Thursday, January 22, 2009

January 22 2009: The Aggregator Lemonade Stand

Harris & Ewing A Clean Sweep 1914
U.S. Capitol Cleaning interior glass neg

Ilargi: Oh, that picture? Sorry, no racism here. Just a desire to point out common decency. We’ve come a long way. And I laud Obama for closing Gitmo. Good on ya mate. I just have behemoth sized doubts on your economic team. And economy happens to be what I do.

Here's one more from our buddy Dan W. at AshizAshes. I find it funny that I got the feeling Dan gets a little stuck and lost in his own metaphors (wait, how do I make the Chinese buy lemonade?), and it still works out to be a clear picture. For some reason, Stoneleigh sent me a Calvin and Hobbes a few weeks ago, she knows I'm a huge fan, that fits right in. I've always been in absolute awe of Bill Watterson, it doesn't even get to jealousy, since he's too brilliant. Just to say that, what a way that is, the daily cartoon, to tell people about what you think is wrong with the world around you. And get filthy stinking rich in the process. Nah, that last bit matters no more to Bill than it does to me. The race is the prize. G-d, I miss Calvin's take on events. Someone else I'll miss is my favorite aunt Manny, who I just minutes ago heard passed away a few days ago. I love you girl. May peace carry you. You are beautiful. And your passing makes me useless for the rest of the day. I am so sad.

Dan W:

The Lemonade Stand: A "Bad Bank" Tale

John owned a lemonade stand. At first it seemed awesome. The only problem was that John owed a bunch of his friends a lot of money because they had either helped him build the stand or lent him money to buy the wood for the stand or lent him money to buy the lemons and sugar and cups for the stand. But truth be known, John didn’t really have any money to pay them back. Why? Well (a) John never actually bought any lemons or cups or sugar with the money he had been lent, (b) John gambled and lost lots of the money that his friends had lent him for lemons and sugar, and (c) the police told John he had to get a permit to actually sell any lemonade and John didn't have the money to pay for such a permit. John was in quite a bind, I’ll tell you. John owed like $250 to his friends, with interest! And for an 11 year old, that was a whole lot of money!

Well interestingly enough, John wasn’t the only lemonade purveyor in this kind of trouble. John found out on the Internet, from a website called, that like 500 other kids were in the exact same boat as him!! All of them also owed a bunch of their friends a ton of money, and all of them, like John, weren’t able to make a penny with their lemonade stands. Well one day John was surfing the web and he came across another website called John couldn’t believe his luck!!! John emailed the guy who owned the site, a guy named Dave, and John told Dave all about his situation. John also told Dave about all of the other kids who were in the same predicament as was John: $250 in debt, no revenue, no capital, no way to pay back their friends. So Dave and John got in touch with all of the other lemonade stand owners, and they held a secret meeting.

At the secret meeting Dave told all of the kids who owned the lemonade stands that he would buy up all of their debts from them, thus allowing the kids who owned the lemonade stands not to have to tell all of their friends who had lent them the money that they were broke and wouldn’t ever be able to pay them back. This, Dave believed, would halt any systemic collapse in the lemonade-stand industry, and since Dave profited from exploiting situations like this, the last thing he wanted to see was a systemic collapse. And in exchange for doing this, Dave told all of the kids who owned the lemonade stands that, from now on, they needed to work hard to make the lemonade stands profitable and that Dave would get a big cut of the profits. (Truthfully, however, Dave didn't care too much about this part of the deal You'll find out why a bit later on in the story.)

This was great! A winning situation for everyone! And so Dave told all of the lemonade stand owners to in turn tell all of their friends who had loaned them money to build the lemonade stands in the 1st place that Dave was the place to go to get their loan money back. So things seemed really cool. But there was a problem: none of the lemonade stand owners had enough capital to buy the lemons and the sugar, or to move their stand to a better location, or to get the permits required by the police. AND, when the kids who had LENT the money to the lemonade stand owners went to Dave and asked him for their money back, he told them that they would have to wait until the lemonade stand owners started making money from selling lemonade. The kids who had lent the money in the 1st place were kind of bummed out, but Dave was smart. He knew that if he didn’t appear to help the lemonade stand owners get started on making money, (a) he would never be able to profit from the piece of the action that he was promised on every glass of lemonade sold and (b) the kids who originally had lent the money to the lemonade stand builders in the 1st place might get angry and even organize some resistance to Dave's plan. Dave knew that he had to make it look like he was trying to get the lemonade stand owners to make money, even though deep down this didn’t really matter too much to him. And of course, Dave had a plan.

