minister of finance, I had coffee with one tax collector at one hotel, then walked down the street and had a beer with another tax collector at another hotel. Both had already suffered demotions, after their attempts to blow the whistle on colleagues who had accepted big bribes to sign off on fraudulent tax returns. Both had been removed from high-status fieldwork to low-status work in the back office, where they could no longer witness tax crimes. Each was a tiny bit uncomfortable; neither wanted anyone to know he had talked to me, as they feared losing their jobs in the tax agency. And so let’s call them Tax Collector No. 1 and Tax Collector No. 2.

Tax Collector No. 1—early 60s, business suit, tightly wound but not obviously nervous—arrived with a notebook filled with ideas for fixing the Greek tax-collection agency. He just took it for granted that I knew that the only Greeks who paid their taxes were the ones who could not avoid doing so—the salaried employees of corporations, who had their taxes withheld from their paychecks. The vast economy of self-employed workers—everyone from doctors to the guys who ran the kiosks that sold the International Herald Tribune—cheated (one big reason why Greece has the highest percentage of self-employed workers of any European country). "It’s become a cultural trait," he said. "The Greek people never learned to pay their taxes. And they never did because no one is punished. No one has ever been punished. It’s a cavalier offense—like a gentleman not opening a door for a lady."

The scale of Greek tax cheating was at least as incredible as its scope: an estimated two-thirds of Greek doctors reported incomes under 12,000 euros a year—which meant, because incomes below that amount weren’t taxable, that even plastic surgeons making millions a year paid no tax at all. The problem wasn’t the law—there was a law on the books that made it a jailable offense to cheat the government out of more than 150,000 euros—but its enforcement. "If the law was enforced," the tax collector said, "every doctor in Greece would be in jail." I laughed, and he gave me a stare. "I am completely serious." One reason no one is ever prosecuted—apart from the fact that prosecution would seem arbitrary, as everyone is doing it—is that the Greek courts take up to 15 years to resolve tax cases. "The one who does not want to pay, and who gets caught, just goes to court," he says. Somewhere between 30 and 40 percent of the activity in the Greek economy that might be subject to the income tax goes officially unrecorded, he says, compared with an average of about 18 percent in the rest of Europe.

The easiest way to cheat on one’s taxes was to insist on being paid in cash, and fail to provide a receipt for services. The easiest way to launder cash was to buy real estate. Conveniently for the black market—and alone among European countries—Greece has no working national land registry. "You have to know where the guy bought the land—the address—to trace it back to him," says the collector. "And even then it’s all handwritten and hard to decipher." But, I say, if some plastic surgeon takes a million in cash, buys a plot on a Greek island, and builds himself a villa, there would be other records—say, building permits. "The people who give the building permits don’t inform the Treasury," says the tax collector. In the apparently not-so-rare cases where the tax cheat gets caught, he can simply bribe the tax collector and be done with it. There are, of course, laws against tax collectors’ accepting bribes, explained the collector, "but if you get caught, it can take seven or eight years to get prosecuted. So in practice no one bothers."

The systematic lying about one’s income had led the Greek government to rely increasingly on taxes harder to evade: real-estate and sales taxes. Real estate is taxed by formula—to take the tax collectors out of the equation—which generates a so-called "objective value" for each home. The boom in the Greek economy over the last decade caused the actual prices at which property changed hands to far outstrip the computer-driven appraisals. Given higher actual sales prices, the formula is meant to ratchet upward. The typical Greek citizen responded to the problem by not reporting the price at which the sale took place, but instead reporting a phony price—which usually happened to be the same low number at which the dated formula had appraised it. If the buyer took out a loan to buy the house, he took out a loan for the objective value and paid the difference in cash, or with a black-market loan. As a result the "objective values" grotesquely understate the actual land values. Astonishingly, it’s widely believed that all 300 members of the Greek Parliament declare the real value of their houses to be the computer-generated objective value. Or, as both the tax collector and a local real-estate agent put it to me, "every single member of the Greek Parliament is lying to evade taxes."

On he went, describing a system that was, in its way, a thing of beauty. It mimicked the tax-collecting systems of an advanced economy—and employed a huge number of tax collectors—while it was in fact rigged to enable an entire society to cheat on their taxes. As he rose to leave, he pointed out that the waitress at the swanky tourist hotel failed to provide us with a receipt for our coffees. "There’s a reason for that," he said. "Even this hotel doesn’t pay the sales tax it owes."

I walked down the street and found waiting for me, in the bar of another swanky tourist hotel, the second tax collector. Tax Collector No. 2—casual in manner and dress, beer-drinking, but terrified that others might discover he had spoken to me—also arrived with a binder full of papers, only his was stuffed with real-world examples not of Greek people but Greek companies that had cheated on their taxes. He then started to rattle off examples ("only the ones I personally witnessed"). The first was an Athenian construction company that had built seven giant apartment buildings and sold off nearly 1,000 condominiums in the heart of the city. Its corporate tax bill honestly computed came to 15 million euros, but the company had paid nothing at all. Zero.

To evade taxes it had done several things. First, it never declared itself a corporation; second, it employed one of the dozens of companies that do nothing but create fraudulent receipts for expenses never incurred and then, when the tax collector stumbled upon the situation, offered him a bribe. The tax collector blew the whistle and referred the case to his bosses—whereupon he found himself being tailed by a private investigator, and his phones tapped. In the end the case was resolved, with the construction company paying 2,000 euros. "After that I was taken off all tax investigations," said the tax collector, "because I was good at it."

He returned to his thick binder full of cases. He turned the page. Every page in his binder held a story similar to the one he had just told me, and he intended to tell me all of them. That’s when I stopped him. I realized that if I let him go on we’d be there all night. The extent of the cheating—the amount of energy that went into it—was breathtaking. In Athens, I several times had a feeling new to me as a journalist: a complete lack of interest in what was obviously shocking material. I’d sit down with someone who knew the inner workings of the Greek government: a big-time banker, a tax collector, a deputy finance minister, a former M.P. I’d take out my notepad and start writing down the stories that spilled out of them. Scandal after scandal poured forth. Twenty minutes into it I’d lose interest. There were simply too many: they could fill libraries, never mind a magazine article.

The Greek state was not just corrupt but also corrupting. Once you saw how it worked you could understand a phenomenon which otherwise made no sense at all: the difficulty Greek people have saying a kind word about one another. Individual Greeks are delightful: funny, warm, smart, and good company. I left two dozen interviews saying to myself, "What great people!" They do not share the sentiment about one another: the hardest thing to do in Greece is to get one Greek to compliment another behind his back. No success of any kind is regarded without suspicion.

Everyone is pretty sure everyone is cheating on his taxes, or bribing politicians, or taking bribes, or lying about the value of his real estate. And this total absence of faith in one another is self-reinforcing. The epidemic of lying and cheating and stealing makes any sort of civic life impossible; the collapse of civic life only encourages more lying, cheating, and stealing. Lacking faith in one another, they fall back on themselves and their families. The structure of the Greek economy is collectivist, but the country, in spirit, is the opposite of a collective. Its real structure is every man for himself. Into this system investors had poured hundreds of billions of dollars. And the credit boom had pushed the country over the edge, into total moral collapse.

Road to Perdition
Knowing nothing else about the Vatopaidi monastery except that, in a perfectly corrupt society, it had somehow been identified as the soul of corruption, I made my way up to the north of Greece, in search of a bunch of monks who had found new, improved ways to work the Greek economy. The first stage was fairly easy: the plane to Greece’s second city of Thessaloniki, the car being driven along narrow roads at nerve-racking speeds, and a night with a lot of Bulgarian tourists at a surprisingly delightful hotel in the middle of nowhere, called the Eagles Palace.

There the single most helpful hotel employee I have ever met (ask for Olga) handed me a stack of books and said wistfully how lucky I was to be able to visit the place. The Vatopaidi monastery, along with 19 others, was built in the 10th century on a 37-mile-long-by-6-mile-wide peninsula in northeast Greece, called Mount Athos. Mount Athos now is severed from the mainland by a long fence, and so the only way onto it is by boat, which gives the peninsula the flavor of an island. And on this island no women are allowed—no female animals of any kind, in fact, except for cats. The official history ascribes the ban to the desire of the church to honor the Virgin; the unofficial one to the problem of monks hitting on female visitors. The ban has stood for 1,000 years.

