Tuesday, January 20, 2009

January 20 2009: The Shortest President

Harris and Ewing Reunion of slaves 1916
Lewis Martin, age 100; Martha Elizabeth Banks, age 104;
Amy Ware, age 103; Rev. Simon P. Drew, born free.
Cosmopolitan Baptist Church, 921 N Street N.W., Washington, D.C.

Ilargi: Watching the inauguration, I couldn't shake the idea that Jon Stewart and SNL's Lorne Roberts must have really liked Obama's acceptance speech today. Especially for Mr. Leibowitz, Dubya was a career maker, and there's been tons of doubts and hair-tearing over how to make fun of the new guy. They now know. The new guy bores people to sleep, which is not a bad angle for comedy.

And if you don't agree, and would want to praise Barack's qualities, please first look at the financial markets. The optimism that was of course supposed to raise stocks across the board is utterly MIA. And that is a very significant indicator. The markets today say that they have no confidence in the new US president. Not when it comes to the economy. I'll admit, it surprises me too, the ferocity with which the reaction comes. A rally of hope and belief would have seemed to be in the cards, no matter what. But it's simply not there. And a loss of what is right now, 3 pm EST, over 3%, must be a warning sign to both Obama and everyone else in America, and the entire world for that matter. It’s not entirely due to the fact that the speech was the least inspiring in decades, but that certainly didn't help.

The negative mood in finance did not start with the inauguration. For that matter, it's not an exaggeration to say that Obama is not today's biggest story. Well, at least not in the world of finance. The Washington party was overshadowed by the by now complete collapse of the British banking system. After losing 66% yesterday, Royal Bank of Scotland loses another 70% of what value remained. Lloyd’s is down by some 60%. Mind you, this is in the face of the most unlimited government support we have yet seen anywhere in the world. The British government has now gone to such lengths and depths to prop up its banks that the reaction has become the inverse of what was intended. Investors are waking up to the idea that if as a government you need to go to such extremes, you must be hiding something. Lots of somethings.

And there, right there, lies the one and only option for President Obama to make things right. That is where he can gain and regain confidence. But the windows of time are short and narrow. The financial world today says that is has no more trust in the banking system. Despite the trillions injected so far on both sides of the Atlantic, there is no more confidence, or trust, or belief, or hope. It’s over, we ran out.

What Obama can do, and it's his sole option, with time running out in a matter of days now, make no mistake about it, is to force the banking system, and the financial system at large, to open their vaults and expose all the paper hidden in there to the light of day. This will be hard, if not impossible - the latter depends on Barack's resolve. But if it's not done, the US somewhere around February 1 will start going through the same motions that London is forced to dance to today. There are no solvent banks left in England, without government, read taxpayers, money they would have to close shop tomorrow morning. The same would happen in the US without the immeasurable and intractable hundreds of billions that have been handed out to date. The reason why this hasn't worked to restore confidence, trust, belief and hope is that there is far too much fear of what is still left in additional losses.

In the present situation, it makes no difference how many billions of your money are given away for free to the banks. The markets have recognized that throwing money doesn not solve structural issues. That needs to be a stern warning to Obama, as well as to all of you. The markets know that there is a high probability of future losses for the banks that will be much higher than what has been handed to them. It is that simple. That is why the British banks are on the edge of a very steep cliff. The English government has refused to recognize this all along, and has instead elected to to open all the taps it could get its smelly little bloated fingers on. It has failed in the UK, and it will fail in the US. I heard a comment during the inauguration that claimed Obama will have a two-year period of grace. He doesn't even have two weeks.

The answer today is not throwing more money into the same holes. The answer instead is openness and honesty with regards to the losses incurred in the past. I give Obama two weeks, till around February 1, to achieve that openness. If by then he hasn't forced open the vaults, I will have to start wondering how long he will serve as president. The problems in our economies are much more grave, and deeper, and potentially more damaging, than anyone seems to be willing to see.

Jim Rogers may have his own interest in mind, after all, he's known as a man how invests in smart cookies. Despite that, though, I don't see much of anything that would contradict his statement that "Sterling is Finished". The UK losses will arrive on Wall Street in a matter of days. The hangover started even before the party had begun.

Wall Street as I write this is down 4%. That is a major crash. On a day that was supposed to bring hope. Let me repeat: there is only one way out: force all losses in the financial world out on the table where we can see it. If that is not done, Obama's presidency may be the shortest in US history. The present TARP programs, as well as the upcoming next generation Wall Street bailouts don't just delay an inevitable downfall, they are nothing but attempts to hide us from the truth, and the truth from us. We have but a few weeks left. And that boring speech hasn't helped at all.

My focus is simple: the love of the common people. And the common people are getting waterboarded across the universe. The British banking sytem has now been recognized as being insolvent. US banks are not far behind. At least in that sense, capitalism sort of works. Obama has two weeks, max, or the US financial sytem will follow Britain. Take care of your people. Don't trust Washington to do it for you. We are in for very hard times. that's what the markets say, when they incur heavy losses on inauguration day.

I still hope you will awake, Barack. But I have stopped believing. You don’t give me nothing to believe in. We need truth. Not just because we like it that way, but because it's the only way to get out of the mess. You have two weeks.

US and UK on brink of debt disaster
The United States and the United Kingdom stand on the brink of the largest debt crisis in history. While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt to more manageable levels. Everything else is window-dressing. To understand the scale of the problem, and why it leaves so few options for policymakers, which shows the growth in the real economy (measured by nominal GDP) and the financial sector (measured by total credit market instruments outstanding) since 1952.

In 1952, the United States was emerging from the Second World War and the conflict in Korea with a strong economy, and fairly low debt, split between a relatively large government debt (amounting to 68 percent of GDP) and a relatively small private sector one (just 60 percent of GDP). Over the next 23 years, the volume of debt increased, but the rise was broadly in line with growth in the rest of the economy, so the overall ratio of total debts to GDP changed little, from 128 percent in 1952 to 155 percent in 1975. The only real change was in the composition. Private debts increased (7.8 times) more rapidly than public ones (1.5 times). As a result, there was a marked shift in the debt stock from public debt (just 37 percent of GDP in 1975) toward private sector obligations (117 percent). But this was not unusual. It should be seen as a return to more normal patterns of debt issuance after the wartime period in which the government commandeered resources for the war effort and rationed borrowing by the private sector.

From the 1970s onward, however, the economy has undergone two profound structural shifts. First, the economy as a whole has become much more indebted. Output rose eight times between 1975 and 2007. But the total volume of debt rose a staggering 20 times, more than twice as fast. The total debt-to-GDP ratio surged from 155 percent to 355 percent. Second, almost all this extra debt has come from the private sector. Despite acres of newsprint devoted to the federal budget deficit over the last thirty years, public debt at all levels has risen only 11.5 times since 1975. This is slightly faster than the eight-fold increase in nominal GDP over the same period, but government debt has still only risen from 37 percent of GDP to 52 percent.

Instead, the real debt explosion has come from the private sector. Private debt outstanding has risen an enormous 22 times, three times faster than the economy as a whole, and fast enough to take the ratio of private debt to GDP from 117 percent to 303 percent in a little over thirty years. For the most part, policymakers have been comfortable with rising private debt levels. Officials have cited a wide range of reasons why the economy can safely operate with much higher levels of debt than before, including improvements in macroeconomic management that have muted the business cycle and led to lower inflation and interest rates. But there is a suspicion that tolerance for private rather than public sector debt simply reflected an ideological preference.

The data makes clear the rise in private sector debt had become unsustainable. In the 1960s and 1970s, total debt was rising at roughly the same rate as nominal GDP. By 2000-2007, total debt was rising almost twice as fast as output, with the rapid issuance all coming from the private sector, as well as state and local governments. This created a dangerous interdependence between GDP growth (which could only be sustained by massive borrowing and rapid increases in the volume of debt) and the debt stock (which could only be serviced if the economy continued its swift and uninterrupted expansion). The resulting debt was only sustainable so long as economic conditions remained extremely favorable. The sheer volume of private-sector obligations the economy was carrying implied an increasing vulnerability to any shock that changed the terms on which financing was available, or altered the underlying GDP cash flows.

The proximate trigger of the debt crisis was the deterioration in lending standards and rise in default rates on subprime mortgage loans. But the widening divergence revealed in the charts suggests a crisis had become inevitable sooner or later. If not subprime lending, there would have been some other trigger. The charts strongly suggest the necessary condition for resolving the debt crisis is a reduction in the outstanding volume of debt, an increase in nominal GDP, or some combination of the two, to reduce the debt-to-GDP ratio to a more sustainable level. From this perspective, it is clear many of the existing policies being pursued in the United States and the United Kingdom will not resolve the crisis because they do not lower the debt ratio.

In particular, having governments buy distressed assets from the banks, or provide loan guarantees, is not an effective solution. It does not reduce the volume of debt, or force recognition of losses. It merely re-denominates private sector obligations to be met by households and firms as public ones to be met by the taxpayer. This type of debt swap would make sense if the problem was liquidity rather than solvency. But in current circumstances, taxpayers are being asked to shoulder some or all of the cost of defaults, rather than provide a temporarily liquidity bridge. In some ways, government is better placed to absorb losses than individual banks and investors, because it can spread them across a larger base of taxpayers. But in the current crisis, the volume of debts that potentially need to be refinanced is so large it will stretch even the tax and debt-raising resources of the state, and risks crowding out other spending.

Trying to cut debt by reducing consumption and investment, lowering wages, boosting saving and paying down debt out of current income is unlikely to be effective either. The resulting retrenchment would lead to sharp falls in both real output and the price level, depressing nominal GDP. Government retrenchment simply intensified the depression during the early 1930s. Private sector retrenchment and wage cuts will do the same in the 2000s. The solution must be some combination of policies to reduce the level of debt or raise nominal GDP. The simplest way to reduce debt is through bankruptcy, in which some or all of debts are deemed unrecoverable and are simply extinguished, ceasing to exist.

Bankruptcy would ensure the cost of resolving the debt crisis falls where it belongs. Investor portfolios and pension funds would take a severe but one-time hit. Healthy businesses would survive, minus the encumbrance of debt. But widespread bankruptcies are probably socially and politically unacceptable. The alternative is some mechanism for refinancing debt on terms which are more favorable to borrowers (replacing short term debt at higher rates with longer-dated paper at lower ones). The final option is to raise nominal GDP so it becomes easier to finance debt payments from augmented cashflow. But counter-cyclical policies to sustain GDP will not be enough. Governments in both the United States and the United Kingdom need to raise nominal GDP and debt-service capacity, not simply sustain it.

There is not much government can do to accelerate the real rate of growth. The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population. The need to work down real debt and boost cash flow provides the motive, while the massive liquidity injections into the financial system provide the means. The stage is set for a long period of slow growth as debts are worked down and a rise in inflation in the medium term.

Insolvent Banks: Why a Debt-for-Equity Swap Won't Work
Henry Blodget has convinced himself that he's worked out "the right way" to fix banks. It's a big debt-for-equity cramdown, basically, which, he says, will "avoid another Lehman" and involve spending "no taxpayer money". Which got me wondering: what do we really mean when we talk about banks being "too big to fail"? In the case of Lehman, the single biggest repercussion from the bank's failure was not the counterparty risk in the CDS market, which everybody was worried about but which turned out not to be a problem, but rather the evaporation of $155 billion in unsecured debt, which contributed to the Reserve Fund breaking the buck and a massive spike in credit spreads.

If we enacted Blodget's plan for, say, Citigroup, the writedown on Citi's senior unsecured debt might well be greater than $155 billion, depending on what exactly Blodget is referring to when he talks about Citi's "debt". He leaves the term (deliberately?) vague, but if you look at Citi's balance sheet, it has $774 billion in deposits, $105 billion in short-term borrowings, $393 billion in long-term debt, and $646 billion in other liabilities, including $250 billion to the Fed and $118 billion in brokerage payables.

If Blodget is serious about spending no taxpayer money, that implies that the Fed should take no haircut and that the FDIC should not have to step in to guarantee deposits. (He also says that "today's preferred shareholders would get wiped out", however, which in and of itself constitutes a loss for taxpayers, since we own a massive chunk of Citi's $27 billion in preferred stock.) But if Blodget really wants to ring-fence not only secured creditors but also depositors, that means that the bulk of the write-downs will be inflicted on Citi's $500 billion or so of non-depositor unsecured creditors.

Blodget wants to write down Citi's $2.05 trillion in assets "to nuclear-winter levels". I'm not sure what he considers to be a nuclear winter, but if those assets are written down to 80 cents on the dollar, that's a write-down of $410 billion right there, and about $285 billion of that sum would have to be eaten by Citi's bondholders. That's not avoiding another Lehman, it's creating a failure significantly larger than Lehman. Yes, those bondholders would get a bunch of equity in return for their losses, but fixed-income investors aren't generally even allowed to own equity, and would be forced to sell those shares at fire-sale prices. The resulting valuation for Citigroup, after writing off $410 billion and swapping $285 billion of debt for new equity, would be so low that it would imply that the rest of the US banking system was also insolvent.

Alternatively, you could include depositors among the unsecured creditors -- which, of course, they are. But if you even hint you might do that, you start a run on the bank, and on any other bank which conceivably might be declared insolvent. Which is substantially all banks: we might be talking about the mother of all bank runs here. And how do you start giving out equity to, say, small Polish depositors? I'm sorry, Henry, but there are no easy answers here. Unless you consider outright nationalization to be easy, of course. Which it isn't -- but it's a darn sight more likely to work than any of the other ideas out there, including yours.

Swedish model for western banks
As newspaper headlines are full of stories about more forced capital injections by governments into leading American and British banks, it has surely become time to end the present ad hoc approach to the intensifying banking crisis. In the US and Britain most of the big banks have now become a weird hybrid of public and private sector, given growing government equity stakes in these banks. This raises the issue of the deeply flawed policy response to the crisis. This is that if the authorities are not prepared to let insolvent financial institutions go bust, which would be the quickest, most effective way to correct excesses, as the Lehman precedent demonstrates, the next best way is to nationalise the, in effect bust, banks outright.

This remains the opposite of what is happening in the US and the other country most vulnerable to an imploding financial services sector, namely Britain. Rather, what is happening is nationalisation by stealth. This approach reached its ludicrous extreme in the November bail-out of Citigroup, where the US government put more money in than the entire market capitalisation of the company on the day the deal was announced. But the taxpayer ended up with only a 7.8 per cent equity stake while incumbent management was left in place! Yet now, just two months later, still more taxpayer money looks as if it is about to be poured into Citigroup, while a similar sweetheart deal has been done with Bank of America.

This approach is a recipe for gross conflicts of interest. It means the institutions receiving taxpayer money are encouraged to continue to avoid ultimately necessary writedowns because of the hope of yet more bail-outs. Yet the reality is that there is an established template for what to do in banking crises if governments remain determined, as they do, not to allow bank failures. That is the Swedish model of the early 1990s. Under this model banks were nationalised, fully aligning the interests of the institution with that of the taxpayer, while the depositor was fully protected. In the process shareholders were in effect wiped out, as they should be, and incumbent management was replaced, as it should be.

This left none of the massive conflicts of interest, as well as perverse unintended consequences, caused by the present anomalous situation in the west where too many banks are being rewarded for failure – leading, incidentally, to a massive competitive disadvantage for those banks that managed their affairs more prudently. A crucial principle of the Swedish model is that banks were forced to write down their assets to market and take the hit to their equity before the recapitalisation began. This is of course precisely what has not happened in either the US or Britain, where too many policy measures seek to delay asset price clearing and only add public sector debt on top of existing private sector debt. This is why the current approach in the west to the banking crisis can be compared more accurately with Japanese policy in the 1990s, and that clearly did not work. The outcome, as then, is increasingly zombie-like banks.

The ultimate endgame in countries such as the US and Britain is still likely to be full-scale nationalisation of most of the banking system, as the logic of such action finally becomes overwhelming. But it would be much better if this were done proactively rather than reactively, since it would accelerate resolution of the financial crisis. This is why nationalising the banks would also be bullish for stock markets, if not for the specific bank stocks themselves – although, obviously, there are powerful vested interests wanting to prevent such an ultimate course of action. Another point about nationalisation, as in the Swedish model, is that it allows the government to separate the bad assets from banks’ balance sheets and place them in one big "bad bank". This should enable whatever is left of the smaller "good" bank, which should be managed by old-fashioned commercial bankers, to become a viable private sector operator again more quickly.

Another more technical, albeit important, point is that, given that many of the bad assets in this cycle will be derivative- related in some form or other, where two nationalised banks have been counterparties to the same transaction the derivative deal could be in effect terminated or cancelled because the government would be the owner of both entities. In this respect the limited number of counterparties in the $55,000bn* credit default swap market could suddenly become a positive and not, as now, a systemic negative.It is true the Swedish model is not a pain-free panacea. It would just mean the beginning of an orderly workout. Unfortunately, the deflationary pain is inevitable because of the scale of the credit boom of recent years, the excesses of which were ignored for so long by the relevant central bankers.

Obama Becomes Banker-in-Chief in Credit Market Freeze
The U.S. economy has little chance of recovering from what may prove to be its worst recession since World War II unless President Barack Obama shows he can get banks to lend money again. Since the Bush administration and Congress last year approved the $700 billion Troubled Asset Relief Program that injected capital into Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co., individuals and companies aren’t getting any of it as fourth-quarter lending by the biggest banks by assets plummeted. The asset-backed market, which is supposed to enable banks to keep lending by transforming loans into tradable securities, remains frozen, leaving would-be lenders unable to package and sell mortgages, credit-card debt and auto loans.

After reporting more than $1 trillion of market losses and writedowns, banks are adding billions of dollars to reserves amid a 16-year high in unemployment and two years of falling home prices. Investor confidence has waned, sending an index of bank stocks to a 13-year low last week. Obama, 47, can’t expect relief from the Federal Reserve, which already cut its main interest rate to as low as zero. All eyes will be on the 44th president today in anticipation that he may unveil a sweeping recovery plan. "It’s a day-one, minute-one problem for the new administration," said Stuart Eizenstat, deputy U.S. Treasury secretary from 1999 to 2001 and now a partner at Covington & Burling LLP in Washington. "It’s difficult to understand with the degree of oversight exactly how those banks got into such deep water. The point now is to keep them liquid, get the balance sheets in order and to get them to start lending."

The mortgage market has contracted even as the Fed reduced interest rates, according to Freddie Mac. While the average 30- year fixed mortgage rate fell below 5 percent this month for the first time since the McLean, Virginia-based company started keeping records in 1971, the real rate that banks charge customers is the highest in more than two decades. That’s because the spread between 30-year mortgage rates and 10-year Treasury yields is about 2.6 percentage points today, up from 1.6 percentage points in 2003 and 1.5 percentage points in 1993, data compiled by Bloomberg and Freddie Mac show. The difference was about 3.3 percentage points in June 1986. The failure of banks to pass along savings is hurting a U.S. economy that’s already in the deepest recession since the 1980s, based on the decline in U.S. manufacturing, exports and consumer spending.

Companies slashed payrolls in 2008 by almost 2.6 million, the most since 1945, the Labor Department reported. The unemployment rate climbed to 7.2 percent in December, the highest level in almost 16 years, and the rate may climb to 8.4 percent in the fourth quarter, a survey of economists compiled by Bloomberg shows. Analysts have been reducing growth forecasts. The economy will contract 1.5 percent this year, a half percentage point more than projected last month, according to the average estimate of economists surveyed by Bloomberg last week. "We are in the middle of the economic Pearl Harbor right now," said billionaire investor and Berkshire Hathaway Inc. Chairman Warren Buffett during an interview late last week with Tom Brokaw of Dateline NBC. "Now we have to get mobilized to win the war, which we will."

With lenders tightening standards, as few as 50 percent of applications are resulting in mortgages this month, compared with an average of about 70 percent during the past 18 months, according to data compiled by analysts at Zurich-based Credit Suisse Group AG. Unfreezing credit "is the single most important thing," said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, in an interview. The Treasury is demanding monthly reports from the banks that received the most capital in the government’s rescue program. Neel Kashkari, the official who administers TARP, wrote to Citigroup, Bank of America and 18 other banks on Jan. 16 seeking figures on business and consumer loans. Treasury also wanted details on purchases of mortgage-backed and asset-backed securities, according to documents obtained by Bloomberg News.

Only government-supported programs, with stricter standards than private lenders once required, have kept home-mortgage lending from shutting down in the U.S., according to newsletter Inside MBS & ABS, published in Bethesda, Maryland. The securitization rate, or amount of new mortgage securities relative to new loans, rose to 78 percent in the first nine months of 2008, the newsletter’s data show. Issuance of bonds with government backing accounted for 99 percent of the total. In 2006, lenders such as banks kept 32 percent of loans and private mortgage securities accounted for 56 percent of sales. Sales of bonds backed by auto-loan and credit-card payments plummeted 40 percent in 2008 as investors fled to the safety of U.S. government debt, New York-based Merrill Lynch & Co. reported. There have been no public sales of such debt in 2009. The gap, or spread, on top-rated credit card-backed debt maturing in three years is about 4.75 percentage points more than one-month Libor, compared with 0.5 percentage point a year ago, Merrill data show.

Banks have been able to raise cash by selling government- backed bonds through the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program. About $115 billion of such debt has been sold since Nov. 25, according to Bloomberg data. The average yield, or spread, investors demand to own investment-grade company debt has shrunk to 5.6 percentage points from a record 6.56 percentage points on Dec. 5, according to Merrill, the biggest U.S. brokerage, which is now owned by Charlotte, North Carolina-based Bank of America. "All of these new banks and old banks that are issuing FDIC-backed bonds are getting what I feel is cheapity-cheap capital," said Marilyn Cohen, president of Envision Capital Management Inc. in Los Angeles, which oversees $175 million in fixed-income assets. "So what are they doing with that money?"

Obama, an Illinois Democrat who spent four years in the U.S. Senate, began proposing policies to restart the economy while campaigning against Republican candidate John McCain in the presidential election. As the George W. Bush presidency entered its final days earlier this month, Obama unveiled an economic stimulus package calling for corporate tax breaks to encourage hiring, a request that sparked dissent from some Democrats. The president-elect plans to save or create as many as 4 million jobs, in part through investments in alternative energy and infrastructure projects like roads and new schools. "Hopefully that helps in the first two years or so," Paul Krugman, the Princeton University professor who won the 2008 Nobel Prize for economics, said in a Jan. 14 interview with Bloomberg Radio. "Hopefully, we find some private sector drivers for recovery beyond that."

Obama probably will back a bank-rescue effort that combines capital injections and steps to deal with toxic assets clogging lenders’ balance sheets, people familiar with the matter said on Jan. 16. He scored a victory last week in the Senate, gaining access to the $350 billion in bailout funds, the second half of the Troubled Asset Relief Program, designed to ease the foreclosure crisis and support banks. The vote, after the close of trading on Jan. 15, followed a plunge in financial stocks that sent the 24- company KBW Bank Index, already at its lowest since 1995, down another 8 percent. Obama’s economic team will use some of the $350 billion to help homeowners avoid foreclosure, according to people with knowledge of the plan. He also may assist cash-strapped cities and states that have trouble selling bonds, the people said.

"We’ve started this year in the midst of a crisis unlike any we’ve seen in our lifetimes," Obama said in a Jan. 16 speech in Ohio. "It’s not too late to change course, but only if we take action as soon as possible." Bank of America, the largest U.S. bank by assets, fell to an 18-year low on Jan. 16, after reporting a $1.79 billion fourth- quarter loss. The figures exclude a record $15.3 billion deficit posted by Merrill Lynch, caused by errant mortgage trading before the Bank of America takeover was completed on Jan. 1. Chief Executive Officer Kenneth Lewis, 61, agreed to buy Merrill on Sept. 15, two months after the purchase of foundering mortgage lender Countrywide Financial Corp. He struck the Merrill Lynch deal the same day New York-based Lehman Brothers Holdings Inc., once the largest underwriter of mortgage-backed bonds, filed the biggest bankruptcy case in U.S. history.

Citigroup reported an $8.29 billion fourth-quarter loss, with more than half coming from writedowns on subprime home loans and related bonds. The New York-based company, which has lost more than 85 percent of its market value in the past year, was forced to obtain $45 billion of government rescue funds and announced last week it will split in two. Home prices in 20 U.S. cities dropped a record 18 percent in the 12 months through October and have fallen every month on a year-on-year basis since January 2007, according to the S&P/Case- Shiller index. Foreclosure filings reached a record 3.2 million last year, RealtyTrac Inc. of Irvine, California, reported, pushing down property values and increasing the number of borrowers who owe more on their mortgages than their properties are worth.

"The challenge that no one has really addressed is the fundamental core problem and that’s the declining housing market," said Gregory Habeeb, who oversees about $7.5 billion in fixed-income assets at Calvert Asset Management Co. in Bethesda, Maryland. "Everybody’s just addressing the casualties of the problem. If there is some more spent on solving the core problem, we might start seeing the end of the decline." Obama plans to tackle the problem with the help of his nominee for Treasury secretary, Timothy Geithner, and Lawrence Summers, whom the president picked to direct the National Economic Council. They also face the task of stimulating credit markets that seized up after the Lehman bankruptcy and have since started to loosen.

The difference between what banks charge each other for three-month loans and the rate that the Treasury pays, the so- called TED spread, has narrowed to about 1 percentage point, the tightest in five months. The spread, a measure of banks willingness to lend, peaked at 4.64 percentage points in October. The credit market is "sick, but still ambulatory," said Envision’s Cohen, who has worked in the bond market since 1979. "There are transactions that are being done." The financial crisis has seeped into the rest of the economy, forcing companies to slash jobs and lifting unemployment to it highest since 1993. Motorola Inc., the No. 2 U.S. seller of mobile phones, Schlumberger Ltd., the world’s largest oilfield- services company, and drugstore chain Walgreen Co. are among companies that have announced job cuts this year.

Obama faces "problems all across the horizon," said Nobel laureate economist Robert Solow, 84, a professor emeritus at the Massachusetts Institute of Technology in Cambridge. "His initial focus really has to be on the real economy, on getting the recession turned around as soon as he can manage it, which is not going to be very soon." Profit at companies in the Standard & Poor’s 500 Index has dropped for the past five quarters, matching the longest losing streak on record. Declines are forecast for the last three months of 2008 and first three quarters of this year, according to estimates compiled by Bloomberg.

Rebecca Blank, an economist at Brookings Institution in Washington and once a member of former President Bill Clinton’s Council of Economic Advisers, said it all adds up to the worst economy since at least World War II. The only comparable period was the back-to-back recessions of 1980 to 1982, she said. Then, Obama was an undergraduate at Columbia University in New York. "It’s been 25 years since economists and politicians in the United States have had to engage seriously about what you do when employment collapses and your financial markets collapse and you’re in a full-economy recession," Blank, 53, said in an interview. "That means you’re flying a little blind on this."

Rates: When Zero Is Way Too High
Interest rates still aren't low enough to stimulate the U.S. economy. Washington needs to engender more inflation so "real" rates turn substantially negative. Can an interest rate of zero be too high? Unfortunately, yes. A new analysis by Goldman Sachs (GS) concludes that the Federal Reserve's cut in the federal funds rate to a record low of zero to 0.25% on Dec. 16 isn't going to be nearly enough to get the economy going again. The report says the Fed would need to reduce the federal funds rate to negative 6% by the end of 2010 to supply the needed amount of monetary stimulus. The problem: It's literally impossible to cut interest rates below zero. As a result, "we are entering a world with interest rates that are far too high for the economy's good," Goldman Chief U.S. Economist Jan Hatzius wrote in a Jan. 16 research note.

That's a big negative for a U.S. economy that's already in a deep slump, with retail sales, industrial production, and exports all plummeting. Citigroup, Bank of America, General Motors, and Chrysler, among others, are struggling to keep their heads above water. Circuit City, the second-biggest U.S. electronics retailer, announced on Jan. 16 that it was going out of business and closing all its stores by the end of March. Meanwhile, homebuilders like Lennar and D.R. Horton are getting squeezed by a record decline in home prices. Ordinarily when the economy slows, the Federal Reserve can juice it up by cutting short-term interest rates to below the rate of inflation, meaning that in inflation-adjusted terms, rates are actually negative. For example, if inflation is running at 6% per year and interest rates are at 4%, the "real" rate is negative 2%. Negative real rates entice people to borrow money for consumption or investment, which gets the economy going again and soaks up unemployed workers and equipment.

