Tuesday, December 23, 2008

Debt Rattle, December 23 2008: A Theory of Coal and Stockings

Harris & Ewing Christmas Child 1910
Urchin in Washington.

Ilargi: The prevailing economic theory in the western world today remains a Chicago school type of Keynesianism, in which markets absolutely must be free unless the gambling encouraged by that freedom runs into debt, in which case the money of the poor, and their children, must be confiscated by their governments in order for the rich to be able to continue gambling. If that still fails, too bad, but it certainly doesn't mean their theory is wrong.

It's one-dimensional thinking at its best. Fight fire with fire, debt with more debt, and gambling debt with more gambling. The only person who ever drew the correct conclusion from this, who peaked into its second dimension, was Benito Mussolini, who had no qualms about promoting corporate fascism. The present bunch of supporters are too smart for that (and they know what happened to Benito), so they defined it as the much more benevolent sounding free-market capitalism. But forcibly using the money that rightfully belongs to people who have more or less voluntarily voted away their control over it, in alleged democratic elections, to politicians who have much closer ties to domestic and multinational corporations than they are willing to reveal, to cushion the lives of the largest stakeholders in those corporations, that just so happens to be precisely what Mussolini had in mind.

The best way to explain exactly how one-dimensional the IMF, Britain's Gordon Brown, and the Citi/Goldman made men who direct the US government are, can be found in the words "necessary to stimulate economic growth". For these people, the Greater Depression we now have entered in full with our eyes open and closed at the same time, is but a boring snag on the road to the liberation that huge increases in their already huge wealth will bring. And the most clever ones even recognize it as an opportunity to vastly add to their power, money and glory. To them, it's utterly inconsequential whether or not they leave hunger, death and despair in their wake. They have only one theory, and therefore it's impossible that this theory might be wrong. In a one-dimensional world, there are two directions: forward and backward. There's no sideways, let alone up and down.

The problem is that we don't live in the sort of world our most powerful people think we do. But while those of us who realize this get distracted by all sorts of three-dimensional issues, the big boyz lose no time with that kind of stuff. For them it's straight ahead, always and forever till death do us part. What happens to the side of them, or above or underneath, is beyond their vision. And that is why they have their power. That and the fact that in their minds, you, the workers and voters, will always be there to catch their fall. Will you?

I want to talk about Canada today as well. There are strange things a-goin- on in the snow. In October, Prime Minister Harper called an election, hoping to go from minority to majority rule with his Conservative Party. In Canada, the right wing parties all formed one party years ago, while those to the left of them did not, and can now never govern. Anyway, Harper did not get his majority. When the others formed a coalition and threatened to throw him from the throne, the PM simply suspended the parliament voters had elected a few weeks before. Whatever that move is, it's not respectful of democracy. Then yesterday, Harper appointed 18 additional senators, but only after they had sworn to vote with him on all key issues. He still faces a vote of confidence in about a month. Harper had previously said he would never make such a move, that the Canadian Senate needed reform, and until that was done, he'd never interfere. Salaries, perks and benefits for these chosen few will amount to $50 million over the next few years.

Last weekend, Harper's minority government, with no parliament to oversee them, threw a $4 billion bone at Canada's auto industry, which is not Canadian, it is American, without much of anything in the way of demands or concessions in return, just some repeats of what Bush had attached to his own Detroit bail-out. Also yesterday, The $45 billion Canadian ABCP mess, which is 16 months old, a time in which the paper was not and could not be traded, was allegedly resolved by the Governor of the central bank, the Bank of Canada. How did this Goldman alumni achieve the breakthrough? You guessed it, with more money than the auto bail-out has cost the Canadian people. Now the ABCP can sell again. Isn’t that just great? Well, you just wait for the market to say what it’s worth. Zilch.

Now I know that perhaps legally, Harper has the right to do all this, though I'd presume there are many questions, which would have to be resolved by parliament, which happens to be suspended. Harper uses public funds to buy votes and power for his own party and himself, and against the other parties, who put together hold a vast majority in the Canadian parliament.. That is not excusable, because it’s undemocratic. It’s Mussolini's view of the world.

It reeks, it smells bad on all sides. It looks to me like an American style coup d'état, with Bush getting absolute powers after the twin towers, and Hank Paulson being absolved from any and all reckoning after he threatened Congress with utter mayhem. It looks like yet another democracy being sacrificed to the needs and desires of those who are the most hungry for money and power. Coming to a theater near you soon, wherever you live.

IMF head warns of UK's 'disturbing' debt
The head of the International Monetary Fund (IMF) said governments around the world need to spend more to head off the threat of recession despite saying that the level of debt in the UK was "disturbing". Dominique Strauss-Kahn told the BBC that under normal circumstances he would oppose sharp increases in state debt, but now saw it as the lesser of two evils when faced with the worst global economic downturn in 60 or 70 years. He rejected the argument of German finance minister Peer Steinbruck that the British Government is making a "breathtaking" mistake by hiking up borrowing in order to inject money into the economy.

More spending by governments was necessary to stimulate economic growth, said Mr Strauss-Kahn, forecasting that 2009 would be "a really bad year". The IMF chief told BBC Radio 4's World This Weekend: "I'm specially concerned by the fact that our forecast, already very dark... will be even darker if not enough fiscal stimulus is implemented." Measures announced so far by the G20 countries following last month's economic emergency summit in Washington may not be sufficient to revive the global economy, he warned. It would take a spending stimulus equivalent to about 2 per cent of global Gross Domestic Product, or about 1.2 trillion US dollars (£800billion), to make a real difference. "The problem is that all the whole society is going to suffer," he said. In November, the IMF lowered its global economic growth forecast for 2009 from 3 per cent to 2.2 per cent, and Mr Strauss-Kahn today said that the prediction would probably be reduced further in January.

"We see 2009 as really being a bad year with recession for most advanced economies and growth decreasing for emerging economies," he said. "At the G20 in Washington a few weeks ago, all the heads of state and government seemed to be aware that something has to be done and I can see that some measures have been announced, but I'm afraid it won't be enough. "Our estimate is that we need a stimulus of something like 2 per cent of GDP, which is 1.2 trillion dollars." Mr Steinbruck ruffled feathers in Downing Street earlier this month with an outspoken interview in which he accused Mr Brown of "crass Keynesianism" for his efforts to inject vigour into the economy with a temporary VAT cut. But Mr Strauss-Kahn said: "I understand the traditional view of the Germans, but nevertheless I think we are in a time when we should be a bit more imaginative then we have been in the past." He said it was "noble" for European Central Bank president Jean-Claude Trichet to warn that eurozone governments must keep a lid on borrowing, adding: "He's the head of the central bank - it's his job to say things like that."

But the IMF boss made clear that he thinks borrowing restraint is the wrong path in the current emergency: "I don't think as a general stance we should have a lax fiscal policy, but we are in the biggest crisis we have experienced for 60 or 70 years and we have to take that into account... "The threat is that big today that we are between two difficult problems - increasing deficit, which is never good, and fighting against recession, which is even worse. We have to choose the less bad solution." Without a sizeable fiscal stimulus package, even the reduction in interest rates to 0.25 per cent seen in the USA this week will not be enough to revive the economy, warned Mr Strauss-Kahn. The IMF boss said the Federal Reserve rate cut was "welcome", but added: "It can't be considered enough. That's why we need to use the other tools we have in our tool-kits, namely a fiscal stimulus."

China urges US to prevent trade protectionism
China and the U.S. should combat protectionism as the global economic crisis worsens, Beijing said Tuesday, in response to a trade case by Washington that accuses China of unfairly promoting goods for export. In a case filed Friday, the U.S. said China was violating global trade rules administered by the World Trade Organization in the way it operates a "famous brands" program to promote the sale of Chinese goods overseas. "There are some different opinions between the two countries on trade and these differences should be solved through equal consultations," Foreign Ministry spokesman Qin Gang said at a news briefing. "Under the current circumstances with the deteriorating financial crisis, we should be alert to trade protectionism in any forms," said Qin.

The United States could be cleared to impose economic sanctions against China if negotiations between the two nations fail to resolve the dispute and if a WTO hearing panel rules in favor of the U.S. A notice on China's Ministry of Commerce said Sunday that China has always obeyed WTO rules and opposes protectionism. China will follow the rules of the WTO in dealing with the case, it said. China's export-dominated economy is feeling the brunt of a drop of demand in its Western markets, with thousands of factories closing in its once-booming southern provinces. Critics say China is not doing enough to stimulate domestic consumption and is still trying to support its exporters, which could bring it into friction with the U.S. and other trading partners.

China also asked the WTO on Monday to investigate whether the United States is illegally taxing Chinese goods such as steel pipe and off-road tires. It is the first time Beijing has ever sought a WTO panel in a trade dispute. In its case, the administration of President George W. Bush said China, in an effort to encourage worldwide recognition of Chinese brand names, has provided numerous types of subsidies at various levels of government. The allegedly illegal subsidies included: cash rewards to exporters, preferential government loans for exporters, research and development funds to develop new products for export, and payments to lower the cost of export credit insurance. U.S. industry groups applauded the action.

Central banks revolution gathers pace
A quiet revolution in central banking is gathering speed, as the Federal Reserve ploughs ever deeper into the brave new world of unorthodox monetary policy and other central banks ponder how far they might have to follow. The world’s central banks have already undergone dramatic changes since the start of the credit crisis more than a year ago. They have cut interest rates with unprecedented rapidity – in some cases to historic lows – and have increased bank reserves massively to meet heightened private sector demand for liquidity. They have become de facto central counterparties in the money markets, and in some cases even direct lenders to companies. Moreover, by making liquidity available against collateral on terms far more favourable than those that prevail in the private markets, they have become in effect catastrophic risk insurers of last resort for whole classes of financial assets – taking on the risk that the crisis could become so bad that they cannot recoup their loans.

But the latest steps by the Federal Reserve – which cut interest rates virtually to zero last week and said it would create money to finance ever-larger credit operations – break new ground. Already the Fed arguably has one companion, the Bank of Japan. The BoJ cut rates to nearly zero on Friday, stepped up its purchases of government bonds and said it would buy commercial paper. When central banks want to stimulate a slowing economy they normally cut interest rates. But when rates approach zero other tactics must be employed. Like the Fed, the BoJ is likely to end up funding these purchases by expanding its holdings of bank reserves and therefore the narrowest measure of the money supply. Unlike the Fed, it has the option of issuing its own debt instead. The Bank of England, while cautioning against assuming that it will follow the Fed into unorthodox territory, is thinking about what it might do in certain circumstances if UK interest rates also fell towards zero. The European Central Bank as a whole is much less prepared to countenance the possibility that eurozone interest rates might end up so low. However, ECB officials say this does not rule out some forms of innovative operations.

That these issues are even being discussed in so many big economies is truly remarkable. Radical as the measures taken by central banks collectively to date are, the territory that lies beyond zero rates is still more unfamiliar. Only Japan has any experience of unorthodox monetary policy. At the turn of this decade it adopted a strategy of quantitative easing – increasing the money supply by increasing bank reserves – in the hope that this would end deflation and boost lending. The strategies under consideration today bear some resemblance to Japan’s quantitative easing, since they involve swelling the central bank’s balance sheet by more than the amount required to accommodate an increase in the private sector’s demand for liquidity. Richard Berner, chief US economist at Morgan Stanley, says the Fed’s strategy amounts to “targeted QE”. But senior Fed officials do not think quantitative easing was a big success in Japan. The Fed says its own strategy is to stimulate the economy by driving down actual borrowing rates – increasing reserves only as a by-product– and it prefers to call this credit policy or credit-based easing. Even the BoJ does not think quantitative easing was an enormous success, and denies that what it is doing now amounts to the same thing.

The ECB remains distinctly wary about further cuts in official borrowing costs, now at 2.5 per cent, with some officials concerned about running out of ammunition – a concern that runs directly contrary to Fed thinking – or of sowing the seeds of the next bubble. However, the ECB could still follow the Fed into the realms of unconventional policy actions if necessary. Jean-Claude Trichet, president of the ECB, told the FT the ECB’s balance sheet had increased by an “impressive” 55 per cent compared with a year ago. He did not rule out the possibility of the ECB buying government debt at some stage, even though such an option was not currently being considered. The Bank of England, for its part, stresses that it is still in the realm of conventional policy, with rates at 2 per cent and no difficulty holding them there. It has nearly doubled the amount of reserves to £44.6bn over the past year, in line with its convention that banks can demand whatever reserve levels they choose once a month. But the Bank is making contingency plans for what would happen if rates had to go close to zero. Charles Bean, the deputy governor, told the FT such policies might have to be considered before rates reach zero and banks have little incentive to manage liquidity. The “essential purpose”, he said, would be to drive borrowing rates lower, and stimulate spending – the same logic that drives the Fed approach.

Ilargi: If you don't say it, I will. Roubini has entered the realm of magical thinking. Maybe he's too popular, maybe someone threatened his family. Time to go back into risky assets by the end of 2009? I don't believe for a second that he seriously believes that. It's a shame, Roubini said some smart things till a few months ago, which made him look like an independent thinker. Now he’s just on the far left flank of the ruling team.

Light at the end of a dark tunnel
The following is an edited transcript from a video interview of Nouriel Roubini, by Aline van Duyn.

FT: What’s in store for 2009?
NR: It’s going to be a year of economic stagnation and recession for most of the global economy with deflationary pressures…I expect a global recession and a severe one.

FT: So you think next year will probably be the worst year?
NR: Yes; I see a recession throughout 2009...and maybe there’ll be return to positive economic growth by 2010.

FT: What other policy actions do you think need to be taken?
NR: Well, part of the answer is the degree of these policy actions. For example, in the US monetary policy right now is very aggressive...I believe the ECB is behind the curve...But also on top of everything else I think that we have to recapitalize financial institutions much faster, more aggressively in the U.S. We also need a plan to reduce the debt burden of households that are now distressed and bankrupt.

FT: So it’s going to cost the taxpayer a lot more?
NR: The fiscal deficit in the U.S. is going to be huge; at least a trillion dollars in 2010; another trillion dollars in 2011.

FT: Is there a risk that the capitalist system doesn’t recover from this shock?
NR: We’re going to avoid the Great Depression and a severe recession even if there is a risk of protracted slow economic growth. So I don’t think this is the end of capitalism, of market economies, but it suggests that really there are significant market failures, that markets don’t self-regulate each other.

FT: Are you advising the future Obama administration?
NR: I’m not directly advising the administration. I’m of course in touch with a number of members in the economic team.

FT: What could be the next shoe to drop?
NR: There are many of them. I think the process of deleveraging is going to continue. You could have a thousand if not more hedge funds going bust all at the same time. Another source of stress is emerging market economies. There are about a dozen of them that are on the verge of a potential financial crisis: Latvia, Estonia, Lithuania, Hungary, Bulgaria, Romania, Turkey, Ukraine in emerging Europe...Pakistan, Indonesia or Korea in Asia. Places like Ecuador that just defaulted. Argentina and Venezuela in Latin America. Some of these countries could get in trouble and there could be contagious effects to other financial markets in other emerging markets. This credit loss is going to spread from mortgages to commercial real estate, to credit cards, to auto loans, to leverage loans, to industrial and commercial loans...There are many sources of financial stress.

FT: What’s your outlook for the dollar?
NR: There are different forces. In recent months the dollar was strengthening part because there was this flight to safety. Of course also the bleak economic outlook in Japan and Europe implied the relative interest rates are becoming less bearish for the dollar, but looking ahead I see a dollar weakness. I see dollar weakness because effectively the Fed is easing money like crazy.

FT: What is the outlook for markets?
NR: I see another 15 to 20 per cent down side risk for US and global equities because in the next few months macro news and earnings news is going to be much worse than expected...I don’t see this as being the bottom of the market. There is a bear market rally, but like the previous ones it’s going to fizzle out. So I’m concerned about equities, I’m concerned about credit, I’m concerned about commodities falling another 15-20 per cent given a severe recession. I’m still concerned about emerging market asset classes. I think that cash and cash like instruments like safe government bonds are still the safer bet for the next few months. Down the line towards the end of 2009 if we see the light at the end of the tunnel of economic recovery, if and when we see it maybe it’s time to go back into risky assets, but not in the short term.

Ilargi: The OECD says 8 to 10 million jobs will go in 2009. November job losses in the US were some 530.000, for an annual rate of 6.3 million. Numbers for other OECD nations are scarce, but Britain is expected to lose an additional 1.2 million. So in the rest of the OECD area, which includes all rich countires, their maximum expected job loss number is 2.5 million. Is that realistic? Will continental Europe, with a thrird more people than the US, hardly lose any jobs at all? No, don't be fooled, the OECD makes it up as they go along.

OECD warns global jobless to rise by 25 million
Some 25 million people around the world stand to lose their jobs as a result of the economic crisis, the head of the Organisation for Economic Co-operation and Development has warned. Angel Gurria, who heads up the Paris-based institution, also blamed "a truly scandalous failure" of regulatory supervision for the crisis and urged European countries to spend more Keynesian-style plans to boost their economies. Speaking to French radio, Mr Gurria said that the scale of the rise in unemployment worldwide would be almost unprecedented as the recession takes hold. He said: "We're heading for a loss of between 8m and 10m jobs in the OECD area... and 20m to 25m in the world as a whole between now and 2010."

