Wednesday, October 15, 2008

Debt Rattle, October 15 2008: The Real People

George N. Barnard Ringside Seats December 15, 1864
Nashville, Tennessee. Battle of Nashville.
Spectators watching the fight between generals Hood and Thomas

Ilargi: With the Dow Jones safely tucked in back down below 9000, and European exchanges losing 7% on average, the positive overall global effect of an unprecedented transfer of public funds to the private sector, to the tune of some $4.5 trillion, has lasted about a day and a half.

The $4.5 trillion could have been used to the benefit of the people it rightfully belongs to, the same people who will soon desperately need every singly penny of it. Instead, it has been given away, and is now no longer available to help in what is cynically called "the real economy".

And that is where the reason for today’s plunging stocks lies: the real economy, in the real world, where the real people live. Unfortunately for them, financial decisions are all taken by those who live in other universes, for whom the real world has no meaning without the world of finance, who are under the illusion that their multi-million bonuses exist for the good of the people.

A nice way of putting it is this: “If you spent $1 million per day from the day Jesus was born until Christmas 2008, you would have spent $733 billion”. In other words, you could have spent a million a day for 12.000 years, and still not get to the amount spent in the past 5 days.

Did anyone notice that the cost of the hotly contested US rescue bail-out just tripled? "In addition to the capital infusions, which will be made this week, the government said it would temporarily guarantee $1.5 trillion in new senior debt issued by banks, as well as insure $500 billion in deposits in noninterest-bearing accounts .. All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion"

There are no limits anymore to the spending of your money, and don't you forget it. There are a lot of stories today about how Paulson and Bernanke forced the first $250 billion in bail-outs on the banks, and about how Paulson cannot force those same banks to use the funds to increase lending.

I think by now it should be obvious that Paulson never meant to increase lending. After all, who’s left to lend it to? The entire US population is overstretched, overdrawn and underwater, and that while home prices are falling like bricks, retail spending plunges, and unemployment rises. Why would any bank want to lend out money to these people, and why would they want to borrow even more? That game is long over.

The same picture, by the way, can be seen in the UK, and soon the rest of Europe. Trillions of dollars are pumped into banks, and no, believe me, they will never come out again. None of the countries, and their plans, that I have read about to date, have any provisions to address the core of the problem: extremely leveraged positions, of the institutions that receive the trillions, in paper that is worth zero or less, as well as extremely out-of-whack housing prices.

The value of the paper is carefully hidden, and simultaneously the delusion persists that home values will stop going down. Forgive me for not believing that Paulson, Bernanke et al are under that delusion. Nor the one that claims that the banking crisis will soon calm down. They just want power, and planting these delusions helps them get it.

David Blanchflower, a highly respected British government economist, and a lone voice in a dry desert, today corrects his earlier prediction of 2 million unemployed in the UK by Christmas: he now says the number will be much higher. Look for similar developments on a global level: welcome to the real economy, and the real people.

The US Treasury and Fed are considering lending to companies directly, and no doubt EU governments will follow the lead. But none of this has any chance of success. Companies need customers. And the customers are broke. Even if banks could somehow be forced to lend to customers, these would either refuse to borrow even more, or get even deeper in debt.

In the US, more parties are showing up at the trough every day. The carmakers want to be part of the Paulson plan, the FDIC will soon need massive infusions now it covers all new bank debt, and the separate states, California first, need billions to douse the flames of going broke, while the precipitous drop in tax revenues hasn’t even started in earnest.

They will all try to do what Iceland and Ireland announced: raise tax levels. I said as early as two years ago that this would happen, and added that raising taxes on people who are getting poorer and losing their jobs, is a very bad idea, especially if they know where you live. There will be a lot of pink slips for government workers under the Christmas trees this year.

Also in the real world, trade itself is increasingly in danger. "The Baltic Dry shipping index, a proxy for world trade flows, suffered its second biggest-ever fall yesterday, to 11%, which took it down under the $2,000 mark and it fell another 8% today to $1,809. The drop means it has fallen more than 80% since July's peak of around $12,000 and is now at a three-year low." Translation: there will be a lot less goods on the shelves in your neighborhood stores, and a lot less raw materials to process in your factories.

The last weapons left are central bank rate cuts, and of course, more trillions in rescues. At this pace, we’ll see them this week. Somebody may yet be rescued, but it won't be you. You’ll be the one paying for it.

Update 4.30 PM EDT


The Dow Jones today lost 7.87%,


Two days after a euphoria induced by $4.5 trillion wealth transfer from you to "them". What will be the cost of the next euphoria?

Am I getting through to people by now? Or do you think it will all be all right tomorrow?

The Dow has gone from 14.000 to 8700, in one year. Have you thought about what would have to happen to bring it back up? People are prone to "magical thinking". But the Dow is lower than it has been in ages, while you, the people, have just spent trillions of dollars to keep it up. For one day.

Think about what you think the next step will be. Think about what you think it will take to stop the bleeding, about how much you think you have left in your wallet to try and prop up the banks, instead of taking care yourself and your family.

ECB Leads Push to Flood Banks With Unlimited Dollars
The European Central Bank, Bank of England and Swiss National Bank loaned financial institutions a combined $254 billion in their first tenders of unlimited dollar funds, stepping up efforts to ease strains in markets. The Frankfurt-based ECB lent banks $170.9 billion for seven days at a fixed rate of 2.277 percent. The Bank of England allotted $76.3 billion and the Swiss central bank $7.1 billion at the same rate, also for a week.

Policy makers are trying to unfreeze credit markets and get banks lending to each other again after a crisis of confidence culminated last week in the biggest stock-market sell-off since 1933, threatening to tip the world into a recession. Money-market rates have started to decline, suggesting the measures may be working.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 9 basis points to 4.55 percent today, according to the British Bankers' Association. It was its third consecutive decline. Asian money-market rates fell earlier today after the Bank of Japan said it will also offer unlimited dollar funds, with its first tender to be held on Oct. 21, and Hong Kong agreed to guarantee all bank deposits.

In the U.S., the government has earmarked $250 billion to purchase stakes in the nation's largest financial companies including Goldman Sachs Group Inc. to prevent a banking collapse. The U.K. is spending 50 billion pounds ($87 billion) on bank stakes, while France, Germany, Spain, the Netherlands and Austria have pledged 1.3 trillion euros to shore up their banking systems.

"There is no quick fix, confidence is gone and it will take quite a while for it to return," said Thorsten Polleit, an economist at Barclays Capital in Frankfurt. "I doubt that things will get back to where they were before the crisis." The bankruptcy of New York-based Lehman Brothers Holdings Inc. last month precipitated the latest chapter of the 14-month crisis, causing banks to stop lending to each other out of concern they may not get their money back.

The world's largest financial companies have posted more than $635 billion in writedowns and credit losses since the start of last year after the U.S. housing market slumped. The ECB, Bank of England and SNB on Oct. 8 joined the U.S. Federal Reserve in a global round of coordinated interest-rate cuts as the economic outlook deteriorated. The Fed announced on Oct. 13 that the world's largest central banks would offer unlimited dollar loans with maturities of seven days, 28 days and 84 days. All of the previous dollar swap arrangements between the Fed and other central banks were capped.

European leaders meet today in Brussels to discuss the next steps in responding to the market meltdown. "When a fire's burning in the global financial markets, it has to be put out, even if it's a case of arson," German Finance Minister Peer Steinbrueck said in Brussels today. "But then the arsonists have to be held responsible and spreading the flames must be outlawed."

Roubini Sees Worst Recession in 40 Years
Nouriel Roubini, the professor who predicted the financial crisis in 2006, said the U.S. will suffer its worst recession in 40 years, driving the stock market lower after it rallied the most in seven decades yesterday.

"There are significant downside risks still to the market and the economy," Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. "We're going to be surprised by the severity of the recession and the severity of the financial losses."

The economist said the recession will last 18 to 24 months, pushing unemployment to 9 percent, and already depressed home prices will fall another 15 percent. The U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy, Roubini added.

Treasury Secretary Henry Paulson said today he plans to use $250 billion of taxpayer funds to purchase equity in thousands of financial firms to halt a credit freeze that threatened to drive companies into bankruptcy and eliminate jobs. "This will be the first round of recapitalization of the banks," Roubini said. "The government has to decide to intervene much more directly in the provision of credit and the management of these companies."

The Standard & Poor's 500 Index rallied the most since 1933 yesterday, rising 12 percent, on the government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars. The S&P 500, which has fallen 36 percent since its October 2007 record, dropped 0.5 percent today. "The stock market is going to stop rallying soon enough when they see the economy is really tanking," Roubini added.

The U.S. unemployment rate stood at a five-year high of 6.1 percent last month. Home prices in 20 U.S. metropolitan areas fell 16 percent in July from a year earlier, the most since records began in 2001, according to the S&P/Case-Shiller home- price index. Bank seizures may push home prices down further, scaring away buyers in coming months, after U.S. foreclosures rose at the fastest rate in almost three decades in the second quarter, according to the Mortgage Bankers Association.

Roubini said total credit losses resulting from the meltdown of the subprime mortgage market will be "closer to $3 trillion," up from his previous estimate of $1 trillion to $2 trillion. The International Monetary Fund estimated $1.4 trillion on Oct. 7. Financial firms have so far reported $637 billion in losses, according to data compiled by Bloomberg.

Paulson Lacks Leverage to Compel Banks to Put New Cash to Work
Treasury Secretary Henry Paulson persuaded nine major U.S. banks to accept $125 billion in government investment. Getting them to lend it out may prove a tougher sell.

The equity stakes the government is purchasing in Citigroup Inc., Morgan Stanley and seven other big institutions come with no guarantee that the investments will spur lending and unfreeze credit markets. Nor do they give the government board seats or any other leverage to demand that that the firms actually use the money to help the economy.

"The truth of the matter is, they can't put a gun to their head and say you have to lend this money," said Charles Horn, a former official at the Office of the Comptroller of the Currency, part of the Treasury Department, and now a partner at the Mayer Brown law firm in Washington.

Treasury officials acknowledge they can't force banks to get the taxpayer money into the hands of their customers. Instead, officials are betting that the government's investment will create conditions where banks have a greater incentive to earn profits from lending than to hoard money to shore up their balance sheets.

"It's in their economic interest," said David Nason, the Treasury's assistant secretary for financial institutions, in an interview with Bloomberg Television. "When you give them a stronger capital position and you also provide a certain amount of government backstop to their funding sources, it's incumbent upon them to go out and continue to lend."

Tim Ryan, head of the Securities Industry and Financial Markets Association and a former bank regulator, said the sheer scale of the capital infusion banks are receiving is in itself a powerful incentive to put the funds to work in the economy. "The bully pulpit doesn't really work with banks, but capital does," said Ryan, who directed the U.S. Office of Thrift Supervision in 1990-1992. The government is providing banks with "quite a war chest that they were not expecting," Ryan said. "They need to put it to work. The only way you put it to work is to lend."

The Bush administration's rescue, part of a $700 billion bailout passed by Congress this month, is raising questions about what role the federal government will play as it becomes a leading investor in the financial sector. Already, companies that accept the taxpayer money are required to submit to restrictions on their top executives' pay.

"Obviously there is a danger" of increased government involvement in banks' corporate affairs, said Martin Baily, a senior fellow at the Brookings Institution in Washington and former chairman of the Council of Economic Advisers under President Bill Clinton. Still, Baily said that the equity purchases are set up to minimize government intervention. Treasury has "been telling these institutions what to do in the last couple months, so they've exercised a good bit of control," Baily added. "I think they'd like to get out of that business."

The Bush administration is counting on agencies that already regulate the banks, such as the Federal Reserve, to keep an eye on daily operations. Those agencies can encourage firms to keep credit flowing to businesses and households. "The regulators can do a lot to give the signals to the bank," said finance professor Len Rushfield of Pepperdine University in Los Angeles.

Even so, subtle government pressure on banks may not make much difference. Unlike with the recent federal takeovers of Fannie Mae, Freddie Mac and insurer American International Group Inc., the U.S. won't take a major share of the banks they invest in. Also, the Treasury has said it won't seek voting rights when it buys stakes. The Treasury said it would dedicate $250 billion to boost bank capital through preferred stock purchases. Bank regulators estimated yesterday that "thousands" of financial companies would participate, although the program will begin with the nine big banks.

"What you'll see most large institutions saying is, `We will certainly listen to the government but our decisions are what's in the best interest of our shareholders,"' said John Coffee, a securities law professor at Columbia University. Financial companies that accept government investments also are counting on Paulson's pro-market philosophy to keep the government out of their boardrooms. The secretary, announcing the capital injections yesterday, said that he regretted having to make such a move.

"Government owning a stake in any private U.S. company is objectionable to most Americans -- me included," he said. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable." Bank executives know that the Treasury and members of Congress are going to monitor the situation, said Scott Talbott, chief lobbyist for the Financial Services Roundtable. "Policy makers will watch closely to insure that the money is used for credit," he said.

The one unknown that makes Wall Street nervous, several industry executives said, is what the next Treasury secretary will do. The U.S. presidential election is less than a month away. "You'd probably want to have Hank Paulson, more than a lot of other people" overseeing the bailout, said Edward Fleischman, a Republican Securities and Exchange Commissioner from 1986 to 1992, and now a senior counsel at the Linklaters law firm in New York. "But you're not going to have any choice who takes his job."

Drama Behind a $250 Billion Banking Deal
The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left.

The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head. The chairman of Wells Fargo, Richard M. Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.

But by 6:30, all nine chief executives had signed — setting in motion the largest government intervention in the American banking system since the Depression and retreating from the rescue plan Mr. Paulson had fought so hard to get through Congress only two weeks earlier. What happened during those three and a half hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks — starting with theirs.

Mr. Paulson announced the plan Tuesday, saying “we regret having to take these actions.” Pouring billions in public money into the banks, he said, was “objectionable,” but unavoidable to restore confidence in the markets and persuade the banks to start lending again. In addition to the capital infusions, which will be made this week, the government said it would temporarily guarantee $1.5 trillion in new senior debt issued by banks, as well as insure $500 billion in deposits in noninterest-bearing accounts, mainly used by businesses.

All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks. The latest show of government firepower is an abrupt about-face for Mr. Paulson, who just days earlier was discouraging the idea of capital injections for banks.

Analysts say the United States was forced to shift policy in part because Britain and other European countries announced plans to recapitalize their banks and backstop bank lending. But unlike in Britain, the Treasury secretary presented his plan as an offer the banks could not refuse. “It was a take it or take it offer,” said one person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private. “Everyone knew there was only one answer.”

Getting to that point, however, necessitated sometimes tense exchanges between Mr. Paulson, a onetime chairman of Goldman Sachs, and his former colleagues and competitors, who sat across a dark wood table from him, sipping coffee and Cokes under a soaring rose and sage green ceiling. This account is based on interviews with government officials and bank executives who attended the meeting or were briefed on it.

Mr. Paulson began calling the bankers personally Sunday afternoon. Some were already in Washington for a meeting of the International Monetary Fund. The executives did not have an inkling of Mr. Paulson’s plans. Some speculated that he would brief them about the government’s latest bailout program, or perhaps sound them out about a voluntary initiative. No one expected him to present his plan as an ultimatum.

Mr. Paulson, according to his own account, presented his case in blunt terms. The nation’s largest banks needed to begin lending to each other for the good of the financial system, he said in a telephone interview, recalling his remarks. To do that, they needed to be better capitalized. “I don’t think there was any banker in that room who was going to look us in the eye and say they had too much capital,” Mr. Paulson said. “In a relatively short period of time, people came on board.”

Indeed, several of the banks represented in the room are in need of capital. And analysts said the terms of the government’s investment are attractive for the banks, certainly compared with the terms that Warren E. Buffett extracted from Goldman Sachs for his $5 billion investment. The Treasury will receive preferred shares that pay a 5 percent dividend, rising to 9 percent after five years. It will get warrants to purchase common shares, equivalent to 15 percent of its initial investment. But the Treasury said it would not exercise its right to vote those common shares.