Right now, zero is about right for interest rates. But the economy is continuing to soften, so it will soon be too high, according to Goldman. Hatzius bases his calculation on Goldman's own version of the so-called Taylor Rule, which is named after Stanford University economist John Taylor. Taylor says the Fed needs to lean against the wind by raising rates when the economy is overheating and lowering them when there's a lot of slack. Trouble is, the Federal Reserve can't cut interest rates below the rate of inflation if inflation falls to zero, which many economists expect to happen soon. Clearly the Fed can't take in $1,000 and pay back only, say, $950 a year later. Rational investors would simply keep their money in cash outside the banking system to preserve its value.

The solution is obvious: The Fed needs to deliberately raise the rate of inflation—maybe not all the way to 6%, but significantly above zero. One way to do that is to print lots of money. The Fed can create money from thin air by purchasing assets such as Treasuries and mortgage-backed securities and paying for them by crediting the seller with newly created reserves at the central bank. That way today's zero interest rates would be negative in inflation-adjusted terms and the economy would get the boost it needs. Fed rate-setters would need to swallow hard, since 99.99% of the time they try to quell inflation, not raise it. But most of the voters on the Federal Open Market Committee are aware that deflation can be an even greater nemesis than inflation.

Even generating negative real rates won't be enough to turn the economy around. So the government will also need to strengthen the banking system and give the economy a fiscal stimulus by cutting taxes and increasing government spending, as the Obama Administration proposes to do. To rescue the banks, Hatzius favors more purchases of bad assets that are on banks' balance sheets as well as lending by the Fed against consumer asset-backed securities. Princeton University economist Paul Krugman favorably cited Hatzius' research in his New York Times blog on Jan. 17. No surprise there, since Krugman himself pinpointed a similar problem in Japan during its "lost decade" of slow economic growth in the 1990s. Wrote Krugman: "This is why we need a huge fiscal stimulus, unconventional monetary policy, and anything else you can think of to fight this slump. Quite literally, the usual rules no longer apply."

Fed Grapples With a New Risk Reality
It has loads of subprime-mortgage bonds, souring commercial real-estate debt and collateralized debt obligations worth a fraction of their original value. This isn't Citigroup Inc. or Merrill Lynch. It is the Federal Reserve. In the past year, the Fed lent out more than $1 trillion in its efforts to stabilize the financial and credit markets. A chunk of that was used to buy mortgage-related securities and loans in the rescues of Bear Stearns Cos. and American International Group Inc., as well as other debt shunned by investors. Now, the government's recent aid packages for Bank of America Corp. and Citigroup have the Fed playing the additional role of a backstop guarantor for portfolios of about $400 billion in troubled assets that were dragging down those banks. Those assets include residential- and commercial-mortgage loans, mortgage securities, corporate leveraged loans and credit-derivative positions.

As the U.S. central bank, the Fed has a mission to maintain financial and economic stability and contain systemic risk in the markets. It lends only when the loans can be "secured to [its] satisfaction," according to laws that govern the Fed's activities. But as the economy slows, mortgage and corporate defaults climb, and asset prices continue to decline, analysts are beginning to argue that U.S. taxpayers could end up shouldering losses from some of the Fed's moves. The Fed's lending could swell by another $1 trillion or more in 2009 as its liquidity programs are tapped further by borrowers and it purchases more bonds, such as those issued by Fannie Mae and Freddie Mac, as well as securities backed by student loans, auto loans, credit-card receivables and small-business loans. The result would be a Federal Reserve balance sheet at least three times its size 18 months ago, when most of the Fed's assets were Treasury securities.

While the Fed has never had a loss before, notes James Bianco, president of Bianco Research in Chicago, its record may not mean much today. "It's a whole new ballgame for them. We've never seen anything like this in terms of the Fed broadening its reach before," Mr. Bianco said. If the Fed incurs losses, "they run a real risk of hurting their credibility and running afoul of their collateralized loan rules," he said. Losses also could undermine the Fed's independence from congressional meddling. In expanding its balance sheet and lending commitments, the Fed has relied on methods used by the very Wall Street institutions to which it has extended lifelines. The Fed uses credit ratings to help determine what to accept as collateral for its loans, employs structured-finance gambits to protect its positions and relies on imprecise valuation models to evaluate prices and monitor its exposures.

There is nothing inherently wrong with using each of these tools, but the recent financial crisis shone a light on many financial institutions and investors that relied too heavily on them and misjudged the risk. A Fed spokesman said credit ratings help the Fed demarcate what securities fall within its "risk tolerance," adding the central bank also can mitigate its risk of losses through "haircuts" on the collateral, or adjusting the amount it lends for each security pledged by borrowers. Fed officials have said the central bank makes loans only where it expects to be fully repaid. Its loans are typically secured by collateral comprising the assets being financed. In some cases, other institutions have agreed to absorb initial losses from defaults among the assets. The Fed's program to lend up to $200 billion to purchase securities backed by consumer and small-business loans will be protected by a $20 billion contribution from the Treasury. That means losses from the securities would have to exceed $20 billion before the Fed's loan is impaired.

Most analysts expect the Fed to recoup its money on its short-term lending programs, as most of the collateral it accepts is of relatively high quality. But they said the central bank bears significant risk on $75 billion in longer-term loans used to purchase troubled assets previously owned by, or linked to, Bear Stearns and AIG.
The Fed would be exposed to losses on the assets of Citigroup and Bank of America only after the banks themselves and other government entities have absorbed tens of billions in losses. But if that happens, the central bank's exposure to risk could balloon. The Fed has committed to lend more than $200 billion to Citigroup and about $90 billion to Bank of America, though it is unlikely that much will be needed.

Some of the assets on the Fed's balance sheet already have lost substantial value over the past six months. In the next several weeks, the Fed will provide an update on the value of assets in Maiden Lane LLC, a company it lent $29 billion last June to purchase $30 billion in assets formerly held by Bear Stearns. Those assets included securities backed by shaky Alt-A residential mortgages -- a category of loans between prime and subprime -- and commercial real-estate loans tied to companies, such as Hilton Hotels Corp., that are in slowing industries. Maiden Lane was set up to facilitate last year's rescue of Bear Stearns by J.P. Morgan Chase & Co., which provided $1 billion to the newly formed firm.

Last fall, the Fed said the value of Maiden Lane's assets had declined to about $27 billion at the end of September. Analysts expect that value to have dropped further following a weak fourth quarter for the credit markets and declines in the values of many mortgage assets. Triple-A securities backed by commercial mortgages declined 11% during the quarter, while single-A securities lost 49%, according to Merrill Lynch indexes. Prices of Alt-A bonds, meanwhile, tanked late last year as loan defaults mounted. Maiden Lane II LLC and Maiden Lane III LLC, created late last year to hold illiquid subprime-residential mortgage-backed securities previously owned by AIG, as well as collateralized debt obligations it insured, so far haven't reported substantial write-downs that would impair the loans of roughly $43 billion the Fed has provided to the two companies.

Those securities were worth about half their original values at the time they were purchased by the two firms, and AIG agreed to absorb initial losses up to $6 billion. The fair value of the securities was recently $46.7 billion, according to Fed data. Their performance is largely tied to that of subprime borrowers. "Ultimately, the risk is to taxpayers," said Sung-Won Sohn, an economics professor at California State University, Channel Islands. "There's no guarantee the Fed is going to get its money back, and it's quite possible it could incur losses from the assets on its books, either from defaults or price depreciation, and Treasury or taxpayers would have to make up for them." Prof. Sohn said, however, that the Fed's unprecedented moves are meant to prevent the economy from spiraling into a depression. "The economic and social costs of that result would far outweigh the cost of buying all these assets," he said.

U.S. stimulus not enough, TARP bailout misused: Soros
The stimulus plan the U.S. government is currently considering is necessary to help American citizens, but it will likely not reverse the country's economic decline, hedge fund manager and billionaire philanthropist George Soros said on Monday. "It is not enough to turn the situation around," Soros told the U.S. Conference of Mayors about the $850 billion proposal to increase spending and cut taxes. nThe plan, which was introduced in the U.S. House of Representatives last week and will likely be passed by next month, will help state and local governments balance their budgets and preserve important social services, Soros said.

At the same time, the $700 billion financial bailout known as TARP for Troubled Assets Relief Program had been carried out in a "haphazard and capricious way" and "without proper planning," he said. "Unfortunately it was misused and the way it was done has poisoned the well. It has created tremendous ill will toward putting up more money," Soros said. For more than a year, the United States has been crippled by a recession that was triggered by a housing market downturn. Last summer, financial institutions with exposures to securities backed by bad mortgages began to buckle. The government stepped in with the TARP to inject liquidity into struggling firms. Last week, President-elect Barack Obama requested Congress release the second half of the funds.

Soros advocated using bailout money to recapitalize banks, but said the $350 billion would not be enough. He said such a move would take more than the entire $700 billion. The bursting housing bubble "acted like a detonator that exploded a much larger bubble," he said. "The economies of the world are falling off a cliff. This is a situation that is comparable to the 1930s. And once you recognize it, you have to recognize the size of the problem is much bigger," he said. Soros said the United States needed "radical and unorthodox policy measures" to prevent a repeat of the Great Depression of the early 20th century that include recapitalizing banks and writing down the country's accumulated debt.

Also, he said, it should create more money to offset the collapse of credit and then rapidly pull that cash out of the system when inflation emerges. The government would have to be very nimble in the timing of such moves, he said. "If they are successful...the deflationary pressures will be replaced by the specter of inflation and the authorities will have to drain the excess money from the economy almost as quickly as they pumped it in. Of the two operations the second one is going to be, politically, even more difficult than the first," he said.

U.S. Banks Stocks Decline, Led by Bank of America, JPMorgan
U.S. bank stocks fell, led by Bank of America Corp., on concern that losses will continue to mount after the lender last week posted its first loss since 1991. Bank of America fell $1.41, or 20 percent, to $5.77 at 10:59 a.m. in New York Stock Exchange composite trading. Citigroup Inc. dropped 36 cents, or 10 percent, to $3.14 and JPMorgan Chase & Co. fell $2.80, or 12 percent, to $20.02. Bank of America extended last week’s 45 percent slide after posting a $1.79 billion loss and receiving government aid to ease the acquisition of Merrill Lynch & Co.

Financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is "effectively insolvent," said New York University professor Nouriel Roubini, who predicted last year’s economic crisis. "If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion," Roubini said at a conference in Dubai today. "This is a systemic banking crisis." Bank of America had its 2009 earnings estimated cut to $1 a share from $1.35 by Deutsche Bank AG analyst Mike Mayo. He also cut his 2010 per-share estimate to $1.80 from $2.20. Citigroup on Jan. 16 posted an $8.29 billion loss, twice as much as analysts estimated, and said it will split in two under Chief Executive Officer Vikram Pandit’s plan to rebuild a capital base eroded by the credit crisis.

Citigroup’s "core problem is that it simply doesn’t make money in any of its businesses except Smith Barney, which it is in the process of selling," Oppenheimer & Co. analyst Meredith Whitney said in a Jan. 19 note to investors. JPMorgan fell after Fox-Pitt Kelton Cochran Caronia Waller analyst David Trone cut the bank’s 2009 per-share earnings estimate to $2.04 from $2.47 citing the New York-based lender’s need to set aside more money to cover bad loans. The stock fell as low as $19.92, slipping below $20 for the first time since November. "The company is obviously not immune to the deteriorating credit environment and thus we expect higher credit costs and reserve builds," Trone wrote in a research note today.

U.S. economy may sputter for years
Transfixed by the daily spectacle of dismal economic news and wild Wall Street swings, few Americans have looked up to see what a wide array of economists say lies beyond the immediate crisis. And with good reason: The picture isn't pretty. The sleek racing machine that was the U.S. economy is unlikely to return any time soon despite the huge repair efforts now underway. Instead, it probably will continue to sputter and threaten to stall for years to come. The prospects are so gloomy, according to a recent study, that unemployment may be slightly higher by the time President-elect Barack Obama's first term ends.

The damage done by plunging house and stock prices, the failure of other major economies to be independent sources of growth and hidden weaknesses in America's past performance have crippled nearly every actor in the nation's economic drama. None -- save perhaps the government -- retains the power to push the economy back to speeds it regularly achieved during much of the last generation, economists say. The result: An economy that once averaged 3% or better annual growth would be lucky to grow 2% a year during the entirety of the new president's term. "That is going to feel like stagnation" to most people, said John Lonski, chief economist at Moody's Investors Service.

"We're in a post-bubble global recession, and post-bubble recessions are lethal for growth," Stephen S. Roach, chairman of Morgan Stanley Asia, said from Beijing. "It will be a long time before the world experiences anything more than anemic recovery." Obama and his economic aides seem to understand the painful prospects they face. Obama misses no chance to temper hopes for a quick and complete comeback. A recently released study by Christina Romer, his nominee to chair the Council of Economic Advisors, and Vice President-elect Joe Biden's chief economist, Jared Bernstein, concluded that, even with an $825-billion stimulus package, the unemployment rate at the end of Obama's first term would be one-half to one full percentage point above where it was before the start of the recession.

That would mean as many as 1.5 million additional jobless workers. And some independent economists say that number could be much higher. What most worries analysts is not a cataclysm such as the Great Depression but the sort of economic morass into which Japan fell after its stock and real estate markets burst in the late 1980s and early '90s. Daily life for most Japanese citizens wasn't terrible. There were few company shutdowns or mass layoffs. Indeed, the Japanese came to call their economic condition the "golden recession," said Simon Johnson, a senior fellow at the Peterson Institute for International Economics. The problem was that the country simply didn't grow -- and that, economists worry, is what could happen in the U.S. and around the world. "Four years from now, I suspect that we'll be pretty much where we are today," Johnson said. The question he predicts people will then ask: "Why can't we get growth going again?"

Four factors -- like the cylinders of an engine -- power an economy: consumers, investors, the government and a favorable balance of trade with other countries. And for many years, the most important of these has been the American consumer. U.S. households long have accounted for the lion's share of economic activity not only here but also in much of the rest of the world. Although U.S. consumers constitute only about 4.5% of the global population, they bought more than $10 trillion worth of goods and services last year. By contrast, said Roach of Morgan Stanley Asia, Chinese and Indian consumers, who together account for 40% of global population, bought only $3 trillion worth.

In the last decade, a new generation of financial engineering -- complex deals involving home equity loans, subprime mortgages and other devices that provided easier access to credit -- seemed to make it safe for Americans to save less and consume more. That further expanded their share of global economic activity and made them even more indispensable here and abroad. U.S. consumer spending shot up from a little over 73% of the economy to nearly 77% from 2001 to 2007, according to government statistics. Initially, the expansion was heralded as evidence of economic vitality. But by now, it has become apparent that the growth was largely a debt-driven bubble -- and a double bubble at that, in housing and in personal consumption.

As the elaborate superstructure of easy credit began to pop rivets, consumers found themselves caught dangerously short. They have reacted by drastically cutting back on purchases, particularly those that are discretionary. Retail sales in the last three months of 2008 plunged 7.7% compared with a year earlier, the government said last week, making it the worst sales quarter in more than 40 years. At almost any other time, economists would write off such a drop as sharp but short-lived and predict that Americans would return to their spendthrift ways as soon as the economy began to recover. But many veteran forecasters say this time is different. "Decades of borrowing have finally caught up with consumers; they realize there is no more easy money left," said Allen Sinai, chief economist of Decision Economics Inc. "This is going to scar this generation of consumers the way the Great Depression did our fathers' and grandfathers'."

For the first year of the current crisis, which began in the summer of 2007, there was hope that a replacement for U.S. consumers and a new source of economic strength had been found in the rest of the world's economies, especially such giant and newly industrializing nations as China and India. Economists pored over figures suggesting these economies were continuing to boom even as the U.S. tottered on the financial brink. There was much talk about other countries having "decoupled" from America and begun their own, internally fueled expansions. But by last fall, the hope had faded. The economies of most of the world are either slowing sharply or actually shrinking. Asian powerhouses such as China are doing so because of a bust in exports to the U.S.

Worse yet, much of the Asian boom appears to have sprung from a sort of financial engineering that served as a matched set to that in the U.S. By keeping their currencies undervalued, they kept export prices low and encouraged others -- especially Americans -- to keep buying. China and other Asian economies "were driven by export bubbles, which, in turn, were a play on the U.S. consumption bubble," Roach said. With the bubbles on both sides now burst, the U.S. and Asia are dragging each other down, he said. If renewed consumption isn't going to revive the U.S. economy, and a growing world able to buy more U.S. exports has vanished, one of the few options for recovery that's left is business investment.

But investment, especially in high technology, was barely growing even during the boom years of this decade. With the economic crisis, it has plunged. Lonski, the Moody's economist, used government statistics to examine business investment in such high-tech items as computer and telecommunications equipment. What he found was that in most previous cycles, companies quickly resumed investing after the economy moved from bust to boom, pushing computer and telecom orders back above their pre-bust highs. But not in this decade. Between the last recession in 2001 and the current one, high-tech investment has barely crawled upward. That has left telecom and computer orders still down nearly 50% from their previous highs.

"This shows that technological progress was lagging" during the decade's good years, Lonski said. It seems unlikely the pattern should improve now that times are bad. That leaves only government to power the renewed growth. Every Economics 1 textbook introduces the economy with the same simple equation. It reads: consumption + investment + net exports + government spending = gross domestic product or output. It's an equation that the new president and his top economic aides know well. With the first three elements negative or contracting quickly, the new administration sees few alternatives but to sharply expand the fourth factor -- government spending. It's not a surefire solution. But the hope is that something eventually catches and the nation's economic engine begins turning over again on its own.

Treasury Demands Banks With TARP Funds Report Lending
The U.S. Treasury, under pressure to revive lending, is demanding monthly reports from the banks that received the most capital from the government’s $700 billion rescue program. Neel Kashkari, the official who administers the Troubled Asset Relief Program, wrote to Citigroup Inc., Bank of America Corp. and 18 others on Jan. 16 seeking figures on business and consumer loans. Treasury also wanted details on purchases of mortgage-backed and asset-backed securities, according to documents obtained by Bloomberg News. Kashkari will stay for a few months after President-elect Barack Obama is sworn in today.

Obama’s aides criticize outgoing Treasury Secretary Henry Paulson’s approach to rescues as lacking transparency and not doing enough to get credit flowing though the economy. While Paulson has defended the cash injections as having averted a collapse of the financial system, Obama had to pledge changes before lawmakers approved the release of the second $350 billion. "Banks are becoming the whipping boy for the Treasury’s failed policies," said Joseph Mason, a Louisiana State University professor in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency. "They’re going to continue to face this pressure." Citigroup spokesman Michael Hanretta said the bank will meet all reporting requirements. Bank of America spokesman Scott Silvestri had no immediate comment.

Obama’s advisers are considering options for dealing with troubled assets still clogging banks’ balance sheets, according to people familiar with the matter. Among alternatives: setting up a government-backed "bad" or "aggregator" bank to hold the securities, or leaving the assets on banks’ books and providing a government guarantee. The Treasury also asked the banks for commentary on their lending activity, to provide "qualitative" updates on trends. In addition, the government wants information on secured lending and underwriting of debt and equities. The first report covers data for October, November and December and is due by Jan. 31. Results will be made public. Subsequent reports will be monthly.

The 20 banks receiving the Treasury’s monthly data request are: Citigroup, Bank of America, JPMorgan Chase & Co., Wells Fargo & Co., Goldman Sachs Group Inc., Morgan Stanley, PNC Financial Services Group Inc., U.S. Bancorp, SunTrust Banks Inc., Capital One Financial Corp., Regions Financial Corp., Fifth Third Bancorp., BB&T Corp., Bank of New York Mellon Corp., KeyCorp, CIT Group Inc., Comerica Inc., State Street Corp., Marshall & Ilsley Corp. and Northern Trust Corp.

Advisers to the incoming president called for more accountability from banks that receive taxpayer money. "Anyone who looks at it has got to be disappointed when they look at what’s happened to lending, has got to think the results have been unsatisfactory," Lawrence Summers, director- designate of the National Economic Council, said on CBS’s "Face the Nation" program Jan. 18. Members of the outgoing president’s party have joined in criticism of the Treasury’s handling of the TARP funds. "My constituents and I myself have not seen the results that we ought to see from it," Senator Charles Grassley, a Republican from Iowa, said in a Bloomberg Television interview. "I want to send a signal to the new administration not to make the same mistakes that the present administration has done."

By requesting monthly status reports, Treasury officials aim to dampen such criticism. The department also plans a quarterly comparison of banks that received rescue money with banks that didn’t, as report data becomes available. In the meantime, the monthly statements will track the activity of the banks receiving the most aid. "The purpose of this snapshot is to provide insight" into how banks are behaving after receiving rescue funds, the Treasury said in its letter to the banks. Obama’s team has asked some of Paulson’s staff to stay on for the first few months of the administration. One of those officials, Kashkari, said last week that markets and the economy are mired "at a point of low confidence" that’s slowing the flow of credit.

"As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans," he said in a Jan. 13 speech. "As confidence returns, Treasury expects to see more credit extended." In the monthly reports, the Treasury is seeking specific information on first mortgages, home equity and credit card loans, along with a summary of other types of consumer lending. Requested business lending data includes commercial real estate lending and consumer and industrial loans. Pressuring banks to boost lending runs the risk of encouraging more bad loans, and borrowers need to be spurred as well, said Bert Ely, chief executive officer of Ely & Co., a consulting firm in Alexandria, Virginia. "This is all very political and the rhetoric is getting pretty fierce," Ely said. "They’re blaming the banks unfairly."

Chrysler Trades 35% Stake to Fiat for Small Cars, World Markets
Chrysler LLC, rescued last month with $4 billion in federal loans, is trading a 35 percent stake to Italy’s Fiat SpA as the two companies work to create viable carmaking operations. Cerberus Capital Management LP’s Chrysler, the third- largest U.S. automaker, would get access to Fiat’s small-car lineup and global sales network to wean itself from dependence on trucks and the North American market, while Fiat would expand a U.S. foothold now limited to its luxury brands. An alliance won’t relieve Chrysler of the need for the U.S. emergency funds. Chrysler still must stem last year’s 30 percent U.S. sales slide, chop capacity and trim dealerships, said Kim Rodriguez, who is based in Southfield, Michigan, and leads Grant Thornton LLP’s automotive-restructuring practice.

"This certainly gives Chrysler a boost, but it doesn’t solve the problem," Rodriguez said today in an interview. "The answer here is that they had to do something in order to move to the next stage of government support to get cash." Hammered by slumping demand in the worst U.S. auto market since 1992, Chrysler had said it would be out of operating funds by mid-month without the federal aid. The Treasury can call the loans unless the Auburn Hills, Michigan-based automaker meets a March 31 deadline to show it can slash debt by two-thirds and revamp operations to survive. Chrysler and Fiat said the alliance is consistent with the terms of the Treasury Department bailout. The automakers said they signed a non-binding agreement that doesn’t involve any cash from Turin, Italy-based Fiat.

The deal requires U.S. government approval. A Treasury spokeswoman, Brookly McLaughlin, couldn’t be immediately reached for comment as President-elect Barack Obama’s administration was poised to take office today. Italian Finance Minister Giulio Tremonti called the accord "good news." Chrysler, the U.S. automaker most reliant on its home market and on trucks and sport-utility vehicles, would be able to tap Fiat’s lineup of small, fuel-efficient cars and a distribution network in Russia, China and South America. Fiat would be able to share products such as trucks, SUVs and electric vehicles, a step toward Chief Executive Officer Sergio Marchionne’s goal of expanding an auto operation that he said on Dec. 6 was too small to survive without a partner. Italy’s biggest automaker also would return to the U.S. with main brands including Alfa Romeo that haven’t been sold in the country since 1995.

"We’ll have to see how much Fiat will need to invest, but this would allow them to enter the U.S. market as a protagonist in a forthcoming recovery with its expertise in small cars," said Davide Manenti, chief of research at Nuovi Investimenti Sim SpA in Biella, Italy. "That’s a great opportunity." Fiat fell 7 cents to 4.41 euros at 5:15 p.m. in Milan trading. The stock declined 2.4 percent this year before today. The partnership with Fiat should be complete by April and is a step toward keeping Chrysler in business, CEO Robert Nardelli said in a letter to employees. Chrysler has said it burned through at least $6.5 billion in the second half. The alliance "offers new opportunities to compete in the U.S. market and the global marketplace," Ron Gettelfinger, president of the United Auto Workers union, said in a statement today. Cutting labor costs is among the requirements of the U.S. aid, and Chrysler and the UAW will have to negotiate those changes.

Chrysler still has more dealerships and factories than it needs, with Fiat likely to take up about 10 percent of that production capacity at best, Grant Thornton’s Rodriguez said. The two companies are an excellent fit, because they have virtually no overlap in products or geographic reach, she said. For Fiat, Chrysler is not "the final solution," said Paolo Mosole, an analyst in Milan with Intermonte, in a note to investors today. Mosole said PSA Peugeot Citroen, based in Paris, is another likely partner. Vice Chairman John Elkann told reporters in Milan that Fiat might raise the stake in Chrysler at a later date and could still make deals with other carmakers. CEO Marchionne ended four years of losses in 2005 after adding models and scaling back spending by sharing components among cars and through partnerships with competitors. The biggest slump in Italy’s car market since 1993 is forcing him to consider cutting financial goals for the first time since returning the company to profit.

Fiat pulled Alfa from the U.S. 14 years ago and hasn’t sold its namesake brand there since 1983, restricting the company’s offerings to luxury models from Ferrari and Maserati. Daimler AG, which sold 80.1 percent of Chrysler to Cerberus in 2007, welcomes "every initiative that enables Chrysler to stabilize its business," spokesman Thomas Froehlich said today before the announcement. Stuttgart, Germany-based Daimler still aims to unload the rest of the Chrysler stake, he said.
Cerberus acquired Chrysler for a $7.4 billion investment, about a fifth of what Daimler paid in 1998.

Fiat Buys American, And Gets A Great Price
Fiat chief Sergio Marchionne grabs a chunk of Chrysler--and the U.S. market--for free.

Fiat Group Chief Executive Sergio Marchionne has proved himself to be a shrewd negotiator. In 2004, he forced General Motors to pay $2 billion to extricate itself from a failed alliance with the Italian carmaker--money he used as the foundation to begin Fiat's remarkable turnaround. Now he has managed to obtain free access to the highly competitive U.S. market without laying out a dime. Fiat will acquire a 35% stake in ailing Chrysler from Cerberus Capital Management, but will not pay anything for it and will not commit to funding Chrysler in the future.

Instead, Fiat will provide Chrysler with important small vehicles and fuel-efficient powertrains to be produced at Chrysler factories, as well as distribution opportunities in key growth markets outside the U.S., where Chrysler is weak. In exchange, Fiat gains U.S. manufacturing capacity for its small cars and access to Chrysler's dealer network. Full details weren't immediately available, however. Like Chrysler, Fiat is a relatively small automaker that is heavily dependent on its home market. Marchionne, who has been looking for a cost-effective way to bring its small cars and premium Alfa Romeo brand to the U.S. market for some time, has been vocal about Fiat's need to find a strategic partner to survive. "This initiative represents a key milestone in the rapidly changing landscape of the automotive sector and confirms Fiat and Chrysler's commitment and determination to continue to play a significant role in this global process," Marchionne said.

For struggling Chrysler, which received a $4 billion emergency loan from the U.S. Treasury Department earlier this month, the alliance with Fiat represents a last-ditch rescue attempt. The company is facing a Feb. 17 deadline to submit a restructuring plan to the Obama administration, outlining how it will become viable by March 31. Chrysler said Fiat management will help it devise the plan. The alliance must be approved by the Treasury Department, among others. Chrysler Chief Executive Robert Nardelli called the Chrysler-Fiat partnership "a great fit," creating the potential for "a powerful, new global competitor." Nardelli added, "The partnership would also provide a return on investment for the American taxpayer by securing the long-term viability of Chrysler brands in the marketplace, sustaining future product and technology development for our country and building renewed consumer confidence, while preserving American jobs."