The OECD, which represents the world's richest nations, was among the first of the major world economic institutions to warn that the UK faces recession. Most economists now expect the jobless total in Britain to rise by more than a million, with some anticipating that it will rise from its current level of 1.8m to around 3m by the end of next year. Mr Gurria said the construction sector would be particularly affected, since activity there had "stopped in a brutal way," with Ireland and Spain affected more than many others. The International Labour Organisation said that it expects the global unemployment toll to rise by 20m to a record high of 210m by late 2009. Mr Gurria's exhortation to rich European economies to spend more on stimulus packages is equally significant. Prime Minister Gordon Brown has come under fire both from the Conservatives and from German finance minister Peer Steinbrück for cutting VAT from 17.5pc to 15pc in an effort to avert a severe recession.

However, Mr Gurria said that the European Union should "go beyond" the fiscal stimulus packages that had already been announced, equivalent to 1.4pc of gross domestic product, saying: "all the other major countries are going beyond that." He also urged the European Central Bank to cut interest rates further. The US Federal Reserve has reduced its own borrowing costs to just above zero. Many economists have warned that the ECB's apparent reluctance to follow suit could consign Europe to a far longer-lasting recession, as well as keeping the euro painfully high. Mr Gurria said that the rich world nations would remain in recession for most of 2009, adding: "We predict a recovery at the end of 2009 and weak growth in 2010." He added that in the build-up to the crisis there had been "a truly scandalous failure of regulation... and supervision". It came after Sir John Gieve acknowledged that the Bank of England had underestimated the scale of the financial crisis.

Crisis deepens in Japan and China as Asian exports plunge
Japan's exports plunged 27% last month in the steepest fall for half a century. The shock data came as the Japanese Cabinet Office warned that the world's second biggest economy is now deteriorating at an "exceptionally high pace". Shipments collapsed to almost all markets in North America, Europe, and Asia, following a pattern already set in recent days by South Korea, Taiwan, and China. Thailand on Monday said its exports fell 19pc in Novermber. It is unclear to whether the violent drop is distorted by a "one-off" inventory shock as companies slash stocks, or whether it is the start of a trade slump that threatens Asia's entire export strategy.

"We think this is very serious," said Stephen Jen, currency chief at Morgan Stanley. "These export surplus countries are super-leveraged to the West, and now we're seeing a multiplier effect (in reverse) as the intra-Asian trade model is stress-tested. What's incredible is that Japan has run a trade deficit for two months in a row despite the fall in oil prices. The next country to watch is going to be Germany," he said. The Baltic Dry Index measuring freight rates for bulk goods has crashed by 94pc since peaking in June. Container shipping for manufactured goods has been less volatile but that too has begun to buckle. Denmark's Maersk and China's COSCO have both cut container rates from Asia by a quarter. Importers have been struggling to secure letters of credit, the lubricant of the trading system. Even large banks in Asia have had trouble obtaining dollars needed for shipping deals.

Masaaki Shirakawa, the Bank of Japan's governor, said the central bank was preparing to buy corporate debt and commercial paper in an emergency move to unlock the credit market. It cut interest rates to 0.01pc on Friday, tantamount to zero. "It's an exceptional step," he said, insisting that the authorities were taking on private credit risk with great reluctance. The bank is boosting its purchase of governement bonds from ¥1.2 trillion to ¥1.4 trillion ($156bn) per month in a return to quantitative easing. In China, the central bank cut rates for the fifth time since September to 5.31pc and trimmed the reserve requirement for lenders. The Govenrmment is rushing through a $585bn fiscal stimulus package.

Beijing is alarmed by outbursts of civil unrest, both in the country's hinterland as 9 million migrant workers return after losing their jobs, and in the export hub of Guangdong where violence has been simmering for months. Some 3,600 toy factories have already closed this year. Premier Wen Jiabao said over the weekend that the key priority is to find jobs for migrants and some 6 million fresh graduates -- the two groups most feared as a political tinderbox. "If you are worried, I am more worried than you," he told students.

Japan's economy minister Kaoru Yosano said Tokyo is mulling a range of drastic measures to support the economy, including the outright purchase of equities held by banks in distress. "We're ready to do everything we can to break the cycle of deterioration in sentiment," he said. The Cabinet Office warned that the surge in the yen against all major currencies was now tightening like vice on Japan's economy. "The tempo of the economic downturn is getting substantially faster, and what's worse there are many negative factors that can make a recession deeper and longer," it said.

The yen has appreciated by a third to ¥89 against the dollar since the credit crunch began. There has been a dramatic reversal of the "carry trade" as hedge funds close worldwide bets that were financed at near zero rates in Tokyo. Japanese investors began to repratriate their vast foreign holdings. It has doubled in value against sterling. The surging yen has played havoc with the balance sheet of Japan's leading exporters. Every one yen appreciation against the dollar and euro shaves Toyota's profits by $450m. The company is now underwater, facing its first loss since 1938. The risk is that Japan could slide back into a deflationary crisis and renewed perma-slump. The country's `Lost Decade' never seems to end.

India, China can't make up for plunge in U.S. spending
American consumers purchase five times as much as Asian shoppers despite the region's rapid growth

They were supposed to keep the good times going: Prakash Shetty, caught recently thumbing through Singh is King DVDs at a mall in India, and Zhu Xiaolin, who enjoys Adidas sportswear in China. But how far can Shetty and Zhu, both 26, and other Asian consumers go to save the groaning global economy? Just how many Buicks, Barbie dolls and Wrangler jeans are they willing or able to buy? Not enough, it turns out.

Much has been made of the power and promise of Indian and Chinese consumers. Each country has a rapidly growing economy, rising incomes and more than a billion people – many of whom have yet to burn through a single credit card. China will be the third-largest consumer market by 2025 and India will be No. 5, ahead of Germany, McKinsey & Co. has predicted. As U.S. sales swooned this year, emerging markets were the sole bright spot on many balance sheets. But such heraldry obscures a painful bit of math: U.S. consumers still buy more than five times as much as Indian and Chinese shoppers combined. And despite rambunctious growth, revenues from India and China have barely softened the blow of declining sales in the developed world – even for companies that have chased after rupees and yuan most aggressively. Moreover, India and China are not immune to the global crunch.

Declining exports, particularly in China, and tight credit have cooled spending growth, despite the favourable long-term trends. Chinese consumer spending is projected to reach $1.3 trillion (U.S.) this year, according to Euromonitor International, a market research firm. That would approach France's $1.4 trillion but pales in comparison to America's $9.9 trillion. Indian consumers will spend $660 billion, about half of China's. In October, Americans spent $102.8 billion less than they did in September. That one month drop is nearly 2,5 times what the Indian consumer spending is expected to grow this entire year. "In dollar terms they can't offset," said Arvind K. Singhal, chair of Technopak Advisors Pvt. Ltd., a New Delhi retail consultant.

It's not that Indian and Chinese shoppers aren't eager. Take Shetty. He just got promoted to assistant manager at the Leela Kempinski, a luxury hotel in Mumbai where rooms were going recently for $280 a night. After he got the news, he handed his mom a fistful of cash, bought a TV, two cell phones (one for his dad), a stack of DVDs, a $700 gold necklace for his fiancé and a couple of new outfits for himself. His appetite for shopping helps explain why growing markets such as India and China "may make up for some of the stagnation you have in more mature markets," said Jan Runau, a spokesperson for Adidas. By the end of this year, China is expected to surpass Japan as the second largest market for Adidas worldwide, after the U.S. But Runau cautioned that once other countries entered the recession, India and China would be affected: "They can't make up for everything.''

Now, the economies of India and China are themselves slowing. Their stock markets have plunged, businesses and households are finding it harder to access credit, and fears of job losses have shaken consumer confidence. Lower export growth in China is spilling over into consumer spending, as workers fret about pay and job security. Zhu, who works at a Shanghai export firm, has been trolling the Internet for shopping deals, because she is not getting a bonus this year. "Companies that can't manage to sell their export items are selling online at very low prices," she said. "It doesn't mean I don't like shopping in stores, but I can't afford that right now.'' Despite government efforts to spur domestic spending, many Chinese remain frugal, concerned about saving for health care and retirement. "Consumer demand is not going to be the answer to disappearing exports," said Robert Lawrence Kuhn, chair of Kuhn Global Capital LLC.

Banks struggle with home loan surge spurred by cut in rates
US banks are having trouble handling a surge of mortgage applications spurred by dramatically lower interest rates, after record loan defaults and thousands of job cuts have stretched mortgage industry resources to the limit. Applications for home loans more than doubled in the two weeks after the Federal Reserve said it would buy mortgage bonds to help stabilise the market, prompting mortgage rates to fall by more than three-quarters of a percentage point. With average rates for a 30-year, fixed-rate mortgage at about 5.2 per cent, growing numbers of borrowers have an incentive to refinance to bring down their mortgage costs.

However, tighter underwriting standards for prospective borrowers, combined with funding and staffing difficulties for mortgage originators, are likely to restrict the supply of new mortgages. "The mortgage industry is collectively unprepared to deal with a cascade of business; staffs were pared to the bone as the market for mortgages shrank over the past year," analysts at HSH Associates wrote in a note. Mahesh Swaminathan, mortgage analyst at Credit Suisse, said that as a result, lower rates would not necessarily create a wave of mortgage refinancing on the scale seen in 2003, when credit markets were healthy. "There is a lot of pipeline congestion. Originators don't have the staffing or the credit lines to fund a lot of loans," he said. "You have more due diligence which requires more staffing. It [cannot] be changed overnight."

Part of the problem is that banks have directed the bulk of their manpower toward their servicing arms in a bid to stem defaults and foreclosures. While banks have pledged to use capital from the US Treasury to boost consumer lending, they are also under intense political pressure to modify loan terms for struggling borrowers urgently. Loan modifications have continued to grow more quickly than other strategies such as subsidy programmes or refinancing into government loans, according to the Office of the Comptroller of the Currency. The number of new loan modifications grew 16 per cent in the third quarter to more than 133,000, said the OCC. The rate of loan modification is likely to be higher in fourth-quarter data, say analysts, as a result of recent initiatives by Fannie Mae and Freddie Mac, the two large mortgage financiers, as well as private sector loan modification schemes.

Key Democrat Barney Frank wants second $350B released earlier
A key House Democrat is pushing to get the second half of the $700 billion rescue fund released next month, before President-elect Barack Obama is inaugurated, in part to help stimulate the economy. Barney Frank, chairman of the House Financial Services Committee, said Monday he is preparing legislation to require that some of the money be spent for specific purposes, such as stemming foreclosures and reducing mortgage rates.  At the same time, commercial real estate developers and other companies are seeking their own share of the bailout pot.  Frank's bill would impose tighter restrictions on the second $350 billion of the bailout funds, such as requiring banks to report on their new lending every quarter and toughening limits on executive compensation. Many U.S. banks have received federal capital in an effort to stimulate lending.

"I don't want to wait until Obama," the Massachusetts Democrat said in a phone interview. "I think we can do it now." The bailout funds, along with a stimulus package the Obama administration is expected to push early next year, would have "the impact that you need to get this economy back out of the dumps," Frank said.  A spokeswoman for Obama did not return a call for comment Monday.  Last week, the Bush administration used the final piece of the initial $350 billion to provide loans to automakers General Motors Corp. and Chrysler LLC. The Treasury Department has earmarked $250 billion to buy stock in banks, including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., and provided $40 billion in capital to insurance giant American International Group Inc. Lawmakers have criticized Treasury for not using any of the initial $350 billion to prevent additional home foreclosures. Up to 2.25 million Americans could lose their homes to foreclosure this year, Federal Reserve chairman Ben Bernanke has warned.

Frank said his legislation would include a version of a plan, supported by Federal Deposit Insurance Corp. Chairman Sheila Bair, to spend $24 billion to give lenders financial incentives to modify more loans and help more borrowers keep their homes. Bair has estimated it could prevent 1.5 million foreclosures.  His proposal also would include a measure, under consideration by Treasury, to use government-controlled mortgage companies Fannie Mae and Freddie Mac to reduce mortgage rates to 4.5 percent or lower to stimulate more home buying.  Frank also wants to revamp the Hope for Homeowners program, which was launched Oct. 1. It was intended to let 400,000 troubled homeowners swap risky loans for conventional 30-year fixed-rate loans with lower rates. The early results have been disappointing, with only 312 applications so far, and officials are looking at ways to expand the program's use.

Frank is "committed to fixing" low participation but blames the Bush administration for resisting the program when it was debated in Congress last summer and being slow to fix problems in its design, said his spokesman Steve Adamske.  Meanwhile, financial industry groups are pushing to use the bailout fund to help a wider array of companies, including automotive financing companies such as GMAC Financial Services. GMAC is 51 percent owned by Cerberus Capital Management LP, a private equity firm; General Motors owns the rest. GMAC, which provides financing for GM vehicle and dealer loans along with home mortgages, is having trouble finding adequate support from its bondholders for a debt transaction that would allow it to become a bank holding company and gain eligibility for bailout money.

"What good does it do to bail out the automakers if you can't get a loan to buy a car?" said Scott Talbott, chief lobbyist for the Financial Services Roundtable, which represents more than 100 large banks, brokerage firms and insurance companies.  Meanwhile, the Federal Reserve on Monday said it has approved CIT Group Inc. as a bank holding company, clearing a key hurdle for the firm to bolster its resources with loans and support from the government's financial rescue fund. The decision means the New York-based commercial financial services firm will have permanent access to the Fed's emergency loan window and will be eligible for loans from the $700 billion rescue fund created by Congress on Oct. 3. Commercial real estate developers said Monday they also are petitioning the government for support from the $700 billion rescue fund. The Real Estate Roundtable said an estimated $400 billion of commercial real estate mortgages will come due by the end of 2009 without adequate refinancing options.

Industry officials said thousands of office buildings, hotels, shopping centers and other commercial buildings could be headed into foreclosure or bankruptcy unless the government provides support.  Jeffrey D. DeBoer, president of the Real Estate Roundtable, said the industry has written to federal officials asking to be included in a new $200 billion loan program being run by the Federal Reserve, with support from the financial bailout program, to bolster the market for credit card debt, auto loans and student loans.  DeBoer said the commercial real estate industry would like to see that program expanded to cover their properties or have a similar program begun to help their industry. 

"We think it is critical that as soon as possible that policymakers announce their intentions to make sure that the credit markets function so this huge wave of debt coming due will be able to be refinanced in an orderly process," he told reporters Monday.  Treasury spokeswoman Brookly McLaughlin said no final decisions had been made yet on the request from commercial developers. But she noted that Treasury Secretary Henry Paulson, when he announced the effort to help the credit card, auto and student-loan markets, said the new lending facility could be expanded and specifically mentioned providing assistance for "commercial mortgage-backed securities."

Democrats Try to Lower Expectations
Even as they depict a massive stimulus package as indispensable to turning the economy around, U.S. Democratic leaders are aggressively lowering expectations that the package will yield dramatic accomplishments quickly.  Rep. David Obey, who is playing a key role in assembling the stimulus plan, which is expected to approach $800 billion, said recently that an infusion of federal spending is "the only game in town." But the Wisconsin Democrat, who is chairman of the House Appropriations Committee, was careful to add: "The downward momentum appears too strong to end the recession anytime soon."

House Majority Leader Steny Hoyer's office said recently that "Congress needs to pass an economic recovery package to prevent any further decline in the economy" -- but cautioned, "recovery will not be immediate." The expectations game is always tricky in politics. To win power, candidates promise to enact sweeping change. But once victory is in hand, they often scramble to lower those expectations so they won't be perceived as falling short.  Democrats are facing an especially precarious version of that dilemma. In crafting a package that will sink hundreds of billions of taxpayer dollars into the economy, they are apprehensive about the fallout if the economy merely continues sputtering along for several years.  And lawmakers are already mindful of how they will face voters less than two years from now. The ruling party almost always loses seats in midterm elections, and that trend could be exacerbated for the Democrats if voters think they threw billions of dollars at the economy with little to show for it. 

"Elections are run in two-year cycles, and we're in an economic cycle that we can't turn around in two years," said Rep. Jerrold Nadler (D., N.Y.). "It's a political problem. But I don't know that there is a way out of it." President-elect Barack Obama, asked how voters will be able to judge whether his economic package is helping, said it would create at least some jobs immediately by funding "shovel ready" construction projects. The Democrats could also get credit if they produce concrete results in areas such as providing mortgage relief or extending unemployment benefits.  Still, the political challenge is daunting, given that economists expect this recession to last for years. "The stimulus package will keep it from getting as bad as it would otherwise be, but that is very hard to measure," said Alice Rivlin, former director of the Congressional Budget Office, who addressed House Democrats recently. "All you can say is, 'It's probably not as bad as it would have been.' But that is very hard to prove."   That is why Democrats are trying to lower expectations now. "The only way to deal with it is to be upfront and say, 'It's not salvation. It will limit the damage. What's been built up for years won't be solved overnight,' " Rep. Nadler said. 

Congressional leaders, conferring with Mr. Obama's team, are pushing to have the stimulus plan ready by early January. They hope the new Congress will pass it by Jan. 20 so Mr. Obama can sign it quickly. One aspect of the Democrats' strategy is to stress that the recession was the Bush administration's fault, not theirs. "President Bush will leave behind a legacy of debt, transforming the biggest surpluses in history into the biggest deficits and affecting our ability to confront the current economic crisis," Rep. Hoyer's office said recently. Democrats also have begun speaking of the long term, emphasizing that their goal isn't merely to end the downturn but also to change society and strengthen the economy for generations. That may be a difficult point to make politically. But Democrats hope that voters understand the severity of this recession and don't expect them to work miracles immediately. They take some hope in that regard from the performance of President Franklin D. Roosevelt, to whom they are increasingly looking as a role model. Mr. Roosevelt didn't rapidly end the Great Depression, but voters supported him because he seemed to care so deeply, taking aggressive action and trying everything at his disposal.  "I think people know this is a serious recession, and they don't expect it to turn it around quickly," Ms. Rivlin said. The Democrats "don't have to produce a turnaround. But they have to produce action."