The terms, officials said, were devised so as not to be punitive. The rising dividend and the warrants are meant to give banks an incentive to raise private capital and buy out the government after a few years. Still, it took some cajoling. Mr. Kovacevich of Wells Fargo objected that his bank, based in San Francisco, had avoided the mortgage-related woes of its Wall Street rivals. He said the investment could come at the expense of his shareholders.

Mr. Kovacevich is also said to have expressed concern about restrictions on executive compensation at banks that receive capital injections. If he steps down from Wells Fargo after completing a planned takeover of Wachovia, he would be entitled to retirement benefits worth about $43 million, and $140 million in accumulated stock and options, according to James F. Reda & Associates, a executive pay consulting firm. Pay experts say the new Treasury limits would probably not affect his exit package.

Kenneth D. Lewis, the chairman of Bank of America, also pushed back, saying his bank had just raised $10 billion on its own. Later, Mr. Lewis urged his colleagues not to quibble with the plan’s restrictions on executive compensation for the top executives. These include a ban on the payment of golden parachutes, repayment of any bonus based on earnings that prove to be inaccurate, and a limit of $500,000 on the tax deductibility of salaries. If we let executive compensation block this, “we are out of our minds,” he said, according to a person briefed on the meeting.

In an interview on Monday, before the meeting, John J. Mack said his bank, Morgan Stanley, did not need capital from the Treasury. It had just sealed a $9 billion deal with a large Japanese bank. During the meeting, Mr. Mack, Morgan Stanley’s chief executive, said little, according to participants. Mr. Paulson, however, was peppered with questions about the terms of the investment by other chief executives with experience in deal-making: Lloyd C. Blankfein of Goldman Sachs, Vikram S. Pandit of Citigroup, John A. Thain of Merrill Lynch and Mr. Dimon.

Among their concerns were: How would the government’s stake affect other preferred shareholders? Would the Treasury Department demand some control over management in return for the capital? How would the warrants work? With the discussion becoming heated, the chairman of the Federal Reserve, Ben S. Bernanke, who was seated next to Mr. Paulson, interceded. He told the bankers that the session need not be combative, since both the banks and the broader economy stood to benefit from the program. Without such measures, he added, the situation of even healthy banks could deteriorate.

The president of the Federal Reserve Bank of New York, Timothy F. Geithner, then proceeded to outline the details of the investment program. When the bankers heard the amount of money the government planned to invest, they were stunned by its size, according to several people. As they heard more of the details, some of the bankers began to realize how attractive the program was for them.

Even as they insisted that they did not need the money, bankers recognized that the extra capital could be helpful if the economy became shakier. Besides, many of these banks’ biggest businesses are tied to the stock and credit markets; the quicker they improve, the better their results. Later, Mr. Pandit told colleagues that the investment would give Citigroup more flexibility to borrow and lend. Mr. Dimon told colleagues he believed the relatively cheap capital was a fair deal for his bank. Mr. Lewis said he recognized the prospects of his bank were closely aligned with the American economy.

Mr. Thain was intrigued by the terms of the guarantee by the Federal Deposit Insurance Corporation on new senior debt issued by banks, participants said. He mentally calculated the maturities on debt issued by Merrill Lynch, to determine how the program could benefit his bank. For Mr. Paulson, selling the bankers on capital injections may not have been as difficult as overhauling a rescue program that had originally focused on asset purchases from banks. In the interview, Mr. Paulson said the worsening conditions made a change in focus imperative.

“I’ve always said to everyone that ever worked for me, if you get too dug in on a position, the facts change, and you don’t change to adapt to the facts, you will never be successful,” he said in the interview. Mr. Paulson insisted that purchases of distressed assets would remain a big part of the program. But having allocated $250 billion to direct investments, the Treasury has only $100 billion left from its initial allotment of $350 billion from Congress to spend on those purchases.

As the meeting wound down, participants said, the bankers focused more on contacting their boards before signing the agreement with the Treasury Department. With time running short and private space limited, some of the bankers left the Treasury building, heading for their limousines while speaking urgently into cellphones. “I don’t think we need to be talking about this a whole lot more,” Mr. Lewis said, according to a person briefed on the meeting. “We all know that we are going to sign.”

US Auto Lenders Aim To Be Part Of Federal Reserve Plan
Automobile-finance companies pushed hard to get in on the government's $700 billion financial rescue plan. Now, with the industry's troubles expected to deepen, they are exploring further moves, including help from the Federal Reserve. The plan outlined by the U.S. central bank Tuesday to effectively lend to companies to fund day-to-day operations will likely not include most auto lenders.

That's because the plan, which would involve Fed purchases of short- term debt known as commercial paper, calls for lending to companies with higher credit ratings. A lobbyist for U.S. auto-finance companies said industry officials are discussing whether to approach the central bank about expanding the program, titled the Commercial Paper Funding Facility, to include auto lenders, whose access to credit has become further restricted amid upheaval in the markets.

"We're hopeful that the Fed will consider purchases of other levels of commercial paper as well," said Chris Stinebert, president and chief executive officer of the American Financial Services Association. "There's a real lack of liquidity." A Federal Reserve spokesman declined to comment on any efforts by the auto industry to seek help from the central bank.

In a sign of the auto-finance industry's troubles, GMAC, partly owned by General Motors Corp) said on Monday it would restrict car loans to U.S. consumers with credit scores of 700 and above. Auto lenders play a critical role because they finance the purchase of cars by both dealers and consumers. But they are facing a growing crisis from many sides, including the freezing of credit markets and the broader economic downturn.

They are becoming increasingly leveraged because of their inability to sell securities backed by auto loans. One factor is that many of these loans are for SUVs and trucks, whose values have declined as consumers turn to smaller vehicles amid high gas prices. But auto lenders say they are suffering more from a general tightening of credit markets than bad assets. "They're just caught in this cycle they didn't create," Stinebert said. He maintained that qualified consumers will still have no problems purchasing cars, but that the markets "continue to tighten."

Congressional leaders have said in recent weeks that auto companies and their lending arms will be eligible for the $700 billion Wall Street rescue plan, which will involve the government's purchasing troubled assets. The plan originally targeted bad home loans but auto-finance companies were among other liquidity-starved businesses who successfully lobbied to be included in the plan. Last month, House Financial Services Chairman Barney Frank D-Mass., responding to a question from Rep. John Dingell, D-Mich., said he would support action from the Federal Reserve to help the auto-finance industry in unusual and exigent circumstances.

The Fed has authority to lend to nonfinancial companies and recently used that authority for American International Group Inc. (AIG) and certain parts of the commercial paper market. Both cases, however, involved broader systemic concerns about the financial system and overall economy.

Blankfein's $70 Million Payday Would Survive Paulson's Limits
Goldman Sachs Group Inc.'s Lloyd Blankfein, whose $70.3 million paycheck made him Wall Street's most highly compensated chief executive officer last year, could still earn tens of millions annually under the bank-rescue plan run by his former boss, Treasury Secretary Henry Paulson.

Executive-pay packages will be restricted for the nine banks receiving a $125 billion infusion of U.S. funds to restart lending, said Paulson, who earned $37.8 million in 2005, his last full year as Goldman's CEO. The investment is part of a $700 billion bailout plan approved by Congress this month. Blankfein, 54, was Wall Street's best-paid CEO in 2007, according to data compiled by Bloomberg. He "could still make tens of millions of dollars if he continues to receive stock grants and Goldman's stock rises," said David Schmidt, a senior consultant for New York-based compensation firm James F. Reda & Associates.

Concerns over public reaction will likely prevent the bank from maintaining the CEO's compensation at last year's level, Schmidt said. Goldman Sachs rose 11 percent to $122.90 yesterday in New York Stock Exchange composite trading. The shares have fallen 43 percent this year. Paulson, who now earns $191,300 annually, is limiting corporate-tax deductions on compensation to the CEO, chief financial officer and the next three highest-paid executives of participating banks to $500,000. While performance-related pay over $1 million has been tax- deductible, companies were able to write off only $1 million of salary since 1993.

As a result, bankers' salaries were often set beneath the $1 million cap. Blankfein's was $600,000 last year, with the rest of his package coming in incentive compensation and services, including a car and driver, according to regulatory filings. Goldman Sachs spokesman Michael DuVally declined to comment.

"This is the first time in American history that the federal government has applied restrictions on the compensation that goes to top executives," House Financial Services Committee Chairman Barney Frank said in a statement. "We will be watching how the Treasury implements these important provisions to ensure that the restrictions are binding and enforceable." The Treasury's stock-buying program will begin with nine banks, which the agency didn't name. People briefed on the matter said $125 billion will be disbursed in days.

Excessive executive compensation is a "legitimate complaint" that needs to be addressed, JPMorgan CEO Jamie Dimon said at Harvard Business School in Boston yesterday. "There were people who made a lot of money who didn't deserve it. That's a fact," said Dimon, 52, who was paid a $1 million salary and total compensation of $27.8 million last year, according to a regulatory filing.

"I don't think there's anything in these rules that will affect their pay," said Sarah Anderson, a director at the Institute for Policy Studies, a Washington-based research group backed by Democrats. Companies will likely maintain current compensation levels and "just take the hit on the tax bill," she said.

For banks that are losing money "and not paying any taxes, this will not be an issue," said Dean Baker, co-director for the Center on Economic and Policy Research, a Washington-based research group. Citigroup, the biggest U.S. bank by assets, had a second-quarter net loss of $2.5 billion, or 54 cents a share. It's forecast to lose $1.77 a share for the full year, according to a Bloomberg survey of eight analysts.

Paulson, 62, will bar companies participating in the stock- purchase program and Treasury purchases of toxic bank assets from offering so-called golden parachutes. Severance of more than three times an executive's base pay won't be tax-deductible for the company, and the recipient will be subject to an extra 20 percent tax on the money, according to the Treasury.

Measures such as the golden-parachute provision are meant to protect the government in its role as the banks' business partner, said Nell Minow, editor of Corporate Library, a Portland, Maine-based corporate-governance research firm.
Congress is likely to "revisit the issue as we better understand" what led to the financial crisis, Minow said. The government will be able to retrieve bonuses and incentive pay that executives already received "based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate," the Treasury said in a statement today.

Such clawback provisions would be more effective if they were "applied to performance of the company in the medium- and long-term, not a material inaccuracy," said David Lewin, a professor at the UCLA Anderson School of Management. U.K. Prime Minister Gordon Brown on Oct. 13 won promises from Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group Plc to lend more at lower rates and stop paying dividends in return for a 37 billion-pound ($64 billion) rescue. Chancellor of the Exchequer Alistair Darling said he wants to cut the bonuses of top executives who led their banks into trouble.

German Finance Minister Peer Steinbrueck, whose government will provide as much as 500 billion euros to banks through capital injections and loan guarantees, wants executive pay to be limited to 500,000 euros ($678,300) annually, he said in Berlin yesterday. Managers should receive "no bonuses, no severance pay during this time and no dividends," he said.

EU in hurry to discard mark-to-market accounting
The European commission is set to propose that depositors are refunded within three days if an EU bank fails, senior officials indicated today.

The commission, adopting revisions to deposit guarantee schemes approved by EU finance ministers last week, will also propose raising the minimum payout to €50,000 (£39,000) immediately — and to €100,000 by the end of 2009. EU banks would be allowed to avoid excessive writedowns of troublesome assets and revalue them under a separate EC proposal to change accounting rules due tomorrow.

The proposed changes, part of a self-styled co-ordinated EU approach to the financial turmoil, were set out by the EC president, JosÈ Manuel Barroso, on the eve of a full-scale EU summit on the financial crisis. "We see light at the end of the tunnel but we are not there yet," Barroso said of market responses to the €2tn rescue plan for banks adopted by eurozone countries and other EU states, including Britain.

The accounting changes, due to be rushed through if MEPs and governments approve, would be made retrospective to third quarter 2008 figures and are designed to create a level playing field with US banks. Senior officials said the changes, approved on Monday by the International Accounting Standards Board, would no longer require banks to "mark to market" distressed products held on their trading books.

Instead, banks will be allowed to value them as "held to maturity" or more closely reflecting their intrinsic value over time. European banks have been forced in recent quarters to write down tens of billions of euros under the previous rules. But Barroso admitted there were serious rifts among the EU-27 over issues such as stiffer regulation of cross-border banks, strict controls over budget deficits and state aid/competition rules.

He called for international regulation of hedge funds and private equity groups in a move at complete loggerheads with his internal market commissioner, Charlie McCreevy. The EC president also indicated a desire to revive French-inspired ideas for a single, pan-European banking regulator to replace the current system of committees or McCreevy's preference for a "college" of supervisors. McCreevy wants a lead regulator to be established in a cross-border bank's home country.

Barroso admitted several countries were putting up strong resistance to even McCreevy's plan which was, from Brussels' point of view, "a minimum." It also emerged that France and Germany are embroiled in a ferocious row behind the scenes over moves by Paris to suspend the "Maastricht" criteria setting a 3% budget deficit limit and 60% government debt for the duration of the crisis. Senior diplomats indicated that Berlin "hated" French president Nicolas Sarkozy for initiating the move.

Barroso and his senior officials insisted the stability and growth pact enshrining the Maastricht rules had been made sufficiently flexible in a 2005 revision to cope with exceptional circumstances and current bank rescue/recapitalisation plans may ultimately be of limited cost to taxpayers.

Separately, France and its allies are pressing for competition rules to be relaxed in the wake of the bank bail-outs for other sectors such as cars, but senior EC officials, who have rapidly approved the British bank guarantee and capital injection scheme, ruled this out.

Interbank lending market costs remain high
The costs for banks to borrow money from each other remain at highly elevated levels in spite of the global government action taken to cure the paralysis at the heart of the financial system. Stubbornly high interbank lending rates indicate that tensions remain in the money markets even though the US, UK and various European governments have pledged to inject capital directly into banks and guarantee many types of bank debt.

Analysts said that while stock markets had rallied and the cost of protecting bank debt against default had tumbled by record amounts in the US, it would take time for the reduced costs of what is in effect government-sponsored funding to show through.
Three-month Libor, the most important interbank lending rate that is used to price loans, derivatives and many other kinds of financial products, has barely moved in sterling markets, which have had full details of the UK government guarantee since Monday morning.

Sterling three-month Libor was just 2 basis points lower at about 6.25 per cent, more than 2 percentage points above where markets are pricing UK interest rates and higher than where the rate set before last week’s co-ordinated interest rate cuts by major economies. Similarly, euro three-month Libor, which was down 7.37bp at 5.225 per cent on Tuesday remains high.

“The fact that the boldest banking guarantee in history was not worth more . . . raised some eyebrows,” said Christoph Rieger, analyst at Dresdner Kleinwort. Dollar three-month Libor is reacting better, down 11.75bp at 4.635 per cent, which was accompanied by a 15bp rise in the yield on three-month Treasury bills to 0.4 per cent.

This leaves the so-called Ted spread, which measures the difference between interbank lending rates and risk-free government lending rates, at a hefty 420bp. “These developments suggest that the market is reducing the odds of imminent financial Armageddon, but that significant year-end funding issues remain,” said TJ Marta, strategist at RBC Capital Markets. 

Lou Crandall, economist at Wrightson Icap, said: “Heightened concerns about counterparty risk may have been the major reason for the initial pullback from the term money markets last month, but investors’ worries about their own liquidity exposure could make them slow to return.”

Bush Administration Mulls Use Of 2nd Tranche Of TARP Funds
The Bush administration is mulling whether to tap the second installment of its $700 billion authority to rescue the U.S. financial system as it looks set to burn quickly through the first $250 billion with its new bank recapitalization plan. U.S. Treasury Secretary Henry Paulson and other Bush administration officials were in discussions about whether they will need to access the next $100 billion, a Treasury official said Tuesday.

Tapping the next tranche would require "merely a transmittal letter from the president to Congress," the official said. The Bush administration announced Tuesday a plan to inject $250 billion into potentially thousands of U.S. banks in the coming weeks, a historic action to restore confidence in the financial system.