And so a few days later Dave called a meeting of all of the guys and gals who had lent all of the lemonade stand owners the money to build their stands in the 1st place. And as you can imagine, this was a HUGE meeting. Like 10,000 kids, all crammed into the gym at the high school in Dave’s town. And Dave told all of these kids---the ones who had initially lent the lemonade stand owners money to build their lemonade stands---that he needed them to lend HIM money so that he could keep the lemonade stands from going bankrupt. He told the 10,000 kids that if they would each give him only $10, he could get the 500 lemonade stands up and running again, and then with his cut on the profits from the lemonade stands he could pay the kids back their $10, plus interest, PLUS the money that they were owed for their original loans that went to build the lemonade stands in the 1st place.

And so each of the 10,000 kids forked over $10, and Dave took his $100,000 and gave each of the 500 lemonade stand owners $10 for lemons and sugar, $10 for the permit from the police, and $5 for a cart so that the lemonade stands could be moved to a better spot for selling lemonade. And all seemed great! The insolvent lemonade stands had been saved! The debt owed by the lemonade stand owners had been transferred to Dave, and in exchange the lemonade stand owners had promised to give Dave a big piece of the action on their future sales. Dave felt great because he had effectively taxed the kids who had originally lent money to the lemonade stand owners in order to get the lemonade stands working again, and Dave only had to spend $15,000 of the $100,000 he had collected. And Dave sent the remaining $85,000 to a bank account in the Cayman Islands, but that’s another story altogether.

Yes all seemed great, except it wasn’t great. It sure wasn’t great for the kids who had originally lent the lemonade stand owners money to build their lemonade stands. They were getting totally hosed! Not only had the debts owed to them by the lemonade stand owners been transferred to this guy Dave, but now they had also given Dave more of their money so that he could help save the lemonade stands! And they were told they couldn’t get any money from Dave---either the $10 plus interest that Dave owed them from the money he got at the big meeting in the school gym, or the debts owed to them by the lemonade stand owners all of which had been transferred to Dave---until the lemonade stands could turn a profit.

And John and the other lemonade stand owners weren’t too concerned about making any money, because (a) their debts had been transferred and they were no longer insolvent and (b) Dave secretly gave each of the lemonade stand owners like $20 just to keep them pretending that they were really trying to turn a profit. And the truth is that Dave didn’t really care too much if the lemonade stands were profitable because (a) he had already taken the 10,000 kids for $100,000, (b) he had only spent about $15,000 of that on recapitalizing the lemonade stands (leaving him with $85,000 all to himself), and (c) he didn’t have to pay back the 10,000 kids who had lent him $10 each and who had also lent money to the lemonade stand owners to build their lemonade stands a red cent until the lemonade stands turned a profit. Those were the rules. And Dave had some pretty big friends who were big bullies and so if any of the 10,000 kids got out of line and complained too much, the bullies would set ‘em straight.

Got it? Dave (The government’s “Bad Bank”) simply took the 10,000 kids’ (the people of the USA) money---or money from selling debt in the form of bonds to China and Japan, etc., but I had no idea how to weave those dynamics into this story---to save the lemonade stand owners (Citi and BofA and all of the other banks). The 10,000 kids were doubly screwed! They were screwed by the lemonade stand owners (the banks) who had gone into debt by being dishonest and gambling and not following through with their fiduciary responsibilities, and they were screwed by Dave (the embodiment of the government’s “bad banks”) who used their money to save the lemonade stands (the banks) while never intending to reimburse the 10,000 kids (us!) one damn cent. In this story the liars are saved, the government saves them, and the public pays the price, over and over and over again.


1. Dave could also print some money, use it to prop up the lemonade stands, and then have the 10,000 kids make sure Dave's printed money retains some value by paying off debt through future taxation.

2. From "The Bum": The way I look at it, Dan, is Dave is going to buy a bunch of rotten lemons from the guys that own the lemonade stands and the 10,000 guys are told if they ever wanted any more lemonade that they would have to pony up and buy them so the 500 guys could get fresh lemons, but the 10,000 guys ain't got no money so a lifetime loan with recourse to their children was arranged for them because the 10,000 guys really were sold on the fact they just couldn't live without lemonade. So Dave exchanges all the rotten lemons for new lemons and the 10,000 guy have to still buy the lemonade plus pay back to loan and the guys that lent the money to the 500 guys who built the lemonade stand paid back the guys that lent them the money to build them plus interest and the guys the own the lemonade stands are making money hand over fist.