Governments Tested as Global Economies Enter Dangerous Part of the Crisis
The dangerous part of the current world economic crisis is just getting underway. Events that can’t be controlled by a Federal Reserve, Bush or Obama administration are starting to unfold and the eventual impact they may have is not now known. Throughout history, sudden shifts in economies and the weal of the majority have resulted in destructive changes that impact not only the region in which they occur but often the entire globe. Writing in the Telegraph, Ambrose Evans-Pritchard makes the case that we are heading once more down that dangerous road:
We are advancing to the political stage of this global train wreck. Regimes are being tested. Those relying on perma-boom to mask a lack of democratic or ancestral legitimacy may try to gain time by the usual methods: trade barriers, saber-rattling, and barbed wire. Dominique Strauss-Kahn, the head of the International Monetary Fund, is worried enough to ditch a half-century of IMF orthodoxy, calling for a fiscal boost worth 2pc of world GDP to "prevent global depression." "If we are not able to do that, then social unrest may happen in many countries, including advanced economies. We are facing an unprecedented decline in output. All around the planet, the people have reacted with feelings going from surprise to anger, and from anger to fear," he said.

We have already seen riots in Greece and a takeover of a factory by displaced workers in, of all places, Chicago. As Mr. Pritchard points out, politicians are falling back on trade barriers to try and hold the wolves at bay. The responses of Russia that he outlines illustrate his case.
Russia has begun to shut down trade as it adjusts to the shock of Ural's oil below $40 a barrel. It has imposed import tariffs of 30pc on cars, 15pc on farm kit, and 95pc on poultry (above quota levels). "It is possible during the financial crisis to support domestic producers by raising customs duties," said Premier Vladimir Putin. Russia is not alone. India and Vietnam have imposed steel tariffs. Indonesia is resorting to special "licences" to choke off imports. The Kremlin is alarmed by a 13pc fall in industrial output over the last five months.

There have been street protests in Moscow, St Petersburg, Kaliningrad, Vladivostok and Barnaul. Police crushed "Dissent Marchers" holding copies of Russia’s constitution above their heads in Moscow’s Triumfalnaya Square. "Russia has not seen anything like these nationwide protests before," said Boris Kagarlitsky from Moscow’s Globalization Institute. The Duma is widening the treason law to catch most forms of political dissent, and unwelcome forms of journalism. Jury trials for state crimes are to be abolished. Yevgeny Kiseloyov at the Moscow Times said it feels eerily like December 1 1934 when Stalin unveiled his "Enemies of the People" law, kicking off the Great Terror.

He goes on to point out that China is sending out mixed signals as well and may indeed through currency manipulation be pulling out the stops to protect its export oriented economy. The extent of the problems in that country are largely unknown but it would probably not be unwise to assume that they are worse than reports would indicate.

In another month a Congress that is decidedly anti-trade and a new administration that won partly on the promise to toughen trade barriers and renegotiate trade treaties is going to assume power. If it appears that other countries are attempting to cure their economies at the expense of workers in the U.S., that Congress and administration are going to find themselves hemmed in by past promises and ideology. Their response could easily intensify the problem. Even a casual reader of history is aware of the monstrous political systems that were spawned by economic misery. Unfortunately, nations have repeatedly chosen to ignore those lessons and paid dearly for having done so. It is to be hoped that we have wiser men at the helm than in the past. It remains to be seen if that is indeed the case.

Oil below $40 on fears of weaker crude demand
Oil prices fell below $40 a barrel Tuesday, adding to a sharp drop overnight, on concerns that energy demand is evaporating in the face of a severe global economic slowdown. Prices have fallen 73 percent since July on investor fears that massive job layoffs and plummeting consumer spending in the U.S. are weakening global oil consumption. By noon in Europe, light, sweet crude for February delivery dipped 6 cents to $39.85 a barrel in electronic trading on the New York Mercantile Exchange. "Fears of demand are dragging the price lower," said Toby Hassall, an analyst at investment firm Commodity Warrants Australia in Sydney. "You don't want to get in the way of a runaway train." Overnight, the February contract fell $2.45 to settle at $39.91 a barrel after Toyota Motor Corp. and drugstore operator Walgreen Co. reported dismal news. Walgreen's said profit fell 10 percent in its fiscal first quarter, while Toyota slashed its earnings forecast for a second time, warning that it now expects to post an operating loss for the fiscal year through March for the first time in 70 years.

The Dow Jones industrial average fell 0.7 percent Monday, the index's fourth straight day of losses. Oil investors have looked to stock markets as a barometer of sentiment in the economy. "What we may have to see before oil prices really carve out a bottom is evidence that crude inventories have stopped rising or a sustained rally in equities," Hassall said. "The focus of the market has been almost purely on the demand side." Hassall predicted prices could fall as low as $25 a barrel next year before rising to as high as $60 if the global economy recovers in the second half. "Prices could dip into the 20s for a time, and then there will likely be fairly choppy, sideways action in the first quarter," Hassall said.

OPEC said last week it would slash production by 2.2 million barrels a day, its largest cutback ever, adding to a 1.5 million output quotas reduction in November in a bid to stem the rapid price decline. Chakib Khelil, president of the Organization of Petroleum Exporting Countries, said Sunday the group was willing to cut production as much as necessary to stabilize oil prices. Khelil also said the market needed time to absorb previous cuts. "It will take time for output cuts to flow through, but there's some doubt about whether there will be full compliance," Hassall said. "I wouldn't be surprised if OPEC cut again in January or February. There's been quite a significant demand side deterioration."

Oil's downward curve is also dragging down gasoline prices and giving consumers a break at the pump just five months after gas prices peaked at $4.11 a gallon. Noting that retail gasoline prices have fallen for the 23rd consecutive week since July 4, trader and analyst Stephen Schork said that as of Monday the national U.S. average was $1.653 a gallon. "That is the lowest price at the pump in nearly five years, i.e. since February 2004," he wrote in his Schork Report. Gasoline futures on the Nymex gained just over a penny to fetch 90 cents a gallon. Heating oil dropped 0.45 cent to $1.34 a gallon while natural gas for January delivery rose by close to 10 cents to $5.39 per 1,000 cubic feet. In London, February Brent crude edged up 2 cents to $41.47 a barrel on the ICE Futures exchange.

Auto Bailout: UAW Chief Draws a Line
Ron Gettelfinger may not be able to hold off wage and benefit cuts as he hammers out a restructuring with GM execs. If General Motors (GM) and Chrysler executives want federal loans beyond the initial $17.4 billion provided by President Bush and the Treasury Dept. on Dec. 19, they will need to wring concessions from the United Auto Workers. And that means dealing with Ron Gettelfinger. As became clear in mid-December, Gettelfinger, the 64-year-old union president, is no pushover. With the fate of an industry hanging in the balance, he refused to back down when Senator Bob Corker (R-Tenn.) demanded that the UAW commit to cutting wages to secure a bailout of Detroit's Big Three.

Gettelfinger's stance—critics call it intransigence—pushed a government rescue to the brink until the Bush Administration stepped in. But even after the Administration released funds for GM and Chrysler, Gettelfinger bristled at the labor concessions that Treasury is insisting on. In response to the Administration's demands for wage and benefits cuts, he said: "We are disappointed that he [Bush] has added unfair conditions singling out workers." Gettlefinger even said he would go to the Obama Administration—which promises to be more labor-friendly—to work out a deal. That sets the stage for negotiations beginning in earnest in January with management at GM and Chrysler as the union and the carmakers try to craft a restructuring plan. Gettelfinger and his staff will first face off against a team headed by GM President Fritz Henderson. The Bush Administration has already laid out some concessions that it wants from the union.

The plan closely mirrors what Senator Corker wanted Gettelfinger to agree to in advance of getting any government money. In documents spelling out the loan terms, Treasury asked to close down the JOBS bank—an anachronism that keeps UAW workers on the payroll even when they aren't working—and make UAW wages, benefits, and plant floor work rules competitive with those of foreign-owned factories in the U.S. by the end of 2009. (The union agreed to suspend the JOBS bank in early December.) The union also must take company stock instead of cash for half of the money that car companies pledged to finance a health-care trust. The talks themselves are historic: The most powerful industrial union in America will be asked to reopen its contract to ensure the survival of the automakers. And Gettelfinger himself will be walking a tightrope. On the one hand, he knows that the stakes are too high for the government to walk away from an industry that directly and indirectly employs an estimated 3 million people. On the other, he knows concessions are inevitable and that to sell them to his 640,000 members he needs to be seen as a defender of the working stiff.

"The goal is to make these companies competitive so that as many jobs as possible are preserved," says Harley Shaiken, a labor economist at the University of California at Berkeley. "The union has a devastating context in which to achieve it." Gettelfinger's challenge is to find a way to help save GM, Ford (F), and Chrysler without destroying the union he has spent much of his life protecting. "We're very concerned, first of all, about the companies staying in business," Gettelfinger said in an interview. "Secondly, we want to maintain a decent standard of living. We're also concerned about our retirees." The earlier brinkmanship in Congress may give a hint as to how Gettelfinger will play his hand. He told Corker that he would agree to take stock instead of cash for 50% of the health-care trust, which is called a Voluntary Employee Benefits Assn. (VEBA). But he would not cut wages, arguing that they are already competitive. When asked if his workers should take a pay cut from their wage of $29 an hour to match Toyota's base top wage of $25, Gettelfinger maintains that with bonuses, Toyota pays over $30.

As for health-care benefits, Gettelfinger points to the fact that the UAW already has already given up a lot: The union agreed to higher premiums and co-pays in 2005 and last year agreed to set up VEBA, a concession intended to take health-care costs off the auto companies' books. Says an exasperated Gettelfinger: "Labor is 10% of the cost of the vehicle, and everyone wants to squeeze another drop of blood out of the workers." That cost-per-vehicle math—and the higher costs shouldered by the U.S. Big Three vs. their Japanese competition—have been at the heart of the debate over Detroit's competitiveness since the 1980s. That was when Gettelfinger first got involved in union leadership. He was a line worker at Ford's pickup truck plant in Louisville when he joined the shop committee at Local 862 and began honing the political and negotiating skills that helped him rise through the UAW's fractious bureaucracy.

Like many of the politicians he deals with, Gettelfinger has a prodigious memory for personal details—how many kids a UAW worker has, what his hobbies are, even the last four digits of his social security number, which was a worker's identification number back then. Union colleagues say that as savvy as he was on the plant floor, Gettelfinger was evenhanded. If workers had grievances with management, he would fight tooth and nail for them. But if the grievance was frivolous, he'd tell them straight up that it wasn't going to fly, says Lewis Sexton, the retired president and chairman of Local 862. During his tenure, Gettelfinger also pushed for big quality improvements. Back when Detroit was at its quality nadir, if a part didn't fit right, workers would send it along and let an inspector on the management staff deal with it, recalls Sexton. But Gettelfinger—a teetotaler who uses profanity rarely if ever—got union workers to step up and find a fix on the assembly line. "He made people responsible for doing the work," Sexton says.

Gettelfinger's speeches are full of red meat for union workers: how it's the government's fault there isn't universal health care, or why trade agreements make it tough for Detroit's carmakers to send cars to Asia while Korean and Japanese cars pour into the U.S. He rattles off the fact that state and local governments have lavished some $3 billion in incentives to bring in foreign-owned factories. That has helped him establish the moral authority to make concessions, Shaiken says. But there is a pragmatic Ron Gettelfinger as well. Three years ago, the automakers were in trouble, and he knew that without concessions there would be no jobs for his members to report to. When Detroit came looking for givebacks, Gettelfinger ultimately agreed to a contract that set back starting factory wages 30 years: New hires will begin at $14 an hour—half the wage for veterans and a pay scale not seen since the '70s. Plus, he has watched the Big Three cut some 80,000 jobs since 2005. That also brings up a key criticism from Detroit's executives.

Gettelfinger made those key concessions starting in 2005, but not until Ford and GM were reeling toward massive losses. The union has never given enough to get the companies ahead of the curve. "It's always a day late and a dollar short," says one former GM executive. Gettelfinger argues that if not for the recession and credit crunch, the Big Three already would be hiring workers at that much lower wage. Including weaker benefits, those new hires cost $28 an hour. That's half what Toyota's workers cost. How did he sell the concessions to his members? None of the current workers lost much of anything. They kept their pay, and their health-care benefits are still first-rate. Anyone losing a job got buyouts averaging more than $100,000, and they typically head into the pension rolls. Says one high-level GM executive: "Ron is a natural-born bargainer." Of course, that plan worked to save the car companies money only so long as they kept growing and had enough cash to buy out older, higher-paid workers. But as the economy slid into recession and auto sales fell into a hole, pressure grew for Gettelfinger to give up even more. In September, GM executives told the UAW boss that they wanted to merge with Chrysler.

The Center for Automotive Research estimated that a merger could cost upward of 30,000 jobs. So Gettelfinger called Steve Girsky, a former Wall Street analyst who once worked as an adviser to GM, to look at the deal. He asked Girsky to tell him the straight truth about what a deal meant, preferring an independent view from the sales pitch coming from GM executives. Girsky discovered that GM was running out of cash, and called Gettelfinger on Nov. 4 to tell him the news. "He was calm," recalls Girsky. "He just said, "O.K., what can we do?"" Most industry observers believe Gettelfinger will fight to the death to keep wages where they are. But under threat of extinction and government prodding, he may well ditch the JOBS bank. Gettelfinger may even have to persuade his members to pay more for health care. When asked about it, he didn't rule it out: "I'll just have to wait and see what the government wants," he said. How about a GM-Chrysler merger? "No," he said firmly. The problem is, Gettelfinger has a tough hand. If he goes on strike, "he loses the country," says Ned Hill, dean of the College of Urban Affairs at Cleveland State University. So he will have to hope the Obama Administration is lenient. "At this point, his cards are all political," Hill says.

GM shares dive amid concern over equity
General Motors Co. shares were pummelled Monday, after an analyst warned that shareholders could be wiped out as the company struggles to restructure before the U.S. government's March deadline. Shares in General Motors, which was downgraded to "underperform" by Credit Suisse with a $1 (U.S.) price target, fell 15 per cent to $3.83 in morning trade. They are down 84 per cent on the year, but had gained 14 per cent last week, after the U.S. government came through with $17.4-billion in emergency loans intended to help auto makers survive long enough to restructure. The Canadian government also promised $4-billion.

Analyst Christopher Ceraso warned Monday that the GM's equity holders could be wiped out as the company restructures ahead of the U.S. government's March deadline. "Over the next two months ... it will become increasingly clear that the enormous sacrifice of value on the part of the union and bondholders will require the complete or near-complete elimination of the existing GM equity," he wrote in a note to clients. Even if GM can reduce its debt by swapping debt for equity, pay contributions to a retiree health plan using stock and reduce its labour costs, he said, the company would still have a stock price below a dollar.

"If GM and its stakeholders can navigate through a tricky set of negotiations, and all parties can agree to sacrifice value in a manner consistent with the targets laid out by the government, we still arrive at a discounted cash flow-derived equity value of less than one dollar per share," Mr. Ceraso said. Ford Motor Co. also traded lower, down 11.5 per cent at $2.61. The company won't receive any of the government aid, as it is believed to have enough cash to last through 2009.

Meanwhile, Toyota Motor Corp. of Japan, which is the world's largest auto maker, warned it would post its first-ever operating loss because of weaker-than-expected sales and the rapidly appreciating yen. Honda Motor Corp. cut its outlook last week. "We are facing an unprecedented emergency," president Katsuaki Watanabe said at a press conference, as he said the company would post a $1.7-billion loss this fiscal year. "This is a crisis unlike the crises of the past."

Canada’s politics industry gets a $4 billion bailout from Harper and McGuinty
The $4 billion governments in Ottawa and Ontario pledged in support of the auto industry Saturday is a very high-priced insurance policy. Not necessarily for the auto industry, but for the politicians who are paying it. Whether the money is well-spent is a matter of opinion. But from the donors' perspective it doesn't really matter. Both governments are putting a hole in their bottom line, while buying themselves freedom from culpability. Auto plants are still going to close. Those unionized workers who don't lose their jobs will be pressured into a significant haircut in wages and benefits. A lot of suppliers and ancillary businesses will go under and communities that rely on the auto industry are looking at hard times. But Stephen Harper and Premier Dalton McGuinty will be able to claim they feel the pain and are doing all they can. Can't blame a guy for that, can you?

The car companies were delighted with the lifeline. The money means they can keep meeting their payrolls, and paying their suppliers, for a few more months. That's how bad the situation has become -- firms that used to think they owned the world are giddy with delight that they might make it to March without being forced into bankruptcy. Chrysler allowed as how it was "very pleased" with its share of the package, while GM's spokesman said the company owes "a huge debt of gratitude" to the politicians. Canadian Auto Workers union president Ken Lewenza said the deal was a "sound decision." His predecessor, Buzz Hargrove, predictably complained that there weren't enough guarantees ensuring Canadian plants would get the same share of Detroit's production they have now, but Buzz has always been a bit of a grump.

You can understand why the beneficiaries would be pleased, though it's difficult to see how another three or four months on life support is going to help them much. The recession everyone has been expecting is just beginning to take hold, and by spring will only be worse. Are Canadians and Americans likely to awake one day in March or April and decide they really want to buy a car from Chrysler after all? For the industry, all the $4 billion is buying is hope: hope that something will turn up; that somehow things will change; that maybe they'll stumble on a formula that will let them get costs down to the point that buyers overcome their reluctance to buy anything built by the companies formerly known as the Big Three.