The administration also said the Federal Deposit Insurance Corp. would begin to guarantee temporarily most debt issued by banks. The FDIC will also extend its deposit insurance to all noninterest-bearing transaction accounts, which are widely used by small businesses to cover payroll and other day-to-day operations. Paulson said that banks have until 5 p.m. EST on Nov. 14 to sign up for the program. He said that nine "healthy" financial institutions had already agreed to accept cash from the government.

A U.S. Treasury official said those deals would close "within days, not weeks." However, he declined to confirm the names of the nine banks that will receive the government money or give the size of the injections. The official said there would be a third program announced soon aimed at ailing banks as opposed to the healthy banks the Treasury said it's targeting with its recapitalization plan. The program would involve purchasing assets from or injecting cash into such firms.

Under authority granted by Congress earlier this month, the Treasury has $700 billion on hand to purchase a wide array of assets, including company stock, to stabilize the financial system. While it received $250 billion up front, the administration must notify Congress to access the next $100 billion. The final $350 billion, which also requires such notification, can be blocked by Congress.

U.S. President George W. Bush sent a letter to House Speaker Nancy Pelosi, D- Calif., on Tuesday to certify that it's "necessary" for the Treasury secretary to use his authority to "purchase, or commit to purchase, troubled assets up to the limit of $350 billion outstanding at any one time." House Financial Services Chairman Barney Frank, D-Mass., said Congress might need to give Treasury more money if its multi-pronged approach does not sufficiently quell the financial crisis.

"If it's being well-used and more is needed, then yes," Frank said when asked if the Treasury Department could need more than $700 billion. "If it begins to work then you may not need a lot more money." When Treasury asked for the $700 billion from Congress, it said that it would use the funds to buy toxic assets from Wall Street. However, the sharp deterioration in the global financial crisis has prompted the Treasury to shift gears within days of receiving the authority. Now, the focus has moved toward recapitalizing the banking sector, which Treasury insists it has authority to do under the legislation.

The recapitalization program attempts to walk a delicate line by embedding incentives to spur banks to eventually repurchase the government shares, but not be so punitive as to discourage firms from participating. A Treasury official compared the government stakes as "plain vanilla preferred shares," saying they wouldn't be structured so as to be punitive. Yet he noted several features designed to make the program less appealing for firms compared with the status quo of no government ownership.

"We wanted to encourage participation," the official said. "The terms are not meant to be punitive, but there are incentives built in so companies will buy us out." Participating firms won't need to shut off dividends to existing shareholders. However, they won't be able to increase dividends to common shares or repurchase common stock for three years. In exchange for its investment, the government will receive warrants to purchase common shares with a market price equal to 15% of the cash it has sunk into the firm. It will receive a 5% annual dividend that will rise to 9% after five years.

Firms also will have to submit to tough restrictions on executive pay, including banning so-called "golden parachutes" to departing executives as well as pay awarded for excessive risk-taking. Also, compensation based on results that turn out later to be wrong can be "clawed back" by shareholders under the program. These restrictions, which were attached to the legislation by lawmakers, also apply to firms selling their rotten assets directly to the U.S. government rather than through an auction or other competitive mechanism.

In addition, Treasury has added one other executive pay condition for firms receiving government equity stakes: Companies can't deduct compensation of more than $500,000 per senior executive for tax purposes. Under current law, companies can deduct up to $1 million.

These executive pay restrictions, which will last as long as Treasury owns stock in an institution, give participants reason to work to quickly buy back their shares. Treasury has also sought to spur participating firms to access the capital markets. A condition of the program bars firms from buying back the government's shares for three years unless the firm raises private capital.

U.S. bank bailout comes at steep price
The U.S. government plan to inject $250 billion into the troubled banking industry will repair balance sheets and help restore market confidence, but the banks and investors will pay a hefty price. U.S. officials announced on Tuesday a plan to inject capital by acquiring preferred stock and warrants to purchase significant stakes across a number of banks.

Half that amount will go to nine banks: Citigroup, JPMorgan Chase, Morgan Stanley, Goldman Sachs Group, Bank of America Corp and Merrill Lynch & Co, Wells Fargo & Co, State Street Corp and Bank of New York Mellon. "I think it helps. It helps everyone who is participating," said Benjamin Wallace, a money manager at Grimes & Co. "These banks have to support others. They all have their share of exposures."

U.S. Treasury Secretary Hank Paulson, under pressure to restore order to the financial markets, pushed these top tier banks to participate so that there would be no stigma associated with the plan as it was rolled out throughout the industry. Still the government's support, comes at a cost.

Fox-Pitt, Kelton analyst David Trone estimates that earnings per share for participating banks will be reduced by as much as 22 percent, at Wells Fargo, or as little as 6 percent, at Bank of New York. Some bank executives, notably JPMorgan chief Jamie Dimon, contended they did not need the additional capital. JPMorgan, which recently raised funds for its acquisition of Washington Mutual, faces 11 percent dilution from the plan. "Not everyone was on board, but Paulson realized you needed an industrywide solution," Grimes said.

Certainly stock market investors applauded the plan, which will inject needed capital into some weak banks and help accelerate the end of the current credit crunch. Treasury also will back new bank debt, guarantee certain deposits and support commercial paper. "These steps will have a significant positive impact on the crisis of confidence," Trone said.

Shares of Morgan Stanley surged another 21 percent Tuesday, after nearly doubling the day before, while Citi stock rose 18 percent as investors greeted news of even more capital strength. Goldman shares rose 11 percent. Longer term, analysts said bank and broker stocks will "stall out" as investors shift their focus from survival to the business environment, which remains weak. That will yield rising losses from loans and problem assets as well as lower revenue.

Meanwhile, earnings now will be weighed down by the preferred dividends. For consumer banking giants Citi, BofA and JPMorgan, $25 billion of preferred stock will generate an annual expense of $1.25 billion. JPMorgan shares fell 3 percent Tuesday amid worries the new capital was not needed and would drag on returns.

Goldman last month sold $5 billion of 10-percent preferred stock to Berkshire Hathaway and issued warrants to buy another $5 billion of stock. Goldman, which also issued $5 billion of common stock, will have to pay out a combined $1 billion each year to the government and to Warren Buffett. Morgan Stanley on Monday completed a $9 billion sale of preferred stock -- yielding 10 percent -- to Mitsubishi UFJ Financial Group, a deal Morgan said gave it more than enough capital. Morgan's preferred dividend tab is an even steeper $1.4 billion a year.

That said, some Wall Street observers say the stability that comes from the new capital outweighs any near term dilution or cutbacks in executive pay. Some weaker banks have little grounds to complain, said veteran Wall Street compensation consultant Alan Johnson. "When you got begging, it's hard to complain if you get chicken instead of chateaubriand," Johnson said. "What can you say? If you don't like the terms, you can go broke."

Bank crisis ends as the economic crisis begins
The taxpayer rescue of the entire western financial system is more or less complete. Tuesday's sweeping move by US Treasury Secretary Hank Paulson to guarantee financial debt and inject state capital into America's biggest banks brings the US into line with Britain and Europe, where almost $3,000bn (£1.7 trillion) has been vouched in the biggest bail-out of all time.

If the history of financial crises is any guide, the violent credit shock of 2007-2008 has largely run its course. The sovereign states of the US, Britain, France, Germany, Italy, Spain, and Holland have broad enough shoulders to carry their load of fresh liabilities – even if Iceland does not.

We are now moving to the next phase, a grinding slump across the G7 bloc of leading industrial economies as years of excess debt are slowly purged from the system. This is when people start to lose their jobs in earnest. Professor Nouriel Roubini from New York University, the vindicated prophet of the crisis, says he can at last glimpse light at the end of the tunnel.

"Policy makers peered into the abyss of systemic collapse a few steps in front of them and finally got religion. While the economic damage is already done, and the global economy will not avoid a painful recession, rapid action will prevent a decade-long stagnation like the one in Japan after the bursting of its real estate and equity bubble," he said, predicting a 'U-shaped' slump lasting 18 to 24 months.

World trade has already stalled. The Baltic Dry Index measuring freight rates for shipping has crashed by 82pc since May, touching a five-year low yesterday. Container vessels are leaving Asian ports with 20pc spare capacity. "We're heading into a global recession," said Simon Johnson, the IMF's former chief economist.

The whole OECD bloc of rich economies is crumbling in unison – a rare event. Such is the dark side of globalisation. Asia is deeply linked into the debt bubble through trade effects, which is why Japan and Singapore are contracting as sharply as the West.

Oil-rich Russia had to step in yesterday with a $56bn package to recapitalise banks and cover foreign loans. Brazil has seen a triple rout in its stocks, bonds, and currency. The Gulf states of Qatar and the Emirates have had to support their financial systems. Even Norway needed a $55bn bank rescue over the weekend.

The French economy is officialy shrinking. Germany's exports fell 2.5pc in August, led by the car industry. BMW has begun to idle three plants; Opel has shut a factory in Eisenach for three weeks. "The eurozone is in recession already," said David Owen from Dresdner Kleinwort. "The consumer downturn has begun, but the cuts in business spending that you see late in the cycle have yet to come. This is going to get a lot worse," he said.

Brussels invoked its "exceptional circumstances" clause yesterday, allowing EU states to breach the budget deficit limit of 3pc of GDP. But leeway for fiscal stimulus is already constrained. Ireland had to raise taxes yesterday to stop borrowing spiralling out of control. Its deficit will reach 6.5pc.

Former Federal Reserve chief Paul Volcker, a harsh critic of the debt bubble, says there is no alternative to the Paulson bail-out measures at this late stage, however "distasteful" they may be. "They will turn an inevitable recession into something more manageable," he said.
Be thankful for small mercies.

Home prices may plummet, but property taxes won't
Housing prices have plummeted, but property tax bills probably won't budge. This January, local tax authorities will begin to send out property assessments for 2009, telling homeowners what their property is valued at, and how much their tax bill is.

But many assessments won't reflect any of the steep home price declines that have been making headlines for the last year or so. And even if property assessments do drop, property tax bills won't necessarily be any lower. "I think you're going to see a lot more taxpayer protest this year," said Bruce Hahn, president of the American Homeowners foundation, a non-partisan consumer advocacy group.

Property taxes climbed relentlessly earlier this decade as home prices rose, according to Pete Sepp, spokesman for the National Taxpayers Union. This year Americans will pay more than $400 billion in property taxes, up about 25% from levels in 2004 and double what they paid ten years ago. At best, says Sepp, those steep increases may start to level off. Nevertheless, homeowners are already pressing assessors for lower tax assessments.

"For my first 25 years [as an assessor], nobody ever asked me to lower the assessment based on a home selling for less down the street. There are many such inquiries this year," said Ken Wilkinson, the tax assessor for Lee County Fla., which includes Cape Coral and Ft. Myers. He estimates that 80% of county residents have seen the value of their homes decline.

The median price of existing homes fell more than 25% in the 12 months ending June 30, according to the Housing Opportunity Index compiled by Wells Fargo for the National Association of Home Builders. Home prices in Moreno Valley, Calif. a city of 187,000, have fallen by more than a third over the past two years, according to the same index. And that has many more homeowners clamoring for reassessments, according to Barry Foster, the city's economic development director.

But even if local prices are way down, taxpayers may not win a lower assessment, because there can be a big lag time between when the home sales used to calculate them take place and when the assessment is actually issued. To calculate 2009 assessments, for example, assessors will use home sale prices from 2008 or even earlier, according to Sepp. Usually this works to taxpayers's advantage, since price increases take a while before they are fully reflected in assessments.

That's why it's typical for most homes to be under-valued, according to Bruce Hahn of the American Homeowners foundation. But that's also why many homeowners aren't likely to see their assessments shrink immediately. There's another reason why homeowners are unlikely to see any decrease in property tax bills. In some states, such as California, Washington State, Massachusetts and Idaho, taxes are based on the last resale price of the house. Even a home worth $500,000 in California may be taxed based on the sale price when it was bought 10 years earlier for $200,000.

"Because the assessment is based on acquisition value, it's difficult to get that re-evaluated," said Sepp. That's why the market value of most homes in these states exceeds the assessed tax values. The owners with best case for a reassessment are the ones who bought at the top of the market and have seen their values drop by a third or more, like many of Moreno Valley's residents.

Even if citizens do receive a lower assessment - and this year Wilkinson expects to lower assessments for most taxpayers in Lee county, Fla. by 20% or more - their property tax bill may not shrink at all. Tax collectors often raise tax rates to offset lower assessments to meet their budgets, which will be very strained this year. Assessments go down but rates go up so that the tax collections stay roughly the same. "State and local governments depend very heavily on real estate taxes and they are reeling from a loss of revenues from sales taxes and other sources," said Bruce Hahn.

Once homeowners get their bills, they'll have several weeks to contest their assessments, according to Hahn.
He suggested they go online to real estate evaluation sites such as Trulia or Zillow to determine how far property values have fallen in their communities. They can also cite comparable home sales for similar properties to make their cases. "Some tax assessors have been very reasonable," said Hahn, "but others are under great pressure to keep revenues up." 

Growing number of US workers are poor
Even before the collapse of major U.S. banks and the Dow's plunge, the rolls of America's working poor grew as their piece of the U.S. economic pie shrank, according to a study released on Tuesday. The percentage of working families who were poor rose to 28 percent in 2006, from 27 percent in 2002, the Working Poor Families Project said in a report based on government data collected as part of the American Family Survey.

"If we start factoring in what's happened this year, we know the number will increase," said Brandon Roberts, an author of "Working Hard, Still Falling Short." The report found that 9.6 million working families were poor in 2006, up from 9.2 million in 2002, the report said. "One-third of all (U.S.) children reside in low-income working families," said Roberts.

By 2008 standards, the report defined working poor as a family of four living on less than $42,400 in the 48 contiguous states, or slightly more in Alaska and Hawaii. Income inequality grew over the period of the study, as janitors, cashiers, construction workers and nannies saw their portion of U.S. income decrease, compared to the richest workers, the report found.

"The fact that it's (the number of poor families) gone up 350,000 from 2002 to 2006 during what were good economic times, some claim robust economic times, is pretty surprising and it's very revealing about the bifurcation of the economy," said Roberts. Twenty percent of working white families were low-income, while 41 percent of minority families were low-income, figures that were stable compared to 2002, the report said.

Ireland delivers gloomy budget
Irish Government ministers are taking a 10 per cent pay cut in a “patriotic” bid to pull the country out of its vertiginous plunge into recession. The announcement was made by the finance minister, Brian Lenihan, as he delivered his budget two months earlier than originally planned. It was brought forward because of the economy’s dramatic deterioration.

The Fianna Fail-led coalition government slashed spending and raised taxes by 2 per cent for those earning more than €100,000 per year. Even so, Mr Lenihan said he expects the 2009 budget deficit to be more than double the European Union limit. The new "income levy" of 1 to 2 percent (1 per cent for those earning less than €100,000) was the central plank of a budget which also introduced an air travel tax as well as increases in taxes on gambling, cigarettes and alcohol.

However, Ireland’s corporate tax rate of 12.5 per cent was maintained, with Mr Lenihan describing it as “a cornerstone in our industrial development in the last decade”. He said: "I want to emphasise that this rate of tax is not for changing upwards and it will continue to be a central part of Ireland's economic brand." French President Nicolas Sarkozy is known to want a European Union-wide corporate tax rate, removing Ireland’s advantage in attracting international companies to use it as an entry point into Europe.

Mr Lenihan said he expected Ireland's public deficit to hit 6.5 per cent of gross domestic product in 2009, well above the 3 per cent cap set by the EU's Stability and Growth pact, and debt to reach 43 per cent of GDP. "A substantial increase in borrowing is unavoidable if we are to minimise the impact of the tighter fiscal position on the economy," he told the Dail.

An abrupt collapse in the once-thriving property market and global market turmoil has pushed the former 'Celtic Tiger' into its first recession in 25 years, ending more than a decade of economic boom and triggering a steep fall in tax receipts. Government data at the weekend showed that, on a pre-budget basis, the 2008 exchequer deficit was set to rise seven-fold to €11.5 billion from €1.6 billion at the end of 2007, before hitting €14.8 billion in 2009.