The United Auto Workers union, which has lost thousands of jobs amid a drastic downsizing of the U.S. auto industry, was elated by the prospect of extending Chrysler's life. "As the U.S. auto industry undergoes a restructuring process, this alliance has the potential to preserve a wide range of choices for U.S. consumers, as well as good-paying manufacturing jobs for our communities," said UAW President Ronald Gettelfinger.

Zero Rates Push Traders to Cash-Rich Swiss Franc, Yen
At a time when interest-rates are sinking toward zero around the world, the biggest currency traders are recommending countries that have the largest trade surpluses, led by Japan, Norway and Switzerland. BNP Paribas SA, the best currency forecaster in a 2007 Bloomberg survey, says the yen will strengthen about 14 percent against the dollar by June. Goldman Sachs Group Inc. made Norway’s krone one of its top 2009 picks, with possible gains of 17 percent versus the dollar. Bank of America Corp., the largest U.S. lender by assets, says the Swiss franc will advance against every major currency. The global economic crisis that forced central banks from the U.S. to New Zealand to cut interest rates last year also reduced earnings from so-called carry trades by about half, according to data compiled by Bloomberg. Currencies of countries with trade surpluses are perceived as safer because governments don’t have to brave credit markets in a year when sovereign bond sales are likely to exceed $3 trillion.

"The tide has turned," said Jens Nordvig, a senior currency strategist in New York at Goldman Sachs. "Surplus currencies such as the franc and the yen are likely to perform well, while the deficit countries are pretty vulnerable." Switzerland’s current-account surplus was 8 percent of gross domestic product last year, while Japan’s was 3.8 percent and Norway’s 16 percent, according to the Organization for Economic Cooperation and Development. That compares with deficits of 4.9 percent of GDP in the U.S., 5.1 percent in Australia and 9.5 percent in New Zealand. The yen rose against all 16 of the world’s most-traded currencies today, including the euro and the dollar. It climbed 3.7 percent versus the British pound. The Swiss franc advanced against the euro and fell versus the dollar. Buying the currencies of nations with the six largest trade surpluses and selling those with deficits returned 4 percent this month, the most since October, according to Goldman Sachs’s CA Outperformance index.

The same wager would have lost 5.9 percent in the six months through September, the index shows. Carry trades -- where investors seek profits buying higher-yielding assets with money borrowed from low interest-rate countries -- were the mainstay of the foreign-exchange market for six years until investors started unwinding the strategies in 2008 after central banks reduced borrowing costs as a global recession began. The best carry trade within the Group of 10 economies is the 4.90 percentage-point difference between Japan’s 0.10 percent key rate and the 5 percent rate set by the Reserve Bank of New Zealand. A year ago, the spread between the two rates was 7.75 percentage points. Carry trades became less popular last year as volatility grew, increasing the risks that profits would be wiped out by sudden changes in exchange rates. Fluctuations among major currencies doubled to 19 percent since the end of 2007, according to data compiled by New York-based JPMorgan Chase & Co. In emerging markets, they tripled to 24 percent.

"Markets tend to pay more attention to fundamental valuations in times of high volatility and uncertainty," said Henrik Gullberg, a strategist in London at Deutsche Bank AG, the world’s biggest foreign-exchange trader. The current account, the broadest measure of trade, "goes into any fundamental valuation of a currency." The Australian dollar weakened 6.3 percent against the U.S. dollar this year, after a 20 percent slide in 2008. The yen is little changed, after appreciating 23 percent. The Swiss franc declined 6.5 percent against the dollar this year, compared with a 6.1 percent advance in 2008. "Switzerland has a double-digit current-account surplus in a world where interest-rate differentials are less important," said David Powell, a currency analyst in London at Bank of America. "The franc will rally across the board." The Swiss franc will rise 1 percent this year, according to the median of 34 estimates compiled by Bloomberg. The yen will end the year 8.2 percent weaker and the krone will advance 5.9 percent, separate surveys show. The Australian and New Zealand dollars will be little changed, Bloomberg surveys show.

Volatility increased because investors fled to the perceived safety of dollars as credit markets seized up following the collapse of Lehman Brothers Holdings Inc. in September and the U.S., Japan and Europe slid into recessions. Banks posted more than $1 trillion in writedowns and losses since the start of 2007. In the past month, a basket of high-yielding currencies including the Norwegian krone, the euro and the Australian and New Zealand dollars would have lost 42 percent against the yen on an annualized basis, according to data compiled by Bloomberg. The same wager lost 31 percent last year and gained 8.7 percent in 2007. Between 2002 and 2008, currencies of countries with current-account surpluses lagged behind those with deficits. Goldman Sachs’s CA Outperformance index declined 40 percent in the five years through October 2007. Betting on gains in so-called surplus currencies ignores the risk that global trade will nosedive, said Chirag Gandhi, a money manager of a $2.5 billion fund at the Investment Board of State of Wisconsin in Madison, Wisconsin, who cut his bets on gains in the yen. International trade will shrink in 2009 for the first time in more than 25 years, the Washington-based World Bank said in December.

The record $6 billion in bets that hedge funds and large speculators put on a yen rally created a "crowded trade," New York-based Merrill Lynch & Co. said in a Jan. 6 report, citing Commodity Futures Trading Commission data. The yen strengthened 14 percent against the euro in the past three months and 12 percent versus the dollar. There’s also the risk that central banks will take steps to prevent their currencies from strengthening. Japan Finance Minister Shoichi Nakagawa signaled last month policy makers were ready to intervene in foreign exchange market for the first time in four years. Thomas Jordan of the Swiss National Bank said Jan. 15 the central bank was watching foreign-exchange markets "very closely." As investor appetite for risk returns "to more normal levels, you’ll see yen selling," said Steven Englander, a currency strategist at Barclays Capital in New York. "You want to be prepared for the market sentiment to turn around."

Economies around the world are showing few signs of a rebound any time soon. Barclays predicts global economic growth of 0.8 percent this year, the slowest pace in more than half a century. Buying currencies with surpluses "will gain more credibility as interest rates narrow," said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a Putnam Investments senior vice president in Boston. "Relative economic performance will become important." Investors should buy the yen against the British pound, the Australian dollar and eastern European currencies such as the Hungarian forint and Polish zloty, Upadhyaya said. The Reserve Bank of Australia reduced its main interest rate to 4.25 percent from 7.25 percent in August. The Bank of England cut borrowing costs to 1.5 percent from 5 percent in the period. Hungary, which received an emergency loan from the International Monetary Fund last year, cut rates half a percentage point yesterday to 9.5 percent.

Countries with trade deficits are preparing to borrow record sums to finance economic-stimulus programs. Euro-region nations will borrow about $1.1 trillion in 2009, according to Royal Bank of Scotland Group Plc. The U.S. Treasury will borrow about $2 trillion this fiscal year ending Sept. 30, compared with $892 billion in notes and bonds last year. "It’s about preservation of capital rather than return on capital," said Scott Ainsbury, who helps manage about $12 billion in currency in New York at FX Concepts Inc. and is buying the franc and the yen while selling the New Zealand dollar. "People who say the bottom is in are kidding themselves. What you see is people basically running away from risk."

Pound Tumbles as U.K. Bank Plan Fuels Concern Crisis Deepening
The pound dropped to a record low against the yen and breached $1.40 for the first time since 2001 as the U.K.’s second bank bailout in three months raised concern the financial crisis is deepening. Sterling had its biggest drop against the euro in a month on Prime Minister Gordon Brown’s plan to support U.K. financial institutions and boost the government’s stake in Royal Bank of Scotland Group Plc. The dollar gained beyond $1.29 per euro for the first time since Dec. 9 as concern banking losses will deepen boosted the greenback’s appeal as a haven.

"The currency market is telling us that there’s risk for a debt crisis in the U.K.," said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. "The U.K. and Europe need more capital injection into the banking system. Until that happens, money flows back to the U.S." The pound slid 3.7 percent to 125.89 yen at 11 a.m. in New York, from 130.71 yesterday, after touching the all-time low of 125.25. It weakened 3.2 percent to $1.3954 from $1.4420, after reaching $1.3863, the lowest level since June 2001. Sterling will slide to $1.30 in the next few months, according to Germanier. Against the euro, the pound fell as much as 2.8 percent to 93.25 pence, from 90.60, the biggest intraday decline since Dec. 18. It depreciated to a record of 98.03 on Dec. 30.

The yen and the dollar gained against all of their major counterparts tracked by Bloomberg after a drop in shares of State Street Corp., Wells Fargo & Co. and BNP Paribas SA boosted demand for the currencies’ safety appeal. The U.S. dollar appreciated as much as 1.9 percent to 52.68 cents versus New Zealand’s currency, the strongest level since Dec. 5. Japan’s yen appreciated 1.7 percent to 116.44 per euro and 0.6 percent to 90.11 per dollar. Canada’s currency fell 0.4 percent to C$1.2588 per U.S. dollar after the central bank cut its target lending rate by a half-percentage point to 1 percent, the lowest level since the institution was founded in 1934, and signaled more cuts may be needed. The decision matched the median forecast of 20 economists in a Bloomberg survey.

The British government’s 50 billion pound ($73 billion) plan to stabilize the financial industry announced yesterday followed October’s 50 billion pound bank recapitalization. The U.K.’s debt may be greater than the government’s November forecast of 146.4 billion pounds in the year to March 31, said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia, which cut the June forecast for the pound today to $1.50 from $1.60. The pound also fell versus all of the 16 major currencies as a government report showed inflation slowed to 3.1 percent in December from a year earlier, the least since April, giving the Bank of England more room to cut interest rates. The trade- weighted pound index lost 25 percent last year The decline of the currency will help to "rebalance" the U.K. economy from "consumer-driven" to "export-oriented," said Trevor Williams, chief economist at Lloyds TSB Corporate Markets, in an interview on Bloomberg Television.

Financial services account for almost 30 percent of the U.K. economy, according to data from the Office for National Statistics. Manufacturing accounts for 14 percent. "After many years where the currency was overvalued, you’re going to have a period where it’s below fair value, where some competitiveness is restored," said Williams. "I don’t think it’s bad news at all." The BOE reduced its benchmark rate to 1.5 percent this month, the lowest in the bank’s history. Policy makers will probably cut the rate to 1 percent at their Feb. 5 meeting, according to a separate Bloomberg survey. At a time when interest rates are sinking toward zero around the world, the biggest currency traders are recommending countries that have the largest trade surpluses, led by Japan, Norway and Switzerland.

BNP Paribas SA, the best currency forecaster in a 2007 Bloomberg survey, says the yen will strengthen about 14 percent against the dollar by June. Goldman Sachs Group Inc. made Norway’s krone one of its top 2009 picks, with possible gains of 17 percent versus the dollar. Bank of America Corp., the largest U.S. lender by assets, says the Swiss franc will advance against every major currency. Europe’s single currency declined for a second day versus the yen after the Brussels-based European Commission said yesterday the region’s economy will probably shrink 1.9 percent in 2009 and grow 0.4 percent next year. "We still believe that these estimates are likely to be surprised on the downside," analysts led by Hans-Guenter Redeker, global head of foreign-exchange strategy at BNP Paribas in London, wrote in a research note yesterday. "We expect the euro to remain under pressure." The euro will decline to $1.20 and to 94 yen by the end of June, BNP Paribas forecast.

Jim Rogers: Sterling is finished
Sterling today fell below $1.40 to its lowest point in seven and a half years because of concerns about the depth of Britain's banking crisis and the Government's rising debt levels as it seeks to bail out the struggling sector. The pound, which declined by 2.67 cents to $1.4529 yesterday, fell further to $1.396 this morning over fears that the Government's borrowing levels may exceed £118 billion, equal to 8 per cent of national income, for the next financial year.

Yesterday, the Goverment unveiled a package of measures designed to rescue the country's flailing banking sector. However, sterling continued to plunge today and Jim Rogers, who co-founded the Quantum fund with George Soros, the billionaire investor, told Bloomberg: "I would urge you to sell any sterling you might have. It’s finished. I hate to say it, but I would not put any money in the UK". Mr Rogers correctly predicted the start of the commodities rally in 1999 and in January 2008, he advised investors to sell the US currency.

Currency traders have been selling sterling as the UK heads toward recession, because it makes it increasingly likely that the Bank of England will continue cutting interest rates, now at 2 per cent, close to zero to try to stimulate the economy. Meanwhile, crude oil fell to the lowest price in a month in New York because of fears that the global recession will deepen, further eroding demand for energy. Brent crude oil for March settlement fell as much as $1.54, 3.5 per cent, to $42.96 a barrel on London’s ICE Futures Europe exchange. The decline follows a fall of $2.07, or 4.4 percent, to $44.50 a barrel yesterday

Sterling slumps to eight-year low after second bank bail-out
Sterling tumbled below the $1.40 mark against the dollar for the first time in almost a decade and fell against the rest of the world's major currencies as the UK Government's second bail-out of the country's banks underlined the dangers facing the economy. The pound, which was trading above the $2 mark less than 12 months ago, slumped to below the $1.40 mark for the first time since June 2001 in morning trading in London after registering a fall of more than three cents yesterday. Currency traders have been aggressively selling the pound as the depth of the recession facing the UK becomes clearer. Interest rates are now at 2pc and most analysts expect the Bank of England to continue cutting close to zero in an effort to get money moving around the economy again.

"Sterling has struggled due to the announcement of the new policy measures, in addition to reports of big losses in the UK banking sector," analysts at UBS said this morning. Analysts are concerned that the second bail-out will substantially increase Britain's debt beyond the 8pc of gross domestic product projected by the Chancellor Alistair Darling at the Pre-Budget Report in November. Prime Minister Gordon Brown admitted yesterday that he does not know how much the second bail-out of the banks will cost. Steve Barrow, currency strategist at Standard Bank, predicts that the pound will slide to around $1.35 against the dollar over the next month or two. He argues that although the US banking system has been hit by similar difficulties to the UK, sterling is particularly vulnerable to a weak performance from the financial sector and banking shares.

"One clear reason for the closer relationship in the UK is that the dollar can act as a safe-haven in times of global stress," he said. Sterling is now down 28pc against the dollar in the past year and in December sterling teetered on the brink of parity with the euro for the first time. This morning it tumbled more than 2p to 92.75 and fell to a record low of 124.77 versus the yen. Jim Rogers, the co-founder of Quantum fund with George Soros, today told Bloomberg News that "I would urge you to sell any sterling you might have."

Lloyds dives as nationalisation fears shift
Shares in Lloyds Banking Group lost almost half their value today amid sharply increased fears that the Government could have to take full control of at least one financial institution before the end of the year. Lloyds Banking Group, which comprises Lloyds TSB and HBOS after they officially merged yesterday, saw its shares dive by nearly 50 per cent at one point before falling by 27.38 per cent to 47.2p. Traders said the market was only beginning to digest yesterday's update from the newly merged bank, which they interpreted as a veiled profits warning.

Yesterday, shares in Lloyds fell 34 per cent after the Government revealed a second package of measures to rescue Britain's stricken banking sector. Mounting concerns over growing state-ownership of UK banks sent shares in Royal Bank of Scotland (RBS) plunging by 67 per cent yesterday after it admitted that full-year losses could reach £28 billion - the biggest corporate loss in British corporate history. The bank also announced that the Government is set to increase its stake from 58 per cent to 70 per cent, sending its shares into freefall on the prospect that RBS would join Northern Rock in coming under state-ownership. RBS' shares rebounded today, up 12 per cent to 13p.

Reports over the weekend suggested that the Government was also looking at increasing its stake in Lloyds from 43 per cent to 50 per cent but the bank's board is understood to be resisting any increase in state ownership. Commenting on Lloyds, one trader said today: "The market is just realising that, like RBS, they should trade right down to penny levels where they are valued as an option on whether or not they will be nationalised." He said investors had taken fright at rapidly deteriorating trading at HBOS, which has suffered from sliding credit quality, sharp falls in the value of its assets and pressure on profit margins following the recent reductions in interest rates.

A spokesman for Lloyds Banking Group said: "The banking sector is experiencing volatile conditions right now and bank shares have fallen as a result. We have a robust capital position and a strong business model." He noted that Lloyds TSB had told the City yesterday that it continued to trade satisfactorily but that HBOS said there had been no significant chance to its position since its previous update in December. "The reality is that these are diffuclt and challeging times across all the developed markets," he said.

David Buik, a partner at BGC Partners, said: "There has been some talk that Lloyds Banking Group may be short of capital and that the Government could well increase its stake from 43 per cent to 50 per cent." Barclays, which has so far resisted Government funding, saw its shares fall 7.7 per cent to 81.2p today while other banks lost value, suggesting Monday’s poor market reaction to the Government’s second massive rescue package was continuing today. It was a graphic illustration of continued banking uncertainty that prompted calls on the Government from Labour MPs to nationalise the whole system, an idea resisted firmly by Alistair Darling, the Chancellor, last night.

George Osborne, the Shadow Chancellor, said that the taxpayer had already lost £17 billion on the Government’s investments in the banks last October.
He said that in taking a stake in RBS ministers had not understood what they were buying and had not attempted to find out. "They didn’t appear to know that RBS was preparing to post the largest loss in corporate history," Mr Osborne said. The second rescue package, which has exposed the taxpayer further to the tune of hundreds of billions of pounds in the hope of getting banks lending to big business and individuals. The Chancellor announced plans to underwrite for a fee "toxic" debt held by the banks to encourage them to be more ambitious about future lending. The terms of the Northern Rock rescue will be altered to stop it running down its mortgage lending the Government will kick-start home loans by guaranteeing £50 billion of mortgage-backed securities.

Mr Darling announced a £50 billion scheme for the Bank of England to buy high quality private sector assets to increase funding to big companies at lower cost. He admitted that this facility could be used by the Bank’s Monetary Policy Committee as a way of meeting its inflation target. Mr Darling was effectively paving the way for "quantitative easing", the modern day equivalent of printing money. The overall package was given a general welcome by business and politicians, but Mr Brown and Mr Darling were criticised for failing to estimate the potential liabilities for the taxpayer from the toxic debt insurance scheme. "We need to be absolutely sure that the threat of insolvent banks does not turn into the threat of an insolvent country," Mr Osborne said.

Bloodbath of the banks II
Fears of nationalisation grow as shares dive after second bailout

Royal Bank of Scotland announced the biggest loss in British corporate history yesterday. The news triggered fears the bank would be nationalised and caused a bloodbath in shares across the sector, overshadowing the Government's latest financial bailout. RBS stunned the market by predicting a loss of up to £28bn for 2008, writing off as much as £8bn of toxic assets and £20bn from the value of acquisitions, including the disastrous takeover of the Dutch bank ABN Amro in 2007. The scale of the losses raised fears that RBS would be fully nationalised and that other banks, such as Barclays, could find themselves controlled by the state.

Shares in Barclays and the new Lloyds group also fell. The Government was first forced to intervene in October with a £50bn recapitalisation of the major UK banks. RBS, which owns NatWest, Direct Line and Coutts, the Queen's bank – was already 58 per cent owned by the Government after it came close to collapse in October. The bank, which was one of the world's 10 biggest, swapped £5bn of preference shares held by the Government for new ordinary shares, giving the state a 70 per cent stake in the bank and making it more secure. RBS shares lost two-thirds of their value, closing at just 11.6p. Stephen Hester, the bank's chief executive, said full nationalisation was a possibility and had been discussed "only as something we all wished to avoid". But with the economy so fragile, nationalisation was possible, he added.

Although some Labour MPs called for full state ownership, ministers insisted that was not their goal. But the Chancellor, Alistair Darling, did not rule out the move as a last resort, saying: "The Government has to continue to do whatever is necessary to get credit flowing." The collapse in bank shares was embarrassing for ministers, who yesterday morning hailed a short-lived rise in share prices after they announced their second rescue package. Last night, they insisted their plan was about saving the economy, not the banks, and that share prices were not in their minds when they drew up the latest measures.

The Government's first bailout in October was meant to restore confidence by injecting more cash into the banks to protect against losses. But shocking results from Bank of America, Deutsche Bank and others last week showed markets became worse than ever in December, battering the values of risky investments and loans stuck on lenders' balance sheets. The Treasury announced a raft of new measures yesterday, designed to further support confidence in the system and get the banks lending to support households and companies. The plan included agreeing to sell the banks guarantees against losses on toxic assets, extending a Bank of England scheme that lets banks swap illiquid securities for Government bonds, and underwriting new issues of mortgages and other loans parcelled up as bonds to boost funding.

Gordon Brown, who said he was "angry" about RBS's excessive lending, added: "I am not going to stand idly by and let people go to the wall because of irresponsible mistakes of a few bankers." He denied the new scheme amounted to a "blank cheque" but could not estimate how much taxpayers' money would be at risk. City experts said the gamble could run into hundreds of billions of pounds. George Osborne, the shadow Chancellor, said: "It is the clearest possible admission that the first bailout of the banks has failed and now they have no option but to attempt a second bailout – a bailout whose size we still don't know, whose details remain a mystery and whose ultimate cost to the people of Britain will only be known when this Government has long gone."

Jane Coffey, head of equities at Royal London Asset Management, said: "These were helpful measures but there was a realisation with RBS coming clean that this problem is even bigger than people had thought. What these measures haven't done is get rid of concern about toxic assets because they don't cover the worst of the stuff." Banking stocks were traded in huge volumes, indicating a mass flight from the sector, with nearly 743 million RBS shares changing hands and a total of 1.2 billion bank shares traded. David Buik, of BGC Partners, said: "What has frightened us all this afternoon are the volumes – people looking to get out. This is grown-up turnover."

Lloyds Banking Group shares tumbled on their first day of trading, losing a third, after Lloyds TSB bought Halifax Bank of Scotland (HBOS) last week in a government-brokered deal to save HBOS from imploding. Investors fear that HBOS's losses on credit investments and commercial property could seriously damage Lloyds. RBS's shocking loss hit confidence in Barclays, whose shares had already lost a quarter of their value on Friday and fell 10 per cent yesterday. Barclays is one of the biggest players in the debt markets that have damaged RBS.

Many investors believe Barclays could suffer losses that force it to be nationalised, though it issued a statement on Friday predicting a £5.3bn profit for 2008, saying it was financially strong. Analysts at Dresdner Kleinwort said a possible future shortage of capital following further asset deterioration could eventually push [Barclays] into the arms of the Government if existing shareholders were unwilling or unable to provide yet further support and share price weakness persists. HSBC, the only UK bank not to raise new capital in the crisis, said it had no plans to accept government capital and could see no circumstances in which doing so would be necessary. Its shares fell by 6.5 per cent yesterday.

EU ministers seek to reassure markets
European Union finance ministers sought on Tuesday to reassure financial markets that their anti-recession spending plans would not destabilise public finances and raise the risk of a default by a eurozone government. "We must voice a pledge to go back to consolidating public deficits as soon as possible," Miroslav Kalousek of the Czech Republic, which holds the EU’s rotating presidency, told reporters as he and his fellow ministers gathered for talks in Brussels. According to European Commission forecasts released on Monday, 12 of the EU’s 27 member-states will run budget deficits this year above 3 per cent of gross domestic product – the level permissible in normal times under EU rules.

But the risks of going deeper into debt to combat Europe’s worst recession in many decades have been highlighted over the past week by downgrades in the credit ratings of Greece and Spain and warnings of similar measures against Ireland and Portugal. EU governments last month approved a €200bn fiscal stimulus plan to restore economic growth, with most of the money coming from national purses and about €30bn from EU funds. The Commission estimates that this action, combined with the "automatic stabilisers" that operate in a recession, such as higher spending on unemployment benefits, means that the overall boost to aggregate EU demand in 2009-2010 will amount to 4 per cent of GDP.

But the massive increase in expenditure will come at a price. Total eurozone government debt is forecast to rise to 75.8 per cent of GDP in 2010 from 72.7 per cent this year and 68.7 per cent last year. Under EU rules designed in the 1990s to ensure the euro’s long-term stability, a government is expected to limit its public debt to no more than 60 per cent of GDP. Jean-Claude Juncker, prime minister of Luxembourg, who chaired a meeting on Monday evening of the 16-strong group of eurozone finance ministers, said no minister had called for additional spending measures to fight the recession. "We need an exit strategy. We need a way to get away from the deficits and the increase in debt stock which are necessary at the current time," Mr Juncker said.

Joaquín Almunia, the EU’s monetary affairs commissioner, dismissed suggestions that the global credit crisis and recession were increasing the danger of a default by a eurozone government with shaky public finances. "I’m not considering this hypothesis in our plans. Our plans are always Plan A. Sometimes AAA," he said. EU diplomats described Tuesday’s discussions among finance ministers as a first effort at setting out a medium-term trajectory for EU public finances. Although the ministers would not set a specific timeframe for returning to deficits of 3 per cent of GDP or less, the discussions would continue in February and March with a view to reaching agreement in time for a summit of EU leaders of March 19-20.

Bail-out offers a blank cheque to struggling British banks
The Government has signed a blank cheque for the banks with its latest bail-out, throwing insurance, guarantees and liquidity at the industry's problems, according to analysts and economists. The wide-ranging bail-out package includes a range of key measures to calm fears about exposure to risk and bribe the banks into lending again. "Any action is a welcome step, but the lack of detail means we can't put a figure on how much is being promised," said Alex Potter, an analyst at Collins Stewart. "If this doesn't work, it's not impossible that the Government will have to take full control."

Others were sceptical that the schemes could force banks to lend in the current climate. "None of these measures get to what may ultimately be the heart of the problem; banks simply do not want to lend with the economy freefalling into recession," said economist Vicky Redwood, of Capital Economics. Philip Shaw, an analyst Investec Securities, said the package should help, but banks could still refuse to take on more risk. "We remain uneasy that this might not kick-start interbank lending sufficiently, resulting in the BoE needing to take even more steps address the lack of liquidity," he said. The key measures are as follows:
  • Insurance for the banks (Asset Protection Scheme)
    One of the big problems for banks is so-called "toxic debt". The Government has offered to provide insurance against risky borrowers defaulting on loans. The bank will pay the Government a flat fee (similar to an excess) and then the state will cover about 90pc of the losses when there is a default. The banks have roughly £120bn of bad assets.

  • Two guarantees to help the recapitalised banks get wholesale funding
    Banks have found it difficult to borrow since the risk of defaulting increased. Under the £250bn Credit Guarantee Scheme, the Government already guarantees new wholesale debt issued by the banks to help them raise funds. The scheme, due to expire on April 9, is now extended until December, with a final maturity date of April 2014. Secondly, there is a plan suggested by Sir James Crosby to kick-start the mortgage market. The state will guarantee £100bn of high-quality asset-backed securities held by the banks, such as mortgages, corporate and consumer debt in a bid to boost the wholesale funding markets, as securities are a major source of financing for banks, who bundle up and sell them on to investors.

  • Liquidity (the Discount Window)
    The £200bn Special Liquidity Scheme will close this month. However, the Discount Window allows banks to swap unwanted assets (such as ones related to sub-prime mortgages) for liquid ones (such as government bonds). For an extra fee, there is the option of swapping assets for one year, rather than a month.

  • Monetary policy measures
    The Bank of England will be allowed to buy high-quality assets such as corporate bonds, commercial paper and syndicated loans with a fund of £50bn. This will set a framework for making it easier for "quantitative easing" – or adding money to the financial system. The Monetary Policy Committee may buy private-sector assets in the same way if it needs to increase money in circulation.

  • Forcing the banks to lend to consumers
    The Government will convert its £5bn of preference shares in RBS into ordinary shares, taking its ownership up from 58pc to 68pc. This means RBS no longer has to pay 12pc interest. In return, RBS will increase lending to £6bn next year. Northern Rock has been given more time to repay its loans. This will help it increase mortgage-lending.

  • Relaxing regulation
    The FSA now requires state-backed banks to have a tier-one capital ratio of 4pc, down from 8pc at the first bail-out. It would prefer banks to have a buffer of 6pc-7pc.