The expenditure make sense, though, if you're a government leader intent on keeping your job. Everyone knows Stephen Harper is about as enthusiastic about subsidizing failing industries as he is about root canals, but there he is, handing over a big cheque. Grimacing, yes, but handing it over. Dalton McGuinty spent five years fiddling with Ontario's budget while blaming the previous government for his inability to get it balanced; now he has to spend the province right back to where it began. But when Mr. Harper stands to congratulate Jim Flaherty on the budget he's to unveil next month, he'll have a certain degree of immunity from attack. When the Liberals assail him for putting the country back into deficit, Mr. Harper can point to the rescue package and ask whether the opposition would have preferred he let the industry collapse.

The Liberal party only exists these days thanks to the votes it gets in Ontario, and it would be a brave MP from Windsor or Oshawa or communities nearby who would seek to cut the lifeline Mr. Harper has offered the province. If Liberal or NDP critics complain the package isn't generous enough, the prime minister can note that Ontario's Liberal premier, and the current union leadership, seemed happy enough with it. The only real option for the opposition is to claim it would spend even more on a bailout, which means pledging themselves to an even bigger deficit, and making other industries even hungrier for similar largesse.

That's not to say Mr. Harper and Mr. Guinty have done the right thing. One way or another the auto industry is going to have to shrink. Refusing a lifeline might have made that happen faster, at the cost of greater short-term pain. Now the suffering will be prolonged, but perhaps slightly less intense. It's not a lot to buy for $4 billion, unless you're a politician who hopes to be around long enough to see it.

US, Canada auto aid packages not enough: Try $125 billion over next two years
The Canadian arms of General Motors Corp. and Chrysler LLC received lifelines over the weekend as the federal and Ontario governments pledged billions in emergency aid. But as market forecasts worsen, tens of billions more will almost certainly be required to keep the ailing automakers going through next year, experts say. Stephen Harper, the Prime Minister, and Dalton Mc-Guinty, the Premier of Ontario, said on Saturday their governments would provide $4-billion in repayable loans to GM of Canada and Chrysler Canada beginning one week from today.

The measures are in response to U. S. President George W. Bush's US$17.4-billion bailout package for GM and Chrysler in the United States, announced on Friday. But as U. S. consumers continue to face stringent credit requirements and cars gather dust on dealership lots, sales forecasts for 2009 are deteriorating, making the implementation of "viable" cost structures that demonstrate GM and Chrysler have a positive net value by March 31 -- a tenet of the loan terms -- all the more difficult. "We have a very negative forecast for next year in the U. S.," Rebecca Lindland, director at IHS Global Insight automotive research, said yesterday.

On Friday, as Mr. Bush announced terms of the bailout designed to keep GM and Chrysler afloat for the next three months, the industry group released its updated projection on U. S. auto sales. The picture is bleak. IHS predicts 10.3 million units will be sold in the United States -- where 90% of Canadian production goes -- in 2009. While having no immediate need of emergency relief, Ford Motor Co. has been granted lines of credit in the event GM or Chrysler were to enter bankruptcy and jeopardize shared suppliers. Ford told Congress at the beginning of the month it expects industry-wide sales of 12.5 million next year. "If you're basing your revenue on a 12-million unit market and it's actually in the 10-million unit range, that's significantly lower revenue," Ms. Lindland said.

The recourse: more government aid. Lots more. Tens of billions more, by one estimate. Mark Zandi, chief economist at New York-based investment researcher Moody's said the cost of keeping GM, Chrysler and Ford in business over the next two years would balloon to between US$75-billion and US$125-billion based on sales ranging between 11 million units next year and 13.5 million in 2010. If Canada was to keep pace with proportionate support, as officials have repeatedly stated, future measures would total at least a further $18-billion, dwarfing the amount laid out on Saturday, when Prime Minister Harper committed $2.7-billion in federal funds with the government of Ontario providing the remaining $1.3-billion.

The loans -- $3-billion to GM of Canada, the biggest automaker in the country, and $1-billion to Chrysler Canada -- will be made available on Dec. 29. GM will receive its allotment in three installments extending into February. Ford's Canadian subsidiary has been granted a $2-billion line of credit it says it will tap only if needed. The terms are structured in much the same way as in the United States, requiring the companies to begin a speedy transformation into leaner businesses that can compete with foreign-based peers such as Toyota and Honda in exchange for renewable loans for up to three years at a 5.3% rate of interest. However, firm evidence must be shown by March 31 that long-term strategies are underway that include concessions from "all stakeholders," Mr. Harper said.

Restructuring will almost certainly cut into a combined Canadian labour force of more than 20,000 workers between GM and Chrysler. The United Auto Workers in the United States has signalled it will commit to concessions before the March 31 deadline. Facing the same dilemma to preserve jobs, Canadian Auto Workers president Ken Lewenza has said the CAW will consider the potential renegotiation of bargaining agreements with the Big Three once it sees whatever deal is made between the companies and UAW. The raft of requirements are to compel automakers to make radical changes, and fast. Failure by GM and Chrysler to demonstrate a net positive value within three months on both sides of the border could result in the recall of the loans, bringing near-certain bankruptcy to at least one.

The availability of consumer credit remains a formidable opponent to that, as U. S. consumers are plagued by stringent lending. If conditions remain constricted and sales depressed through the first quarter, the new administration in the White House will be forced to make the uncomfortable decision to revise President Bush's terms or steer GM and Chrysler to the spectre of bankruptcy. "I don't know if [president-elect Barack Obama] would necessarily let one of them fail," Ms. Lindland said yesterday. Mr. Harper iterated as much on Saturday. "I believe the United States will not let them fail," he said. "If they're not going to fail, we will ensure that Canada retains its share of North American production."

Canadians oppose auto bailout: poll
A majority of Canadians believe it is unwise for the government to spend billions of dollars bailing out the collapsing domestic auto industry because it does not guarantee the companies will stay alive for more than a few months and it sets a precedent for other struggling sectors. The finding is contained in a poll showing 58% of adults are against a new government aid package, with the strongest opposition coming from Alberta and the most support from Ontario, where the Canadian subsidiaries of Detroit auto makers are located.

"I think there is a line of thought for a majority of Canadians that the car industry should change its ways and they don't want to throw good money after bad," said John Wright, senior vice-president of Ipsos Reid, which conducted the poll exclusively for Canwest News Service and Global National. The polling firm surveyed 1,021 adults from Dec. 18-21, in the midst of the federal and Ontario governments announcing $4-billion in emergency loans for the Canadian subsidiaries of Detroit auto makers General Motors and Chrysler, to go hand in hand with a US$17.4-billion package from the United States.

Prime Minister Stephen Harper and Ontario Premier Dalton McGuinty announced Saturday they would provide $3-billion for General Motors of Canada and $1-billion for Chrysler Canada. Mr. Harper described the repayable loans as a "regrettable but necessary step to protect the Canadian economy." The Ipsos poll showed that a slight majority of Ontario residents - 52% - believe "the auto industry is an integral part of the Canadian economy and the government should be providing assistance to keep the companies from going under." Alberta led the country in dissent, with 69% opposing auto aid, followed by Atlantic Canada at 66%, Saskatchewan and Manitoba at 65%, Quebec at 63%, and British Columbia at 62%.

"We do see in the heartland of the country where this matters the most, in Ontario, there is much more sympathy for whatever restructuring takes place," said Mr. Wright. Under the terms of the package, Ottawa will provide $2.7-billion and Ontario $1.3-billion in three instalments, with the first payments going out Dec. 29. The financing consists of 91-day renewable loans, up to a maximum of three years, with a condition that they will not be renewed unless GM and Chrysler submit restructuring plans to ensure their long-term viability. Mr. Wright attributed the opposition to the package to a poor campaign by the industry to convince the country that it can restructure.

"This is about bridge financing some of the largest employers in North America," said Mr. Wright. "I think what has happened that from the very outset the word ‘bailout' has taken a connotation where most Canadians believe that this is really about continuing more of the same and as a result they have a punitive attitude toward the companies." Older, educated men were the least likely to favour financial aid, the survey showed. The pollster did not use the word "bailout" when surveying Canadians on their views, describing the package as "assistance." The online survey has a margin of error of plus or minus 3.1 percentage points, 19 times in 20.

Bush's tough auto talk puts Canadian auto union CAW in crosshairs
With just a few words, U.S. President George Bush has done what the Detroit Three were unable to achieve with decades of negotiating: eliminate the iron grip the mighty United Auto Workers union has held for decades on setting labour rates in the auto industry. Chrysler LLC, Ford Motor Co. and General Motors Corp. have been effectively ordered to make their labour rates competitive with Japanese auto makers in the United States. In the process, Mr. Bush has cast the future of those companies' operations in Canada into the hands of the Canadian Auto Workers union, which divorced from the UAW in 1986, but now will have to find ways to match what the UAW does or risk watching about 30,000 jobs in this country vanish.

Prime Minister Stephen Harper echoed Mr. Bush's thoughts in announcing a $4-billion rescue package for Chrysler Canada Inc. and General Motors of Canada Ltd. on Saturday when he said all stakeholders will have to make sacrifices. The CAW "would have to sign on to the same deal" as the UAW, said Sean McAlinden, an expert on automotive labour issues and chief economist of the Center for Automotive Research, an industry think tank in Ann Arbor, Mich. The problem for the unions, Mr. McAlinden noted yesterday, will come during the GM restructuring talks, when the largest Detroit company asks holders of its debt to trade that debt for equity. "The bondholders are going to say: ‘Why should we swap debt for equity, unless we see a really rich, big union concession in Canada and the United States?'" he said.

But the key question is which labour rate will set the benchmark: Will it be the approximately $49 (U.S.) hourly costs at the Georgetown, Ky., operations of Toyota Motor Corp., or will it be the new Honda Motor Co. Ltd. plant in Indiana, where wages are about $21? The $49 Toyota figure creates a competitive gap of about $18 an hour at unionized Canadian plants, using the CAW figure of $67 (Canadian) an hour for labour costs in this country based on the two currencies trading at par and excluding payments to retired workers. CAW economist Jim Stanford argues that labour costs here equate to $53.60 when the dollar is trading at 80 cents (U.S.). Given the volatility of currency markets, however, and wild fluctuations in the commodity prices that propel the Canadian dollar, that advantage can be wiped out virtually overnight.

The Detroit Three will find it impossible to invest in their Canadian operations if the UAW agrees to cut labour costs and the CAW does not, said industry analyst Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. in Richmond Hill, Ont. Talks with GM Canada will likely begin in early January, Chris Buckley, president of CAW local 222 in Oshawa, Ont., said yesterday. He said he's confident the CAW can reduce costs without touching base wage rates of $35 (Canadian) an hour. Sticking deeply in the craw of Canadian managers are the so-called SPA days, or special paid absense: two weeks off the job that have been criticized in the vocal public debate about whether to offer financial assistance to Detroit. Even if the CAW agrees to cut costs to match new UAW labour rates, some assembly plants operated by the companies in Canada are in danger as the three auto makers slash production over the next few years to make themselves more competitive.

Detroit Three production will drop by about two million vehicles between 2008 and 2010, Michael Robinet, vice-president of global vehicle forecasts for consulting firm CSM Worldwide Inc., said in a presentation in Detroit earlier this month. That's the equivalent of about eight assembly plants. Some of those have already been announced, such as the GM truck plant in Oshawa as well as Chrysler and Ford factories in the U.S. Midwest. The obvious decisions about plant shutdowns have already been made. "The facilities that are going to have to close from here on out, it's going to hurt," Mr. Robinet said yesterday.

Ottawa and Ontario offered the loans in part to ensure Canada maintains its 20-per-cent share of North American production, but as that production shrinks, the Canadian plants become vulnerable. One of the wild cards is whether Chrysler can survive even with the $4-billion (U.S.) in loans Washington earmarked for it on Friday and the $1-billion (Canadian) Ottawa outlined the next day. There is a widespread belief in the industry that Chrysler will be forced into bankruptcy and its assets sold off. Its minivan plant in Windsor, Ont., is viewed as a valuable asset, but there is uncertainty about whether a buyer would be interested in its Brampton, Ont., large-car facility.

Canada Auto Union Chief Sees No Pressure to Cut Wages
Canadian autoworkers don’t feel pressure to agree to further wage concessions to bolster General Motors Corp., Ford Motor Co. and Chrysler LLC, union President Ken Lewenza said. "I resent the fact that wages are even getting any discussion because in Canada, 7 percent of the cost of a vehicle is related to wages," the Canadian Auto Workers chief said today in a Bloomberg Television interview. The CAW represents 27,800 active Ford, GM and Chrysler workers in Canada.

The governments of Canada and the province of Ontario agreed Dec. 20 to lend the domestic units of GM and Chrysler C$4 billion ($3.3 billion), a day after President George W. Bush said the automakers would get $13.4 billion in emergency loans. Bush’s plan requires the automakers to set pay and work rules by the end of 2009 that will be competitive with those of overseas automakers with plants in the U.S. The Canadian loans put GM and Chrysler under a Feb. 20 deadline for restructuring proposals that show "acceptable evidence" the plans will proceed by March 31.

"It’s important to stay competitive" with workers in other markets, Lewenza said. "We’re always measuring ourselves fairly consistently with" the United Auto Workers union in the U.S., he said. The CAW agreed in May to new three-year contracts with GM, Ford and Chrysler that would freeze wages while avoiding a so- called two-tier system in which new hires don’t reach the same pay as current workers. The UAW’s 2007 labor accords include a two-tier arrangement.

Canada PM Harper’s Senate appointments called 'obscene'
Stephen Harper announced on Monday 18 new senators, prompting the opposition to question their legitimacy and claim the prime minister broke a longstanding promise against such appointments. Mr. Harper's move angered New Democratic Party MP David Christopherson who calculated the 18 new senators would reap about $50 million in pay and perks over their eight-year appointments, while some of his Hamilton, Ont., constituents face unemployment and can barely afford Christmas presents. "It's obscene," said Mr. Christopherson, the NDP's democratic reform critic.

Among the appointees for 18 vacancies are Conservative fundraiser Irving Gerstein, party vice-president Michael MacDonald, CTV broadcaster Mike Duffy, former journalist Pamela Wallin, defeated Conservative MP Fabian Manning, former Olympian Nancy Greene Raine, and former Parti Quebecois politician Michel Rivard. Patrick Brazeau became the youngest person, at age 34, to get a Senate appointment. He is the leader of the Congress of Aboriginal Peoples, a strong supporter of the Harper government who frequently challenges the Assembly of First Nations headed by Phil Fontaine. Liberal Leader Michael Ignatieff said by appointing the senators, while Parliament is suspended so that Mr. Harper could avoid defeat of his minority Conservative government earlier this month, "Stephen Harper has shown that he does not deserve Canadians' trust." "Mr. Harper knows that he does not have the confidence of the House of Commons," he said in a statement. "Appointing senators when he lacks a mandate from Parliament is not acceptable."

The 18 bolster depleted Conservative ranks in the 105-seat Senate to 38, compared to 58 Liberals. Conservative Senator Leader Majory LeBreton said in an interview Mr. Harper will fill another 11 vacancies by the end of 2009, bringing the Conservative total to 49. Eight Liberal seats will become vacant by retirements during the year. Ms. LeBreton said the 49-50 split, with six independents, will make passage of Senate reform likelier as soon as the end of 2009. Mr. Harper had held off filling the appointments, in hopes of Senate reform bills passing in the last couple of years, but neither the opposition nor most provinces agreed to his proposals for fixed-term limits of eight years or electing senators. Both the NDP and the Liberals cited quotations over the years from Harper that he would never appoint senators. In making the appointments, Mr. Harper said all the men and women pledged to support eight-year term limits and other Senate reform legislation. He suggested he wanted to make the appointments now in case a coalition government takes office in the new year and decides to fill vacant Senate seats.

Senators receive a base salary of $130,400, plus extras for positions such as committee chairs. They are eligible at age 55 for pensions worth 75 per cent of their best five years salary after serving six years in the Senate; the pension is indexed to the cost of living after age 60. Senators get 64 return trips per calendar year anywhere in Canada by any plane or train. They can designate someone else to use the travel. Senators can claim up to $20,000 per year in travel and living expenses if they live 100 km from Ottawa. Senators receive $149,400 to set up an office on Parliament Hill, hire staff and conduct research. "Our government will continue to push for a more democratic, accountable and effective Senate," said Mr. Harper. "If Senate vacancies are to be filled, however, they should be filled by the government that Canadians elected rather than by a coalition that no one voted for."

Ms. Wallin, a former consul general in New York and former journalist, said she sees eye to eye with Harper on Senate reform. "He's very frank and he is a big believer in Senate reform, as am I," Ms. Wallin said of Mr. Harper. "I covered this as an issue for many years of my life and I do think that the role of the Senate is important, but I do think it needs to be reformed. He wanted to, I think, reassure himself that those were my values and that I cared about that. I said I did, and I mean that." Mr. Brazeau said shedding light on the problems of Aboriginal People will be a priority, as will national unity. Being an Algonquin aboriginal person, a Quebecer, and a proud Canadian, I look forward to those challenges as well, we still have this issue of separatism in this country and I certainly don't want to see that happen so I think that we need to raise the level of debate and we need to unite Canadians," he said.