"It is my intention to secure a progressive reduction in the deficit as a percentage of GDP in 2010 and 2011," Lenihan said, struggling to be heard over the heckles of opposition deputies, who accused him of making a bad situation worse. "You have made decisions today that will threaten to turn a recession into a depression," said Richard Bruton, deputy leader of the main opposition Fine Gael party.

But the pay cut for ministers will go down well across the country. Some senior civil servants are taking a similar voluntary cut.
"As a small open economy, we are especially vulnerable to economic shocks beyond our shores," said Mr Lenihan. "The international credit crisis has compounded and deepened the downturn in the construction sector and led to a fall off in consumer confidence." A €10 air travel tax, which will come into effect from 30 March, will apply to all Irish airports.

There will be an increase in the standard rate of VAT by half a point to 21.5 per cent from 1 December, but no change in the zero rate which applies to food, children's clothes and footwear. The budget provided an opportunity "for all of us to pull together and play our part according to our means," Lenihan said, describing it as "no less than a call to patriotic action"

Ireland Raises Income Tax, Cuts Spending as Budget Gap Swells
Irish Finance Minister Brian Lenihan said he plans to raise income tax for the first time in a quarter century and slash public spending as the economic slump opens a hole in the public finances. A 1 percent tax will be added to all personal incomes, rising to 2 percent on earnings over 100,000 euros ($136,570), Lenihan, 49, said in his budget speech in the parliament in Dublin today. The levy marks the first increase in Irish income tax since 1984.

"We must take the right decisions now," Lenihan said. "The soft option would have grave consequences for the future of this country." Ireland became the first euro area economy to enter a recession in the second quarter as construction and consumer spending slumped. Today's budget, Lenihan's first, comes against a backdrop of tumbling house prices and a financial crisis that has sent share prices crashing and forced the government to guarantee all the deposits and debts of Irish banks.

The budget was brought forward from its usual date in December as the outlook deteriorated. Since Lenihan took over five months ago, the banking crisis has worsened and Ireland now faces its bleakest prospects in 25 years. The benchmark ISEQ stock index has dropped 55 percent this year, Western Europe's worst performer. Bank of Ireland Plc and Allied Irish Banks Plc, the country's largest lenders, have fallen more than 75 percent.

The economy, as measured by gross national product, will contract at least 1.5 percent this year and 1 percent in 2009, according to the forecasts announced today. The budget deficit will widen to 6.5 percent of gross domestic product in 2009 from around 5.5 percent this year. Lenihan said he plans to conduct a review of the National Pension Reserve Fund before the end of the year. Ireland contributes 1 percent of GNP to the fund every year to meet future pension needs. He also said the government and some senior civil servants will take a 10 percent pay cut.

"There is too much at stake; we all have too much to lose by not taking action now," Lenihan said. "We face the most challenging fiscal and economic position in a generation." While the income tax levy will raise funds for the government, it may further damp an economy where retail sales are tumbling and consumer confidence is close to a record low.

In the U.K., Chancellor of the Exchequer Alistair Darling has ruled out immediate tax rises or spending restraint, saying now is not the time to take money out of the economy, but has hinted measures will ultimately be needed to reduce the deficit.

JP Morgan warns on weak profit after 84% fall
JP Morgan, America's largest bank by market value, today reported an 84 per cent slump in third quarter profits and warned of falling income "over the next few quarters".

The bank, which is one of nine US financial institutions who will receive a share of the Government's ambitious bailout package, saw its third quarter profit reduced from $3.4 billion in the same period last year to $527 million, after writing off $3.6 billion. Since the sub-prime crisis emerged early last year, JP Morgan has written off $18.8 billion on assets and credit costs.

However, the group's running total is lower than Citigroup, the US banking giant, which has so far written off around $50 billion while JP Morgan has been able to rescue struggling rivals and earlier this year saved Bear Stearns from collapse. Overall revenue fell from $16.1 billion to $14.7 billion and Jamie Dimon, JP Morgan's chief executive said today: "Given the uncertainty in the capital markets, housing sector and economy overall, it is reasonable to expect reduced earnings for our firm over the next few quarters."

JPMorgan's investment-banking division made $882 million in the third quarter, compared with profit of $296 million the previous year, and revenue rose $1.1 billion.

Credit Woes Squeeze Wells Fargo
Wells Fargo & Co. posted a 24% drop in third-quarter net income as the bank wrote down its investments in Fannie Mae, Freddie Mac and Lehman Brothers Holdings Inc. and added to credit reserves. But revenue increased amid growth in loans and deposits.

Chief Executive John Stumpf said, "Our strength, security and outstanding financial performance continued to compare favorably with our industry peers." He added that the bank, which last week won the battle against Citigroup Inc. to acquire Wachovia Corp., expects to complete the deal by year-end and that the company's "disciplined" acquisition strategy "will not change."

Wells Fargo reported net income of $1.64 billion, or 49 cents a share, down from $2.17 billion, or 64 cents a share, a year earlier. The latest results include 13 cents a share in write-downs for the Fannie, Freddie and Lehman investments, along with a 10-cents charge from boosting credit reserves by $500 million to $8 billion. The reserve is now double its year-ago size.
Revenue climbed 5.4% to $10.38 billion. Excluding the write-downs, revenue would have climbed 12%.

Analysts polled by Thomson Reuters were expecting earnings of 42 cents a share on an 11% revenue increase to $10.96 billion. Asset quality weakened substantially during the quarter, with net charge-offs rising to 1.96% of average total assets from 1.01% last year and 1.55% in the second quarter. In April, the company made a policy change for only those loans in default for 180 or more to be written off. Previously, those in default 120 days or more were written off.

Nonperforming assets -- those near default -- surged to 1.22% from 0.58% a year earlier and 1.02% in the prior quarter. Loans delinquent 90 days or more as of Sept. 30 totaled $8.44 billion in the latest quarter, up 53% from a year earlier. The company said it continued to see delinquencies "increasing as the negative credit trends impact loan performance."

Net interest margin -- the difference between interest earned on loans and paid on deposits -- increased to 4.79% from 4.55% a year earlier, though it fell from 4.92% in the second quarter. Wells Fargo said the latest margin reflects reduced funding costs and "continued above-market" core deposit growth.  Average core deposits increased 4.6%, while loans rose 15%.

After staying in the shadows in recent years by avoiding large acquisitions, Wells Fargo thrust itself onto center stage several weeks ago as it announced a deal to acquire Wachovia for just over $15 billion several days after Citigroup had agreed in a federally backed deal to buy it for $2.1 billion. Wells Fargo's ability to pay so much more, without government help, highlighted its strength.

Wells Fargo has also been listed among nine "healthy" financial firms in which the government is injecting capital.  Wells Fargo is still dealing with another contentious battle against Citigroup, which is seeking $60 billion in damages related to the Wachovia transaction. Tuesday, Wells Fargo fired back by filing its own lawsuit against Citigroup, asking a federal court to block Citigroup from pursuing its liability claims.

The legal wrangling makes up just part of the difficulties Wells Fargo must grapple with as a result of the Wachovia deal. The bank also said it will face some $74 billion in losses and write-downs from acquiring Wachovia and its troubled portfolio loans of loans.

GM: Better off bankrupt
GM certainly is keeping a close eye on its cash these days. One supplier reports he is now getting paid 60 days after he presents an invoice - not the 30 days he was used to. Worse, the clock doesn't start ticking until after the bills get approved in Detroit - and then sent to Arizona for processing.

Next thing you know, GM will be inflating its float by cutting supplier checks on banks in Fiji that will take weeks to clear. It is a measure of GM's desperation that it is reported to be considering a linkup with Chrysler to get access to Chrysler's cash so it can remain in business. The idea has provoked nearly universal skepticism among analysts and GM watchers.

With good reason; they have history on their side. The list of unsuccessful auto mergers stretches from the present day - Daimler and Chrysler, BMW and Rover - all the way back to Studebaker-Packard and Nash-Hudson. Buying Chrysler would only get GM more of what it doesn't need: more brands, more models, more factories, more employees, more dealers.

You have to wonder what makes GM think it could run Chrysler's operations more successfully than it has run its own. Like a second marriage, a GM/Chrysler merger would be a triumph of hope over experience. So what's an ailing automotive giant to do? GM has the wrong products to sell into a shrinking market and can offer little or nothing in the way of financing to its customers.

To remain liquid through next year, it needs to raise $10 billion to $15 billion through a combination of internal measures, borrowing and asset sales. That's next to impossible these days. With some of its bonds selling for less than 50 cents on the dollar, the cost of new debt would be prohibitive. Not even vulture investors are clamoring to buy shuttered parts or assembly plants. And Hummer, which GM is trying to shed, does not appear to be the next iconic American brand. Harley-Davidson it isn't.

So how about a government bailout? What's good for GM is good for the country, and vice versa. The federal government has promised more than $1 trillion to keep banks, insurance companies and other financial institutions afloat. Couldn't it find another $100 billion or so to invest in the Detroit Three on top of the $25 billion in loans already approved?

A government loan wouldn't be about protecting well-compensated union jobs or keeping afloat inefficient suppliers in Michigan and Ohio. It could be directed toward advancing Detroit's and the country's strategic interests by speeding development of alternative fuel technologies that reduce our dependence on foreign oil as well as help limit the generation of greenhouse gases.

GM may have a decent shot at that in a Democratic administration. If not, there is bankruptcy. That's a horrible possibility, to be sure, and one that GM claims is not an option because it would destroy consumer confidence in its vehicles. Who is going to accept a three-year warrantee on a new car from a bankrupt company?

But hear me out. Bankruptcy would give GM a chance to negotiate further cost reductions with its union workers, work out its obligations with those suppliers that are still solvent, and help speed the rationalization of its dealer body. Would GM then be stigmatized as the only bankrupt auto company? No way. Ford and Chrysler would immediately find that they have been made uncompetitive by GM's actions and quickly follow it into Chapter 11.

Flying one bankrupt airline felt a little awkward, but by the time half a dozen were in the same condition, it seemed perfectly natural. That would apply to the Detroit Three. There is still an appetite out there in America's heartland for Detroit iron, and in the end bankruptcy may be the best way to continue to satisfy it.  

UK unemployment: 'Something horrible' this way comes
No one should be surprised by today's huge rise in unemployment. David Blanchflower, the Bank of England monetary policy committee's labour market expert, has been warning of "something horrible" happening to the jobless numbers for months and months. But few wanted to listen to him.

They should have, because the numbers today are horrible. They show the biggest rise in unemployment - 164,000 - since June 1991, when the economy was tipping into its worst post-war recession. The jobless rate also jumped from 5.2% to 5.75%, the biggest increase since July 1991. Employment suffered its biggest drop since February 1993. These are recession numbers.

Unemployment on the broadest Labour Force Survey measure is now a tad under 1.8 million. Blanchflower has been warning it will go to 2 million by Christmas. Today he admitted to me he was wrong - he now thinks it will be well above 2 million by Christmas. The numbers are bad at many levels. For a start, they apply to the period up to the end of August - well before the current stage of the financial crisis erupted a month ago. So there will be much worse to come.

They are also bad because they show a huge number of young people - 56,000 - became unemployed in the three months to August - the biggest rise since the series began in 1992. This happened because young people were unable to find jobs as they left school or university. Because they are not eligible for benefits, they have not been picked up by the claimant count numbers, which is a key reason why the claimant count did not go up by more than it did last month.

It rose by 31,800, a bit less than the upwardly revised leap of 35,700 in August but still heading up fast. Remember that last month's increase was the worst since December 1992. Blanchflower was ignored by his MPC colleagues all through the summer as he voted for interest rate cuts because he saw the damage the credit crisis was inflicting on the economy way before they did.

Indeed, the Bank's governor, Mervyn King, made a jocular aside to him when both men appeared before the Treasury committee on September 11 that the gods must have given Blanchflower some unemployment figures from the future but had not been so kind to him. Well, it now looks either that the gods had given Blanchflower the data or simply that, as a serious labour market economist, he had been looking at the numbers in greater detail than his colleagues.

It is true that the MPC finally cut interest rates last week for the first time since April in an emergency response to the meltdown in financial markets. They cut half a point to 4.5% and further hefty cuts are expected. But the cuts were already needed. Rates were too high. Inflation, which many of the MPC members had been fretting about, was not the problem. The danger of deflation was, and is, the problem.

Look at another number in the labour market figures. The headline average earnings growth rate fell to 3.4% - its lowest for five years. Not surprising, you might think, since unemployment has been rising for a while and people are too afraid of losing their jobs to ask for a big pay rise. But until very recently MPC members were saying that the spike in inflation caused by the spring surge in oil prices, would feed through into higher wages. It didn't, hasn't, and won't.

All that matters now is that rates are cut further and quickly to prevent the recession we are already in turning into "something horrible".

US Consumers’ Confidence in Banks Plummets to 21%
Who has faith in big banks? Not many consumers these days, and that's driving people into the arms of their local institutions.

Only 21% of consumers polled are confident in U.S. banks, according to a survey taken in late September by Gallup. That marks an unprecedented drop from 40% in mid-July and is the lowest level of consumer confidence in banks in three decades. The 21% low easily beat the previous trough of 30% in October 1991, which occurred amid a major recession, the savings-and-loan crisis and lingering turmoil from the Gulf War.

Rocking that trust further are huge banks getting even bigger -- Bank of America swallowing Merrill Lynch, Chase merging with Washington Mutual and Citibank wrestling with Wells Fargo over Wachovia. "It looks like just another manifestation of greed and protecting themselves," said Alan Siegel, chairman of branding firm Siegel & Gale. But not all banks are equally feeling the heat, and some local institutions are benefiting.

Unity National Bank in Miami County, Ohio, says it's getting new customers every day from Chase branches in town. "People are saying they're just not comfortable there," said Julie Monnin, Unity's marketing director. "We haven't changed anything about the way we do business. ... [But] people who before thought that maybe we were too stringent [with loan requirements] are now saying that they see why we are."

Unity is going out of its way to make sure consumers know it's solid. It has revamped its website to say so, adding a letter from the bank's president and an FAQ section. It even posted the home phone numbers of its president and marketing director. It also plans to put a newspaper insert in the local press. "We want [customers] to know we're doing fine," Ms. Monnin said.

Gallup's findings show that while fewer than 25% of consumers trust U.S. banks, a much healthier 66% said they had confidence in the local banks where they do business. Both numbers are down from mid-July, but while national bank confidence dropped from 40%, local bank confidence dropped from 80%.

"What people were saying is ... 'I don't trust those other bums, [but] I believe in the people at my individual institution,'" said Douglas Berlon, Gallup global practice leader for financial services. "A lot of local banks have positioned themselves as the caregiver -- we take care of you and your money," said Fritz Grutzner, president of branding-strategy firm Brandgarten. "And in times like this, it works to their benefit."

The key is to maintain that trust. "The whole concept of that moment of 'wow' between employees and customers at the local bank level means they have to manage it, believe in it, instill it and train around it. You have to make sure you're living at that local level," Mr. Berlon said.

The American Bankers Association, in which most members hold $125 million or less in assets, said many of its member banks are proactively reaching out to customers through private and public messaging. They're e-mailing customers, taking out ads in local papers and offering services that previously carried fees for free, an ABA spokeswoman said. She said one member bank has even hired an ad agency to create a video called "How Your Money Is Protected."

"Part of the issue has been that the general population doesn't make the distinction between Wall Street investment banks and neighborhood banks or deposit banks," she said, adding that only about 11 of the 8,500 banks in the U.S. have failed in the past year. Local banks' open and direct communication to customers is the right strategy, Mr. Siegel said. "To be silent is a mistake. You have to be honest and transparent and communicate with customers."

That's what Canandaigua Bank has been doing since May, prompted by the housing crisis. Steve Martin, VP-public relations and marketing, said the upstate-New York bank has been proactively communicating a reassuring message to its customers. "Our objective was to be a leader in the market and tell our customers the facts and give them information," he said. "What we have received is an overwhelming response of deposits and loan requests."

