Thursday, December 18, 2008

Debt Rattle, December 18 2008: Or is it you?

Edmund Dulac - The emperor's new clothes

Ilargi: I want to mention again something I wrote yesterday in Your lives at zero percent . That is, we're not just talking -or, if you will, no longer- about governments and central banks responding to debt losses with more debt, as most people would phrase the issue.

What we see happening has now, after the recent rate cuts, seriously turned into responding to gambling losses with more gambling. Our governments have no Plan B. It's either reviving the old system, which brought our bankers and politicians what they possess in money or power, or, if that doesn't work .....?...... Yeah, what? Silence, emptiness, or a very loud ear-splitting bang instead? You tell me. I don't know. No Plan B. And, of course, if you play without one of those, you're just plain gambling.

Funny thing is that a large part of the current mess started out with hedges, insurances, against losses on bets. But our "leaders" -is there anyone besides themselves who still use that term? - haven't hedged a single inch of risk. It's all out, double – triple - quadruple or nothing. With your money, of course. I bet they would never play these games if their own cash was at stake. They’d act like Morgan Stanley, and bet against their own stock. Not the most ethical of moves, but surely profitable. Hey, wait a second, you think that maybe.....? Let me get back to that in a moment.

All the bets placed with your money will be lost. And they know it, but if they don’t play, they’ll be thrown out of the casino into the cold dark streets. No, they choose to pick their voters’ pockets for another trillion dollars and play on. The reason we know the bets will be lost is that there are tens of trillions of dollars in hidden losses still in the vaults of banks, pension funds, governments and other institutions. Nothing will restart until they are made public. Why would you leave your money with a bank that you know hasn't come clean on what it’s lost, what its gambling debts are? One day they will be forced to come clean. That day may come soon. Someone will realize (s)he has nothing left to lose. Someone will feel the need to cleanse herself from all the dirt.

We see another trend developing: the race for the carry trade. After the US rate cut this week, Japan tries to cut something off of not much of anything, The yen rate stands at 0.3%, and it's no more than purely ceremonial to lower it even further. But it’ll happen anyway. Both hope of course that investors will borrow their currency to invest in, if possible, Europe –or even China-. Still, unlike in the past decade, where this practice allowed Japan to accumulate huge foreign reserves, it won’t work. The reason is simple: there is nothing left to invest in, there are no profits to be had anywhere. Well, except by betting against assets. Like the US dollar in its newfound subzero state. Hey, wait a second, you think that maybe.....?

See, the Fed sort of hints that it would like to see the dollar fall, as long as it can control by how much. Not a smart move, it can't control that. And that's a bit of a too simple mistake, don’t you think? Makes you wonder how much profit the Goldmans of the world have made on Tuesday’s surprise cut. How many Euro’s were purchased on Monday. Great way to score a big win while the American people get bamboozled once again. Is Wall Street now betting all-out against the United States? Is the Fed doing it too? Would be easy: whoever decides when to cut and by how much has the prime seat for profits. Is this the new way to get their fat fingers on what is left of the wealth of America? It would work like a charm, you know.

Every sector of every economy in the world, each in their own way, still has a long way down to go. The only way to put a bottom under the downfall is to show the world what your financial state really is. That means you have to open and empty all your pockets, and put all your IOU’s on the table. Until you do that, and you stand naked in front of the entire planet, nobody will ever believe you again.

But I don't think -nudge nudge wink wink- that they're after honesty, or anything remotely like it. Wall Street is nothing but an entire mini-cosmos full of Maddofs, Rasputins and Ponzies, and they know when the game is up.

" "Here it is your Highness, the result of our labour," the scoundrels said. "We have worked night and day but, at last, the most beautiful fabric in the world is ready for you. Look at the colors and feel how fine it is." Of course the Emperor did not see any colors and could not feel any cloth between his fingers. He panicked and felt like fainting. But luckily the throne was right behind him and he sat down. But when he realized that no one could know that he did not see the fabric, he felt better. Nobody could find out he was stupid and incompetent. And the Emperor didn't know that everybody else around him thought and did the very same thing.

The farce continued as the two scoundrels had foreseen it. Once they had taken the measurements, the two began cutting the air with scissors while sewing with their needles an invisible cloth. "Your Highness, you'll have to take off your clothes to try on your new ones." The two scoundrels draped the new clothes on him and then held up a mirror. The Emperor was embarrassed but since none of his bystanders were, he felt relieved. "Yes, this is a beautiful suit and it looks very good on me," the Emperor said trying to look comfortable. "You've done a fine job."

"Your Majesty," the prime minister said, "we have a request for you. The people have found out about this extraordinary fabric and they are anxious to see you in your new suit." The Emperor was doubtful showing himself naked to the people, but then he abandoned his fears. After all, no one would know about it except the ignorant and the incompetent."

Now, there's one more question I have for you. Please think about it for a second.

Who would you say plays the emperor in today's world? Is it the Wall Street bankers, and the politicians in whatever country you live in?

Or is it you?

Who's being played for a fool here?

Bank of Japan to Do the Unthinkable - Again
Japan's central bank is about to do something it finds unthinkable -- again. Expectations for another interest-rate cut in Japan have jumped sharply this week. A cut Friday won't bring rates to zero, but they'll get close. For the Bank of Japan, this will mark a return to familiar territory -- interest rates were cut to zero amid economic crisis in 1999 and stayed near that level for years after. But familiarity in this case doesn't equate to comfort. The BOJ's generals now -- who were its colonels a decade ago -- have a long list of concerns about the problems low rates can cause.

They leave the bank with little room to maneuver if things worsen, and cutting rates all the way to zero eliminates a critical pricing mechanism for public markets. Outright buying of commercial paper -- another move that could be announced Friday -- opens the BOJ up to corporate default risk, while buying more Japanese government bonds could skew its balance sheet. At another central bank these might only be one side of the argument, but at the BOJ they are the foundation of institutional inertia against cutting rates so low.

Even after the BOJ bowed to political pressure and cut rates in 1999, its unease with the situation had it rushing to raise rates again as soon as possible. Too soon in fact; just six months after raising rates in 2000, the BOJ had to ease again. (This flip-flop had a top political official publicly calling the BOJ governor of the time a "numbskull.") The argument for a cut, meanwhile, is straightforward: Deutsche Bank, for example, thinks the economy may be heading for the worst recession since the end of World War II.

It was the public recognition, from BOJ chief Masaaki Shirakawa, of the economy's dire situation that sparked the speculation of a cut on Tuesday. The Federal Reserve's own cut a day later added to this; a cut in Japan will prevent the yen from strengthening further against the dollar. Overnight interest rate swaps now reflect a 70% chance of a 20-basis-point cut in the policy rate on Friday, to 0.10%. Such a move might be unremarkable elsewhere, given the state of the world. But for the BOJ, it'll mark a step into the past -- a step it's loathe to take.

Japan seen cutting rates as OPEC cuts don't lift oil
Japan's central bank meets on Thursday poised to drive rates close to zero to help the economy hit hard by crumbling global demand, a decline underscored when OPEC's biggest ever supply cut failed to lift oil prices. The Bank of Japan is expected to cut interest rates from already rock-bottom 0.3 percent on Friday after the U.S. Federal Reserve's dramatic rate cut, but stop short -- for now -- of reviving a policy of flooding markets with massive amounts of cash. The Fed slashed U.S. rates to 0-0.25 percent, pushing the dollar down to a 13-year low near 87 yen on Wednesday and adding pressure on Japan's central bank to join another round of rate cuts when its policy meeting ends on Friday.

The Philippine central bank was also expected to leap into action on Thursday, possibly trimming rates by half a percentage point to help spur economic growth. The severity of the global economic downturn sparked by the U.S. mortgage market meltdown last year prompted policymakers to look for unconventional tools after many have already slashed rates to historic lows and rushed out massive stimulus packages. Bank of England Deputy Governor Charles Bean said in an interview with the Financial Times zero rates were also a possibility in Britain, on its way to its first recession since 1990s.

After a recent string of gloomy data, Japan's government was set to downgrade its assessment of the recession-hit economy in December, the Nikkei newspaper reported. "If the BOJ shares the government's view on the financial situation, I expect the bank to take whatever steps are necessary," Finance Minister Shoichi Nakagawa told reporters. Japanese authorities also warned of possible intervention to stem a surge in the yen, battering exporters, such as carmakers, already hit by collapsing global demand. "We'll deal appropriately with it including currency intervention," Chief Cabinet Secretary Takeo Kawamura told a news conference.

In a sign of the worsening woes, the head of Japan's auto industry lobby said that the yen's current strength would have a profound negative impact on domestic carmakers, saying he hoped foreign exchange markets would return to stability. "Sudden forex moves, especially big ones, will not only hurt short-term corporate profitability but also make it very difficult for companies to make medium to long-term plans," Satoshi Aoki, chairman of the Japan Automobile Manufacturers' Association, told a news conference.

Japanese demand for new vehicles will likely fall 4.9 percent in 2009, the group said, predicting the first drop below 5 million vehicles in 31 years. The dollar was hovering at around 87.75 yen off its 13-year low and touched a 2-1/2-month low against the euro as the U.S. rate cut widened the interest rate differential in favour of the euro zone currency. Expectations that the Bank of Japan and other central banks in the region will follow the Fed's lead and drive borrowing costs near record lows lifted bank shares in Tokyo and helped most stock markets in the region clock up moderate gains. Japan's Nikkei average closed 0.6 percent higher and the MSCI index of stocks in Asia-Pacific outside Japan was up 1.3 percent by 0630 GMT.

Oil prices steadied at around $40 a barrel on Thursday, near its lowest in more than four years, a sign that slowing demand was trumping OPEC's biggest-ever production cut. The Organisation of the Petroleum Exporting Countries (OPEC), keen to build a floor under dipping prices, announced on Wednesday it would cut 2.2 million barrels daily of output starting January 1, slightly more than expected. "The world economy is driving the price more than anything OPEC can do at this state," said Gary Ross, CEP of consultancy PIRA Energy. "It will be hard for the cuts to have any traction with regard to price in a deteriorating economic environment." South Korea, one of Asian economies hardest hit by the global financial crisis, said on Thursday it would launch a 20 trillion won ($15.1 billion) fund in January to help banks replenish capital and encourage them to lend. In Germany, the country's leading think tank Ifo is expected to announce another drop in its closely-watched business climate index after it hit a 16-year low last month.

As the Fed Flattens Rates, the Dollar Gets Bruised
The dollar is sliding back into a rapid downward trajectory as the United States enters a new era of ultra-low interest rates and investors reassess the currency’s worth in a drawn-out recession. A day after the Federal Reserve adopted a near zero-interest rate policy to stimulate the economy, the euro jumped as much as 4 cents against the dollar, the largest single-day move since the euro’s birth in 1999. Against the yen, the dollar tumbled to 87.14, the lowest level in 13 years. The dollar was also weaker against the pound and the Swiss franc. "This is a market movement that has surprised me," said Stephen Jen, global head of currency strategy at Morgan Stanley. "It is so rapid and so large, and something very real."

The dollar — which on Wednesday rose as high as $1.44 against the euro from $1.39, before closing at $1.43 — had enjoyed a surprising rally since September, after Lehman Brothers'  collapse forced hedge funds and other big investors to liquidate assets and return money to the United States.   It continued to strengthen even after the government’s initial plan to shore up the financial system foundered, reaching as high as $1.2453 on Nov. 20. That counterintuitive shift seemed to highlight the dollar’s role as a safe store of value in times of crisis, despite the recession. But the dollar’s brief appeal in recent months mainly reflected a lack of better options. While much has been made recently of the euro as a new rival, the currency used by 15 European economies has weakened as recession struck the Continent. At the same time, Japan and other powerhouses in Asia quickly succumbed to a global deceleration.

Now, the landscape is shifting. The Federal Reserve’s decision to keep interest rates near zero "for some time" is a tacit acknowledgment that the recession will worsen before it improves, investors said. "There’s a reason behind the fact that the Fed had to go this low," said Franz Wenzel, deputy director of investment strategy at Axa Investment Managers in Paris. "The U.S. economy is in deep trouble." With virtually no more room to manipulate its main lever for the economy, the Fed has also been running its dollar printing press to flood credit markets with liquidity.  In just a few short months, the central bank has effectively become a substitute for banks and other lenders, especially in the commercial paper market and others that remain frozen to certain economic transactions. The Fed also stands ready to buy mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans.

And while some economists are predicting a mild recovery in the second half of 2009 as the Fed’s actions and a $700 billion stimulus plan promised by President-elect Barack Obama raises demand, unemployment could yet hit double-digits.  Taken together, the effect is one of greater downward pressure on the dollar — a dynamic that economists expect will continue for the foreseeable future. "Aggressive quantitative easing by the Fed should add to the U.S. dollar supply globally and undermine the value of the dollar," Robert Sinche, the global head of currency strategy at Bank of America in New York, said in a research note. Currencies normally reflect the underlying fundamentals of an economy, and slow, controlled declines or gains allow businesses and investors to plan rationally for the future. But even by the standards of currency markets, the whipsaw nature of the dollar’s recent movements has come as a shock to many investors who expected the dollar to stabilize at a stronger level.

Powerful interest rate differentials have played a large role, ensuring that investor appetites at this turbulent moment are directed toward other currencies. The benchmark rate of the European Central Bank is 2.5 percent, far lower than when the financial crisis began, but still more than in the United States. The Bank of England’s rates are headed down, but are still higher than the Fed’s for now.  That reduces the return, or yield, on dollar-denominated assets.  Ashraf Laidi, chief market strategist at CMC Markets in London, called the policy "the Fed’s yield assault on the dollar."  On some level, investors are also pondering a calculus that has existed for years but never seemed as real as now. American consumers have long needed credit from the rest of the world to keep up spending. As they pull back, a painful recession is the result. The logical corollary for the currency trade, said Mr. Wenzel, is that the flow of dollars into the United States is bound to weaken, and the exchange rate along with it. "The recession trade is still on," he said.

Fed cut sparks bets against US dollar
By cutting rates to just above zero and promising to hold them there until the economy recovers, the Federal Reserve has created near-perfect conditions for a one-way bet against the U.S. dollar. After four months in which the U.S. currency recorded its biggest gains since 2002, the dollar fell 4 percent yesterday against the euro, one of the largest one-day declines on record. In the past two weeks, the dollar has lost 12 percent of its euro value, reversing just over half the gains racked up since July. Against a trade-weighted basket of major currencies, the dollar is down 8 percent, wiping out almost half the previous 20 percent gain in four months. And against gold, the dollar is down 14 percent, partially reversing an earlier 25 percent gain.

The sudden turnaround has nothing to do with the economic outlook or trade and financial flows. The outlook for the U.S. economy is broadly unchanged. Business activity looks set to continue falling during the remainder of the year and well into H1 2009, with any recovery unlikely before H2. But the outlook has not changed in the last ten days, and the euro zone, Japan and China seem unlikely to fare much better. Meanwhile, underlying trade and investment flows have actually shifted in ways that should be dollar-supportive. After six years in which the burgeoning net offer of U.S. assets to the rest of the world weighed down on the currency, net asset sales have declined substantially over the last year and should remain limited over the next 6-12 months. Slowing growth and falling oil prices are cutting the current account deficit, while overseas asset liquidation and balance-sheet consolidation have reduced financing requirements on the capital side. Both trends should continue well into next year:

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The dollar's savaging has instead come at the hands of speculative flows, as the market adjusts to the consequences of unexpectedly aggressive easing by the Fed that have set the scene for more selling over the next few months. The Fed's decision has sent a clear signal that borrowing to short the dollar will remain cost-free for an extended period. As a result, the dollar risks replacing the yen as the new funding currency of choice for carry traders. To speculate against a currency, you need to be able to borrow it cheaply and in large amounts. The Fed has now guaranteed both. In the early stages of the crisis, lack of dollar liquidity in overseas centres such as London and Frankfurt sent interbank rates for dollar borrowing surging and propelled the currency higher.

But the Fed has addressed the dollar drought by extending massive swap lines with overseas central banks, while liquidity in the domestic markets remains at all-time highs, with bank vaults groaning with excess reserves and money market rates little more than zero even before yesterday's reduction in the official target. By shaving the target cost of overnight costs to just above zero, and reassuring investors it will hold rates at that level for the foreseeable future, the Fed has essentially given traders a cost-free way to borrow overnight, roll positions forward consistently with minimal rate risk, and invest the proceeds in higher yielding assets. The Fed clearly hopes the increased borrowing will be used to purchase higher-risk financial assets and restart the securities markets inside the United States, as well as financing higher levels of consumer spending and business investment.

But overnight money is fungible. It could just as easily be used to fund purchases of higher-yielding currencies and assets overseas.
For the past decade, the yen has been the favoured funding currency for carry traders exploiting yield differentials. Investors have borrowed plentiful funds at near-zero cost in the Tokyo market, sold the yen, and invested the proceeds in higher-yielding currencies such as the Australian and New Zealand dollars, and the euro. Carry trades financed such huge asset acquisitions and put so much upward pressure on exchange rates of target countries that the Reserve Bank of New Zealand despatched an unusual mission to Japan last year to warn Japanese investors about the risks of carrying trading, talk down New Zealand's real estate market and try to stem the inflows.

One consequence of Japan's zero interest rate policy has been the leakage of plentiful liquidity abroad rather than to restart domestic lending. The main danger with using the yen as the funding currency has always been its residual strength, unpredictable appreciation against the U.S. dollar, and resulting sharp swings in the crosses against other currencies. Now that the Fed has matched the Bank of Japan in cutting rates to zero, there must be a risk the dollar will take over from the yen as the funding currency of choice, creating a persistent new source of dollar selling. While the dollar may become the darling of carry traders, the Fed's rate cuts and attempts to manipulate the shape of the yield curve would at first glance seem to have brought an early and unexpected Christmas present to the government in Beijing.

As the world's largest owner of U.S. Treasury bonds and mortgage-backed agency bonds, China's State Administration of Foreign Exchange (SAFE) is the largest beneficiary of the bull market in Treasury securities. For years, China's leaders have worried their excessive concentration of reserve holdings in dollar-denominated bonds leaves the country vulnerable to a crisis of confidence in the dollar or a rise in yields triggered by concerns about inflation and debt issuance. Persistent attempts to diversify have been stymied by fears of precipitating the very crisis of confidence, currency collapse and bond sell off China wants to avoid. China's massive stock of bonds is so large there is insufficient liquidity to sell it. Instead the bond mountain has overshadowed the whole market and made it almost impossible to withdraw.

Now the Fed has unexpectedly arranged the strongest bull market in U.S. Treasuries anyone can remember, China has been handed an unexpected capital gain - and a seemingly golden opportunity to start exiting by selling some of its Treasuries into the rally to investors clamouring to buy them. The more the Fed drives up Treasury prices along the whole curve, the more tempting it will become for China to liquidate at least some of its bond mountain, pocket a tidy profit and reduce its excessive exposure to the United States. Heightened risk that SAFE will begin selling bonds and repatriating the proceeds has intensified downward pressure on the U.S. currency.

However, this Christmas present is one that China many never be able to open. In fact, equilibrium across the fixed-income and currency markets ensures the dollar will have to weaken enough to ensure exchange losses from converting the bonds to euros or yen offset any gains China could make from selling the Treasuries at inflated prices into the rally, and keep China's reserves remain safely locked up in U.S. government debt. China had no way out when the Treasury market seemed at risk of an inflation-driven sell off. Now the dollar's sell off leaves it no way out when the market is rallying.

China says lending to US will not go on forever
China warned Wednesday it would not keep lending money to the US economy indefinitely, even as new data showed it had consolidated its position as the top buyer of American government bonds. "China's increased purchase of US Treasury securities should not be interpreted as an endorsement of the assumption that the US can borrow its way out of the current financial crisis," the China Daily said in an editorial. The warning from the state-run newspaper, an English-language daily that mainly addresses a foreign audience, came after the US Treasury Department reported a steep increase in Chinese holding of US Treasury bonds.

China held 652.9 billion dollars of US Treasury bonds at the end of October, up 11.2 percent from 587 billion dollars a month earlier, when China became the largest creditor ahead of Japan, according to the data released Tuesday. Japan remained in second place, with total holdings of 585.5 billion dollars at the end of October. The China Daily said that, given the global economic crisis , the consequences would be serious if China and other nations stopped channelling money into the US economy. "Interest rates in the US would rise to undermine that government's efforts to bailout distressed financial institutions and companies," it said.

China was also constrained by a lack of other places to put its money, according to the paper. "With few options to invest its increasing reserves safely and profitably, China may thus have to buy more US Treasury securities in spite of growing domestic skepticism that such purchases may incur huge losses later," it said. However, as China and other nations help prop up the US economy, the United States should use the window of opportunity to undertake necessary reforms, the China Daily said. "The current strong foreign appetite should not be taken by the US government as solid proof of the long-term value of its Treasury bonds," it said. "Instead, it should race against time to undertake painful but critical reforms to revive its economy before such demand peaks any time soon."

Obama May Seek a Stimulus Plan Exceeding $850 Billion
Barack Obama may ask Congress next year to approve a stimulus plan of around $850 billion, an amount that has grown as the U.S. economy sinks deeper into recession, an adviser to the president-elect said. Obama’s transition team believes the amount, about 6 percent of the U.S.’s $14 trillion economy, is needed to reverse rising unemployment, said the adviser, who spoke on condition of anonymity. The sum would exceed initial estimates by House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, as well as surpassing what some economists and the International Monetary Fund say is required.

The latest proposal is circulating in Congress as Obama’s advisers work with lawmakers to craft a package aimed at improving roads, bridges and other parts of the U.S.’s crumbling infrastructure. The plan probably will also include state aid for unemployment and health-care programs and incentives such as tax credits to promote renewable energy production, lawmakers have said. The president-elect wants to create as many as 2.5 million jobs over the next two years. As unemployment has increased, estimates of what is needed to pull the nation out of the slump have continued to grow, with some economists calling for a $1 trillion spending program. They include Kenneth Rogoff, a Harvard University professor who was an adviser to Republican presidential candidate John McCain, and Joseph Stiglitz, a Nobel Prize winner who served in President Bill Clinton’s White House.

UBS AG economists calculate a global stimulus of 1.5 percent of gross domestic product has so far been lined up for next year. The IMF has called for packages of at least 2 percent of GDP to stem the economic crisis that’s sweeping the globe. European Union leaders are drawing up stimulus packages that together will be worth around 1.5 percent of the 27-nation economy, or around 200 billion euros ($289 billion). China plans a 4 trillion yuan ($585 billion) stimulus. Obama met with top economic advisers this week, including his designee for Treasury secretary, Timothy Geithner, and director of the White House National Economic Council, Lawrence Summers. Obama adviser Laura Tyson said she would like to see a package as large as $900 billion.

House Speaker Nancy Pelosi, a California Democrat, this week said the stimulus package should be in the range of $500 billion to $600 billion. Democratic Senate Majority Leader Harry Reid of Nevada earlier this month said $400 billion would be the low end of any proposal.
Pelosi has said she wants to get a bill to Obama soon after he takes office on Jan. 20. Reid hasn’t set a date for Senate action on the legislation. Last month’s higher-than-expected job losses have added urgency to the effort. The Labor Department reported on Dec. 5 that employers eliminated jobs at the fastest pace in 34 years in November and the unemployment rate rose to 6.7 percent. The Federal Reserve yesterday lowered the interest rate for overnight loans between banks to between zero and 0.25 percent from 1 percent. “We are running out of the traditional ammunition that’s used in a recession,” Obama said yesterday after the announcement.

GM and Chrysler Reopen Talks on a Merger
General Motors Corp. and Chrysler LLC have reopened merger talks, as Chrysler owner Cerberus Capital Management LP has signaled its willingness to give away part of its ownership in the auto maker, say people familiar with the discussions. With cash running low at both companies, Cerberus took the initiative to restart discussions that sputtered just weeks ago. At that time, both GM and Chrysler viewed a business combination as impractical and as a distraction from their mounting liquidity problems. The renewal of the talks could be a way for Cerberus to show Washington -- which is weighing a $14 billion rescue package for the auto industry -- that it wants to cooperate in restructuring the industry, say people familiar with the buyout firm's thinking. And it could offer the firm a way to protect its stakes in two distressed auto-finance companies, GMAC LLC and Chrysler Financial, which are crucial to the survival of the Detroit auto makers.

It isn't clear what effect the renewed merger talks might have on the intricate political calculus hanging over a government rescue of the auto makers. Wednesday, Chrysler said it would suspend production at all 30 of its plants for a month starting Friday. Earlier this month, Congress pressed Cerberus to inject fresh capital into Chrysler as part of any rescue plan. So far, the firm has rejected the idea, saying shareholders of rivals GM and Ford Motor Co. aren't being asked to contribute more capital, and that its investment charter prohibits such a move. One way in which Cerberus might make concessions, however, could be to give away some of its principals' stakes in Chrysler as part of a broader restructuring. That could mean giving a future government auto czar discretion to distribute Cerberus' stake to the United Auto Workers union or even to GM.

Cerberus's equity in Chrysler has already been valued at zero by Daimler AG, which still owns 19.9% of the auto maker. But Cerberus hopes lawmakers would view such a move as a contribution to the restructuring of the troubled industry, says a person familiar with its thinking. Chrysler is asking the government for a $7 billion bridge loan by Dec. 31. The company told lawmakers earlier this month that the financing required for even a short bankruptcy would be higher -- between $12 billion and $15 billion for a proceeding lasting just one year. But its argument got a harsh reception from many lawmakers, who questioned why Cerberus couldn't provide the financing.