Harper appointments confirm Senate role as payola heaven
There’s always professional squeamishness when journalists are granted a juicy patronage plum from the government they are paid to objectively cover. Mike Duffy has been a CBC or CTV icon since most of today’s national press gallery members were in diapers. He’s entertaining, informative, plugged-in and, as that incessant rotation of ego-stroking MP testimonials on CTVs’ Newsnet suggests, genuinely liked or begrudgingly respected by all political parties. But at the stroke of noon on Monday, he went from being last week’s host of Mike Duffy Live to being next month’s Mike Duffy Sedate as one of Prime Minister Stephen Harper’s lapdog Conservative senators.

Whether real or imaginary, journalist appointments by government are viewed as the reward for obedient conduct, a perception further tainted by having Mr. Duffy’s appointment lumped in with a trough-full of patronage payoffs for Conservative fundraisers, defeated candidates and party toadies. The added complication for the charismatic Mr. Duffy, who has always held conservative political views, is that he agreed to Mr. Harper’s pre-conditions before joining this unprecedented orgy of senatorial stuffing. When Mr. Harper added 18 senators and their $135,000 paycheques to the taxpayer’s tab with job security until age 75, they had to first pledge allegiance to Conservative policies on Senate reform in the future while promising to oppose any coalition of opposition parties that included the Bloc Quebecois.

Harper’s demand goes beyond the standard expectation of senators being generally loyal to their patronage saint. It demands their specific votes as the pre-condition for their appointment. Ok, ok, all you true-blue Tory believers, it’s true the Duffy appointment was balanced off by having former CBC personality Pamela Wallin elevated to the upper chamber. And, yes, former prime minister Jean Chretien gave former CTV reporter Jim Munson a winning ticket to this political lottery. But Ms. Wallin hasn’t covered politics for decades and Senator Munson was laid off by CTV and ended up inside the Liberal government more out of paycheque necessity than personal preference. Ironically, when I wrote a column four years ago questioning the rash of journalists hired by various government ministers or agencies after the 2004 election, Stephen Harper sent rare congratulations though the grapevine, noting they were proof of a payoff to reporters he suspected of a Liberal bias.

So what does that make Mike Duffy? Stacking the Senate with members of the national press gallery and assorted political partisans is hardly the sort of reform Conservatives wanted from their prime minister, who always vowed to nudge the Senate toward the election of quality representatives from provinces with vacancies. This one-day pile-in does nothing more then solidify the Senate’s image as payola heaven and harden its reality as a partisan divide under the control of respective party leaders. Surely Mr. Harper could’ve found reform-minded Canadians with gold-plated public service records that voters in the respective provinces might’ve elected, if given the option. Yet he opted for the wearying same-old, same-old mentality of the Senate as the official clearing house for partisan IOUs.

Would Saskatchewan voters elect upper crust Pamela Wallin as their Senate representative? Not a chance. Would the voters of Newfoundland elevate former Conservative Fabian Manning just nine weeks after they voted him out of an MP’s job? Would the B.C. electorate choose Yonah Martin for an appointment when she couldn’t even land a winnable seat last Oct. 14? Would Ontario voters embrace Irving Gerstein, whose only political claim to fame was serving as Canada’s top Conservative fundraiser? Would Quebec pick former Canadian Alliance candidate Leo Housakos, best friend to a PMO communications official, who was tainted earlier this year by allegations of meddling in a public works file?

Hell no -- to all of the above. Instead of reforming it, Mr Harper has reconfirmed the Senate as the pigpen for party has-beens, cast-offs, party bagmen and political pals with a couple honorable mentions thrown in to make the Conservative rebalancing project go down a little easier. But don’t let the warming optics of the Nancy Greene senatorial appointment fool you. She may be the iconic face of Canadian skiing, not to mention Mars bars, but she’s a non-partisan anomaly on the Christmas appointment list. Perhaps the best that can be said for the sheer audacity of having Mr. Harper carbon-copy the Liberal Senate-stacking playbook is that it makes Mr. Duffy’s elevation less professionally offensive. At least Mike Duffy put in time trying to keep MPs honest. With few exceptions, the rest are being rewarded for helping keep Conservatives elected.

Bank of Canada Governor Mark Carney: Paper tiger
Bank of Canada Governor Mark Carney spent most of the first 16 months of the asset-backed commercial paper restructuring watching over the process from afar, offering the occasional push or piece of advice. Last week, with the fate of the plan and $25-billion of Canadians' wealth hanging in the balance, he stepped into the foreground to drive the final, crucial negotiations that saved the deal just before a deadline yesterday. Barring an unexpected problem, the paperwork should be done this week and investors big and small should have their money unfrozen in mid-January.

Mr. Carney did it by getting on the phone with everyone from individual investors to the head of Deutsche Bank AG. Sources said Mr. Carney played a key role in getting Ottawa to commit to aiding the restructuring plan, persuading three provinces to step up and finally, this past weekend, winning new terms from a group of foreign banks to minimize the risk for taxpayers. The foreign banks were the final hurdle. There could be no deal without an agreement with Deutsche, Merrill Lynch & Co., HSBC PLC and other giant financial institutions that are on the other side of the troubled derivatives deals at the heart of the frozen market. They had already made significant concessions but Mr. Carney, as he picked up the phone Friday to dial Deutsche chief Josef Ackermann, was about to ask for more.

By Saturday morning, after a series of calls with top bankers including Mr. Ackermann, whose Deutsche is the counterparty to roughly half the $200-billion of derivatives whose value hinges on the restructuring, there was a deal in principle. The key foreign banks had agreed to Mr. Carney's demands. The alternative was just too grim - failure of the ABCP fix would mean more giant writedowns for banks already battered by the credit crisis. Mr. Carney and the team in Ottawa, which also included top officials from Finance such as Tiff Macklem, knew they had the best hand. They took full advantage. "They played their cards so well," said one person close to the situation. "They minimized their financial commitments and really used moral suasion to the max. Kudos to them; they dictated the terms of the deal."

How Mr. Carney, a former investment banker, ended up running the negotiations is a tale that began about two weeks ago, when key players in the restructuring realized there was a problem. Big investors such as the Caisse de dépôt et placement du Québec were nervous that an agreement negotiated in March to fix the market wasn't sturdy enough to hold up in credit markets that had steadily worsened over the summer and fall. The deal had to be redone. Officials from the foreign banks, ABCP investors, Canada's largest banks and Ottawa made their way to Toronto. They gathered on Wednesday, Dec. 10, at the offices of law firm Goodmans LLP, home to the legal team advising the ABCP restructuring committee and its leader, Purdy Crawford. The complex talks dragged on for two days, forcing some key players from the foreign banks to miss flights home, before the outline of a deal emerged.

But there was a hitch. The new plan called for big investors like the Caisse and National Bank of Canada to throw more money into the kitty to strengthen the restructuring plan. In return the foreign banks would offer new terms that would protect investors. The price was steep. The foreign banks asked for more than $60-billion in extra financing, sources said. The committee bargained them down to $9.5-billion, but even then, nobody in the room had the cash. Government backing was the only realistic hope. That set in motion eight days of tense political negotiations. Finance Minister Jim Flaherty had to be brought around from his position that a "private-sector" solution was best. Mr. Flaherty began to soften his stance as advisers, including bankers from Credit Suisse, laid out the risks and the consequences of inaction. However, he added a new dynamic by demanding help from a trio of provinces - Ontario, Quebec and Alberta - where publicly owned institutions held about $20-billion of frozen paper. At first, the provinces balked, leading to a round of intergovernmental wrangling as time ticked away.

Amid all that, Mr. Carney took time out to reach out to Brian Hunter, one of the roughly 2,000 individual investors stuck with ABCP. Worried by comments from Mr. Carney that Canada's markets could "survive" the collapse of ABCP, Mr. Hunter sent the central banker an e-mail. To his surprise, the Mr. Carney called the next day - the afternoon of Thursday Dec. 18 - with reassurances. "He has a good empathy for the folks that are in this thing," Mr. Hunter said. "It was clear that he was working to get this done, and he clearly understood that, sure, we could survive this, but we didn't want to." "He was very charming and upbeat on the phone, so you go 'Maybe we do have some guys that know what they're doing out there.' " he added. Friday morning, less than 24 hours later, Ottawa announced that it, Ontario and Quebec would back the deal. Alberta joined later that day.

But even with four governments on side, there wasn't going to be anywhere close to the $9.5-billion the foreign banks had been promised. The governments would provide $3.5-billion in credit lines, and big investors such as the Caisse and National Bank of Canada would add another $1-billion. That's when sources said Mr. Carney, a man with no lack of self-confidence, really took over the talks and Mr. Crawford and his committee were largely cut out of the loop. The biggest risk was clear. The foreign banks wanted Ottawa on side because they thought that once the government was in, no matter for how much, it would never let the deal go down.

That raised the spectre of the government funding a bottomless pit of losses like the U.S. government faces in the wake of bailing out failing insurer AIG. Mr. Carney had to avoid that. He did it by demanding terms that make the chances that Ottawa and the provinces will have to pay "almost impossible," said a second person involved in the talks. There's no chance the governments will have to advance any loans before mid-2010. By then, the hope is that markets will have calmed. And investors will be out of a mess that ate up 16 months of their lives. "It's a fine deal," said Colin Kilgour, a consultant advising corporate holders of ABCP. "The risk to the taxpayer is very low."

UK heads for deeper recession as GDP shrinks
The UK economy is heading for a deeper recession after official figures showed third-quarter growth shrank by more than expected. GDP contracted by 0.6pc between July and September, the steepest drop since 1990, as service industries including financial companies, hotels and restaurants suffered, the Office for National Statistics said. Household spending dropped 0.2pc, despite the usual splurge before Christmas, and savings inched up.

“This means the recession is deepening and consumers are saving more. That is a pretty clear sign that we’re going to get a bigger fall in output in the fourth quarter,” said Brian Hilliard, chief UK economist at Societe Generale. The UK economy is expected to shrink by up to 1pc in the fourth quarter, pushing the country officially into recession - defined as two consecutive quarters of contraction. Third-quarter GDP was revised downwards from a previous estimate of 0.5pc. The economy was stagnant in the second quarter, making growth for the year 0.3pc. There was significantly weaker growth in a number of the main service industries, particularly distribution and business services.

Howard Archer, economist at Global Insight, said: “Consumer spending is being increasingly pressurized by now rapidly accelerating unemployment, muted income growth, very tight lending practices, heightened debt levels, a depressed housing market and substantially lower equity prices.” Heightened concerns about the economic outlook and jobs would lead consumers to tighten their belts, he said. “These factors seem certain to outweigh the support to consumer spending coming from lower interest rates, the VAT cut and increased discounting on the high street.” Sterling weakened to 94.45p against the euro and was little changed at $1.4811.

Number of mortgage approvals drops to record low
The number of mortgages approved for people buying a new home has plunged more than 60 per cent in 2008 to a new record low, new figures have revealed. A mere 17,773 loans were approved for house purchase in November, down from 20,767 in the previous month and 60.7 per cent less than in November last year, according to the British Bankers' Association. There was a steep decline in the number of people remortgaging, with just 29,798 loans approved for people switching to a new deal in November, compared to 52,452 during the previous month.

The figures also revealed that personal deposits rose, in part reflecting an inflow of savings reclaimed from accounts in Icelandic banks. Howard Archer, an economist at Global Insight, said the figures indicated that housing market activity "remains dead in the water". He said: "The outlook for the housing market remains bleak. "Ongoing very tight credit conditions, still relatively stretched housing affordability on a number of measures, faster rising unemployment, muted income growth, widespread expectations that house prices are likely to fall a lot further and an unwillingness of many people to commit to buying a house when the economic outlook and job prospects look so bad form a powerful set of negative factors weighing down on the housing market." And he added: "It is still very difficult for many people to get a mortgage or find the required larger deposit.

"Even if the government measures to tackle the financial crisis work on a sustained basis, it will clearly take time for confidence to improve and mortgage lending to pick up significantly. These factors are likely to continue to outweigh the beneficial impact of lower mortgage interest rates resulting from the Bank of England slashing interest rates, particularly as it is still very difficult to get a mortgage." The BBA said net mortgage lending - which strips out redemptions and repayments - reached from £2.9 billion in November, down from £3.3 billion in October. David Dooks, BBA statistics director, said: "People remain concerned about the impacts of the rapidly slowing economy on their personal finances.

Germany's Way Out of the Crisis
By PEER STEINBRÜCK, finance minister of Germany.

'It is unclear whether general tax cuts can significantly encourage consumption during a recession.'

In the timeline of the financial crisis, there is a very distinct turning point: the collapse of Lehman Brothers in September. The bankruptcy of one of Wall Street's most renowned investment banks caused one of the last levees protecting the financial markets from a total loss of confidence to burst. What had originated in the relatively small U.S. subprime mortgage market now escalated and hit the rest of the world -- financial markets and the real economy alike -- with full force. The most far-reaching consequence of this dramatic loss of confidence was that the interbank market, where banks lend to each other, virtually froze. After Lehman's collapse it was clear that individual measures of government support and the regular, substantial injections of liquidity from central banks would no longer be enough to contain the financial markets' sweeping loss of confidence. Governments realized that only systemic, comprehensive solutions could help restore confidence in and on the financial markets.

Only the state now had the power to restore confidence among financial-market actors and the public to avert grave harm for the real economy. Governments around the world closely coordinated their policies to restore the stability and proper functioning of the financial system. The measures taken include purchasing toxic assets, strengthening equity capital of financial institutions, issuing guarantees and even the partial nationalization of banks. But we need more than just acute crisis management. What we need to do now, above all, is to learn from the crisis. If there is one key insight this crisis has taught us, it is that, in the age of globalization, we need to find a new balance between financial markets and government. The laissez-faire capitalism of the Chicago school of economics has proven to be unsuitable as a model for the supervision of financial markets.

But what should a new balance between government and financial markets look like -- one that does not let the pendulum swing from blind faith in the markets to naïve trust in government? We need a robust and consistent global regulatory framework for the financial system, monitored by international organizations, such as the International Monetary Fund and the Financial Stability Forum, and guaranteed by individual states. In essence, we need to implement the five goals agreed at the World Financial Summit on Nov. 15:
  • - Strengthening Transparency and Accountability: Financial-market participants must provide comprehensive information, including for complex financial products. There must be no more excessive risk-taking.
  • - Enhancing Sound Regulation: In the future, the G-20 will ensure that all financial markets, products and participants are regulated or subject to oversight (including rating agencies).
  • - Promoting the Integrity of Financial Markets: This includes better protecting investors, avoiding conflicts of interest and taking measures against market manipulation and fraud.
  • - Reinforcing International Cooperation: The cooperation among national regulators for crisis prevention, crisis management and crisis resolution must be better coordinated.
  • - Reforming International Financial Institutions: The IMF should, in cooperation with the FSF, enhance its early warning capabilities and play a key role in coping with crises. Developing countries and emerging economies should be given a greater say in the IMF and World Bank, while the FSF should be enlarged to include leading emerging market economies.

We are well on the way to realizing these five goals. At the European and global level, authorities are already developing measures to strengthen the supervision of equity, risk and liquidity management; improve transparency, evaluation standards and the rating process; and strengthen cooperation among national supervisors and cross-border crisis management. But achieving a new balance between financial markets and governments also means that we must rethink the G-7 finance ministers process in order to be better equipped to meet future crises. Currently the G-7 finance ministers process is the central forum for reaching consensus among the leading industrial nations on fiscal and economic policy issues. It combines a high degree of competence to take action with -- at least comparatively -- informal, quick and streamlined procedures, which is precisely what is important in crises.

It is, however, undeniable that the G-7's share of global economy activity is decreasing. Like it or not, this will also have implications for the G-7's ability to guide the global economy. The world is becoming multipolar. This will inevitably affect international decision making and institutions on financial and economic issues. I am certain that, in 10 years, a different group of countries will have a much stronger influence on global policy, including global financial policy. This group will include China, South Korea, the Gulf region, Russia, Brazil, India, South Africa and also the Europeans. The result of the past financial excesses, however, was not only the collapse of the financial markets, but also the rapid and severe slump in world economic growth. The sharp fall in global demand is having a growing impact on the world economy, especially Germany, one of the world's leading export nations. In order to at least cushion the effects on jobs and growth, the German government -- despite claims to the contrary -- is pursuing a decidedly countercyclical economic policy in close cooperation with our European and global partners.

For the time being, the German government is even putting this goal ahead of its objective of eliminating new borrowing by 2011 -- an objective that is essential for achieving generational fairness and creating the financial scope to invest in education. That's why we continue to support this goal. As soon as we have overcome the financial crisis, we shall reconcentrate all our efforts on balancing the budget so that future generations won't be saddled with our debt. The German government is relying on "automatic stabilizers," those government expenditures or receipts, such as unemployment benefits or taxes, that automatically increase or decrease without requiring government action. These play a much larger role in Germany than, for instance, in the U.S. We are neither raising taxes nor cutting expenditures to compensate for the revenue shortfalls due to the weak economy, because we do not wish to act in a pro-cyclical fashion. Instead we are giving taxpayers lasting relief and are providing targeted incentives to stimulate growth: As early as October the government launched a €14 billion package to stabilize social insurance contributions, reduce unemployment insurance contributions, raise child benefits, bring forward the housing allowance, and to provide relief in 2010 for health-insurance expenses.