Fed lifts cap on currency swap with Bank of Japan
The U.S. Federal Reserve on Tuesday erased the upper limit on its currency swap line with the Bank of Japan, the latest in an extensive series of steps to restore stability in shaky credit markets world-wide. "The size of the swap line between the Federal Reserve and the Bank of Japan will be increased to accommodate whatever quantity of U.S. dollar funding is demanded," the Fed said in a statement.

The Fed has opened swap lines with other major central banks to enable them to lend to their local commercial banks in an effort to get U.S. dollars circulating in overnight and short-term money markets. The Fed on Monday similarly removed the caps on swap lines with the Bank of England, the European Central Bank and the Swiss National Bank.

Are states next in line for federal bailout?
How California fares with a $4 billion short-term bond sale this week will help answer a key question looming over the current US financial crisis: are traditional credit markets so frozen that states won't be able to raise revenues to tide them over their cash crunch? The practice of selling short-term bonds is used regularly by at least a dozen US states, and occasionally by several more, to keep state programs and services running smoothly year round.

Because tax income is not steady throughout the year – far more revenue comes in from September through December than January through March – California and others (including Massachusetts, New Jersey, Nevada, Rhode Island, Arizona, Delaware, New York, Florida, and Alabama) borrow short-term to pay their bills when revenues are temporarily insufficient. Now, with states facing the same problem faced by millions of businesses – tightening credit markets – at the same time that revenues are sinking, many budget officials are worried that they may not be able to borrow when they need to.

Some, including California, have notified US Treasury Secretary Henry Paulson that if the credit markets don't come through, they may be knocking on his door. There is currently no formal mechanism in place for the federal government to provide loans to states unless the need is generated by a natural disaster, say experts. By law, states have to balance their budgets each year. If several go to the federal government and line up all at once, who will decide which states gets the limited – and dwindling – funds?

"This is an unprecedented situation because of the scope of the lending needs," says Alan Rubin, director of federal government relations for Buchanan Ingersoll & Rooney, which has decades of experience in state financing. "If these states can't get their funds the usual way and start asking the federal government, there is no clear-cut way for Washington to respond." The federal government is best prepared to come through with funding after disasters – such as Katrina or 9/11 – says Mr. Rubin and others.

"This could pit states against each other in very uncomfortable ways," says Rubin. "If the federal government has to determine who gets $6 billion and who gets $10 billion, there's likely to be a lot of finger-pointing. People will be very angry if politics becomes the methodology – there are real issues that are critical to determine. We've never been there before."

Scott Pattison, executive director for the National Association of State Budget Officers, says "about 10 to 12 states in the next few months might have to go on market for a RAN [short-term bonds called Revenue Anticipatory Notes]." Most states have rainy day funds they are dipping into during the current revenue crisis. Other states may be forced to raise taxes, cut services, or do both, he says.

California needs to make up a $7 billion shortfall. But state Finance Department spokesman H.D. Palmer says this week's bond sale will attempt to collect only $4 billion. "Given the market conditions, we concluded it was best to go only for $4 billion immediately and try for $3 billion more in a few weeks," he says. Because Massachusetts successfully marketed $700 million in bonds last week, Palmer says Governor Schwarzenegger is "cautiously optimistic."

The state sent a letter to Henry Paulson last week saying that if the bond sale doesn't work, officials hope to borrow from the US Treasury under the recently signed Troubled Asset Relief Program (TARP). "The Treasury hasn't answered yet," says Nick Johnson, director of the state fiscal project for the Center for Budget Planning and Priorities. "There's some discussion on whether or not they have legal authority to do so."

The issue to watch, say several state fiscal analysts, will be whether the credit markets will be able to loan money to California and other states. If not, it sends a dire signal to the rest of the country's businesses. "States are the safest loans out there with the exception of a loan to the US federal government," says Donald Boyd, a state fiscal analyst with the Rockefeller Institute of Government, the public policy research arm of the State University of New York.

"They have very diverse economies, have the power to tax, and cannot go bankrupt. How can General Motors get a loan, if the state of Massachusetts cannot?"

California Selling Short-Term Notes at Higher Yields
California sold almost half of the $4 billion of notes it is offering this week to avert a cash shortage, with tentative yields as much as 1.1 percentage points higher than last year. Notes due May 20, 2009, may offer a yield of 3.75 percent to 4 percent and debt to be paid off June 22 might yield 4.25 percent to 4.50 percent, said Tom Dresslar, spokesman for California Treasurer Bill Lockyer, in an e-mail. The state sold $7 billion of notes last year at 3.37 percent.

California, home of the world's eighth-largest economy, is seeking to raise cash to pay bills until tax revenue arrives later in the year. The state is pressing forward, even as rising costs drive borrowers, including New York City and Ohio, to defer long-term bond sales. Standard & Poor's last week threatened to lower the state's credit rating if the sale falters amid a freeze in the bond market.

"It's about being able to sell it," said Matt Fabian, managing director at Concord, Massachusetts-based research firm Municipal Market Advisors. "Everyone is paying higher yields to get their deals done." The yields are still a quarter-percentage point lower than previous preliminary yields underwriters suggested might be necessary to find buyers for the notes as the credit crisis saps investor demand.

That's "perhaps a good indication that there is interest," said Mark McCray, a managing director and municipal bond fund manager at Newport Beach, California-based Pacific Investment Management Co. The notes may yield as much as 3 percentage points more then the U.S. Federal Reserve's target rate for overnight bank lending; last year, the state paid 1.38 percentage points less.

Bank of America Corp. and Goldman Sachs Group Inc. are leading a group of investment banks taking orders from individuals today and tomorrow, with final pricing set for Oct. 16 when institutions such as funds and insurers place orders. During the first day of the so-called retail order period, individual investors said they wanted to buy more than $327.4 million of the May notes and almost $1.5 billion of the June notes, Dresslar said. The preliminary tally of $1.837 billion represents 45.9 percent of the deal. Last year, California collected $1.65 billion, or 23.5 percent, of the note sale during a three-day retail period.

California Governor Arnold Schwarzenegger, who appeared in radio advertisements pitching the bonds to state residents, said he bought some. He didn't say how much he purchased. "It's clear that the first day of note sales to Californians has gone extremely well and exceeded expectations, Schwarzenegger said. "These are good, safe investments that will help protect vital state services."

California's notes this year carry ratings of MIG1 from Moody's Investors Service, the highest possible. S&P and Fitch Ratings assigned their second-highest short-term ratings of SP1 and F1, down from SP1+ and F1+ last year. S&P placed California's long-term general obligation rating of A+ under review for possible downgrade Oct. 10, citing "concerns over the ability of the state, as a result of recent market conditions, to successfully access the short-term market to meet its pressing cash flow needs."

The state, the biggest borrower in the municipal-bond market, has $51 billion in general-obligation debt outstanding and is rated A+ by Fitch Ratings and a comparable A1 by Moody's Investors Service. Schwarzenegger two weeks ago told the U.S. Treasury his and other states may need emergency federal loans if they aren't able to tap the debt market. Last week, the Republican governor said the need had lessened.

Japan government to freeze its share sales to aid prices
To ease selling pressure on domestic stocks, the government plans to freeze the sales of shares it acquired during past financial turmoil, Finance Minister Shoichi Nakagawa said Tuesday. It also intends to revive legislation to enable public-fund injections into faltering regional banks and extend a mechanism to protect life insurance policyholders with taxpayers' money, he said.

The steps are the cornerstone of a policy package Nakagawa announced to cushion the blow from the global financial crisis. "Japan's financial system remains stable, compared with what's happening in the United States and Europe," said Nakagawa, who doubles as state minister in charge of financial services. "We have put together the measures that we need right now, after taking into account falling share prices and other factors."

On Tuesday, the Nikkei 225 index gained 1,171.14 points to close at 9,447.57, more than recovering the 881.06 points it lost Friday. The government bought shares from large banks between 2002 and 2006 to reduce unrealized losses on their stockholdings and began selling them on open markets in fiscal 2006 after share prices stabilized.

The Bank of Japan, which bought shares in a similar campaign between 2002 and 2004, will also be asked to freeze sales. The government plans to reinstate a law that expired in March, to authorize recapitalization of regional lenders with public funds. It has also slated legal revisions to extend by three years a safety net under which public funds can be used to protect policyholders of failed life insurers.

The government will seek tighter monitoring on the practice of short selling, a factor behind falling share prices.
The Tokyo Stock Exchange will be required to publish the value of shares short-sold every day for each industry sector, up from the current monthly disclosure.

Baltic Dry shipping index warns of tough times on the horizon
The Baltic Dry shipping index, which has been flashing amber signals about the world economy for the past couple of months, is telling us there is something going badly wrong because it is now stuck firmly on red.

The index, a proxy for world trade flows, suffered its second biggest-ever fall yesterday, to 11%, which took it down under the $2,000 mark and it fell another 8% today to $1,809. The drop means it has fallen more than 80% since July's peak of around $12,000 and is now at a three-year low.

The index has long been seen as a good leading indictor of future economic production levels because it charts the cost of freight movements in 26 of the world's biggest shipping lanes of "dry" materials, such as coal, iron ore and grain which feed into the production of finished goods some weeks or months ahead.

Think back to the first part of the year and there was a boom in oil and commodities prices, which pushed up demand for the ships to carry them. Now we seem to be stuck in the bust phase. We know that oil and commodity prices have fallen sharply because demand has faded in the face of high prices and because the world economy is being deflated by the global financial crisis.

There is some hope today that the worst of the financial crisis may be over, thanks to the mass injections of capital into banks by governments in Europe and the US. But the damage to the world economy is already a fact of life and the Baltic Dry is pointing to a further slowdown in both output and inflation in many of the world's economies.

The index may also be telling us something scarier. It may be telling us that the world's great industrial powerhouse, China, could be in trouble and that its imports of raw materials are collapsing at a far greater pace than the slow slide in demand from the West for China's finished goods would imply.

There have been increasing concerns about China this year. It has been booming for years and growing, if the official figures are to be believed, at more than 10% a year. That has, in turn, given rise to a stockmarket and housing market boom which now look to be going pop, as ours have done. The great Asian miracle economy might now be coming apart at the seams, in spite of the official figures suggesting everything is stillfine. But the Chinese authorities cannot control the Baltic Dry.

Wall Street Skid Prompts Calls for Interest-Rate Swap Guarantee
The executives who devised a way to guarantee private energy deals after Enron Corp.'s collapse will use the same approach to soothe concern that traders can't honor bets in the $400 trillion interest-rate swap market.

Clearport, formed a year after Enron went bankrupt in 2001, uses the New York Mercantile Exchange's clearinghouse to guarantee over-the-counter energy trades. Derivative traders said the same model can bolster confidence within the markets for interest-rate swaps, used by almost every buyer or seller of debt to protect against swings in rates. "This is an extraordinary opportunity," said Tim Woodward, European head of exchange-traded derivatives at UBS AG in London. "I can't imagine you will find any investment bank in the space who thinks this is not the right time to examine this."

The failures of Lehman Brothers Holdings Inc. and Bear Stearns Cos., sparked by bad bets on subprime mortgages, fed panic on Wall Street that other big banks wouldn't make good on trades. Lehman was among the top 10 counterparties for trades of credit-default swaps, prompting the Federal Reserve Bank of New York to seek ways to reduce market risks. Supporters of the clearinghouse model say it redistributes risk to a number of institutions, not a single counterparty.

Wachovia Capital Markets estimates that clearinghouse revenue for credit-default swaps, used to hedge against the risk of loan defaults or to speculate on creditworthiness, may reach $100 million within a year. The interest-rate swap market is almost seven times larger, making it the world's biggest over- the-counter market.

Two of Clearport's creators, Vincent Viola and Robert "Bo" Collins, were chairman and president, respectively, of Nymex in 2001. The third, Christopher Edmonds, was chief development officer at ICAP Plc, the world's largest broker of trades between banks. Their venture, International Derivatives Clearing Group LLC, applied to the Commodity Futures Trading Commission in late August for regulatory approval, a process that typically takes 90 days.

Clearport has grown to be the second-largest producer for Nymex, accounting for 28 percent of the exchange's gross clearing revenue in the second quarter. IDCG, like Clearport, will generate revenue by charging a fee to guarantee each swap. So-called clearing members will have to capitalize the venture with a minimum of $5 million each.

Edmonds will serve as chief executive officer of New York- based IDCG, replacing Collins, who has no management role at the company. Viola is a founder of the clearinghouse and remains involved, Edmonds said. Until recently, investment banks and companies such as New York-based insurer American International Group Inc. that traded interest-rate swaps were perceived as solid counterparties. It was much the same in credit-default swaps, where traders relied on the ability of a single counterparty to make good on trades. That's no longer the case, said Craig Pirrong, a finance professor at the University of Houston.

"Some of the major dealers have disappeared and the rest of them are under a cloud, so that really changes the competitive environment," Pirrong said. "There's a very clear parallel in what was going on then in the energy space and what's going on now virtually everywhere." IDCG aims to guarantee existing swaps starting Dec. 1, said people with knowledge of the matter, who declined to be identified because the information is private. The next step would be to offer access by February through third-party trading platforms to execute new swaps backed by the clearinghouse, the people said.

The new swaps might appeal to hedge funds, lightly regulated investment pools generally open only to wealthy investors, and active traders who want access to the contracts without going through a prime broker. It would let hedge funds and brokerages compete for trades in a market dominated by about a dozen dealers. It also would free up capital in an environment where cash is highly sought-after.

Spreads on interest-rate swaps could fall if a clearinghouse were used and public bids and offers were available, reducing trading costs. The price to trade a swap with a bank is now hidden within the overall cost of the transaction and depends on how a bank rates a counterparty's creditworthiness. An inter-dealer broker who reaps revenue of $150 million to $300 million a year "will try to destroy anybody who challenges their model," said Michael Cosgrove, head of North American energy operations for broker GFI Group Inc. in New York.

Nymex forged Clearport at the same time as a similar successful effort by Intercontinental Exchange, its main competitor. Half of Atlanta-based Intercontinental's transaction revenue came from OTC clearing in the first six months of 2008. Several other attempts to clear OTC energy trades failed, including a push by TradeSpark LP. "If the dealers are ever going to get behind something like this, it will be now, and I dare to say that the regulators could in fact insist upon it," said Bill Cline, a former Accenture Ltd. partner.

Fannie, Freddie Debt Spreads Widen to Records on Bank Guarantee
Yields on Fannie Mae and Freddie Mac corporate debt rose to records relative to Treasuries as the government said it would guarantee borrowing by banks, providing bond buyers with competing U.S.-backed investments. The difference between yields on Washington-based Fannie's five-year debt and similar-maturity Treasuries rose 15.8 basis points to 118.2 basis points as of 3:35 p.m. in New York, according to data complied by Bloomberg.

As part of U.S. plans announced today to halt a credit freeze, the Federal Deposit Insurance Corp. will fully guarantee newly issued, senior unsecured debt from some banks. The bank notes initially will probably carry yields greater than those on Fannie and Freddie's $1.7 trillion of debt, reducing demand for so-called agency bonds, said Jim Vogel, an analyst at FTN Financial Group.

"This is a major shift investors will have to digest," Vogel, the head of agency debt research at FTN in Memphis, Tennessee, wrote in an e-mail. The FDIC's coverage applies to all senior unsecured debt issued by certain banks on or before June 30, 2009. The largest seller of U.S. agency debt is the Federal Home Loan Bank system, the series of 12 cooperative lenders owned by U.S. financial companies. A basis point is 0.01 percentage point.

The government is directly helping banks refinance by agreeing to guarantee new securities amounting to 125 percent of the debt they have maturing through June 30. That would enable banks to sell $12.5 billion of debt backed by the U.S. for every $10 billion they have coming due.

Fannie and Freddie, the mortgage-finance companies that own or guarantee almost half of the $12 trillion of U.S. residential debt, were placed into a government-run conservatorship last month following losses that pushed foreign debt buyers to retreat from their securities. The U.S. at the time vowed to inject as much as $200 billion of capital into the firms to support their corporate borrowing and more than $4.2 trillion of home-loan bonds they guarantee.