Meanwhile, the price of Government bonds tumbled yesterday as Gordon Brown's second bank bail-out created uncertainty and sparked fears over the prospect of more Government borrowing. The yield on 10-year bonds, or gilts, jumped 0.14 percentage points to 3.43pc. The higher the yield, the lower the price the bond commands from potential buyers. The yield in five-year bonds rose 0.1 points to 2.89pc as demand for bonds fell. The falls were sharp in gilt terms and signalled fear among bond investors that by taking bigger stakes in the banks and underwriting billions of pounds worth of so-called "toxic debts", the Government will be saddled with more debt if the assets they are guaranteeing default.

"From the gilt market's point of view the big concern is that the guarantees that have been announced will end up costing money," said John Wraith, UK rates strategist at RBC Capital Markets. Ten-year bonds fell even more sharply on Friday, by almost 0.16 points, in anticipation of a new bank aid plan. The pound fell against both the dollar and the euro yesterday, closing at $1.4521 and €1.104 respectively. The FTSE 100 also ended the day down, falling almost 1pc to 4108.47. Traders said they feared the Government was moving one step closer to full nationalisation. Royal Bank of Scotland was the biggest faller, down 67pc at 11.6p.

Britain Announces Second Financial Bailout, But....
Britain's second multi-billion pound bailout aims to get banks lending again by insuring toxic assets. But will it be enough? Last year, British Prime Minister Gordon Brown won plaudits worldwide for a multi-billion package to recapitalize domestic banks in the hopes of staving off a financial meltdown. It took some by surprise, then, that on Jan. 19 Brown -- along with his finance minister, Alastair Darling -- was again outlining a multi-billion plan to prop up Britain's struggling financial services sector. Yet unlike the previous announcement, which focused on providing new capital to struggling banks, the Jan. 19 package had a broader goal: to shore up the British economy. Under the plan, the government will provide insurance -- for a fee -- against losses on banks' riskiest assets, the Bank of England will create a £50 billion ($73 billion) fund to buy high-quality securities from the corporate sector, and the central bank will swap British Treasury bonds for hard-to-move, but Triple-A rated assets.

The government also announced it would increase its stake in struggling bank RBS from 58 percent to 70 percent by converting £5 billion ($7.4 billion) of preference shares into ordinary shares. The British Treasury similarly revealed plans to maintain the loan book of nationalized mortgage lender Northern Rock, reversing an earlier proposal to run down the bank's lending. All this may sound pretty technical, but it all has one clear goal -- to get banks lending again. Here's how it should work. By providing insurance for toxic assets, the British government hopes financial institutions will start to feel more confident about providing new capital to companies and/or homeowners. One of the biggest causes in the recent contraction in credit has been banks' fears that they are overexposed. By offering a safety net against further losses, Gordon Brown reckons banks will again open their wallets to new business, which then will jumpstart the economy as companies/consumers start to spend.The Bank of England's move to buy/swap high-quality assets also is part of this plan.

Since Lehman Brothers collapsed in September, 2008, the money markets have virtually shut down as investors have shied away from (possibly under threat) banks and companies. That's left institutions with a liquidity problem, meaning they've had to cut back on investments and slash workforces just to keep their heads above water. By exchanging these securities (which remain illiquid, but of high quality) for liquid British Treasury bills, the central bank hopes to inject much needed cash into the market, and consequently boost the domestic economy. This plan has many advantages, but it does leave the British taxpayer with an even larger stake in the financial services sector, as well as increasing already-bloated government-debt. Gordon Brown says he will wind down state-owned assets as quickly as possible, although the prospects for the British economy look dire for at least the next twelve months. And if any naysayer was looking for a reason to criticize the Jan. 19 plan, he/she would only have to look at struggling RBS.

On the same day that the government increased its ownership of the bank to 70 percent, RBS announced it's expecting a £7 billion ($10.2 billion) to £8 billion ($11.7 billion) loss for 2008. The bank also said it also could write down between £15 billion ($21.9 billion) to £20 billion ($29.2 billion) of assets related to its acquisition of Dutch financial giant ABN Amro in 2007. All told, the figures could represent the largest ever loss reported by a British corporation. By early afternoon trading in London, the bank's share price had fallen almost 52 percent. That's not the sort of news Brown would have wanted as he unveiled the latest attempt to stave off a long-term recession. RBS certainly has become a basket case. But the Jan. 19 plan is an attempt to stop such financial problems from spreading into the broader British economy.

Trichet Vision Unravels as Italy, Spain Debt Shunned
European Central Bank President Jean-Claude Trichet’s vision of economies converging behind the shield of a shared currency may be unraveling. The gap between the interest rates Spain, Italy, Greece and Portugal must pay investors to borrow for 10 years and the rate charged to Germany has ballooned to the widest since before they joined the euro. The difference may grow further as Europe’s worst recession since World War II hurts budgets and credit ratings across the region. Diverging bond yields hurt Trichet’s argument that the ECB’s inflation-fighting mandate ushered in an era of stability for nations that once suffered rampant price growth. They also make it tougher for the ECB, which cut its key rate to a record yesterday, to set one benchmark for all 16 euro nations. That may delay recovery as governments try to fund stimulus plans.

"It will act as an additional braking mechanism on these economies," said Julian Callow, chief European economist at Barclays Capital in London. "For the ECB it makes it harder to determine the future evolution of the economy." Trichet has asserted that the ECB, which was modeled on the Bundesbank, and the prospect of euro membership helped some nations import the credibility built up by Germany in the decades after World War II. In May, Trichet said the euro prompted a "convergence of market interest rates" to the level set by "the most credible national currencies" before monetary union. The yield on Spain’s 10-year bond averaged 8.5 percent in the six years before it joined the euro and the gap with the equivalent German bond was 246 basis points. In the next eight years, the average yield fell to 4.5 percent and the spread to 13 basis points.

That convergence is now being thrown into reverse. In the past week, Standard & Poor’s has downgraded Greece’s credit rating, and those of Portugal and Spain are also under threat. The difference between the Spanish and German 10-year bonds rose to 115 basis points today, the highest since 1997. The spread on Italy’s bond was also the most in 12 years and the Greek spread was the most since 1999. Investors are becoming more discerning about who they lend to as shrinking economies force governments to increase budget deficits. Greece’s shortfall may widen to 3 percent of gross domestic product next year, Ireland’s to 7.2 percent and Portugal’s to 3.3 percent, the European Commission said in November. Standard & Poor’s said Jan. 12 that Spain’s deficit could top 6 percent this year. The worsening economic outlook is pushing the euro lower. The currency has lost 6 percent against the Swiss franc, 4 percent versus the yen and 4 percent compared with the dollar in the past month. It has declined 8 percent versus the pound since Dec. 30, when it reached an all-time high of 98 pence.

As well as spoiling Trichet’s dream of a more-united European economy, the differing borrowing costs mean rate cuts will have a more uneven impact across the region and restrain recoveries in some countries. Trichet said yesterday officials were "observing the market spreads," which were related in part to the broader financial market turmoil. The widening spreads underlined the importance of governments keeping within European budget rules, he said. The ECB cut its main rate by a half point to 2 percent yesterday, which matches the record low set between 2003 and 2005. Trichet told Japanese broadcaster NHK in an interview broadcast today that while the bank is likely to cut interest rates further, it will not reduce the benchmark to zero. "There is a question mark about a much more patchy upswing," said Ken Wattret, senior economist at BNP Paribas SA in London. "The divergence of economies will continue to raise questions about whether monetary union is functioning."

That last debate has received a fresh airing among those who question whether the single currency is ultimately sustainable without a common fiscal policy. Harvard University economist Martin Feldstein, who was skeptical of the euro from the start, said in November that diverging bond yields suggest investors "regard a breakup as a real possibility." While part of the recent trading may amount to a bet the bloc will splinter, the probability remains "very, very small, given the political will and the perceived complications of someone leaving," said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. Spanish Finance Minister Pedro Solbes said Jan. 13 the idea of a country leaving the euro zone was "inconceivable." Italian Finance Minister Giulio Tremonti said yesterday the euro project was "totally sustainable." "When push comes to shove it would be more expensive to be out of the system right now than inside," said Marc Chandler, head of currency strategy at Brown Brothers Harriman & Co. in New York.

While the yield on Greece’s 10-year bond stood at 5.4 percent yesterday, Hungary, which may set a new euro entry target date by March, must pay 9 percent. The problem for Trichet is that bond spreads will probably continue to widen, said David Owen, chief economist at Dresdner Kleinwort. With governments borrowing to stimulate their economies, bonds sold by the more-troubled economies may become even less attractive, he said. "You don’t, within the euro-system, have to buy Spanish paper at all," Owen said. Thomas Mayer, chief European economist at Deutsche Bank AG, said the diverging yields are a "warning shot" to governments to improve competitiveness through restraining costs or have investors impose discipline on them by choking off capital just when they need it most. "You get this if you enter a really bad recession," he said. "It’s obviously a very harsh medicine but you could say the market is dishing out this medicine."

The euro is torture instrument for Spain
Ten years of euro membership have lured Spain into a terrible trap. Real interest rates of minus 2pc set by Frankfurt for German needs led to a Spanish property bubble of fearsome scale. Construction rose to 16pc of GDP, trumping the British and US bubble by large margins. Spanish companies tapped the euro capital markets as if there was tomorrow. Reliance on foreign borrowing reached 10pc of GDP, among the world's highest. Wages went up and up. The result is a current account deficit that is also 10pc of GDP. Now what? A country with full control over all levers of economic policy can claw its way out of such a hole. Spain can do almost nothing. A key reason why Standard & Poor's has stripped Spain of its AAA credit rating is that the country no longer sets its own interest rates and cannot devalue its currency to restore balance. S&P did not say explicitly that EMU has become an instrument of debt-deflation torture for Spain. That would be breaking the great euro taboo. It insisted that EMU provides an anchor of stability. But that is pro-forma dressing. The sub-text is that Spain cannot recover until it breaks its chains.

It is true that Germany regained competitiveness by screwing down wages in the early part of this decade, but it did so when southern Europe was inflating merrily. Spain faces a much harder task. It has to claw back 20pc to 30pc in labour competitiveness against a stern Germany that will not inflate. Therefore, Spain must deflate. It must embark on a 1930s policy of draconian wage cuts. It remains to be seen whether this will be tolerated by a democracy. Brussels expects Spanish unemployment to reach 19pc - or 4.5m people - by late next year. This is a depression. Workers are already rising up against the ruling socialists. An angry march by trade unions in Zaragoza on Sunday is the first shot across the bows. As yet, no Spanish heavyweight has questioned the orthodoxy of EMU membership. That may change, as it is changing in Ireland. The euro system is starting to inflict very grave hardship on ordinary people. This is exactly what critics always feared. In the end, it will breed conflict.

UK January house asking prices down sharply
Asking prices for houses in England and Wales fell 7.3 percent on a year ago in January, property website Rightmove said on Monday, the sharpest drop since its house price series began in August 2002. The survey, which is not adjusted to take seasonal factors into account, showed average asking prices fell 1.9 percent between December and January to 213,570 pounds, down nearly 12 percent from their peak last May and the lowest level since June 2006. The figures support widespread evidence that the housing market slump is far from over and could even be gaining momentum as Britain enters its first recession since the early 1990s.

Rightmove said dramatic cuts in interest rates by the Bank of England since October had boosted new buyer enquiries. But the figures also show new sale listings were less than half the level they were at last year and asking prices have dropped by more than 7 percent since November, the fastest three-month decline since the survey began. "The speed with which prices have declined has been worrying, but it does mean we are potentially reaching the bottom sooner," said Miles Shipside, commercial director at Rightmove.

Britain's housing market has taken a battering over the past year as the global credit crunch has made it difficult to borrow. A survey from Britain's biggest mortgage lender, the Halifax, showed house prices fell an unprecedented 18.9 percent in 2008. Rightmove's survey shows asking prices have fallen less steeply than actual selling prices, suggesting buyers are negotiating deals well below the marketed price.

U.K. Home Prices Forecast to Drop 45% from Peak
U.K. house prices will need to fall by nearly half from their peak of 18 months ago before they start to rise again, according to the current pricing of property derivatives, which analysts say would push substantial portions of U.K. banks' mortgage books into negative equity. Analyst reports issued by Morgan Stanley and Royal Bank of Scotland Group PLC last week each said derivatives were pricing a peak-to-trough fall of 45% in U.K. house prices from August 2007 to the end of 2010. RBS's estimated that such a substantial fall would put 60% of HBOS's mortgage book into negative equity, more than half on Lloyds TSB's books and more than a third at Barclays PLC and RBS. HBOS and Lloyds this week merged into Lloyds Banking Group PLC.

Barclays said the average loan-to-value of its mortgage book in June last year was 35%, and average loan to value ratios on new residential mortgages were 51%, but it wouldn't comment further. Lloyds TSB declined to comment. HBOS and Royal Bank of Scotland didn't return phone calls seeking comment. U.K. house prices have been hit by tight lending conditions, restricting the issuance of new mortgages. Nationwide, a leading mortgage lender the previous week said the average home in the U.K. lost £30,000 (about $44,200) in value over last year, falling to £150,000. The average price of houses now stands at about the same level as spring 2005, the report said. Morgan Stanley said the average value of U.K. homes has already dropped by a fifth since the peak in August 2007.

Royal Bank of Scotland: the bank that sank
The Royal Bank of Scotland was on the brink last night after the biggest loss in British corporate history sparked a collapse in its shares. Billions of pounds were wiped from its stock market value despite the Government’s pledge to keep it afloat with more money from the taxpayer. As Gordon Brown set out plans to increase public ownership to 70 per cent of what was once one of the world’s biggest financial conglomerates, City investors dumped the shares in a selling frenzy. RBS, worth £75 billion only two years ago, is now valued at £4.5 billion, even though it received £32 billion from taxpayers and shareholders less than three months ago.

The bank’s plight prompted calls for the outright nationalisation of RBS, with some MPs urging the Treasury to take over its day-to-day running. Lloyds Banking Group, another bank bailed out by the taxpayer, saw its shares plunge 34 per cent yesterday. Barclays and HSBC also fell. The turmoil suggested that the Government’s second massive rescue package had failed to restore confidence to the financial sector. It was a graphic illustration of continued banking uncertainty that prompted calls on the Government from Labour MPs to nationalise the whole system, an idea resisted firmly by Alistair Darling, the Chancellor, last night.

The scale of losses at RBS is breathtaking. The bank, which also owns NatWest, estimated that bad debts and writedowns on past acquisitions could leave it as much as £28 billion in the red for 2008, nearly double Vodafone’s record £15 billion loss in 2006. The bank’s admission that it had paid between £15 billion and £20 billion too much for the Dutch bank ABN Amro last year prompted an angry response from Mr Brown. The Prime Minister was furious that British taxpayers were now having to pay for losses that were incurred on foreign investments. "Almost all their losses are in the sub-prime markets in America and related to the acquisition of the bank ABN Amro," he said. "And these are irresponsible risks which were taken by a bank with people’s money in the United Kingdom."

Sir Fred Goodwin, who oversaw the bank’s acquisitions spree, resigned as chief executive in November when the Treasury was forced to acquire a 58 per cent stake to keep RBS afloat. George Osborne, the Shadow Chancellor, said that the taxpayer had already lost £17 billion on the Government’s investments in the banks last October. He said that in taking a stake in RBS ministers had not understood what they were buying and had not attempted to find out. "They didn’t appear to know that RBS was preparing to post the largest loss in corporate history," Mr Osborne said.

Yesterday’s slump in bank shares overshadowed the second rescue package, which has exposed the taxpayer further to the tune of hundreds of billions of pounds in the hope of getting banks lending to big business and individuals. The Chancellor announced plans to underwrite for a fee "toxic" debt held by the banks to encourage them to be more ambitious about future lending. The terms of the Northern Rock rescue will be altered to stop it running down its mortgage lending. The Government will also increase its share in RBS from 58 per cent to 70 per cent and kick-start home loans by guaranteeing £50 billion of mortgage-backed securities.

Mr Darling announced a £50 billion scheme for the Bank of England to buy high quality private sector assets to increase funding to big companies at lower cost. He admitted that this facility could be used by the Bank’s Monetary Policy Committee as a way of meeting its inflation target. Mr Darling was effectively paving the way for "quantitative easing", the modern day equivalent of printing money. The overall package was given a general welcome by business and politicians, but Mr Brown and Mr Darling were criticised for failing to estimate the potential liabilities for the taxpayer from the toxic debt insurance scheme. "We need to be absolutely sure that the threat of insolvent banks does not turn into the threat of an insolvent country," Mr Osborne said.

Vince Cable, the Liberal Democrat Treasury spokesman, said that the Government was potentially writing "another blank cheque" for the banks that could leave the taxpayer with vast losses. "Ministers are offering hardly any details about the terms of this underwriting," he said. "Taxpayers are being signed up to yet another bank bailout when it is clear the Government hasn’t done its homework." Mr Brown said: "I came into politics because of the scourge of unemployment in my own home area and I will not sit idly by and let people go to the wall because of the irresponsible mistakes of a few bankers." City analysts believe up to 30,000 jobs could go at both RBS and at Lloyds Banking Group, formed from the merger of Lloyds TSB and HBOS.

Stephen Hester, RBS group chief executive, said: "What we have to do is make sure our good businesses get stronger and the weaker ones are cut back. But we and all the other banks have to cut our costs — and that includes job losses." Lloyds Banking Group refused to comment on job losses but said that it expected annual cost savings as a result of the merger to be more than £1.5 billion by 2012. Sir Victor Blank, group chairman, said: "I think that what the Government has done today will make a significant difference. I think there are some green shoots." Yesterday’s package came as the European Commission predicted a deeper recession in Britain than the Treasury had forecast, and worse than that in most other EU countries. It suggested British growth of minus 2.8 per cent in 2009 compared with minus 1.8 per cent across the whole EU.

Irish bank shares plunge in value
Shares in Ireland's three remaining publicly-listed banks have plunged following the nationalisation of Anglo Irish Bank. In afternoon trade, Allied Irish shares were down 62%, Bank of Ireland fell 49% and mortgage and insurance specialist Irish Life & Permanent dropped 41%. Investors are worried about all three firms' exposure to Ireland's slumping property and construction markets. Parliament will start debating the bill to nationalise Anglo Irish on Tuesday. Analysts said shares in Allied Irish and Bank of Ireland were being hit particularly hard because of growing investor fears that the banks' existing shares will be heavily diluted when both banks formally accept billions in government investment this spring.

Last week, Finance Minister Brian Lenihan announced plans for a government takeover of Anglo Irish, and its shares were suspended. Shares in the Dublin-based bank had fallen 98% over the past year on the back of bad debts and corporate scandal. The government had previously proposed taking a 75% stake in Anglo Irish at a cost of 1.5bn euros (£1.36bn; $1.97bn). But it dramatically opted for a full takeover on Thursday, on the eve of an emergency shareholder meeting called to approve the earlier government investment.

International confidence in Anglo's debt management plummeted last month after investigators revealed that then-chairman Sean FitzPatrick had hidden the value of his personal loans from shareholders. Friday's shareholder meeting heard that Mr FitzPatrick had borrowed up to 127m euros, but hid these debts from the bank's external auditors for eight years. Five Anglo Irish directors resigned from the board on Monday, joining Mr Fitzpatrick and two other directors who had already resigned. The government is expected to fill the board positions soon.

While Ireland's parliament will start debating the bill nationalising Anglo Irish on Tuesday, the government is still revising its contents. It has now dropped a controversial rule restricting the ability of its biggest depositors to withdraw funds if they also have outstanding debts at the bank. That measure had appeared to be targeted at Anglo Irish's biggest shareholder, billionaire entrepreneur Sean Quinn, whose family owns 15% of the bank's shares.

The government has denied claims from opposition lawmakers that it had dropped the plans under pressure from Mr Quinn, whose Irish companies make concrete and other building materials, run hotels, and sell insurance. Bank of Ireland's chief executive, Brian Goggin, also announced on Monday he would step down this summer. He originally planned to retire in 2010. Bank of Ireland governor Richard Burrows said Mr Goggin wanted "to make way for fresh leadership to take Bank of Ireland through the challenges which lie ahead".

Dutch home sellers reduce prices as buyers stay away
Never before have so many Dutch home sellers reduced the asking prices of their homes as they did last year. Houses also are remaining on the market much longer. Sellers dropped their listing price over 100,000 times on the leading Dutch real estate website Funda.nl in 2008. This trend notably accelerated after the week of 25 October, when the number of cuts in the asking price increased markedly as the Dutch housing market was hit by fears of the global economic crisis. By the end of 2008, the average home sold brought in 233,000 euros. Down 5 percent from 246,000, the figure at the end of 2007. These numbers are compiled from the listings of all homes offered on the Funda website, which is the official sales site of the Dutch association of real estate agents (NVM).

This real estate brokerage association is the largest in the Netherlands, with a market share of over 70 percent of all houses sold. In 2006 and 2007, while the average housing price increased, about 1 percent of all sellers lowered their asking prices. This percentage almost doubled since October 2008, when the number of dwellings with discounted asking prices reached 1.9 percent per week. Buyers are staying away en masse and driving demand down, which has forced the average asking price of a house to decrease. This year's outlook for the housing market is gloomy. The sale price of an expensive home can fall as much as ten percent, according to Ger Hukker, the chairman of the brokerage association. "A fall of five percent is quite possible, for the entire market," he says. The average housing price fell 1.8 percent over the previous year, the association reported recently. This shift came about primarily through a bad second half of the year. These dips in housing prices seem to be disproportionately affecting the high end of the market. Pieter Joep van den Brink, a real estate agent and chair of the real estate association of Amsterdam, says that "everything over 750,000 euros will be difficult [to sell]."

For example, Leon Planken of Amsterdam initially put his luxurious villa on the market for 7.4 million euros. Planken calls his "the most beautiful spot in Amsterdam." The 510 square metre villa is overlooking the water and contains a private movie theater, a double car garage and two fireplaces - prime real estate, but it won't sell. Planken has lowered the price to 4.8 million, about a 35 percent discount. "When I put it on sale, the market was still good. I wanted to see what I could get for it. Now that the market has slowed, my real estate agent has advised me to cut the price," says Planken. Although the pricing of this villa is exceptional, the sharp fall typifies the difficulties the housing market is facing after decades of uninterrupted growth. In 2008, the real estate agents association sold a total of 129,456 homes - a drop of 12 percent from 2007. Potential buyers are skittish, or more critical of offerings, due to the unrest on financial markets and an expected recession.

No city demonstrates the contrasts as much as The Hague, where you have both very expensive and very affordable housing. The expensive neighbourhoods have witnessed the deepest price cuts. In Amsterdam the average house price for the last quarter fell by 5.7 percent. 2009 will be a difficult year. Yet real estate agents warn that it can't be said that the housing market is at a standstill. Amsterdam real estate agents sold 1,933 homes last quarter. "We hoped for 2,500, so it was disappointing. But it is not nothing," says Van den Brink. "A home is now more competitively priced in the market than two years ago," according to Alwin Rijpstra, a real estate agent in Apeldoorn. He says that previously sellers had the attitude of 'let's just try and see,' whereas now buyers run the risk of having their home be priced out of the running if it stays on the market too long. If a home is more than two months on the market and has generated too little interest, Rijpstra confers with the owner. What do they want? What is realistic? "But you usually don't cut the price immediately. That happens after about three or four months." The market won't grind to a halt, says Hukker. "Why wouldn't you buy now?", he asks. The prices have fallen, the interest rate on mortgages is relatively low and inflation too. Thus, buying power is still there, says Hukker. "In ten years people will say, 'I wish I'd bought a house in 2009'."

Forecast for Denmark: Historic decline
The outlook for the Danish economy has deteriorated considerably according to Nordea Bank, which forecasts 135,000 jobless by the end of 2010. In its latest economic report, Nordea Bank says that the Danish economy is facing an historic decline. The bank's bleak outlook for the economy - which it says is facing its biggest drop in economic activity since the oil crisis of the early 1970s - is in part as a result of a depression on various important export markets and in part as a result of the more direct effects of the credit crunch. In particular, Nordea draws attention to a two-year drop in the housing market that has affected both construction and private consumption. The unexpected deterioration of the credit crisis since mid-September has made the prospects for the Danish economy almost plummet, the bank says, with unemployment expected to reach just under five percent or 135,000 people during 2010.

Nordea says that the current financial crisis has already reached levels statistically only seen once a century. At the same time, the bank says that despite a deficit in public finances it should be possible to relax economic policy if the pending downturn is unexpectedly harsh. An under-financed tax reform in 2010 may also be necessary in order to slow the increase in unemployment, the bank says. "What is an almost catastrophic development in the financial markets has resulted in a heavy reduction in growth expectations on several of Denmark's most important export markets such as Great Britain, Sweden and Germany," the bank says. Nordea does believe, however, that private consumption will grow marginally in 2009. Households will, it says, benefit from tax relief of some nine billion kroner as well as agreed pay increases of some four percent.

For French carmakers, the price of a bailout will be keeping jobs at home
French car companies will have to keep jobs in France if they are to benefit from a government bailout. Speaking on the eve of a summit convened by the Government to agree measures to support the country's sputtering carmakers, Luc Chatel, the French Industry Minister, said that his Government was looking at a range of measures to support the industry, including subsidised loans, loan guarantees and convertible bonds. "The big question is what is offered in exchange. This support will not be a gift. Manufacturers will above all be required to maintain their industrial sites in France. This Government will neither accept nor support factory closures," Mr Chatel said in an interview with Le Figaro, the French newspaper. The car industry supports one job in ten in France, but Renault and Peugeot-Citroën, the giants of Gallic carmaking, have announced redundancies and output cuts at their factories recently in the face of falling sales and margins.

Tomorrow's gathering at the French Finance Ministry, which will be attended by manufacturers, suppliers and unions, is expected to coincide with details of capital injections into the leading motor companies. President Sarkozy has promised funds and Christine Lagarde, the Finance Minister, has hinted at balance sheet support. The State already has a 15 per cent shareholding in Renault, the No 2 French motor manufacturer, and the total amount that may be made available to car companies is expected to be between €5 billion (£4.5 billion) and €10 billion. When asked whether the State would increase its holdings in certain groups, Mr Chatel said: "The need of manufacturers is not necessarily new capital. But, in return for our financial support, a share stake could represent a fair exchange."

The financial distress of the industry will weaken its ability to adopt global production strategies as the State demands a quid pro quo for taxpayer support. Less than half of the Renault cars sold in France last year were homemade, with a third made in another European country and a fifth imported from non-European sites.
A large part of the bailout is likely to be support for the consumer lending units of the big car manufacturers and to support the credit needs of suppliers and motor dealers. The French Government has already provided €300 million in funds to support a vehicle-scrapping fund to lure consumers into swapping old cars for new. The Government also intends to bump up research budgets aimed at producing zero-emission cars.

Mr Chatel said that the Government was consulting the European Commission over its plans. Last week, Günter Verheugen, the European Industry Commissioner, gave warning that there was a risk that one of Europe's carmakers could succumb to the crisis. European Union ministers agreed to increase their help to the motor sector. Mr Chatel said that he reckoned the EU should increase support. In Britain Lord Mandelson, the Business Secretary, said last week that support for industry should be on a level playing field: "We should not compete against each other. We have to be conscious about what is happening in the United States."

Ukraine Bonds Flag Default as Russia Has 'Upper Hand'
Four years after Ukraine embraced the West with the election of President Viktor Yushchenko in the Orange Revolution, the former Soviet nation’s economy is collapsing and investors expect the country to default. Even with the International Monetary Fund’s $16.5 billion bailout, Ukraine’s finances are deteriorating as the country battles with Russia over natural gas prices and the cost of steel, its biggest export, sinks. Yields on Ukraine’s $105 billion of government and company debt are the highest of any country with dollar-denominated bonds except Ecuador, which defaulted in December. The currency, the hryvnia, weakened 38 percent in the past 12 months against the dollar. The benchmark stock index lost 85 percent in 2008, the biggest drop in the world after Iceland, data compiled by Bloomberg show.