On top of that, on Nov. 5 the German government adopted an extensive emergency package to save jobs. Both packages together have a volume of about €31 billion in 2009 and 2010 or 1.25% of Germany's GDP. This doesn't even include the billions in additional tax relief as a result of the German Supreme Court's recent ruling demanding the return of a special commuter tax allowance. These measures are targeted to produce quick results to limit the economic fallout from the world financial crisis without sacrificing the fruits of our budget consolidation in the past few years. Countercyclical economic policy represents neither a license to allow the levees to break, nor does it mean a return to the age of large-scale, debt-financed economic stimulus packages. Our experience since the 1970s has shown that such stimulus programs fail to achieve the desired effect. On the contrary: Previous debt-financed growth policies might be partially responsible for the current recession. So do we really want to repeat our past mistakes?

The only certain effect of such stimulus measures is to increase public debt. Why should this be any different today? All too often we have heard "This time it's different!" -- most recently, albeit in a different context, when Germany warned its partners in early 2007 about the risks emanating from the international financial markets. It is more than likely that such large-scale stimulus programs -- and tax cuts as well -- would not have any effects in real time. It is unclear whether general tax cuts can significantly encourage consumption during a recession, when many consumers are worried about losing their jobs. The history of the savings rate in Germany points to the opposite. Targeted measures are clearly preferable to scattershot ones.

Extensive debt-financed spending or tax reduction programs are currently not a suitable means for Germany to effectively compensate for the decline in global economic growth. It is more than questionable whether a large-scale, debt-financed stimulus package would actually enable Germany's economy to emerge from the recession earlier or in better shape. It is, however, quite clear that, at most after a couple of years, the middle class would have to foot most of the bill for these measures in the form of higher taxes. It would also undermine the fiscal discipline in the European Union. Governments can reduce the likelihood of the emergence of financial-market crises and mitigate significant declines in economic activity. No more, no less. Anybody who claims otherwise is deliberately pulling the wool over people's eyes and thus undermines confidence in the political process. That is the last thing we need now.

Russia Says Ukraine’s Unpaid Gas Debt Threatens Economic Growth
Russia accused Ukraine of threatening its economic growth by withholding about $2 billion in payment for natural-gas supplies. "Not paying for gas effectively lowers the production cost of Ukrainian goods and makes them more competitive on foreign markets, including in Russia," the Kremlin press service said today in an e-mailed statement. Russia has told Ukraine, which ships about four-fifths of the nation’s gas exports to Europe via its pipelines, that it will cut deliveries in the event of a failure to be paid for energy shipments in 2008. The gas exporter shut off deliveries three years ago amid a price disagreement.

The Moscow-based Institute of Energy and Finance estimates that each ruble in capital investment adds five rubles to economic growth, meaning non-payment by Ukraine could reduce Russia’s gross domestic product by 301 billion rubles ($10.6 billion), representing lost growth of 0.7 percent, the press service said. Viktor Zubkov, chairman of Russia’s gas exporter OAO Gazprom, said yesterday that Ukraine should be held "fully responsible" for any disruption in Russian gas supplies to Europe as the sides struggle to resolve the dispute by a Jan. 1 deadline.

State Controller says California could be broke in 2 months
California's chief financial officer warned Monday that the state would run out of money in about two months as hopes of a Christmas budget compromise melted into political finger-pointing by the end of the day. Republican Gov. Arnold Schwarzenegger began the day on a cheerful note, suggesting that negotiations with Democratic leaders could lead to a budget deal as early as this week to help close the $42 billion shortfall that is projected through June 2010. "Yesterday we sat there for hours and we worked through it step by step and we made some great progress," the governor said during a morning news conference in Los Angeles. "So we feel like if we do that two more times like that, I think we can get there ... before Christmas Eve or Christmas Day."

The thaw didn't last long, as legislative leaders later in the day criticized Schwarzenegger and indicated their work was done until the start of the new year. The governor faulted lawmakers for "failing to take real action" in addressing the state's budget deficit but said he will continue working with them on a solution that includes spending cuts, new revenue and an economic stimulus plan. Assembly Speaker Karen Bass responded by suggesting the governor should sign an $18 billion package Democrats sent to him last week containing both cuts and tax increases. "The single biggest roadblock to having construction on the 405 (freeway) move forward is Arnold Schwarzenegger," said Bass, a Los Angeles Democrat.

Republicans, meanwhile, said they would not negotiate on a deal they believe to be illegal. The Democratic plan was pushed through on a simple majority vote, not the usual two-thirds vote for tax increases, which would require some GOP support. "We cannot be a part of negotiating an illegal tax increase package that is a blatant attempt to silence California voters," Assembly Minority Leader Mike Villines, R-Clovis, said in a statement. By the afternoon, Schwarzenegger spokesman Matt David said neither side had been willing to transcend party politics and special interests to make concessions. "The Democrats want to block cuts to state government spending, and the Republicans want to block revenue increases because they have signed pledges to protect special interests," David said in a statement. "Legislators were sent to Sacramento to fix problems, but now what they're doing is making the situation worse."

If lawmakers fail to pass an updated budget plan, state Controller John Chiang said, his office will be forced to defer billions of dollars in payments or issue IOUs to state contractors. The instability of the banking industry has made borrowing money to bridge the gap an uncertain possibility, he said. "The state's dire cash position not only jeopardizes and places at risk our ability to meet our financial obligations in a timely manner, it threatens our ability to respond to natural disasters and protect our communities from crime," Chiang wrote.

Also Monday, state employee unions filed labor complaints to stop Schwarzenegger's plans to furlough workers as a way to deal with the state's ballooning budget deficit. Last week, he ordered all state employees to take two days off a month without pay or a similar salary cut to save $1.3 billion in the coming fiscal year. He also ordered state agencies to cut their payrolls by 10 percent. The Schwarzenegger administration referred calls to the state Department of Personnel Administration. "We have attempted to bargain under circumstances where there are no resources for pay increases, and that has made bargaining extremely difficult," department spokeswoman Lynelle Jolley said.

Unions sue Schwarzenegger over mandatory days off
Two public employee unions on Monday sued Gov. Arnold Schwarzenegger to block his effort to furlough state workers in a cost-cutting measure as California's treasury runs out of money. Last week, Schwarzenegger issued an executive order to require that all state employees take two unpaid days off each month starting in February. The governor said the measure is needed to conserve cash, with the state budget gap estimated to reach $42 billion a year and a half from now. The lawsuit, filed in Sacramento County Superior Court, asserts that only the Legislature can alter the pay of workers who have labor contracts with the state. It asks the courts to issue a temporary stay to stop Schwarzenegger's efforts, which could affect 230,000 workers. "We don't think he has the authority," said Bruce Blanning, executive director of Professional Engineers in California Government.

The union, which represents 13,000 engineers, surveyors and others working for the state, filed the lawsuit along with the California Assn. of Professional Scientists. The governor has "asked for a couple of months to try to convince the Legislature to pass a bill to allow him to furlough employees," Blanning said. Democrats declined to include such a provision in the budget plan they passed Thursday. Schwarzenegger cited the lack of such authority as one reason he planned to veto the measure. Lynelle Jolley, a spokeswoman for the administration, said the law gives the governor extra authority to alter working conditions during emergencies. Schwarzenegger last month declared a fiscal emergency but had hoped to get the support of legislators for the furloughs, she said. "We had the legal authority then, but . . . didn't think it necessary to exercise it," she said, explaining that the fiscal situation has since grown more dire.

Schwarzenegger attempted a few months ago to unilaterally reduce the pay of state employees, but his order never took effect. State Controller John Chiang said the state's payroll system was incapable of carrying it out. The matter eventually stalled in court. The governor and Democratic leaders of the Senate and Assembly are scheduled to meet today in an attempt to resolve their differences. They negotiated over the weekend, and the governor said he hopes to strike a deal, possibly before Christmas. Schwarzenegger has indicated he is willing to approve the increased gas, income and sales taxes the Democrats have proposed. But he is also demanding changes to California's environmental and labor rules to give businesses more power over their employees' hours and to allow private contractors to take a larger role in public construction projects.

Chiang underscored the state's dire financial circumstances in a letter sent today to Schwarzenegger and legislative leaders that warned the state has fewer than 70 days before it runs out of cash. "Without action by the Legislature and the governor, we literally are weeks away from a meltdown of state government that threatens the delivery of critical public services our citizens deserve and expect," Chiang wrote. At a news conference in Los Angeles on Monday morning, Schwarzenegger deplored the absence of a state budget and defended the furloughs as a last resort. "I hate to lay off any state employees, may I remind you, because those are hardworking people and they all have to provide for their families," he said. "But we are running out of cash by February, so I have no other choice. California is on a track to a disaster the way it's going."

More Companies Are Cutting Labor Costs Without Layoffs
Even as layoffs are reaching historic levels, some employers have found an alternative to slashing their work force. They’re nipping and tucking it instead. A growing number of employers, hoping to avoid or limit layoffs, are introducing four-day workweeks, unpaid vacations and voluntary or enforced furloughs, along with wage freezes, pension cuts and flexible work schedules. These employers are still cutting labor costs, but hanging onto the labor. And in some cases, workers are even buying in. Witness the unusual suggestion made in early December by the chairman of the faculty senate at Brandeis University, who proposed that the school’s 300 professors and instructors give up 1 percent of their pay.

“What we are doing is a symbolic gesture that has real consequences — it can save a few jobs,” said William Flesch, the senate chairman and an English professor. He says more than 30 percent have volunteered for the pay cut, which could save at least $100,000 and prevent layoffs for at least several employees. “It’s not painless, but it is relatively painless and it could help some people,” he said. Some of these cooperative cost-cutting tactics are not entirely unique to this downturn. But the reasons behind the steps — and the rationale for the sharp growth in their popularity in just the last month — reflect the peculiarities of this recession, its sudden deepening and the changing dynamics of the global economy.

Companies taking nips and tucks to their work force say this economy plunged so quickly in October that they do not want to prune too much should it just as suddenly roar back. They also say they have been so careful about hiring and spending in recent years — particularly in the last 12 months when nearly everyone sensed the country was in a recession — that highly productive workers, not slackers, remain on the payroll. At some companies, employees are supporting the indirect wage cuts — at least for now. The downturn hit so hard, with its toll felt so widely through hits on pensions and 401(k) retirement plans and with the future so murky, that employers and even some employees say it is better to accept minor cuts than risk more draconian steps.

The rolls of companies nipping at labor costs with measures less drastic than wholesale layoffs include Dell (extended unpaid holiday), Cisco (four-day year-end shutdown), Motorola (salary cuts), Nevada casinos (four-day workweek), Honda (voluntary unpaid vacation time) and The Seattle Times (plans to save $1 million with a week of unpaid furlough for 500 workers). There are also many midsize and small companies trying such tactics. To be sure, these efforts are far less widespread than layoffs, and outright pay cuts still appear to be rare. Over all, the average hourly pay of rank-and-file workers — who make up about four-fifths of the work force — rose 3.7 percent from November 2007 to last month, according to the latest Labor Department data.

Watson Wyatt, a consulting firm that tracks compensation trends, published survey data last week that found that 23 percent of companies planned layoffs in the next year, down from 26 percent that said they planned to do so in October. Companies say they are considering other cost cuts, like mandatory holiday shutdowns, salary freezes or cuts, four-day workweeks and reductions of contributions to retirement and health care plans. Companies seem particularly determined to find alternatives to layoffs in this recession, said Jennifer Chatman, a professor at the Haas School of Business at the University of California, Berkeley. “Organizations are trying to cut costs in the name of avoiding layoffs,” she said. “It’s not just that organizations are saying ‘we’re cutting costs,’ they’re saying: ‘we’re doing this to keep from losing people.’ ” She said the tactic builds long-term loyalty among workers who are not laid off and spares the company having to compete again to hire and train anew.

That was part of the thinking at Global Tungsten & Powders, a metal plant in Towanda, Pa., whose business has dropped 25 percent from a year ago. The company has already cut overtime and travel, as well as purchases of office supplies and equipment. It is now allowing and indeed encouraging its 1,000 workers to take unpaid furloughs to stave off more drastic cuts. “We have a very skilled and competent work force and the last thing we want to do is lose them when we’re assuming this economy is going to come back,” said Craig Reider, the company’s director of human resources. Workers, he said, are buying in to the concept. “In this holiday season, many employees want to support our efforts here to minimize costs,” he said.

In San Francisco, a Web design firm called Hot Studio laid off a handful of workers when the dot-com bubble burst in 2000. But the company’s owner, Maria Guidice, said the tactic was painful, and she did not want to repeat it. This time, her first step is to take away bonuses — for the first time in the company’s 12-year history — and instead give people paid time off over the holidays. “In 2000, it was like ‘cut the heads,’ ” she said of the ethos of the era. This time, she says, it feels different. “Our No. 1 priority is to keep people employed and to do that we’re going to bank the money and keep it for when we need it,” she said, adding, “I know some people are super bummed, but they understand we’re trying to keep the work force intact.” Several employees at Hot Studio said they did not mind the policy, particularly as they have heard of layoffs elsewhere in the economy. “People feel they’d much rather have a job in six months than get a bonus right now,” said Jon Littell, a Web designer.

The magnanimous feeling will probably pass, said Truman Bewley, an economics professor at Yale University who has studied what happens to wages during a recession. If the sacrifices look as though they are going to continue for many months, he said, some workers will grow frustrated, want their full compensation back and may well prefer a layoff that creates a new permanence. “These are feel-good, temporary measures,” he said. But John Challenger, chief executive of Challenger, Gray & Christmas, a company that tracks layoffs, said employers were being driven now not by compassion but by hard calculations based on data they have never had before. More than ever, he said, companies have used technology to track employee performance and productivity, and in many cases they know that the workers they would cut are productive ones. “People are measured and ‘metricked’ to a much greater degree,” he said. “So companies know that when they’re cutting an already taut organization, they’re leaving big gaps in the work force.”

At the Pretech Corporation, a concrete manufacturer in Kansas City, Kan., that has not had a layoff in 15 years, part of the rationale is pride. To keep the perfect track record, the company has cut overtime, traded a $5,000 holiday party for an employee-only barbecue lunch, and trimmed its pipe-making operation to four days from five, which allows it to save substantially on heating and electrical costs.Business is down sharply in some of the company’s divisions, but Pretech is also transforming to take on more work making concrete for infrastructure jobs, like the kind the government might support through stimulus efforts, the company’s co-owner, Bob Bundschuh, said. He said employees seemed to embrace the changes, knowing that a small sacrifice in overtime pay could preserve their job and the health insurance benefits that go with it. “We’re optimistic about the future,” he said, adding that he thought things could turn around in six months. If so, “We want our guys to stay around because they’re good guys and they work hard.”

India's Crucial Textile Industry Unravels
Half of the yarn-making machines in V. Kalyanaraman's spinning mill sit idle, and a third of his staff of more than 400 workers has been let go. The domino effect of recession in the West has arrived here in southeastern India, crimping textile exports and eliminating hundreds of thousands of jobs. Textile factories -- including India's notorious garment-making sweatshops -- are among the country's first manufacturing businesses to suffer as American and European clothing retailers slash orders amid slumping consumer spending.  India's second-largest employers after agriculture, textile concerns employed 35 million workers last year. But the companies have already shed 700,000 jobs this year and at least 1.2 million textile employees are expected to be out of work by March, according to the government's Ministry of Textiles.

The sector is crucial to the country's economy. The textile industry contributed 4% of India's gross domestic product in the year that ended March 31, and accounted for 13.5% of Indian exports, bringing in $17.6 billion.  The industry is particularly important in the southern Indian state of Tamil Nadu, which is bearing the brunt of the slowdown. At Mr. Kalyanaraman's Chandra Textiles Ltd., the work force -- mostly migrant female workers from rural areas -- has been trimmed 30% to 300 workers, and more cuts are expected as U.S. demand shrivels. Mr. Kalyanaraman has also halted construction on a new spinning mill, leaving it half-built.  So far, most of the textile industry's job losses are among its least-skilled and lowest-paid workers at spinning mills, dyeing houses, and stitching and embroidery factories. Employees in such operations, mainly women, earn about $2 a day. It isn't unusual to spot child workers in such factories, although it's illegal to employ them.

As India's once-booming economy slows, some financial and technology companies have started handing out pink slips, too. Last month, American Express Co. cut 100 staffers in India, while Goldman Sachs Group Inc. is also expected to lay off an unspecified number of staff in India as part of an announced 10% reduction in its global workforce, according to people familiar with the matter. Cellular phone maker Motorola Inc. said Indian workers will be among those affected by a global reduction of 3,000 employees announced in October. No sector has been hit as hard as textile manufacturing. The drop in demand for all textile products, including raw cotton, started late last year, company executives say. That's when the housing bubble burst in the U.S. and many Americans stopped buying household items such as carpets and blankets. The trend has since accelerated and spread into apparel and other products.

Meanwhile, the industry's woes have been compounded by India's chronic infrastructure problems. Tamil Nadu state, home to a quarter of the country's textile production, last month capped power usage at 50% of normal levels to deal with a severe energy shortage. Textile businesses such as spinning mills need to operate around the clock to remain profitable, factory owners say.  "The textile industry is really being hit on all sides," says K.A. Srinivasan, chairman of the South India Mills Association. He warns that "the full effect is still to be seen."  That is evident in the small city of Tirupur, 37 miles from Coimbatore. Tirupur used to be a thriving center for the Indian garment trade, with almost 3,500 apparel makers. Locals call the city "little Japan" for its dependence on exports. Half of the garments made there are shipped to the U.S.  Now, trucks delivering raw cotton to Tirupur factories are half-empty, reflecting slumping orders. Workers who have had their shifts eliminated or shortened sit idly on the stoops of their garment plants.