This explains the high-pitched shrieks the next morning, as the ancient ferry packed with monks and pilgrims pulls away from the docks. Dozens of women gather there to holler at the tops of their lungs, but with such good cheer that it is unclear whether they are lamenting or celebrating the fact that they cannot accompany their men. Olga has told me that she was pretty sure I was going to need to hike some part of the way to Vatopaidi, and that the people she has seen off to the holy mountain don’t usually carry with them anything so redolent of the modern material world as a wheelie bag. As a result, all I have is an Eagles Palace plastic laundry bag with spare underwear, a toothbrush, and a bottle of Ambien.

The ferry chugs for three hours along a rocky, wooded, but otherwise barren coastline, stopping along the way to drop monks and pilgrims and guest workers at other monasteries. The sight of the first one just takes my breath away. It’s not a building but a spectacle: it’s as if someone had taken Assisi or Todi or one of the other old central-Italian hill towns and plopped it down on the beach, in the middle of nowhere. Unless you know what to expect on Mount Athos—it has been regarded by the Eastern Orthodox Church for more than a millennium as the holiest place on earth, and it enjoyed for much of that time a symbiotic relationship with Byzantine emperors—these places come as a shock. There’s nothing modest about them; they are grand and complicated and ornate and obviously in some sort of competition with one another. In the old days, pirates routinely plundered them, and you can see why: it would be almost shameful not to, for a pirate.

There are many places in the world where you can get away with not speaking Greek. Athens is one of them; the Mount Athos ferryboat is not. I am saved by an English-speaking young man who, to my untrained eye, looks like any other monk: long dark robes, long dark shaggy beard, fog of unfriendliness which, once penetrated, evaporates. He spots me using a map with thumbnail sketches of the monasteries and trying to determine where the hell I am meant to get off the boat: he introduces himself. His name is Cesar; he’s Romanian, the son of a counter-espionage secret-policeman in the nightmarish regime of Nicolae Ceaucescu. Somehow he has retained his sense of humor, which counts as some kind of miracle. He explains that if I knew anything about anything I would know that he was no monk, merely another Romanian priest on holiday. He’s traveled from Bucharest, with two enormous trunks on wheelies, to spend his summer vacation in one of the monasteries. Three months living on bread and water with no women in sight is his idea of a vacation. The world outside Mount Athos he finds somehow lacking.

Cesar draws me a little map to use to get to Vatopaidi and gives me a more general lay of the land. The mere fact that I don’t have a beard will expose me as a not terribly holy man, he explains, if my mauve Brooks Brothers shirt doesn’t do it first. "But they are used to having visitors," he said, "so it shouldn’t be a problem."

Then he pauses and asks, "But what is your religion?"
"I don’t have one."
"But you believe in God?"
"No."
He thinks this over.
"Then I’m pretty sure they can’t let you in."
He lets the thought sink in, then says. "On the other hand, how much worse could it get for you?" he says, and chuckles.


An hour later I’m walking off the ferry holding nothing but the Eagles Palace hotel laundry bag and Cesar’s little map, and he’s still repeating his own punch line—"How much worse could it get for you?"—and laughing more loudly each time.

The monk who meets me at Vatopaidi’s front gate glances at the laundry bag and hands me a form to fill in. An hour later, having pretended to settle into my surprisingly comfortable cell, I’m carried by a river of bearded monks through the church door. Fearing that I might be tossed out of the monastery before I got a sense of the place, I do what I can to fit in. I follow the monks into their church; I light candles and jam them into a tiny sandpit; I cross myself incessantly; I air-kiss the icons. No one seems to care one way or the other about the obviously not Greek guy in the mauve Brooks Brothers shirt, though right through the service a fat young monk who looks a bit like Jack Black glares at me, as if I was neglecting some critical piece of instruction.

Otherwise the experience was sensational, to be recommended to anyone looking for a taste of 10th-century life. Beneath titanic polished golden chandeliers, and surrounded by freshly cleaned icons, the monks sang; the monks chanted; the monks vanished behind screens to utter strange incantations; the monks shook what sounded like sleigh bells; the monks floated by waving thuribles, leaving in their wake smoke and the ancient odor of incense. Every word that was said and sung and chanted was Biblical Greek (it seemed to have something to do with Jesus Christ), but I nodded right along anyway. I stood when they stood, and sat when they sat: up and down we went like pogos, for hours. The effect of the whole thing was heightened by the monks’ magnificently wild beards. Even when left to nature, beards do not all grow in the same way. There are types: the hopelessly porous mass of fuzz; the Osama bin Laden/Assyrian-king trowel; the Karl Marx bird’s nest. A surprising number of the monks resembled the Most Interesting Man in the World from the Dos Equis commercial. ("His beard alone has experienced more than a lesser man’s entire body.")

The Vatopaidi monks have a reputation for knowing a lot more about you than you imagine they do, and for sensing what they do not know. A woman who runs one of the big Greek shipping firms told me over dinner in Athens that she had found herself seated on a flight not long ago beside Father Ephraim, the abbot of Vatopaidi (business class). "It was a very strange experience," she said. "He knew nothing about me, but he guessed everything. My marriage. How I felt about my work. I felt that he completely knew me." Inside their church I doubted their powers—in the middle of a great national scandal they have allowed a writer from VANITY FAIR, albeit one who has not formally announced himself, to show up, bunk down, and poke around their monastery without asking the first question. But coming out of the church I finally get seized: a roundish monk with a salt-and-pepper beard and skin the color of a brown olive corners me. He introduces himself as Father Arsenios.

Grecian Formulas
For most of the 1980s and 1990s, Greek interest rates had run a full 10 percent higher than German ones, as Greeks were regarded as far less likely to repay a loan. There was no consumer credit in Greece: Greeks didn’t have credit cards. Greeks didn’t usually have mortgage loans either. Of course, Greece wanted to be treated, by the financial markets, like a properly functioning Northern European country. In the late 1990s they saw their chance: get rid of their own currency and adopt the euro. To do this they needed to meet certain national targets, to prove that they were capable of good European citizenship—that they would not, in the end, run up debts that other countries in the euro area would be forced to repay. In particular they needed to show budget deficits under 3 percent of their gross domestic product, and inflation running at roughly German levels.

In 2000, after a flurry of statistical manipulation, Greece hit the targets. To lower the budget deficit the Greek government moved all sorts of expenses (pensions, defense expenditures) off the books. To lower Greek inflation the government did things like freeze prices for electricity and water and other government-supplied goods, and cut taxes on gas, alcohol, and tobacco. Greek-government statisticians did things like remove (high-priced) tomatoes from the consumer price index on the day inflation was measured. "We went to see the guy who created all these numbers," a former Wall Street analyst of European economies told me. "We could not stop laughing. He explained how he took out the lemons and put in the oranges. There was a lot of massaging of the index."

Which is to say that even at the time, some observers noted that Greek numbers never seemed to add up. A former I.M.F. official turned economic adviser to former Greek prime minister Konstantinos Mitsotakis turned Salomon Brothers analyst named Miranda Xafa pointed out in 1998 that if you added up all the Greek budget deficits over the previous 15 years they amounted to only half the Greek debt. That is, the amount of money the Greek government had borrowed to fund its operations was twice its declared shortfalls. "At Salomon we used to call [the head of the Greek National Statistical Service] ‘the Magician,’ " says Xafa, "because of his ability to magically make inflation, the deficit, and the debt disappear."

In 2001, Greece entered the European Monetary Union, swapped the drachma for the euro, and acquired for its debt an implicit European (read German) guarantee. Greeks could now borrow long-term funds at roughly the same rate as Germans—not 18 percent but 5 percent. To remain in the euro zone, they were meant, in theory, to maintain budget deficits below 3 percent of G.D.P.; in practice, all they had to do was cook the books to show that they were hitting the targets. Here, in 2001, entered Goldman Sachs, which engaged in a series of apparently legal but nonetheless repellent deals designed to hide the Greek government’s true level of indebtedness. For these trades Goldman Sachs—which, in effect, handed Greece a $1 billion loan—carved out a reported $300 million in fees.

The machine that enabled Greece to borrow and spend at will was analogous to the machine created to launder the credit of the American subprime borrower—and the role of the American investment banker in the machine was the same. The investment bankers also taught the Greek-government officials how to securitize future receipts from the national lottery, highway tolls, airport landing fees, and even funds granted to the country by the European Union. Any future stream of income that could be identified was sold for cash up front, and spent. As anyone with a brain must have known, the Greeks would be able to disguise their true financial state for only as long as (a) lenders assumed that a loan to Greece was as good as guaranteed by the European Union (read Germany), and (b) no one outside of Greece paid very much attention. Inside Greece there was no market for whistle-blowing, as basically everyone was in on the racket.