"The market is telling us there is a high probability of a default," said Tom Fallon, head of emerging-markets at La Francaise des Placements in Paris, which manages $11 billion and sold its Ukrainian holdings six months ago. "It’s an advantage that the country is committed to policy measures that the IMF is prepared to back, but that is no guarantee it won’t default." The gap in yields between Ukraine’s bonds and Treasuries tripled in the past four months to 25.1 percentage points. The country’s bonds yield 9.6 percentage points more than debt sold by Argentina, which defaulted in 2001 and has yet to compensate all holders, according to JPMorgan Chase & Co. data. Ukraine is getting battered after European steel prices plummeted 56 percent since August, according to data from Metal Bulletin. Industrial production fell 26.6 percent in December, the steepest decline in Europe, as the global economic slowdown cut international demand.

The country’s dispute with Russia over natural gas prices disrupted supplies across Europe and threatens to slow industry in Ukraine because of higher fuel costs, analysts led by Vienna- based Martin Blum at UniCredit SpA wrote in a research note this month. Ukrainian Prime Minister Yulia Timoshenko returned to Moscow today after hammering out a deal during weekend talks with Russian counterpart Vladimir Putin. Ukraine will pay higher European prices for Russian gas from 2010, after a 20 percent discount this year. In return, 2009 transit fees for Russia will remain at last year’s level. Putin said gas transit to Europe will resume in full. "Russia does have a bit of an upper hand, but an excessively weak Ukraine would not be a benefit to Moscow either," said Ivailo Vesselinov, a senior economist at Dresdner Kleinwort in London. "The Kremlin has to balance keeping Ukraine stable so that does not spill over into a chaotic break- up, and preventing a move away from Russia politically."

The nation’s 46 million people are 45 percent Russian speakers and 55 percent Ukrainian, according to Dresdner. Ethnic Russians make up 17.3 percent of the population, compared with 77.8 percent ethnic Ukrainians, according to the Central Intelligence Agency Web Site. While the U.S. is supporting membership to the North Atlantic Treaty Organization, Russia has warned the move would break the country into two states and prompt Moscow to aim missiles at Ukraine. A feud between Yushchenko and Timoshenko has made matters worse as the collapse of their coalition government in September hampered policies to reassure investors. The central bank seized Prominvestbank, Ukraine’s sixth-biggest lender by assets, in October. The crisis led the IMF to provide $4.5 billion of emergency loans in November. Conditions for the credit include moving toward a flexible exchange rate, tackling inflation and running a balanced budget even though Ukraine’s parliament approved a 2009 deficit of 2.96 percent of gross national product. The government will partly cover the shortfall by selling bonds, according to the plan reached last month. Ukraine’s inflation rate is the highest in Europe at 22.3 percent.

An IMF mission is scheduled to visit Kiev this month before it provides a second payment in February. "Without rapid correction, this could undermine the outlook for the second tranche," said Ali Al-Eyd, an economist at Citigroup Inc. in London. Ukraine’s economy, which expanded at an average annual rate of 7 percent since 2000, grew 2.1 percent last year. Gross domestic product may shrink 5 percent this year, Oleksandr Shlapak, the president’s deputy chief of staff said in November. The slump coupled with the hryvnia’s decline increased concern that the government and companies will default after a fourfold jump in foreign debt since January 2004, according to data on the central bank’s Web site. Citigroup, Credit Suisse Group AG and UBS AG arranged more than $8 billion of bond sales for the Ukrainian government since 2004, according to data compiled by Bloomberg. The country has to repay $1.4 billion of maturing foreign debt this year, according to Citigroup.

"I doubt Ukraine will default on the public debt, but at these sorts of high bond spreads the market doesn’t see it that way," said Paul McNamara, who helps manage $1.2 billion of emerging-market debt at Augustus Asset Managers Ltd. in London, including Ukraine government and City of Kiev securities. Investors demand higher yields from Ukraine than the average 18.1 percent yield on Argentina’s debt in October 2001, just before the Latin American nation defaulted. Ukraine’s yields are more than double the 10.8 percent Russian yields in the month before it defaulted in August 1998. While a default by Ukraine is "not impossible," it is not "imminent," said Dmitry Sentchoukov, an emerging-market strategist at Dresdner in London. Ukraine’s yield spread narrowed to 25.18 percentage points from a record 27.38 percentage points on Dec. 30, JPMorgan data show. Ecuador, which stopped making payments in December on $3.9 billion of debt, has a yield spread of 37.46 percentage points.

AKIB UkrSibbank, the Ukrainian unit of BNP Paribas SA, sold $200 million of bonds in July 2007 at face value to yield 7.375 percent. The securities are now quoted at 57 cents on the dollar with a yield of 51 percent. The cost to protect bonds sold by Ukraine against default jumped more than 12-fold in the past year to 3,489 basis points, the third-highest worldwide after Ecuador and Argentina, according to London-based CMA Datavision prices for credit- default swaps. The contracts, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point is worth $1,000 on a credit-default swap protecting $10 million of debt. "Credit events are likely in the coming months," said Dresdner’s Vesselinov. "At this stage we would expect the risks to be concentrated with the corporates."

Mexico Stimulus Plan Fails to Spur Building in Lesson for Obama
Enrique Fernandez is counting on a surge in government construction spending to ignite sales at his lighting installation company in Juarez, Mexico, which saw revenue slide 30 percent last year as projects dried up amid the credit crunch. "We won’t have growth, but I expect sales not to fall," Fernandez said in a telephone interview. Economists and bankers say he’s overly optimistic. Mexican President Felipe Calderon’s infrastructure-spending plan is too small and too slow to lift the economy out of recession this year, said Luis Arcentales, a New York-based economist with Morgan Stanley. That should serve as a lesson for the Obama administration as it prepares an $825 billion stimulus package that includes $90 billion for public works projects in the U.S., he said.

Calderon, who promised to make spending on roads, bridges, hospitals and sewage systems an engine for growth during his six- year term, increased government investment in such projects by 29 percent to 229.8 billion pesos ($16.6 billion) in the first nine months of 2008 from the previous year. The result: a 0.2 percent drop in construction activity from January to October. "The headwinds facing the economy in 2009 appear to be so strong that probably the construction spending, if it takes place, won’t be able to offset them," Arcentales said in an interview. Calderon’s pledge to boost investment from government and private-sector partnerships by 7.5 percent this year may at best keep the industry from declining and adding to the country’s 4.5 percent unemployment rate, the highest since at least 2000, said Gabriel Casillas, an economist with UBS AG in Mexico City. The economy will likely contract 2 percent this year, he said. "We’re going to see the government doing more public investment, but that’s only going to compensate for the drop in private construction," Casillas said.

Private building and housing, which make up about two-thirds of construction activity in Mexico, are expected to decline this year on lack of credit and slack demand. The postponement last week of a government-backed $4.88 billion port project at the west coast town of Punta Colonet dealt a blow to Calderon’s strategy for public- private partnerships to drive construction in Mexico. "We have a full-fledged credit crunch going on in Mexico," said Edgar Amador, strategy director for the Mexican unit of Paris-and Brussels-based Dexia SA, the world’s largest lender to local governments. "My bank and everybody else’s bank are just paralyzed." Dexia made 22 billion pesos of loans to Mexican state and local governments for infrastructure projects in the last three years. The bank was looking at more than a dozen projects to finance, including highways, waste-water treatment and railroads before the September credit crunch hit. "We had to kill them all," Amador said. "We’re sitting on the sidelines now."

The number of construction workers registered with Mexico’s social security system declined to 1.01 million in December from 1.24 million in September, according to the Mexican Social Security Institute. Construction projects, which can take months to get started, aren’t the best way to stimulate an economy quickly, Arcentales said. The industry is three times smaller than manufacturing and makes up only 6 percent of the Mexican economy, limiting its impact, he said. "If you tell me you’re going to build a refinery, which is a multiyear project, it’s probably the right thing to do," Arcentales said. "In terms of stimulating economic activity immediately, it’s just not there." Alfredo Coutino, a senior economist for Latin America at Moody’s Economy.com in West Chester, Pennsylvania, said that most governments, including the U.S., face delays in getting projects out to bid. "Mexico is not a unique case in that sense," Coutino said.

In the U.S., Democrats in the House of Representatives are proposing to spend $30 billion on highway construction and $10 billion on transit and rail projects over two years as part of an $825 billion stimulus package. Lawmakers are planning to have legislation ready for President-elect Barack Obama to sign by Feb. 14. Obama will we sworn in tomorrow. Calderon, who took office Dec. 1, 2006, still is betting on construction to stimulate the Mexican economy. On Jan. 7, he announced plans for record public-private investment of 570 billion pesos this year. Humberto Armenta, president of the Mexican Construction Industry Chamber, forecasts construction will only increase as much as 1 percent in 2009 as private projects and home building struggle. Private construction may pick up in the second half of this year as banks and foreign investors begin to lend again, Armenta said.

"Once the global risk capital begins to move, Mexico will be a prime destination," he said in a telephone interview. Fernandez, the owner of Juarez-based company Constructora Electrica Fer SA, hopes to win government work and keep sales from sinking further. Fernandez employs 50 workers to provide lighting for shopping centers and hospitals and had sales of $5 million in 2007. "The situation is very difficult," Fernandez said. Bigger contractors also are looking to the government to help weather the recession. Empresas ICA, Mexico’s largest construction company, forecast revenue will rise as much as 30 percent this year from an estimated 29 billion pesos in 2008. Amador of Dexia bank doesn’t share ICA’s optimism on Calderon’s spending plan. "You need a serious package here, something massive to keep the economy out of the doghouse," Amador said. "I think they’re being very timid."

Canada Cuts Rate to Record 1%, Signals More Easing
The Bank of Canada slashed its key interest rate to the lowest since the institution was founded in 1934 and signaled that more cuts may be needed to jolt the economy out of recession and stabilize credit markets. Governor Mark Carney cut the target rate on overnight loans between commercial banks by half a point to 1 percent, lower than the previous record of 1.12 percent in 1958 when the rate was based on treasury-bill yields. The move was anticipated by 19 of 20 economists surveyed by Bloomberg News. Canada’s move mimics efforts in the U.S., the U.K. and Japan to revive lending as credit markets reel from about $1 trillion of write-offs and losses. The collapse of financial firms such as Lehman Brothers Holdings Inc. and Fortis contributed to the worst global downturn since the Great Depression and helped push Canada into a recession for the first time since 1992.

"The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required," policy makers said in a statement today from Ottawa, repeating a phrase they used to announce a reduction last month. The economy will shrink through the middle of 2009 for an annual decline of 1.2 percent, the central bank said, scrapping an October prediction for an expansion of 0.6 percent. Canada’s inflation rate will be negative for two quarters this year due to lower energy prices, and policy makers said it won’t return to their 2 percent target until the first half of 2011. "The door is still open for more cuts," said Martin Lefebvre, a senior economist at Montreal’s Desjardins Group, Quebec’s largest credit union. "There’s no doubt in my mind they will cut again in March. The economic context is deteriorating." The Canadian dollar dropped 0.6 percent to C$1.2610 per U.S. dollar at 10:22 a.m. in Toronto, from C$1.2538 yesterday.

The country’s exports and domestic demand are falling and "it will take some time for financial conditions to normalize," worldwide, the central bank said. Still, the bank said there are signs that "extraordinary measures" taken by policy makers worldwide are "starting to gain traction" and help markets. The financial crisis has driven up banks’ borrowing costs and forced them to raise new capital. That in turn has made them reluctant to extend credit to consumers and businesses. Bank of Canada officials and Finance Minister Jim Flaherty have said the country’s banks, rated the soundest last year by the World Economic Forum, have scope to expand lending. Executives from the country’s biggest banks told Carney, 43, and Flaherty, 59, at a meeting this month that they continue to lend to "credit-worthy" clients.

Five banks including Royal Bank of Canada, Bank of Montreal and Toronto-Dominion Bank matched the Bank of Canada’s interest-rate cut today, after they and the rest of the biggest lenders failed to immediately match the full 75-basis point reduction in December. The lenders today cut their prime rates to 3 percent from 3.5 percent. Policy makers in Canada may be closer to trying a strategy known as quantitative easing, Carlos Leitao, chief economist at Laurentian Bank Securities in Montreal, said before the decision. That policy is designed to leave banks with so much free cash that they stop hoarding and expand lending. It can involve a central bank buying securities and creating money to pay for them.

The U.S. Federal Reserve cut its main interest rate to as low as zero on Dec. 16 and pledged to buy unlimited quantities of securities, after a series of policy moves failed to arrest what may be the worst recession since World War II. The Bank of England on Jan. 8 cut its main rate to 1.5 percent, the lowest since its founding in 1694, and last week the European Central Bank cut its benchmark rate to the lowest recorded level. Canada’s economy is suffering from sluggish exports of goods such as lumber and cars and low prices for commodities such as oil and metals, causing a net job loss of 105,000 in November and December and a decrease in domestic demand. Canadian factory owners posted the biggest monthly sales drop on record in November, with shipments abroad falling 6.4 percent, Statistics Canada reported earlier today from Ottawa. New orders dropped 13 percent that month, the agency said.

The Bank of Canada’s stimulus may be followed next week by the biggest fiscal boost in decades. Flaherty said Jan. 9 that his Jan. 27 budget will include a "substantial" deficit, Canada’s first in 12 years. The plan will generate a shortfall of between C$20 billion ($16 billion) and C$30 billion in the coming fiscal year, Prime Minister Stephen Harper said in an interview last month with CTV. The central bank will update its forecasts for economic growth and inflation on Jan. 22. Today’s statement predicted that output would rebound in 2010, expanding by 3.8 percent. Business executives in Canada say they’re struggling with the tightest credit climate since at least 2001, according to a central bank survey released Jan. 12.

Rate cuts may not boost spending right away because companies are too worried about the economic outlook to spend even if they have access to credit, Doug Munro, 46, president of Maritime-Ontario Freight Lines Limited, said Jan. 15 in an interview from Brampton, Ontario. While Munro’s company has held on because it ships products such as foods that are in steady demand, the recession has him re-thinking plans to buy more containers and undertake a C$4 million, 15-acre expansion of his truck depot. "My instinct is, with all of this trouble in the economy, maybe it would be better to wait," he said.

Rule change would allow Canadian government to buy bank stock
Ottawa is looking at changing little-known rules that prevent governments from owning shares of Canadian banks and insurers, according to sources. Doing so would not only allow the government to inject capital into banks if that ever became necessary, it could also make it easier for Canadian financial institutions to pull off foreign takeovers, and ease the way for sovereign wealth funds to invest in institutions here. As it stands, provisions in the laws governing financial institutions bar the federal government, provincial governments, foreign governments and sovereign wealth funds from owning stock in the big banks and insurers.

In November, Finance Minister Jim Flaherty signalled his intention to revisit those laws as they apply to Ottawa because he wants the government to have the legal ability to inject capital into financial institutions, although he hopes he never has to use it. The legal flexibility would help bring Canada's regulatory tool kit in line with those in other countries, where governments have been buying stakes in banks to keep them afloat, he suggested at the time. But banks and insurers are also talking to Ottawa about changing the restrictions that apply to foreign governments and sovereign wealth funds.

When the financial crisis began to take its toll on U.S. banks, the first wave of refinancing came from sovereign wealth funds. If Canadian institutions needed capital injections, most sovereign wealth funds would not be able to come to their rescue under the current rules, one industry source noted. (The Bank Act prevents banks from allowing their shares to be transferred or issued to "the government of a foreign country or any political subdivision of a foreign country, or any agent or agency of a foreign government.").

The most recent wave of capital infusions in the U.S. and elsewhere has come from governments, which now own stakes in many world banks and insurers. That's making it trickier for Canadian institutions to make foreign acquisitions and pay in shares. If a Canadian bank wanted to buy a foreign bank and pay for the transaction with its own stock, a foreign government would technically not be allowed to accept that stock as payment. The Finance Minister's office declined comment yesterday.

"You have to ask yourself what was the original policy decision in terms of not allowing foreign governments to own shares of Canadian banks, and I wonder if maybe that hasn't become outdated," said Andrew Fleming, a senior partner at Ogilvy Renault. Jeffrey Graham, a partner at Borden Ladner Gervais, said the law was likely created "to ensure a level of separation between governments and the banking sector, which I'm sure you could argue serves very legitimate public purposes, but we are in a different time." Canadian financial institutions have been pressing for "a level playing field" internationally, and feel in many ways that they are being put at a disadvantage by the Troubled Asset Relief Program in the U.S., and similar bailouts in other countries.

Yesterday, the Irish government reiterated it will recapitalize the country's top two lenders, while the British government announced new guarantees of troubled assets, gave its central bank the ability to buy billions worth of securities and boosted its stake in Royal Bank of Scotland Group PLC. The banks and insurers have been holding a series of discussions with Ottawa in various working groups to brainstorm ideas both for helping the institutions and for freeing up credit.

Oil Falls Below $33 a Barrel on Rising Supply, Contract Expiry
Crude oil fell below $33 a barrel in New York as declining demand bolstered U.S. supplies and traders sold positions on the last day of the February contract. Inventories at Cushing, Oklahoma, where oil for New York futures is stored, climbed to 33 million barrels on Jan. 9, the highest since records started four years ago, according to the Energy Department. Traders have to sell February futures today or accept the barrels at a time of falling demand. "There’s a continuing focus on oversupply, especially at Cushing," said Tom Bentz, senior energy analyst at BNP Paribas in New York.

Crude oil for February delivery fell 93 cents, or 2.6 percent, to $35.58 a barrel at 9:59 a.m. on the New York Mercantile Exchange. Futures touched $32.70, the lowest since Dec. 19. Prices are down 61 percent from a year ago. Floor trading was closed for the Martin Luther King Jr. holiday yesterday. Electronic trades will be booked today for settlement. The more-active March contract dropped $1.10, or 2.6 percent, to $41.47 a barrel. Rising U.S. stockpiles and forecasts from the International Energy Agency and OPEC for declining world demand contributed to an 11 percent drop in Nymex crude oil last week. Prices are down 20 percent this year, after tumbling 54 percent in 2008.

Russia and Ukraine signed 10-year natural-gas contracts, ending a dispute that squeezed supplies to the European Union for almost two weeks. Shipments resumed today. United Nations Secretary General Ban Ki-Moon visited the Gaza Strip today as Israel pulled out troops following an end to rocket attacks by the militant Islamist Hamas group. "All of the props that were supporting the market are being taken down," said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. "The Russia-Ukraine gas dispute has been settled, although I don’t know when there will be deliveries in Europe, and Israeli troops are leaving Gaza."

The dollar climbed as high as $1.2911 against the euro, the strongest since Dec. 10, and most recently traded at $1.2939. Gains in the U.S. currency diminish the appeal of dollar-priced commodities used to hedge against inflation. "The rallying dollar and weak stock markets don’t create an attractive market for oil," said Michael Fitzpatrick, vice president for energy at MF Global Ltd. in New York. Brent crude oil for March settlement declined 43 cents, or 1 percent, to $44.07 a barrel on London’s ICE Futures Europe exchange.

Oil slides while base metals buckle
European crude oil prices fell by more than $1 a barrel on Tuesday on rising hopes for a resolution to the dispute over gas supplies between Russia and Ukraine. Meanwhile, copper dropped sharply, leading a broad retreat across the base metals sector as risk appetite weakened. On London’s International Commodity Exchange, March Brent lost $1.03 at $43.47 a barrel. Dealers are using Brent as a barometer for the global energy market as the front month Nymex WTI contract has disconnected with other benchmark crude prices. In electronic trading, Nymex February West Texas Intermediate, due to expire at the close of Tuesday’s session, fell $3.03 to $33.50 a barrel from Friday’s close of $36.53.

There was no settlement price for the Nymex WTI contract on Monday due to a US public holiday. March WTI, which becomes the benchmark from Wednesday, lost $2.87 at $39.70. The distortion affecting the WTI front month contract, the world’s most widely followed benchmark for the oil market, intensified as the Nymex February contract neared expiry. A surge in crude oil inventories in Cushing, Oklahoma, where WTI is delivered into America’s pipeline system, has depressed its value against other global benchmarks, such as Brent and other domestic US crudes grades. Michael Wittner, senior oil analyst at Société Générale, said that the crude oil market was not as weak as the headline front-month WTI price indicated. "Brent … as well as light sweet crudes in other regions, show a low-to-mid $40s market."

The International Energy Agency, the western countries’ oil watchdog, last week said that Brent was now "arguably more reflective of global oil market sentiment". That opinion has been echoed by traders and analysts. PFC Energy, the Washington-based consultancy which advises some of the world’s largest oil companies, said: "Surging Cushing inventories have again led to WTI de-linking from global markets, upending the usual crude oil differential relationships." Copper led the base metals lower, dropping 4.4 per cent to $3,290 following a big jump in stocks of the red metal held at London Metal Exchange warehouses, up 15,425 tonnes. Aluminium prices traded at their lowest level for more than five years, sinking below the $1,400 a tonne level to 1,385 a tonne, down 2.9 per cent on the day. Aluminium stocks held at London Metal Exchange warehouses rose 15,325 tonnes on Tuesday following Monday’s huge increase of 51,875 tonnes.

Aluminium inventories have risen sharply over the past year, underlining the deteriorating outlook for demand. LME aluminium inventories have risen to more than 2.54m tonnes, bringing stock levels within touching distance of the record high of 2.66m tonnes reached in July 1994. In addition, traders estimate China has aluminium stocks of at least 1m tonnes, mostly held off exchange. Among the other base metals, nickel dropped 4 per cent to $10.850 a tonne, zinc lost 3.6 per cent at $1,222 a tonne, lead fell 2.6 per cent to $1,140 a tonne, tin sank 3.6 per cent to $10,775 a tonne. Gold traded at $834.20 a troy ounce, moving in a narrow range between a low of $824.75 and a high of $835.15, after ending trading on Monday at $835.40, under pressure from dollar strength and weakening oil prices.

Don't Bank On It
Two-thirds of the Federal Home Loan Banks, their balance sheets weakened by investments in toxic mortgage securities, could be forced to turn to the federal government for a rescue that could reach as high as $13.5 billion. Already, several of the crippled FHLBs, the largest source of mortgage credit in the country, have stopped paying dividends to member banks, which are smaller banks and thrifts, which could lead to an increase in mortgage rates or in a noticeable decrease mortgage availability.

On Friday, FHLB Pittsburgh, one of the largest of the 12 regional bank-owned FHL Banks with $99 billion in assets, told its member banks that it is on the brink of falling below regulatory capital levels. Paul Miller, a banking analyst with Friedman Billings Ramsey, told The Post it was likely an Obama Treasury Dept. would provide TARP money to prop up the FHLBs because having a chain of mortgage banks fail would automatically make mortgage rates go up. The problems of eight of the 12 FHL Banks falling below the 4 percent regulatory loan loss provision level is the result of a move made a decade ago to invest in riskier, but higher yielding, private mortgage-backed securities and not those mortgages backed by Fannie and Freddie.

FHLB Pittsburgh admitted Friday that at least one-third of their $8.8 billion in mortgage-backed securities are trading at 65 cents on the dollar. The federal government created the 12 FHLBs in 1932, during the Great Depression, to provide mortgage liquidity. The 12 regional FHLBs across the country are owned by roughly 8,100 banks. The 12 FHLB heads wrote a letter last week to the accounting standards board asking for a change in the rules that will allow them to keep from marking the mortgage bonds to their actual value. Some troubled FHL Banks are also asking their regulator to drop the ratio. But sources inside the Federal Housing Finance Agency say that is unlikely to happen because the regulator's first goal is to preserve capital - not to Band-Aid failed balance sheets. The FHLB Banks are not automatically qualified for TARP money and will need their regulator, James Lockhart, to lobby Washington

Refinancing eludes many as rates fall
Mortgage rates hit stunning new lows last week, falling below 5 percent for the first time in decades. The stampede of refinance applications triggered when rates first starting tumbling in early December continues apace. But the good news comes with a big caveat. Many applicants - even ones with good jobs and credit scores - are getting turned down altogether or are unable to land the best rates. "Everybody wants to refinance, and nobody qualifies," said Marc Savoy, a mortgage broker with Pacific Mortgage Consultants in Larkspur. That's a slight exaggeration - in fact a quarter of the people who come to Savoy do qualify, he said.

As has been the case for months, only borrowers with stellar credit, documented income and equity are seen as desirable. That means that struggling homeowners who face the prospect of foreclosure are completely shut out. "If you have one mortgage (payment) late, I can't even touch you, so forget about (someone who's close to) foreclosure," Savoy said. But even otherwise well-qualified people are finding obstacles because of the plunge in home prices. Most of the mortgage boom is in refinance applications, not home purchases. As values fall, many homeowners find that they suddenly don't have enough equity for a refinance.

"Home values have dropped so extraordinarily low that it's taken people out of the game," Savoy said. "Lenders chart a premium based on how much equity you have. If you start climbing above 80 percent equity, they charge you for it, making it so expensive that it's not worth it to refinance." The Federal Reserve's promise to purchase mortgage-backed securities brought down rates - which lured prospective borrowers. The Mortgage Bankers Association said that mortgage applications for the week ended Jan. 9 were the highest since June 2003, and were up 52.4 percent compared with the same week last year. But the "pull-through rate" - the percentage of applications that resulted in actual loans - was less than 50 percent, said Orawin Velz, associate vice president of economic forecasting at the Washington, D.C., trade group.

"Lending standards are much tighter now and also home prices have declined in many, many areas," she said. "This is a more severe problem in your area on the West Coast. In California, Florida and Arizona, many areas have seen double-digit (home price) declines for months and months." Bill Meeker of Fremont is one of those getting crunched by falling home values. He has a steady job as a CPA for a Fortune 500 company, excellent credit, equity in his home - and he only needs a conforming loan of under $417,000. But while his equity was once 20 percent, as home values have sunk, it has dropped to about 10 percent.

Lenders tell him that's not enough to qualify for a refinance, so they are turning him down or requiring that he pony up extra money for pricey mortgage insurance, he said. "No lender will allow me to refinance without mortgage insurance or bringing a ton of cash to the table," he said. "Many simply refuse to work with me, including my current lender." Meeker is taken aback by being seen as an undesirable lending prospect. "I'm one of the good guys," he said. "I pay on time; I didn't get in over my head. I'm not responsible for this temporary drop in real estate prices. I'm sure there are a lot of people in my boat so I find it surprising that lenders won't work with us."

At Bank of the West in San Francisco, Stew Larsen, mortgage banking division executive, said volumes are up dramatically. "The number of loans we have in process is 2.5 times as large as it was on Dec. 1," he said. "It's been a remarkable run-up in new business." All that business has created bottlenecks at many lenders, which had trimmed workforces during the past couple of lean years. The result is that loans take longer to process. At Bank of the West, "we're closing loans now in 35 days," compared with 20 days a year ago, Larsen said. Home buyers, who often have a contractual time limit to fund their mortgage, go to the head of the line. "We tell refi applicants we will lock you in for 60 days and no shorter, to make sure we protect your rates."

Guy Cecala of Inside Mortgage Finance in Bethesda, Md., said that otherwise qualified buyers can run into problems besides declining equity. "None of these low rates are being offered to investors, who accounted for close to a third of borrowers" during the boom years, he said. "Investors are being treated like plague victims." Another hurdle, even for those with plenty of equity, is trying to take out cash in a refinance. Homeowners with existing home equity lines of credit, even if they don't want to borrow any more money, are treated as cash-out refis and seen as less desirable, he said. "For example, if you have a $300,000 mortgage and a $100,000 line of credit and your house is worth $700,000, you've got plenty of equity," he said. "But paying off both of those and getting a new mortgage would be treated as a cash-out refi by Fannie Mae and Freddie Mac these days. They penalize cash-out refis."

The safest type of refinance? "Rate-adjustment refis - refinancing just to get a lower payment." Cecala advises consumers to shop around. "It's advantageous to go through a mortgage broker because they can talk to multiple lenders and tell you what the best prices are," he said. "Some brokers can get better rates out of lenders through their wholesale division than you can get through retail" - going directly to the lender. But many major lenders have curtailed their use of brokers. JPMorganChase, for instance, said last week it will stop doing business with brokers. The other downside to brokers, he said: "They get better rates but they can add more junk fees. "There are a lot of potholes," Cecala said. "It's a lot of work to refinance your mortgage these days."