Tirupur's exports, which were growing at 15% a year and peaked at $2.2 billion in the year ended March 31, are set to decline 20% this year, says A. Sakthivel, president of the Tirupur Exporters' Association. "From the tea shop to the big store or theaters, Tirupur lives on exports," Mr. Sakthivel says, adding that the slowdown "will affect us from top to bottom."  Raja Shanmugam, who owns a garment factory that makes T-shirts for German clothing brand Tom Tailor, says he has seen a 20% drop in orders since September. Last year, his 800-person company, Warsaw International Ltd., had sales of $8 million. This year, he doesn't expect to bring in more than $5.5 million.  "Even now, I cannot plan for tomorrow," Mr. Shanmugam says. He cites unpredictable foreign demand and volatile exchange rates -- which undermine his efforts to hedge currencies -- as key concerns. The industry has been lobbying the government for help. Last month, a delegation from the Tirupur Exporters' Association traveled to New Delhi to ask the central government to reinstate a tax break for exports, reduce lending rates from state-owned banks, and extend a two-year moratorium on loan payments for garment exporters. The government has indicated it will try to help, but hasn't disclosed any specific measures.

New Zealand recession deepens
New Zealand's economy has contracted for a third straight quarter as the combination of a weak housing market and a slowing global economy takes its toll. The country's gross domestic product contracted 0.4pc in the three months to the end of September and that follows a 0.2pc decline in the second quarter and a 0.3pc shrinkage in the first three months of the the year. The decline for the latest quarter was in line with economists' expectations. Like that of its larger neighbour Australia, New Zealand's economy has enjoyed a booming housing market over the past decade.

However, the bursting of the housing bubble has prompted New Zealanders to apply a sharp brake to their spending. The drop in consumer spending in the third quarter was the third in a row and the worst run since the 1980s. The wider global slowdown is exacerbating New Zealand's woes by hitting demand for its key exports such as milk, timber and lamb. Analysts said the figures make further cuts in interest rates likely. The central bank slashed the rate 1.5 percentage points on Dec 4, following a full point cut in late October, although interest rates remain high compared with other industrialised nations.

"The big judgments will be about what's happening in the [Group of Seven leading industrial nations] and emerging economies and whether what we've seen for the past three quarters locally is just the tip of the iceberg," Deutsche Bank chief economist Darren Gibbs said. Finance Minister Bill English said it was essential that New Zealand's economy was put on a medium to long-term growth track as quickly as possible. "Our challenge for 2009 is to put New Zealand in the strongest possible position to take advantage of better economic times when they come internationally," he said. New Zealand was last in recession in the second half of 1997 and early 1998 amid the Asian financial crisis.

In Hard Times, Houses of God Turn to Chapter 11 in Book of Bankruptcy
The auctioneer told the small crowd huddled outside the Talbot County Courthouse that the property would be sold "as is" -- rectory, bell tower, oak pews and rose-tinted stained glass windows included. "Who gives $700,000, 700, 700?" he called out. One man, a representative for a local bank, raised his finger. The auctioneer tried in vain to nudge the price up. "Sold!" he cried. St. Andrew Anglican Church had just been bought by the bank that had started foreclosure proceedings against it. "It's probably good for my soul to be taken down a notch," said the Right Rev. Joel Marcus Johnson, the rector of St. Andrew, after the auction.  During this holiday season of hard times, not even houses of God have been spared. Some lenders believe more churches than ever have fallen behind on loans or defaulted this year. Some churches, and at least one company that specialized in church lending, have filed for bankruptcy. Church giving is down as much as 15% in some places, pastors and lenders report.  The financial problems are crimping a church building boom that began in the 1990s, when megachurches multiplied, turning many houses of worship into suburban social centers complete with bookstores, gyms and coffee bars. Lenders say mortgage applications are down, while some commercial lenders no longer see churches as a safe investment.

"We are seeing more stress in churches than we have in modern history," says Mark G. Holbrook, president and chief executive of the Evangelical Christian Credit Union of Brea, Calif., which specializes in lending to churches. The credit union has moved to foreclose on five of its 2,000 member churches this year, and Mr. Holbrook says he expects to take similar action against five more next year. Before now, it had foreclosed on only two churches in its 45-year history. Church Mortgage & Loan Corp. of Maitland, Fla., another church lender, foreclosed on 10 church properties in the past couple of years. Unable to sell any of them, the company didn't have the funds to pay more than 400 bondholders the estimated $18 million it owes, says company lawyer Elizabeth Green. Church Mortgage filed for Chapter 11 bankruptcy protection in March.  Strongtower Financial of Fresno, Calif., says two of its 300 evangelical church borrowers are in default, compared with only one in the previous 15 years.

Dozens more churches are listed as delinquent on their loans, according to a search of county court records nationwide.  Churches were long considered good credit risks, lenders say. Weekly collections tend to be steady, even during recessions, and churches feel a moral tug to pay debts. Most of the nation's 335,000 churches carry little or no mortgage debt, and are based in buildings that were paid off long ago.  But some churches, especially those not affiliated with major denominations, borrowed briskly to build or expand in recent years. Spending on construction of houses of worship rose to $6.2 billion in 2007 from $3.8 billion in 1997, according to the U.S. Census. Now, churches are seeing congregants lose jobs and savings.  The 125-year-old Mount Calvary Missionary Baptist Church, of Jacksonville, Fla., borrowed about $2.6 million in 2002 to add a new education wing, reflecting pool and tower. In addition, the church's 1,200 members pledged $1 million to the building campaign, but two-thirds of that money was never actually donated, according to the church's pastor, the Rev. John Allen Newman.

A quarter of the congregants soon stopped attending church, says Mr. Newman, so weekly collections started to dwindle. He and the church leaders cut staff and electricity use to save costs, but in January, facing a foreclosure judgment of $3.3 million, the church filed for bankruptcy protection. Mr. Newman says the church hopes to settle its debts and emerge from bankruptcy proceedings in the coming months.   "There have been too many churches with a 'build it and they will come' attitude," says N. Michael Tangen, executive vice president at American Investors Group Inc., a church lender in Minnetonka, Minn. "They had glory in their eyes that wasn't backed up with adequate business plans and cash flow." St. Andrew, the recently auctioned Maryland church, opened 17 years ago in a former sporting-goods store in downtown Easton. The town of historic colonial mansions and sprawling farms was once home to Frederick Douglass. More recently, the town has become a retreat for Washington's elite.

The rector of St. Andrew, Bishop Johnson, attracted like-minded conservatives who disliked Episcopal innovations, such as ordaining female priests. In 2005, the church borrowed $850,000 to buy a much larger space that had once belonged to a Roman Catholic parish. The 1868 Gothic revival structure was large for Bishop Johnson's congregation of 50 people. But the gregarious Midwesterner, who once raised money for a ballet troupe and orchestra, said he was confident his ministry and donations would grow. "I'm well liked, I'm a lucky man," he says he felt at the time. He wooed real-estate agents, bankers and well-heeled locals -- some of whom didn't even attend the church -- and received pledges worth $200,000. Some donors said they were impressed with the bishop's generous food pantry and help given to local Hispanics.

For a time, Bishop Johnson said Mass in Spanish on Friday nights for workers at a crabmeat processor, and the parish also offered English classes.  "He served a part of this community that often times does not get served well," says Lee Denny, president of the local General Motors dealership. Mr. Denny, an elder in Easton's Presbyterian Church, donated $10,000.  But expenses mounted. There were mice in the basement and bats in the belfry. It cost about $45,000 to stanch creeping black mold. Once the local Catholic parish began saying Mass in Spanish, it drew off most of St. Andrew's immigrant members. Weekly donations dropped to about $600 from $1,425 three years ago, says Bishop Johnson. And many of those who had pledged $200,000 toward the mortgage payments told the bishop they needed to delay their gifts, saying their stock portfolios were down.

Last February, the church couldn't meet its monthly interest payments. The lender, Talbot Bank, a unit of Shore Bancshares Inc., foreclosed in August, seeking $950,000, including principal and unpaid interest. It was one of five properties Talbot foreclosed on this year, but the only church, says W. David Morse, a vice president at the bank. At the auction's end, Bishop Johnson shook hands with Mr. Morse. "These people are not Wall Street bandits, for crying out loud," the bishop said of his bankers. St. Andrew's congregants will likely stay in the building for several more weeks while the bank seeks a buyer.  The transaction gave James C. Andrew, the auctioneer, some pause. He was married in the building in 1997 when it was a Catholic church and his two children had been baptized there. "I'll probably wind up with coal in my stocking for Christmas," he said.


Anonymous said...

As this theory goes, oil as a manipulated and speculative commodity is being used as a tool, like a weapon of mass destruction, to re-shape global industries, e.g, as global oil crashes in value, the correlated destruction and crash of the global auto industry begins to look like two parties at war, both of whom are positioning themselves with strategies that are at odds with each others futures.

Hence, the future interests of OPEC oil production are not aligned with Detroit and the future of Detroit auto production depends on financing that will not be linked to the current OPEC infrastructure. This economic battle for future value in the form of a stable valuation will play out with production cuts by OPEC, designed to restrict supply capacities so that oil rices will increase. Adversely, the increased oil prices and manipulated shortages will fuel the nationalized desires of many countries to reduce demand and plan ahead for greater fuel efficiency measures. Furthermore, oil production countries and OPEC-related members will be less likely to invest in or support dollar-based carry trade. Therefore, increased volatility and instability in currency markets will add pressure to future valuations related to Treasury yields that are often dependent on foreign purchases.

Nationalization, isolationism and independence will be a side-effect of this global valuation war which will force a re-balancing of global interactions in a world where oil is less and less important.

Anonymous said...

Even Toyota posted such a huge loss, after 71 years...

The beginning of the end?

Anonymous said...

i, there's an error in your first sentence and I'm unable guess how it should read.


Anonymous said...

Let me take a stab at it:

"The prevailing economic theory in the western world today remains a Chicago school type of Keynesianism: markets must be absolutely free -- until the gambling encouraged by that freedom runs into debt, in which case the money of the poor and their children must be confiscated by their governments in order for the rich to be able to continue that gambling."

el gallinazo said...

Bigelow said...
Anonymous 11:27 said...

S&P up .5% and SDS down 14%
tell us what this means

A couple of days ago S&P was up, so was SDS. Taxes and capital gain distributions for SDS maybe, fleeing or buying? I don't have faith in the 'efficient market' I'm with El Vulture looking for a little profit.


This is indeed strange. I put in an order to dump my SDS at the opening on Monday and took a hit. If I had waited until mid-day, I could have broken even, but I had a family with broken pipes and no water. My perverse sense of priorities did me in. Any proper turkey buzzard would have sat by his computer, eyeing the carcass for hours on end.

Well it's way the hell down. Either

1) They discovered that the CEO of ProShares is Bernie M.

2) It's some sort of the end of the year tax dump.

3) The rocket scientists at ProShares screwed up big time in their mandate to mirror by minus 2X the S&P500.

4) The other gamblers think we are heading into the suckers' rally with jet skis.

5) It's all the fault of those slanty-eyed gray aliens again.

6) Beats me. Glad I'm back in cash for the moment.

jewishfarmer said...

On a completely irrelevant note, Billy Flesch (referenced in the article on non-layoff cuts) at Brandeis was my mentor and doctoral advisor, and probably the single biggest influence on my critical faculties ;-). I'm glad to see him leading the way - Brandeis has a small endowment because of its comparative youth, and constant budget problems - and historically they've responded to economic problems by laying off everyone who could possible get laid off. I don't have a lot of hope for their long term financial stability, but at least this might keep the junior faculty working.

Not very relevant, but nice to see Billy out there in front.

el gallinazo said...


It's way below where it should be vis-a-vis the S&P500. If I knew what was going on, I might be tempted to buy it back.

Check out Mish's commenters. 90% of them are day traders.


Ilargi said that you were sucked into a black hole beyond the Schwarzchild radius. Like Mark Twain, the report of your demise was exaggerated. Too bad.

The Lizard said...

Chris Hedges: Man is a Cruel Animal

Barbarians as civilizers.

Ilargi said...


nothing you could say would be irrelevant here.

Bigelow said...

el gallinazo and Anonymous 11:27,

I am holding “for the long term”

SDS short term capital gain of $11.46 announced today.
“Owners of ProShares Short ETFs got a rude awakening this morning when short-term capital gains went ex for their ETFs. And they were huge! Usually funds give investors a little time to make a decision if they want to sell the fund before the ex-date, but ProShares announced the gains yesterday after the close. This didn't allow owners to do anything but be forced to pay the short-term capital gains tax on their shares.”
ProShares Short ETF Short-Term Capital Gains Distributions

Gravity said...

I will submit fully to the discipline and guidelines of our hosts, I shall never again spam or post nonsense, I pledge to make a helpful donation as soon as credit permits.

I may have something relevant to add to these discussions, please allow me to post constructive comments once in a while.

If not, I really like this blog, and will be happy just reading it.

Anonymous said...

Hey Everyone!

Excellent news! I just got back from our department’s holiday lunch at Ruth’s Chris, and our director of Accounting said that he read an article that said we are now at the lowest point of the recession! It’s only going to improve from here! What a relief!

When he said that, I had to shove a big piece of tenderloin in my mouth to keep from laughing. I would have spoken up, but I didn’t want to ruin a fine cut of beef with nasty talk about economic collapse.

I’ll be sure to ask him where he read that article, I'm guessing the Wall St. Journal editorial page. :-)

Bigelow said...

“Roger J says:
Today, 9:07:27 AM

“talking about market intervention, the regulators have come up with a new one: halting short ETFs option trading.

I got this notification from Interactive Brokers:
"The CBOE has halted the following ETF options: PSQ, DOG, SH, QID, DXD, SDS, MZZ, TWM, SMN, SRS, DUG, EFU"

CBOE, AMFX, PHLX all did the same thing.

Just look at the result. Those ETFs are TOAST. They are distorted to the downside by about 20% their normal value. Now consider hedge funds & firms that actually use those ETFs for hedging purposes.

Talking about creating depressions... this is certainly one step progress towards it.”

Global Economic
Trend Analysis Comments

Bigelow said...

To finish boring everyone...

“KNannith Today 02:27 PM

Proshares Short ETFs experienced big share-price reductions to reflect the distributions. ie ETFs distributed dividends along with significant short-term capital gains.

This is, basically, a wash. I am holding on to my Ultrashort ETFs since I am not worried about my tax implications at the moment.

These distributions reduce the net assets of each of the affected ETFs as of the close of business today, and the ETFs will trade ex-dividend tomorrow. The record date is 12/26/08, and the payment date is 12/30/08.”
xTrends Comments

Anonymous said...


Sharon is not supposed to be saying anything anywhere until she finishes her book. (Her own directive to self)

Sharon - back to the non-internet connected keyboard with you!

Shamba said...

I'm doing christmas Cards and bills today so I'm also sending in my small contribution to your excellent blog, Ilargi and Stoneleigh and others who post for the blog.

It's not much but it's at least an expression of my gratitude for the thought provoking and good information you provide here.

Peace to You All,

Unknown said...

What Nouriel said is IF we see light at the end of the tunnel then MAYBE it will be time to go into riskier assets at the end of 2009. But not before then. There's a lot of weasel words in there.

Anonymous said...

Existing home sales sink by 8.6 percent in November, as prices plunge a record 13.2 percent

"We hope that, similarly, the current slowdown in home sales activity is a short-term phenomenon," Yun said, noting that people in the real estate industry are "crossing our fingers" that the market will recover."


I wonder if "crossing our fingers" helps? :)

Anonymous said...

Some TAE readers may not have seen this interesting piece on The Panic of 1873:

The Real Great Depression

I&S: Is this more or less the way you see things playing out? I notice that one of the major riots took place in NYC (Tompkins Square, 1874) where people presumably were more dependent upon the system for their survival than those in agricultural areas. I shudder to think what would happen today.

D. Benton Smith said...

We’ve heard of the metaphorical ‘house of cards’ quite a lot recently.

But what if we have not been living in a financial house of cards?

What if it has instead been a monetary prison of greed? Our own greed.

Remember the famous P.T Barnum quotation? (No, not “There’s one born every minute.” … appropriate though it might be.)

The one I’m referring to is, “You can’t cheat an honest man.”

What do you suppose he meant by that?

Didn’t he mean that the first step of cheating someone is conning them into believing they can get more out of a transaction than they put into it… and that an honest person cannot be tempted that way because an honest person does not want more than what they fairly produced?

That credo has served me pretty well.

Of course, it is only half the story.

The other half is to insist, and I do mean (literally) INSIST that other’s abide by the same rule of fairness and equity.

By this doctrine, for example, not only does Bernard Madoff belong behind bars… but so do most (if not all) of his clients… regardless.

10% returns on investment, ad infinitum, are physically impossible aren’t they?

For a hundred million dollars to turn into a hundred and ten, and then into a hundred twenty-one and thereafter a hundred thirty-two, geometrically increasing on an annual basis (slowly at first, and then quite rapidly)… forever… can happen in only ONE way: hard working producers of real goods and services are being cheated.

Such is the seminal concept of the so-called credit-based Capitalism that has been what we believed to be the bedrock of our civilization, when in truth it was the shiftiest of sand. Quicksand.

Higher mathematics is not required. Arithmetic will do nicely.

If we want a civilization that lasts longer than a few hundred years, we better come up with a better founding principle than that. Controlling society by stimulating greed is like controlling a lion by stimulating appetite. Sooner or later you’re going to get eaten.

Ilargi said...

And peace to you too, Shamba,

And all the other people who have donated to the Christmas Fund. I very much dislike begging for anything, it's a pride thing, but I also realize that I won't be able to carry this thing unless it allows me to offset some losses, i.e. what I work here, I can't work elsewhere. The Automatic Earth has saved its readers millions of dollars, no, I'm not kidding, and no, I'm not stupid, simply by advising them to be careful about where to place their money.