That changed on October 4 of last year, when the Greek government turned over. A scandal felled the last government and sent Prime Minister Kostas Karamanlis packing, which perhaps is not surprising. What’s surprising was the nature of the scandal. In late 2008, news broke that Vatopaidi had somehow acquired a fairly worthless lake and swapped it for far more valuable government-owned land. How the monks did this was unclear—paid some enormous bribe to some government official, it was assumed. No bribe could be found, however. It didn’t matter: the furor that followed drove Greek politics for the next year. The Vatopaidi scandal registered in Greek public opinion like nothing in memory. "We’ve never seen a movement in the polls like we saw after the scandal broke," the editor of one of Greece’s leading newspapers told me. "Without Vatopaidi, Karamanlis is still the prime minister, and everything is still going on as it was before." Dimitri Contominas, the billionaire creator of a Greek life-insurance company and, as it happens, owner of the TV station that broke the Vatopaidi scandal, put it to me more bluntly: "The Vatopaidi monks brought George Papandreou to power."

After the new party (the supposedly socialist Pasok) replaced the old party (the supposedly conservative New Democracy), it found so much less money in the government’s coffers than it had expected that it decided there was no choice but to come clean. The prime minister announced that Greece’s budget deficits had been badly understated—and that it was going to take some time to nail down the numbers. Pension funds and global bond funds and other sorts who buy Greek bonds, having seen several big American and British banks go belly-up, and knowing the fragile state of a lot of European banks, panicked. The new, higher interest rates Greece was forced to pay left the country—which needed to borrow vast sums to fund its operations—more or less bankrupt. In came the I.M.F. to examine the Greek books more closely; out went whatever tiny shred of credibility the Greeks had left. "How in the hell is it possible for a member of the euro area to say the deficit was 3 percent of G.D.P. when it was really 15 percent?" a senior I.M.F. official asks. "How could you possibly do something like that?"

Just now the global financial system is consumed with the question of whether the Greeks will default on their debts. At times it seems as if it is the only question that matters, for if Greece walks away from $400 billion in debt, then the European banks that lent the money will go down, and other countries now flirting with bankruptcy (Spain, Portugal) might easily follow. But this question of whether Greece will repay its debts is really a question of whether Greece will change its culture, and that will happen only if Greeks want to change. I am told 50 times if I am told once that what Greeks care about is "justice" and what really boils the Greek blood is the feeling of unfairness. Obviously this distinguishes them from no human being on the planet, and ignores what’s interesting: exactly what a Greek finds unfair. It’s clearly not the corruption of their political system. It’s not cheating on their taxes, or taking small bribes in their service to the state. No: what bothers them is when some outside party—someone clearly different from themselves, with motives apart from narrow and easily understood self-interest—comes in and exploits the corruption of their system. Enter the monks.

Among the first moves made by the new minister of finance was to file a lawsuit against the Vatopaidi monastery, demanding the return of government property and damages. Among the first acts of the new Parliament was to open a second investigation of the Vatopaidi affair, to finally nail down exactly how the monks got their sweet deal. The one public official who has been strung up—he’s had his passport taken away, and remains free only because he posted a bail of 400,000 euros—is an assistant to the former prime minister, Giannis Angelou, who stands accused of helping these monks.

In a society that has endured something like total moral collapse, its monks had somehow become the single universally acceptable target of moral outrage. Every right-thinking Greek citizen is still furious with them and those who helped them, and yet no one knows exactly what they did, or why.

Monk Business
Father Arsenios looks to be in his late 50s—though who knows, as their beards cause them all to look 20 years older. He’s about as famous as you can get, for a monk: everyone in Athens knows who he is. Mr. Inside, the consummate number two, the C.F.O., the real brains of the operation. "If they put Arsenios in charge of the government real-estate portfolio," a prominent Greek real-estate agent said to me, "this country would be Dubai. Before the crisis." If you are kindly disposed to these monks, Father Arsenios is the trusted assistant who makes possible the miraculous abbacy of Father Ephraim. If you are not, he’s Jeff Skilling to Ephraim’s Kenneth Lay.

I tell him who I am and what I do—and also that I have spent the past few days interviewing political types in Athens. He smiles, genuinely: he’s pleased I’ve come! "The politicians all used to come here," he says, "but because of our scandal they don’t now. They are afraid of being seen with us!" He escorts me into the dining hall and plants me at what appears to be the pilgrim’s table of honor, right next to the table filled with the top monks. Father Ephraim heads that table, with Arsenios beside him.

Most of what the monks eat they grow themselves within a short walk of the dining hall. Crude silver bowls contain raw, uncut onions, green beans, cucumbers, tomatoes, and beets. Another bowl holds bread baked by the monks, from their own wheat. There’s a pitcher of water and, for dessert, a soupy orange sherbet-like substance and dark honeycomb recently plundered from some beehive. And that’s pretty much it. If it were a restaurant in Berkeley, people would revel in the glorious self-righteousness of eating the locally grown; here the food just seems plain. The monks eat like fashion models before a shoot. Twice a day four days a week, and once a day for three: 11 meals, all of them more or less like this. Which raises an obvious question: Why are some of them fat? Most of them—maybe 100 out of the 110 now in residence—resemble their diet. Beyond thin: narrow. But a handful, including the two bosses, have an ampleness to them that cannot be explained by 11 helpings of raw onion and cucumber, no matter how much honeycomb they chew through.

After dinner the monks return to church, where they will remain chanting and singing and crossing and spraying incense until one in the morning. Arsenios grabs me and takes me for a walk. We pass Byzantine chapels and climb Byzantine stairs until we arrive at a door in a long Byzantine hall freshly painted but otherwise antique: his office. On the desk are two computers; behind it a brand-new fax machine—cum—printer; on top of it a cell phone and a Costco-size tub of vitamin-C pills. The walls and floor gleam like new. The cabinets exhibit row upon row of three-ring binders. The only sign that this isn’t a business office circa 2010 is a single icon over the desk. Apart from that, if you put this office side by side with the office of Greece’s minister of finance and asked which one housed the monk, this wouldn’t be it.

"There is more of a spiritual thirst today," he says when I ask him why his monastery has attracted so many important business and political people. "Twenty or 30 years ago they taught that science will solve all problems. There are so many material things and they are not satisfying. People have gotten tired of material pleasures. Of material things. And they realize they cannot really find success in these things." And with that he picks up the phone and orders drinks and dessert. Moments later a silver tray arrives, bearing pastries and glasses of what appears to be crème de menthe.

Thus began what became a three-hour encounter. I’d ask simple questions—Why on earth would anyone become a monk? How do you handle life without women? How do people who spend 10 hours a day in church find time to create real-estate empires? Where did you get the crème de menthe?—and he would answer in 20-minute-long parables in which there would be, somewhere, a simple answer. (For example: "I believe there are many more beautiful things than sex.") As he told his stories he waved and jumped around and smiled and laughed: if Father Arsenios feels guilty about anything, he has a rare talent for hiding it.

Like a lot of people who come to Vatopaidi, I suppose, I was less than perfectly sure what I was after. I wanted to see if it felt like a front for a commercial empire (it doesn’t) and if the monks seemed insincere (hardly). But I also wondered how a bunch of odd-looking guys who had walked away from the material world had such a knack for getting their way in it: how on earth do monks, of all people, wind up as Greece’s best shot at a Harvard Business School case study? After about two hours I work up the nerve to ask him. To my surprise he takes me seriously. He points to a sign he has tacked up on one of his cabinets, and translates it from the Greek: the smart person accepts. the idiot insists.

He got it, he says, on one of his business trips to the Ministry of Tourism. "This is the secret of success for anywhere in the world, not just the monastery," he says, and then goes on to describe pretty much word for word the first rule of improvisational comedy, or for that matter any successful collaborative enterprise. Take whatever is thrown at you and build upon it. "Yes … and" rather than "No … but." "The idiot is bound by his pride," he says. "It always has to be his way. This is also true of the person who is deceptive or doing things wrong: he always tries to justify himself. A person who is bright in regard to his spiritual life is humble. He accepts what others tell him—criticism, ideas—and he works with them."

I notice now that his windows open upon a balcony overlooking the Aegean Sea. The monks are not permitted to swim in it; why, I never asked. Just like them, though, to build a beach house and then ban the beach. I notice, also, that I am the only one who has eaten the pastries and drunk the crème de menthe. It occurs to me that I may have just failed some sort of test of my ability to handle temptation.