"It's a not a credit-related issue," Gary Cloud, a senior portfolio manager who helps oversee $500 million at the AFBA Funds in Kansas City, Missouri, said in a telephone interview. "There's nothing that has fundamentally changed." Investors may also be concerned that an increase in supply of Fannie and Freddie debt may hit the market, following reports that the U.S. has directed the companies to buy $40 billion a month of subprime and Alt-A mortgage securities, Cloud said.

"How do they do that? They don't waive their wand," Cloud said. "They sell bonds to raise cash to buy the securities." The difference between yields on McLean, Virginia-based Freddie's five-year debt and similar-maturity Treasuries rose 18.1 basis points to 124.2 basis points.

What keeps the Dow Jones up? Happy thoughts
The cover of today's New York Daily News loudly proclaimed the joy and wonder, the shock and awe of yesterday's Wall Street rally. Right beside the headline, in the middle of a huge red arrow marked "Dow soars to biggest point gain in history," the paper presented a picture of a trader, both thumbs up, sporting a cocky, devil-may-care smile. Inside, the paper carried another shot of its leering cover boy, this time accompanied by another trader sporting a mindless grin.

It was hardly necessary to read the accompanying article, as the pictures told the whole tale: the stock market, after plummeting for a few days, more or less hit bottom. Other countries started pouring money into their banks, calming the panic, and enabling investors to remember that the paper they were passing back and forth sometimes represented actual value. When this happened, the investors proceeded to start buying some of their stock back at ever-increasing rates, causing the Dow Jones index to rapidly rise. Of course, the next few acts in this play are equally obvious: the market will continue to fluctuate as irrational exuberance and irrational caution trade places and seek equilibrium in the Wall Street version of manic depression.

For some people, the wild fluctuations of the market will translate into equally wild emotional rides. In the United States, the land where Calvinism never died, wealth is still considered a sign of rectitude and poverty a mark of weakness. It naturally follows, then, that the relative ebb and flow of our economic fortunes will translate into a similar roller coaster of pride and self-doubt. One need look no further than the cover of the Daily News to see a man who takes responsibility for the strength of the market and, presumably, blames himself for its failings. As stock market players continue to confuse knowledge of the market with the ability to control it, their sense of self will rise and fall with its fluctuations.

The flip side of the unknown trader's BOOYA! grin is a brutal depression, a condition noted by the Reverend Canon Ann Malonee. As the vicar at Trinity Church, the storied house of worship located at the intersection of Broadway and Wall Street, Canon Malonee is something of a spiritual first responder for the financial district. With regard to the recent panic, she stated "I've had a number of people say that this is [...] reminiscent of 9/11," noting that "It's that sense of having the rug pulled out from under them."

Just as the financial crisis has had effects far beyond the environs of Wall Street, the ensuing depression has also spread across the country, leading to a rise in suicides and "mercy killings," as families have realized that they will no longer be able to stay in their homes. In the process, many people facing foreclosure have also turned to suicide hotlines, counseling services, and other community organizations, quickly overwhelming these resources.

According to some experts, this sense of malaise and helplessness is, ironically, having a negative effect on the economy. As a recent CNN poll noted, 60% of Americans think that an economic depression is "likely" to occur in the near future. While economists strongly disagree, many have noted that this widespread perception will actually exacerbate the forthcoming recession. As consumers hoard their money and prepare for the worst, the cuts in expenditures will result in reduced jobs and greater economic hardship. Under the circumstances, it seems like the grin sported by the Daily News' unknown trader may have more power to control the economy than any rational thought he might produce!


Anonymous said...

Hey, all you unwilling to make tip jar contributions, you can click on a few ads on the site.Whatever helps ilargi to continue this blog.

Anonymous said...

All of us must continue to contact our representatives and senators with our outrage regarding the crooked allocation of OUR savings and future taxes to an elite group of fraudsters!!! Spot on Ilargi for this analysis of this criminal theft of our kids & grandkids future!!

Anonymous said...

OK, I think I've got it.

Project this: you are standing in front of a line of 100 people, stretched out perpendicular to your view.

And the person who gave you the 20 Billion $ expects you to lend it out to 5 of the people in the line. And the LIBOR is 'coming in', and the TED spread is falling, and everything in 'the numbers' seems to point to MAYBE, DOWN THE ROAD A BIT, this being a good way to make some cash: loan the $ out at a nice % of return, build on the 'principle', repay the 20 Billion $ and make a tidy li'l profit. Because that IS the name of the game here: PROFIT.

Hmmmm, but wait. There's a pretty good chance that at least 10-20 of these folks have a locked safe full of CDS "assets" that they are just praying that they can settle...not through continuing the lending cycle down to the consumer, but through holding onto the cash until their swap-based exposure comes to light, and then having the reserves on hand to settle margin calls without having to go belly up. Hmmmmm....kind of a crap shoot here. To whom do you loan the $$$??? Whom do you trust? They all have their hands out. They all appear sincere and well-mannered.

Oh ya. Another dilemma. You yourself also have a lot of vulnerability with regard to CDS and other worthless instruments gathering dust in your own vaults. AND, there's a pretty good chance---because these derivatives are sold and traded through dozens, if not hundreds, of unregistered, unrecorded transactions---that you may have to face the piper sometime down the road as some OTHER institution gets called to the carpet and one of your CDS bundles is unfortunately involved in the maelstrom.

LIBOR is down, TED is down...things look good. But the reality of the CDS worm leaves the LIBOR and TED spreads inconsequential to your decision-making processes.

Your choice? You sit on the 20 Billion $$$ and pray it's enough to cover your vulnerabilities as the swaps hit the fan over the coming weeks and months. (Of course, the dudes who lent you the 20 Billion are effing pissed and they show up with guns and shyte. Hmmm, what to do what to do?)

"Risk" has changed in ways we could never have imagined 30 years ago. Due to the unregulated nature of the Derivatives market, and because the bonds and other instruments being 'insured' didn't actually have to be 'one degree of separation' from the seller, we have a multi-trillion dollar, multi-trillion tentacled parasitic beast just waiting to bore through the leg of a few major financials....and then it really REALLY IS... bye bye baby.

Anonymous said...

@ anonymous (RE: congressfools)

I have a "better" idea. The age of the professional politician needs to end. The professional politician is nothing more than a fast-talking, know-nothing, slick, lying, self-absorbed, self-important, overly ideological, spoiled, rich piece of shit. These folks have got to go.

In their stead we should have "government by jury". Here's how it would work:

A few thousand citizens over the age of 16 get a letter in the mail stating that they have been randomly selected to become part of a congressional "pool". Another several thousand citizens are randomly selected to serve on "grading pools". These grading pools spend time meeting with those who are in the 'congressional pool'. Grading Pools either vote to pass individuals on to the next level or bump them peremptorily from the pool. The last 545 give or take, fill the seats of the Senate and the House for either a 2, 4 or 6 year term. Term lengths would be randomly generated.

That's it. Simple, democratic, and likely to create a legislative body far more honorable, righteous and effective than anything we've seen in recent time. It has to be better than what we've got now. Christ, anything is.

Anonymous said...

Ilargi said: "...The value of the paper is carefully hidden, and simultaneously the delusion persists that home values will stop going down. Forgive me for not believing that Paulson, Bernanke et al are under that delusion. Nor the one that claims that the banking crisis will soon calm down. They just want power, and planting these delusions helps them get it..."

Dan wonders:

At what point does having power become somewhat of a liability rather than an asset?

Power to do what? To buy big estates and protect them with milita forces? To be the Lord of the Manor? To hold onto your multi-million dollar homes? If indeed we are heading for what it sure seems like we are heading for, then it could be fair to argue that being one of socities so-called "power brokers" may, in fact, be rather a tenuous position to find Those of us who are destined to become part of the poor masses of the disenfranchised, robbed, citizenry will have each other. We will build small communities, communities of barter and sharing and mutuality. We may suffer hardships, but we will suffer together, and from this we will find strength and beauty. People like Paulson and Bush and all of the other plutocratic sons-of-bitches will continue to rule and demand and live lives of desperate anger, fear of loss, and quarenteen. They will be isolated...and while they may suffer the fool's illusion that wealth and power bring happiness and contentment, they will in fact suffer a fate far worse than any I intend to suffer---I may be hungry and cold, but I will be part of something rich and suffused with love. Their existences will be fueld by greed and lust for power--and their lives will forever exist in darkness and shadow.

Anonymous said...

This video gelled the concepts I learned on TAE:

bluebird said...

Dan says" At what point does having power become somewhat of a liability rather than an asset?" and "we have a multi-trillion dollar, multi-trillion tentacled parasitic beast just waiting to bore through the leg of a few major financials"

I'm thinking this beast is so huge, it is eventually going to come back and bite those who created it. What wealth they think they have, is on paper, just like the rest of us...and it is all worthless.

Eventually, those who will have power, will have the tangible assets.
Anonymous Reader

bluebird said...


If the powerful, only have tangible assets, what kind of life is that?

el gallinazo said...

Well, if they were happy, then they wouldn't be scumbags. Not a mystery.

Anonymous said...

to all of you shedding tears for the "powerful" - bull sh.t

cut that out

you are going to revel in self pity not community building

cold starving and sick while, yes, the mansions guarded by tanks will have all their lights on to better see the caviar

so Dan, bluebird - don't take your readers for fools, don't feel sorry for the rich - or are you waiting for the "tickle down" - the only thing trickling down from the upper rungs of the ladder is SH.T

sorry for being so irate - not to offend anybody, but those emotions for the "oh so unhappy "rich and powerful"" are TERRIBLY misplaced.


Anonymous said...

not shedding tears, trust me...i've never been this angry...and THAT'LL surely kill me before starvation and freezing to death do/does...

So...just looking for the Monty Python in all of this...shit

Anonymous said...

Monkey Business

bluebird said...

@anonymous !@@#$@#$%@^&

Maybe I should have left a sarcastic indicator? No way I feel sorry for those rich scumbags, far from it. I have more urgent and certainly more important things to do to prepare for the upcoming meltdown.
Anonymous Reader

Anonymous said...

Aw, come on guys be charitable , you gotta feel sorry for the rich and powerful, all they really got is each other. That's not a lot,

Anonymous said...

Don't know if it's already been posted, but CalculatedRisk is now posting daily Crisis Indicators.
Useful stuff in one place.

Anonymous said...

I think that being rich and powerful is only really useful when you can enjoy being rich and powerful, which means that you have to travel in circles of less rich and powerful people. But not poor or disenfranchised people.

Being spoiled and pampered in a gated community is no fun when you cannot go shopping outside the gates for fear of being mobbed as one of the oppressors. Similarly, being able to fly in your private jet is not very useful when the angry poor are shooting at your jet as you try to land. Kunstler paints the image of motoring in the Long Emergency as being only for the rich and privileged (as aviation was 70 years ago), but we who cannot afford to motor would be inclined to drift rocks in the direction of a car going past. That's only fun for the poor people.

That's why I am disinclined to see all of our financial troubles as a planned conspiratorial effort; I think that it was just a consequence of many greedy people making the same independent choices, and no regulator to tell them "no".

Anonymous said...


I think participants here were simply reflecting on how ultimately the powerful elites orchestrating the bailout and meltdown are not/will not be happy. Happiness in the sense of "the Good" -- a philosophical reflection.

These corrupt elites fail to realize their interconnectedness with every sentient being, including the common people. Likewise, they have no qualms about destroying our common habitat: the Earth. They delude themselves when they believe that they will be the last ones standing, and that "God" is on their side.

Yes, power corrupts and absolute power corrupts absolutely. All empires and their powerful elites are evil and, of course, lack compassion.

What I find most depressing is the number of common people who have been stained by the elitist-imperial culture. I think of this each time I see a Hummer.

We must seek simplicity and stand up for the underdog.


Anonymous said...

ilargi, the Roubini interview article (from Bloomberg?) points back to this site.

Ilargi said...

Link fixed, thanks.

Starcade said...

anonymous 1350: WHAT FUTURE???

Serious question. I took one look at (the completely predictable fact of) what happened today, and I'm now fairly certain that I will lose my friend and the roof over my head to this economy.

Get it through your head, people: It's all over. The entire US economy (and probably the world's) is going to die. Probably _this year_, definitely within the next couple. I don't even think the United States herself will survive the eventuality.

Make peace with what you will have to do, because you don't have long.

dan w: Welcome to why I believe there is no non-zero value in much of anything anymore. Basically, what people are trying to do is to finance the buying out of one pile of sh*t (at 10 cents on the dollar, if even that) _with all of their other piles of sh*t_. If there ever is transparency of balance sheets and the like, EVERYTHING FAILS. _EVERYTHING_.

As for the "power brokers": Really, without some sort of "death squad" militia, they'll have no power remaining (Real Soon Now), and, more likely, many of them will be dead -- some at their own hand, many at others'. The problem with the concept of community on the level you're proposing is that there is going to have to be a massive shake-out. That's going to mean Martial Law, that's going to mean gang rule, that's going to mean bodies stacked like cord-wood.

I believe Man, at his core, to be a wholly evil creature -- that's why I believe there has to be a God, to guide us through this mess. Otherwise, what stops us from barbarism?

bluebird: No, those with power will be those who can seize said tangible assets -- or who can retain through one degree or another of force.

Vis-a-vis the rich not being "happy": I disagree, to this extent: I believe it has always been the aim of the rich to kill a significant percentage of the world's population off and enslave all of the "others" who remain. That's why a lot of these dogs oppose social programs and spending for the common good -- the infrastructure, then, must collapse and force a purge, either through force of militia, mass unrest, or mass attrition.

Here's the kicker: It is my belief that THIS IS THE DESIRED RESULT. Kill off, say, the poorest 15-30-50 million in "America", and the rest will do what you tell them because _they want to live_. Basically, "live as we want you to live, or you won't live".

Anonymous said...

But the Dow is lower than it has been in ages, while you, the people, have just spent trillions of dollars to keep it up. For one day.

Shit, even Cialis can keep it up for thirty-six hours.

Seriously though (and I've commented to this effect before now): peeps, you should NOT be continuing to pay your taxes.

Anonymous said...

starcade, you're actually managing to cheer me up. Why? Very simple: your extreme pessimism creates a wonderful pole.

Here's the basics as I see them: the less attached and connected to the current wealth extraction system you were and are, the less you really have to fear.

If you want to attract violence to yourself and others around you, there is no finer way to do that than the fear you are manifesting, coupled with the uniquely American faith in their silly guns. Not that owning a gun is a bad idea around now, but it's certainly a very poor plan A, as a final fallback, yes, might come in handy though for most people, it will probably be the direct cause of their death, or indirect. I've lived in Ghettos or close to them my whole life, and I've seen this fear many times, and it's certainly not related to the real dangers of such situations, it's more a self-fulfilling energy that you yourself generate. A very bad option in my opinion.

You'd think the only thing in life is economics, but it's not. It's a big part, but it's a superstructure, not an essence of human existence. Your comments remind me of that. What will remain if Capitalism loses its ability to grow? I'd say reality.

Only in severely distorted societies like ours in the modern Industrial world does this kind of confusion occur.

Will adjustments be painful? Of course. Will people die? Probably. But one thing is for sure, it's the people who stop living in fear and start creating and building real world communities that will do the best.

Good practical places to start: turn off the TV, permanently. Never read any major corporate media, at least not without also having quality genuine balanced analysis such as that provided here.

Make sure to check out this recent Moyers Interview with George Soros. Soros is consistently fairly balanced and sane, he makes a lot of sense in his analysis there, including his comments about the likelihood of disaster.

I suggest reading quality anthropology to get over this absurdly narrow minded vision of human nature, you certainly cannot locate any overall conclusive evidence for that, quite the contrary in many societies in fact. Some tribes are violent, others aren't. And even the violent ones often make quite a bit of sense when you get into it. But there are violent greedy cultures, who only know aggression, and I'd certainly agree that our dominant ones here now are that, but that's hardly proof of this being human nature, that's just looking into the mirror and not liking what you see.