For now, the Bush administration isn't planning to force GM or Chrysler into bankruptcy as a condition for receiving government aid, an option that had been on the table previously, say people familiar with the matter. The administration is still wrestling with how much money to give the auto makers and how long the aid should last, according to one of these people. Layered on top of these complex discussions is the fate of GM's former finance unit, GMAC, in which Cerberus holds a majority stake. It also controls Chrysler's Chrysler Financial unit. Part of Cerberus's strategy, say people briefed on the matter, is to protect its majority investments in these two units. A person familiar with the GM-Chrysler talks said that Cerberus is eager to make concessions in order to arrange a combination of Chrysler's finance arm with that of GM. "That is one of the core goals," this person said. In order to achieve that end, according to this person, Cerberus feels it has to be flexible on the use of its ownership stake in Chrysler.

Chrysler's financing arm warned auto dealers earlier this week it may have to temporarily stop making the loans they use to stock their lots with vehicles. Dealers, concerned Chrysler could seek bankruptcy-court protection, have been withdrawing as much as $60 million a day -- about $1.5 billion so far -- from the fund used to help them finance their inventory, according to a letter reviewed by The Wall Street Journal.
The financing units haven't played a big role in the jockeying over an auto-industry rescue. But federal officials are looking at whether any money put toward rescuing the auto companies might go for naught if the government couldn't also save the companies' financing arms, said one person briefed on the talks. "The fincos were ignored in the congressional debate, but they have requests out as well for money," and now they and the auto makers are being considered as a package, this person said.

Chrysler Financial and GMAC are constrained by the tight credit markets. Because they could be classified as banks, they are central to Detroit's argument for receiving government money from the Troubled Asset Relief Program, set up for the financial industry. One developing problem in the auto makers' pursuit of government rescue funds is the state of Chrysler's collateral. Unlike GM, which has assets it can pledge or use as collateral for a federal loan, Cerberus is believed to have pledged all of Chrysler's assets in the summer of 2007 as security for $10 billion in bank debt. GM, by contrast, could pledge its substantial operations in Europe, China and elsewhere, along with trademarks. An analysis by J.P. Morgan Chase & Co. this summer estimated those assets could raise $6 billion to $9 billion for the company. That could make the government feel more secure in lending money to the auto maker.

GM Says Report of Chrysler Merger Talks Untrue
General Motors says a report that it and Chrysler have restarted talks to combine the two ailing automakers is untrue, the Associated Press reports. Spokesman Tony Cervone says GM's stance on the merger talks hasn't changed since it suspended them when it announced third-quarter earnings in November, AP reports. The Wall Street Journal reported Thursday that GM and Chrysler have reopened merger talks, as Chrysler owner Cerberus Capital signaled its willingness to give away part of its ownership in the automaker.

Because cash is running low at both companies, Cerberus took the initiative to restart discussions that sputtered just weeks ago, the Journal reports, citing people familiar with the discussions. The Journal reports the renewal of the talks could be a way for Cerberus to show the U.S. government -- which is weighing a $14 billion rescue package for the auto industry -- that it wants to cooperate in restructuring the industry. And it could offer Cerberus a way to protect its stakes in two distressed auto-finance companies, GMAC LLC and Chrysler Financial, which are crucial to the survival of the Detroit automakers.

Earlier this month, Congress pressed Cerberus to inject fresh capital into Chrysler as part of any rescue plan. So far Cerberus has rejected the idea, saying shareholders of GM and Ford aren't being asked to contribute more capital, and that its investment charter prohibits such a move, according to the newspaper. One way in which Cerberus might make concessions, however, could be to give away some of its principals' stakes in Chrysler as part of a broader restructuring. That could mean giving a future government auto czar discretion to distribute Cerberus' stake to the United Auto Workers union or even to GM, the Journal says.

According to a person familiar with the GM-Chrysler talks, Cerberus is eager to make concessions in order to arrange a combination of Chrysler's finance arm with that of GM, the Journal reports. In order to get that achieved, Cerberus feels it has to be flexible on the use of its ownership stake in Chrysler, the Journal reports.

Why Cerberus Won’t Put More Money Into Chrysler
At the Senate auto-bailout hearings two weeks ago, bailout-celebrity Sen. Bob Corker, a Tennessee Republican, aimed his rhetorical guns at Robert Nardelli, CEO of Chrysler: Couldn’t Cerberus Capital Management, the $27 billion private-equity firm that owns 80% of Chrysler, simply bail out the auto maker itself without government funds? The next day, the House picked up Corker’s battle cry as Rep. Ginny Brown-Wait, a Republican from Florida, asked, "If the private-equity company that currently has the major holding in Chrysler has $24 billion currently in assets and they will not put forth any more money to stave off bankruptcy, how can we, in all good conscience, expect the taxpayers to take on this substantial cost?"

Even weeks later, as the auto makers await word of their fate, Cerberus has committed to not put any more money in Chrysler. Deal Journal spoke to a person familiar with the situation to find out what kind of arguments the investment firm has been making to lawmakers. It basically breaks down into four categories:

Private equity shouldn’t be singled out: Cerberus officials say their private-equity firm has limited partners that include some of the same stakeholders as General Motors and Ford Motor: pension funds, retirees and endowments. "No one is asking General Motors and Ford to pour their money in, and Cerberus has the same shareholders as they do—retirees, pension plans and endowments."

Cerberus has invested all it is allowed to in Chrysler: The $27 billion Cerberus manages isn’t cash on hand. Cerberus’s charter maintains that the firm can’t put more than 5% of its assets into any one investment; to buy Chrysler in the first place, Cerberus had to seek permission from its limited partners to bend the rules of the charter. To inject more money into Chrysler, Cerberus would have to again seek permission. And the chances are slim that the LPs would agree to invest–and potentially lose–another batch of money on an auto maker so close to bankruptcy precipice that it has hired bankruptcy advisers. Cerberus’s LPs know what everyone else knows: that the financial tsunami of the past few months has wiped even more of the value from auto makers than would otherwise be the case in an economic downturn. "The timing of the investment was unfortunate," this person said, and Cerberus "can’t recover."

Cerberus has already put more money behind Chrysler: In June, Cerberus extended lifeline to Chrysler through a $2 billion loan. Any more would push the limits of Cerberus’s duties as an owner. "Cerberus does not act like an ATM machine for its portfolio companies," this person said.

Cerberus is adamant that it isn’t "looking to make money" on a Chrysler bailout: Daimler recently valued its minority Chrysler stake at zero. Cerberus has told lawmakers it would give up all its management fees on both Chrysler and GMAC (in which Cerberus bought a 52% stake in 2006) if the auto makers and finance companies get government money. Cerberus also will allow its equity stake to be distributed to unions, suppliers, and any other constituencies involved in Chrysler’s restructuring.

Ilargi: Know what? Maybe I’ve been giving Bush and Obama -way- too much credit so far. I’ve been saying for ages that no president would want one or more dead carmakers on his watch. Well, sending out his main henchman may well mean that W. just found out it could easily be his legacy, if he doesn't act swiftly. And perhaps Obama has yet to find out that if not now, it’ll happen in his first year as president. I’m not saying all this is so, I simply find it hard to believe both are that ignorant. But still, Paulson’s involvement makes me wonder.

Paulson Takes the Lead in Auto Rescue Talks
The White House and the Treasury are deep into negotiations with General Motors and Chrysler over reorganization plans that could result in freeing up more than $14 billion in emergency loans to keep the companies afloat through the first quarter of 2009, according to industry executives and a senior administration official. The Bush administration appears to want an agreement with the automakers before Dec. 25. It was unclear, however, when all of the particulars might be worked out, said the senior official, who spoke on the condition of anonymity because of the delicate nature of the negotiations. But the official indicated that the administration was inclined to do more than just keep G.M. and Chrysler alive until President-elect Barack Obama takes office, saying, “Giving them enough money to limp along doesn’t solve anything.”

In the negotiations, the Treasury secretary, Henry M. Paulson Jr., is effectively taking on the role of “auto czar,” which was envisioned in the carmakers rescue bill written by the White House and Congressional Democrats and approved by the House but blocked by Senate Republicans. In the days since the White House said it would step in to prevent the collapse of G.M. and Chrysler, Treasury officials have been poring over detailed financial data in a meticulous exercise that one G.M. executive likened to “putting on the aqualung” and diving deep into the companies’ books. G.M. officials said that the company’s chief financial officer, Ray Young, and a team of aides had provided the Treasury with a vast sheaf of documents including supplier contracts and payment schedules, production plans, employee payrolls, debt obligations, interest payments and even utility bills.

The negotiations continued on Wednesday even as Chrysler announced that it would idle all of its factories for a month or more, extending an annual holiday shutdown that normally lasts about two weeks. Chrysler’s finance arm also warned dealers on Wednesday that a shortage of cash might force it to stop making loans temporarily that many dealers rely on to buy inventory for their lots. G.M. had already announced extensive idling of its plants in Canada and the United States during the first quarter. Other automakers, including Honda and Ford, have announced cutbacks in production as the entire industry copes with plummeting demand for vehicles in the deepening recession.

In an interview on Wednesday on CNBC, Mr. Paulson said the auto bailout talks were now his primary focus, but he declined to say if the money promised by the White House would be disbursed before Christmas. “The autos will get the money as quickly as we can prudently do it,” he said. G.M. has said that it desperately needs $4 billion to survive through the end of this month and that $10 billion could carry the company through March 31, the end of the first quarter of 2009. Chrysler has said that $4 billion would allow it to avoid bankruptcy and stay in business through the quarter. The auto companies have said they expect the terms of the emergency government assistance to match roughly the requirements in the legislation approved by the House, which would force them to submit to strict oversight and impose numerous taxpayer protections.

That bill also would have forced the companies to carry out drastic reorganization plans, slashing jobs, closing factories and consolidating product lines as they sought to restore profitability, and it would have required the companies to have a clear plan to achieve a positive cash flow in the future. But officials said that providing aid to the automakers using the Treasury’s $700 billion financial stabilization program was substantially more complicated without legislation tailored specifically to the automobile industry. White House officials blamed Congress for the delay in speeding funds to the companies. “Because of the failure by Congress, we’re left with suboptimal options,” said Tony Fratto, the deputy White House press secretary. Cautioning that no decisions had been completed, Mr. Fratto added, “We’ll do what is in the best interests of taxpayers and the national economy.”

In addition to the emergency loan package, officials are working with the finance arms of G.M. and Chrysler to convert them into government-regulated financial institutions, a designation that could make them eligible for separate loans from the Federal Reserve. The Senate vote last week, in which Republicans blocked the auto bailout legislation, capped a month of public drama over fears that at least two of Detroit’s Big Three were in imminent danger of collapse, including two rounds of contentious hearings with the auto chiefs on Capitol Hill. In recent days, however, administration officials and company executives have sequestered themselves, offering only the slightest hints of what they are discussing, as market analysts speculate about how long G.M. and Chrysler can survive without a government lifeline. Ed Gillespie, a senior adviser to President Bush, told Fox News on Wednesday that an announcement on aid was not necessarily imminent. “There will be a decision obviously by the end of the year,” he said. President Bush in a separate interview said he would make a decision “relatively soon.”

And Mr. Bush reiterated that his greatest concern is the possibility of a “disorganized bankruptcy or disorderly bankruptcy.” The White House press secretary, Dana Perino, has made that point repeatedly, but it is unclear if the administration would consider some sort of prepackaged bankruptcy for one or both of the companies. Legal experts said, however, that speculation was growing that the White House and the Treasury were exploring that idea, which would be unusual. It would require the advance cooperation of the autoworkers, bondholders, suppliers, dealers and other stakeholders, who would all have to agree to concessions. The private-sector financing for such a package would total about $25 billion for both companies, legal experts said, with the Treasury providing a guarantee by adding about $5 billion from the financial rescue fund.

Ilargi: What happened to these guys’ PR people? Might as well fly your jet over Capitol Hill carrying a banner that says: “Catch me if you can”.

GM Mexican Plants Expand as Carmaker Seeks Funds for Rescue
General Motors Corp., the biggest automaker in the U.S. and Mexico, increased production of $12,625 Chevrolet Aveos south of the border while seeking a bailout to keep domestic plants from closing. The Detroit-based company and competitors such as Ford Motor Co. shifted more manufacturing to Mexico this year to capitalize on wages less than an eighth of those in the U.S. and factories that make fuel-efficient models. Through November, Mexican plants turned out 5 percent more vehicles than a year earlier, versus an estimated decline of 30 percent in the U.S. Mexico is so far weathering the collapse of the global auto industry better than its North American neighbors. Even with a projected decrease in production of as much as 20 percent in 2009, the world’s 10th-largest maker of light vehicles will still suffer less than the U.S. or Canada, according to Eduardo Solis, president of the Mexican Automobile Industry Association.

"The type of vehicle that’s produced in Mexico for the cost that it’s produced and the proximity to the U.S. are factors helping us fare better than other countries," said Emilio Mosso, a deputy director at the Mexican Economy Ministry. Thanks to investments by most of the major producers, Mexico has developed a high quality, low-cost manufacturing base. Assembly-line technology is now sophisticated enough to let the nation expand into aerospace, with Bombardier Inc., Safran SA and Honeywell International Inc. investing in operations in recent months. "The number of errors produced in Mexico is relatively lower than in other countries," Adolfo Albo, an economist in Mexico City with Spain’s Banco Bilbao Vizcaya Argentaria SA said in a telephone interview. "Plants are newer and the training processes are more effective."

Output there also favors small and mid-size vehicles, which make up almost three-quarters of those manufactured. Other models produced in Mexico include the Pontiac G3, Ford Fusion, Volkswagen Beetle and Dodge Journey, a new car-based, sport- utility vehicle. The product mix positions the industry to grab market share in coming years as consumers seek out fuel efficiency, Mosso said. Through November, Mexico had gained a percentage point to 26 percent of U.S. imports this year, even though close to 30,000 fewer cars from there were sold in the states than in the same period of 2007. That said, Mexico won’t be immune to the global drop-off in vehicle sales. More than 70 percent of its cars end up in the U.S. where sales in November fell to the lowest annual rate in 26 years, according to Autodata Corp.

Exports to the U.S. slipped 2.6 percent to 1.1 million autos and light trucks through November versus the same period last year. That compares with an 11 percent drop for South Korea, a 9.8 percent decline for Germany and a 7.4 percent slide for Japan, the auto industry association said. The drop was offset by increased shipments to Europe and South America in the first 11 months. Sales of Mexican exports were up 4 percent through November. "It’s a world automobile industry crisis that we haven’t yet felt because of those export markets, which next year simply won’t be there," Solis said. Still, the "pothole" the industry hit won’t last forever, said Gustavo Cespedes, 46, vehicle manufacturing director for GM North America, who is slated to become chief of the company’s San Luis Potosi plant in January. "Here in Mexico, I believe we’re in a favorable position."

Lower labor costs are the biggest advantage. At around $3 an hour, the average Mexican wage is less than one-eighth of those in the U.S.’s $25.34 and one-seventh of Canada’s $21.38, according to Sergio Ornelas, the president of industrial park operator Intermex, which provides real estate services to auto and car-parts producers. Ornelas cited information compiled from the Boston Consulting Group, the U.S. Department of Labor and The Economist Intelligence Unit during a recent conference in San Luis Potosi. Auto companies contribute to a government-run health system and mandated individual retirement accounts for each worker, which keep health and pension-benefit costs low compared with the U.S., Ornelas said. The push into Mexico by U.S. car companies could be slowed by restrictions put on GM and Chrysler LLC for accepting Troubled Asset Relief Program funds, said George Magliano, senior auto analyst at Global Insight Inc. in an interview at the San Luis Potosi conference.

"This money is going to come with a tremendous amount of strings," he said. "If they give you $25 billion and you start closing all your U.S. industry, that could be an issue." If GM and Chrysler are forced to declare bankruptcy, it may speed up the transfer of production to Mexico as carmakers seek to slash expenses, said Nick Criss, executive director of industrial services in the nation for real estate broker Cushman & Wakefield Inc. "Mexico tends to be the core manufacturer for many companies because it’s a low-cost center," Criss said. GM, for instance, has invested $3.6 billion in Mexico in the last three years. Its auto and light truck production there rose 28 percent in November, the national car industry association said on Dec. 9. The company said total output in North America, including Mexico, fell 32 percent for the same month to 249,000 vehicles. GM declined to break out its Mexican production. Ford spent $1.2 billion in 2005 to increase output in Hermosillo of its mid-size Fusion sedan. Production in Mexico from January to November rose 1.5 percent, while it fell 26 percent in the U.S. and 9 percent in Canada, it said.

Chrysler is building a $570 million factory near Saltillo, Coahuila, that will produce 440,000 engines a year, said Manuel Duarte, a Mexico City-based spokesman. It has canceled one of its two work shifts at a light truck plant there, Duarte said. China FAW Group Corp. has announced plans to build a car factory in Michoacan on the Pacific coast that will begin operation in 2010. Other Asian companies, including Hyundai Motor Co., South Korea’s biggest automaker, and Tata Motors Ltd., the Mumbai-based maker of Jaguar and Land Rover vehicles, are looking to invest for the first time, Mosso said. Toyota Motor Corp. increased capacity last year at a plant in Tijuana to 50,000 Tacoma trucks. The wave of investment helped Mexico expand its production to more than 2 million cars in 2007 from 1.54 million in 2003.

Mexican car output is forecast to rise to 3 million units by 2015, Magliano said. Over the same period, the U.S. industry has gone in reverse, dropping 12 percent to 10.54 million vehicles last year from 11.92 million in 2003, according to CSM Worldwide. The seasonally adjusted annual rate through November plummeted to 8.71 million cars and light trucks, CSM Worldwide said in a Dec. 15 statement. Mexico also has 12 free-trade pacts, including ones with Japan, the European Union, Chile, Colombia and Israel, and preferential tariff access with 44 other countries, Mosso said. "We have intrinsic advantages in Mexico that nobody can take away," GM’s Cespedes said.

The TARP Sinkhole
When it comes to your tax dollars, Congress should be tight as a miser’s fist. But it isn’t. Not when it comes to the bailouts of the financials and the banking system. Many banks are getting bailout money when they should not qualify for the funds at all. Especially banks that willy nilly chucked loan money at all sorts of commercial real estate projects now mothballed and moth-eaten, vacant lots that, if lined up end to end, would stretch from here to Jupiter. In fact, of the 202 banks that have been approved for capital injections from the government’s $700 bn Troubled Asset Relief Program [TARP], a full 142 are in violation of federal bank risk regulations.

So says Richard Suttmeier, a bank analyst at the research group ValuEngine, who X-rayed the way the money is going towards banks-as well as federal bank rules that are supposed to stop banks from playing with bank capital like they’re running a slot machine in Las Vegas, rules that are as transparent as a bucket of molasses. Suttmeier says because of their poor risk management, these banks face a higher chance of failure than others. So the question is, should they get TARP money, taxpayer money, now if they face a higher risk of bellyflopping? "The TARP has given billions of dollars to community banks that hold $617 bn in construction and development loans, which are becoming" delinquent, he says, "at a rapid pace."

Back in December of 2006, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency issued regulations on risk management for banks who do  commercial real-estate lending. While the bubble was still inflating, the central bank and federal bank regulators were worried about banks with severe overexposure to commercial real estate loans. Regulators had kicked around the rules since the fall of 2005, so the problem of banks overextending themselves here-an understatement to be sure–was on the watchdogs’ radar screen for some time. Specifically, the rules said that if a bank’s loans for construction and land development amounted to 100% or more of the bank’s total risk capital-meaning, the required sums it had set aside as a cushion-the bank would supposedly fall into a serious dangerous zone when it comes to government oversight.

There are now 202 banks that have been approved for capital injections from the government’s $700 bn Troubled Asset Relief Program, what Suttmeier calls the TARP Sink Hole. But out of the 202 banks, the number of banks violating the 2006 regulatory guidelines, in which they should not make construction loans that meet or exceed their regulatory cushions, now number 142. Why worry about the rules though? Especially since the government can change them at will? Just as it suddenly did an about face and changed the rules by resurrecting just for Citigroup and just for AIG a version of the first iteration of the Troubled Asset Relief Program [TARP]?

In the first go around, the government said it would buy at auction bad securities built during the credit bubble, even though by the time of that decision the Federal Reserve had taken on $29 bn (now worth $27 bn) in bad securities and assets from Bear Stearns. The Federal Reserve then quietly took on $52.5 bn in toxic securities from AIG. And the government recently made a whopping exception when it opted to backstop $243 bn or so in Kryptonite mortgage-backed and commercial real-estate backed securities at Citigroup. TARP is careening around worse than the Olympic Jamaican bobsled team. Out of the 142, here are 15 of the worst offenders, according to Suttmeier:

Morgan Stanley earns $3.3 billion hedging its own debt
The market lost confidence in Morgan Stanley in its fiscal fourth quarter. But the Wall Street firm had the ultimate retort: It found a way to make hard cash out of this disfavor. In the three months through November, when the financial system nearly crumbled, Morgan Stanley made $2.1 billion from buying back its own debt at distressed levels. It recognized another $1.1 billion gain from derivatives used to hedge its own debt. These gains helped limit the fourth-quarter loss to $2.37 billion.

Banks have been booking gains on their own debt as it has fallen in value throughout the credit crunch. This sounds counterintuitive but within the logic of accounting it makes some sense. A drop in the price of a company's bonds is treated as a decline in a liability, producing a gain. Companies using mark-to-market accounting typically don't mark all their debt, but enough is accounted for in this way to have created sizable paper profits. What Morgan Stanley did in the fourth quarter is notable because it locked in cash gains by buying back bonds that were trading between 60 cents and 80 cents on the dollar. The firm also booked noncash gains of $2.7 billion in the quarter as debt spreads widened.

By contrast, Goldman Sachs' fourth-quarter debt gains of $700 million were much smaller -- even though both firms' credit-default-swap spreads roughly doubled over the period. Goldman likely marks less of its debt and may deploy different valuation methods. Investors rightly don't ascribe much value to the gains, and regulators keep them out of certain capital measures, but in mean times like this every penny counts.

BNP Paribas Comes Unstuck
See how even the mighty are falling. BNP Paribas, widely considered one of Europe's most stable and well-run banks, has so far managed to avoid most of the carnage in the industry and last week became the first bank since the collapse of Lehmans to issue bonds without a government guarantee. But Wednesday's surprise warning of substantial losses in its corporate and investment bank shows no one is immune from this crisis.

Coming so soon after Goldman Sachs announced its first quarterly loss in a decade, BNPP's investment banking woes hardly came as a complete surprise. Even so, the scale of the turnaround was shocking. BNPP says the division has made a loss of 710 million euros in the year to date, which means its investment bank must have lost an eye-watering 1.6 billion euros in October and November, following its third quarter results. And since BNPP is not a big proprietary trader like Goldman Sachs, the bulk of these losses will have come from supposedly less risky client-driven trading activities.

For BNPP, the profit warning re-opens questions over its capital strength just as its deal to buy Fortis's Belgian banking operations has been thrown into doubt by a Belgian court which has insisted the deal be put to a Fortis shareholder vote in February. That's a blow since the attractive terms of the deal -- BNPP is paying a 30% discount to book value -- made it an important component in BNPP's plans to improve its capital ratios. The deal will also improve BNPP's liquidity profile thanks to Fortis's lower loan to deposit ratio.

BNPP still clearly does not believe it needs a rights issue or it would have announced it alongside the profit warning. Of course, its bullishness may be justified. Although its current core Tier 1 ratio of 5.6% is very low compared to the current European average of 7.4%, the rest of the bank is still profitable, exposures to the toxic US and UK housing markets is minimal and risk management is strong. BNPP should be able to boost capital through its own resources -- providing the crisis doesn't get worse. But that increasingly looks more like a bet than a judgement.

BNP Paribas Says Fortis Assets Deal Stalled
The future of BNP Paribas SA's plan to buy Fortis NV assets remained clouded Thursday after the French bank called off an extraordinary general meeting scheduled Friday to give shareholders a chance to vote on the deal. In a statement, BNP Paribas said the acquisition can't proceed according to the planned timetable since the Brussels Court of Appeal suspended it. On Dec. 12. the court backed Fortis Banque shareholders who took the Belgian government to court in protest at the dismantling of the company that left them holding shares worth less than €1 ($1.44). It ruled that shareholders should have been given a say over the asset sale.

The move comes amid press reports that the Paris-based bank could drop the deal if it is held up for too long. Belgian newspaper Le Soir reported Wednesday that BNP Paribas Chief Executive Baudouin Prot told the Belgian government the bank will withdraw its bid for the Fortis assets unless the deal is concluded quickly. Fortis's Belgian banking and insurance businesses were sold to BNP Paribas as part of a rescue package masterminded by the Belgian government in October as the bank teetered on the brink of insolvency. Its Dutch assets were nationalized by the Dutch government. BNP Paribas said in October it would pay €14.5 billion for Fortis's Belgian and international banking activities, as well as the Belgian insurance division. Fortis said Wednesday it will reincorporate the insurance business following the court ruling.