"The whole government says they are angry at us," he says, "but we have nothing. We work for others. The Greek newspapers, they call us a corporation. But I ask you, Michael, what company has lasted for 1,000 years?" At that moment, out of nowhere, Father Ephraim walks in. Round, with rosy cheeks and a white beard, he is more or less the spitting image of Santa Claus. He even has a twinkle in his eye. A few months before, he’d been hauled before the Greek Parliament to testify. One of his interrogators said that the Greek government had acted with incredible efficiency when it swapped Vatopaidi’s lake for the Ministry of Agriculture’s commercial properties. He asked Ephraim how he had done it. "Don’t you believe in miracles?" Ephraim had said. "I’m beginning to," said the Greek M.P.

When we are introduced, Ephraim clasps my hand and holds it for a very long time. It crosses my mind that he is about to ask me what I want for Christmas. Instead he says, "What is your faith?" "Episcopalian," I cough out. He nods; he calibrates: it could be worse; it probably is worse. "You are married?" he asks. "Yes." "You have children?" I nod; he calibrates: I can work with this. He asks for their names …

Notes on a Scandal
The second parliamentary inquiry into the Vatopaidi affair is just getting under way, and you never know what it may turn up. But the main facts of the case are actually not in dispute; the main question left to answer is the motives of the monks and the public servants who helped them. In the late 1980s, Vatopaidi was a complete ruin—a rubble of stones overrun with rats. The frescoes were black. The icons went uncared for. The place had a dozen monks roaming around its ancient stones, but they were autonomous and disorganized. In church jargon they worshipped idiorrhythmically—which is another way of saying that in their quest for spiritual satisfaction it was every man for himself. No one was in charge; they had no collective purpose. Their relationship to their monastery, in other words, was a lot like the relationship of the Greek citizen to his state.

That changed in the early 1990s, when a group of energetic young Greek Cypriot monks from another part of Athos, led by Father Ephraim, saw a rebuilding opportunity: a fantastic natural asset that had been terribly mismanaged. Ephraim set about raising the money to restore Vatopaidi to its former glory. He dunned the European Union for cultural funds. He mingled with rich Greek businessmen in need of forgiveness. He cultivated friendships with important Greek politicians. In all of this he exhibited incredible chutzpah. For instance, after a famous Spanish singer visited and took an interest in Vatopaidi, he parlayed the interest into an audience with government officials from Spain. They were told a horrible injustice had occurred: in the 14th century a band of Catalan mercenaries, upset with the Byzantine emperor, had sacked Vatopaidi and caused much damage. The monastery received $240,000 from the government officials.

Clearly one part of Ephraim’s strategy was to return Vatopaidi to what it had been for much of the Byzantine Empire: a monastery with global reach. This, too, distinguished it from the country it happened to be inside. Despite its entry into the European Union, Greece has remained a closed economy; it’s impossible to put one finger on the source of all the country’s troubles, but if you laid a hand on them, one finger would touch its insularity. All sorts of things that might be more efficiently done by other people they do themselves; all sorts of interactions with other countries that they might profitably engage in simply do not occur. In the general picture the Vatopaidi monastery was a stunning exception: it cultivated relations with the outside world. Most famously, until scandal hit, Prince Charles had visited three summers in a row, and stayed for a week each visit.

Relationships with the rich and famous were essential in Vatopaidi’s pursuit of government grants and reparations for sackings, but also for the third prong of its new management’s strategy: real estate. By far the smartest thing Father Ephraim had done was go rummaging around in an old tower where they kept the Byzantine manuscripts, untouched for decades. Over the centuries Byzantine emperors and other rulers had deeded to Vatopaidi various tracts of land, mainly in modern-day Greece and Turkey. In the years before Ephraim arrived, the Greek government had clawed back much of this property, but there remained a title, bestowed in the 14th century by Emperor John V Palaiologos, to a lake in northern Greece.

By the time Ephraim discovered the deed to the lake in Vatopaidi’s vaults, it had been designated a nature preserve by the Greek government. Then, in 1998, suddenly it wasn’t: someone had allowed the designation to lapse. Shortly thereafter, the monks were granted full title to the lake.

Back in Athens, I tracked down Peter Doukas, the official inside the Ministry of Finance first accosted by the Vatopaidi monks. Doukas now finds himself at the center of the two parliamentary investigations, but he had become, oddly, the one person in government willing to speak openly about what had happened. (He was by birth not an Athenian but a Spartan—but perhaps that’s another story.) Unlike most of the people in the Greek government, Doukas wasn’t a lifer but a guy who had made his fortune in the private sector, inside and outside of Greece, and then, in 2004, at the request of the prime minister, had taken a post in the Finance Ministry. He was then 52 years old and had spent most of his career as a banker with Citigroup in New York.

He was tall and blond and loud and blunt and funny. It was Doukas who was responsible for the very existence of long-term Greek-government debt. Back when interest rates were low, and no one saw any risk in lending money to the Greek government, he talked his superiors into issuing 40- and 50-year bonds. Afterward the Greek newspapers ran headlines attacking him (DOUKAS MORTGAGES OUR CHILDREN’S FUTURE), but it was a very bright thing to have done. The $18 billion of long-term bonds now trade at 50 cents on the dollar—which is to say that the Greek government could buy them back on the open market. "I created a $9 billion trading profit for them," says Doukas, laughing. "They should give me a bonus!"

Not long after Doukas began his new job, two monks showed up unannounced in his Finance Ministry office. One was Father Ephraim, of whom Doukas had heard; the other, unknown to Doukas but clearly the sharp end of the operation, a fellow named Father Arsenios. They owned this lake, they said, and they wanted the Ministry of Finance to pay them cash for it. "Someone had given them full title to the lake," says Doukas. "What they wanted now was to monetize it. They came to me and said, ‘Can you buy us out?’ "

Before the meeting, Doukas sensed, they had done a great deal of homework. "Before they come to you they know a lot about you—your wife, your parents, the extent of your religious beliefs," he said. "The first thing they asked me was if I wanted them to take my confession." Doukas decided that it would be unwise to tell the monks his secrets. Instead he told them he would not give them money for their lake—which he still didn’t see how exactly they had come to own. "They seemed to think I had all this money to spend," says Doukas. "I said, ‘Listen, contrary to popular opinion, there is no money in the Finance Ministry.’ And they said, ‘O.K., if you cannot buy us out, why can’t you give us some of your pieces of land?’ "

This turned out to be the winning strategy: exchanging the lake, which generated no rents, for government-owned properties that did. Somehow the monks convinced government officials that the land around the lake was worth far more than the 55 million euros an independent appraiser later assessed its value as, and then used that higher valuation to ask for one billion euros’ worth of government property. Doukas declined to give them any of the roughly 250 billion euros’ worth controlled by the Ministry of Finance. ("No fucking way I’m doing that," he says he told them.) The monks went to the source of the next most valuable land—farmlands and forests controlled by the Ministry of Agriculture. Doukas recalls, "I get a call from the Minister of Agriculture saying, ‘We’re trading them all this land, but it’s not enough. Why don’t you throw in some of your pieces of land, too?’ " After Doukas declined, he received another call—this one from the prime minister’s office. Still he said no. Next he receives this piece of paper saying he’s giving the monks government land, and all he needs to do is sign it. "I said, ‘Fuck you, I’m not signing it.’ "

And he didn’t—at least not in its original form. But the prime minister’s office pressed him; the monks, it seemed to Doukas, had some kind of hold on the prime minister’s chief of staff. That fellow, Giannis Angelou, had come to know the monks a few years before, just after he had been diagnosed with a life-threatening illness. The monks prayed for him; he didn’t die, but instead made a miraculous recovery. He had, however, given them his confession.

By now Doukas thought of these monks less as simple con men than the savviest businessmen he had ever dealt with. "I told them they should be running the Ministry of Finance," he says. "They didn’t disagree." In the end, under pressure from his boss, Doukas signed two pieces of paper. The first agreed not to challenge the monks’ ownership of the lake; the second made possible the land exchange. It did not give the monks rights to any lands from the Finance Ministry, but, by agreeing to accept their lake into the Ministry of Finance’s real-estate portfolio, Doukas enabled their deal with the minister of agriculture. In exchange for their lake the monks received 73 different government properties, including what had formerly been the gymnastics center for the 2004 Olympics—which, like much of what the Greek government built for the Olympic Games, was now empty and abandoned space. And that, Doukas assumed, was that. "You figure they are holy people," he says. "Maybe they want to use it to create an orphanage."

What they wanted to create, as it turned out, was a commercial-real-estate empire. They began by persuading the Greek government to do something it seldom did: to re-zone a lot of uncommercial property for commercial purposes. Above and beyond the lands they received in their swap—which the Greek Parliament subsequently estimated to be worth a billion euros—the monks, all by themselves, were getting 100 percent financing to buy commercial buildings in Athens, and to develop the properties they had acquired. The former Olympics gymnastics center was to become a fancy private hospital—with which the monks obviously enjoyed a certain synergy. Then, with the help of a Greek banker, the monks drew up plans for something to be called the Vatopaidi Real Estate Fund. Investors in the fund would, in effect, buy the monks out of the properties given to them by the government. And the monks would use the money to restore their monastery to its former glory.