I suggest changing mirrors, and understanding that this is not the first large change that has hit humanity, nor will it be the last. Kunstler seems to have this one pretty much right. Much will change, and much can be improved.

Starcade said...

anon, to me: That would work (the less connected you are to the system, the better off), except for one simple problem:

There are enough people so damned connected to the system that you are left with the real inevitability of a massive shakeout. I understand how most people don't want to look at the reality of a mass insurrection and one man turning against the other, but think: For many millions of Americans, they are not going to have the ability to otherwise continue. We. Will. Not. Be. Able. To. Get. Food. (to play off the riff of a very nice article that I'm sure was posted here when it was available)

That's facts. You're already beginning to see spot shortages. Try getting anything good which is on sale for a good price out there in the last few weeks. Good luck.

You do touch on the problem: For many people, _because of their attachment to their guns_, that IS Plan A. And B, C, and D. Don't think that there aren't a lot of people who have simply existed for the time that they can f*ck sh*t up and go out in a blaze of glory. Kunstler speaks of them well.

I mean, if you have lived with some of the people in ghettos, then you not only understand the fear, but the unmitigated _ANGER_ with which a lot of these people live. When the social order breaks down (and any intelligent person knows it must, and damned soon), that anger is going to come out and it's not going to be pretty when it does.

THAT is what I fear. I fear it because I've seen it, lived it, and had to deal with it within myself as well. I don't fear a gun any more than the simple "fight or flight" motif -- that innate system we all have as animals for self-preservation. I fear what I can do, though -- a lot.

You do say it properly, though -- a severely disoriented society in the Industrial World. We are no longer really a part of the Industrial World... We've built an entire economy on toxic paper, the last 20 years -- and it's about to snap back. Hardcore.

The _moment_ it does, they won't have enough places to bury all the bodies.

Again, I understand that the proper long-term solution is building smaller communities -- the problem is _getting there_. First off, large sections of this continent would have to be essentially rendered uninhabitable (that the systems would not exist for such communities).

Second, what stops gang rule? What stops the Crips, Bloods, Nortenos, (their Southern counterpart that I can't remember the name of), etc. from turning LA into one massive bloodbath over the course of time? What stops roving gangs from taking over said communities and extorting all the resources at gunpoint?

The problem, at core, is that we are a very different "tribe" than most. We glorify this sh*t. And there are so many who are just waiting, chomping at the bit... I mean, think: Can you even walk up the street anymore without some random tough either verbally assaulting you, insulting you (with the intention of starting a fight) or threatening you outright?

If you can, understand there are places where you are not so lucky.

Anonymous said...

If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)

The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.

In the end, the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess. I still have microfilm to read

The Real Great Depression

Anonymous said...

Quote from NPR:

"privatize gains and socialize losses"

Expanded Bailout Differs From Original Plan

Anonymous said...

starcane, as with our financial bubble, the only real way to get to where we need is to deflate our population as well.

We crossed the sustainable human global population barrier around 1985, not coincidentally about the same time we crossed the oil found vs oil produced daily barrier, and the time the current financial credit bubble started.

None of that, in my opinion, is a coincidence.

There is no scenario that supports more growth, more population, etc, so however we stumble to get to where we need to get to is what we will do.

gangs can only exert short term influence/terror, there is only so much to loot, after that, you need to start doing something productive to get food. Last I checked, humans need to eat in general at least once a day. Same for gun nuts, you only have so many bullets, so much gun powder, then you need to get to work and do real stuff.

I'm fortunate to have met people of the older generation, 60-80 years old, different races, and believe me, this gang junk is very new, and doesn't reflect the quite recent reality. It's just one more aberration of our current wasteful corrupt system, you see the signs from top to bottom.

The great grandparents of almost every gang member or survivalist (maybe great grand now) were totally rooted, farmed, worked with the earth, wherever they came from.

We are in a bubble in all ways, and it's not really useful to assume bubble generated thinking is going to sustain non bubble generated reality.

The bubble is going to deflate, already oil is essentially too expensive to pump in new wells in many cases at today's prices. No oil, no 7 billion people, period.

The Buddhists cover this well, we have all, individually, generated a massively inflated, and uttelry false, sense of self worth, that makes the idea of our individual demise an utterly horrible concept. Any healthy society understands that it is the society, not the individual, that matters.

Without resource exploitation growth cannot occur, and without growth, capital structures cannot function. Since apparently the only way we can start to act rationally is to be forced to by material circumstances, then that's what we will have to do I guess.

Remember, no growth, no wealth. And what we need to do, and will do out of biological necessity, is to shrink. Obviously the people who are currently benefiting from this past have tried for 25 years to maintain false growth via credit, but that cannot be sustained. Losing this is good, not bad.

team10tim said...

Hey hey dan w,

Your idea of government by jury has already been explored to some extent. There is a book by Robin P Clarke called The Future Is Here that explains a random representative governance, kind of like jury duty. It's an interesting read. The problem is getting it implemented. You either need to elect some politicians who are willing to undue their own institution and thereby abdicate their collective thrown or a revolution is required.

PS the book is weirdly organized because it starts out explaining how corrupt and incompetent the present system is in order to convince the reader that something 'less bad' is preferable.

team10tim said...

dan w,

forgot to mention, you can read the book online if you follow the link.

Anonymous said...

Anon 8:41 and 7:44

"Silly" and "guns" would not be used in the same sentence by anyone who knew anything about, or had any experience with, firearms.

"Will there be deaths. Probably." You truly are above it all aren't you?...lost in the vanity of your own thoughts and imagination!!

George Soros is NOT our friend (though he may be yours - but I doubt it). The man who broke Britain deems to help the common folk? Yes, Master, I understand now.

Are you really Anon Critic from some weeks back? You seem to have the whole world, not to mention life, completely figured out...and all before (and I would guess decades before) your 60th birthday! I suppose it must be all be related to Buddism in some way I don't quite understand...but thank God for that!


Starcade said...

anonymous, to me again: You're essentially right. The problem is that the infrastructure (and you can take that to mean a social infrastructure or a physical infrastructure) cannot hold 6 billion people on the planet, nor 305 million legal citizens in the United States.

To combat that, you have two choices, and only two: Either increase taxation to the point where there is little point of making money past a certain point (like the US used to), or decrease the population -- and attrition might not do that second job quickly enough. I assert the PNAC Rethuglipigs openly desire and are working toward the latter result -- killing off enough of the poor to enslave and scare the rest.

Hence, we are where we are.

You are absolutely correct that this is no coincidence with the breaking of the credit barriers too. The fact that people can't live without credit is not a small fact -- nor does it, necessarily, have to do with just credit cards or personal credit.

It has to do, also, with institutional credit allowing goods and services to get where they need to go -- the "just in time" delivery model. Well, it's no longer "just in time". There are spot shortages coming up now -- and they seem to be getting progressively worse. Where will we be (or will we be?) next spring?

Now, you are correct about gangs being short-term terror, but keep in mind one very simple concept: To get to the point where productive matters really _matter_ again, you either need to outlast the gangs, eliminate them, work with them (ha ha), or be damned lucky -- but you, as I said before about community building, need to get that far. There will be a violent social upheaval in the next few weeks or months. It can't be held back much longer. You not only have to make sure that you survive it, but that you survive it well enough to have the ability to go to that next step in the process. Even then, you'll still have to deal with pockets of violence and a government which, even more openly than now, can do whatever it wants.

The fact of the matter is: How many, then, need to die -- worldwide? A billion? Two?? 'Cause I think that's where we're going...

Anonymous said...

Starcade, that's about what I think is going to happen too.

GSJ, if you can't get the points, I guess misstating someone else's points is as ok. Most of your guesses are wrong.

If you stop trying to read black and white and look for slightly more complicated nuances I think you'll find a bit more information. Did I say Soros is our friend? No, I said he had an interesting view, worth considering. He does, he's been right more than most in the last years, as such, it's worth paying attention. I respect people who tend to be right, that's why I read ilargi too. Trying to simplify things the way you're doing isn't going to help either you or anyone else, but if it makes you happy, keep it up, it won't affect anyone else.

Do I think the gun nuts trying to hold off the world are doomed? Yes I do, as much as the gang guys are doomed, until they wake up and start to do positive things. Sure it's a fun fantasy, lots of people have it, but it's not very interesting, nor is it something I'd bank my personal future on, but each to their own.

Arguing online is also not in the set of positive things we can do, by the way, you can exchange views, etc, but at some point, you have to realize that things aren't going to turn out the way you think, you will not be in control, no matter how much we have been brainwashed into believing this is possible always. We have to start cooperating and move away from being the problem. Many won't be willing to make this choice, and the elites of course will try their damnedest to retain their status.

Also, since nobody actually knows what will happen materially in the next 10 years or so, I suspect it's best to simply follow known best practices, not known worst primitive ones. We aren't the first people in history to hit real problems and bumps, I think maybe it's easy to get a bit over excited about such things, go to extremes.

America is made out of lots of regions, some will do better than others. I have no idea how the upper classes will do, that's hard to see right now. To me probably the best most realistic course of action is to pick the best region that fits your type and just go with it. Kunstler is right long term about places like Los Angeles, they have no future.

Do I think I'll drift above this all? Probably not, but in the end, who cares, there weren't any guarantees given when we were born. Our obsession with individual self value is going to be very hard to let go of, I certainly expect to see a lot of resistance in the process, why wouldn't people resist losing what they think is worth the most?

Things haven't really changed much over the last 30 years, nothing happening now would surprise anyone paying attention in the 70s, so acting like suddenly everything is radically different.. well, I guess it triggers the panic/complacency switch we seem insistent on having, but otherwise, things are just a bit more... of the same.

Anonymous said...

Starcade, re how many people to reach sustainable levels, the more resources we use now, the more won't be sustained. And all signs point to us using everything up on the process, so long term, it's not looking good, but I'm not going to worry about long term stuff like that, it's a waste of time. People who make the right long term decisions, in my opinion, will do best long term. Maybe not always short term, but definitely long term.

Personally, I find the estimates of the Limits to Growth authors wildly optimistic, re the carrying capacity long term of the earth. And the more people we try to carry long term, the fewer can be sustained long term.

I'm not sure there's really a convincing argument for a hard crash, it seems like a gradual decline is just as likely, maybe even more likely. But it's easier to rouse ourselves to action I guess if we convince ourselves the crash is coming next week/month/ or whatever, maybe it is, I don't know, but I kind of doubt it.

If we lose our consumer culture, who cares, it's worthless anyway.

Anonymous said...

"Most of your guesses are wrong."

[Anon Critic 10:32 pm]

Gee, I only made one guess...and I think I nailed that one!


team10tim said...


I think your update has a typo: The Dow has gone from 15.000 to 8700

I think you mean from 14,000 down to 8,700

Sorry to knit pick, I usually don't care about typos, but with numbers it does make a difference.

Anonymous said...

I believe Man, at his core, to be a wholly evil creature -- that's why I believe there has to be a God, to guide us through this mess. Otherwise, what stops us from barbarism?


When our energy/resource context shrinks, our behavior will follow. This cycle (overshoot, conflict, crash) has been repeated for hundreds of thousands of years.

A good starter point is "The Blank Slate - The Modern Denial of Human Nature" by Pinker.

Anonymous said...

Note on 15.000 :

Ilargi has, since the founding of this blog, used the European number notation: dot where we'd use a comma, and vice-versa.

Ten thousand four hundred sixteen point four five would be:


team10tim said...
This comment has been removed by the author.
team10tim said...


The issue isn't the notation but the number 14.000 vs 15.000

October 9, 2007, the Dow Jones Industrial Average closed at the record level of 14,164.53, this represented the final high of the cyclical bull.

Stoneleigh said...

Anon from yesterday,

Stoneleigh, you think that being in debt is not a good thing, right? But what if hyperinflation arrives soon? Having a mortgage might be OK in such a circumstance, no?

Hyperinflation isn't on the cards for a long time. We're facing the opposite - deflation. Debts quickly become a millstone round your neck during a deflation as real interest rates will be very high (even if nominal rates are low).

Second question: would you pay off part of a mortgage on a house in a city (where your job is) or would you buy farmland (enough for a survival type of existence)? Obviously holding cash long term seems like a long term losing proposition.

Liquidity (cash and cash equivalents, namely short term treasuries) is what you need for the time being to ride out deflation. Being out of debt is important enough to sell and rent if there's no other way. A time will come to buy property and other hard assets with what you can preserve by cashing out now (as long as you don't trust it to the banking system in the meantime), but that time isn't here yet.

Anonymous said...

Anon @ 10:32pm

Thank you for some sane comments. Nice to see someone is is well grounded in reality, whatever that may be.

Anonymous said...

GSJ, seems you have nothing of value to contribute beyond trying to engage in meangingless online debates without saying anything meaningful yourself. This is not at all interesting. But it's also not surprising. Is it panic, fear? Who knows, who cares.

Not a path I'm at all interested in pursuing, but you're of course free to do and believe what you want to believe. I think with a few careful selections some people, not all, can do alright, everyone is free to make those decisions themselves, it's a gamble, you take your chances. But sometimes the opportunity comes to put real beliefs to real tests, and only time can tell how it will turn out.

One thing that's increasingly clear to me, perpetuating the same behaviors that got us here isn't going to do much good, so I'm going to try to not do that.

But I'd repeat my suggestion, if you're looking for concrete actions to take now, if you haven't thrown your tv out your window yet, do it, that's a great first step. That helps, by the way, defuse that paranoid fear people develop about all those nasties out there, and lets you deal with a more mundane and far less dramatic real world.

Keep up the good reporting stoneleigh and ilargi, it's much appreciated.

Farmerod said...

The level of Canadian journalism is plumbing new depths. These reporters are either a) comically naive or b) the FOX news of Canada

Ottawa may make (hundreds of) millions on CMHC plan for banks

Stoneleigh said...

Bluemarble (from yesterday),

We live in a co-housing community (60 households, 2.5 miles from center of 35,000 city) where most people are PO aware.

Sounds good to me.

There are discussions in our neighborhood about pulling $ out of our bank (most of us use the local bank) and we are worried about contributing to the problem and causing a failure of our community bank. In other words, we don’t want to add to the mess by fleeing.

I understand, but there's really no such thing as a safe bank. If you leave what you have there, you could easily lose it all and no one would benefit from your having done so (least of all you).

Most people are taking small measures of stocking up on basic supplies.

Good - the more people around you who are prepared, the better off all of you will be. Go for no debt, cash under your own control and supplies that give you a measure of control over the essentials of your own collective existence.

We’re wondering, what can communities do to weather this catastrophe? We realize that just doing what is the best for our own individual families may end up costing other families. What can we do to balance individual interests with common good?

Most importantly, keep up that cooperative spirit through thick and thin. Look after each other and prepare together to the extent that you can, so that as many people as possible around you will have some reserves to fall back on.

In particular, my family is fortunate enough to have some resources still remaining that my partner inherited from her mom. Our financial advisor is STILL recommending that we put these liquid resources in mutual funds. We already have significant resources in mutual funds (socially responsible for what that’s worth)...probably too late to do anything with them.

Most mutual funds will probably be wallpaper unfortunately. You may be able to get out of them on the next substantial rally that lasts more than a couple of days (and don't buy any more). A rally is approaching, although I don't think we've seen the low for this move yet. My guess is still that we'll break the October 2002 low (DJIA about 7500) at least. Liquidity is what you need now.

So, should we put $100,000 into our community infrastructure? For example, should we use these resources toward infrastructure such as energy (many of us have solar panels on our houses), wood based heating to back up the gas, water (our water comes from the town now but we have some ponds we use for food production, a greenhouse?

You are very public spirited, which is all too rare. I would suggest you balance the needs of your own family and your community. You need to keep at least several months worth of liquidity, but you could certainly invest in some community infrastructure as well, especially if your neighbours would pitch in too.