Bracing for More Bankruptcies
A wave of filings is expected in 2009, putting in jeopardy the value of equity shares and giving investors one more thing to worry about. When it comes to corporate bankruptcies, last year was ominously quiet outside the financial sector. Get ready for the storm. In the first couple weeks of 2009, chemical company LyondellBasell on Jan. 6 filed for bankruptcy reorganization, followed by another chemical maker, Tronox, on Jan. 11. Telecom equipment provider Nortel Networks also sought protection from its creditors with a bankruptcy filing on Jan. 15.

Some bankrupt companies are being forced to take the next step as the funding needed to reorganize their businesses proves difficult, if not impossible, to come by. Circuit City filed for bankruptcy last year, but on Jan. 16 the electronics retailer said it would liquidate all 567 of its U.S. stores. The largest bankruptcy of 2008 was the collapse of investment bank Lehman Brothers and its almost $700 billion in assets. But other than Lehman, 2008 was relatively quiet for bankruptcies. According to BankruptcyData.com, 136 public companies filed for bankruptcy in 2008. That's more than in recent years, but—despite more than a year of a U.S. recession and worldwide credit crisis—the tally is only the sixth worst in the past decade.

Edward Altman, a leading expert on bankruptcy who is a professor at the New York University Stern School of Business, estimates the 2008 default rate—a measure that includes both bankruptcies and other credit troubles at corporations—was 4.5%, just one point higher than the historic average. By contrast, Altman expects the default rate to jump to the double digits in 2009 and 2010. Other bankruptcy experts agree that bankruptcy filings are set to skyrocket. Bankruptcies often have a delayed reaction to economic and financial difficulties. Many troubled firms continue to subsist on easy credit terms obtained before the credit crisis began. "There have been a lot of companies hanging on by their nails," says Greg Segall of Versa Capital Management, a private equity firm specializing in distressed investing.

Now, says Michael Shinnick, a portfolio manager at Wasatch-1st Source Long/Short Fund, "We've seen a very abrupt pendulum shift from abundant liquidity to tight [liquidity]." Some firms can't find lenders, while other must pay high interest rates to get financing. Segall likens the credit crisis to an earthquake. The crisis may end and the ground may stop shaking. But, he says, "All the damage that was done by the earthquake is going to be discovered for months and years to come." The prospect of a spike in corporate bankruptcies should worry investors. In a corporate bankruptcy, equity shareholders are last in line to get their money back. Even if a business does survive, most equity stakes are completely wiped out.

Thus the heightened bankruptcy threat is changing investors' calculus, Altman says. "Usually stock [investors] are much more interested in the upside," he says. "Now, I think you need to be much more concerned about the downside." Which industries could be hit hardest by bankruptcies? Problems in the automotive industry are already well-known after General Motors and Chrysler asked for and won federal government assistance late last year. Al Francesco, a director at consulting and accounting firm CBIZ Mahoney Cohen who handles bankruptcies and business restructuring, expects more retailer bankruptcies soon. A bad holiday season put many retail chains on shaky footing, he says, but there will be a slight lag before bankruptcy filings, as bills for holiday merchandise come due in January and February. In a downturn, capital-intensive industries—such as chemical makers—are also vulnerable to a serious weakening in their financial condition.

Sales can drop steeply in these cyclical industries, even as the companies are stuck with high debt loads to pay for expensive, and now underused, equipment. Energy and shipping companies are also exposed to this phenomenon now that, respectively, fuel prices have dropped and global trade has slowed, says Eric Mintz, a portfolio manager at Eagle Asset Management. However, with the U.S. battling its nastiest recession in at least a generation, the bankruptcy threat isn't limited to a few troubled areas of the economy. "I'm not aware of any area of the economy that's doing well now," Mintz says. Well, maybe bankruptcy law. Experts predict bankruptcy filings will come from all corners of the stock market. That puts a premium on investors who know how to evaluate a company's credit risk. For example, Altman in 1968 developed the Z-score formula, which calculates a company's balance-sheet strength to predict the possibility of bankruptcy within two years.

A company's debt level—and whether the business has enough cash flow to cover debt payments—is a crucial factor. But especially these days, investors should "look at debt maturities, when [loans are] coming due," Shinnick says. A company that must pay off or renegotiate a mound of debt in 2009 could be hit hard by the tougher credit markets. Another company's balance sheet might also show a large debt load, but if that debt is not due for several years, the company may stay out of bankruptcy court for longer. For investors, the only upside of a spike in bankruptcies is that it clears the field of weak players, allowing stronger firms to excel. Because of years of easy credit, "there are a lot of troubled companies that should have been buried years ago," Segall says.

Investors can look for companies that can take advantage of their competitors' bankruptcies. Mintz cites Best Buy as a retailer that should benefit from rival Circuit City's liquidation. The problem, though, is that bankruptcies ratchet up the economic pain for everyone. The Circuit City liquidation puts more than 30,000 people out of work. Bankruptcies have a ripple effect up and down the supply chain in afflicted industries. For instance, Segall warns that many suppliers could be hurt by retailer bankruptcies. Once it gets going, the bankruptcy trend—and all the investor and employee pain it represents—could prove one of the nastier features of the current downturn.

Colleges Looking to Close Books on Debt
U.S. colleges have been scrambling to refinance often heavy debt loads that have left some uncomfortably exposed to the vagaries of the credit markets. In a report early this month, bond rater Moody's Investors Service said the outlook for the higher-education sector was negative. In part, analysts cited colleges' reliance on "volatile" debt markets. Last year, the ratings agency downgraded or changed the ratings outlook on 29 colleges. A key area of concern: most schools' reliance on variable-rate demand bonds, whose payments are tied to prevailing interest rates. The bonds often bear lower rates than plain-vanilla, fixed-rate debt. That is why they are so popular among colleges, which have used them since the 1980s. Moody's said the 300 private colleges it rates have sold $25 billion in variable-rate debt, or about 39% of their borrowing outstanding. Almost three-quarters of the colleges sell variable-rate debt. Among the schools that have used the instruments are Harvard and Princeton universities, which recently replaced variable-rate debt with fixed-income borrowing while retaining their top AAA bond ratings.

Variable-rate debt has a big catch. Although the bonds have maturities as long as 30 years, investors can demand repayment in full with little notice. Colleges typically secured a guarantee from a bank to be a buyer of last resort to protect them. But the terms of that credit typically call on schools to repay the banks in three to five years. Complicating matters, many colleges entered into arrangements that let them, in effect, pay fixed rates on their variable-rate bonds. They achieved that by entering into interest-rate swaps with big banks. In many cases, colleges would face hefty fees if they ended those swap arrangements. Analysts at Moody's and Standard & Poor's said most colleges should be able to weather the debt storm through budget cuts and fund raising. But Mary Peloquin-Dodd, a managing director at Standard & Poor's, said a few could face "severe circumstances" if they can't find financing to repay a bank quickly.

In November, Moody's downgraded the debt of Simmons College, a women's school in Boston, to Baa1 from A3, citing risks associated with variable-rate debt. Standard & Poor's made a similar downgrade. Simmons took on $100 million in variable-rate debt over the past decade for various campus projects. In a recent report, Moody's said the school has only $52 million in unrestricted funds that it could use to repay that debt. Were investors to demand early payment, it could result "in rapid credit deterioration for the college," Moody's wrote. Simmons is finalizing a deal to sell about $39 million of fixed-rate debt to replace a batch of variable-rate bonds recently trading at distressed levels -- with interest rates of almost 10%.

Helen Drinan, Simmons's president, said it's unlikely that investors would demand repayment on the rest of the bonds, which have long-term bank backing. But she said that, over time, Simmons plans to replace those bonds with fixed-rate debt, as well. "Without a doubt, no institution wants to face an acceleration of its debt, which can be crushing," she said. To shore up its finances, the college cut about 5% from its budget, now about $100 million, and froze hiring. In September, investors redeemed $235 million in variable-rate debt issued by the University of Pittsburgh because of concern about the credit-worthiness of the bank that provided a backstop for the bonds. The University of Pittsburgh, which has a high investment-grade credit rating, was able to restructure its bonds so that its own financial resources now back the bonds.

Set big money aside: You might need it
If the financial meltdown-turned-recession hasn't made you start saving more money for a rainy day, you should have your head -- and your bank account -- examined. An emergency-cash account, which should be enough for three to six months of living expenses, is a keystone of getting your financial house in order. And it is even more urgent now with millions more jobs in jeopardy amid the down economy. "People have to save more money. That's the bottom line," said Philip van Doorn, an analyst for TheStreet .com Ratings. "Do you really need fancy cable services, the latest Xbox game, Guitar Hero, dining out four nights a week? Question everything, cut back and put it in savings. If it doesn't hurt, you're not saving enough."

But that's far easier said than done for many people in an era of rising housing costs, insurance premiums, health-care expenses and other living costs. How many people can really afford to sock away a lot of money? Not Marcia Bexley, an independent marketing consultant in Orlando who works contract to contract and client to client. "Emergency cash? Well, I've always tried to keep a cushion, and I'm pretty careful with my money," she said. "But I can't say I have anywhere near three to six months' worth. I might have one month in reserve." Overall, the nation's personal-savings rate has hit the skids this decade. People saved an average of 1.5 percent of their income -- not including retirement accounts -- in 2008, compared with more than 4 percent 10 years ago and 7 percent 20 years ago, according to the Department of Commerce.

Still, a 2007 survey by Bankrate.com showed that 46 percent of consumers claimed to have as much as six months of emergency savings -- a figure that raised some eyebrows. "I think those numbers are very high," said Greg McBride, senior financial analyst for Bankrate.com. "I'm skeptical that many people actually have that much socked away for emergencies." Some may have considered 401(k) accounts or home-equity lines as emergency money. But the market crash and housing meltdown wiped out a massive chunk of those resources. Besides, experts have never encouraged people to borrow from their retirement nest egg -- a risky gambit that often can backfire. It is even more risky with the huge losses most 401(k) accounts took in the market crash.

And home equity -- well, there's still not a lot of that available. Real-estate values continue to fall, many credit scores are suffering and banks are tightening their grip on the till. So the onus falls back on individuals to take initiative. "Keep in mind, you should first be meeting your basic expenses before you begin contributing to an emergency fund," said Denise Kovach, a financial planner with Certified Financial Group in Maitland. "But getting started can be as simple as depositing $100 in an interest-bearing account, then following up with $50 or more per month thereafter." Don't tie emergency money to easy access such as a debit card, she said.

It's also a good idea to set up an automatic deposit from each paycheck. "A good day to have the draft occur is the day after you get paid," said Andrew Orr, president of OrrGroup Financial in Orlando. "So the draft to savings is first in line." If you make the effort to build a rainy-day fund, you might never end up in Anne-Marie Bowen's office. The Orlando bankruptcy lawyer said most of her clients never had emergency reserves. "It's definitely a smart idea to have it, because it might get them through a period of unemployment," Bowen said. "But by the time I see these clients, they're so overwhelmed with debt, they've liquidated any savings and retirement money they ever had." Saving for emergencies Track what you spend: Tally your basic expenses versus discretionary "wants." Identify areas to cut back and flag as potential savings.

Lock it in: Calculate at least three months of expenses and make that your emergency-fund goal. Determine what you can afford to save from each paycheck and set up an automatic bank draft to your emergency savings account.Do some homework: Check out Internet-based money-tracking services such as mint.com, geezeo.com, Quicken Online and Mvelopes.com. Some are free; others offer a 30-day free trial, then charge for a subscription. The final word: "Pay yourself first by a direct deposit. Increase that contribution with every raise, tax refund, windfall or debt that gets paid off. Most importantly, cut your expenses. That's where the really tough decisions have to be made," says Greg McBride of Bankrate.com.

Suicides are shy homicides
How many more victims of the financial crisis will there be? The US, the UK, Japan, India, and Egypt have all reported growing concern over suicides linked to debt. They are wise to be worried: in Japan the suicide rate increased by 34 per cent during the 1998 financial crisis. On the face of it, it is hardly surprising that a sudden downturn in an individual's finances can precipitate depression and, in certain cases, suicide. But what is most striking about many of the suicides reported here and in the US in the last few months is their extreme rage. Men who have lost their fortunes kill themselves and sometimes their families as well; wives kill themselves when their husbands lose everything; men and women kill themselves as their houses are repossessed.

These suicides may appear to be fuelled by despair, helplessness, shame, and in some cases guilt, but in many cases the suicide note reveals overwhelming anger. One woman, facing foreclosure on her house, wrote to the mortgage company: "You have failed to protect me. You have broken your promise. You have destroyed my life." Mortgage companies, banks, investment companies, and now governments are being blamed by many people for their devastating losses. Since they can't murder the institutions or the Madoffs of this world, people are killing themselves instead. The Italian poet Cesare Pavese coined the phrase "suicides are shy homicides". Recent suicides linked to the financial crisis are no exceptions.

But it is not simply the case that people who have suffered these huge financial losses feel angry, let down, and helpless. For many of these suicides, financial failure is the final blow in a long history of feeling inadequate, rejected and robbed of love. The murder that takes place is against an internal parental figure who has made the individual believe that he can only be loved if he is successful; more often than not, this also means self-reliant and hard working. So, when financial loss occurs it is especially traumatic. The efforts to gain love in the eyes of the parent have been suddenly wiped out in one fell swoop, and further efforts seem utterly futile. There is a powerful sense that everything is doomed to fail because it will all be undone in the end. Being left with no money (or house) is equivalent to being left with a parent who has withdrawn love for no apparent reason.

More specifically, it is like being let down by a parent who puts their own needs first, leaving the child at risk. What seemed safe and relatively secure no longer exists, and the failure of the banks and mortgage companies to go on providing this security inevitably triggers off memories of parental failure that can feel life-threatening. In some cases, the parent who needs to be pleased may also be projected onto the wife or husband, and the experience of rejection may thus be twofold. Failing one's spouse can be humiliating and shameful but also persecuting. One banker, referring to a colleague's suicide, described it as an act of honour because his colleague had felt so responsible to his clients for inadvertently losing their money in the Madoff fraud.

The guilt and despair such failure elicits is enormous. But so is the rage. In the case of people who have traumatic histories of emotional insecurity, the combination of despair and rage can produce a fatal cocktail. Add to this the impotence in not being able to actually kill the parent who has failed you (that is, the person or institution on whom you depended and who has betrayed you), and you come up with suicide.


Unknown said...

An ominous title to today's Rattle, Ilargi. I see a double - or perhaps triple- entendre there?

Anonymous said...
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Anonymous said...


huh? oh sorry dozed off

Anonymous said...

(Llargi): "But I have stopped believing. You don’t give me nothing to believe in." Obama...don't...give you...nothing...to believe in? The grammar is funny enough, but add to it the high seriousness and affectation of your typical comments, and one has a blog entry that is extraordinarily comical! You're a hoot! Thanks! ;)

Anonymous said...

If you think you have problems ...
"More than one million unemployed Spanish are without Welfare benefits (except for Health Care) [ 1,044,022 ] and according to most studies there will be 400,000 more come next May. Towards the end of the year the jobless situation will get much worse and still more Spanish people will lose their Welfare payments.

That’s not counting Illegal Immigrants, who may number One Million, do not have any rights to Unemployment Benefits and most won’t be able to get any jobs.

Spain doesn’t have a Job Seekers Allowance system, like Britain and other European countries. It has a form of Insurance included in the Social Security System, whereas unemployed get different amounts of money during different times according to their contributions and the money they put into the system -this system used to work just fine in prosperous times but it is now failing badly. In any case it doesn’t last longer than a year and a half, all included. As many people have been on short contracts, they have right to only a short time of Welfare payments, that’s why there will be 400,000 more without benefits by next May.

This is the National System. Some parts of Spain -we have a quasi-federal State- do have Welfare Benefits for the poor, but it is not generally the case. Neither are Food Stamps, or the equivalent, generally available."

More in my website. I do not want to take up too much space as I know it is a great day for you, a day of Hope for America and the World.

Unknown said...

George Monbiot, that British stalwart of environmental concerns, suggests today that perhaps local communities need to start thinking again (as they did during the Great Depression) about creating local currencies, and perhaps this time central banks shouldn't stop them.

It's really just the germ of a serious idea, as Monbiot himself admits, that requires more serious analysis.

Unknown said...


A few days ago you posted links where one could buy water purifiers and all manner of items for sustainability. I have not been able to find that info. Sorry for the trouble, but could you post that again?

Ilargi said...

Anon :4:44

That was even more boring than Obama's speech.
Feel free to come to the point in 10% of those words.

Anonymous said...


You are probably referring to Lehman's. Their website is okay and the representative I talked too was very nice.

Anonymous said...

Two weeks??? How'd you come to that conclusion Ilargi.

I thought that we had atleast one year of steady but increasingly worsening global economy, reckoned that 2010/2011 would be the real knock out year...

TWO weeks?? Do you see some kind of spectacular implosion, banks being closed to the public, massive rise in unemployment in two weeks, civil unrest?

bluebird said...

I see the loss today as the banksters last hurrah. They stole all that they could, and what is left (which is nothing), is for Obama.

. said...

That's just juicy. British banks fall down hard just like Bear Stearns and there is no way to stand them back up and dust them off. The United States is half a step behind ... perhaps coming so soon the Obama children won't really have a chance to jump on the bed in the Lincoln bedroom before it all comes down.

God, I despise Republicans in general and Bush II in particular.

Phil said...

"Gordon Brown brings Britain to the edge of bankruptcy"


The mainstream media here in the UK is starting to get a glimpse of reality...

Anonymous said...

A ray of hope possibly. TOD has a really interesting article on, The Liquid Fluoride Thorium Paradigm.

A possible nuclear technology that could well save us from the coming energy crisis. It doesn't seem to have any real drawbacks...Yet.


For more details


Stoneleigh said...

The main problem I had with Obama's speech today was that he explicitly said not to listen to the 'cynics' - that people shouldn't let anyone tell them that they may have to tighten their belts or that the next generation may have to be satisfied with less. Call me a cynic Mr President, but I'd rather see people prepare for hard times before they happen. Lowering expectations to something at least a bit more realistic is an important part of mental preparation.

I understand that people want very badly to believe in a dream right now, but if that dream blinds them to reality at the worst possible time then it isn't very helpful.

Phil said...

VK: Some of the comments on TOD sum up why we don't need Thorium Reactors, or any other misguided technofixes. More easily available energy = more human destructiveness. Enough's enough, I say.

david matthews: Whine on your own blog, please.

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

Ludwig Willem Wenebach interview with Johan de Meester.

My friend Van Rappard, being terribly upset at the violent quarrel which had arisen between him and Van Gogh, asked me to go see Vincent and try to bring about a reconciliation. I went to Nyuen, where Van Gogh lived, and the visit still stands out vividly in my memory. It was the most remarkable experience I ever had.

The big room was in a farmhouse of the sexton of the Catholic church. It was crowded with all sorts of articles, spread around in the greatest disorder. The first thing my eyes caught were the characteristic, violently painted canvases as well as the expressive drawings which covered the walls. They were most striking. Then I discovered a great many birds' nests and eggs on several tables. Then there were wooden shoes, old caps and bonnets such as womenfolk wear, some very dirty; old chairs without seats , rickety and broken, and in a corner all sorts of working tools. In a little room at the back sat Vincent before an easel; the room seemed much too small for a studio.

After shaking hands, it seemed to me as if Vincent was very pleased to see me. He showed me everything and he talked volubly and interestingly about his aim and work, his difficulties in working with the peasants and so forth.

It seemed so strange to me that, although he lived amongst them, he flew into a rage and seemed so provoked at them. Yet even more he railed against the "decent"people and the bourgeois, kicking now and then against his easel. During the conversation some of his drawings fell to the floor and, as I picked them up my shirt cuff, which was fastened with a gold cufflink showed. Vincent's eye fell on it, and looking at me in a contemptuous manner, he said furiously: "I can't stand people who wear such luxuries!" This unusual, unkind, and rude remark made me feel most uncomfortable, but I pretended not to notice and paid no attention to it. Vincent himself forgot it almost immediately, for in the pleasantest way he proposed that we take a walk through the country.

It was during this walk that he gave me a glimpse of his sublime soul, his sensitive artistic feeling: he noticed all the colors, the delicate atmosphere, the bright sun and mighty clouds, the crops, the shady trees: he was full of enthusiasm about all of the beauty of the country, every detail of light and shade on cottage and field, and so on. I felt that I had met a mighty artist!

This seemed to me the right moment to bring up the subject that had brought me there, and Vincent seemed also to have read my thoughts, for he told me how often he had walked there with Van Rappard, and how he regretted their variance about his drawings.

I then replied: "Anton did not intend to hurt you, but spoke his mind freely as a friend to a friend, and he apologizes to you."

" Well, if he takes back what he said, it is all right," Vincent replied, and we dropped the subject.

The road on which we were walking was deeply furrowed, and taking the smoother side, I said: " Won't you walk behind instead of beside me? The road is so rough and uneven."

Vincent answered:" No, thank you. It is not good to take the smooth road path in ones life! I never do! "

Bigelow said...

Is there anyway you could make a few of your particularly important headlines flashing neon pink?

Like: Swedish model for western banks “A crucial principle of the Swedish model is that banks were forced to write down their assets to market and take the hit to their equity before the recapitalisation began.”

They forced all the dirty laundry out into the light of day quickly and managements were sacked.

To which should be added and the board and directors’ compensation –since it was all based on specious valuations, fraud and lies—should be taken back too. And as you have emphasized in your commentaries … needs to get it done yesterday. I wish it was more than just a dream.

Anonymous said...


I purchased my Big Berkey water filter from New Millennium Concepts Ltd.. They are always well stocked in replacement filters, too.

Ilargi said...


"A ray of hope possibly. TOD has a really interesting article on, The Liquid Fluoride Thorium Paradigm."

Yeah, just lovely, let's rekindle the whole thorium thing for the 1000th time. If you ever want a reason why the Oil Drum is by now utterly irrelevant, it's right there. the rehashing of stale been-there done-that "technology".

Got to do something to keep the idea alive that you have a function, right?

Thorium is as much nonsensical as the Obama promise. Take your pick and your faith.

Anonymous said...

on Monbiot's: The Britsh already have it! Any one of you have been to Scotland? Besides the normal, British pound, three different Scottish banks print their own money, with different designs, in 5, 10, 20, 50 and 100 pound denominations. It's a nightmare and there are a lot of false notes. Same thing in the channel islands, etc. Funny thing he doesn't mention it, I've always had my misgivings about those notes.

Anonymous said...

Here it is

Obama's Inaugural Address: The Full Text
Here are a few quotes ... He knows what happened to the financial system....
Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age.

- a nagging fear that America's decline is inevitable, and that the next generation must lower its sights.
Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America — they will be met.
The state of the economy calls for action, bold and swift, and we will act.

- and that a nation cannot prosper long when it favors only the prosperous.

Obama is displeased ...

Didn't I read somewher that in the old days, If you displeased the Emperor of China, that he would take retribution down to the fifth generation?

Anonymous said...

You posted that the stock market debacle today was the world's vote of no faith in Obama and the inauguration. Uhmm... the European banks collapsed on Monday, MLK day, when the NYSE was closed. Given the interconnectivity of the global markets, isn't it more likely that today's nosedive had more to do with that, rather than any lack of faith in Obama? Just saying.

scandia said...

Bingo! The penny just dropped! I am full of delight!
Never did I think it would be the market who would ride in to champion the cause of transparency, to demonstrate such courage. I share common cause with the market who wants an honest,complete accounting. Off balance,fudged numbers,insider advantage,leads to false valuations which leads to system failure. I'm cheering for the marketeers! Let's really party in Washington on the day the vaults are opened for public scrutiny!
Yes, its been a damn good day!That's the change we need.I have hope restored!

Anonymous said...


you beat me to the punch on some of those quotes.

I would also add:
'..our time of standing pat, of protecting narrow interests and putting off unpleasant decisions - that time has surely passed

What is required of us now is a new era of responsibility'

I thought it was a pretty good speech and actually mentioned a lot of the 'stuff' that has to be addressed. Pretty meaty in some ways actually. (considering the occasion)

As for Obama well...

it's hard to separate him from the hype and it's hard to imagine someone actually moving the monster that the US government has become
sometimes fate delivers the right person at the right time perhaps
'He's the One'

Time will tell.

Anonymous said...


Grasshopper you haven't fully internalized the 'Doomer Mantra'

Now repeat after me:

'There's a problem!'
'It's a Really Big Problem!'
'There's Nothing we can do!'
'We are Doomed!'

get it?

Anonymous said...

I would also like to add one more thing. First, let me say how much I enjoy your site. I have learned a lot and my eyes have been opened and for that I thank you. Having said that, I also have to add that I found your picture today highly offensive, aggressive, and inappropriate.
However you feel about Obama as a man or a politician, using a photo of former slaves, in an obviously disparaging article about Obama on a day like today really disappointed me. Enough said. Thanks again for providing us with a really great site.

scandia said...

Perhaps some of you out there have been meaning to get 3 months cash in hand under your control but just keep putting it off. It would be prudent to do so now or as soon as you can.For Obama the UK banking story is a black swan event. Which also makes it ours.
A bankrupt nation cannot honour its guarantees. Even to you and me.
I started my stash with just $20. Amazing to fill the tin and start another...I feel empowered every time I add to the cash.

Jim R said...

Even though it's off-topic for this board, I just can't help myself.

Sure, let's build a fleet of thorium reactors. It's kind of like planting a garden after the cupboard is bare and you're getting weak from malnutrition. That garden could feed you if you can just find something to tide you over for a year or two or ten.

If the thorium reaction is really self sustaining as they say.

If the fluorides don't eat holes in your nuclear plumbing.

If you can figure out how to run everything on the electricity / waste heat from the thing.

If you don't kill a bunch of people from accidentally spilled radwaste (yes, all nuclear technology generates it)

If the hornworms don't come and chew up your tomatoes, little yellow butterflies eat your cabbage, and if the weather doesn't change...

Anonymous said...

Deflationary period will be brief, hang on to your hats for inflation afterward. Peter Schiff nailed it almost 100% over three years ago. Why not put your trust in someone with a proven track record?

Anonymous said...

I think you read the speech again.

"What the cynics fail to understand is that the ground has shifted beneath them, that the stale political arguments that have consumed us for so long, no longer apply."

My reading is that the cynics he referred to are the obstructionist moneyed class. The speech was not dull, it was dark. He mentioned tough times, budget cuts, even the bloody snow of Valley Forge. There is a lot there, heck he sounds like he reads your blog. Your response surprises me.

Stoneleigh said...

Anon @8:29,

The people in that photo are resilient survivors, all over 100 years old, who lived to see the world change for the better. I think they are beautiful.

Our intent is never to disparage. Our photos show a slice of life as it was not really so long ago. We have come so far in a short time, but much of our material wealth is illusory. It will disappear and we will once again face some of the harsh realities our great grandparents faced, and we will have to learn to be content with much less. Fortunately, as we will rediscover, people can be happy with much less, so long as they have each other to lean on.

Hype is a dangerous thing, as it pumps up expectations even further at a time when things are about to take a sharp turn in the opposite direction no matter what Mr Obama does. I feel very sorry for him as he's been set up to be the fall guy.

Anonymous said...

Well, let's just agree to call the choice of photo... insensitive. You entitled the article, "The Shortest President". You then show a photo of four former slaves, lined up by height, and who couldn't be smaller if they tried. Frankly, it strains credulity for one to think that this was mere coincidence.

So I will choose to believe that either you failed to realize how hurtful using a slave photo on the day that America's first African American was sworn in would be, or that it was a subconscious decision on the part of someone who may wish to show more restraint in the future. I appreciate your responding to my comment, and I for one am more than willing to move on at this point.

Anonymous said...

Question posted by Rob on dollardaze.org/blog/?post_id=00405:

Why is there all this talk right now about deflation, when the US dollar has lost 98% of it's value since 1792?

Crude oil has gone down to $40/barrel so that means we have a deflation crisis? It was $40/barrel back in 2003, and it was around $20/barrel in the '90s. Seems to me that we need a lot more of this "deflation" just to get things back to where they used to be.

Is the Fed creating a deflation scare so they can use it as an excuse to inflate the money supply even more?


Ilargi said...

"Well, let's just agree to call the choice of photo... insensitive."

No, we will not. We will instead choose to interpret to see your interpretation of what we do as stupid.