From an ancient deed to a worthless lake the two monks had spun what the Greek newspapers were claiming, depending on the newspaper, to be a fortune of anywhere from tens of millions to many billions of dollars. But the truth was that no one knew the full extent of the monks’ financial holdings; indeed, one of the criticisms of the first parliamentary investigation was that it had failed to lay hands on everything the monks owned. On the theory that if you want to know what rich people are really worth you are far better off asking other rich people—as opposed to, say, journalists—I polled a random sample of several rich Greeks who had made their fortune in real estate or finance. They put the monk’s real-estate and financial assets at less than $2 billion but more than $1 billion—up from zero since the new management took over. And the business had started with nothing to sell but forgiveness.

The monks didn’t finish with church until one in the morning. Normally, Father Arsenios explained, they would be up and at it all over again at four. On Sunday they give themselves a break and start at six. Throw in another eight hours a day working the gardens, or washing dishes, or manufacturing crème de menthe, and you can see how one man’s idea of heaven might be another’s of hell. The bosses of the operation, Fathers Ephraim and Arsenios, escape this grueling regime roughly five days a month; otherwise this is the life they lead. "Most people in Greece have this image of the abbot as a hustler," another monk, named Father Matthew, from Wisconsin, says to me in a moment of what I take to be candor. "Everyone in Greece is convinced that the abbot and Father Arsenios have their secret bank accounts. It’s completely mad if you think about it. What are they going to do with it? They don’t take a week off and go to the Caribbean. The abbot lives in a cell. It’s a nice cell. But he’s still a monk. And he hates leaving the monastery."

The knowledge that I am meant to be back in the church at six in the morning makes it more, not less, difficult to sleep, and I’m out of bed by five. Perfect silence: it’s so rare to hear nothing that it takes a moment to identify the absence. Cupolas, chimneys, towers, and Greek crosses punctuate the gray sky. Also a pair of idle giant cranes: the freezing of the monks’ assets has halted restoration of the monastery. At 5:15 come the first rumblings from inside the church; it sounds as if someone is moving around the icon screens, the sweaty backstage preparations before the show. At 5:30 a monk grabs a rope and clangs a church bell. Silence again and then, moments later, from the monk’s long dormitory, the beep beep beep of electric alarm clocks. Twenty minutes later monks, alone or in pairs, stumble out of their dorm rooms and roll down the cobblestones to their church. It’s like watching a factory springing to life in a one-industry town. The only thing missing are the lunchpails.

Three hours later, in the car on the way back to Athens, my cell phone rings. It’s Father Matthew. He wants to ask me a favor. Oh no, I think, they’ve figured out what I’m up to and he’s calling to place all sorts of restrictions on what I write. They had, sort of, but he didn’t. The minister of finance insisted on checking his quotes, but the monks just let me run with whatever I had, which is sort of amazing, given the scope of the lawsuits they face. "We have this adviser in the American stock market," says the monk. "His name is Robert Chapman. [I’d never heard of him. He turned out to be the writer of a newsletter about global finance.] Father Arsenios is wondering what you think of him. Whether he is worth listening to …"

The Bonfire of Civilization
The day before I left Greece the Greek Parliament debated and voted on a bill to raise the retirement age, reduce government pensions, and otherwise reduce the spoils of public-sector life. ("I’m all for reducing the number of public-sector employees," an I.M.F. investigator had said to me. "But how do you do that if you don’t know how many there are to start with?") Prime Minister Papandreou presented this bill, as he has presented everything since he discovered the hole in the books, not as his own idea but as a non-negotiable demand of the I.M.F. The general idea seems to be that while the Greek people will never listen to any internal call for sacrifice they might listen to calls from outside. That is, they no longer really even want to govern themselves.

Thousands upon thousands of government employees take to the streets to protest the bill. Here is Greece’s version of the Tea Party: tax collectors on the take, public-school teachers who don’t really teach, well-paid employees of bankrupt state railroads whose trains never run on time, state hospital workers bribed to buy overpriced supplies. Here they are, and here we are: a nation of people looking for anyone to blame but themselves. The Greek public-sector employees assemble themselves into units that resemble army platoons. In the middle of each unit are two or three rows of young men wielding truncheons disguised as flagpoles. Ski masks and gas masks dangle from their belts so that they can still fight after the inevitable tear gas. "The deputy prime minister has told us that they are looking to have at least one death," a prominent former Greek minister had told me.

"They want some blood." Two months earlier, on May 5, during the first of these protest marches, the mob offered a glimpse of what it was capable of. Seeing people working at a branch of the Marfin Bank, young men hurled Molotov cocktails inside and tossed gasoline on top of the flames, barring the exit. Most of the Marfin Bank’s employees escaped from the roof, but the fire killed three workers, including a young woman four months pregnant. As they died, Greeks in the streets screamed at them that it served them right, for having the audacity to work. The events took place in full view of the Greek police, and yet the police made no arrests.

As on other days, the protesters have effectively shut down the country. The air-traffic controllers have also gone on strike and closed the airport. At the port of Piraeus, the mob prevents cruise-ship passengers from going ashore and shopping. At the height of the tourist season the tourist dollars this place so desperately needs are effectively blocked from getting into the country. Any private-sector employee who does not skip work in sympathy is in danger. All over Athens shops and restaurants close; so, for that matter, does the Acropolis.

The lead group assembles in the middle of a wide boulevard a few yards from the burned and gutted bank branch. That they burned a bank is, under the circumstances, incredible. If there were any justice in the world the Greek bankers would be in the streets marching to protest the morals of the ordinary Greek citizen. The Marfin Bank’s marble stoop has been turned into a sad shrine: a stack of stuffed animals for the unborn child, a few pictures of monks, a sign with a quote from the ancient orator Isocrates: "Democracy destroys itself because it abuses its right to freedom and equality. Because it teaches its citizens to consider audacity as a right, lawlessness as a freedom, abrasive speech as equality, and anarchy as progress."

At the other end of the street a phalanx of riot police stand, shields together, like Spartan warriors. Behind them is the Parliament building; inside, the debate presumably rages, though what is being said and done is a mystery, as the Greek journalists aren’t working, either. The crowd begins to chant and march toward the vastly outnumbered police: the police stiffen. It’s one of those moments when it feels as if anything might happen. Really, it’s just a question of which way people jump.

That’s how it feels in the financial markets too. The question everyone wants an answer to is: Will Greece default? There’s a school of thought that says they have no choice: the very measures the government imposes to cut costs and raise revenues will cause what is left of the productive economy to flee the country. The taxes are lower in Bulgaria, the workers more pliable in Romania. But there’s a second, more interesting question: Even if it is technically possible for these people to repay their debts, live within their means, and return to good standing inside the European Union, do they have the inner resources to do it? Or have they so lost their ability to feel connected to anything outside their small worlds that they would rather just shed themselves of the obligations?

On the face of it, defaulting on their debts and walking away would seem a mad act: all Greek banks would instantly go bankrupt, the country would have no ability to pay for the many necessities it imports (oil, for instance), and the country would be punished for many years in the form of much higher interest rates, if and when it was allowed to borrow again. But the place does not behave as a collective; it lacks the monks’ instincts. It behaves as a collection of atomized particles, each of which has grown accustomed to pursuing its own interest at the expense of the common good. There’s no question that the government is resolved to at least try to re-create Greek civic life. The only question is: Can such a thing, once lost, ever be re-created?


52 comments:

DIYer said...

"As Recovery Boosts Big Banks, Smaller Lenders Are Still Struggling"
by Robin Sidel - Wall Street Journal

Puhleeeze! Doesn't this idiot know what boosted the big banks!? It wasn't recovery, it was three quarters of a trillion GIFT. They should have been dismembered and shut down.

PRI-De said...

It looks like Stoneleigh will ave plenty to discuss at our shindig in Detroit.

Cheers

Bukko Canukko said...

Perhaps it's time to change Dr. Doom's nickname and start calling him Dear Mr. Fantasy.

Linda said...

Ilargi said, "And as long as we continue on the present path, all that will happen is they get more broke."

It begs the question what the gov't ought to do. Only confused by the "as long as we continue on the present path"...as if there were a way out!

Alexander Ac said...

Excellent as usual!