Exactly what would be best is pretty site-specific. A heated greenhouse would extend your growing season. We're putting in one with a radiant floor fed by our outdoor wood-fired furnace. You can insulate them with something as simple as soap bubbles blown between two layers of transparent wall (I'll have a look for the link when I get a chance). Wood-fired furnaces can heat several structures including both greenhouses and homes.

Hand tools, water filters (see Big Berkey), garden implements, solar battery chargers, solar cookers, wind-up radios, grain mills, human-powered generators, heirloom seedsand many other things would be useful for you and others.

It still seems risky to spend that amount of money rather than saving for a rainy day.

It is risky. Make sure you hang on to plenty of it in liquid form as there are many, many rainy days ahead. You'll need money to pay your running costs and the property taxes that are sure to go up.

I do know a lot about organic agriculture since I am one of the few research scientists who has been studying these systems for 20 years! Hopefully this will be of some value in the coming years.

Great skill set! It should be very useful indeed, to you and your community.

I want to thank both of you for your efforts.

You're very welcome :)

I found your site from the DailyKos where a few diarists were translating your analysis. When I read these I decided I needed to understand something about the financial world.

Yup. Finance is critical at the moment. That's why Ilargi and I concentrate on it - the timeframe is shorter than for other crises such a peak oil, and those who don't navigate this one won't have any freedom of action to deal with subsequent crises.

Based on what I learned from reading your site and other financial info that was clearly influenced by your analysis, I convinced my partner to pay off our mortgage with some of the resources she inherited from her mom's passing. We did this 2 months ago even though her financial advisor was recommending investing in the market. Whew!

Great :) Too many financial advisors can't see the wood for the trees. They really don't know much beyond the basic mechanics that apply during normal times (or what's passed for normal recently). They almost never question the assumptions the system is based on. Almost all of them are as much a part of the herd as anyone else.

If you need any agricultural advice in the future I will be happy to help you in anyway I can.

Thanks for the kind offer - much appreciated :) Your climate and mine here in Ontario aren't too different (one hardiness zone different perhaps?). We're still learning as much as we can, but it's a slow process. Ilargi and I were experimenting with companion planting this summer (three sisters - corn, beans and squash - grown in the old native pattern). Next summer we'll be doing much more.

Anonymous said...

I am glad to see that people[our readers] are making concrete efforts and personal mitigation efforts.I have spent most of the last 8 years since the y2k non-event continuing a switch to low-energy type life.Its true,I live 20 miles outside a fair size city,but if order,and a continuation of something resembling a civil society continue,I think it will be in Portland Oregon.I am confident that the local folk around will "tighten up"the same way I saw happen at the crisis that didn't happen.Most folks I speak to have figured out that the shit has hit the fan...and they are to a man,[or woman]starting to look at what the spray pattern is.

Starcade,its not going to be fun.People are going to lose hope,and ,in their pain and rage, will strike out at whom ever they see as the nearest,clearest target.The Rich.I think conspicuous consumption is a suicidal tendency now,and will be for a long time.It is time to keep low profile,and do your business in as much privacy as possible.

A good friend at work believes those whom are truly wealthy[generational] understand it is time to give back.I,ask him why,as they are acting as if They now will seize complete control thru a tool like Paulson,his logic was interesting.He said"The wealthy of every country are usually fairly bright.They have the example of the french aristocracy as what happens when you push a population too far.In various fashions,this has happened in every land,when the wealthy get too greedy.Besides,there is too much money to be made re-structuring the entire usa into a low energy entity"I hope he is right. I have little desire to live in a bad sci-fi flic.

Today I re-established my rabbit habit.I kept bunnies for 6 years,then tired of the work,and hassle.As I expect my hours to get cut back in the future,I want my little fertilizer factory/pets or meat operation to fire back up.With Comfry,and Himalayan blackberries for base food,cost is way low...payback high.

The bees are clustered...will see in a few months what my winter kill is.

I suggest a book on line called"Possum Living"by a woman named Dorthy Freed for some of the best ideas around for low-energy life...

I know that many of us are fearful of whats coming.What I would remind those who are of the same age as I,[half century mark]is that we went thru a pretty bad time back in the 70-80.Here in Oregon,it was rough.The official un-employment rate was hovering around 16-17%.In reality,more like 20-25%.It meant if you wanted work,you took whatever you could find,and were happy to do whatever was required to keep said employment.There will be some young people who are in for a very very hard life soon...who will learn some bitter lessons.
Teen girls working the streets.
Bad not leave anything where it could be boosted,cause it will grow legs
If by some means,the new president is successful in dragging our dead-broke country back from the brink,we will still have years of a hard,hard comeback ahead.And then peak oil.

There was a song from that time that sums it up well...Called "Boney Fingers"

"work your fingers to the bone,what do you get?

boney fingers!boney fingers!"

Time for bed..


Anonymous said...

Is the rest of the world attempting to battle a US threat to deflate the dollar, the, until now, reserve currency of the world? Is that what these massive currency swaps are about?

Anonymous said...

Everyone is so surprized, actually losing faith in the Fed, in the stock market. It's been coming down a long, long time. If you want to read about it, "Barreling Towards Babylon" is at my blog.

Stoneleigh said...

CMH (from yesterday),

Nursing will be an extremely good profession as it will make you very valuable to your community. In a future world of pay-as-you-go healthcare (in Canada as well as the US), having access to a medical professional will be very important. Even in a world with little money, it's a barterable skill. It's hard and emotionally draining, but rewarding too.

Someone else suggested if we go into inflation mode, it may be good to have a mortgage - why?

It isn't, and won't be, good to have a mortgage, as it isn't inflation we face.

I also sold my house - like the other nurses who have posted here.

You'll be very glad you did. With a huge mortgage you would have lost it eventually. Now you've rescued your equity stake, but you need to make sure you look after it carefully. Cash under your own control and some Canada savings bonds would be best.

If housing prices will go up now in the US, why will they decrease in Canada?

I don't think they will go up in the US. Even if they stabilize temporarily with a market rally, which I doubt until we see a much larger rally than a couple of months, they have much, much further to go to the downside. My guess is a price fall of 90% on average.

It has also been said in Canada that CMHC guarantees these mortgages where very little has been put down and therefore we will not see what has happened in the US.

Yes we will. Guarantees like that won't be worth the paper they're written on, any more than deposit insurance will be (which is why you shouldn't trust the banking system). We'll be playing catch-up with the US, meaning that our fall will develop more quickly than theirs did, as is happening in Britain. The real estate market will go illiquid (ie no buyers), inventory will increase enormously and prices will fall once people get desperate enough to drop them.

I sense I will be renting for the rest of my life - and lack of rent controls will be a destiny of poverty.

Think of renting as paying someone else a fee to take the property price risk for you - a very good bet under current circumstances. Rents will fall along with other prices, meaning that for people who have preserved their erstwhile equity in liquid form (and looked after it!), life will be progressively cheaper. As someone with money, you should have a lot to chose from, and landlords desperate to rent to a responsible paying tenant (when most will be unable to pay), will probably compete for you.

Also, the other nurses here indicated they had been laid off during recessions in the past. This also happened to me, so it will probably happen again.

You could well be laid off, as there will be very little money to employ anyone. However, you will have liquid assets from selling your house, and those will go a long way in a deflationary environment where the price of everything falls in relation to cash. What you have could go a long way (so long as you're very careful about looking after it), so you'll be less dependent on employment than most. Besides, you have vital skills that could be bartered if nothing else.

You're in a vastly better position than you would have been if you hadn't sold, and a much better position than most people. Just make sure you don't trust the banking system with what you have, or put in in mutual funds that will be wallpaper.

Anonymous said...


Why will mutual funds be wall paper? Bond funds too? I could see where the stock and hedge ones could go down, a few closed a couple of months ago.

I have ~20 years (frugal) years worth of cash in treasury money market funds, bond index fund and a little in munis for the income. Some stock funds in IRAs, only ~10% total. Got out of stocks a year ago when all this started to look bad.

I hope that if land prices drop enough I could get more, only have 60 acres, not much to live on. Right now land is too expensive.

Anonymous said...

Hi Stoneleigh,

A recent market analysis would have us breaking even with the remaining principle on our 2002 mortgage (our only debt). At this location I’ve got cord wood for the winter, food stored, and several months of liquidity under my control. We are staying put.

I’m not going to gain any liquidity through a sale. Do you consider a mortgage to be the same Debt Millstone as other debt obligations? It seems to me that a mortgage is the easiest Millstone to rid myself of by walking away.

Also, I’m having trouble wrapping my head around an economic cascade scenario resulting in massive job losses before Christmas and how that would affect the masses of homeowners facing foreclosure. Do you see any plausibility in the hints coming from Politicians regarding efforts to re-work loans and other measures to keep people in their homes? (wow, look at my Kunstler-esque “Something for Nothing” thinking! Tough habit to break :).

Thanks again –


Anonymous said...


I receive quite a bit of correspondence from the street and some of it is
great commentary. One mortgage trader writes on an ad hoc basis and his
pieces are always insightful. He is a veteran trader and he always has
some wisdom to impart.

He notes that over the last week 30 year mortgage rates have backed up
over 100 basis points. They have backed up about 175 basis points over the
last 4 weeks moving from 5.25 percent to 7.00 percent.

He makes the salient point that as long as rates remain high there will be
no refinancings,foreclosures will continue, and home prices will decline.

In his opinion rates have climbed because the Great Deleveraging has
incited another episode of forced selling by banks, hedge funds and
insurance companies that need to raise cash.

He expects that the process of deleveraging in concert with increased
supply from the Treasury will work to keep rates elevated for quite awhile

Anonymous said...


Hand tools are pretty basic and the pointwhere one should start. Hammer, brace and bit , Chinese style draw saw (easy to use), vice grips, wire cutters pliers and multi-purpose screwdriver will handle most of the small jobs one has about the house. But, for anyone with a lot of work to do, setting their place in order, one needs to bring in the slaves. The power tools.

By one method or another electrical power will be around for a while yet, even if it is from the small portable gas driven generator. I would gladly ride my bike all day to save fuel, I enjoy riding a bike I don't enjoy hand sawing. I may not be driving a car at 10 dollars a gallon but I know I would still be sawing and drilling. I will definitely be keeping my swede saw sharp but hanging on the rack gathering dust as long as possible


Got to go let out the ducks as it is getting light here, with the three we have we are getting 2 to 3 eggs a day which is more than we need. Have a timer on a light so they are doing pretty well laying but don't know what I will do when the cheap power does go. I can't give them candles as I figure they would get careless and burn the joint down.

Keep up your good works, you and ilargi.

Anonymous said...

Dear Stoneleigh and Bluemarble (from yesterday):

The link to the site describing a working soap bubble greenhouse Located north of Perth, Ontario, CANADA:

Also, a nice article on this method by the Southern Region Sustainable Agriculture Research and Education Program (SARE)out of the University of Georgia and Fort Valley State University at:

Finally, three US patents which describe using soap foam insulation
include and which are available at Google Patents for free (just type in the patent number) are:

6575234 Dynamic heating and cooling of a building using liquid foam

4562674 Replaceable foam insulation system


Nice concept for blocking the night time coolth, yet admitting sunlight when available.


Anonymous said...

I hope your three sisters experiment went better than mine. Just as my sweet corn was becoming ready to harvest the raccoons invaded and pulled down both the sweet corn and the climbing beans. The beans weren't killed, like the corn, however, they had mildew, which affected my harvest. Now, I've relocated and my local botanical garden has a nice display which I will use as a reference to improve a system.

Sure am jealous of those duck eggs, but I'd be even more jealous of some live ducklings.


Anonymous said...


We live in Portland too and have lots of blackberries on our property. I had never heard that rabbits will eat them. Is it just the fruit or the leaves as well? If they will eat the leaves I may get some. We have chickens already but just for eggs.

I hope you are right about Portlanders. We have lived here 11 years so haven't seen the bad times here. I find they are more courteous drivers than most places I've been and hope that's an omen of civility under stress.

Anonymous said...

Good one indagator, saw something along the same line using Styrofoam beads, but bubbles would be so much more elegant.

BTW that reference to Google Patent search is worth a comment on its own. Thanks, didn't know there was such an animal.



Yes and best way to get duck eggs, IMO, is first getting ducklings (rather than buying adults of who knows for sure their age) but they do go through a very ugly stage, just close your eyes for a month or so and they become, if not swans, quite beautiful in their own right.

Anonymous said...

Snuffy and dark_matter, we are in the Portland area also. That's a good start for a village. :~)

Anonymous said...

To Stoneleigh and E. Brown,
I was deeply touched to receive responses from both of you.
I do have mutual funds and I think it may be too late to get them out. I have been told that it is dangerous to take them out as no one can time the market and no one knows where the bottom lies.
I am an experienced registered nurse and have many skills under my belt; however, lack in financial expertise.
I read the difficulty one nurse was having trying to get a bank to get her short term GICs.
I too feel bullied by those who care for my money. I am an excellent patient advocate and know my profession and the related laws and health acts well. However, the world of finance and economics is as foreign as trying to fly a jumbo jet would be and in fact intimidates me. Like the other nurses, I read Ilargi's writing with awe and do my best to dissect what he is saying. Reminds me of reading those articles from JAMA and The New England Journal of Medicine when I was at university - except that Ilargi is a much superior writer.
It is hard to be alone and know what is about to unfold - probably another Great Depression. My dad was born in 1916 and my mother in 1920 - stories of going to school hungry and a grandmother using the same teabag for a month are totally foreign to people my age who grew up having all their needs met. Both my grandmothers were immigrants to Canada and both were widowed with small children. To complicate things, one grandmother spoke no English.
I don't sleep at night - and have become run down. I remember listening vividly to both my grandmothers, parents, aunts and uncles talk about the hardships of the "dirty thirties". Amazingly some of their stories were told with great humor and never with bitterness. I worry about the people I see as patients who are living below the poverty line and struggle with just trying to exist from day to day.
One of my grandmothers had apprenticed as a schoolteacher in England before coming to Canada. She died when I was a little girl, but she taught her daughters the value of having an education and making sure you can be marketable in tough times and are able to rely on oneself. She taught in one room schoolhouses in Canada. My other grandmother supported her 5 children by sewing.
I do hope my chosen career (and I work in the front lines) and all my experience will be an asset for me as we all head into this brutal storm.
My friends think I am crazy, their parents are much younger than mine were - and much more well off. But who knows, with what is unfolding, people like me might find it easier to adjust in the world we are about to come to know.

Anonymous said...

Another Portlander checks in. You can contact me through the URL given, and we can raise a glass of home-made cider in a few weeks - I got not one, but TWO five gallon carboys bubbling away after last weekend's cider pressing! One of the few areas in which life has exceeded my expectations lately.


PS - have you tipped our hosts lately, hmmm?

scandia said...

Outtacontrol, Yes I spotted that article on the globe online this morning. Clicked on the link you sent to read some comments. Boy oh boy what a hostile environment.! Came rushing back to the goodwill on TAE!
Those with stars on their bellies sure don't like plain belly citizens commenting on the play.

Million Blogger March said...

Nice post... had to link to this.

Not understanding the 'eco-nomical vs the economical' difference will be the final bullet to the head of our nation.

As we sink into the greatest economic depression of our generation we will inadvertently cut our nations emissions lower than all kyoto and U.N. proposals to U.S. emissions. All within the next decade (not 2030).

What we need is someone to present this inarguable fact to the people who are making Obamas decisions for him.

If we do not. We will tax the very air plants breath (CO2) and the substance human life is comprised of (carbon).

NONE of this has to do with carbon or CO2 or global warming...
'IF' it did the following facts could be implemented world wide to end it.

Inarguable facts:
Our nation can run several times over on free and nearly limitless geothermal energy:,0,7002141.story

Adding 45 more nuclear facilities would do NOTHING to help.

Solar and wind power have not proven to ROI any nation since the carter era and can not power our nations war machine that is the third largest user of fossil fuels in the world.

It is about taxing everyone for everything to give the few unlimited power and sustainable control.

Really, sit down and listen to the facts in the message. Then base 'change' on reality.

Reality based diplomacy... now that would be 'change'.