Also Thursday, the European Commission said the Dutch government shouldn't integrate ABN Amro's Dutch operations with Fortis until an agreement could be found on some assets that were to be sold to Deutsche Bank AG. "Pending an agreement on this issue no integration of the two banks can take place," the commission said. When Fortis acquired ABN Amro Bank, it promised to sell parts of ABN Amro's commercial banking business for €709 million in cash to Deutsche Bank to meet the commission's antitrust concerns over the market concentration the combined entity would have in Dutch retail banking.

Meanwhile, contacts between the commission and the Dutch government are continuing to see how the asset sale to Deutsche Bank can be implemented in the current circumstances. The closing of the asset sale with Deutsche Bank became uncertain following the nationalization of the Dutch activities of Fortis. ABN Amro bank said Wednesday the asset sale was no longer valid, while Dutch Finance Minister Wouter Bos has said in the past the government would investigate whether the sale could be reversed.

ABN AMRO says asset sales to Deutsche Bank invalid
ABN AMRO no longer considers valid the sale of part of its Dutch assets to Deutsche Bank, a deal crafted earlier this year to comply with antitrust concerns, the Dutch banking group said on Wednesday. Fortis, which bought ABN AMRO last year in a joint bid for 70 billion euros ($98 billion), had agreed in July to sell 709 million euros worth of assets serving corporate clients, mid-sized business and other smaller units to comply with European Commission antitrust requirements. That deal was halted by the Dutch central bank in late September after Fortis was carved up and partially nationalised by the Dutch and Belgian governments.

In a letter to employees obtained by Reuters and confirmed by ABN, Jan Peter Schmittmann, head of its Dutch operations, and Gerrit Zalm, newly appointed chief executive, said they no longer considered the agreement valid. "For the past six weeks our team has been busy looking at different angles of the situation," the two executives said. "We have come to the conclusion that the agreements are no longer in force." The executives said they had informed Deutsche Bank, which declined to comment. A spokesman for European Commissioner Neelie Kroes did not comment directly on the letter, but noted the commissioner had called for the divestment of assets despite plans by the Dutch government to go forward with the integration of ABN and Fortis in the Netherlands before an eventual privatisation after 2011.

An ABN spokesman declined to say whether ABN would take further steps to unravel the deal. ABN's stance, the latest in the tumultuous unravelling of Fortis, throws into doubt whether the deal will go forward, be renegotiated or scrapped. The Dutch central bank said it had put the deal on hold because of "exceptional circumstances on international financial markets, the uncertainty with regard to the future shareholder in ABN AMRO Bank and the implications of this uncertainty for all parties involved."

Fortis's Dutch business and ABN were eventually fully nationalised by the Dutch government, while the Belgian government had agreed to sell the bulk of Fortis's Belgian operations to BNP Paribas. The BNP Paribas deal was put on hold by a Belgian court last week. Fortis had complained before that the sale of two units servicing large corporate clients, 13 commercial advisory branches for medium-sized clients, parts of Hollandsche Bank Unie N.V. and factoring services company IFN Finance resulted in a loss of 300 million euros.

Deutsche Bank Skips Call Option on EU1 Billion Bond
Deutsche Bank AG, Europe’s biggest investment bank by revenue, passed up an opportunity to redeem 1 billion euros ($1.4 billion) of subordinated bonds, saying it would be more expensive to refinance the debt. The bank had the option to buy back the 3.875 percent notes on January 16 or pay a so-called step-up coupon of 88 basis points more than Euribor, Frankfurt-based Deutsche Bank said in a statement. The cost of protecting the bank’s debt from default jumped and its shares dropped more than 7 percent. Deutsche Bank’s decision startled bondholders because borrowers are expected to repay callable notes at the first opportunity and the securities are valued on that basis, according to ING Groep NV analyst Jeroen van den Broek. Investors are concerned Deutsche Bank’s decision to break with convention will encourage other borrowers to skip calls, triggering losses.

"The ice has been broken," Amsterdam-based van den Broek said in an interview. "It’s always been accepted that financial institutions will call and this will have a significant downside effect on prices." Credit-default swaps on the Markit iTraxx Financial index linked to subordinated bonds of 25 European banks and insurers jumped 20 basis points to 226.5, according to JPMorgan Chase & Co. That’s the biggest one-day rise since Sept. 26 and the highest level since Oct. 7. Deutsche Bank, shaken last quarter by losses of 1.26 billion euros from trades made for its own account, faces soaring borrowing costs as investors shun all but the safest government debt. By accepting the step-up and not calling the bonds it will pay annual interest of about 4 percent compared with as much as 7 percent if it tried to raise new debt, van den Broek said.

The extra yield investors demand to buy financial company bonds rather than government debt climbed to a record 4.69 percentage points, according to Merrill Lynch & Co.’s European Financial Corporate Index. That compares with 1.28 percentage points at the start of the year and is the most since Merrill started collating the daily data in 1999. Deutsche Bank "decided not to exercise its early redemption option to call the notes at par because replacement costs would be more expensive," the statement said. The last bank that failed to call bonds was Sondrio, Italy-based Credito Valtellinese Scrl, which chose not to repay 150 million euros of securities in April. "Frankly I’m surprised," said Bill Blain, a broker at KNG Securities in London. "No doubt some doomsters will say Deutsche Bank is skipping a call because it faces further losses."

European banks use the market for bonds with call dates rather than fixed maturities to meet regulatory reserve requirements, known as Tier 1 and 2 capital. Subordinated bonds rank after senior notes and loans for repayment. Deutsche Bank has the right to redeem the securities issued in 2004 every quarter after next month’s call date. Deutsche Bank stock fell 2.06 euros, or 7.38 percent, to 25.935 euros, at 3:20 p.m. in Frankfurt. Credit-default swaps linked to the lender’s subordinated securities jumped 40 basis points to 255, according to CMA Datavision. The contracts, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.

Fresh credit strains in Europe as Deutsche Bank shocks markets
Deutsche Bank has refused to redeem a bond issue in an unprecedented move that has rattled Europe's credit markets and cut short the relief rally following America's dramatic move to zero rates. The news set off a fresh flight from European bank debt. Credit default swaps (CDS) on the iTraxx Financial index measuring stress in the sector saw the biggest jump since the Lehman Brothers crisis, rising 20 points to 226. Adding to the gloom, Standard & Poor's warned that a fifth of all lower-rated companies in Western Europe and the UK are likely to default over the next two years, greatly exceeding the scale of bankruptcies after the dotcom bust. The agency said up to 75 companies that issue debt in the capital markets would fail in 2009 as they struggle to roll over debt. Four have failed this year.

Deutsche Bank, Germany's top lender, said it had chosen not to exercise a "call option" on a subordinated bond worth €1bn (£930bn), breaking an iron-fast code in the credit markets. The bank's share price fell 7pc in Frankfurt, and the default insurance on the company's debt surged. "This has never happened before," said Willem Sels, a credit strategist at Dresdner Kleinwort. "Banks have never wanted to do it because it upsets investors and could mean that future funding will be hit." Deutsche Bank, run by Josef Ackerman, is within its legal rights. The contract lets the bank accept an automatic rise in interest costs after five years, or call the option and raise money on the open market.

Ronald Weichert, the bank's spokesman, said it would have been "much more expensive" to secure fresh finance in the current climate. "The situation has changed, and we had to decide what to do in the appropriate interests of Deutsche Bank," he said. The travails at Deutsche are the latest sign that credit stress is continuing to plague Europe's lenders, despite a blanket bail-out by EU governments in September. The European Central Bank warned in its Financial Stability Report this week that lenders are at risk from a deeper slowdown than expected. "Banks need to be especially vigilant in ensuring that they have adequate capital and liquidity buffers to cushion the risks that lie ahead," it said.

The ECB is coming under heavy pressure to follow the Federal Reserve and central banks of Canada, Britain, Switzerland and Sweden in slashing rates and exploring emergency options. Norway cut rates by 175 basis points to 3pc on Wednesday. Eurozone prices fell 0.5pc in November and may be flirting with deflation by the middle of next year. The region is falling into deep recession. Berlin expects the economy to contract by 2pc next year in the worst slump since World War Two, according to German press leaks. Italy is facing two years of contraction. Concerns are spilling over into the debt markets. Yields on Italy's 10-year bonds have risen to 132 basis points above German Bunds, partly on concerns that Italy may have trouble rolling over €200bn next year.

Jean-Claude Trichet, the ECB's president, this week hinted that the bank may hold rates at 2.5pc in January. "Do we have a feeling there is a limit to the decrease in rates? At this stage certainly yes. We have to beware of being trapped at nominal rates that would be much too low." ECB hawks have been warning that extreme rate cuts are unhealthy and likely to lead to inflation down the road, although there have been rumblings of discontent from the Dutch, Cypriot, Portuguese and Spanish members. There is now a stark divide in philosophy between the ECB and almost every other central bank. The result has been a sudden shift of funds into the euro over recent days, pushing it to $1.44 against the dollar and a record €1.0758 against sterling.

UK Chancellor Darling plans national lending scheme
A multibillion-pound package of measures aimed at getting the banks to restart lending to business will be announced by Alistair Darling next month, The Times has learnt. The Chancellor is considering a national lending scheme under which the Government would guarantee new lending to businesses of all sizes as one of his leading options. If past loan schemes are followed, the Government would cover most of the risk on each loan, possibly up to 80 per cent, and the bank would bear the rest. The taxpayer could be faced with a big bill if companies defaulted, as some certainly would. The default rate of firms involved in government loan schemes since 1981 is 28 per cent.

Mr Darling's plan will be seen as similar to the £50 billion national loan guarantee scheme proposed earlier this month by the Conservatives. However, government insiders say that there will be key differences. Officials are urgently seeking ways to ensure that loans guaranteed under the scheme are for new lending and that the lenders do more than merely reschedule existing loans or already-planned loans in order to get them covered by the government guarantee. The scheme will be far more ambitious than the £1 billion small firms loan guarantee scheme extended in the Pre-Budget Report. It comes after a warning from Mervyn King, the Governor of the Bank of England, that the single most pressing challenge for domestic economic policy is to get the banking system lending normally again.

Mr Darling is keen to unveil the lending scheme in January because thousands of companies renew their loans in the early months of the year. His latest moves are being prepared as the CBI gives warning that healthy companies will struggle to survive unless the Government takes urgent action to deal with the intensifying credit crunch. It urges the Government further to recapitalise the banks where necessary.
Richard Lambert, Director-General of the CBI, said yesterday that unless credit, on which companies rely for day-to-day business, began to flow again, other government initiatives would be "expensive failures".

Mr Lambert said that the Government, the Bank and the Financial Services Authority must ensure that banks are not being forced to reduce their exposure to debt too rapidly, which would suck finance out of the economy too fast, crippling otherwise healthy firms and causing long-term damage to the economy. In a letter to companies, he said: "We still need to address the root of the problem. Credit flows, on which companies depend for day-to-day business, remain severely constrained. Until this underlying issue — getting credit flowing around our economy again — is resolved, economic activity cannot begin to recover. Otherwise healthy companies will face increasing difficulties, and some will struggle to survive."

UK finances slide further into the red
Britain’s public finances slid further into the red in November, with a drop in tax receipts – principally on income – contributing to a current budget deficit of £13bn against a shortfall of £8.1bn the year before. Total current receipts from taxes, social security and other categories slipped to £35.1bn in November from £37.1bn in November 2007. Tax receipts were also below those of 2007 in October, marking the first time that receipts have been below those of the year before for two back-to-back months since 2003. Current expenditure in November is also running ahead of that of the year before, with outlays of £47.6bn against £44.8bn in November 2007, with a rise of £1bn in net social benefits to £14.6bn. That category of expenditure is expected to rise as unemployment surged to 6.0 per cent in November and the claimant count rose through the key 1m mark.

Public sector net borrowing for the month was £16bn, £5.3bn higher than November 2007, when net borrowing was £10.7bn. The deteriorating state of the public finances helped push the pound closer towards parity with the euro. Sterling was also undermined by comments from Charlie Bean, deputy governor of the Bank of England, who said in an interview with the Financial Times that that zero interest rates were a possibility in the UK. The UK currency has now fallen more than 6 per cent against the euro this week and nearly 30 per cent since the start of the year. The Office for National Statistics warned that monthly data on public sector finances can be volatile and urged that receipts and spending be viewed on a year-to-date basis, rather than the shorter period presented by the latest statistics.

Year-to-date, the current budget deficit is £39.4bn against £18.0bn for the first eight months of 2007-08, while net borrowing for the period is £56.1bn against £29.2bn the year before. The Treasury has already warned that the nation’s finances would be in much worse shape this year than had been expected when the current year’s budget was unveiled last March. In his pre-Budget report in November, Alistair Darling, chancellor, said that for the 2008-09 fiscal year, the public sector current budget would sustain a deficit of £41.2bn, while forecasting that public sector net borrowing would rise to £77.6bn. Public sector net debt, excluding financial sector interventions – including the transfer of Bradford and Bingley into public ownership, the transfer of deposits in Icelandic-owned banks and the plan to recapitalise certain UK banks – is expected to rise to 41.2 per cent of gross domestic product at the end of March, breaking the government’s “golden rule” that debt should not exceed 40 per cent of national output. As of November, including financial assistance, net debt stood at 44.2 per cent of GDP.

German December Business Confidence Lowest Since 1982
German business confidence dropped to the lowest in more than a quarter century in December as the credit crisis pushes Europe’s largest economy deeper into a recession. The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, fell to 82.6 from 85.8 in the previous month. That’s the lowest reading for Ifo’s main index since November 1982. Economists expected a drop to 84, the median of 39 forecasts in a Bloomberg News survey shows.

Germany’s economy is on course for its worst contraction since 1993 next year as a global slowdown saps export demand, forcing companies to curb spending and hiring. Daimler AG, the world’s biggest maker of heavy trucks, said the recession may be "deep" and the European Central Bank this month cut its key interest rate by the most on record to stem the slump. "There’s no way out of the situation over the coming quarters," said Laurent Bilke, an economist at Nomura International Plc in London. "The ECB will certainly cut interest rates further." This month’s reading is the lowest since data for a reunified Germany was first compiled in 1991. A subindex measuring executives’ assessment of current conditions fell to 88.8 from 94.9 in December. A gauge of expectations slipped to 76.8 from 77.6.

"The results are pretty poor," Ifo economist Gernot Nerb said. "Expectations come down but only a little bit. It is the current conditions that plunged." The euro traded at $1.4456, little change from before the Ifo figures were released. Germany’s economy is likely to shrink for a third straight quarter in the three months through December and will contract 0.8 percent next year, its worst performance since 1993, the Bundesbank says. The BDB association of German banks has forecast a 1 percent contraction in 2009. German manufacturing contracted for a fifth straight month in December and exports declined 0.5 percent in October. Volkswagen AG, Europe’s largest carmaker, said on Dec. 9 it may struggle to reach growth objectives for 2010 on waning sales. Daimler said a slump in the commercial-vehicle market may continue into 2010.

"The financial crisis and economic slowdown" have already "significantly weakened demand in all of our target markets," said Peter Bauer, chief executive officer of Infineon Technologies AG, Europe’s No. 2 maker of semiconductors. The euro is also strengthening against the dollar, reversing a slide of as much as 20 percent earlier this year, making business even harder for German exporters. The currency climbed by a record 3.1 percent to $1.4437 yesterday as near- zero U.S. interest rates led traders to abandon the dollar. The ECB and German Chancellor Angela Merkel are trying to limit the scale of the recession. Merkel said on Dec. 16 her government needs to adopt more stimulus measures to help the economy after already agreeing a package including construction investment and tax relief costing 32 billion euros ($45 billion) over two years.

Central banks around the world are also cutting borrowing costs to contain the fallout from the financial crisis. The ECB on Dec. 4 cut its key rate by 75 basis points to 2.5 percent and investors are betting on another reduction in January. The Federal Reserve lowered its key rate on Dec. 16 to between zero and 0.25 percent from 1 percent previously. Still, ECB President Jean-Claude Trichet said on Dec. 15 that there’s a limit to how far the bank can cut borrowing costs. The Frankfurt-based central bank wants to "ensure that the 175 basis-point decrease that we have already decided is effective," he said. "While the ECB is currently keeping its cards close to its chest and indicating some reluctance to cut interest rates sharply further, we still believe that another reduction in January is more likely than not," said Howard Archer, chief European economist at IHS Global Insight in London.

Rumor says: Carney is a rube or a liar or both. He, like most Canadians, including the government, keep looking at the big banks as some kind of publice service institution. They're not. They're private corporations and they will act accordingly. If they were public institutions, they would be Crown corporations and the government could make them lend out money if that's what the government wants. For this reason, if the government wants more lending, buying up mortgages from the banks will accomplish nothing. We saw this in the US already, so apparently Carney and the government are either blind or just dumb. To cause more lending, the government either needs to nationalize a bank or just create a direct retail loans facility. Not that we need more lending right now, but this is two times stupid. The government can't effect the policy that they want, even if that policy is wrong. How pathetic is that?

Ilargi: Banks across the globe refuse to lend because they have billions in new writedowns coming up in Q1 '09. If they fail to have enough reserves afterwards, they risk their own survival. The whole lending push from central banks is a shadow play: central bankers know the books of the banks like no other.

Bank of Canada chief Carney to banks: Lend, don't hoard
Mark Carney is pointing a finger at the country's big banks for hoarding capital against a rainy day instead of doling out more loans, a choice the Governor of the Bank of Canada says is damaging the economy. The public admonishment is an unusual move for a central bank governor, but Mr. Carney has recently decided to advocate more publicly for certain government policies and bank behaviours. While he has a direct line of communication with the chief executives of the big banks, his message hasn't been embraced. The banks have been racing to bolster their capital cushion, increasing the amount of money they hold to protect against potential loan losses. "It is not clear to me that they need additional capital buffers," he said of the banks during a meeting with the editorial board of The Globe and Mail. "What is clear to me is that there is unfilled demand for credit for worthy investments, and I'm sure that our banks will see these opportunities in the fullness of time."

The banks are tightening up just as many businesses are having trouble securing loans. The crimped corporate-credit environment could spur layoffs or closures and exacerbate pain in the economy precisely as the country is dragged into its first recession in nearly two decades. Worries about companies' struggles to get loans emerged as one of the biggest risks to the economy at a meeting between Finance Minister Jim Flaherty and his provincial counterparts yesterday in Saskatoon. "There was a feeling they could do more to get credit to business," Gregory Selinger, Manitoba's Finance Minister, said of the banks. Ontario Premier Dalton McGuinty also criticized Canada's big banks for not doing more to help cash-starved businesses. "One of the ways they can help is to make sure there is not an undue constraint on access to credit," he said. "Businesses need to continue to operate lines of credit."

Banks refused to respond to Mr. Carney's remarks yesterday, and the Canadian Bankers Association declined comment. Banks are required to hold capital, or funds, to protect their depositors in the event that they lose money on bad loans. Canada's banking regulator requires banks to keep the ratio of their most solid capital, known as Tier 1 capital, to their loans and investments above 7 per cent. Global rules require only 4 per cent. The riskier a bank's lending, the more capital it has to hold. In the wake of the September collapse of Lehman Brothers Holdings Inc., investors, analysts and regulators placed greater emphasis on the importance of capital cushions, which help to protect banks from financial hits such as soured loans and writedowns. Market pressure has created what some analysts have deemed to be the new minimum acceptable ratio of 9 per cent in Canada, and the big banks all now have ratios ranging from 9.1 per cent to 10.5 per cent.

Three of the big five have taken the extraordinary step of issuing common shares in recent weeks. Earlier this week, Bank of Montreal CEO Bill Downe referred to his bank's move as "prudent." At least one bank chief has acknowledged some doubts about opting to raise capital. When Toronto-Dominion Bank CEO Ed Clark decided to raise capital late last month, he felt it was not in his bank's best interest. But he also felt pressure to bow to the market's whim, he said in an interview at the time. What Mr. Carney advocates is almost a Keynesian approach to banking, in which a buildup of capital in good times is used to fund lending in bad times. The argument is that it's similar to the government practice of using deficit spending to prime the pump in a recession.

In a speech to a business audience in Toronto, Mr. Carney warned about the "paradox of thrift," which economist John Maynard Keynes coined to refer to destructive behaviour of individuals during a recession. At an individual level, people want to save more and invest less in a recession. But collectively, this makes things worse. Banks may decide to stop lending because they fear losses, but their behaviour exacerbates the downturn. "Of all places, Canada should be able to avoid this … paradox of thrift," Mr. Carney told The Globe, because Canada's well-capitalized banking system does not need to hoard capital to cover eventual losses. The Canadian banks are well positioned to heed critics such as Mr. Carney, since they all have capital levels well above the minimum requirements and access to relatively inexpensive government funding.

Even Canada's banking regulator, Julie Dickson, who has been prodding banks to conserve capital, now says it's "not the time to raise capital requirements across the board." Former Bank of Canada governor David Dodge recently called on the bank, regulators and the Finance Department to band together and "lean against the wind" by combatting policies that could exacerbate the economic downturn. As the financial crisis has gathered steam, officials around the world have identified policies that threaten to make the situation worse, ranging from accounting rules that cause the banks to take writedowns quarterly, to the regulations that cause employment insurance premiums to rise when job losses loom. In the future, banks should be required to build up capital buffers when the economy is good, Mr. Carney said.

Warnings about Canada’s risky mortgages ignored
Canada Mortgage and Housing Corp. officials ignored warnings from senior Finance Department and Bank of Canada officials during the past two years that its active business in high-risk mortgage insurance could overburden consumers. According to sources familiar with the discussions, CMHC executives did not heed the warnings and continued to underwrite larger volumes of insurance policies for risky home loans with 40-year amortizations and minimal down payments. The sources said the federal agency's executives disagreed about the potential risks and defended the creditworthiness of borrowers who were granted insurance for the riskier mortgage products. One senior Ottawa official said CMHC was such a significant underwriter of 40-year mortgage insurance polices that it currently accounts for two-thirds of the nearly $56-billion of 40-year mortgages that were approved by banks, trust companies, credit unions and other lenders during the first six months of 2008.

Unlike the United States, Canada does not publicly release data about different classes of mortgage debt. CMHC does track mortgage data, but its officials have declined requests by The Globe and Mail for information about the volume of 40-year and low-down-payment mortgages. In a statement issued last night, CMHC said it discussed mortgage risks with central bank officials in 2006 after former bank governor David Dodge raised concerns about the new breed of long-term home loans. "CMHC officials took the governor and senior bank officials through the materials and discussed how the product was administered. The Bank of Canada was reassured by the fact that CMHC's product includes no change in mortgage qualification criteria and as such would not be of significant concern to the Bank. We know of no other concerns that the Bank of Canada or the Department of Finance had with our activities that in their view would threaten financial stability," the statement said.

The agency said only a "relatively small" proportion of the $334-billion in mortgages it insures are either 40-year or zero-down-payment mortgages. A spokeswoman declined to put a figure to "relatively small." Finance Minister Jim Flaherty announced in July that the federal government was cancelling its policy of guaranteeing 40-year mortgages as of Oct. 15 in order to shield Canada from the kind of housing crash that has devastated the U.S. economy. However, according to sources, bank executives had been warning Mr. Flaherty and central bank officials since the beginning of 2008 about a dramatic and unexpected increase in demand from consumers for 40-year mortgages with small down payments.

Lenders, insurers and government officials interviewed by The Globe characterized the first half of 2008 as a period of apparent paralysis by federal decision makers. These sources said bank and insurance executives and finance officials disagreed over how to pull the plug on popular and risky mortgage products. One of the few things they did agree about, according to sources, was that there was insufficient monitoring of CMHC, which accounts for about 70 per cent of the total value of mortgage insurance underwritten in Canada. "There is an accountability issue at CMHC," said one senior Ottawa official, who declined to be identified. CMHC is a federal agency that has been supplying mortgage insurance since 1954, and is currently overseen by Human Resources and Social Development Canada. In response to a question about its accountability, CMHC said in its statement: "The lines of accountability are very clear, like all Crown corporations CMHC is accountable to Parliament through its minister."

When The Globe contacted Human Resources Minister Diane Finley, her spokeswoman replied: "We will have to decline and allow CMHC to respond to the questions applicable." According to people familiar with CMHC, the agency imported U.S.-style mortgage products to protect its dominant market position from large U.S. insurers who were allowed into the Canadian market in 2006. Canadian laws require borrowers with less than a 20-per-cent down payment to obtain insurance for their mortgages. "They felt they were pushed into to this because of the new competition," said a person familiar with CMHC. Underlying these concerns, sources said, was a federal internal study launched by the new Conservative government in 2006 to review the possible privatization of a number of agencies, including CMHC. The prospect of privatization, one source said, fuelled concerns that the agency needed to be seen as an effective competitor.

CMHC said in its statement that its decision to insure longer-term and lower-down-payment loans in 2006 "reflected the market trends for the period." Until 2006, the agency and its only rival, Genworth Financial Inc., did not insure mortgages that were amortized beyond 25 years. In February of 2006, several months before four U.S. insurance giants were allowed into Canada, CMHC introduced the country's first 30-year mortgage insurance product. What followed was a ferocious battle for market share between CMHC, Genworth and American International Group, the first of the new insurance entrants.