Of course we're not the only source of info, I know, but it should still be possible to generate enough in donations to keep this thing in the air. As I said in the new banner: why not donate 5% of what we saved you to the fund, so we can continue to save you and others more money? So far we're doing pretty good, don't you think? I'm not trying to get rich here, I would be doing something else if I were, I'm simply attempting to keep the ship afloat.

And that is not a given, if I have to keep giving all my time to the cause. I'd love to expand this place, to move into directions that I see right in front of my face, to get much more practical about the next steps I think people need to take. But the time is not there.

I want to create a second, non-purely-financial, site up and running, but I also want to have control over it. Simply because I know what I want. That may seem dictatorial, but hey, I'm doing fine thus far on finance, I see things way ahead, so maybe it would be an idea to trust me on the next step as well.

Remember: the more contributions come in, the harder it gets for me to step away from TAE. But there has to be a level in which I can stop worrying about my own life, and its expenses. And even at that, my needs and desires are way below the average citizen. I'm not in this for the money.

Me and Stoneleigh simply want to gather as many folks as we can get, awake them to what goes on, and save their savings. Is 5% of those savings too high a price? I don't think so, not if it helps you save even more by allowing us to continue, and not if it helps you to allow others to do the same.

Anonymous said...

The other half is to insist, and I do mean (literally) INSIST that other’s abide by the same rule of fairness and equity.

Many people have been saying much the same. Unfortunately justice is largely distributed unilaterally. Many subsets of the greater population are forced to abide by the rules in much greater numbers than other subsets. It makes them very angry and distrustful after awhile.

This is the main argument for re-establishing the rule of law, which so many folks poo-poo with expressions of grave concern. You can afford that position best when you aren't watching all your friends, families and neighbors get incarcerated or worse for far less socially destabilizing crimes.

Perhaps we don't have to 'hang 'em high' but they should at least feel the same weight of justice they dish out so lightly.

D. Benton Smith said...

Hi Ilargi, Stoneleigh & perhaps others,

A modest christmas gift is in your electronic stocking as of a few minutes ago.

Seasons best to all, and thank you.


Anonymous said...

I appreciate your time and hard work and am also sending a Christmas donation.

By the way, I am a bit surprised that Canadians are not re-acting to Harper's moves. I thought that people in Canada were not as complacent as in the US.

Anonymous said...


I was happy to contribute to your Christmas fundraiser, and I encourage all others here to do the same.

Things could get very strange from here on in ... and if things really do get dramatically worse, I would very much miss the insight and guidance that you and Stoneleigh provide.

I'm intrigued by your new venture... I for one can't wait to see what you've got up your sleeve!

Regards and happy holidays,

Ilargi said...


Mille grazie and an Eve of Peace for you and yours.


Eve of Peace for you as well.

I share you surprise, and don't quite know what to make of it. Maybe people are trying to wish it all away. But I think Canada risks a large scale political crisis. How believable will any next government be?

Anonymous said...

I've spent day and night reading this site for a week. Thank you for it, Ilargi. They say that only the faithful servants of God warn of impending doom - even if you don't believe, I mean no disrespect by saying I think it applies here.

Lost my job in October, lost my house in short sale (conventional mortgage, had it ten years, lost all equity and then some....). Am moving to Rhode Island with family and trying desperately to warn them the shit is about to hit the fan.

There's an aunt with land in NH, a well, rural...enough to grow on. Should we get a gun? We're none of us used to guns or even thinking about them, but I'm considering it.

Is this rural farm thought a good contingency plan, in your opinion?

Merry Christmas...it's not for me, but it looks like next year might be a whole helluva lot worse.

Ilargi said...

Anon 5.30

"Is this rural farm thought a good contingency plan, in your opinion?

Yes, definitely. I'm sorry to hear of your mishap, and hope you can turn it into something good.

Look into your skill set. Are you up to rural life? My friend Sharon, NY state, can teach you a bunch, sharonastyk.com. Just keep on digging her site, and if you can't find it, write her or me.

Yeah, a gun might be a thing to have around. A few good dogs too. Some hogs and/or lama's to protect the lifestock.

And yes, your Christmas can be good regardless. After all, it's a celebration of NEW life. Well, celebrate yours. You already have more options than many others, don't forget.

Anonymous said...

Thanks for the above tips. Wow. Last time I shot a gun it was a .38 because we had nothing better to do with our time but target practice. I do not think I could harm another human being.

The farm would be vegetable only, I think, unless I could honestly convince them that this is REAL before it actually totally unravels. I'm having a hard time with that.

Yes, I am lucky in the sense that I'm not out on the street at 41 with a 15 year old daughter. That's where we'd be without family; we were always just making enough to keep the roof over our heads.

I'm scared shitless, not just for me and them, but for everyone honest, decent and underserving of what's coming our way.

Ilargi said...

Count you blessings, and cherish your aunt. I hope she's up to taking you guys in. If she is, life could just prove to be a richer place after a while. You will need people around you, both yourself and her. And your little girl will adapt better and faster than you might think.

Again. a merry Xmukkah.

scandia said...

Oarwell, you asked if someone in Canada could explain what is going on in our gov't. Ha! Lots of opinions in Canada about that!
On the surface Harper & Co avoided a vote of confidence by shutting down Parliament. His spin masters have convinced the uninformed that he had the right to do so.He attached some unpalpable conditions to the last budget that made it impossible to pass. He is one smart cookie.
Now he is larding up the Senate with his support under the guise of reforming our democracy.
I am going to go out on a limb and give you my analysis.
Harper is a ruthless power player, much more skilled at the Art of War than anyone else in the country, anyone else in the opposition. He is not restrained by any sense of co-operation, fair play. He is laying a trap for the opposition that they are walking right into. Harper, against his own judgement, gave a bailout to the auto industry. His finance minister is calling for guidance from the public as to how to cure what ails us. Most disingenious ly...The trap is he has now seeded the Senate with his " people" sitting pretty for a future coup. He will intentionally not present an acceptable budget and the opposition will vote non confidence. The outcome will be either a coalition gov't or another election.Harper & Co do not want to be the gov't when the shit hits the fan so he is setting up the opposition to take the blame. Then when all lays in ruin he will resurface and establish total control It is the Art of War strategy. What is occuring has nothing to do with problem solving or good governance.It has everything to do with power for an elite corporate community. Much like I see unfolding in the US. We are doomed as a nation as we lack any leadership in any party with a combination of street smarts, knowledge and integrity.If the opposition see the trap and back off Harper wins. If they vote non confidence Harper wins later.
The more destitute the people are the better for Harper & Co.The high minded activists amongst us( I used to be one) are in for a shock as they can't imagine this degree of ruthlessness and betrayal.
( all with the agreement of the Governor General, the Queen of England's rep in Canada. I'm sure there is a story to tell there as well but that is for another day. I suspect it has something to do with the Anglo -American desire to maintain Empire)
Not sure what it says about me that I CAN imagine this degree of ruthlessness and betrayal.

Anonymous said...

I believe the free market theories of the Chicago School are more correctly associated with Milton Friedman, not Keynes.

Anonymous said...

By the way, I am a bit surprised that Canadians are not re-acting to Harper's moves. I thought that people in Canada were not as complacent as in the US.
Okay! I'll take up the debate. (A different opinion than scandia)

I don't believe that the people should be paying for the fraud that has been committed by the financial leaders. Why should I and my children pay.

Those who should be paying should be the ones who made the decissions and made exorbitant profits and their children.

Harper was being blackmailed to spend and spend. Watch where the spending will be done. None of it will have any beneficial effect for those being layed off.

We have 14,700 immigrant farm workers in Ontario. That could be 14,700 auto workers doing that work. Of course, you know, that this will not happen.

How about forestry workers,... tree planting projects ...
I could go on and on with other usefull work that could be done but it will not happen.

The infrastructure projects will not hire layed off workers because the construction industry already has the qualified trades men. By the time the auto workers get trained to be apprentices, the recession will be over. (they are predicting a max. of 36 months. heheh)

The longer that it takes for the gov. to spend the money the better Canadians will be.

You cannot pay off your debts by enslaving or selling your children.

Wyote said...

Scandia and Oarwell:
Thank you. If my musing have entertained or even stimulated, I have succeeded in my goal as provocateur. Currently, you are the illustrators, and while I haven’t seen your work, if you dwell here I’m sure it is deft. Writing these at work during spare moments helps me digest the corrupt bolus delivered by the Invisible Hand each day. When I get home, I read Ilargi’s prescient take (as well as all the illuminating comments) and try to keep calm.
So being holiday and all, I’ll follow Hank’s lead and take a bit of time off.

Paulson: “Tim (Geithner), Hank Paulson here. Hey buddy, you must be staying late. I thought you’d be out on holiday. But now that I got ya on the line, tell me how the plans are coming together.”
G: “Look, Hank, we sent over some drafts to your office a week ago. We’re tracking along just fine. Did you want to make some adjustments? You knew that Sheila was digging in her nails on the foreclosure piece. The Boss says it’s gonna happen. Can’t help it.”
P: “Of course, I’ve thought all along she was right but you know, the car don’t go unless the wheels are on and the wheels don’t go unless they’re greased. I’ve got Ben working the demand side and I’m trying to keep the road ahead clear so we can get back to the Game. The big players are still fidgety though.”
T: “Well we’ve got our work cut out for us.”
P: “ Right. But looking ahead, everyone over there knows that Beijing needs some smoothing over. Not tryin’ to insinuate myself into the next phase but, I would be available to make a few trips on behalf of the new administration. To, you know, assuage the feelings as it were. Partners can always be better partners.”
T: “We could use your expertise there, no doubt.
P: “Have a great holiday, Tim. Get your rest. See you on the Hill next month.”

ExRanger said...

Ask and you shall recieve. Happy Holidays via Pay Pal

Submit your advice said...
This comment has been removed by the author.
Anonymous said...

I’ve read several posts on this site referring to rural property and self sufficient hopes. I would like to address some of the challenges and rewards of such a lifestyle from my experiences. I recommend the basics, a garden with soil built up with lots of organic matter and a soil test for PH at the very minimum. Then a few apple trees with at least one type that matures late and stores well. The livestock and mainstay of self sufficient living has to be the chicken. Select a variety that is a good layer but has some broodiness (tendency to set on and hatch their own young) qualities. You can allow free range with good success but you must keep them out of your garden area most of the year. Remember that everything likes to eat chicken, humans as well as hawks, fox, raccoons, opossum, mink, dogs. I think you get the point. Mother earth news website is fantastic for information although some of their politics I could do without. Most of all do not get discouraged it is a learning process within a community of loving and giving people. America must re-establish its' community connections to endure the coming events.

Anonymous said...

Ilargi and Scandia,

Thanks for the insight into the Canadian conundrum. Harper sounds like a bad player, but, as Jal hinted, even bad players can have controlling eminences grise.

Did Harper create these new Senators out of whole cloth, or by redistricting (what is call gerrymandering in the US)?

Also, what was his proximate cause for disbanding parliament? Was it their unwillingness to pass a budget?

I would imagine that the provision allowing the PM to abolish the legislative branch (I assume parliament is the l.b.), is one that would ordinarily only be taken in extremis, that is, in moments of national emergency. By whose authority does he act?

He sounds like he read Cheney's Little Red Book. In our country, the crooked mantle of Machiavelli is being passed to Rahm Emanuel.

Anonymous said...

Thank you gentlemen for your fine, and much needed, work. I haven't seen anywhere else a place that has explained so well what's going on, or how to best prepare for it.

Honestly, your views are so radical that it's hard to get used to. But it's difficult to argue with the basic logic. the facts, or the results.

I sent my donation in this morning.

For your amusement, you might want to check out Wikipedia's definition of what an economic depression is:


"a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation or hyperinflation are also common elements of a depression."

I was going to say that we're going to have to wait for that incredibly knowledgeable body of wisdom, the National Bureau of Economic Research, to officially declare whether we're in a Depression, but there was this gem:

"the National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions."

This is the astoundingly brilliant group that announced that the latest recession started a year ago, and that we've been in one for all of 2008. Pardon my sarcasm, but these people actually get paid for this nonsense?

I can only figure that they get paid so that the mainstream media has something to fall back on, so that they don't have to use the "D" word. I don't mean to be (too) cynical, but I can't figure any other reason why people take them seriously.

ogardener said...

I've read some posts recently about some people considering to get back to the garden, horticulture, etc. in preparation for an uncertain future. So this post will not be completely on topic.

I thought I would pass this link on for those who may need or desire a pretty decent plant reference for future living arrangements and general knowledge.


I hope you all get to spend some quality time with your family and friends over the next several days and thanks I & S and everyone else on the "Debt Rattle".

Love, Peace and Apples

Honest John said...

The house I bought 3 years ago sits on an acre of land, in the large back yard. The former owner had a good sized garden, not being the green thumb type, I let it grow over thinking I had no time for gardening, well, that garden will be full next spring.

Tyr said...

Fund Chief With Madoff Ties Commits Suicide

Suicide on Wall Street is becoming a far too common occurrence, reports CNBC's Charlie Gasparino.

Happy holidays :-/

Anonymous said...

Anon said "I believe the free market theories of the Chicago School are more correctly associated with Milton Friedman, not Keynes."

Re-read what Ilargi wrote. He's saying that the Chicago school Friedmanites only want Keynesian policies applied to subsidise the rich (them) when things go badly (Now)

scandia said...

Oarwell, to respond to your questions, the Senate has vacant seats. Appointing 18 new Senators writes new history especially when Harpers campaign platform was to eliminate payola appts and have an elected Senate. I always wondered what Gerrymandering meant. Now I know.
Harper disbanded our " legislative assembly" to avoid a confidence vote which he would have lost. The vote was not allowed. Our constitution allows such a vote, especially in a minority gov't . Not that the neocons whether of US or Cdn variety have respect for constitutions.
We have the most secretive gov't ever known to Cdns.So much for transparency in both the financial and political spheres.
I'm sure you can tell that " back room " governance disturbs me greatly.
I think Ilargi and Stoneleigh would agree that the prudent will no longer depend on gov't but make their own arrangements.Legitimacy in gov't in not just a US issue. It applies to all G7 countries.

el gallinazo said...


"Suicide on Wall Street is becoming a far too common occurrence, reports CNBC's Charlie Gasparino."

I guess on the eve of Christmas I should be compassionate like W, but try as I might, the tears just won't come.

As to donation announcements, I am sure PayPal is informing I&S of these donations, so I assume the announcements are in the priming the pump Keynesian mode :-) Jesus said that when one gives, let not the right hand knoweth what the left hand is up too. But for the teeming masses, this turkey buzzard has been contributing a meaningful sum monthly since the late summer, and sporadically prior to that.

(I am typing this with my right index finger and will not inform the left hand).

Anonymous said...

From stories about the suicide of Rene-Thierry Magon de la Villehuchet, who lost money for his clients through Madoff, it appears that he was driven to despair not by the usual suspects, such as financial ruin or fear of criminal prosecution, but rather by something that the Madoffs of the world sorely lack --- a sense of shame.

Anonymous said...

Sent you a Christmas gift via PayPal last night.

Primer on Canadian Politics for Non-Canadians:

In our parliamentary system, we do not elect the Prime Minister, we elect our local Member of Parliament. The PM, who is an elected MP, is usually the leader of the party that has the most MPs. To govern, the PM must have the "confidence of the house" which usually means his party has a majority of MPs. In our current government, the PMs party has more seats than any of the other parties but does not have a majority. In this so-called minority government, the PM must gain enough support from opposition MPs to have a majority each time there is a "confidence vote" (all budget bills plus some others). The current PM has been in a minority position for 2-1/2 years but has been able to win confidence votes because the main opposition party has been disorganized with a weak leader and not ready for an election. Although the PM had passed a law mandating fixed election dates (like the US), he broke his own law to call an election at a point when he thought he could win a majority. This failed so he proclaimed that he would continue to govern by working cooperatively with the opposition. Then, only days into the new parliament, he delivered an "economic update" that contained neoconservative items that would limit strikes and roll-back wage equity and a measure that would hurt the opposition parties financially. It was a major slap in the face to the opposition parties. He miscalculated in that the opposition parties put aside their ideological differences and formed a coalition. They declared that they would topple his government on the next confidence vote. The PM postponed the confidence vote date by a week and started a disinformation campaign to tell the country that the opposition coalition was illegitimate and undemocratic (it wasn't), When it was clear that nothing was going to stop them, he then went to the Governor General and prorogued (suspended) parliament. The GG is the Queen's representative and has a largely ceremonial role in our system. However, in a case such as this, where a PM clearly doesn't have the confidence of the house and is using the power to prorogue solely to avoid a confidence vote, the actions of the GG have come under scrutiny. The next opportunity for the opposition to vote non-confidence will be January 26th. If they do, then the GG must dissolve parliament and ask whether anyone else can form a government. If the opposition coalition is still intact, they well take over and we will have a new PM. It appears that the current PM expects this to happen as he is using his powers to appoint senators. In Canada, we don't elect our senate. They are appointed by the sitting PM (they stay until they are 75 years old). Although they must ratify bills passed by parliament before they become law, there are ways to bypass the senate if they don't ratify something. They don't have the same powers as the US senate. The current PM had promised senate reform measures including elections so his decision to fill 18 senate seats by appointment is an indication that he thinks his government will fall in January.

Sorry for the length of this post but it appeared that some of you wanted to better understand political events in the Great White North.