There is nothing, and there never has been, in what we do here, be it in words or in pictures, that merits the sort of bigot comment that you are trying in multiple attempts now to lay upon us.

There is nothing insensitive about the picture, there is in your comment though.

The people in the picture are beautiful. How about you? Go find a mirror.

Honest John said...

You know, I'm kind of getting a bad feeling around here, posts getting deleted, total defeatism in the intro, no real solutions being discussed. I like what Mish did with his "open letter to congress", let's start making noise, email your congressmen....sure they'll never listen, but at least your doing something about it....maybe I'm naive, but who cares. I'm preparing for the worst personally, and it's easy, because I never got into debt, other than a mortgage on a house that was never overpriced. So when I hear how I'll have to live with less, well I never lived over my means, so I'll be a survivor, and may even prosper...Or maybe I have no clue and we'll all be hunting for food in two weeks.
Oh, and my favorite part of Obama's speech is when he actually recognized us Godless non-believers.That HAS to be a first.

Anonymous said...

Please reread the portion of my post that stated that it was insensitive to use a slave photo in conjunction with a negative article about Obama on such an historic day. If the article which followed the picture was about the strength of the human spirit, or to show how far African Americans had come in this country, that would be one thing. But you made the connection negative by following the "Shortest President" photo with an article that called Obama boring, with a speaking style well suited to SNL, and finishing up by saying that he gave the worst speech you had heard in decades. Decades? Have you forgotten Bush so quickly? Surely, you jest.

You then finished the article by saying that "You don't give me nothing to believe in." Surely not a glowing article and one that I'm positive that the people in that photo would have been troubled to have their images associated with.

Let's try an exercise. Make the article a negative one about Rahm Emmanuel. But before you start the hit piece, include a photo of former Holocaust survivors. Get it now? What's the old adage? When you find yourself in a hole, the first thing to do is... stop digging. So. Stop. Digging. Please.

Bigelow said...

Anon 10:04,
“Why is there all this talk right now about deflation, when the US dollar has lost 98% of it's value since 1792?” Perhaps you mean lost 95% using the CPI from 1913-2008. From 1929-1933 the dollar actually gained 24% in purchasing power. But the CPI is not really the way to measure inflation see Inflation “deflated” Read a few Primers at the top of the main page.

Unknown said...


Take your own advice. Stop digging. Ilargi has a well documented track record of stating the reasons for his work, and they couldn't be farther from narrow-minded bigotry. You're seeing what you want to see, not what's actually here. You're reading in your own interpretations which lack a basis in anything actually found at TAE.

Ilargi can fend for himself, he doesn't need me to say this, but I like him to know that not everyone's jumping at the ghosts of bigotry. Not when there's actual acknowledged racism all around America and the world. More than enough for you to crusade against.

Anonymous said...

It seems like the brain-dead Obama wackos come out of the woodwork if one says anything their mindless religion. With this economic mess, and the current clowns posing as advisors, the only thing they have left is hope. Clearly intelligence and reason are gone, for some.

Especially funny are the loons with no published predictions over the past year dissing the accuracy of I & S. Heh. You know they lost money and will lose more. How much do you have to lose before you get a clue?

My prediction: The stock market will be lower for the next inauguration than it was at the start of this one.

Oh - and that is a superb picture. It gets the message across quite well.

So don't let the wackos get you down.

And thanks for the heads-up about the next two weeks. I was hoping for two years as well.

People shouldn't forget that the FDIC insurance is limited, so if the big banks go, there won't currently be enough to go around. Granted, the Feds would probably bankroll it. But take 3 months of expenses out? Heck, I'm only leaving in as much as I can afford to lose.

Also, don't forget that the contents of safe deposit boxes can (will) be seized, with no coverage whatsoever.

I'll look at Banks again when they are solvent.

Anonymous said...

My thoughts about Obama is that it is misguided for anyone to place all their hope in the figure of a single individual. But, to be sure he is a thoughtful guy, he listens to more than one point of view, and he understands the importance of allowing others to do what they do well. This combination of leadership skills has not been seen in the US for some time, in my opinion.

That said, one cannot expect a single administration to find a simple policy fix to the global scale problems we now confront. Certainly, there will be no magical policies coming forth in the next two weeks!

Even the current mix of *bold* plans being shopped around seem to be more desperate Hail Mary passes for the endzone rather than well reasoned economic engineering solutions to well-understood problems.Bold in the sense that no one really knows their effect or, I suppose, the risks that they carry to the economic system.

A president, though, is not quite like a prime minister, he has a ceremonial/symbolic role in the US system as well as a policy role. It is in the symbolic nature of his role that Obama can serve, maintaining the nations hope for better in the face of the coming decline.

Zaphod said...

First time poster here (6 month lurker, small financial supporter).

Three points for today:

1) Those who are picking on the photos must not follow the blog much. I love the pics. Rarely do they seem to pertain to the story, and anybody who reads Ilargi much knows he's not at a bigot. Surely if ever there was a day to see past race and let tolerance overcome hypersensitivity, today would be it?

2) Though the speech was pretty basic fluff, at least it sounded good. Tomorrow the real work starts. I can't even fault the party too much -- the dollars are trivial, and though I don't see much value in hosting Hollywood types to a public fete there is value in recognizing what this inauguration means to older black people especially, and minorities in general.

3) What's with the anti-TOD tone? I know there is some history there, but from my perspective TOD performs a valuable service on many topics, and as you know just because some techno-cornucopian stuff gets posted doesn't mean the editors or most of the readers see it as a serious option. Peak Oil might not be a big topic this year, but for sure its reverberations will affect us all in the coming decades.

Keep up the good work Stoneleigh and Ilargi. You provide a valuable perspective.

Starcade said...

It's over, then -- and nothing survives.

You'd basically infer that Obama would be offed (or the country dissolved) in one month (W. H. Harrison).

It is a grave fear of mine that, the moment the books get exposed, everything dies, and I think you're beginning to see that with the UK revelations. Is my math wrong, or has RBS lost over 90% of its remaining value in two days since every UK bank was stated as insolvent?

I see the same thing happening to America. The real question comes down to: What forces the needed bank holiday, and would it do good in the first place? What banks survive?

But you're right -- he's got very little time (about 10 days) before the violence really starts, it looks like...

Anonymous said...

I & S know me a little more than the readers of the comment section.


Have any of you gone into a retirement home where the residents are just waiting ... nothing to do ... nothing to occupy their hands or their minds ... Lethargic.

NO! Then try to imagine what the atmosphere could be like. HOPELESS

Now, change the picture, imagine that you can go in there and change things.

Imagine that you can remove those dark clouds hanging over their head and make them smile ... make them laugh ... make them forget their pains and sorrows and get them to remember the good times in their lives.

Its not a big accomplishment but its one that is being done everywhere in one form or another ... giving comfort and peace of mind to ... the dying ... the condemned ... etc.

I'm sure that no compassionate person would yell to the man standing on the ledge... JUMP, JUMP.


Starcade said...

If Obama doesn't give the people anything to believe in, it's all over, because the next million-man mob in Washington will burn the city down.

VK: RBS has lost 90% in two days. California may be cutting off all welfare and tax refunds Feb. 1. Two weeks? Sounds about right.

Starcade said...


How many compassionate people are left?

Anonymous said...

Okay, everyone, let's calm down. I'll just make three final points and then I'm through with this discussion.

1) If you read any of my earlier posts you would have seen some pretty glowing compliments of this site so I'm not trying to criticize I&S on their knowledge or insight. In fact, I learn a lot from them.

2) I am not some mindless Obama administration zealot. Frankly, it doesn't matter who is at the helm, we are all in deep, deep trouble. Something, incidentally I picked up from reading this site.

3) And finally. I still stand by my statement that the photo choice was insensitive. If I implied bigotry that wasn't there I truly, truly apologize. But I stand by my statement of insensitivity.

Not to wear out my earlier analogy, but I doubt if anyone here would use a Holocaust survivor photo when discussing any person of Jewish heritage, especially when the thrust of the article was negative. So why is it okay to use slavery imagery? They were both painful, horrific times and not images to be used lightly. The headline was "The Shortest President" followed by a picture of four very short ex-slaves. Anyone who can't see how that could sting is really just closing his/her eyes on purpose.

That's all I'm going to say on this matter. Good night and good luck.

P.S. Of course if I wake up tomorrow to see a photo of Al Jolsen with the caption of Colin Powell: Traitor or Patriot, then all bets are off. :-)

Anonymous said...


the following article from todays debt rattle certainly answers my question from yesterdays post (1st comment)

Set big money aside: You might need it

If the financial meltdown-turned-recession hasn't made you start saving more money for a rainy day, you should have your head -- and your bank account -- examined. An emergency-cash account, which should be enough for three to six months of living expenses, is a keystone of getting your financial house in order. And it is even more urgent now with millions more jobs in jeopardy amid the down economy. "People have to save more money. That's the bottom line," said Philip van Doorn, an analyst for TheStreet .com Ratings. "Do you really need fancy cable services, the latest Xbox game, Guitar Hero, dining out four nights a week? Question everything, cut back and put it in savings. If it doesn't hurt, you're not saving enough."

scandia said...

Starcade, I appreciate the fear of what happens when the vaults are opened. A metaphor might illuminate why it is necessary, even critical, to do so. The metaphor is an infected wound. If left to fester the poison spreads, the patient with a strong immune system( i.e. no debt) can fight off the ravages of infection. A patient in compromised health succumbs to life long handicaps, may even die. Most medical people would recommend lancing the wound allowing the pus to run out. Recovery is then possible.
If we had sought medical attention earlier these extreme measures could have been avoided.Typical for a gambler. Double or nothing. This way of life or no way of life.
As I don't know any other way of life, I feel quite frightened.I really hope I discover more adaptability within myself than I have demonstrated to date.

Anonymous said...

You know, I'm kind of getting a bad feeling around here, posts getting deleted, total defeatism in the intro, no real solutions being discussed. I like what Mish did with his "open letter to congress", let's start making noise, email your congressmen....sure they'll never listen, but at least your doing something about it....maybe I'm naive, but who cares.


Did you completely skip the 5th paragraph in the intro? There is a solution to all of this. A painful one, but a real solution to expose the banks not just for the sake of ideology, but because if it isn't done now, the pain to bear will only swell greater and greater.

Anonymous said...

If anyone recalls on election day, on 04 Nov 08, when Barrack Obama won the electoral votes, as was granted president elect, the markets took a terrible dive. actually i recall the day after on 05 Nov 08, the markets dived horrendously. That was the sign. And today as Barrack Obama swears into office, the markets tanked. That was the markets saying that confidence has been lost last Nov. and it was predicted that today and tomorrow will be very bad days for the markets.

Historic day? very much so. but the proof is in the pudding, Prez Obama must show us what he can do. So far he has been all talk. And he is the best speaker i have heard in a very long time. one can't help and listen to what he says. but it's all been talk, now he is in position to get things done, his choice of picks for various cabinet positions tells me and the world that it's the same ole democrats from the 90's. Clinton era redux.

Bush 43, started his first 4 yrs with Reagan and Bush 41 cronies. same ole, same ole. career politicians appointing career politicians every few yrs and we are foolish enough to think each time will be much different, but no it's the same. they are all the same, just different titles. the two parties may have different names but they are no different.

The media is hyping this up so much, that I haven't seen that many celebs and politicians in one day celebrating a new prez. since days after 9/11. with the concerts in New York and the politicians posturing about how America is so resilient and neighborly love is bringing us together and how the USA is gonna get even with whoever attacked us. pumpimg up the crowds, remember that?

kjm said...

Personally I don't understand the Ilargi worship, even tho it his blog. I sense a very nasty anti-American undertone here.

Speaking of the photo on today's page -- why any of the photos? What do they mean? Why not photos of Canadians? Were there no cameras in Canada during the 30's?

el gallinazo said...
This comment has been removed by the author.
el gallinazo said...

Anon 11:31

"1) If you read any of my earlier posts you would have seen some pretty glowing compliments of this site so I'm not trying to criticize I&S on their knowledge or insight."

Anyone who posts this message totally anonymously is a freaking moron.

The Lizard said...

KJ //

The older people in the picture are freed slaves. Canada had cameras, but no slaves. Except the ones disloyal enough to have run away from the Worker's Paradise.

Anonymous said...

Look, folks: As alternatives to this slowly deteriorating effort--The Automatic Earth--there's a vast number of strong, insightful, and well-informed economics blogs elsewhere. This site is an echo chamber replaying the same refrains over and over and over again. And from quasi-intellectual bitterness over the chief contributors' worsening lack of imagination, those refrains are becoming increasingly strident, coarse, and, over time, plainly uninteresting. Perhaps they'll turn it around. In the meantime, however, take a look elsewhere; after reading today's Automatic Earth offering, I will be doing precisely that....-- :)

kjm said...

Hanged man -- are you serious?! No slavery in Canada? You need to study up on a little history!

el gallinazo said...


"Personally I don't understand the Ilargi worship, even tho it his blog. I sense a very nasty anti-American undertone here. "

Perhaps it has to do with the fact that he and Stoneleigh have made more accurate macro-economic predictions during the last 2 years than any other "pundits" in this or any alternative universe. By not sugar coating their predictions, they have allowed the readership here to protect themselves to the greatest extent possible for each individual. Their two political agendas are that the banks must come clean regarding their off-the-books hidden losses, and that governments must conserve what reserves they have left to help the average citizen to avoid starvation, freezing, and death through medical illness.

Stoneleigh can explain complicated economics in an incredibly lucid and easy to follow manner.

They are non-Libertarians despite ascribing to Austrian economic theory by propounding the idea that only through community solidarity on a local level can people survive the coming times.

"Speaking of the photo on today's page -- why any of the photos? What do they mean? Why not photos of Canadians? Were there no cameras in Canada during the 30's?"

First you maintain that our hosts are nasty anti-Americans and then you decry the lack of Canadian photos. Forget your meds? Besides everyone knows that Canada had not emerged from the last glacial ice age by the 1930's and there were no cameras at that latitude.

el gallinazo said...

KJ makes a good point regarding slavery in Canada.


Slavery remained in Upper and Lower Canada until 1834 when the British Parliament's Slavery Abolition Act finally abolished slavery in all parts of the British Empire.

Anonymous said...

Shortest president in history?? Previous record holder was that guy who died after a month from pneumonia. For BO to beat that record, he would probably need to eat a bullet or suffer a mechanical glitch in one of those manly helicopters. Quite a bold prediction !! If that is his fate, how could a quick spring cleaning of bank vaults change anything? Either I&S have some very well-placed moles, or it was a case of overstatement. (Personally I think BO is very much like W -- not really in charge of anything; just playing the front man for elites who are in charge; and since he seems to be a decent front man for the moment he will stick around. But I have no moles anywhere.)

Different people find different value in TAE, which is not a surprise or a bad thing. I found the site by accident last June and did not miss a day since then. I made a modest contribution, and will do it again soon. To me, the value is: an outstanding aggregation of news that you wouldn't find anywhere else, with tidbits of insightful commentary. In particular, Ilargi is great at spotting the implications of below-the-fold articles that tell much more about what's coming than the big articles at the top of the day's headlines.

Ilargi's sometimes over-dramatic intros are not what I personally value the most, but whatever. Sometimes I even cringe because I think it undermines his credibility. He took some heat for predicting earlier that you wouldn't recognize your hometown by Christmas. Whatever. Though hats off if BO really is gone in a month.

What I wish Ilargi had addressed today: the splash headlines seemed as usual behind the story and missing the point. UK banks didn't lose a big chunk of their intrinsic value in the last few days. They had none for a long time, and the market was just catching up to the reality. The UK bailouts are much more aggressive in claiming equity for the taxpayers. The plunge in stock prices simply reflects the near certainty that they will be nationalized and that market equity all but eliminated. Anyone reading TAE knew that a long time ago. The US picture is murkier, since bailouts have a much greater sweetheart quality for the banks. Drops in Citi and BAC suggest that the market does not trust the government to transfer the rest of their losses away from the stockholders and onto to the taxpayer, as it has already done with a big chunk. Why not? BO's team has been making so much noise lately about a banking crisis needing urgent action, preparing the pulbic and markets; they must be cooking something big. I would have guessed just a total give-away to the banks, but maybe not.

Anonymous said...

I can imagine there is some very high-octane button pushing going on right now by our "new"leadership.The good thing is,we have some effective manager types now running the .gov,instead of a lot of people who believe .gov is a sin...can't govern efficiently if you don't believe in government.

[ I see a whole bunch of mechanics around a car who just started in with the wrenches&gauges trying to fire that puppy up...

Problem is the motor was stole awhile back...]

The one thing they can do is make legislation,and if you think there is not a "Huge"pile going to hit President O's desk the first day congress gets rolling...they have a "to do"list they have been working on since the election day.My bet is there is a chunk of money to shut up the "Govenator"and comptroller "Snidely Whiplash"and their threats to start throwing the poor,blind and unemployed under the bus in 2 weeks,as well as lighting a fire under any dems or rethugs deemed "Obstructionist"

Now is when the real fun begins.

Britain is 1 step from oblivian,and the problem is they might take us with them...we are sorta close to that edge ourselves,and no one really knows just how close we are.

Yes,yes,I know our gentle hosts have pointed out the fact ,that we are,in reality completely ,100%,3000ft below the surface,dead possum in the road BROKE,BANKRUPT...However,in this situation appearance is everything.If we looked,and acted like the deadbeats we so truly are,why,no one in their right mind would loan us a nickle,much less a couple of trillion dollars

Appearance IS everything.

We will have to hopefully start doing the Obama "Muddlin thru shuffle" starting tomorrow..Our gentle hosts are dead on the money when they point out it may only be weeks before the Dreck hits the whirling impeller

Got the bees feed with divert these last few days.They were looking good,especially one Italian Queens hive that is the strongest of the 20 or so I keep at the house.A warm[60deg]clear winter day,all the hives but one came out.When examined,it looked like I had lost the queen awhile back,and it died of old age.The divert sugar I have fed them with will keep me from spring starvation losses hopefully,and will start with a bunch of overwintered hives in good shape.When the pollen starts in the spring[and my sinuses go crazy]If I feed them heavy,I should be ready this year,
to do whats called a mississippi splits,[4way]and end up with 100 to 140 hives this year.Yes!.Thats when I start to work on individual hive strength and start thinking about how to deal with a mountain of honey headed my way

Getting late time for the crib...


kjm said...

Iceland's banks have been revealed to be insolvent. Ireland is close behind; ditto for England. Russia is facing another default. Yet all of them are still secure within their borders, eating 3 square meals a day, and life goes on.

Meaning; talk of being one step from oblivion is meaningless. What does oblivion look like? Is Iceland in oblivion?

We need a better way to discuss what comes next than apocalyptic drama. True, we're in new territory and no one knows for sure what comes next. But actual blood in the streets isn't likely.

Obama may be a bore, and that's a matter of opinion -- perhaps some would like more emotion and less reason in his speeches -- but our new prez knows he has to keep the ATMs dispensing $20 bills. That's good enough for now.

Anonymous said...

Stoneleigh, I think your political bias is clouding your analysis (again). You wrote: "The main problem I had with Obama's speech today was that he explicitly said not to listen to the 'cynics' - that people shouldn't let anyone tell them that they may have to tighten their belts or that the next generation may have to be satisfied with less." Fortunately, that isn't at all what Obama said. His reference to cynics was directed against the perennial conservative/republican charge that social programs are too expensive and we just can't afford them. No matter that they make that same charge in both good economic times & bad. Now that they've seriously tanked the economy, they see a great opportunity to do away with as many social programs as possible. Nowhere did Obama say that people wouldn't have to tighten their belts. On the contrary, he said that we face serious challenges that will not be met easily or in a short span of time. He talked about spending wisely, reforming bad habits and doing business in the light of day. He also promised that programs which did not meet the test of increasing people's prosperity would be ended. Too bad you didn't hear any of that.

Anonymous said...

Wow Ilargi - the best you had to offer today was that you thought Obama was boring. Why so petulent? There's usually good info to be found here, which is much appreciated. Pettiness only distracts from what your better efforts have to offer.

Anonymous said...

@Anon 11:31 Fair enough. One of the strengths of this country is the hard won right to express our views, especially when we disagree. Pardon my rant about the Obama nuts, but honestly, I'm tired of all the ga-ga eyed people gushing about Obama today.

Yes, it's a great day. Yes, I think he has the potential to be a great leader. And I can't think of someone who has been more inspiring of late. But I dislike blind, unquestioning faith in anything, and that's what some of the posts have come across as.

I think the context of the picture was clear if you've read some of the other intros of the past. But I can see your point.

@KJ Re: Ilargi worship. Heh. Ok, now that's funny. You might try reading from some discussions in the past to appreciate the amusement. Sure, he's got his fanbois/girls who can't think straight or see their own hypocrisy and are just silly cheerleaders. I, for one, can tell you that I think Ilargi doesn't grasp the basic fundamentals.

Nonetheless, I respect and appreciate his efforts and views, even when they are completely wrong and misguided (I'm poking fun at myself here, as I've been wrong once too in my life, that I can, ahem, recall). I appreciate his insight, and he usually makes good points. But not always.

None of us are perfect. It's only by intelligent discourse and debate that we can get to the truth. Cheerleading isn't going to do any of us any economic good. So if you've got an intelligent on-topic point, do make it! It's easy ignore the idiot cheerleaders, as their posts boil down to "rah-rah".

To Ilargi's credit, I can say that he hasn't deleted my posts, even when they haven't been to his benefit. So I'm quite willing to trust his judgment on the posts that have been censored even though I haven't seen them.

If you've seen them, and disagree, I'd appreciate being informed about it.

Starcade said...

Scandia: The problem with your analogy is that you believe the cancer has not completely taken over the body (the body being the entire country, society, currency, etc.).

That's like Karl Denninger, believing the derivative notational values are worthless -- had they not been, Western finance would already be destroyed.

My belief is that the cancer has gone terminal and to the entire body -- now, it's just, how long do we have to live? Many aren't even getting us through February.

crony capitalism: I'll ask you the same question I've asked others. Even if we do it now, what survives? What hasn't become so polluted that exposing it to the light of day doesn't wither it away like a vampire?

This is why you are having people openly saying that the entire country could be defunct in the next 2-4 weeks.

KJ: Actually, word is that there are fresh protests in Iceland today.

Erin Winthrope said...

To the detractors:

Apart from Jay Hanson, I've never read another analyst who comes as close as I&S to describing the connections between our present financial predicament and our tragically limited neurological wiring. If you don't understand both, then you don't really understand anything: You're just collecting facts.

Ponder these quotations from Ilargi:

“until we run headfirst into the wall, we will deny the existence of the wall.”

"Compared to other animals, we humans have one true distinction: we are the most tragic species. We can see what we do, but we can't help ourselves from doing it."

Truer words were never spoken.

Stoneleigh said...

For those who have noted that several posts were deleted today, I wanted to let you know that they were all written by one person - David Matthews - who has no other agenda than to be obnoxious wherever he posts. He was banned long ago from The Oil Drum for a constantly (ie multiple times per day) cheering for the end of humanity, due to peak oil or financial collapse, on the grounds that it would be good for the planet. He is banned here as well.

We do not delete posts that are critical. They are an essential part of two-way communication, but occasionally someone steps over a line and earns a ban. I can think of only two such posters here.

el gallinazo said...


Other than occasionally predicting that the collapse would occur a bit faster than it is, please enumerate Ilargi and Stoneleigh's errors. Precise timing is only important for day traders and turkey vultures. (Don't want to land on a corpse too early).

Anonymous said...

@ Starcade, Ilargi, Phil, Mr Moto, DIYer

Thanks for your responses. I know thorium is a long shot but it seems like a pretty good technology, high EROEI and is abundant in the crust as opposed to Uranium. There's the huge question of scalability, the Indians are giving it a shot. So lets see if it works there?

A question for starcade, won't the US Govt step in to bail out California till it can. (Until the bond markets dislocate 12-24 months from now)?

Stoneleigh said...

We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together.... ....We will harness the sun and the winds and the soil to fuel our cars and run our factories....

Now, there are some who question the scale of our ambitions - who suggest that our system cannot tolerate too many big plans. Their memories are short. For they have forgotten what this country has already done; what free men and women can achieve when imagination is joined to common purpose, and necessity to courage.

What the cynics fail to understand is that the ground has shifted beneath them - that the stale political arguments that have consumed us for so long no longer apply.

The above is the part of Obama's speech that I was objecting to earlier. The cynics he refers to are clearly those who question the scale of his administration's ambitions, and I would definitely fall into that category. I don't do so on the basis of stale political arguments though, but on the grounds that these plans diverge severely from the reality of what will be possible.

Imagination joined to common purpose and necessity to courage are all very laudable, but what about capital and energy? We are about to experience worse constraints imposed by those two factors than any we have ever seen. And despite yesterday's wave of optimism, we are also moving into an era of distrust and division. Mr Obama's plans are unfortunately well outside the boundaries of what is realistic.

My memory is not short. The US has achieved a great deal, but did so in a era of cheap and plentiful energy and latterly cheap credit as well. Those circumstances no longer apply, and they will determined what freedom of action the Obama administration has.

The point in the speech about harnessing renewables to runs cars and factories is a case in point. You cannot run an industrial society on renewables. Period. As beneficial as they are (with the exception of biofuels that compete with the world's poor for food), they do not scale up and do not have the energy density to sustain cities. If we who are here today ever find ourselves living in a society based on renewables, it would look nothing like what we are familiar with. Cars and factories would certainly be a thing of the past.

I should point out that whatever faults I find with Mr Obama's utopian ideals, they are vastly less objectionable than the domineering arrogance and ignorance of the previous administration. People here who think my criticism means I must be a conservative are quite mistaken. I have heard it said that the entire political spectrum in Canada would fit comfortably within the democratic party, and that's probably not far off the truth.

We are progressives, but we are also critical thinkers and are not prepared to give anyone a free ride. To promise effectively that the American dream can continue in its present form is to do people a disservice. It deters them from preparing for the hard future that is coming, and it is coming no matter what Mr Obama does. As nice as it is to share a moment of joy and optimism with a majority of Americans, and indeed the world, we cannot let it blind us to reality.

scandia said...

Stoneleigh, I agree that many do not take into account the real world limitations inposed by energy supply,the environmental degradation. This week Martin Wolf in FT wrote his view of the Obama presidency, his recipe for rebalancing world trade. He recommends that the Chinese take on the consumer behaviour that has been the perogative of the West. If they consume more then there will be a market for the goods produced in factories running on alternative fuels. Even Martin Wolf( I am in awe of his writing style)appears blind to the implications of a huge Chinese population consuming more. What to do with the waste for instance?
It , to me, makes less and less sense to transport what we produce to far off markets in light of the limitations I mentioned. I see a solution in scaling down, not scaling globally. And therin lies the threat to " our way of life", our patterns of consumption. I do not see humankind capable of managing current levels of complexity, especially complexity without transparency.

bluebird said...

I am thinking that at the State of the Union address in a few weeks, Obama will list the problems facing the country and proposals to fix them. The SOTU speech is much longer than an inaugural speech.

Zaphod said...


I share your concerns about Obama's statements and plans, and how little attention resource and monetary reality seems to receive.

Rather than a train of bail-outs and inefficient make-work projects, I think all remaining Federal and state credit must be tightly focused on projects that share one of two key criteria:
1) Energy conservation or production
2) Efficient product manufacturing

The former is obvious -- our nation runs on cheap energy, and we need to both use less and plan for producing more at reasonable cost. Bailouts, bloated social programs, BAU street projects, and lots of gov't growth will hurt more than they will help.

For manufacturing, my view is that we need to plan for the day that we don't have cheap stuff from China, and we should start with "growth industries" like wind turbines, and then rebuild high-value industries for products that can be consumed at home and sold abroad. We need to plan for balanced trade, with enough added exports to cover the oil inports.

In any event we must stop considering finance workers, politicians, bureaucrats, tax accountants, and such as part of "real GDP". The only jobs that really matter are those that manufacture products we need to survive, and a few more that offer luxury services and enjoyment.

I suspect we have crossed the zero point for GDP ROI per new dollar of debt, and if so any new debt will hurt more than it will help dollar-wise, but maybe if it is targeted on critical projects it will still have value for our national stability.