Pace of rouble depreciation quickens
Russia on Wednesday allowed the rouble to depreciate by the biggest amount to date against a euro-dollar basket as it took advantage of a weaker dollar. The rouble dropped 1.2 per cent against the basket, falling to 32.64, as the central bank allowed the seventh incremental weakening of the rouble in less than two months and the second this week. The move coincided with a weakening in the dollar as the central bank sought to keep the depreciation as unnoticeable to the population as possible. The government is seeking to shield the Russian population from a sharp devaluation fearing political consequences, even as it comes under pressure from a steep fall in the oil price since this summer. Economists warned that pressure was still mounting for a much sharper one-off devaluation in order to restore the balance of payments and stop the drain on reserves.

Russia’s reserves have fallen $161bn since August as the central bank attempts to stem the downward pressure on the rouble. Anton Strouchenevsky, an economist at Troika Dialog, said the step-by step weakening of the rouble against the basket, which now totals 11 per cent since August, was not enough to keep the currency level with devaluations undertaken by some of Russia’s biggest trading partners such as Ukraine and Turkey. Mr Strouchenevsky said the effective rouble rate – the rate weighted against its main trading partners – had actually strengthened 5 per cent in the last two months, meaning exporters, especially in the metals sector, were still being hit hard.

Pressure is growing to speed up the devaluation as new data released this week showed November industrial output fell by 8.7 per cent year-on-year, the steepest drop since the August 1998 collapse. Several leading economists and bankers are calling for a sharp, one-step devaluation of 20-25 per cent to kickstart the economy by cutting back imports and reduce the pressure on reserves. Economists warn the government’s policy of pursuing a gradual weakening of the rouble is merely fuelling expectations for further devaluation and accelerating the drain on reserves as banks and the population rush to change roubles into dollars. “All the rouble liquidity in the economy is being exchanged for dollars,” Mr Strouchenevsky said.

On Wall Street, Bonuses, Not Profits, Were Real
“As a result of the extraordinary growth at Merrill during my tenure as C.E.O., the board saw fit to increase my compensation each year.”
— E. Stanley O’Neal, the former chief executive of Merrill Lynch, March 2008

For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million. The difference between the two amounts was his bonus, a rich reward for the robust earnings made by the traders he oversaw in Merrill’s mortgage business. Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.

But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value. Unlike the earnings, however, the bonuses have not been reversed. As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle. Scrutiny over pay is intensifying as banks like Merrill prepare to dole out bonuses even after they have had to be propped up with billions of dollars of taxpayers’ money. While bonuses are expected to be half of what they were a year ago, some bankers could still collect millions of dollars. Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning.

“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.” Even Wall Streeters concede they were dazzled by the money. To earn bigger bonuses, many traders ignored or played down the risks they took until their bonuses were paid. Their bosses often turned a blind eye because it was in their interest as well. “That’s a call that senior management or risk management should question, but of course their pay was tied to it too,” said Brian Lin, a former mortgage trader at Merrill Lynch. The highest-ranking executives at four firms have agreed under pressure to go without their bonuses, including John A. Thain, who initially wanted a bonus this year since he joined Merrill Lynch as chief executive after its ill-fated mortgage bets were made. And four former executives at one hard-hit bank, UBS of Switzerland, recently volunteered to return some of the bonuses they were paid before the financial crisis. But few think others on Wall Street will follow that lead.

For now, most banks are looking forward rather than backward. Morgan Stanley and UBS are attaching new strings to bonuses, allowing them to pull back part of workers’ payouts if they turn out to have been based on illusory profits. Those policies, had they been in place in recent years, might have clawed back hundreds of millions of dollars of compensation paid out in 2006 to employees at all levels, including senior executives who are still at those banks. For Wall Street, much of this decade represented a new Gilded Age. Salaries were merely play money — a pittance compared to bonuses. Bonus season became an annual celebration of the riches to be had in the markets. That was especially so in the New York area, where nearly $1 out of every $4 that companies paid employees last year went to someone in the financial industry. Bankers celebrated with five-figure dinners, vied to outspend each other at charity auctions and spent their newfound fortunes on new homes, cars and art.

The bonanza redefined success for an entire generation. Graduates of top universities sought their fortunes in banking, rather than in careers like medicine, engineering or teaching. Wall Street worked its rookies hard, but it held out the promise of rich rewards. In college dorms, tales of 30-year-olds pulling down $5 million a year were legion. While top executives received the biggest bonuses, what is striking is how many employees throughout the ranks took home large paychecks. On Wall Street, the first goal was to make “a buck” — a million dollars. More than 100 people in Merrill’s bond unit alone broke the million-dollar mark in 2006. Goldman Sachs paid more than $20 million apiece to more than 50 people that year, according to a person familiar with the matter. Goldman declined to comment. Pay was tied to profit, and profit to the easy, borrowed money that could be invested in markets like mortgage securities. As the financial industry’s role in the economy grew, workers’ pay ballooned, leaping sixfold since 1975, nearly twice as much as the increase in pay for the average American worker.

“The financial services industry was in a bubble," said Mark Zandi, chief economist at Moody’s “The industry got a bigger share of the economic pie.” Dow Kim stepped into this milieu in the mid-1980s, fresh from the Wharton School at the University of Pennsylvania. Born in Seoul and raised there and in Singapore, Mr. Kim moved to the United States at 16 to attend Phillips Academy in Andover, Mass. A quiet workaholic in an industry of workaholics, he seemed to rise through the ranks by sheer will. After a stint trading bonds in Tokyo, he moved to New York to oversee Merrill’s fixed-income business in 2001. Two years later, he became co-president. Even as tremors began to reverberate through the housing market and his own company, Mr. Kim exuded optimism. After several of his key deputies left the firm in the summer of 2006, he appointed a former colleague from Asia, Osman Semerci, as his deputy, and beneath Mr. Semerci he installed Dale M. Lattanzio and Douglas J. Mallach. Mr. Lattanzio promptly purchased a $5 million home, as well as oceanfront property in Mantoloking, a wealthy enclave in New Jersey, according to county records. Merrill and the executives in this article declined to comment or say whether they would return past bonuses. Mr. Mallach did not return telephone calls.

Mr. Semerci, Mr. Lattanzio and Mr. Mallach joined Mr. Kim as Merrill entered a new phase in its mortgage buildup. That September, the bank spent $1.3 billion to buy the First Franklin Financial Corporation, a mortgage lender in California, in part so it could bundle its mortgages into lucrative bonds. Yet Mr. Kim was growing restless. That same month, he told E. Stanley O’Neal, Merrill’s chief executive, that he was considering starting his own hedge fund. His traders were stunned. But Mr. O’Neal persuaded Mr. Kim to stay, assuring him that the future was bright for Merrill’s mortgage business, and, by extension, for Mr. Kim. Mr. Kim stepped to the lectern on the bond trading floor and told his anxious traders that he was not going anywhere, and that business was looking up, according to four former employees who were there. The traders erupted in applause. “No one wanted to stop this thing,” said former mortgage analyst at Merrill. “It was a machine, and we all knew it was going to be a very, very good year.”

Merrill Lynch celebrated its success even before the year was over. In November, the company hosted a three-day golf tournament at Pebble Beach, Calif. Mr. Kim, an avid golfer, played alongside William H. Gross, a founder of Pimco, the big bond house; and Ralph R. Cioffi, who oversaw two Bear Stearns hedge funds whose subsequent collapse in 2007 would send shock waves through the financial world.
“There didn’t seem to be an end in sight,” said a person who attended the tournament. Back in New York, Mr. Kim’s team was eagerly bundling risky home mortgages into bonds. One of the last deals they put together that year was called “Costa Bella,” or beautiful coast — a name that recalls Pebble Beach. The $500 million bundle of loans, a type of investment known as a collateralized debt obligation, was managed by Mr. Gross’s Pimco. Merrill Lynch collected about $5 million in fees for concocting Costa Bella, which included mortgages originated by First Franklin. But Costa Bella, like so many other C.D.O.’s, was filled with loans that borrowers could not repay. Initially part of it was rated AAA, but Costa Bella is now deeply troubled. The losses on the investment far exceed the money Merrill collected for putting the deal together.

By the time Costa Bella ran into trouble, the Merrill bankers who had devised it had collected their bonuses for 2006. Mr. Kim’s fixed-income unit generated more than half of Merrill’s revenue that year, according to people with direct knowledge of the matter. As a reward, Mr. O’Neal and Mr. Kim paid nearly a third of Merrill’s $5 billion to $6 billion bonus pool to the 2,000 professionals in the division. Mr. O’Neal himself was paid $46 million, according to Equilar, an executive compensation research firm and data provider in California. Mr. Kim received $35 million. About 57 percent of their pay was in stock, which would lose much of its value over the next two years, but even the cash portions of their bonus were generous: $18.5 million for Mr. O’Neal, and $14.5 million for Mr. Kim, according to Equilar. Mr. Kim and his deputies were given wide discretion about how to dole out their pot of money. Mr. Semerci was among the highest earners in 2006, at more than $20 million. Below him, Mr. Mallach and Mr. Lattanzio each earned more than $10 million. They were among just over 100 people who accounted for some $500 million of the pool, according to people with direct knowledge of the matter.

After that blowout, Merrill pushed even deeper into the mortgage business, despite growing signs that the housing bubble was starting to burst. That decision proved disastrous. As the problems in the subprime mortgage market exploded into a full-blown crisis, the value of Merrill’s investments plummeted. The firm has since written down its investments by more than $54 billion, selling some of them for pennies on the dollar. Mr. Lin, the former Merrill trader, arrived late to the party. He was one of the last people hired onto Merrill’s mortgage desk, in the summer of 2007. Even then, Merrill guaranteed Mr. Lin a bonus if he joined the firm. Mr. Lin would not disclose his bonus, but such payouts were often in the seven figures. Mr. Lin said he quickly noticed that traders across Wall Street were reluctant to admit what now seems so obvious: Their mortgage investments were worth far less than they had thought. “It’s always human nature,” said Mr. Lin, who lost his job at Merrill last summer and now works at RRMS Advisors, a consulting firm that advises investors in troubled mortgage investments. “You want to pull for the market to do well because you’re vested.”

But critics question why Wall Street embraced the risky deals even as the housing and mortgage markets began to weaken. “What happened to their investments was of no interest to them, because they would already be paid,” said Paul Hodgson, senior research associate at the Corporate Library, a shareholder activist group. Some Wall Street executives argue that paying a larger portion of bonuses in the form of stock, rather than in cash, might keep employees from making short-sighted decision. But Mr. Hodgson contended that would not go far enough, in part because the cash rewards alone were so high. Mr. Kim, for example, was paid a total of $116.6 million in cash and stock from 2001 to 2007. Of that, $55 million was in cash, according to Equilar. As the damage at Merrill became clear in 2007, Mr. Kim, his deputies and finally Mr. O’Neal left the firm. Mr. Kim opened a hedge fund, but it quickly closed. Mr. Semerci and Mr. Lattanzio landed at a hedge fund in London.

All three departed without collecting bonuses in 2007. Mr. O’Neal, however, got even richer by leaving Merrill Lynch. He was awarded an exit package worth $161 million. Clawing back the 2006 bonuses at Merrill would not come close to making up for the company’s losses, which exceed all the profits that the firm earned over the previous 20 years. This fall, the once-proud firm was sold to Bank of America, ending its 94-year history as an independent firm. Mr. Bebchuk of Harvard Law School said investment banks like Merrill were brought to their knees because their employees chased after the rich rewards that executives promised them. “They were trying to get as much of this or that paper, they were doing it with excitement and vigor, and that was because they knew they would be making huge amounts of money by the end of the year,” he said.


Free money coming your way!
New year is a time for new beginnings; for resolutions; for sweeping out the old and making a fresh start. But never before has the turning of the year brought such a transformation for the economic landscape. When the sun rises on January 1, it will do so on a world which has changed beyond recognition, a world in which interest rates are no longer the chief tool for economic policy-making and helicopter drops of money are the modus operandi; in which the banking system – that once-great foundation for the global economy – is on the brink of nationalisation; and in which the big question is not how much wealth the economy is capable of generating in the coming 12 months, but whether it faces a year or a decade of recession.

If anyone harboured doubts as to the scale of the crisis, these would have been dispelled on Tuesday night. Not only did the United States Federal Reserve cut its benchmark rate to zero; it also indicated that it will leave rates there for some considerable time and that it will pull out the big guns – in other words ready the printing presses – to fight the worsening crisis. The following morning we learned that the Bank of England had been considering reducing rates by even more than the percentage point it opted for this month. Zero – or near zero – interest rates are only a few months away on these shores. These are drastic measures, but understandable when one considers the scale of the economic devastation thrown up by the financial crisis. It is not merely that most of the Western world is now in recession, but that its scale is of a kind few of us have experienced. Only months ago it seemed hyperbolic to compare it with that of the early 1990s – still less the 1970s or, God forbid, the 1930s. But the statistics are bearing out the pessimists' worst fears.

Unemployment is rising at the fastest rate since the 1970s in the US, and in Britain faster than at most points during the last recession. Two million people will be jobless by Christmas. Companies of all hues, in all sectors, are laying off workers and slashing investment. Banks are cutting credit lines and leaving many firms facing bankruptcy. House prices are falling at a sharper rate than in modern history. Even so, the fact that the Fed is advocating the sort of helicopter drops of cash Milton Friedman and Ben Bernanke once speculated about is startling. For as long as we can remember – whether you were trying to manipulate levels of money in the economy, as in the 1970s and early 1980s, or inflation, as in the 1990s and 2000s – interest rates have been the key tool at policy-makers' disposal. Those days are over. Instead, the Fed must control the economy by pumping money in and out directly. It must directly buy up assets until the economy finds its feet again. This has alarming precedents: it was the printing presses that did for Weimar Germany, and sparked Zimbabwean hyperinflation.

Should quantitative easing – as central bankers call these measures – prevent a long, drawn-out period of deflation, it would do so only at the cost of brewing up a tremendous bout of inflation in subsequent years. Whether this results in double-digit inflation is academic: the upshot will be a sharp rise in interest rates for a long period. A year or so ago it was fashionable to paraphrase Robert Frost to warn that we are trapped between the extremes of fire and ice. The contrast today is even more stark: on the one hand lies a long, potentially inescapable stretch of deflation, on the other is high inflation, high interest rates and sluggish growth. As bad a taste as it may leave in the mouth, I feel the inflation option is the better one. This might seem peculiar given that the Consumer Price Index is still above 4 per cent, but before long the UK will be experiencing widespread falls in prices. Soon, we will be crying out for a little dose of inflation.

So, the chances are that the Bank of England will follow the Fed and drop rates to zero – or thereabouts. And life will start getting rather peculiar. It is not inconceivable that banks could start charging customers to hold their money – after all, their business model is predicated on positive interest rates. Some lucky households – those who took out tracker mortgages a few years ago – may find themselves with a negative interest rate, where their bank should be paying them for the privilege of holding their money. All of these things are possible with zero interest rates, though the Bank will most likely ape the Fed and cut only to a half or quarter percentage point. Mainly, though, just as the millennium bug sparked fears of a computer meltdown, the worry is that zero interest rates would cause an unpredictable chain reaction of destruction in the financial system.

The one thing likely to save us from the big zero is the pound's weakness. We are not in a sterling crisis – not yet at least. When currencies fall they usually do so for one of two reasons: because investors are worried that the economy is heading for a slump, or because they have lost faith in the people running the country. All the indications are that the pound's fall has owed more to the former; indeed, the yield on government debt, a key sign of faith in economic management, has dropped to the lowest levels in more than 20 years. But while an International Monetary Fund bail-out is only a distant possibility, one cannot rule it out. The problem is that, for all those trillion-dollar figures that float around, we still don't know precisely the scale of the losses facing the banking system. The poisonous potion of mortgage debt which brought down the lenders has not yet been drawn out of the system, and governments have concentrated on life support.

So, despite a £50 billion infusion of public cash, Royal Bank of Scotland, HBOS and Lloyds TSB are still having to cut the amount they are lending, as they scramble to repair balance sheets. While this is to be expected, it has the by-product of worsening the slowdown. In a recession there are always plenty of opportunities to find bargains, but what if no one will lend you the money to buy one? All of which is why it looks increasingly likely that the Government will have to go one step further towards nationalising the banking system. Just when you thought the financial crisis had died down – to be replaced by the economic slump – it returns. As the Bank Governor, Mervyn King, warned the Chancellor this week, the coming months will see more public money having to be put behind the banks.

This is not quite the same as nationalising the "means of production" in an effort to exert government control, it is temporary hospitalisation. This is not Old Labour – it is new nationalisation, or, for those on the other side of the Atlantic, neo-nationalisation. It is hard to predict what will emerge from this wreckage, but now is not the time to write the obituary of the US or the UK economy. The next few years will be tough, but we are not alone. Nowhere – not China, not the Middle East – will escape this slump. Times are bleak, and will remain so for a while. But the chances are that this time next year we will be talking about the green shoots of recovery, and speculating how long before the strange parallel world of zero interest rates comes to an end.

China's X'mas exports hit
China's peak period for exporting Christmas presents has taken a heavy hit this year amid the global economic crisis, with growth in the industry down nearly 40 per cent, state press reported on Thursday. China exported $1.28 billion (S$1.83 billion) of Christmas-related products from July to October, up 3.6 per cent over the same period in 2007, but the growth was down 38.9 percentage points year-on-year, Xinhua news agency said. The four month period has traditionally been the peak period for exports of Chinese-made Christmas products, the report said.

From January to October, Christmas-related exports totalled $1.64 billion, up 8.3 per cent year-on-year, but down 32 percentage points from the same period in 2007, it said, citing the customs administration. The report did not detail what exactly constitutes a 'Christmas-related export', so it was not clear if electronics, clothes, toys, or other products that could be given as Christmas presents were included in the figures.

The United States and the European Union continued to be the major markets for China's Christmas exports with the two regions accounting for 77 per cent of such products during the first 10 months of the year, it said. The overall value of Chinese exports slipped 2.2 per cent in November, marking the first year-on-year drop since June 2001, the government said last week.

Despite the slowdown, China's trade surplus is likely to hit another record in 2008, the nation's economic planning agency said on Wednesday. 'We expect... the full-year trade surplus to exceed 280 billion dollars, an increase of 18 billion dollars from 2007,' the National Development and Reform Commission said in a statement on its website.

California Democrats devise plan to hike taxes
California's Democratic leaders were planning a vote today on a brazen proposal to raise gas, sales and income taxes through a series of legal maneuvers that would bypass the Legislature's minority Republicans. The Democratic gambit, announced Wednesday, would raise $9.3 billion to ease the state's fiscal crisis by increasing sales taxes by three-fourths of a cent and gas taxes by 13 cents a gallon, starting in February. The plan would add a surcharge of 2.5% to everyone's 2009 state income tax bill. It would also require businesses to withhold taxes on payments above $600 made to independent contractors, as they are now required to do with salaried employees.

In addition, the Democrats said they would cut $7.3 billion from schools, healthcare and other programs. Their package would total $18 billion and nearly halve the state's budget shortfall, projected to reach $41.8 billion in the next 18 months. Both the Assembly and Senate planned to vote on the package today. Late Wednesday, Democratic lawmakers were negotiating with Gov. Arnold Schwarzenegger over items he wanted included in the proposal before he would support it. Inside the Capitol, the strategy is considered revolutionary, because it would sideline the GOP. Though Republicans are a minority in both houses of the Legislature, they have repeatedly blocked tax increases and thwarted budgets they did not like, because California is one of only three states mandating a two-thirds vote for both budgets and tax increases. Achieving that threshold requires some Republican votes.

"I still believe in bipartisanship," Senate President Pro Tem Darrell Steinberg (D-Sacramento) said at a Capitol news conference. "But there is an even greater responsibility than practicing bipartisanship, and that is to govern. And that is what we intend to do here today." Republican legislators and antitax groups promised legal challenges to derail the Democrats' plan. "Raising taxes on people and playing funny math and calling it fees is not governing," said Assembly GOP leader Michael Villines of Clovis. "That's trickery, is what that is." The plan hinges on a legal distinction made by judges that a tax is imposed broadly and used for general government purposes, while a fee is charged to users of a specific benefit provided by government, such as a road.

The proposal would employ an arcane loophole in state law that lets legislators pass a tax bill with a simple majority vote -- if the bill does not raise more revenue. The Democrats intend to do two things: eliminate some existing fees, including those on gasoline, and substitute tax increases that would include a 9.9% levy on oil extraction and the income tax surcharge. Under the proposal, the Democrats would then reimpose the gas fees at higher levels; fees can be raised with simple majority votes. The gas money would go to roads and transportation. The net effect would be billions of dollars in new revenue for the state.

Similar proposals have been considered in past budget crises but never acted on out of concern that they would unravel in court. The Democrats said Wednesday the plan had passed muster with the nonpartisan Legislative Counsel's office, which provides legal advice to lawmakers. But the only opinion from that office that Democrats released was from 2003. Democrats said this plan was the only way they could see of breaking the current budget impasse, which has stretched on for more than a month since Schwarzenegger called lawmakers back into session. "Sen. Steinberg and I are committed to getting this job done with or without our Republican colleagues," said Assembly Speaker Karen Bass (D-Los Angeles).

Matt David, a spokesman for Schwarzenegger, said the Republican governor would not sign the measure unless it included cuts to the state's workforce, which public employee unions are resisting. David said Schwarzenegger also is insisting that lawmakers include measures for mortgage relief and provisions allowing private contractors to perform more state construction and even take over some government facilities, such as roads. "If it doesn't have these components, then the vote . . . is nothing more than a drill," David said in an interview.

Jon Coupal, president of the Howard Jarvis Taxpayers Assn., said the Democrats' bid violates tenets of Proposition 13, the 1978 initiative that capped property taxes and required that all other tax increases be approved by two-thirds of the Legislature. "If they proceed with this proposal to raise taxes with a simple majority vote, they will be sued and they will lose," Coupal said. "So we're very confident this is more of a ploy than anything else." Legal experts said no one can know how the courts would rule. Judges might be reluctant to take an action that could send the state spiraling into insolvency. On the other hand, the experts said, judges -- particularly those afraid of recall campaigns -- might be afraid of a populist uprising akin to the revolt that led to Proposition 13.

"It is absolutely a shell game," said Kirk Stark, a professor at UCLA School of Law. But "in the 30 years since Prop. 13 was enacted, the courts have been accommodating of legislative ingenuity." Or, said another UCLA law professor, Jonathan Zasloff: "The court may just say, 'We are not dealing with this; it is not our job' " to run the state's finances. "It will be a galvanizing issue that tests the independence of the judiciary." If the plan were to survive legal tests, the state would still face a debilitating budget gap and a cash crisis so severe that California's top three financial officials -- the state treasurer, the controller and Schwarzenegger's finance director -- voted Wednesday to freeze financing on road, levee, school and housing projects.

State fiscal experts said lawmakers would have to erase the entire budget gap before they would resume issuing the bonds that finance such projects, which number more than 2,000. They said state bonds are not selling while financial speculation grows that California may become insolvent. "In a market where investors are looking for quality, we do not feel they are going to want to buy the bonds of the state of California" until the state's finances are righted, said Paul Rosenstiel, a deputy treasurer. "We don't hear from the investment bankers at all these days."

States Squeeze Cities, Spreading the Economic Pain
The worst budget crisis in decades is forcing states to cut funding to cash-strapped cities, which already are slashing police, firefighters and other services. Cities have limited options when presented with state cuts, but some are fighting back. Last month, the League of Arizona Cities and Towns sued the state over its demand for city funds. A group of California redevelopment agencies sued their state to block it from conducting a "raid" of $350 million in local redevelopment funds. States typically reduce city aid during budget shortfalls. Localities will be hurt more during this recession than when government finances turned down earlier in the decade, said Scott Pattison, executive director of the National Association of State Budget Officers. After the 2001 recession, sales and income taxes were squeezed, but property taxes -- the primary source of local-government funds -- held up relatively well.

In today's recession, both state and local revenues are suffering across the board. In the past 30 years, state spending has grown by an average of 6.3%. States cut a total of 0.1% from their budgets for fiscal 2009, which ends in June; the faltering economy is increasing projected deficits in the coming months. States are facing $30 billion in budget deficits for the current fiscal year, according to the Fiscal Survey of States released this week by the National Governors Association and National Association of State Budget Officers. That figure is likely to grow in the coming months. Twenty-two states, including Georgia, California and Nevada, already have cut spending from their 2009 budget.  This week Minnesota's governor and legislators said cities and counties can expect aid to decrease soon. The state is coping with estimated shortfalls of $426 million for this year and $5 billion for the two-year budget period that begins in July. New York Gov. David Paterson's budget proposal, released this week, would cut about $240 million in aid to New York City. The Nevada legislature voted earlier this month to take out a line of credit from its local-government investment pool to help fill a $342 million shortfall in its $6.8 billion, two-year budget.

Governors and state lawmakers say extraordinary measures are necessary because the downturn has sliced revenue including sales, corporate and personal income taxes. Commitments to local aid must be on the table, they say, along with across-the-board cuts to state agencies, tuition increases at state universities and pleas for federal assistance. Cities say any decrease in funds could trigger higher local taxes and would cut into municipal services. While states usually handle big-ticket programs such as health-care funding, prisons and social-services programs, municipalities are responsible for services such as fire and police protection. In Mesa, Ariz., the police academy won't have a graduating class next year, says Mayor Scott Smith, because the force is cutting positions. Libraries have cut their hours and swim programs will be limited to six of the city's 11 public pools next summer. Mesa gets most of its revenue from local sales taxes, and about one-third of the city budget comes from money distributed by the state, according to Mr. Smith. "For the first time our cuts are across the board and affect all departments, including public safety," he said.