Nate Hagens at TOD writes:

"as I now believe debt deflation and or currency reform are clearer and more present threats than resource depletion or environmental damage in upsetting the social applecart"

http://www.theoildrum.com/node/6938

may we call it "Stoneleighization" of the opinion?

VK said...

So how many trillions have been spent already and what effect has it had on the reality on the ground in America?

Ok, so Obama and his team of Ponzi economists have borrowed and spent with reckless abandon and the cheerleaders in the Mainstream media have been blowing as hard as ever. Over the last year, for every dollar of US tax revenue, a dollar has been borrowed. The FED quantitatively eased $1.7 Trillion or so into the economy but if one looks at the data, the reality is that, for all that buck there wasn't much bang.

Let's summarize the better than expected data that has been in the news of late.

First of all, the CMI growth index stands at -5.63pc today. The 2008 low stood at -6.02pc. We're not that far off from surpassing that trough.

Unemployment rates are still where they are a year ago, while the US is now trillions more into debt. U3 at 9.6pc and U6 at 16.7pc while Shadowstats.com is registering unemployment at closer to 22pc.

Existing home sales registered a 15 year low as you are well aware by now.

New Home sales hit an all time record low.

Just to get the 8 million people who have lost their jobs so far in the great recession, and to provide employment to the 150,000 or so people that come into the job market every month as a result of demographic trends, a job by the end of Obama's second term, if there were to be one, would require the creation of 261,000 or so jobs per month!! What would be the driver of that job growth? In the past housing was the primary driver of the economy, as well as the constant flow of easy money bubbles. Now that engine has gone bust.

Speaking of engines, August auto sales came in at a 28 year low, think how much the population has grown in 28 years! Though I see that the Porsche sales managed to surge, while GM, Toyota, Nissan etc all tanked.

David Rosenberg writes that, The ISM manufacturing index, "managed to spike even though the three leading sub-indices — new orders, backlogs and vendor performance — all declined in what was a 1-in-100 event." So even though the internals were horrible, the headline print was all sunshine. Closely resembles the stock market don't you think? All hubris and no substance.
Further the ISM Non-Manufacturing index showed a decline in jobs as the figure came in at 48.2, a 7 month low, yet the BLS data managed to show that the US economy added 67,000 private jobs, I'll allow for the 115,000 or so jobs added from fudging with the blackbox that is the birth/death model. While the ADP survey, was more in line with the ISM data, showing a contraction of 10,000 jobs in the private sector.

What was most peculiar in the recent BLS report was the fact that Non-Seasonally adjusted data for the Not in Labor Force category showed a huge increase of 800,000 people! This was quite a move, will have to watch out for such data swings going into the next month. Maybe it's a result of summer holidays ending and teens leaving their jobs, if they ever had one?? or it could be something more substantial, either way, 800,000 people swinging one way or another is a huge move in my book.

VK said...

A continuation...

BTW Only 47.6% of people ages 16 to 24 had jobs in August, the lowest level since the government began keeping track in 1948, the Labor Department said Friday. By comparison, 62.8% of that age group was employed in August 2000.

The unemployment rate averaged a record 18.3% during June, July and August for those under 25. That's more than twice the jobless rate for people 25 and older.

Professor Laurence Kotlikoff has shown that the US is functionally bankrupt, with a $202 Trillion funding gap between revenues and projected outlays if only the accounting weren't done Enron style. The real debt is thus 15 times official GDP.

A couple of Trillion dollars in debt later (Well about 3 Trillion in the past two fiscal years), for the month of June it was reported that the use of food stamps soared to a record 41.3 Million people. That's more than the population of Canada. Think about that for a minute!

The bulwark of job creation in America has always been small business, yet the NFIB and Discover Index used to measure Small Business Owner confidence came in with very disappointing results. The Discover index came in at an 18 month low while the NFIB index came in at a 4 month low.

Healthcare costs meanwhile are increasingly falling on the shoulders of the employee, recently we had this piece of data; "The average worker with a family plan was hit with a 14% premium increase this year, pushing the bill to nearly $4,000 a year, according to a survey by the nonprofit Henry J. Kaiser Family Foundation and the Health Research and Educational Trust." Apparently this was the largest rate of increase since the survey began in 1999. Rising healthcare costs mean that there is less discretionary income for consumption.

While Morgan Stanley released a report a few weeks ago saying that the US government Debt/ Revenue ratio which stands at 358.1pc is so bad that it handily beats Greece and Ireland. And we all know the pain that they are experiencing. Morgan Stanley also goes on to write, that default is inevitable, just what form will it take? The Automatic Earth can easily answer, it will be a deflationary bust, Ponzi style.

So as long as the US Government backed ponzi enablers are in charge, your goose is cooked. Protect yourself from the coming storm by building community networks around you and protecting yourself for the long term because as Stoneleigh says, to protect yourself from the long run, you have to survive the short term. So batten down the hatches, Hurricane Earl might have fizzled out but the financial storm is only just beginning.

anon10 said...

Mutant Rat Epidemic Spreading Economic Black Plague

scandia said...

@VK, that was some double barrelled comment. Me thinks your research and analysis deserves an intro-essay spot.
I appreciate particularly your effort to humanize the numbers, to invite readers to imagine, " what if we/us are in those numbers? What would that mean?"
Currently the number crunchers in power are measuring only their slice of the pie. I do wonder what the game changer will be?
VK, I thank-you for your contribution to TAE.

bluebird said...

The Elephant in the Room

Ahimsa said...

VK, I thank you also. Your voice is so special here at TAE.

Paz!

jal said...

@ Stoneleigh
Can you give us your impressions of the reactions of your speaking engagements?

jal

John said...

If the govts want folks to hold investment longer just reduce the tax rate on the capital gains and bring integrity back to the markets. But, alas, I suspect neither of those realities will be seen in our day. John

Alexander Ac said...

Oh shit,

I just saw "economic prognosis" that current economic trends continue, we will reach the level of Germany in 2030!

Well, by "we" it is meant to be Slovakia, where I live...

Such economic prognosticians should go to jail!!!

jal said...

Linda said...
It begs the question what the gov't ought to do. Only confused by the "as long as we continue on the present path"...as if there were a way out!

There is a way out.
It is happening as we speak.
Borrowers are being refused loans.
Borrowers are being forced to liquidate assets to pay back their loans.
Lenders, (savers), are not lending to people that do not have any assets that can be taken in lieu of loan repayment.

The lenders, (savers), that used the “old” lending standards and that cannot get assets in a default to cover their loans, will be taking a haircut.
Yep! If growth was a measure credit, then there will not be growth.
There is a reset going on.
jal

logout said...

September 10 2010: No economic growth for years to come

ilargi, ilrgi, now what kind of a Roubini title is that for you to be using, it hardly even merits the term Gloom Lite. LOL

(And besides in some circles it sounds eco-positive)

Ka said...

@VK

So as long as the US Government backed ponzi enablers are in charge, your goose is cooked.

There is another way of looking at it. The ponzi enablers are in charge of a ponzi system, known as Western industrial civilization. A system that depends on growth is incapable of managing decline. Hence, the best thing for those in charge to do is to extend and pretend, which gives those who understand that decline is inevitable more time to prepare. The majority of geese are cooked either way. Thanks to extend and pretend (and sites like TAE) a few more will have better options.

DIYer said...

Listening to the goldbug report today, many of the Q-line remarks refer to Stoneleigh's interview. Apparently it made quite an impression with regular listeners. (Yes I know they probably get 150 Q-line messages for every one they put on, so Mr. Puplava must have chosen them deliberately)

Stoneleigh's preso is the only one I know of that puts all the pieces together. And addresses the inflationistas with such an amazing economy of words..

Patz said...

No economic growth for years to come. If you mean 10^10 years then I would agree. When the tribe that used to occupy Manhattan trades some trinkets with the the tribe that occupies what used to be Queens then we will see some 'green shoots.' Before that---nah!

I. M. Nobody said...

VK,

You have summarized the causes of our discontent very succinctly. Giving any credence to numbers from the BLS birth/death model is, however, a considerable act of, uh, charity. It's not only a black box, it is a black magic box that can churn out numbers totally untethered to any reality.

Our reality is that debts are dissolving and households consolidating at a pretty rapid pace. As reported recently by Damon Vrabel, many of our major retailers grossly over expanded during the bubble years and now face declining profits and will have to retrench. That will mean fewer employed clerks and fewer trucking miles.

Our medical system may be closer to the cliff than we may realize. During my recent ten day stay in Iowa's major medical center, I saw and heard things that were troubling. There is significant under staffing and equipment shortages.

Base load electrical generating capacity continues to be utilized at a disturbingly low percentage of capacity. One nearby plant, when it can find a buyer, is selling watts at a loss. Employees are being offered early retirement.