Honest John said...


"We are progressives, but we are also critical thinkers and are not prepared to give anyone a free ride. To promise effectively that the American dream can continue in its present form is to do people a disservice. It deters them from preparing for the hard future that is coming, and it is coming no matter what Mr Obama does. As nice as it is to share a moment of joy and optimism with a majority of Americans, and indeed the world, we cannot let it blind us to reality."

That paragraph is exactly right and crystallizes my thoughts perfectly. My one tiny little shred of hope for Obama, is that I see him as honest, maybe he has fooled me into thinking this and I bought it, but I see him as honest and extremely intelligent. With time, preferably very soon (today), he will understand that bailouts, and taxpayer sponsored welfare for the financial system, the auto industry et al. is not going to get us anywhere but deeper in the ever growing hole of debt and depression. That's my optimistic side,and I'm probably wrong,but I HAVE to think that for my own sanity. Now for reality, the people he has surrounded himself with are the ones that got us here in the first place, and quite honestly, this is why I'm here at TAE. I agree we have to expose all of the toxic assets that are still hiding in all of our insolvent financial institutions, but we also have to do something about it ourselves. We all can write our congressmen and tell them how we feel.We can all email our friends and families, with a sense of urgency, and tell them to do the same. We can dissect the problems, and say what we want, but if we don't do anything, then you might as well just be talking to yourself in the mirror. Okay you say, it won't do any good, well then just give up, and discuss, critique, and make yourselves feel smart, but it's a waste of time, what are we accomplishing?
Pessimistic side of me says it's totally hopeless, and it won't do any good, but I look at my dad, 87 years old, Greek immigrant who lived through A LOT of turmoil including WW2 and the following Greek civil war, and he is still optimistic, based on what, I don't know, he always was, just his nature. I guess it in my genes.

Ilargi said...

Anti-Americanism? Am I supposed to come up with a serious reaction to that?

The picture is insensitive because the slaves are short? Now there's a priceless accusation. How can you tell?

I never predicted you wouldn't recognize your hometown by Xmas. Why do I have to repeat that? Why is it OK for people to regurgitate the same false claims again and again? I only said that the way things were going, the risk was real. $8 trillion says your hometown bank's facades still stand.

Nor did I say that Obama will be gone in two weeks. Can I expect people to actually read what I write, or do I need to weigh every word by the million different ways it can be misinterpreted by those who choose not to read what it means?

The way the British banking system is imploding these days spells enormous problems for Wall Street. In the face of the largest bail-out to date, RBS's market cap went from £75 billion to £4.5 billion, after it burned through £32 billion in taxpayers cash.

There is only one option left: put a fair value on all toxic debt. If Obama, Brown and all other politicians do not force that to happen, you will see more money disappear than you ever thought possible. And is will be your own money, and that of your kids.

Stoneleigh said...

I realize that this will be a terribly unpopular opinion, but Obama-mania is a great example of human herding in action. When the newscasters can cut to image after image of people celebrating with tears in their eyes in the US, Canada, England, France, Germany etc it's obvious how 'catching' human emotions are. When it's optimism that can be a wonderful collective experience, but it won't always be optimism that unites us in our emotional response.

Imagine what the opposite of yesterday's emotional consensus would be. Today we are still near the beginning of the deleveraging, where ordinary people have yet to lose their jobs en masse, see their unions broken, lose their homes, see their savings go up in smoke in a bank run, watch their pensions disappear into the ether, lose their access to basic healthcare, or lose their ability to heat their homes or provide three meals a day for their families.

All of these things are coming, and the emotional consensus then will not be pleasant. Mr Obama is riding the tiger, and if he falls off the danger is that the crowd that worship him now could become the mob that eats him for breakfast. I think he's a fundamentally decent, honest and well-meaning person who doesn't realize what a tight spot he's in.

bluebird said...

Stoneleigh - Are credit unions really much safer than banks? If a herd of people start running to banks for their money, wouldn't the herd also run to credit unions to withdraw their savings?

Anonymous said...

Stoneleigh @7:46 & 10:20, I agree and understand your thoughtful posts.

I would remind TAE readers that Obama subscribes to the fallacies of "the War on Terror." Additionally, he is a "friend" of AIPAC. Hence, I don't expect the US Empire to embrace peace.

Could the elites/powerful have selected Obama to be the "fall guy" as Stoneleigh suggested? Very possible, indeed. Certainly, Obama is a charismatic idealist and great orator who might be able to control the disenfranchised masses with his color and words when food scarcity, massive unemployment, etc. hits.

BTW, I'm a progressive(originally Kucinich supporter) and so-called Latina who voted for Obama and share some of the idealism he espouses. Nevertheless, I refuse to be blind to the realities of corrupt US politics and the enormous problems facing the US and the world today.

Anonymous said...

Good Morning Everyone!

Yes, it is a good morning.

Alex said ... "but we also have to do something about it ourselves."

I do think that there are people reading TAE and formulating their suggestions and passing them on to Obama's team.
Therefore, this forum is part of a helpfull process.

Ilargi you have been constant in your proposed solution ...

"There is only one option left: put a fair value on all toxic debt."

I believe that the "financial wizards" have rejected this path because they don't know what to do after that happens.

Those "financial wizards" do not speak with one mind. I'm sure that if you had a roomful of them that they could not reach a unanimous consensus on what to do. (just like this forum)

As things get worst, the G20 will be meeting and they will be comparing notes on the effectiveness of their different approaches.

I hope that there will be a possibility for me to harvest the fall crops from my garden

Anonymous said...

Oh man,

I thought I found the place when only reason reigns, but nothing is shielded. As far as this allegations go is just craziness. No I don’t worship nobody but Ilargi and Stoneleigh gained my respect and admiration every day. The one thing I will blame them is too much care and hard work.

Slavery is not black it is also white and yellow and red, is a human failure. Yesterday was a wonderful victory for all the humans that hope for the progress and this place is one of the places that is propelling it. (the picture proves it and is a good illustrations). Obama to me does not represent the african american he represents the reason the smart guy. I did like his speech, the whole speech just affirmed who he is and said let's finish this formality and get to work. Will he be able to make a difference, I don’t know. What I do know is that he is the best man in the world for the job.

Please do not give in to the witch-hunt, if the people that somehow found their way here behave like this, there is no hope for the world.

EBrown said...

What's up with the Yen?


Greenpa said...

Anyone remember my prediction here that Obama would find a way to lock up Bush's last minute regulations changes in permanent legal tangles?

From the Washington Post "Fix" blog today:
"News Nugget: White House chief of staff Rahm Emanuel made sure the government knew there was a new sheriff in town late Tuesday when he put his John Hancock on a memo to all agencies suspending any pending regulations until a full legal review was conducted. That means no under-the-wire changes made by former President George W. Bush will slip into law in the early days of the Obama Administration as senior aides are still figuring out where the bathrooms are and how the email system works. "

Greenpa said...

Stoneleigh: "I realize that this will be a terribly unpopular opinion, but Obama-mania is a great example of human herding in action. "

On the contrary, I think you are exactly right.

I think though, that there are a few persons on the planet who are capable of understanding herds; and sometimes directing their actions. That's part of the claim for the "powers that be", is it not?

For me, the hope lies in the possibility (and it's only that) that Obama may actually understand herds- and be capable of using those phenomena- for our mutual good; instead of personal enrichment.

He shows some signs that this may be true- one of them being precisely that he "says" what the herd wants- and needs- to hear.

He's now got massive emotional backing around the planet, yes? That's kind of a big deal.

Anonymous said...

@el gallinazo: Let me reply to your question this evening. I don't have time for a decent reply, presently.

@Stoneleigh, re: "human herding". That was insightful. I.e. one of those "why didn't I see that before?" moments.

Thank you for pointing that out.

Stoneleigh said...

I very much hope so Greenpa. If he can't bring the herd with him then someone else will in a different direction, capitalizing on much less positive emotions down the line.

It really is a beautiful thing to see so many people around the world united in joy, however much denial of reality it might involve. Mood can turn on a dime though, and often for no identifiable reason.

Don't get me wrong - I would very much like to see him succeed. I just don't think he understands the scope of this crisis and the magnitude of the forces that are being unleashed. I wish him the very best of luck, because I know he'll need it.

Ilargi said...


For what it's worth:

Stuffed Steeper

21-Jan-09 12:27 ET

10-Yr: -15+/32..2.429%.. USD/JPY: 87.8900.. EUR/USD: 1.2852Stuffed Steeper : The market is holding lower but off the worst levels of the day with trade deferring to spreads. The long end is leading as curve surfers steepen things up on supply concerns reaching out the calendar and not as much dis-inflation in the pipelines as maybe expected. The 2-10-yr yield spread is toying with ytd steepness near 173.6 with a breakout suggesting a move to 187 in due time. Geithner's hearing is progressing with the expected grilling but nothing that would suggest he will not get the nod. The yen is soaring as huge demand was unleashed post-option expiration with model accounts possibly front-running positive seasonality (Mar year end demand). The buck was slammed to 87.10 where it found support. A break eyes 86 while short-term resistance is forming near 88.20. The euro is offered with the Portugal ratings downgrade not helping much. The break of 1.2850 has yet to see any follow-through and shorts will likely prefer better levels before jumping in. Spot gold is down at 853.29 (-3.96) while crude is holding up at 41.66 (+0.82).

Stoneleigh said...


Are credit unions really much safer than banks? If a herd of people start running to banks for their money, wouldn't the herd also run to credit unions to withdraw their savings?

Bank runs are indeed a contagious phenomena that can take out the good with the bad. In the meantime you can investigate banks and credit unions and compare them by such methods as IDC score. The scores range between 1-300, with higher scores being safer. Anything over 200 is great, and 165-199 is very good. Ratings can be confirmed with IDC by phone, for a fee.

Veribanc also offers ratings over the phone for $10, according to the FDIC.

See here for the FDIC list of bank rating and analysis services, complete with contact details.

The FDIC does not release its ratings on the safety and soundness of banks and thrifts to the public. There are private companies, however, that rate banks and thrift institutions. The FDIC Library staff has compiled the following list of bank ranking and analytical services as a resource guide for researchers. The list is divided into two major categories: bank ranking services and credit rating/analytical services. Database services, bank securities ratings, and bank rankings by phone are listed separately.

Weaseldog said...

Two weeks to fix this, may be an apt assessment. But I can't for the life of me, figure out what could fix all of this in two weeks.

I'm glad that the world saw reason to celebrate Obama, and through him have found reason to hope. I'm saddened however, that such hope has been given at such a late date.

On other blogs, I've read commentary from people who have known and worked with Obama in the past. The collective assessment seems to be that he is a particularly good example of a Chicago politician. As his Senate record of saying one thing doing another, seems to bear out.

His choice of appointments, seem to also be a continuation of his 'do one thing say another', philosophy.

So I expect that as president, he'll continue to say he'll do things, while doing something else.

Perhaps I should give him two weeks probation? After all, I'm not sure what is getting at, suspending Gitmo trials. That could be a good step in the right direction.

I've been coming across David Matthews in various venues, for a decade now. I tend to think he's right, that the planet doesn't need us. But sometimes, the most moral or ethical viewpoints will shut down a conversation, rather than lead it into a productive direction.

We are after all, by nature, egocentrical creatures. We abhor information that suggests that we do not have value. In this fashion, David preaches a nihilism, that goes against our psyche. He makes some people, downright angry. For me, I just got bored with him after a while. As if I can speak to this without being somewhat hypocritical.

So I can't help but wonder if I'm not one of the two other posters that are riding the line...

I can't think of a good reason to discount the predictions of imminent collapse. Everything is still falling apart. I can't though, help but think that there might be some magic fix (illegal of course) that the Fed will dream up, to keep the banks alive a while longer, while the real economies continue to crash.

Could the Fed pull a 'Weekend at Bernies' rescue, and keep the banks appearances up, even if they had no profitable business? So long as payroll checks for the brass don't bounce, they are still in business, right?

As to the pic, I'm not sure how short those folks are. Put them up on the steps and they are taller than the sconces. From that pic, I can't really tell their height. Further, even white people were short then, due to hard labor from a young age and poor nutrition.

Right now, I'm of the opinion that a crash is imminent, and that no one can stop it. The question arises as to how we as individuals and communities can weather it, and what will the upside look like?

As to oil, I'm reading reports that tankers are being used to store oil, to be resold when prices go up. It seems to me that this is another crisis in the making. I can see this adding volatility to the oil market, destabilizing any potential near term recovery. And what happens if the firms leasing the ships never see a good time to sell, before they go bankrupt?

Stoneleigh said...


So I can't help but wonder if I'm not one of the two other posters that are riding the line...

Not at all.

David Matthews used to start every DrumBeat over at The Oil Drum with reams of scripture along with eager anticipation of human downfall. That just isn't useful and drives other posters nuts. Now he's here, and put up about 6 posts yesterday filled with nothing but spite - calling us racist bigots for no other reason than that we dared to question Obama-mania. I wouldn't call those contributions from an ethical voice.

Anonymous said...

Paradigm shifts?

Kuhn's observation-hypothesis-experiment iterative cycle (e.g. applied to predictions of oil price rises, not) led me here from TOD.

Clarity from Ilargi and gentle patience from Stoneleigh has got me hooked.

We're now doing what we can to encourage 'red pill' moments of ephiphany in friends and family.

The TOD taught me a lot about which parts of the infrastructure might go down, and the potential consequences.

It's given us a bit of a head start I hope. It amuses me to read on Denniger's site some of the 'early stage' survivalism realisation that's emerging - ooh it takes me back.

It may amuse/encourage I+S to know that as a result of TAE we're doing the following - hope we're not just naive dreamers for trying this:

At the moment we're in the UK. We have the chance to jump ship (and provide sanctuary for up to 18 like minded souls (still working on who) to a 2 hectare small holding, vines, orchard etc, half way up a hillside in sparsely populated part of rural Italy, free of obligations apart from £1k taxes/year (as of now!) Not ideal (Italy) but better than the UK, the house has been there for 200 years so they must have survived without oil etc.

We also have a small house here with some equity left in it.

We are planning to borrowing money on our house in the UK (in the next week or so) then sell it asap, using the £ to take the 'italian job' properly off grid.
We hope to save 2/3 of it to give us something to live on out there till we get the garden up and running (and work out how to eat the wild boar that dig everything up - grrr) - but it will be in sterling - about £30k.

If we're moving to Italy but living here for now, it seems reasonable to split the currencies in the event one of them tanks.

If anyone's got any thoughts or advice on this madcap scheme, (hey or even fancies a visit!) we'd welcome them.

If there is a European equivalent of the FDIC could some one link it? thanks


Anonymous said...


I read attentively the comments by Anon concerning the photo today and, frankly, came up blank. As is almost always the case, there is simply no obvious link between the photo and the rest of the page.

People can of course try hard to find a link, but that is their business and does not have any bearing on the intent of the blog authors.

I am more receptive to the desire of people here not to see their hopes and dreams stomped on quite so firmly by Ilargi on a very symbolic day. I agree, delusions and herding are dangerous, but a 24-hour break simply to partake in the uplifting surge of hope on the part of millions of people (even if I and many of them know that the reprieve will be very short) really does recharge the batteries. What is any party, fête or Fest for if not to provide a break in what we know (or will know) to be true. Therein precisely lies their value.

For what it is worth,

Honest John said...

I take the Bill Maher approach to trying to understand why people are "herding" as Stoneleigh put it, they are mostly uninformed. They get their news from Jon Stewart or Colbret Report. The haven't clue about toxic assets, or what a derivative is, all they know is Bush is gone and a new guy is in the White House that make them feel good. Or they are aware, but still ignore it and think everything will work out fine in the end. Our neocortex just hasn't evolved enough to dismiss our fears, or allow us to comprehend the complexity of our situation. We are humans, and our emotions take over our ability to see things as they really are, there are exceptions by a few, but vastly in the minority.

Weaseldog said...

StoneLeigh wrote, "calling us racist bigots for no other reason than that we dared to question Obama-mania. I wouldn't call those contributions from an ethical voice."

I'd ban him for that.

Anonymous said...

The pound is absolutely dying right now...

Stoneleigh said...


Congratulations - that sounds simply wonderful. I love to hear stories like that, and I wish you and whomever else joins you the very best of luck :)

Not that I expect to get back to Europe again, but if perchance I do then I'd love to pay you a visit, and François too. One can never have too many friends.

I agree with your idea of splitting currencies for the time being.

Anonymous said...

“Sometimes, short sellers (who profit when shares lose value) offload massive amounts of phantom stock to drive down prices, destroy pubic companies, or even crash the market. That is why there used to be restrictions.

At any rate, I don’t think Madoff had an office at the SEC. He certainly was not employed there. But the SEC was glad to have Madoff write a rule exempting Madoff from the rules. The formal name of the rule is, “the option market maker exception to Rule 203(b)1,” but the SEC was so thankful that it named the rule after the great man himself.

It was called, “The Madoff Exception.”

After Madoff wrote that rule, market makers (e.g., Madoff) proceeded to “rent” their exemption to hedge funds (i.e. friends-of-Madoff).

It remained against the law for hedge funds to sell phantom stock to manipulate the markets. It was also against the law for market makers to help hedge funds orchestrate such schemes. But under the Madoff regulatory regime, unscrupulous short sellers (i.e. friends-of-Madoff) could engage in this illegal activity so long as they did so with the illegal connivance of a law-breaking market maker (i.e. Madoff).

A few months ago, this naked short selling was implicated–by numerous academics, the U.S. Chamber of Chamber of Commerce, the Secretary of the Treasury, the CEOs of Wall Street’s biggest banks, respected law firms, John McCain, Hillary Clinton, and numerous congressmen – in the near total collapse of the American financial system.

The SEC has not prosecuted anybody for this. After all, there is an “exception.””
Bernard Madoff, the Mafia, and Naked Short Selling

Starcade said...

VK: They had better move quickly to bail out California (as in hours, if not by the end of the week). I speak very seriously as I say that it's all over for social order the moment the checks stop. When I used to live on the streets, I used to see packs of recipients waiting for their money outside the check-cashing place on 7th and Market at midnight every check day in San Francisco.

I fear for the safety of the entire Civic Center/mid-Market area if the checks stop. One thing to keep in mind, though: Since Feb. 1 is on a Sunday, the February 1 "check day" is actually January 30. Still not clear what that exactly means, however.

Stoneleigh: Alger's American Dream is dead. Upward mobility is no longer feasible (hasn't been for some time, really -- studies have shown that Europeans have a better shot at moving up the ladder than Americans do), and the whole question may come down, now, to who gets to determine who lives and who dies. There has to be a real question as to whether the credit bubble has not also created a population bubble as well.

It is for this reason that, unless he openly wishes to open areas which would segregate the poorer sections of the population from the rest until the recovery can take hold (and then he better have enough food and incentive to keep them from rioting), he almost has to do whatever is plausible to keep the checks going -- and I'd say that even if I weren't drawing SSI. The reality is, as one person slamming the welfare state put it, the checks are an incentive (and, for many, the last one) not to riot. Checks stop Feb. 1? Riots start Feb. 1.

Ilargi: Re: the predictions. In both cases (The Sept. 27 one about our hometown at Christmas and the one about Obama's term yesterday), even if that's not what you intended to "predict", that's how both predictions came across to me.

You said on 9/27/2008: Few if any banks, few jobs, no retirement plans. "By Christmas, you'll be lucky if you recognize the town you live in."

You said there was a real chance that Obama would be the shortest-serving President if immediate action wasn't taken. That means he's out within a month -- either by a bullet or by the absolute collapse of the Union. "Let me repeat: there is only one way out: force all losses in the financial world out on the table where we can see it. If that is not done, Obama's presidency may be the shortest in US history."

That is where they are getting the predictions, Ilargi.

Here's the kicker: What if there is no non-zero "fair value" for the toxic assets? What if they are truly (correctly) worth nothing?

jal: This is the true tragedy. Without continued bailouts, fall of this year is not looking much of plausible at all.

Weaseldog: Make no mistake: Obama's very life depends on that he does not do another thing than he says. If he tries to continue this and TSHTF, they'll take him out along with a lot of others, and the belief that he could be the shortest-reigning President would prove correct.

If a crash is imminent, understand that any "upside" would require either a needed culling of the herd or a required keeping quiet of same herd. If the second doesn't happen, the first MUST.

Anonymous said...


I guess I understood his part of the speech where he talked about cynics differently than you as I thought it did not relate to the previous statements in the same way you did, but pointed instead towards something else. I don't think that Obama discourages criticism or has problems with serious disagreement, but is rather concerned about something else that is harder to put into words and something I've been trying unsuccessfully to explain. I'll give you a personal example and see if this makes it clearer.

At a job I held a few years back, I had a boss who always complained that a specific project never got done. I tried to explain to him that part of the reason for it was that he never really explained in any concrete way what he wanted the end product to look like. So, I put together a sample of a specific way in which the work could be done and my boss decided to have a meeting. What surprised me was that after the meeting, in a conversation with a coworker, it became apparent to me that he thought I did what I did out of some kind of "secret agenda" to make sure I got my way. He was actually shocked when I looked at him and said "I don't give a shxt whether or not my format is chosen. The point was to try to get our boss to be more specific in what he wanted by forcing him to critique one possible direction. It does't matter to me what direction we go in, I just want to know where we're going."

Thus, to me the cynicism is not about people who disagree but rather has it's roots in a way of interacting and viewing others that starts from the point of having to figure out their precise "agenda" before deciding whether to even interact with them. Plus, it offers a highly convenient excuse for inaction because it allows you to avoid a fruitful engagement or debate by simply concluding in your own head that no matter what you say, the person will only seek his or her own aims. Or, it allows you to rationalize pure obstructionism by viewing all dissenters as an "enemy" and thus not debating ideas and issues on their merits.

So, it is not about avoiding debate or discussion, but rather a reminder of a need for a different way of communicating that lets us find a common way forward. I think that he's doing this now because if we can learn to collaborate and work together, we have a greater chance of surviving what's coming.

Linda S.

Anonymous said...


@ CS

I am unfamiliar with the Italian equivalent of the FDIC, so cannot help you there, except to say that each country transfers into national law the European decisions which set a minimum (recently raised). Each country may guarantee more than the minimum. In France, it is 70 k€ per account holder and per institution (bank, insurance company, etc.).

As for moving to Italy (assuming you are not Italian), I can offer you three pièces of advice.
1. Learn the language.
2. Learn the language better.
3. Learn the language more.

You probably already know all this, but it is truly a make or break condition. In terms of how they will welcome you, in terms of your grasp, involvement and satisfaction in your new country.

I live in a section of the Alps where many English-speaking people have arrived and it is sad to see their self-imposed internal exile. I cannot understand their motivation (or lack thereof). Many have left and more are leaving now given the financial situation.

Otherwise, your project sounds like great fun. To my mind, Italy is the (other ;-) great place to eat well and I have even found some decent wine there!


Ilargi said...


"Few if any banks, few jobs, no retirement plans. "By Christmas, you'll be lucky if you recognize the town you live in."

You said there was a real chance that Obama would be the shortest-serving President if immediate action wasn't taken. That means he's out within a month -- either by a bullet or by the absolute collapse of the Union. "Let me repeat: there is only one way out: force all losses in the financial world out on the table where we can see it. If that is not done, Obama's presidency may be the shortest in US history.""

Neither is a hard prediction. WIthout the trillions spent, Xmas would have have looked real different.

"Obama's presidency may be the shortest.." is what it is, with the emphasis on "may". What's happening in England changes the game: even higher bailout numbers now serve to crush confidence, not increase it. I'll address that today.

Anonymous said...


I have been a big Obama supporter for a long time, and I find nothing to object to in anything I&S have posted.

In fact, if this "bad bank" plan passes, I think it will constitute a breach of the public trust. I don't think the elites in the US establishment have any idea of the medium and long-term political consequences of their actions over the past six months. This is like Bourbon dynasty stuff, honestly.


Anonymous said...

david mathews, while I agree most people who spend too much time online should spend time outside, your chosen method to deliver this message is completely absurd, childish, and very typically internet troll-like, so you completely fail to achieve your goal.

Most people when they fail to achieve their goals readjust their methods until they find a way that works better to achieve it, but you're just following the typical internet troll method, which is to keep babbling and ignoring anything outside of that.

I suggest you follow your own advice and go take a very long walk in real nature, and then come back and work on finding a more positive way to share your love of nature, ie, the real world.

But I assume you actually really aren't interested in doing anything like that, otherwise you'd find a way to spread that message that isn't so juvenile. Think about it, what is your point? Are you just another one of the asberger crowd that has no idea how to interact with real humans? That's what you read like, that's not I assume your goal, but it's what you are communicating.

I love nature, but spending time in it doesn't make me want to go online and whine and complain and insult, apparently it's not working for you at all, try to find out why.

Anonymous said...

I think Ilargi has a point about Obamamania. I listen to him talk and am moved by his idealism and supposed goals. But look at his actions and who he surrounds himself with? Retread political hacks and globalist chickenhawks (the big Zbig). The lyrics don't match the music.

Until we see what he does it's all theatre.


Stoneleigh said...

For anyone who might be wondering, this is the sort of thing (quoted from the post I am about to delete) that earns a ban here.

David Matthews: I find it odd that you are saying all of this while Ilargi and Stoneleigh are writing the most vile sort of racist crap and posting on a daily basis on their knowledge-starved credit crisis blog.

Ilargi and Stoneleigh represent the Talk Radio - Rush Limbaugh - Fox News - Sarah Palin wing of conservativism ... you know, the side which lost.

They should get outside more. Perhaps they might meet non-white people and it might change their racist minds.

I just wanted you all to know that we delete very little and ban very few, but there are some things that cross a line. No one need fear that their posts will be deleted merely because we disagree with their point of view.

Anonymous said...

david mathews, either you are suffering from some type of mental disorder, and should be banned from further postings, or you are just a plain old fashioned fool, which would make a ban desirable as well.

It's one or the other.

You aren't convincing anyone here of anything, your views are pure babble, and you really need to go find out why you feel the need to waste your time posting places you don't like.

I suggest a 1 week backpacking trip in the wilderness, without your meds.

If you think someone is stupid, then don't waste your time reading their blog, that's kind of basic. The fact you continue suggests you really have some kind of problem, get help.

But I'm going to vote for you being on some form of meds, which don't appear to be working very well for you (if you are, please have the dignity to at least remain silent and not make further excuses).

Ilargi, feel free to delete this posting as well after you remove his.

Anonymous said...

david mathews, I didn't say I agreed with Ilargi on all issues, I don't, some I ignore, some I agree with, some I am uncertain about, but it doesn't really matter to me, I am not looking for 'truth' here, I don't need anyone to tell me what the 'truth' is, that's what thinking for yourself is for.

That's totally unrelated to the fact that you appear to be a total troll, who has no idea how to communicate at all.

There's no reason to be polite to you, you are a stereotype internet troll.

All your efforts and postings have failed to achieve your desired goal, and yet you persist. This is probably due to mental disorder plus meds, I'll stick to that, since I don't know any normal people as lame as you are.

Anyway, go take a hike, a long one, 7 days minimum, and stop wasting bytes by your failed efforts to convince someone of something, and your silly attacks.

You have no idea what a cliche you are, the internet is filled with trolls like you, the only variables are what topic they chose to waste their time posting on.

Anonymous said...

Trollers, http://tinyurl.com/4vor3, they're like flies on a picnic, only much more unsettling. Hope you manage not to fan the flames, even 'deleting' is gasoline sometimes - not easy.

Cheers for the heads up Stoneleigh and Francois - our door is always open :) we owe you big time..cs

Anonymous said...

Now, back to the real, non-medicated world: riots in iceland. Great stuff.

"Ordinary islanders were determined to vent their fury at the way that the political class had allowed the country to slip towards bankruptcy. The building was splattered with paint and yoghurt, the crowd yelled and banged pans, fired rockets at the windows and lit a bonfire in front of the main door. Riot police moved in. ....

Iceland, Bulgaria, Latvia: these are not natural protest cultures. Something is going amiss."

Ah, a sight for sore eyes, nice going Icelanders. And since that country is small enough to have a real democracy, let's watch what happens there, maybe the Icelanders will decide that default is a good option, ie, hand in the keys and start over.