Nevada, already reeling from foreclosures, has seen sales and gambling taxes from Las Vegas and Reno tumble. The Nevada legislature voted in a special session last week to establish a line of credit of as much as $160 million from a $725 million local-government investment pool. Cities, counties and school districts allow the state to invest that fund to earn a higher rate of return than they could on their own.  Borrowing from the investment pool would increase Nevada's debt at a time when state finances are expected to worsen. That troubled officials in rural Humboldt County, a mining community in the northern part of the state. On Dec. 1, the county decided to pull out the $11.5 million the county had invested in the Nevada fund. "The state has not clearly set a plan out for how the line of credit will be repaid," Humboldt County treasurer Gina Rackley said. County officials planned to meet Wednesday to decide what to do with the investment, which currently is in a savings account, she said.

Most municipalities assume some state aid in their budgets. Already, many cities have pared spending through layoffs and lower public-safety funding, amid declining revenue from sales and property taxes. Because cities have less taxing power than states, reductions in state aid likely will force further cuts.  Adding to the local burden: During the real-estate boom, several states placed caps on local property taxes, to quell protests over taxes that soared with home values. In Indiana, statewide caps that voters welcomed earlier this year now are expected to hurt local governments that depend heavily on property taxes. Last week, Gary, Ind., filed a petition about its economic plight with Indiana's Distressed Unit Appeals Board, which was set up recently to hear complaints about the tax caps. Gary officials said the new law could force the city to cut its general-fund budget by about half, or more than $30 million.

In some states, legislation limits cities' exposure to the state budget knife. Four years ago California voters passed a law that requires state loans taken from local revenue to be paid back within three years. "It really changes the relationship between locals and the state," says Megan Taylor, a spokeswoman for the League of California Cities. Some local bodies are taking their fight to the courts. The California Redevelopment Association, which represents local redevelopment agencies, filed a lawsuit this month seeking to block a bill that would use $350 million in redevelopment funds to plug a state budget hole. In Arizona, cities sued the state after the state demanded that cities give the state about $30 million. "We can't allow this precedent to stand," said Ken Strobeck, executive director of the League of Arizona Cities.

So leap with joy, be blithe and gay,
or weep, my friends with sorrow.
What California is today,
The rest will be tomorrow.

   --Richard Armour 1962

California Lawmakers Kill Tax Increase to Cut Deficit
California lawmakers for a second time rejected tax increases intended to narrow a record budget shortfall, even as the state’s swelling financial problems may force it to cut off $3.8 billion in spending for work on schools, roads and other projects. The Democrat-backed bills sought to cut $7 billion of spending while raising $11.3 billion with higher taxes on retail sales, oil production and alcoholic beverages. The tax increases, similar to those backed by Republican Governor Arnold Schwarzenegger, were blocked by Republicans, a minority that still commands enough power to prevent the two-thirds vote needed to pass a budget. "We are in a crisis" said Assemblywoman Noreen Evans, a Democrat from Santa Rosa, during a debate on the defeated proposal. "This is not something we can run away from. This is not something we can just stick our heads in the sand and hope it goes away."

California, the most-populous U.S. state, will run out of money as soon as February unless lawmakers end an impasse over how to replace revenue lost amid the recession.  Schwarzenegger’s administration has said the state may begin paying bills with IOU notes as early as February, a measure that has been utilized only one other time since the Great Depresssion. Republicans and Democrats, ordered into an emergency session by Schwarzenegger, have been deadlocked over how to eliminate a swelling budget deficit that emerged in the spending plan they passed just three months ago. Last night, Assembly Speaker Karen Bass of Los Angeles ordered lawmakers locked into the Capitol in Sacramento in an unsuccessful bid to force a deal. Democrats abstained from voting last night after it became clear the measures would fail.

The state has a $14.8 billion shortfall in the current budget year that’s projected to swell to $41.8 billion by July 1. On Dec. 1, Schwarzenegger, 61, ordered lawmakers in a special session to deal with the problem and threw his support behind tax increases. The escalating financial crisis has depressed the state’s bond prices, driving up the yields. A California bond maturing in 2033, which pays 5 percent interest, dropped to 76 cents on the dollar to yield 7.08 percent. That’s down from as much as 80 cents yesterday, when it yielded 6.66 percent. The governor invoked powers granted him in 2004 to declare a fiscal emergency, which gives the Legislature 45 days to plug the shortfall. If no solution is found in that time, members are barred from doing any other legislative work until they have dealt with the problem.

Democrats sought to fill some of the gap by raising the state’s sales tax by 1.5 percentage points for three years to 7.25 percent, as well as adding a 9.9 percent-per-barrel severance tax on oil produced in California and a 5-cent tax on every 12 ounces of beer, 5 ounces of wine and 1.5 ounces of spirits sold in the state. Republicans, a minority in the Legislature, have the power to block any proposal and have ruled out tax increases. They want to cut spending by as much as $15 billion from schools and welfare programs, such as health care for the poor. The Republicans also want to ask voters to divert $6 billion of tax money that is earmarked for specific uses such as mental- health programs. Their plan is scheduled for a vote later today.

"Those proposed taxes would kill our economy," said Republican Assemblyman Chuck DeVore. "California already has the highest income tax rate in the nation. We have the highest sales tax rate in the nation. We have the highest gas tax in the nation. We have the highest corporate tax in the Western U.S."  Lawmakers’ failure to reach an agreement comes as a state board prepares today to vote on whether to shut off $3.8 billion of funding for construction projects as the financial crisis threatens to drain its cash. Usually the state replenishes funds spent from the Pooled Money Investment Account by selling bonds. With growing doubts about the state’s solvency and with money scarce on Wall Street, Treasurer Bill Lockyer said that can’t be done.   The board’s decision will delay or halt work on prisons, schools, hospitals, roads and other public projects, dealing a blow to an economy that’s already reeling from a housing market crash that has cost about 136,000 construction jobs over the last two years. Such a step would come as President-elect  Barack Obama is preparing a plan to funnel billions to states for infrastructure, a move intended to stoke the economy.

Last night’s failure was a second defeat for Democrats who command a majority in the Legislature. Lawmakers from the party offered a proposal last month that would have sliced $8.1 billion from the budgets of schools, colleges and other programs and raised another $8.1 billion by increasing vehicle license fees and freezing income-tax brackets at 2007 levels. That plan fell short of the necessary two-thirds vote on Nov. 26, when no Republicans backed it. California, the biggest borrower in the municipal-bond market, has $51.9 billion in general-obligation debt. It’s rated A+ by Standard & Poor’s and Fitch Ratings, the fifth-highest grade, and an equivalent A1 at Moody’s Investors Service.

Ukraine Currency Plunges 17% on Default Concern
Ukraine’s hryvnia plunged 17 percent in two days to a record low against the dollar as a pledge by President Viktor Yushchenko to support the currency failed to ease concern that most of the country’s loans risk default. The currency fell 7 percent today, reaching 9.65 per dollar at 2:30 p.m. in Kiev, adding to a 44 percent drop this year. It continued to slide after Yushchenko said Ukraine will buy hryvnia and called for licenses to be revoked for lenders found speculating against the currency. The central bank said it will raise its benchmark refinancing rate from 12 percent to an unspecified level to stem the decline.

Ukraine is attempting to arrest a deepening crisis since the International Monetary Fund provided a $16.4 billion bailout last month as the falling currency increases the cost of more than half of loans from domestic lenders that are in dollars, according to central bank data. The ex-Soviet nation, with $104 billion of corporate and state debt, has the third-highest credit risk worldwide after Ecuador, which defaulted last week, and Argentina, based on the cost of credit-default swaps. “Yushchenko’s poll ratings are at record lows so I’m not sure how much confidence the man on the Kiev metro has in his abilities to manage this crisis,” Timothy Ash, head of central Europe, Middle East and Africa research at Royal Bank of Scotland Group Plc in London. An exchange rate near 9 per dollar means 60 percent of foreign-currency loans and mortgages may not be repaid, Roman Zhukovskyi, head of the social and economic department in the president’s office, said in a televised press conference in Kiev yesterday.

“There will be corporate defaults and banking consolidations,” said Ali Al-Eyd, an economist at Citigroup Inc. in London. “The plunge in the foreign exchange is going to bite and only reinforces the negative trends developing in the economy. Growth is going to stall.” Ukrainian companies need to repay as much as $4.1 billion of debt in December as lenders refuse to refinance the debt amid the worst global financial crisis since the Great Depression, according to Dmitry Gourov, an economist focusing on Ukraine at UniCredit SpA in Vienna. Dollar loans made up 53 percent of credit issued by Ukrainian lenders as of Sept. 30, according to the central bank Web site. Yushchenko threatened the central bank with a “serious staff decision” if it fails to stabilize the hryvnia and demanded that policy makers revoke the licenses of speculators. “We will have stricter monetary policy,” central bank Governor Volodymyr Stelmakh said. The bank is holding a meeting this afternoon to discuss further policy and Petro Porohsneko, head of the central bank council, will hold a press conference at 5 p.m. in Kiev.

The central bank will sell dollars today at a rate of 8.95 per dollar and tomorrow at 8.7 per dollar, Finance Minister Viktor Pynzenyk said in televised remarks. The central bank attempted to manage the hryvnia’s decline since October by buying and selling foreign-exchange reserves. Natsionalnyi Bank Ukrainy drained $3.4 billion in November and $4.1 billion in the previous month, reducing reserves to $32.7 billion on Nov. 30. Further intervention is curtailed by Ukraine’s agreement with the IMF, which prevents reserves from falling below $31.4 billion by the end of the year and calls on the central bank to move toward a flexible exchange-rate regime. Ukraine’s economy, which has expanded at an annual pace of 7 percent since 2000, will probably slow to 2 percent this year, central bank adviser Valeriy Lytvytskyi said on Dec. 15.

The country’s woes have been exacerbated by the collapse of the ruling coalition in September amid disagreement between Prime Minister Yulia Timoshenko and the president. The coalition was re-formed this month. “Nothing has changed in the political situation and that doesn’t inspire confidence in the near-term outlook,” Citigroup’s Al-Eyd said. Ukraine’s economy, which relies on steel for 40 percent of exports, is weakening as production dropped 48.8 percent in November and prices tumbled. European prices for hot rolled coil, the benchmark steel product, have dropped 47 percent since August to $425 metric ton, according to data from U.K. industry publication Metal Bulletin. Ukraine’s industrial production fell by a record 28.6 percent last month as steel, machine building and oil refining slumped, after a 19.8 decline in October, the Ukrainian Statistics Office said last week.

The cost to protect Ukraine against default jumped more than 13 times this year to 31 percent of the amount of debt protected, behind Ecuador at 59 percent and Argentina at 46 percent, CMA Datavision figures on Bloomberg show. NAK Naftogaz Ukrainy, Ukraine’s state-run energy company, said today it acquired the necessary U.S. dollars to pay its debt for natural-gas supplies from Russia, transferring $800 million yesterday. OAO Gazprom, Russia’s natural-gas exporter, was demanding Ukraine repay about a fifth of a $2.4 billion debt before it agreed on fuel prices for next year The hryvnia is being subdued by “capital flight, the thin market being effected by Naftogaz dollar purchases and faltering confidence in the currency from locals,” Gourov said “There was a massive explosion of credit in Ukraine more than a year ago,” said Viktor Broczko, investment manager at Progressive Developing Markets in London, which manages about $500 million in emerging and frontier-market stocks. “It was mind-blowing and unsustainable.”

Dead wait
Anyone looking out from the restaurants and offices of Singapore’s tree-fringed south shore in the last few years has had a grandstand view of globalisation in action. Scores of ships would be either anchored offshore or passing by in one of the world’s busiest shipping lanes. Among the commonest sights have been huge container ships either taking vast quantities of manufactured goods from Asia towards Europe or, largely empty, heading back for more. The view has started to change in the last few months. As well as the gainfully employed ships, there are now substantial numbers laid up, waiting for the end of a sudden and deep collapse in their earning power.

First came the dry bulk carriers that shift iron ore and coal around the world. Now, container ships are beginning to appear among them, mothballed by operators who have seen demand growth either slow down or go into reverse. Consumers in western Europe and North America are buying far fewer of the toys, computers, furniture and other manufactured goods that go inside the stackable steel boxes they carry. “It seems to be going faster and deeper than expected,” Michel Deleuran, a senior executive in Denmark’s Maersk Line, the sector’s biggest operator, says of the downturn. Container trade between Asia and Europe, which rose 16.5 per cent last year, is shrinking for the first time in history, according to some estimates. The spot rate for moving a 40-foot container from Hong Kong to Rotterdam plummeted from about $2,700 (£1,750, €1,900) in autumn last year to as low as $200 now.

Such figures represent a severe shock for an industry that has grown used to the double-digit annual volume growth and buoyant freight rates it has enjoyed for nearly all the seven years since China joined the World Trade Organisation. The sector has not only been ideally placed to benefit from globalisation but arguably caused it. The introduction of the container in the 1960s and 1970s slashed the costs of transporting goods compared with the general cargo ships they superseded and encouraged manufacturers to move further away from their markets. For retailers, manufacturers and other shippers who are container lines’ customers, the rate slump continues the long-term trend under way since the first container ship set sail in 1956. Many will now be able to send cargo the thousands of miles between Asia and Europe or North America for a fraction of the trucking or rail costs of moving it a few hundred miles on land. But the trade-off is likely to be poorer service, according to John Fossey, editor of Containerisation International, a trade journal. On most routes, container lines or alliances of lines run a “string” of ships – traditionally eight for the round-trip from China to northern Europe and back – a week apart on a circular route.

Lines and alliances are now cutting services, merging different strings and slowing ships down to reduce fuel costs and ensure that ships run full. That often requires the use of an extra vessel to maintain a weekly service – Asia-Europe round-trips now typically take 63 days and require nine ships, against 56 days and eight ships before. “Shippers, who have benefited enormously in recent years from carriers offering them multiple weekly sailings from a wide variety of ports, are probably going to suffer from fewer sailings per week,” Mr Fossey says. “They probably will find themselves having access to fewer port calls and probably have to face longer journey times as the liner companies are slowing their vessels down.” Many of the aggressively growing European companies that have come to dominate container shipping in the last five years look set for years of struggling to meet the cost of ambitious fleet expansion plans. The mainly German funds that own large parts of such lines’ fleets could face still tougher times as shipping lines terminate charters and struggle to finance what Nick Sjoberg of Braemar Shipping Services, a London shipbroker, calls a “feeding frenzy” of ship orders.

“The person who ordered the ships has a problem,” he says. “He has to raise the equity and nobody wants to finance him. That has the potential to create significant problems for banks and for investors.” At the heart of the industry’s problems is the coincidence of the demand slowdown with the start of a wave of deliveries of mammoth ships ordered at the height of excitement over China’s manufacturing boom. The largest container ships now – nearly 400m long, 55m wide and able to carry 13,000 containers – have about one and a half times the capacity of the biggest of barely five years ago. They have been designed mainly to handle exports from China and other Asian countries to Europe, although some could be used on services between Asia and the US west coast. Mr Sjoberg says shipowners need to raise $500bn to pay for ship purchases to which they have committed. For the lines with the largest fleet order books, that promises to be an onerous burden. Bigger vessels, when full, can transport each container more cheaply. But many see the giant ships proving a liability in the downturn. Container ships, unlike tankers or dry bulk ships, operate to fixed schedules, like a bus, train or airline service. Like nearly all businesses, they need to attract enough customers to cover fixed operating costs before making a profit. Larger ships can make filling the available space harder and force operators to offer deeper discounts.

Mark Page, research director at the London-based Drewry Shipping Consultants says the arrival of big new vessels on the Asia-Europe services of CMA CGM, the Marseilles-based world number three line, helped to push down rates on the whole route. “In a falling market, the last thing anybody wanted was some really cargo-hungry new ship on the berth every week, needing to be filled,” he says. CMA CGM, along with some other believers in big ships, counters that the new vessels are part of the answer for the industry, not the problem. Nicolas Sartini, in charge of its Asia-Europe trades, says CMA CGM benefits from its worldwide network, parts of which – such as Asia-west Africa trade – are still growing. It is counteracting the slowdown in Asia-Europe volumes by topping up with cargo bound for west Africa, which is discharged at Tangiers for delivery by a second vessel. Even if future vessel orders cannot be cancelled, lines will seek to postpone deliveries, to avoid the depressing effect on rates of a glut of new capacity. Many will also be able to dispose of ships chartered from specialist owning companies to cut their costs and fleet size. CMA CGM has the option to hand 150 of the 385 vessels it currently operates back to their owners during 2009, according to Mr Sartini.

Still, the slowdown is likely to shift the industry’s balance of power eastwards. Asian operators such as Singapore’s Neptune Orient Lines and Hong Kong’s Orient Overseas Container Lines, whose smaller ships until recently looked a liability, now appear better placed than others. They largely held back from placing big orders in recent years. AXS Marine, a Paris shipbroker, predicts that world container fleet capacity will grow by more than 14 per cent a year on average between this year and the start of 2011. Even corrected for the effects of slower speeds and ship scrapping, Drewry expects vessel capacity to grow by about 12 per cent this year and next – well above any predictions of traffic growth.

In fact, it is possible to argue the problems may be only just beginning. Preliminary figures from Drewry’s annual report on the sector, to be published next week, suggest shipping lines’ rates have still been rising this year by 4.1 per cent. For next year, they predict a fall in average rates of nearly 20 per cent. That could leave shipping lines facing still more unpalatable choices. The container ships laid up off Singapore are mostly older, smaller workhorses that lines are taking out of service to concentrate on filling their latest craft. If the downturn continues much longer, Braemar’s Mr Sjoberg suggests, they may instead need to send gleaming-hulled new vessels each costing $170m straight to the parking bay.

‘It has always been a cyclical industry but the speed of the slump is very dramatic’
Every ship that enters the port of Hamburg must pass the expansive window of Hermann Ebel’s modern office on the banks of the river Elbe. This commanding view of one of Europe’s biggest container terminals puts the owner of Hansa Treuhand in a good position to discuss how the financial crisis has affected German shipping. “It has always been a cyclical industry but we’ve experienced an economic slump in just three months. The speed is very dramatic,” says Mr Ebel, whose shipping finance company controls a 70-strong fleet of mainly container vessels. As liquidity has dried up and trust evaporated, banks have refused to write the letters of credit vital to the shipping of bulk goods. Some container ships have been forced to carry lighter loads while bulk cargo piles up in ports around the world, particularly in east Asia.

As one of the world’s most important shipping nations, Germany is particularly vulnerable to these problems. German companies own 36 per cent of the world’s container ship capacity, while the country’s banks are responsible for about 40 per cent of global shipping finance. This latter activity has ground to a halt as demand for new vessels slumps and German lenders grapple with the turmoil in financial markets. HSH Nordbank, the world’s largest shipping lender, was forced to seek up to €30bn ($41bn, £27bn) in loan guarantees from the government’s banking rescue fund and is set to slim its balance sheet as part of a restructuring. Several other Landesbanken – regionally owned public lenders – are also heavily involved in shipping finance and lending could contract further. “I am not sure how much shipping finance will be available next year,” says Christian Hennig, head of shipping credit at MM Warburg, a Hamburg-based private bank.

Germany’s strength in container shipping is due in part to an innovative funding model known as KG finance, which spreads the costs of shipbuilding by giving private investors tax incentives to buy equity stakes in such projects. German shipping KG funds last year attracted about $5.6bn of equity, according to Clarkson Research Services, a maritime database company. Yet this model has come under pressure as anxious investors hoard cash and demand for shipping charters falls, forcing some companies to lay up vessels. For those shipowners able to renew their charters, lower rates are barely covering the cost of operating vessels. Particularly worried are shipowners that have placed orders for a new generation of super-sized container vessel due to come into service from 2010. Such companies are likely to try to delay or cancel these projects – possibly forfeiting hefty deposits – in order to avoid taking possession of ships they cannot charter.

Although Hansa Treuhand is expecting the delivery of 11 ships in the coming years, they are relatively small and most already have contracts. Investors’ exposure to lower charter rates will be limited, the company says, as most invest in pools rather than single vessels.
Shipowners emphasise that not all is gloom and doom, notably in the tanker markets where charter rates have held up. People in the industry say Hamburg’s terminal operators are almost grateful for the respite after months of operating flat-out. Moreover, shipping companies are confident that the financial crisis will not mark the end of globalisation and the rewards it has brought. “Notwithstanding the current economic deterioration, in the long term world trade and the shipping industry have an excellent future,” says Hans-Heinrich Nöll, head of VDR, the shipowners’ association.

One in Five US Households Fell Behind on Utility Bills Last Winter
One in five U.S. households was behind on its utility bills coming out of last winter, a new survey concludes, raising fears that the current heating season could be even worse. One in 20 households had its utility service terminated in 2007. Electric customers who were overdue owed an average of $157 in May 2008, when prohibitions on most wintertime service shutoffs ended, while overdue natural-gas customers owed an average of $360.

The survey, expected to be released on Wednesday, was conducted by the National Association of Regulatory Utility Commissioners, or Naruc, an organization of state utility regulators that has become increasingly concerned about a worsening trend of payment delinquencies and service shutoffs. Results were gleaned from statistics submitted by utility commissions in 41 states and the District of Columbia, the largest sample size ever analyzed by the organization. Utilities included in the survey serve roughly half of all U.S. households.

The federal government doesn't collect data on delinquencies, so Naruc stepped in to fill the void. Although the association considers the data imperfect, it believes the survey provides a valuable snapshot. "We know the economy is in worse shape than when the numbers were taken, and we know people are struggling," said Rob Thormeyer, spokesman for Naruc in Washington, D.C. State commissions likely will use the survey results to press Congress and state legislatures for more assistance for low-income customers. For many households, crunch time comes in the spring after prohibitions on wintertime shutoffs end.

Higher delinquencies hurt utilities as well as consumers. Gas-distribution companies wrote off 4.3% of their revenues in 2007 because customers didn't pay their bills, the survey found, significantly more than the 2.6% written off in 2005, according to a prior survey by the organization. Electric companies wrote off 1.3% of their revenue in 2007, about the same as in 2005, the survey found. Utilities may seek more money to cover bad debts in the future. Currently, utilities in some states are allowed to socialize those costs over paying customers, but are denied that ability in other states.

As Obama Picks Cellulosic Advocates, EIA Predicts Shortfall
The U.S. won't be able to meet its mandate to produce 36 billion barrels of biofuel by 2022, according to the government's top energy forecaster. The Energy Information Administration predicted the technological breakthroughs necessary to produce the advanced ethanol quantities called for in the mandate would mean only around 30 billion barrels will be produced. The prediction comes as President-elect Barack Obama named his Agriculture Secretary nomination, former Iowa Gov. Tom Vilsack, who's a proponent of advanced cellulosic ethanol, but an advocate of dropping subsidies for corn- based ethanol.

As chairman of a Council of Foreign Relations task force on climate change, Vilsack recommended in a June report to reduce tariffs on imported biofuels, and begin "phasing out domestic subsidies for mature biofuels such as conventional corn-based ethanol." Obama's Energy Secretary pick Steven Chu has also spoken unfavorably against corn ethanol. "The problem with corn is that is you look at how much energy one needs to invest to grow one unit of energy or ethanol, approximately two units of energy are needed," Chu said in a 2005 speech. "It's a good idea for corn farmers, because they get subsidized, but it's not a good deal for the world," particularly because of the carbon dioxide emissions related to corn ethanol production, Chu said.

Chu, however, orchestrated the $500 million research and development program into advanced biofuels with BP PLC (BP), planning that innovation and government and private-sector funding will be able to crack the code necessary for a major expansion of cellulosic biofuels production. If the tariff is axed or allowed to expire, countries like Brazil, which has been steadily boosting its production, will likely see imports escalate. The EIA forecasts ethanol supply from cellulosic feedstocks reaching 12.6 billion gallons (including both domestic and imported production) in 2030, while biodiesel and biomass-to-liquid diesel fuel use rise significantly, reaching nearly 2 billion gallons and 5 billion gallons, respectively, in 2030.

Renewable Fuels Association spokesman Matt Hartwig said his group had been in discussions with Obama's transition team about possible funding in the President-elect's stimulus package expected in the new year. "Ethanol is uniquely poised to employ new technologies and scale up production significantly in the short term to greatly reduce imports of foreign oil and more meaningfully help address the issue of global warming," Hartwig said in a statement. Although the industry has received subsidies, it has been hit hard by over- production, distribution problems and the financial crisis. Many plants have been put on hold, are teetering on bankruptcy or are likely targets of an expected wave of consolidation in the industry.

Battle opens over China's future
The new year is not here yet but already China's government and dissidents are in battle over how to mark 2009, a year that will be overshadowed by contentious anniversaries and economic woes. Chinese President Hu Jintao told officials on Thursday that Communist Party rule must not waver. But "Charter 08," a petition campaign launched last week, wants dramatic democratic changes to end decades of uncontested Party control. There is no doubting the defiant ambition of the fast-growing campaign, said Wang Yi, a law lecturer and rights campaigner who signed its list of 18 demands.