Down on the farm, a fungal disease labeled Sudden Death Syndrome is sweeping through soybean fields. Corn is maturing early and some gene stacks have proven susceptible to a leaf blight. Yields will almost certainly be below USDA predictions.

Aside from our ability to bomb at will any primitive country on the planet and the presumed ability to practically exterminate all life on the planet, we have very little to show for our decades long mal-investment milieu.

Like our predecessors in Rome and Ravenna, we are running out of new peoples to rob and enslave. After Afghanistan, what is left? We've hit the dregs. Just as in the old empire, the bills will keep coming in and the taxes will not suffice. The center will retreat behind a swamp and the rest of us will be casting our gaze on the latest in barbarian fashions.

We've read the script and we know how the play ends. There are doubters who think we would not be so foolish as to actually continue producing that play. I would refer them to Barbara Tuchman. Folly has been on the march for a long time and shows no sign of retiring.

In any event, my reading of the instruments shows that we flew past the coffin corner quite some time ago. There is no way that we will not have to ditch in a very choppy sea. Do see to the lifeboats and take good care of the rations. It will be a long slow drift to any land of milk and honey.

Coy Ote said...

"We believe an ambitious destruction of credit-bubble debt investments would and will allow the economy to roar back to life."
--Michael David White (Housingstory.net)
p.s. I also believe in the tooth fairy and (a relative?) Snow White

;-) I am a convinced coyote... that economics is a religion and just as full of s.... er... superstition!

Bukko Canukko said...

I.M. Nobody said...

Like our predecessors in Rome and Ravenna, we are running out of new peoples to rob and enslave. After Afghanistan, what is left?

Venezuela and the northern sections of South America, in the best-case scenario. (Best for the MIC, that is.) If the U.S. loses the ability to project force over the ocean due to loss of political will, a less-than-total financial crisis or energy-supply depletion, imperial urges can still find outlet in the "near abroad" (to use a Russian term.)

There's oil in them thar jungles! We must stop the scourge of narcotics coming from those countries, from whence the dope somehow leaps into the veins and noses of unsuspecting Americans! Hugo Chavez (or the bogeyman dictator du jour) is a bad man! He pals around with terrorists!

When empires like Rome fall, they wage their battles closer to home. Even Russia, after its stumble and crack-up of the early 1990s, is reasserting itself militarily in lost lands like Chechenya and Georgia. A massive military, and the infrastructure that supports it, does not evaporate overnight. When there are weapons, and masses of men who have spent years focusing on how to use them, they'll get used. Even conquest has a forward-rolling inertia factor.

The reason I say use of force in South America would be a best-case for the U.S. is that if there's a total TSHTF moment and everything collapses quickly, the American military will busy itself keeping order INSIDE the 50 states. If it can't go out to play, it will stay in, "to keep the nation united against those who would destroy our country." You don't want to see that happen...

snuffy said...

Each of the entries I can find time to see has increased my somber,dark forebodings.The in-depth examination of the economic-time-bomb that is Greece,should terrify anyone who is paying the slightest attention to the wave,after wave,of alarms,yells,and breathless pleas for someone,anyone,with the power to alter whats coming to act .I note the tenor of comments in the mainstream media have begun to increase in their shrillness...they cannot say what they feel....but they know..Too many now have close friends,family,that are underwater and going down.
I have disruptions in my family that are tearing part of it apart.It may sound strange,but in some ways It is a very good thing I am 3000 miles away.I can focus completely on my work...live to work-eat-sleep-work...and forget, for a while,that when I return home,many things will have changed.
Change is the only real constant we live with..

The longer I stay in this area the more evidence of serious economic decay ,way,way past the notes I posted the other day.Most of the small manufacturing shops,small business buildings are shells...empty..lonely "for rent",and "for sale" signs are everywhere.Every mini-mall or small shopping center has a minimum of 1 empty storefront.The more I look, the more I see.Its much worse than the area of Oregon in which I live.

I ran into a old acquaintance I hadn't seen in 25 years.We spoke of the changes,of good friends who were not here anymore...then he lapsed into a quiet description of how grim life in the rural south had become...his words were nearly a chant of "Thank god I have a job".Most of his large,extended, family were staying with him.None could find work.Ouch.[I may be in a similar situation soon]
Its late,and I need to hit the laundry ....
Bee good,or
Bee careful

snuffy

snuffy said...

Bukko Cannokko

I really,truly hope you are dead wrong.Way Way too many hispanic folks know their way around the states,and would take a real dim view of this type of actions by those seeking to maintain the empire.It would get nasty very very quickly.Remember .5 million demonstrators in the streets after just a little provocation...usa troops in Ven. is a excellent way to blow up everything...everywhere.

Bee good,or
Bee careful

snuffy

Fuser said...

@jal

Regarding North Olmsted talk:
I got to spend a couple great days with Stoneleigh as she was preparing for the presentation at our public library –here are a few of my thoughts and observations. There were a couple aggravations in getting the whole thing set up. Most of the larger and free venues were booked solid for a year by groups from the Boy Scouts to various political committees. Our public library had the only opening available. They canceled it a few days before she was to speak because they insisted she worked for a natural gas company and was doing this for profit. I could not convince them otherwise –but they agreed if I removed her name from the booking calendar and changed it to The Automatic Earth Group –they would let us hold the meeting.

We had about 30 people attend. Stoneleigh had to go through her presentation quickly because we only had the room for 90 minutes. Because we ran short on time –I offered to have everyone over to my house for questions(wine) and discussions(beer). Eight or nine showed up for that part. Stoneleigh answered their questions well into the night and we ended up finishing by torchlight. As you could imagine, it was a pretty cool conversation. I thought the questions about how we all ended up there and why the general public had a hard time accepting things were the most interesting. We also talked about various other financial websites (Zerohedge, Theoildrum, marketticker, LATOC) and some of our favorite writers there.

At one point I thought I could actually hear the sounds of the economy collapsing –but it was just James Madison’s stomach growling. Was great to put a face to the names memphis and bluebird! As you could imagine Stoneleigh is an absolute pleasure to spend time with. Loved watching Quest for the Holy Grail with her! Also, I got to see a photo of Ilargi –he’s a good looking guy. Not at all like Uncle Fester, which is what I had for some unknown reason envisioned.

Ventriloquist said...

From ZH (and given their massive audience, a lot of exposure) --

Mish and Gonzolo Lira in the Octogon -- Hyperinflation vs Deflation (may the best man win)

Damn, but I'd love to see Stoneleigh in that Octogon as a third-party-participant in this knockdown/dragout over who FINALLY wins the hyperinflation/deflation battle.


.

NZSanctuary said...

Alexander Ac said...
Oh shit, I just saw "economic prognosis" that current economic trends continue, we will reach the level of Germany in 2030! Well, by "we" it is meant to be Slovakia, where I live... Such economic prognosticians should go to jail!!!

Perhaps you overestimate the level of Germany in 2030! ;-)

bluebird said...

@jal - Regarding North Olmsted talk:

Stoneleigh has an excellent presentation, with lots of charts and graphs and thorough explanation. Afterwards, even spouse agreed with what's coming, but he's got gokarts to race until the economy implodes. It was great meeting Fuser and Memphis. Thanks to Fuser for having us at his house to continue the discussion.

Before the presentation started, I was chatting with some of the people and found out that probably a dozen were attending Stoneleigh's presentation, because they previously heard her impressive interview on Financial Sense. Very timely interview! I'd be curious to hear if that interview also attracted more people to the Michigan presentations.

scandia said...

@Ilargi, I appreciate the quote from Marguarite Yourcenar. "...to see in the present the lineaments of times to come." Celente of Trends Research will like that one!
I googled Yourcenar as I'd not heard of her. It says something though not sure what that she had such academic success( Acadamie Francaise) although she received little formal education.
I suck up inspiration where I find it:)

Woody said...

Edgar Bergen,

Thanks for the Mish/Lira heads up. Michael Hampton at Global Edge Radio does an excellent job conducting both interviews.

Here's a link to the Zero Hedge article which sets the stage and links to both audio interviews.

Greenpa said...

Bukko Canukko said...
I.M. Nobody said...

"Like our predecessors in Rome and Ravenna, we are running out of new peoples to rob and enslave. After Afghanistan, what is left? "

"Venezuela and the northern sections of South America, in the best-case scenario."

Remember Antarctica, folks. Really. Yes, there are treaties barring mineral development. Ask the Native Americans about how effective those are.

The Owners are highly conversant with the Big Lie technique, they've used it for millennia. "We must open Antarctica to oil exploration, and rare-earths mining, for the good of the starving babies in the Sahel."