"This marks a shift from the past," Wang said by phone from his home in Chengdu, in the country's southwest. "We're offering not only criticism but also our own quite comprehensive proposal for China's future ... and this includes a whole sweep of people, from former Party officials to dissidents." There is also no doubting the anxiety of China's leaders, laden with an abrupt economic slowdown, gathering discontent over unemployment, and next year the touchy 20th anniversary of the bloody June 4 crackdown on the pro-democracy movement. Authorities have already detained Liu Xiaobo, a prominent participant in the 1989 protests who helped organize the Charter. Other organizers have said they were briefly held by police. But some said they are ready for imprisonment.

"This will be a long-term endeavor, like Charter 77," said Zhang Zuhua, one of the movement organizers, referring to the Czech dissident campaign launched in the 1970s that inspired China's. "When I was questioned, I told the police I don't want to be arrested, but if they do jail me, I will be ready for it, whether it's a year or a dozen or more," he said, sipping ice coffee in the backroom of a cafe in west Beijing. China is thus set for a year of unsettling contention, pitting emboldened dissidents against a one-Party state that prizes unchallenged control -- and all this as the economic slowdown fans memories of the woes before the 1989 protests. "Of course, this document hopes to advance political reform at the time of the 20th anniversary," said Wang. "We need to escape this bind we're caught in of a market economy and a top-down high-pressure political system. It's at a dead-end."

China is in thrall to political anniversaries in a way few nations are, and 2009 will bring an abundance of dates that the ruling Communist Party will either celebrate or tip-toe around. As well as June 4 and the 60th anniversary of the founding of the People's Republic of China, there is the 50th anniversary of the Dalai Lama's flight from Tibet to exile in India after a failed uprising, and the 90th anniversary of the May Four student protest movement that called for "science and democracy." Zhang, the former Communist Youth League official who helped draft Charter 08, said organizers decided to launch it before police stifled activists using detentions and house arrests. Charter 08 demands rule of law with an independent judiciary, open democratic elections and a federal government that would grant a measure of autonomy to Tibet.

Many measured words in the Charter echo a lot of the Party's own vows. But taken in full it amounts to a "stake in the sand" that could mark a turning point for Chinese political debate, said Perry Link, a professor at the University of California, Riverside, with long-standing ties to the country's dissidents. "It is the first time in PRC history that a group has taken a public stand against one-Party rule," said Link in an email. His English translation of the Charter can be found on the website of the New York Review of Books ( "This is more than what the Communist Party has always called 'reform'. It calls for more fundamental change," said Link. The movement is also striking for its range of inspirations and support. It consciously echoes the Charter 77 movement, which challenged Communist Party power in Czechoslovakia years before the fall of the Berlin Wall and division of that country.

The original 303 signatories of Charter 08 include lawyers, professors, business people, rural activists and artists. Thousands more citizens have since signed via the internet or sent messages of support, said Zhang. They included university students, migrant workers and high-school students, he said. "This time the Internet has played a big role," he said of the Charter's fast spread. "There's a bunch of young people who have been putting it up on message boards all the time, faster than it can be taken down." The Communist Party has so far kept mute about this challenge. But the detention of Liu Xiaobo was a clear enough response. Liu's wife, Liu Xia, has repeatedly gone to police to ask for him after officers took him last week. But she has received no information, said Zhang, who stays in touch with her.

"It's clear that state security wants to build a case against him," said Nicholas Bequelin, a specialist on China for Human Rights Watch, a New York-based advocacy group. China's leaders believe they have found the right recipe for their country's return to strength and prosperity: market-driven growth and one-party control. But the slowed growth of recent months and a rising reservoir of jobless workers and graduates has officials worried. Charter 08 on its own is most unlikely to stoke such discontent into anything like the 1989 protests, when workers and small business owners joined students in denouncing corruption and top-down rule. The Party used troops to crush that challenge, killing hundreds, some critics say thousands.

Judging the Party's recent handling of dissidents, officials may attack Charter 08 with selective arrests and trials. But that may not silence core supporters of the Charter, especially if broader ripples of discontent erode Party authority. "The Party has always relied on a combination of carrots and sticks," said Bequelin. "If it is unable to distribute as many carrots, the stick loses its efficiency."

Bracing for the Global Downturn
As the year draws to a close, and as the world faces recession, a credit crunch and job worries, the economic outlook is the bleakest it has been in postwar history. The next year is expected be a test of strength for the German economy. Will the country's export strength prove to be its Achilles heel? Last Friday, the world came to a standstill in Stuttgart's Sindelfingen district. On normal days, about 1,500 trucks and 52 rail cars arrive at the Mercedes plant in Sindelfingen, carrying steel and glass, tires and dashboards, headlights and seats. More than 36,000 employees pass through the factory gates every day to develop new models and assemble the current ones -- the Mercedes C, E and S classes. On normal days, at least 1,500 cars roll off the assembly lines at the plant. But what is normal nowadays, with new reports on the recession coming in each day? Now the Mercedes plant is closed -- until Jan. 11. Production facilities worth billions have been shut down. Everything, from the paint shop to the welding and production robots to the assembly line itself, has stopped moving.

Daimler, like Ford (at its German plants), Opel, BMW and VW, has stopped production temporarily. The German auto industry, which is responsible for one in seven jobs, is putting itself into something resembling an artificial coma. Some companies are using working time accounts to keep their employees at home, while others have introduced a shortened workweek. No one knows what will happen next year. When plants are shut down in Germany's automotive production centers -- Stuttgart, Munich and Wolfsburg -- it also affects the employees of the carmakers' suppliers: engineers working for transmission manufacturers, technicians with the steel companies, and creative talent at ad agencies. Silence has descended on places that were once hubs of busy activity, from hammering to filing, drafting to designing. And a ghostly silence it is, this national standstill. Order volume has plummeted across the board in German industry, and the markets are shrinking at a breathtaking pace. Planned investments are being cancelled or postponed. The economy has entered a recession of previously unimaginable proportions.

Economists are predicting new alarming scenarios for 2009 almost every day. Pessimistic estimates of the amount by which the German economy will shrink range from 0.8 to 2.2 percent. Experts are also outdoing each other with worrisome new unemployment figures. The Organization for Economic Co-operation and Development (OECD) remains cautious and expects about 700,000 people to join the jobless in Germany by the end of 2010. Others, like Dirk Schumacher, chief economist at the Goldman Sachs office in Germany, want to prepare us for the worst: Six million jobless, he says, is conceivable. Even the German government is revising its forecasts. While the experts in Berlin predicted miniscule growth for 2009 in October, they now expect the economy to shrink by 2 percent. This would catapult the government deficit from zero to about three percent of GDP, to reflect decreased tax revenues and increased expenditures for unemployment benefits. "On the whole, next year Germany will likely face its greatest stress test, at least since reunification," states the draft version of the government's new annual economic report, which also notes that economic development has "weakened drastically."

The government's economic experts do not expect the economy to return to positive territory by 2010. And on Wednesday, the daily Süddeutsche Zeitung reported that, in its internal calculations, the government is expecting to generate at least €30 billion in new debt in 2009 -- three times as much as in 2008 and the highest level since 1996. Despite the crisis, the coalition government in Berlin has not shown much leadership strength. Officially, Chancellor Angela Merkel of the conservative Christian Democrats continues to oppose additional large-scale government bailout programs. Merkel's finance minister, Peer Steinbrück of the center-left Social Democrats, seems to prefer quarreling with the British and French who, he insists, are frittering away their money with their bailout packages. In doing so, he has also angered many. In the opinion of German Economics Minister Michael Glos -- a member of the Christian Social Union (CSU), the Christian Democrats' Bavarian sister party -- things are not moving quickly enough. Glos has been increasingly forceful in opposing his own chancellor and, by doing so, throwing his lot in with his party's new chairman, Horst Seehofer. As Bavaria's new governor, Seehofer is trying to demonstrate his strength in the run-up to next September's federal election. Party politics, it seems, has distorted much of the government's response to the crisis.
In November, the chancellor warned the public to be prepared for "a year of bad news." Never in the 60-year history of the Federal Republic of Germany have citizens been this anxious as they enter a new year, plagued by worries of how much worse things can get and, most of all, how safe their jobs are.

On the surface, there has been surprisingly little change. The Christmas markets are as crowded as ever, and traffic remains heavy on highways headed for ski regions. At €0.98 per liter of diesel ($4.92 a gallon), even filling up isn't quite as depressing as it was in the past. Could it be that things aren't nearly as bad as we have been led to believe? Crisis? What crisis? But with each new report of companies having to increase their write-offs and of credit lines being terminated, there is a growing sense that the country is merely experiencing the calm before a powerful storm, and that it is approaching a turning point. The question is: How bad will it get? Will 2009 be more like 2001, the year of the Sept. 11 terrorist attacks on New York and Washington, which was followed by only a brief downturn? Or like 1973, the year of the oil crisis, which marked the beginning of a decade of stagnation and inflation? Or will the future resemble 1929, the year the stock market crashed, leading to a worldwide depression that did not, in effect, end until 16 years later, with the end of World War II?

In Eisenhüttenstadt, a traditional industrial city near the Polish border, residents are preparing for the worst. ArcelorMittal, the world's biggest steel producer, has reduced the hours of 1,600 of its 2,700 employees at its Eisenhüttenstadt plant and plans to eliminate 300 positions altogether. "When we cough, Eisenhüttenstadt gets pneumonia," says Jürgen Schmidt, an engineer. If he is right, the city must be very sick indeed. Schmidt has been working here for the last 15 years, and things have gone uphill for most of that time -- until two months ago, when everything suddenly changed. "It was like someone applying the emergency brakes on a fast train," he says. ArcelorMittal's customers, especially carmakers, have cancelled orders en masse. They have even stopped taking delivery on finished products. Demand has declined by one-third. After a repair in late November, one of the company's blast furnaces was simply kept shut down. "Maybe it'll start up again in the spring," Schmidt says optimistically.

But the news from around the world paints a grimmer picture. One country after the next is officially reporting the beginning of its recession, the value of all securities on the world's markets has virtually been cut in half, to about $26 trillion (€20 trillion), and companies are planning massive layoffs: 5,000 jobs at Dow Chemical, 5,300 at Credit Suisse, 12,000 at AT&T, 14,000 at the mining conglomerate Rio Tinto, 16,000 at Sony and up to 35,000 at Bank of America. Citigroup has plans to eliminate 53,000 jobs. What is most astonishing is the incredible speed with which the crisis is spreading from one company to the next. Shrinking demand for cars affects more than just automakers like Daimler or VW. The suppliers of plastic parts suffer, as well. They, in turn, order less granulated plastic from chemical companies, which in turn reduce their production of naphtha, a product made by distilling petroleum. In this way, the deterioration in the automobile market ultimately affects oil companies like Exxon, Shell and BP, not to mention the countless skilled tradesmen, couriers and caterers who work for all of these companies and also suffer from the decrease in orders.

Few industries have been spared. The crisis affected the car and truck industry first, because consumers can easily rationalize postponing a new car purchase, knowing that their existing cars are usually sufficient. The chemical industry, as a key supplier to the auto and construction sector, is next. Dow Chemical, for example, has already cut back production at its plant in Stade outside Hamburg by half. Machine building, Germany's most important industry, will not be spared either -- although the crisis will hit it with some delay. Companies in the sector still have a backlog of orders to process, which could keep them busy for months or even years. The effects of the recession are the most severe in those businesses that have already seen better days, including video rental stores, clothing retailers, department stores and the semiconductor industry. In these businesses, every crisis accelerates structural change, no matter how much the government -- as in the case of chip producer Qimonda -- attempts to offset the decline. The core issue in Germany revolves around the future of a domestic economy that depends more heavily than most on the global economy. Does this make Germany especially vulnerable? "Exports are the Achilles heel of the German economy," says Berlin economist Henrik Enderlein. Will its strength in foreign trade end up being Germany's downfall? Or will the unique profile of German industry enable it to escape the crisis largely unscathed?

No other country in the world has profited as much from the worldwide interconnectedness of markets since the fall of the Berlin Wall. In the last 15 years alone, the percentage of the total economy devoted to exports has grown considerably, from 24 to 47 percent. This could make the impending plunge all the more precipitous. The ports are a case in point. In Hamburg, for example, the booms of many cranes are left idle, with many container ships arriving at the port's terminals only half-full. In the northern German port of Bremerhaven, the country's most important transshipment point for cars, business is stagnant. Parking lots at the port are crowded with 90,000 new cars, one-third more than usual. The World Bank expects global trade to shrink in 2009 for the first time in a quarter century. German companies are already feeling the pinch, now that the volume of orders from abroad has declined by almost one-fourth compared with November 2007.

France, the Netherlands and Great Britain, Germany's main markets, are equally beleaguered. Meanwhile, demand is also declining across the euro zone, the 15 countries that have adopted Europe's common currency, which is the destination for two-thirds of German exports. According to the draft of the government's annual economic report, the downward slide among key trading partners as Europe slides into a recession poses "a unique challenge," as Germany finds itself confronted with "a crisis in international demand." Consumption has also declined in overseas markets. The Americans, deeply in debt, can no longer afford products made in Germany. All hopes had been pinned on the so-called BRIC nations (Brazil, Russia, India, China), but they too are facing difficulties. In India, the terrorist bloodbath in Mumbai has made investors nervous. China is planning a $600 billion (€460 billion) bailout program to counteract the downturn there, and Chinese airlines are rethinking billions in orders for Airbus products. In Russia, the ruble is rapidly losing its value, causing the country's currency reserves to melt away.

The synchronicity of these events is what gives the crisis its unprecedented broadness and depth. Things could get even worse for the German export industry if the mountain of American debt causes the dollar to lose a significant amount of value. When that happens, German companies will find themselves with far fewer customers for their expensive products. One of the greatest risks is that countries, following a typical pattern in times of crisis, will tend to seal off their markets. Russia, hoping to protect its domestic industry, plans to increase duties on imported cars. "My greatest fear is that we will see a wave of protectionism," says Berlin economist Michael Burda. This would pose a considerable problem for the German auto industry. In addition to exporting a large share of the vehicles assembled domestically, German carmakers now produce almost one in two cars in factories abroad.

Normally, this puts German manufacturers in a much stronger position than their French or Italian competitors, which are focused far more heavily on a single market, Europe. In a crisis, Mercedes, BMW and VW are normally able to effectively offset fluctuations in demand. But plummeting sales around the globe will also affect the Germans. At an employee meeting last Tuesday Bernd Osterloh, the head of VW's works council, pointed out the potentially devastating effects on the company. Experts, Osterloh reported -- to a sea of glum faces -- have already lowered their original predictions for worldwide auto sales in 2009 from 62 million to 49 million vehicles. The greatest risk to German manufacturers is that their business model is based solely on growth. In addition to having increased capacity by building new factories, they have raised productivity in existing plants by five to 10 percent each year. If sales do not grow at the same rate, or even decline, the carmakers will be forced to lay off employees.

Opel faces difficulties as a result of the existential crisis at its parent, General Motors. BMW has already slashed more than 8,000 jobs, and jobs could soon be in jeopardy within the VW Group. If the crisis continues, the Wolfsburg-based company will likely terminate some of its 18,000 temporary workers and its 25,000 contract workers. Martin Winterkorn, the chief executive of Volkswagen, expects auto industry sales to take a hit in 2009. In a meeting with senior executives, he said that the company should prepare for a 20 to 25 percent drop in car sales worldwide. Although VW would not be as strongly affected, Winterkorn said, it too could expect to see sales decline by 10 to 12 percent. Winterkorn knows exactly how difficult it is to sell a car these days. Whenever VfL Wolfsburg, the local Bundesliga football team, has a home match Winterkorn invites 10 VW dealers from the visiting team's city and asks them for their blunt accounts of how business is going for them. On Dec. 7, when a club from Hanover was the visiting team, the mood was dismal. "Nothing is moving," the dealers told Winterkorn. There are days, they said, when "not a single customer shows up in the showroom, and when the phone doesn't ring at all."

Many car dealers, even BMW and Mercedes-Benz dealers, are about to go out of business. Daimler has already paid its dealers more than €53 million ($70 million) to make up for their losses. In the long run, however, carmakers will be just as unable to keep cash-strapped dealers afloat as their ailing suppliers, which are finding access to capital increasingly difficult. Banks have either stopped lending altogether or are lending under less attractive terms. Even the automotive banks within the industry, used for decades as a means of stimulating sales, are in trouble. The current economic crisis, which has its roots in the subprime mortgage crisis in the United States, is now eating its way through the entire German economy, and yet it has been only 13 weeks since the collapse of the investment bank Lehman Brothers. No one could have imagined that this event would shake the global economic system to its core, that mortgage loans bundled into securities would trigger such an economic tsunami, and that the waves could reach as far as the average citizen's savings accounts in the most provincial parts of Germany. "The globalization of the financial industry reaches much further than many had believed," says economist Burda.

All confidence within the financial industry has been lost and has yet to be restored. The banks are hording their money. Within the euro zone, for example, banks have roughly €130 billion ($173 billion) on deposit with the European Central Bank, compared with less than €100 million in early September. The banks are still afraid of lending money to each other, and even more hesitant to lend to their customers. It has even become difficult for financially sound companies to secure fresh capital. As a result, they are borrowing less and cutting back their investments, only adding to the adverse interaction between the financial crisis and the economic downturn. TMD Friction, a manufacturer of brake friction parts in the western city of Leverkusen, has seen massive declines in orders from carmakers like Mercedes, Porsche, BMW and VW. In an era of just-in-time production, this means that manufacturing is brought to a standstill virtually overnight. The situation escalated last week, when the banks refused to bridge the liquidity gap, and the auto industry supplier filed for bankruptcy -- even though its operating business remained healthy, as CEO Derek Whitworth points out. The future of many companies remains difficult to gauge. Only those with a healthy cushion of equity capital stand a good chance of surviving the crisis relatively well. Conversely, companies that have relied entirely on debt capital and have developed no reserves could find themselves quickly deflating. Companies that have already been bled dry by outside financial investors will be in similarly difficult straits.

Over the course of the year, well-known German companies like retailer Hertie, watchmaker Junghans and fashion house Wehmeyer have become insolvent, and another wave of bankruptcies could follow in 2009. Experts with Creditreform, a credit management company, already expect the number of bankruptcies to increase by more than 15 percent. Some small and mid-sized companies have fallen for a special form of financing known as mezzanine financing, a hybrid form of equity and debt capital brokered by banks. Business was booming until recently. Between 2004 and 2007, banks provided 685 companies with about €4.1 billion ($5.5 billion) in fresh capital. The market was structured in exactly the same way as the market for toxic US mortgage loans, with banks packaging and securitizing their mezzanine tranches and selling them to investors -- but without conducting detailed audits and while keeping the transactions off their own balance sheets.

No one wants anything to do with mezzanine financing today. "The standard mezzanine market is dead," says Michael Nelles, a financial consultant in the western city of Essen. Nelles, together with investment bank Lehman Brothers, developed a mezzanine product for companies with modest credit ratings. His original plan was to raise €350 million ($465 million) for 108 companies, including German companies like Schneekoppe, a producer of breakfast cereals, but insurance companies and pension funds were uninterested in the project -- and then came the Lehman bankruptcy. Many of Nelles's small-business clients now lack the funding the project was meant to provide. "Some will fall by the wayside," says Nelles. Hoping to avert disaster, companies are now selling their futures by mortgaging their assets to leasing companies, and sometimes even their brand names.

Fear has taken hold within many businesses, as employees wonder who will be eliminated next: steelworkers, bank employees, newspaper editors? Everyone is vulnerable. Outplacement consultants, who help laid-off workers search for new jobs, have already noticed sharp growth in new orders. When laying off staff, companies generally proceed in several stages. First they take the soft approach, by not filling positions that have been vacated, allowing annual contracts to expire and imposing hiring freezes. If this is insufficient, their next step is to let contract workers go or shorten the workweek. The last stage consists of layoffs within the core workforce. The federal government is left with little time to take measures to offset the downturn. The draft version of the annual economic report summarizes the government's current approach this way: "Global weak development in overseas demand must be offset domestically to avoid negative effects on the labor market." In other words, the government will have to throw its full weight behind billions in bailout programs to prevent new mass unemployment.

The government now has the means to do so, thanks to disciplined spending habits and coffers still brimming from past tax revenues. Various instruments are being considered. Stimulus payments, for example, have already been used effectively several times in the United States. However, Americans are famous for their love of consumption, while Germans are known for their fondness for saving money. For this reason, a stimulus program runs the risk of failing in Germany. Besides, people could easily use their checks for products not made in Germany, such Chinese-made DVD players or Swiss watches. Finally, issuing stimulus payments requires bureaucratic expense, because not all citizens are centrally documented. Lowering the value-added tax seems to be a simpler approach, but only at first glance. This measure, which Great Britain has just implemented in a great hurry, has its potential downside. Who will guarantee that retailers will in fact pass on the savings to their customers?

A reduction in the income tax, on the other hand, is attractive for several reasons. It reduces the burden on taxpayers, which could help the economy. And it provides partnerships, which are also subject to the income tax, with an incentive for investments. But cutting taxes also has a significant drawback: Half of all German households pay no wage or income tax whatsoever. These are primarily low-income households, an important group in an economic stimulus program, because they are more likely to spend their tax savings immediately. Reducing health insurance premiums would be a way to reduce the financial burden for most Germans. Almost everyone pays health insurance premiums, including blue-collar and white-collar workers, retirees and civil servants. To implement such a program, the government would have to increase its tax subsidies to the health insurance agencies, financing the increased expenditure with debt, if necessary. This would bring down premiums, thereby increasing citizens' purchasing power. The catch? Monthly savings for consumers would be relatively small, raising doubts as to whether the measure could truly trigger a surge in consumption.

In the end, the government will likely employ a mixture of instruments. Chancellor Merkel currently seems to favor reducing the income tax, combined with a stimulus payment, in the form of a check, to those who pay no income tax. She also wants to expand government investment in transportation, schools and universities, programs that work directly by creating work and, as a result, income. The package will be assembled and approved in the first quarter of 2009. "The federal government will carefully monitor economic development," the annual economic report promises. "In the event of an intensification of the international crisis, it will take advantage of its latitude to take additional stabilizing measures to relieve the burden." In the end, however, the government cannot set everything straight. In fact, it is probably far less capable of doing so than politicians believe. Companies, for the most part, must overcome the crisis themselves.

For now, it will hardly be possible to avert the loss of many thousands of jobs with carmakers, in the chemical industry and in construction. On the whole, however, Germany stands a better chance than most countries to eventually regain its footing. German companies are world market leaders in many industries, and they will be the first to benefit from a regional upturn. Hardly any corporate executive doubts that China and India will be important growth markets again after the crisis ends. In anticipation of the future upswing in these countries, Andreas Renschler, head of the Daimler truck division, has instructed his senior executives to push forward with plans to build a plant in India. "You will continue to march forward, just as planned," he told executives at a management meeting, pointing out that there will be life after the crisis. And when that happens, Renschler wants to make sure that the world's largest truck manufacturer will be among the winners. For now, however, recession is in the cards. Daimler, like many other companies, has no choice but to impose a forced hiatus. Steelmaker ThyssenKrupp, for example, added two weeks to the traditional Christmas vacation at its plant in the western city of Krefeld, where it produces stainless steel. Before that, the company shipped a 360-kilogram (790-lb.) star to the city where the crisis began: New York. It now graces the top of the Christmas tree at Rockefeller Plaza.

Sen. Grassley Targets Nonprofit Hospitals on Charity Care
Sen. Charles Grassley is weighing proposing legislation in early 2009 that would hold nonprofit hospitals more accountable for the billions of dollars in annual tax exemptions they enjoy, aides to the Iowa senator said. The legislation would require nonprofit hospitals to spend a minimum amount on free care for the poor, also known as charity care, and set curbs on executive compensation and conflicts of interest, according to staff members for Mr. Grassley, ranking Republican on the Senate Finance Committee. Nonprofit hospitals account for the majority of hospitals in the U.S. In return for not paying taxes, they are expected to provide benefits to their communities, including charity care. Some, though, have curbed charity care, while others have closed facilities in blighted inner-city neighborhoods while building new suburban campuses.

Under the new legislation, penalties would be imposed on nonprofit hospitals that fail to meet the new requirements, Sen. Grassley's aides said. The penalties could escalate from taxes and fines to stripping a hospital of its federal-tax exemption if it continues to misbehave, they say. Sen. Grassley is working on the proposed legislation with several Senate colleagues, including New Mexico Democrat Jeff Bingaman, and is hoping to capitalize on the momentum for health-care change in Washington. But he is likely to run into stiff resistance from the hospital industry's powerful lobby, making the chances that such a bill would pass difficult to handicap. Alicia Mitchell, a spokeswoman for the American Hospital Association, said such legislation would be premature given that nonprofit hospitals haven't had a chance to demonstrate their goodwill under new Internal Revenue Service reporting requirements. "Hospitals do more to assist the poor, the sick and the elderly than any other part of the health-care system," she said.

In the past, Sen. Grassley's staff has suggested that nonprofit hospitals should spend at least 5% of their patient revenue on charity care. It is unclear whether the legislation under consideration would adopt that threshold, his aides said. One penalty being discussed by Sen. Grassley's staff would be a new excise tax on so-called private-benefit transactions. Such a tax could be applied to executive compensation deemed excessive or to contracts tainted by conflicts of interest. The senator's staff also is weighing fines that could be levied against hospital executives and board members. The senator would first like to try to get the Treasury Department to reinstate charity-care requirements that were undone by the IRS in 1969. If that doesn't happen, he is ready to introduce a bill in the first quarter of 2009, members of his staff said. While Sen. Grassley has long criticized the nonprofit-hospital sector for failing to justify its tax exemptions, his aides say persistent evidence that some nonprofit hospitals continue to act uncharitably has made him think that legislation may be necessary.