Ah, well, that's all right then, and can I have one of the jobs that pay so well working on the oil rigs?

There is room for traditional "economic growth" there, for another century or two. And hey; it's cooler down there than it's going to be here. Room for condos, coming soon.

I. M. Nobody said...

Bukko Cannucko & Greenpa,

I'm a little surprised that you two appear to be factoring resources above finance. Resources are essential to growth, but they must be cheap resources and finance is essential to the finding and extracting of resources.

There was still almost an entire planet of resources that Rome hadn't stolen yet. That didn't matter though because they ran out of money to properly pay the Legions and keep their citizens loyal by providing services and opportunities. IMHO, we are rapidly approaching that point.

The problem with theft-based economic systems is that the ruling class can never restrain itself from stealing too much of the loot. Which must lead to collapse of the system, when the majority who presumed they were equal partners discover they've been used and cast aside.

I detect a presumption that the MIC is an integral part of the ruling class and will vigorously carry out any mission given them. Based on writings by people like Franklin Lamb, Winslow Wheeler and Chuck Spinney, I think that is a misreading.

The MIC have been important instruments of global thievery. However, it is now being subjected to the same sorts of treachery that we citizens have been experiencing. The ruling class really wants to give the Air Force re-fueling tanker contract to Europe's EADS.
Continued...

Gravity said...

All your monetary base are belong to us.

Ilargi said...

IM Nobody

A few times now I've seen all sorts of different or same versions of your comments in the moderation list. I try to pick what I think is good, without doubles. I see your last one posted ends in Continued, so I may have picked the wrong one this time. If so, please accept my apologies.

.

I. M. Nobody said...

I have no doubt that our soldiery are not very happy about the Blackwater gunmen making several times their own pay. Militaries are notoriously unreliable when things go unstable. Mercenaries are even more likely to go rogue.

My supposition is that South Americans will have plenty to fear from their own barbarians as trade breakdown destabilizes almost all regimes. If we do send lots of troops into the jungles for endless duty, I presume that officer fragging will again be a routine occurance.

My mind, which doesn't seem to have lost much yet, doesn't even want to ponder what it would cost to extract minerals from Antarctica. I'm thinking the ruling class doesn't want to think about it either. They don't actually need lots of resources for themselves. What they need is to be totally in charge, and at long last they are, for now.

VK said...

@ Ilargi

If so, please accept my apologies.

Stop going soft on us Ilargi!! ;-)

I. M. Nobody said...

Ilargi,

VK is absolutely right. Who my adopted relatives are and my fragile health are not reason enough to go all apologetic on us. At a time like this we need attitude more than ever. :)

Thanks, for communicating though.

Bukko Canukko said...

Re: online radio interviews with Mish and Lira -- I had some time off work Saturday and I've got a fast computer connection, so I was able to listen to both via ZH. I was surprised at how lame Mish's segment was. His "analysis" was almost all "horse-race." What the sentiment is, what the "markets" (i.e. "speculators") are going to do, etc. Only a little reflexive union-bashing, though. On the whole, I thought Mish's take on things was shallow and lacking the analysis that his blog used to provide two years ago.

While I don't agree with Lira's hyperinflation prognostication, and I don't like his defense of the murdering Pinochet economic system, at least he tried to get into the deeper causes of why he thinks things will go as he predicts. I thought he came off as a better analyst than Mish. And he's only been econoblogging since this year?

Not to be a suck-up here, but I think those two chats are pale compared to Stoneleigh's recently posted interviews. At least she draws together environmental, financial, historical and psychological factors to support her predictions. If I had those 22 minutes x 2 that it took to listen to Mish/Lira, the time would have been better spent vacuuming the house.

Ilargi said...

"VK said...
@ Ilargi

If so, please accept my apologies.

Stop going soft on us Ilargi!! ;-)"


"US", pigtails?

Dream on.....



.

Bigelow said...

"All your monetary base are belong to us."

LMAO

thethirdcoast said...

@ Greenpa:

Remember Antarctica, folks.

I really *don't* think we want to go digging around in the ice down there:

http://www.youtube.com/watch?v=ouZkkIsLiNg

Just trying to lighten the mood!

Seriously though, I'm feeling pretty good about life because somehow I've managed to wind up in a niche job where I've managed a healthy raise and performance bonus, and I realize this is pretty extraordinary in today's economic landscape. Hopefully I can make it continue for a little while yet.

Tiger said...

Kurt Cobb, one of my favourite bloggers on peak oil and energy resources (though not known for his knowledge of economics), seems to be predicting deflation followed by inflation, like TAE. He also stresses that bailouts serve the interests of the rich (but then we knew that anyway, didn't we):

"No doubt there are many unforeseen events which might halt the world's slide into the deflationary mire--perhaps a large-scale war or central bank policies that essentially print paper money and hand it out to the populace. But barring such extraordinary events, inflation is likely to show up only as a latecomer to the global economy's wake. What course inflation will take and whether governments and central banks will once again be capable of stemming the losses of the wealthy is impossible to know. That they will try to stem the losses of the wealthy is beyond question."

http://resourceinsights.blogspot.com/2010/09/class-interests-and-future-of-inflation.html

zander said...

Anyone got a link to last nights debut show by Ruppert "the lifeboat hour"?

Thanks in advance

Z.

Alexander Ac said...

Also an interesting article by Juan Cole about ignorance of (american) media, but for TAE readers that is hardly news. This ignorance is about Pakistan floods:

"Juan Cole, The Media as a Security Threat to America"

http://www.tomdispatch.com/post/175292/tomgram:_juan_cole,_the_media_as_a_security_threat_to_america__/

scandia said...

Reports on the new banking rules say the rules won't take effect until 2019! How is that " good news"? Talk about " extend"!

jal said...

Re.: Basel III

I was surprised to see how fast the analyst and commentators in MSM were in seeing that it was bull shit.

The Canadian banks are supposedly at double those numbers ... NOW ... and they will be facing some strong headwinds.

In my opinion Basel III was an admission that their balance sheets are so bad that they will never be able to even get to the 50% of the level of the Canadian banks for the next 8 years.

Where is the money going to come from?

hint ...
http://www.examiner.com/international-trade-in-national/deutsche-bank-acquisition-mode

Deutsche bank confirmed this Sunday night that it would make an offer to acquire Deutsche Postbank, the largest German bank by depositors and individual customers.

The bank already owns 30% of Deutsche Postbank and will offer 24 to 25 euros per outstanding share for the remaining 70%.

The total acquisition would amount to 6 billion euros approximately.

In order to raise cash, Deutsche Bank is launching an IPO to raise 12.5 billion euros by issuing 309 million new shares at an offering price of 31.80 euros, starting on September 22.

The offering price is 30% below the current share price of 47.70 euros at Friday closing and existing shareholders of Deutsche bank will be able to buy one new share for every two they hold.

This IPO is the largest since Deutsche Telekom made its public offering in 1999 for 11 billion euros.

Deutsche Bank will use the extra capital reserve to adhere to the new Basel III agreement which stipulates that all European banks are subject to a 7% Tier I capital ratio starting 2013.

Bigelow said...

@Zander

http://www.progressiveradionetwork.com/michael-ruppert/

They don't have the episode archived just yet.

zander said...

@ Bigelow

thanks mate.

Z.

el gallinazo said...

DIYer

3/4 trill was just the "starter" as they say in restaurants in your neck of the plains.

Bukko

I have been referring to him as Dr. Doom Lite for a couple of years. He likes to position himself between the CNCC hucksters and reality and tries to stay about 3 months ahead of the idiot MSM like the NY Times. I think he knows the truth but is more interested in personal marketing.

Re extension of force into LA - the USA is quite unpopular in Argentina for political reasons. I take a lot of flack as a Gringo.

jal said...

It’s payback time. $20B is not petty cash.

http://www.bloomberg.com/news/2010-09-13/bofa-may-owe-20-billion-in-mortgage-buybacks-insurers-say.html
BofA May Owe $20 Billion in Mortgage Buybacks, Insurers Say
Fannie Mae and Freddie Mac are among firms seeking to force banks to take back defective mortgages, especially those written during the peak of the housing boom, after defaults helped push the two federally backed firms and some insurers to the brink of collapse.

Ilargi said...

New post up.



Basel III: We Lost, The Banks Won




.

Alexander Ac said...

2nd Nobel Peace prize for Obama?

http://www.telegraph.co.uk/news/worldnews/northamerica/usa/8000747/US-secures-record-60-billion-arms-sale-to-Saudi-Arabia.html

Great, US will get money for the second stimulus!!