Sen. Grassley's office cited a recent case brought to its attention involving Silver Cross Hospital, a nonprofit hospital in Joliet, Ill. The patient, a self-employed insurance salesman named John DeMarco, underwent emergency colon surgery at Silver Cross in January 2007. Before the surgery, Mr. DeMarco says, he told the hospital his health insurance wouldn't cover the operation because it stemmed from a pre-existing condition. The hospital nonetheless billed him for $45,155.52 and eventually sued him when he failed to pay. A few months after his colon surgery, Mr. DeMarco's wife gave birth to their second child at another hospital. That hospital helped the DeMarcos qualify for Medicaid, the government health-insurance program for the poor. Sen. Grassley sent Silver Cross a letter Wednesday inquiring why it didn't try to determine whether Mr. DeMarco qualified for Medicaid or other financial assistance. "Given all of the federal benefits Silver Cross receives, I am troubled by Silver Cross' recent legal action against Mr. John DeMarco," the letter says.

Ruth Colby, a spokeswoman for Silver Cross, said the hospital has "great empathy for Mr. DeMarco and what he's been through with his health, his insurance and the aggravation he has experienced with our hospital." But, she said, Silver Cross's records show Mr. DeMarco earned too much to qualify for Medicaid or its charity-care plan. Ms. Colby adds that Silver Cross has since agreed to lower Mr. DeMarco's bill to $10,000. Silver Cross spent $6.3 million, or 2.8% of its revenue, on charity care in its latest fiscal year. It has come under criticism in Joliet for spending $400 million to build a replacement hospital in an area that is more affluent than its current location. Ms. Colby says the new facility remains "in the same community" and Silver Cross will continue its commitment to serving poor patients.


Anonymous said...

I am so confused. I like the anon before also read Garth's site. He yesterday talked about how his fee only fp did a great job wit his portfolio and he's still invested in the markets. He's recommended a 32 year old to do the same.
I finally got my stuff into GICs at the bank, but now wonder if I did the right thing. I'm a lot older, don't have a lot, and realize as my fp said, that I probably will now be working into my 80s. My fp further told me to not ever come back to her.
What is up here, I am feeling quite frustrated with so little knowledge and doing my best to understand what is happening.

Anonymous said...

One second question to put out there. Is it possible for us to be in a depression and see hyperinflation at the same time in order that we pay back all these bailout schemes?
I know my questions may seem clueless, but I genuinely don't know and want to understand this stuff.

scandia said...

Kluane, Good ridance to that FP!
You did the prudent thing. I say so because I did the same thing. At least I can sleep at nights knowing I can get at my " stash".
I read Garth's advice to the young homeowner/investor. I don't agree with the advice. I am not in favour of anyone playing a rigged game. Stay calm, keep a hand on your capital and let events unfold. Ilargi and Stoneleigh will be the first to broadcast when it is time to invest.
Now if you are skilled at investing and have funds to play with( afford to loose) then by all means see what gains you can make.
Ilargi said, " Someone will feel the need to cleanse herself of all the dirt". Ilargi,why do you think it will be a woman?

el gallinazo said...


First, I never saw the abbreviation fp before, so I plugged it into my abbreviation page which came back with 50 possibles. The two closest would probably be "food poisoning" or "fishing partner." But I guess it refers to a financial planner.

I don't read Garth very much. He deals primarily with west Canada real estate, and I just don't have time to read a specialty like that. But from his recent perspective with equities, he appears to be a total freaking moron.

Let's see. A year ago today the TSX composite index was a hair under 14,000, and at this moment it stands at 8,430. As I figure it, that's pretty damn close to one-half. Maybe his financial planner was shorting the market? Maybe his fp had a time machine to pick the one equity out of a 100 which actually increased in the last year. Did ole Fat Girth tell you what the net increase in his portfolio was and what percentage was in equities?

You may have to work into your 80's, but your fp will probably be living under a bridge in two years. I think you should give him some really warm woolen socks and an air mattress for Christmas. Why don't you ask if you can visit him under the bridge - he should pop you his new address.

Kluane, what I think you need is a pinch of viscous anger in your blood stream. I just may go back into the chemistry business, see if I can isolate it form my blood stream, and start selling it. I have plenty to spare.

Anonymous said...

It's been interesting telling friends and family about the credit crunch and the whole gig about peak oil. It's like they get it but don't at the same time.

They sort of understand that our way of life will change entirely but they haven't done a single thing to alter their plans or way of life. Many of my colleagues will carry on pursuing a masters/ honours in this and that.

Everyone's waiting for the economy to get better, to return to "normal" times. I guess what's unusual is that, we were lucky enough to live in extraordinary times when science and technology revealed the universe to us, the workings of the brain, the spirit in the selfish gene and the thrill of driving a car at full speed.

Now to more economic matters I suppose. What does the board make of the recent EUR/USD move. Are we going to see the decline of the dollar or is this a headfake?

John Hemingway said...

excellent post:-)

Unknown said...

Will they succeed at keeping the dollar down? What if other banks cut? I don't see how they could do it without hyperinflation.

Mish thinks this is just another flailing response that will do nothing to counter deflation, while Denninger has started hyperventilating about an imminent bond market dislocation.

Any thoughts?

Unknown said...

A very short animated film about humanity and progress from a rock's perspective.

Anonymous said...

My family is uninsured and my wife recently had to visit the local emergency room for kidney stones twice in one week. These visits involved an IV without medication, examinations, one kidney ultrasound, plenty of high-powered diagnosis and then a summary dismissal with a prescription for Percocet. Cost of a standard NaCl drip IV - $600.00. Combined cost of both visits - $4,000. My wife will soon give birth to our third child and will require a C-section. Estimated cost $30,000 +. (I know I’m adding to the burden of population but I see it as a personal survival strategy for my children.) If I cannot obtain the emergency Medicaid insurance for the delivery the hospital will have to eat the entire cost of delivery as we will be forced to take bankruptcy. Not a great burden for us as we won’t have to divest ourselves of any personal property.

It seems that a positive feedback could be in the making. As more employees are laid off and lose health insurance there will be tremendous pressure on hospital finances. Many more people in my family’s situation will take bankruptcy as the medical bills quickly become overwhelming. Some will keep their homes and some will see it as an opportunity to give the home back to the bank leading to more pressure on the financial system. Eventually the health system will fail or be reorganized. Many of those bond issuances for huge medical center expansions will go into default. More people will be out of work, more without insurance and more showing up penniless at the emergency room door.

Turning patients away at the emergency room door will not be an option. Failure to provide aid by those in the medical services, seen as financial blood suckers by many, will only result in considerable criminal drama being played-out in hospitals across the nation. They may be able to dump helpless street people in back alleys but the formerly middle class will be more aggressive and capable of retribution. The hospital's only option will be to shut their doors completely. I think we will soon see third world medical care, similar to that seen in the former Soviet Union following their collapse.

Ilargi said...

Anon 1.36

I just added an article on US health care at the bottom of the thread that got lost somehow in today's full load.

Grassley Targets Nonprofit Hospitals on Charity Care

It's not that Grassley is per sé wrong, it's that priorities in US health care are completely screwed up by the principle of making a profit on sick people.

I share your fears of its future. At the same time I also commend the workers for their sacrifices. But they can't keep it going either. What is it, 4 times more money per capita spent on health care than in most European countries, where the care overall is hugely superior?

I've said it a thousand times: when people's basic needs -water, food, shelter, health care, energy- are subject to profit-based market economics, there is one possible outcome only: those who no longer generate a profit will the discarded like so much garbage. A society's first priority must be to satisfy its citizens' basic needs, or it will of necessity fall to pieces.

Water, food, shelter, heat and care have to be taken care of by the society as a whole, or they will ultimately not be taken care of.

In Europe I have noticed a very strong movement towards generic medicine, health insurance firms that refuse to buy more expensive ones. That is one positive step. That said, you have to wonder how long the systems here will prevail, since there is no-one who recognizes the wall looming up ahead.

Anonymous said...

Anon @ 1:36

My brother is an ER Doc in the US. I have recently followed him around during one of his night shifts.

In short he say pretty much the same thing. That we are damn close to a collapse of the medical care system and that it is going to be very ugly......

Anonymous said...

On Wall Street, Bonuses, Not Profits, Were Real
Read it again and again. Take out your pencil and you will find out where your money went.
“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.”

“No one wanted to stop this thing,” said former mortgage analyst at Merrill. “It was a machine, and we all knew it was going to be a very, very good year.”

“They were trying to get as much of this or that paper, they were doing it with excitement and vigor, and that was because they knew they would be making huge amounts of money by the end of the year,” he said.
Executive Pay Limits May Prove Toothless
Loophole in Bailout Provision Leaves Enforcement in Doubt


el gallinazo said...

Anon 1:36

"I think we will soon see third world medical care, .........."

We should be so lucky. I went to a hospital in Lima Peru last year. Had a complete blood work-up, saw two specialists, and had two ultra sound photos taken of my prostate. Total price in USD - 157.

Four years ago I went to a dentist in Cusco. Had my two front front top incisors capped, about 7 fillings, and leveled out my bite to reduce any TMJ problem. Four years ago, excellent work, no hay problemas. Total cost $390.

Went to see a dermatologist in Cusco for a problem on my foot. Excellent diagnosis and resolved the problem (which my American doctor had not). Cost of visit - $17.

I am totally dependent on third world medicine. God help me if I get a problem that can't wait for my next visit.

Anonymous said...

Good Afternoon all,

Thought I’d check in, and let everyone know how FED policy is affecting your average corporate cog…

Looks like the most important part of my job just became obsolete… I was reviewing this month’s investment account statement against our commercial checking accounts, and it appears that we can now earn a higher yield leaving our free cash in checking as opposed to sticking it in our money market account. The yield in our checking account is currently .5%, and the money market account is now yielding .35%.

As a treasury analyst, the main focus of my job was to build & maintain financial models that would successfully predict incoming collections & outgoing controlled disbursements, payroll, etc. in such a way as to minimize the funding in our operational accounts, and pushing as much cash as possible into our investment accounts to maximize interest income.

When our yield was at 5.25% at the beginning of this year, I was earning the company over $75K a month in additional interest (which was significant for our smallish company)… Now, the interest return on our cash wouldn’t cover my labor cost to track it.

I’m still responsible for reconciliation & reporting, so I still have a function here, I’m just not generating revenue for the company anymore, which makes me entirely worthless in the eyes of the people upstairs.

…Which is probably moot at this point, because this week I drew up our mid-term cash projections for ’09, and I’m showing that we’ll be in the red by May 1st (and that’s if the ridiculously optimistic revenue numbers from the Director of Business Planning are accurate). I pointed this out to my director, and she said that we’ll just have to secure another credit facility this spring, nothing to worry about (do banks even lend money to mid-cap companies anymore?).

So, long story short, my question is: When I’m laid off in a few months, should I even bother looking for another job in my specialty, or should I just concentrate on finding any productive employment available? And will there be anything available by next May?

el gallinazo said...


"Is it possible for us to be in a depression and see hyperinflation at the same time in order that we pay back all these bailout schemes?"

I guess it's possible. That is what is going on in Zimbabwe right now. No question that the country is setting land speed records for hyperinflation, and the GDP and real production is in the toilet. Everyone there is either terrified and/or depressed, so I guess it qualifies as a national depression.

However, in "advanced economies" where the vast bulk of the money is credit rather than paper, I think this would be next to impossible.

Ilargi said...

Garth, Kluane at al

re: hyperinflation

Yeah, we should get us a glossary here, or a bunch of primers, since we can't repeat ourselves all the time. But I have no time to do such things, nor does the site generate the money to have it done. Nudge nudge. I would like to do a lot here, but I'm mostly all alone (no disrespect to anyone who tries to help), and I need to eat like everybody else. This site is a full time job, simple as that.

It will be a long time before we see hyperinflation though. The US can't print money at will, since it needs to sell its debt abroad in the bond markets. Moreover, there is much more money/credit disappearing then they could ever print in the first place. $30 trillion in global stock markets over the past year, $2 trillion in US housing, an upcoming $2 trillion in credit card 'space', and trillions more throughout other economic sectors. It's no coincidence that we live in a deflation today. And we are, no matter what media and experts try to make you believe.

And that will last for a few years, we will have to undergo deleveraging first. Once bond markets collapse, some countries will tend to re-inflate, but I'm not so sure the US can even do it. It's not possible for a government to inflate its money supply while the wealth of its citizens and industries is vanishing faster than its presses can churn out the stuff.

While it's true that inflation is money supply vs goods and services, and the latter ones could go fast as well, I would still bet that the supply goes down faster. The debt is of behemoth proportions. And Helicopter Ben is nothing but a fairy tale designed to make you feel good.

Ilargi said...


You made me laugh an admittedly hollow while. I wonder how many people are aware of what you're describing, which goes on all through the world today, let's call it the flipside of the economic rescue missions. Works miracles, don''t it?

"So, long story short, my question is: When I’m laid off in a few months, should I even bother looking for another job in my specialty, or should I just concentrate on finding any productive employment available? And will there be anything available by next May?"

With your awareness and insight, they should be glad to have you. You are what stands between them and huge additional losses. You can save their jobs. When it all shrinks by 20%, and you keep it at zero, that is a huge profit. But of course it's hard to make them see that: they are undoubtedly sure the financial saving grace is waiting around the corner.

There'll be many parties looking for someone who actually understands what's going on. In the meantime, your present employer's worst thing to do is to let you go. You will save your director's job, if anyone can. Might be good to tell her that.

Taking a good ag course is worthwhile as well though. Job losses in 2009 will be horrendous, far more than anyone has dared imagine so far. 1 million a month is the most I've seen until now, but that is very low.

Any job you have depends on too many variables you don't control. A doctor, a plumber, they have good jobs, though they won't make nearly what they do now. Most of the rest is discretionary, and likely to go.

good luck, break a leg

Unknown said...

Sorry, I should have been much clearer. I understand that the Fed cannot stop deflation. That being the case, I was wondering how they can hope to control the dollar now that they've made this last cut, even if it was largely symbolic. I was even more curious about the timing of a bond market dislocation - what sort of legs does the US treasury market have? I'm curious to hear anyone's opinion.

el gallinazo said...


I have a dumb ass question. The NYT article says that the USD may become the source for a new carry trade. But can speculators actually borrow money at these low rates to invest in Iceland and Ukraine which are paying some real, juicy interest rates? All I hear is that the banks are not lending. So, only the Fed connected banks themselves can run a new carry trade with free money. And they are just stupid and reckless enough to start it. What do you think?

Bigelow said...

According to Wikipedia the word Numeracy is a blend of "numerical” and “literacy", so perhaps Fineracy might be a blend of "financial” and “literacy". Not much basic fineracy around today. Little is taught either, except maybe if you include the Home Economics class I had at age 11. I was told how to find an inexpensive cake mix. The most popular part was when we then baked and ate it. I recall only one Critical Thinking course –speaking of Ilargi’s Emperor has no cloths theme—the teacher was sacked for having a bad attitude. I’ve always been helped somewhat by an interest in history, make that economic history. At age 16 I knew the Federal Reserve Bank was illegal. I learned there is always more to know about money and society. However the need to learn what is reality is an individual thing, as it seems fineracy is generally discouraged in order to maintain profits. So to Ilargi’s “Who's being played for a fool here?” it is us. It has always been us.

I look forward to Ilargi’s introductory remarks on say Bastille Day.

Anonymous said...

El Gallinazo @2:18 -

Yes, soon many amongst us will wish we were in the Third World. In Cuba, for example, people know how to grow their food organically and they have an excellent health care system for everyone!


Starcade said...

Plan B is simple.

In Magic: The Gathering, there was a card called Nevinyrral's Disk. It removed all land, artifacts, and creatures from the game. (May have done enchantments too, but I do think it left something left.)

We called it "Blow Up the World".

That's Plan B. Whether that takes the form of massive riots in the First World to expunge a significant population, or it takes the form that Denninger thinks it might (75% chance trade war, 25% chance hot war -- real damned soon now), "Blow Up the World" is Plan B.

Bigelow said...

Speaking of seeing a doctor as a universal human right I recommend Michael Moore’s documentary "Sicko."

Open Wide and Say ‘Shame' NewYorkTimes

Starcade said...

Kluane 1227: Exactly!! And that (depression + hyperinflation) is about to happen, with utterly devastating results across the board. Nations will fall. Every nation might, well, fall.

Scandia: I have no dispute that cash is king, but I will ask you (essentially) the same question I asked Ilargi yesterday: Can you be sure that any bank at all will withstand this -- in that there will be such a thing as "cash" for you to get a hold of under your own control??

el gallinazo: Two years? At the rate things are going, if his financial planner is not under a bridge in three months, I'll be rather shocked? Calendar 1Q 2009 will be deadly in the markets.

And as for your last statement in that particular post: If I could bottle my anger and sell it to reduce how much I have, it'd be of everyone's benefit. Only by the grace of whatever you consider holy am I not either dead by a police officer or in prison for a huge incident. I pray that grace continues.

VK: The thing is: What do you do, short of getting armed and going all survivalist on this? Because once TSHTF, it's _ALL_ over. And, as someone well put it, the government is making a lot of people who have nothing left to lose -- and you know what happens then.

Anon 1336: I'm sorry to see you eaten alive by that garbage. Fact is, be lucky you got in now -- once they just stop seeing people because they can't pay (and anyone who doesn't see that day coming needs their heads examined), it's going to get ugly around hospitals. You are exactly correct, except that I do not believe that most hospitals will not try to deny care to people who can not pay.

Ilargi: Keep your statement in mind for those who continue to scoff at my belief of 1/3 net loss of population in the USA post-TSHTF: You are correct in saying that anyone seen as not productive to the process will be _discarded_. There's 120 million people (as of the last chart I saw -- it's almost certainly more now) who either have negligible positive net worth, zero, or negative.

The only question is how the other 2/3 will survive.

TampaSteve: Anything available, and that's if you can find it. By next May, the blood will be running even faster (jobs-wise). The unraveling is already beginning to become apparent.

Ilargi re: hyperinflation: The government is going to try to print infinitely -- what other choice does it have, given the caveat that it is trying to maintain the present order? The devaluation and hyperinflation occur when it can't sell enough to keep pace anymore. And I don't see that as a long process anymore. (Especially with, what, $7.7T in bailouts already...)

Anonymous said...

Ilargi – Thanks for the vote of confidence; the vast majority of my insight is a direct result of the efforts of you and Stoneleigh.

I think my job is secure in the short term because I kept warning them about Wachovia (where our operating accounts are) during our last credit facility in March. Once our bank got eaten by Wells, then our MM fund almost collapsed when I was on vacation, they started listening to my calls to put the breaks on our facility expansion in anticipation of endless growth… They waited to actually start trimming CapEx spending until this month, but better late than never.

However, the internal numbers I’ve seen lately are impossible for the directors to ignore… And the people above me don’t understand it yet, but the chances of a deus ex machina financing from the banks next spring are right about zero. I really don’t think this company is going to see 2010, even if we cut to the bone right now. I’ve made peace with it, but there are going to be a lot of stunned and unprepared people when that day comes. It’s all very sad at this point; there are a lot of good people here that don’t deserve to be ruined.

But, I’ll keep plugging along, raising concerns in each staff meeting, retooling the cash models to squeeze a few more days out of our reserves… Maybe if I can secure 350 people another paycheck or two, I’ve done something worthwhile.

Bigelow said...

Starcade, now from Leviathan,

A part of “money” that is also subject to disappearing is the $800 trillion of unregulated derivatives contracts soon imploding in a country near you.

Anonymous said...

On Cuba's excellent health care system, see the film "Salud!"


Anonymous said...


I'm at Big4 and I'm seeing Chapter 7 all around me. Everyone is in denial. First excuse is, things will get better in a few months. Next excuse is, they will get Chap 11 financing. Next excuse is, they will get bought out. Etc. etc. etc.

Anonymous said...


You might find this organic farm of interest, located south of Tampa -- Charlotte County.

They conduct weekend organic gardening teach-ins.


el gallinazo said...

Re my medical Peruvian anecdotes. While the sums I mentioned are chicken feed (currently) to a middle class Norte Americano, to the average Peruvian they are very onerous and similar in scale and proportion to what Americans are facing. So I do not mean to imply that the successor to the Inca empire is dripping with a national largess to its people.

However, this blog is devoted, in part, to the survival of individuals who read it through these perilous times, and in that respect, my anecdotes have meaning.

I told my 34 year old son, who is having some dental problems, that when he gets an estimate to correct them at $2000 or more, we will send him to Dr. Cepeda in Cusco.

Anonymous said...

Insightful site! :)

ilargi said:

there is much more money/credit disappearing then they could ever print in the first place. $30 trillion in global stock markets over the past year,

On the face of it that would suggest the stock markets could be down to a level worth revisiting. Maybe in select areas, or is there a lot more bottom everywhere?


Anonymous said...

"I really don’t think this company is going to see 2010, even if we cut to the bone right now."

Any chance that your company can look at other sources for revenue?

As Darwin said: "It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change."

el gallinazo said...


Stoneleigh's analysis is that there is a serious, multi month suckers' rally yet to come, and then the plunge to Hades.

Or to paraphrase a bandito colleague of mine, "We don't see no steenkeen bottom."

Anonymous said...


Just read the figures for medical care in the U.S. and shuddered. That distant clunk you heard was my jaw hitting the desk here.

I encountered U.S. medicine a few years ago (problem during my wife's pregnancy) and still cringe. We flew (as in flying, but also fleeing) back to Europe and sanity.

My comment about encountering U.S. medicine is certainly unfair. I saw one medical center, but it was such a stereotype, i.e. poor care and mind-boggling prices.

I agree 100% that some things must be taken out of the commercial sector. The only profit should be improved public health for the country as a whole.

I do not know if we will manage to save our systems here in Europe, but public healthcare is high up on a very short list of things that could induce me to take to the streets.


EBrown said...

I am an ER nurse and can confirm that emergency medicine in the US is caught in a tough spot. I'm not privy to the finances of our unit but my manager has made several changes lately in attempts to save money -

1. Imploring us to be gentle with the EKG machine's cord as we unplug it and wheel it from its spot into the patient rooms ($150 to replace the cord).

2. Cutting out the overtime spots of a nurse who often picked up the higher wages by filling spots in the schedule (so long as the spots are filled at non-OT rates this can save quite a bit of moola). Even better from the manager's perspective is when we scrape by short-staffed with no one (two nurses and one doc rather than the needed three nurse:one doc ratio).

3. Firing the hospital's payroll/scheduling coordinator (this was not limited to my dept, but hey, if other's pick up the work it saves a salary).

4. Making comments about the dept's "money leaks" fairly frequently. Money leaks being things like the previously commented upon bags of Normal Saline. We have to pull a charge ticket off the bag and put it in the patient's charge sheet in order for the records people to bill for it.

Obviously all this is anecdotal and I view it through the prism of understanding of the larger financial world swirling through my town.

I agree that Emergency Medicine in the US is going to be forced to change dramatically in the coming years. I suspect that for a while yet there are going to be many hospitals closing their doors. The legal framework for practicing medicine in the US currently favors that over trying to provide some basic level of services out of homes and clinics. I've come to believe that we're going to have to go through a "rough patch" where huge numbers of hospitals and medical services cease to exist before we'll collect the gumption to try to rebuild some semblance of a healthcare system in the US. As Ilargi continues to hammer home - the incentives are too perverse - If you have good health be very, very thankful.

Mish had a piece yesterday about salaries being frozen and one of the examples he cited was a major New Mexico hospital that is freezing the entire institution's payroll as is. I wouldn't be surprised to read news in the near future of across the board pay reductions... Another example from my dept is a per diem nurse who has been traveling down to Virginia. She's now trying to pick up hours in my dept because the place in VA she's been at has instituted a hiring freeze and she can't get time. Ooops.

perry said...

Sending interest rates to 'near zero' is an attempt to drive holders of cash, out of cash and into other, more ephemeral assets. If that doesn't work sufficiently well enough, the next step may be to send rates 'below zero'.

Then, how many will still hold cash?


Anonymous said...

San Francisco Area Home Prices Drop Record 44 Percent

"Home prices in the San Francisco Bay Area plunged a record 44 percent in November and the median fell to the lowest since September 2000 as foreclosure sales pushed down values, according to MDA DataQuick.

A total of 5,756 new and resale houses and condominiums sold in the nine-county region last month, a 12 percent increase from a year earlier. The median fell to $350,000, down 7 percent from October and down 47 percent from the peak set in June, July and August of 2007, the San Diego-based research firm said today in a report. The Bay Area median has fallen 12 consecutive months on a year-on-year basis."

Anonymous said...

The so-called BRIC group of nations has made great strides over the last decade. Still, contrary to what their political leaders and some economists are saying, the purchasing power of consumers in these countries remains too limited to counter the current global economic decline.

Jim O’Neill, the London-based Goldman Sachs Group Inc. chief economist who coined the BRIC acronym, recently said: “The BRIC consumer is going to rescue the world.” The remark reminded me of other experts who predicted that emerging market economies would “decouple” from the troubled economies of developed nations and maintain their fast growth.

While the U.S, the E.U. and Japan are responsible for 66 percent of the global gross domestic product, Brazil, Russia, India and China account for only 12 percent, according to 2007 data by the United Nations.

In other words, if the three most advanced economies contracted by, say, 2 percent next year and all other non-BRIC countries had zero growth, then the four BRIC nations would have to grow an unrealistic 11 percent in 2009 to avert a global recession.

Global Growth

The idea of BRIC consumers saving the world seems even more far-fetched given that households in BRIC countries represent only 10 percent of world consumption, while those in the U.S., Europe and Japan account for 68 percent.

In November, the International Monetary Fund lowered its 2009 global growth forecast to 2.2 percent. Advanced economies will contract by 0.3 percent, the first annual contraction during the postwar period, according to the organization.

EBrown said...

The question arises in my mind often in regards to money flows and medicine in the US. Where does all that money go? Specialist MDs generally make pretty much money. Family docs make middle class to upper middle class wages (though with very long work weeks) Hospital administrators make a good amount of money. Nurse's, lab techs, rad techs, etc make middle class wages. I think the crazy costs in US healthcare are largely driven by insurance companies and pharmaceuticals.

I'm not at all surprised about the $600 dollar bag of normal saline. I'm surprised it wasn't even more. We see an average of 40 patients a day in our dept. I bet the average bill for those 40 comes to well over $1,000/visit. We can charge $80-90 for an IV push medication, even if the medication only costs the hospital pharmacy a measly $1-2.

How much in daily wages are spent to run the dept?

3 nurses x 20 hours (night hours only have two nurses on) = 1,500

1 doc x 24 hours = I have no idea 1,500 - 2,000?

1 unit clerk x 18 hours = 200

1 phlebotomist/lab tech x 24 hours = 360

1 X-ray tech x 24 hours = 360

1 CT tech x 12 hours (plus on-call) = 300

1 Housekeeping x 2 hours = 20

1 Supply stocker x 2 hours = 20

1 Pharmacist x 2 hours = I have no idea 70-80?

1 Manager x 8 hours = 250

Extraneous hidden things - specialist consults, maintence, biomed equipment repair people, medical record keeping, etc = 2,000

So my ballpark figure is ~$7000 per day in wages... I wonder how close I am to the mark - less than a quarter of what we bill for.

Anonymous said...

Thanks el gallinazo, I thought this illargi joker was blowing a bit of smoke on that 30 trillion as I had had it in my head from somewhere that the total market was about 40 trillion. Went to Wiki after posting and it said 36.6 but, and that is a big but that was in October this year not October last year

My apologies Mr. ilargi sir.


Anonymous said...

Hi EBrown!
I got myself on a mailing list.
Maybe you should ...

Dear jal,

Over the coming weeks, thousands of Americans will be leading Health Care Community Discussions -- small local gatherings in which Americans are sharing thoughts and ideas about reforming health care. President-elect Obama and Health and Human Services Secretary-designate Tom Daschle are counting on Americans from every walk of life to help identify what's broken and provide ideas for how to fix it.

You can help shape that reform by leading your own Health Care Community Discussion anytime between now and December 31st.

Secretary-designate Daschle recorded a short message about these important discussions. Watch the video and sign up today to lead a discussion in your community:
Secretary-designate Daschle is committed to reforming health care from the ground up, which is why he won't just be reading the results of these discussions -- he'll be attending a few himself.

When you sign up to lead a discussion, we'll provide everything you need to make your conversation as productive as possible, including a Moderator's Guide with helpful tips. All you have to do is reach out to friends, family, and members of your community and ask them to attend -- and, when it's over, tell us how it went. The Transition's Health Policy Team will gather the results of these discussions to guide its recommendations for the Obama-Biden administration.

No transition has tried something like this before, and your participation is essential to our success.

Thank you,


John D. Podesta
The Obama-Biden Transition Project
The canadian health system has its problems but maybe the US can come up with a system that take only the best.

Anonymous said...

el gallinazo,

That is closer to "Bottoms? Bottoms! We don't need no steenkeen bottom."

Anonymous said...

More or less/in this range.
Here in the NETHERLANDS for basic health insurance you pay 100 to 150 Euro per person per month.

the first 150 Euro in a year for medicines you have pay by yourselves. next is free/ no limit.

Free hospital/surgery etc.

I am jobless.
I pay 85 Euro a month, and get subsidi from the governement +- 45 Euro a month.

With an addional 10 Euro extra insurance I get also dental care, insurance health for the whole world.

This health care includes besides medicines, hospital, surgery, dental care etc. etc and many more

Anonymous said...

Oh I forgot to tell...

health insurance is composulry here in the Netherlands. Every Dutch citizen must have a insurance (and is registerd) otherwise you get a fine by the dutch government.

Wyote said...

Bernanke: “The Sheikdoms are in disarray, Russia taking pay holidays, Europe fracturing like a Lego toy. And Bernard Madoff with Christmas! Heh, heh!”
Paulson: “It’s all about fear, Benny. The longer we can maintain the herd direction, the more we can use them. Life is good, life is good.“
B: “ But should we be worrying about Beijing?“
P: “And what can they do? Beg us to raise the rate? Nah.. They need our recovery more then they need more cash. And in many ways Ben, they lead the pack. They’re singin’ our tune and walking where we want them to walk. So, ‘Puff, Puff the Magic Dragon’ “.
B: “Right Chief, gottcha. “
P: “My best to the family, Ben. Oh, and tell Alan his Happy Holidays check is in the mail.”

scandia said...

Speaking of health care I, finally, after 5 years, have a family doctor. When I stepped into her office I felt like I was going back in time. Old furniture, files piled up on the floor, Dr wearing old, well worn clothes, no make-up, no power trip. No secretary. She does all her own paper work!Or so it seems.I feel lucky to have ended up with an eccentric person who obviously doesn't view her practice as a profit centre. Hope she is a good doctor!

Bigelow said...

I have a question. Haven't noticed any directions for the old (as in the non- 20 to 60 year old vigorous types). In a world of pension defaults and attempts to put Social Security accounts in the stock market any thing your grandparents might do? Just asking.

Oldsters are more dependent on income than the rest of us. As Dmitry Orlov noted in his book Reinventing Collapse --Soviet Example and American Prospects, when Russia collapsed an economy of favors cushioned the lack of a job or money somewhat. Most people were not thrown out of their housing although every other need involved a bartering opportunity.
However old age pensioners went down particularly hard.

Another worthy besides providing health, food and shelter to all as duties of human society is care for the old and infirm.

Anonymous said...

Stoneleigh & Ilargi,

I've been meaning to compliment you on the photos and pictures on your blog. I always find them interesting and meaningful within the context of the post.

Now every time someone starts to tell me that the economic picture isn't as gloomy as it appears, I'm going to sing
"The Emperor is all together,
he's all together,
but all together.
The Emperor is all together not dressed!

From Danny Kaye in Hans Christian Andersen.

Thank You People Very Much!

Ilargi said...

"I have a dumb ass question. The NYT article says that the USD may become the source for a new carry trade. But can speculators actually borrow money at these low rates to invest in Iceland and Ukraine which are paying some real, juicy interest rates? All I hear is that the banks are not lending. So, only the Fed connected banks themselves can run a new carry trade with free money. And they are just stupid and reckless enough to start it. What do you think?"

i'd say yes on about all counts. How about, as I wrote earlier, the Fed making a killing by placing bets vs the USD ahead of its own rate cuts? Morgan Stanley does it...

Ilargi said...

"Ilargi said, " Someone will feel the need to cleanse herself of all the dirt".
Ilargi,why do you think it will be a woman?"

They carry the hope of cleansing. Men have proven for too long they can only screw up.

Anonymous said...

They carry the hope of cleansing. Men have proven for too long they can only screw up.

-Tis because of competition and mate selection that men screw up IMO. Generally more egoic and testosterone makes us angry. Men are continuously striving from freedom, the ultimate thrill that a man seeks is to face death and win. Freedom is the highest goal for a man, it reflects in our actions and our desires.

Anonymous said...

Ilargi, Stoneleigh and friends - I just wanted to let you know that the Canadian Finance Minister has opened an ear for consultations on what to do about... "stimulating" the Canadian economy.

I'm grateful for all I've learned via this site on what a cockeyed mess has been made, and regarding the continued pursuit of bad money by worse choices... But here's a test: What do you advise a government to do under these circumstances?

Unfortunately, it appears they're really only offering a survey of some very broad ideas. But there is space for you to prioritize "your idea". I'd be really interested to hear the ideas on this forum, myself. Be nice and share...

(FWIW, I myself haven't the foggiest idea what the gov. could do, and what effect it could really have in protecting (?!?) the population from this tsunami. I used to think nationalizing the banks would be a great idea, steering the obscene profits back to the country... but those days be gone, it seems.)

(And FWIW, all I've learned here hasn't really helped me make any really clever choices for myself, either. I figure I'm going down with the ship - not first shift, mind you. But hey, at least from here I can see the show nice and clear...)

Here's the text, from

Consulting with Canadians

The Honourable Jim Flaherty, Minister of Finance, invites all Canadians to share their views and priorities as the Government prepares Budget 2009.

“The Government is open to innovative new ideas that would help shape the plan for economic recovery in the 2009 budget,” said Minister Flaherty.

Related document:

* Fiscal Stimulus - Budget 2009 Consultations

The following ideas have been proposed as ways of providing stimulus in Budget 2009. Please rank them according to the priority they should have in the Government’s plan. If you’ve got another idea, rank that one as well. You will have the opportunity to spell out your ideas on the next screen.
*Expedite Infrastructure Spending
*Invest in Housing
*Build strong sustainable labour markets and training incentives
*Support traditional and emerging industrial sectors
*Improve Access to Credit
*Your Idea: If you believe Budget 2009 should have a different stimulus priority, assign a ranking to this box. You will be able to explain this priority on the next screen.

Anonymous said...

That URL again:

Anonymous said...

@ Bigelow
Gov't to taxpayer: "honor thy father and thy mother" - or else!

@ Shane:
don't fall for it! they already know everything, they've got their own ideas and it's not about helping the nation. It's about helping themselves on the way out.
Asking you for your opinion is a placating device to delay your objections to their plans. See Obama campaign.

el gallinazo said...


Is that the same Daschle who was, until very recently, a lobbyist for the health insurance companies? If I want to have smoke blown up my ass, I'd rather use the time to have it done by a professional.

Anonymous said...

I have an idea!
You could suggest that they
*establish democracy in Canada
*install a parliament

scandia said...

Shane, as to what the Cdn gov't should do about stimulating the economy I'd say that is the wrong question. The assumption is that the path forward is to stimulate the economy. That may be a later action but it is not the first requirement.
The first requirement is transparency. Taxpayers must know who's getting their money and the true condition of the recipients.
Without trust restored more tax dollars down the rabbit hole will not heal the marketplace.
This public consultation is a red herring. An effective way to silence opposition to the stimulus packages.
Finally Harper & Co. shut down Parliament silencing the voice of the people's representatives. Now he wants to talk? He doesn't want to talk to those elected to speak for us. Rather game changing don't you think?
Gr-r-r, I get right worked up by this phoney Flaherty stance...

el gallinazo said...


You could not have been reading this blog very long to have asked this question. Ilargi has been repetitively clear about it.

1) Do not use taxpayer money to prop up zombie banks that gambled away all their capital. Let them collapse. We don't need them. They are useless parasites on the butt of society.

2) The banks f**ked us up bad, and there is no way we can avoid a depression. The question is how long it will last and how painful to all the citizens it will be.

3) Use taxpayer money that is not being put into the black hole of crooked financial companies to ease the pain through soup kitchens, heating grants, sewage treatment plants and water treatment plants renewal, medical care, etc.

Anonymous said...

I went and gave my two cents. I should have included a link to TAE.
Is that the same Daschle who was, until very recently, a lobbyist for the health insurance companies? If I want to have smoke blown up my ass, I'd rather use the time to have it done by a professional.
I don't have a clue.
I would say,"If you don't vote, you cannot bitch. If you do not participate in solving the problem, then accept what is handed out."

Anonymous said...

Oh excuse me like voters aren't already 'accepting what is handed out'? There is no choice but the ones they manufacture for you. True opposition is not allowed. Sorry to burst your bubble but you, John Q. Public, do not have, nor have you ever had, free and fair and open elections. Period.

el gallinazo said...


"I would say,"If you don't vote, you cannot bitch. If you do not participate in solving the problem, then accept what is handed out."

And I would say that anyone who continues to play in a rigged game is a sucker and a fool.

This is not being negative. We have plenty of stuff we have to do and can do. But by channeling our energy into these bastards hands, we are just sealing our tombs.

Anonymous said...

And I would say that anyone who continues to play in a rigged game is a sucker and a fool.
That's the only game in town. It has cost me 50% of my little bit of savings.
Now, from spending time here, and helping out, I'm trying ... I'm not bitching.

el gallinazo said...


"That's the only game in town. It has cost me 50% of my little bit of savings. "


Anonymous said...

el gallinazo
I'm/was part of the majority of uneducated majority.
Were you?

Starcade said...

Bigelow: The only dispute I have with your statement is the number. Last I heard: $1,460,000,000,000,000. That's going to be an awfully big bang.

Anon 1602: I'm seeing Ch. 7 all around me too. I've been telling people (anyone who would listen, and most who would not) about how certain entertainment ventures wouldn't last in an economy where the stuff is illegally all over the Internet and the amount bought is nowhere near enough to sustain.

So, what do I read today?? The parent of the largest anime company in the USA has to close one of its other largest divisions and cut expenses in all remaining divisions to prevent bankruptcy _right now_ -- not in January, after the holiday numbers come in.

People are not going to recognize this country -- very damned soon.

perry: That answer will come soon -- what happens when rates go negative. You got a taste of that with the short-term treasuries already...

Anonymous said...

Even those who guess the future in advance may not be able to avoid its dangers.

Wise words. Much to learn from that.

Anonymous said...

Don't think I saw this article from Salon posted here today; while some of the prescriptions are a tad optimistic, the socio-economic analysis is spot-on.

Unknown said...

News from Australia.
The latest figures show that the Federal Government coffers were in very good shape at the end of October. The underlying budget surplus for the full twelve months to October stood at $18,509 million, with the fiscal balance at $25,278 million and the headline balance at $28,082 million.
• In the year to October revenues are up 40.1 per cent, running ahead of expenses, up 37.0 per cent.
. Not only does the budget remain solidly in surplus, but the government has the ability to draw on almost $70 billion of assets. As at October 2008, net worth of the Federal Government stood at $69,569 million. (Source:

Also of our banking industry this is stated;
The strength of Australian bank balance sheets is probably lost on most investors. Remarkably the level of impaired assets is still below the peaks of the past recession despite the fact that bank assets are now five times
larger. While banks have to remain responsive in lifting bad debt provisions in future quarters, they are well positioned with the capital base ratio hitting 12-year highs. Quite simply, comparing Australian financial institutions
with those in the US or UK is like comparing chalk with cheese. (Source:

The quotes are from a bank/broking site so of course they will say good things about themselves, however some of the numbers do show that Australian financial institutions & government are operating in a different framework to other parts of the world.

It does not however spare us from the grief arriving on our shores and also coming in spades next year. See below;
Australian households have experienced the biggest annual slide in financial wealth for over 20 years. The latest figures show that the average Australian has lost $16,000 over the past year – at least on paper – no doubt
restraining enthusiasm to spend this Christmas. The net value of financial wealth held by the average Australian stands at just over $43,000. Source:

That loss figure will likely be double for those that have not made any preparations for 2009.

tickmeister said...

Why do people think they are entitled to free medical care? A doctor is supposed to spend years of his life and hundreds of thousands of dollars to be educated and then lance a boil on your butt for no charge? If medical care is to be free, where does it end? Do you all expect free heart transplants?

Anonymous said...

@tickmeister: Nobody said anything about doctors working for free. Maybe you should try learning a tiny, tiny bit about how medical care is provided, with doctors making fine livings, in those countries that provide universal health coverage (i.e, every single industrialized nation on earth except the USA).


Unknown said...

Re: US Health System.
Ask the question who is making all of that money out of the sick?

Answer: The legal profession & the insurance industry, then the pharmaceutical industry, then the medical equipment companies, and then the doctors.

Here is my plan to turn it around. Change the law that permits people to sue for professional negligence. Do that and you take out the two single biggest costs to medical delivery.

Sure make doctors answerable to a tribunal where they must show that they have employed best endeavours, and remove licences to practice from the incompetents, but get the leeches of lawyers and insurers out of the equation. Do that and it will be more affordable for the less well off.

Anonymous said...

Be part of the solution get involved at

Anonymous said...

@kerrsyl: You're mostly right about where the money goes, but you're way, WAY off if you think that eliminating malpractice suits would have a major impact on healthcare costs.

Eliminating malpractice suits would take out AT MOST about 5% of the excess costs in the system, and more likely it would be less than 2%, maybe less than 1%.

Bottom line, malpractice suits are not a major factor. Private insurance (and that's got nothing to do with malpractice insurance, which is a wholly separate matter)and the whole top-to-bottom profit-driven nature of healthcare delivery in this country is the problem. (More emphasis on preventive care would also help, but it's hard to deliver preventive care when people can't afford to go to the doctor.) Taking away people's recourse to malpractice suits would hardly help at all if the system is not fundamentally changed.

You can Google around, but here's one place to start:

Unknown said...

Be part of the solution get involved at

If I was US based then I might. Just an outside looking in observation. We tend to think the way we do it in our own country is the best way, until we start to evaluate the pro & cons of how other nations do it.

The way the US does it, has meant that working class and lower middle class in the US has had the least access to medical care of any developed country in the OECD.

Bigger problem, is that the profit leech ideas from the US are finding their way into other nations health care systems.

All countries need to stamp out this profiteering. The only industry that maybe deserves some lattitude is the pharmiceutical industry as they do invest heavily in research, and they do actually produce things that are useful. However the size of their return on investment is a bit extortionate. I would still however prefer that they kept innovating.

Unknown said...

Eliminating malpractice suits would take out AT MOST about 5% of the excess costs in the system, and more likely it would be less than 2%, maybe less than 1%.

That is looking at only the cost of the suits. The bigger issue is the cost of the insurance premiums against malpractice.

The cost of our obstetrician for our 3 children born over a 5 and a half year period went from $1200 to $1800 to $3000 for his services. These were the costs outside of Government subsidies. The reasons for the price increases were openly disclosed as his increased costs of professional negligence insurance.

Over that period he was in the same offices, with the same staff, so his other costs would only have been negligable.

The private medical insurance issue is another can of worms entirely. The idea of insurers owning, managing, or determining what services can be offered is horrendous to think about. Their whole ethos is profit and minimizing risk. There is nothing about what is best for the patient.

It appears to this individual that the more that corporations, professional managers, and senior public service people have got involved in hospital adminstration, the higher the costs of delivery, and the lower the standard of actual patient care.

I can remember as a child when my father had an extended stay in hospital, that the senior nursing sister controlled all of the HR functions including payroll for her nursing staff (not a clerk to be seen anywhere), and the senior doctors ran the hostpital. There was no CEO, no Managing Director, no Area Health Service Manager.

The hospital simply had its annual budget and it was upto the senior doctors on how best to manage that. It seemed to work really well.

Jump forward 40 years, and the same hospital, with the same number of beds, now has a clerical and managerial staff that exceeds the number of doctors and nurses, and not one of these extra people actually provides any patient care.

The more we have made it complex, the more we have compromised the core service delivery.

team10tim said...

Anon 10:30 PM,

RE: voting

There is no choice but the ones they manufacture for you. True opposition is not allowed. Sorry to burst your bubble but you, John Q. Public, do not have, nor have you ever had, free and fair and open elections. Period.

You fundamentally misunderstand what democracy is and we are in these dire straights partly because most Americans are suffering from the same delusions. Democracy is not an event where the public votes for candidate A or B. It is a process of building consensus amongst an informed and active citizenry. It requires participation before the election or even the primaries. If you wait until the general election to make your voice heard you will be stuck with a choice between tweedledumb and tweedledumber.

I get the impression that you think our democracy is a sham, and that is a very myopic view of the situation. It is a sham, but it is a sham that we are entirely complicit in. I understand your frustration that the rule of the people, by the people, for the people has been co-opted by the wealthy and powerful to their own narrow and short sighted ends, but ultimately we the people sanction it.

To sum up, this is not a system that you are subject to, it is a system that you are.

Anonymous said...

@kerrsyl:"That is looking at only the cost of the suits. The bigger issue is the cost of the insurance premiums against malpractice."

No, actually it's not. It's looking at the cost of malpractice premiums and estimated costs of defensive medicine. I'm not sure if it even includes the cost of the suits -- that's actually the most minor of the costs.

Eliminating malpractice wouldn't save enough money to make a major difference. It might or might not be a good idea, but it is definitely not the solution to making healthcare affordable and available in the US.

Anonymous said...


This is hilarious, don't you people get it? This is an artificially created recession. It is meant to scare people. Today's money is all electronic, the problem can be wished away at the click of a button. Once asset prices depreciate the rich and the big banks will swoop in and buy them for dirt cheap prices.

Obama's stimulus package will re start the economy in a year or so and people will be euphoric! Obama our saviour, while the banks enrich themselves and the central bankers make money too. It's all part of the grand scam.

There are plenty of resources in the world. TOD and TAE have got good intentions but they are a bit clueless. Iraq has the world's largest oil reserves by far. Iraqi oil will be pipelined through to saudi arabia when needed.

The current low oil prices are meant to destabilize Russia and China along with Venezuela. Once thing occurs, the US gets more power, more resources and is once again king on top of the mountain.

The real political elite who run this country are far smarter than we can even imagine, the computing technology at their disposal is mind boggling.

This is a shock and awe on a large scale ;-) The world will be shocked and everyone will be in awe of America. Watch and Wait.

ExRanger said...

I love it! Credit Suisse Executives are getting paid their bonuses in Toxic Assets!

el gallinazo said...


"el gallinazo
I'm/was part of the majority of uneducated majority.
Were you?"

I came of age during the height of the Vietnam War and the Kennedy Assassination. It left me with an indelible skepticism and cynicism of the vast majority of politicians and all of the MSM. It was obvious to me as a physics minor that Oswald could not have killed Kennedy alone (frankly, as an aside and not to start a thread on this, I am quite certain that he was a patsy and never fired at Kennedy at all).

So when you asked me if I was "uneducated," factors in my youth gave me a certain, indelible education to assume that TPTB, whether politicians or MSM tycoons, were liars and scumbags, and to look beneath the surface of conventional "wisdom." Thus when I happened upon TAE, I saw its value immediately.

To answer your question directly, my net saving are in the mid six figure range. In the last 18 months I have added to it by about 10%, mainly by buying ultra short index ETF's with a small portion of it which I refer to as my "mad money."

el gallinazo said...

Anyone know what the story is about the mega spike in crude oil last evening. It when from about $36 to $42, almost a 20% increase, between 6 and 7 pm eastern time. This is extremely unusual yet I haven't seen a reference to it.

Anonymous said...

Anon @ 2:12a - Wow! I hope you're right, that means we can keep the party going on!

Too bad we can end climate change, resource depletion, and overpopulation with the push of a button, but that free electronic money should help. If it’s not too much trouble, could you transfer some of that free electronic money into my checking account? I need to buy a few pairs of sturdy work boots and some 100# bags of rice. :-)

el gallinazo said...


With the current cost of a hernia operation, better keep the race bags to 50 pounds :-)

Weaseldog said...

On HyperInflation...

This topic is confusing. Mainly because it can mean different things to different people.

Also, the money supply can inflate in one sector and contract in another, leading to further confusion.

On Terra Firma, I tend to worry about price inflation, more than the monetary inflation of supplies hidden away in bank vaults. And on this note, I see no conflict between price inflation and deflation, if they impact different industries and different product categories.

Over the last few years for instance, we've seen wheat prices inflate, while the price of LCD televisions has deflated.

Now when the government or the Fed gives away $trillions of dollars, how can we be assured those dollars are borrowed? If we need to borrow more dollars than is available, can a Chinese bank print dollars to loan us? If the Treasury is simply conjuring money out of thin air, but not reporting it, how would we know?

When a hundred billion dollars is given to a bank, does it just evaporate? Or does it enter circulation? If it's used to pay off exotic derivative instruments, does it just disappear, or does the bank they are paying out to, then get to spend that money on yachts and private jets? After all, isn't that essentially pure profit? They made a bet and these are the winnings, right?

Now if we borrow dollars, to give away, to cover the debt of borrowed dollars, doesn't this keep inflating the M3?

Weaseldog said...

Bigelow said... "A part of “money” that is also subject to disappearing is the $800 trillion of unregulated derivatives contracts soon imploding in a country near you."

Modern computers can theoretically handle numbers that size, very well.

It will be trivial to print that quantity of money in ones and zeros and give them away.

They might have to do it in batches though, as existing systems can only handle so many decimals in the FIX protocol. They'll have to upgraded to handle all the new zeroes that will be moving between accounts.

Weaseldog said...

TampaSteve, don't you know that Peak Oil is just a conspiracy and that the supply of oil in the Earth exceeds the mass and volume of the entire universe?

Stuff never runs out!

Somewhere, there is an infinite supply of dodo birds, just waiting for market forces to release them...