U.K. Pound Serves as Omen for Dollar
As the British pound continues to sink, its travails are a cautionary tale for the U.S. dollar. The U.S. and the U.K. face very similar predicaments, from a deepening recession to a damaged financial system. Both are orchestrating massive bank bailouts and attempting to assist struggling homeowners. Both are ramping up government spending even as they rely on financing from overseas investors. And both countries have central banks that have slashed interest rates and opened the door to unconventional ways of stimulating the economy. Yet their currencies have headed in opposite directions. On Wednesday, the British pound tumbled to a 23-year low against the dollar, briefly buying just $1.362, down from over $2 only six months ago. The pound also hit a new all-time low versus the Japanese yen. It got a minor boost in late afternoon trading, following a report that finance ministers from major industrialized nations will discuss the currency's weakness when they meet next month. By contrast, the dollar managed to strengthen against a host of currencies as the financial crisis intensified last fall. It has also surged ahead in recent days, particularly versus the pound and the euro.

Unlike the pound, the dollar is being buttressed by its unique status as the world's reserve currency and the vehicle for transactions in U.S. financial markets, including Treasury bonds. That means investors often seek out the dollar as fears rise, sometimes in spite of their concerns about the U.S. economy. "The dollar is still benefiting by default" as investors run from riskier bets, says Lisa Scott-Smith of Millennium Global Investments, a London currency manager. "The pound isn't a natural reserve currency in the way that the dollar would be." The euro also has flagged in recent weeks, as concerns have risen over the creditworthiness of some of the more indebted countries that use the currency. But it has suffered less than the pound, a sign that investors may be gravitating toward the largest, most highly traded currencies as nearly all economies stumble.

Meanwhile, there's little light ahead for the beleaguered pound, say some currency experts. The economic news is "horrendous," says Neil Mellor, a London-based currency strategist at the Bank of New York Mellon. "There is very good reason for panic at the moment." In one worrisome sign, investors not only dumped the pound earlier this week, but also shed U.K. stocks and government bonds, sending their yields up. Such a combination, if sustained, would raise the fear that investors are exiting from a host of U.K. assets, creating a vicious cycle that is difficult to arrest. That's also the scenario that some worry might await the dollar and U.S. bond yields, should appetite from overseas investors wane. These days, policy makers are inclined to let their currencies weaken "until such a time as other asset markets flag that enough is enough," says Alan Ruskin, chief international strategist at RBS Greenwich Capital. Given that the moves in British government bond yields aren't yet extreme by recent standards, "I don't think we've quite reached that point in the U.K."

In a note on Wednesday, Goldman Sachs analysts pointed out that recent moves in the pound and U.K. bond yields were more typical for emerging markets with weak fundamentals. However, they added, the analogy isn't justified over the long term. Indeed, the firm recommended that investors buy the pound as well as U.K. bonds. While the dollar continues to benefit from its unique position in financial markets for now, it is far from clear that the resilience will last. "Right now the market is beating up on the pound, but at some point it will look for something else to pick on," says Paul Mackel, a currency strategist at HSBC in London. The fact that the Federal Reserve stands ready to use a host of unconventional measures to flood the economy with liquidity in an effort to stimulate growth "could hurt the dollar quite badly" later this year, he says.

Riots in Iceland, Latvia and Bulgaria are a sign of things to come
Icelanders all but stormed their Parliament last night. It was the first session of the chamber after what might appear to be an unusually long Christmas break. 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.

Now in the grand sweep of the current crisis, a riot on a piece of volcanic rock in the north Atlantic may not seem to add up to much. But it is a sign of things to come: a new age of rebellion. The financial meltdown has become part of the real economy and is now beginning to shape real politics. More and more citizens on the edge of the global crisis are taking to the streets. Bulgaria has been gripped this month by its worst riots since 1997 when street power helped to topple a Socialist government. Now Socialists are at the helm again and are having to fend off popular protests about government incompetence and corruption.

In Latvia – where growth has been in double-digit figures for years – anger is bubbling over at official mismanagement. GDP is expected to contract by 5 per cent this year; salaries will be cut; unemployment will rise. Last week, in a country where demonstrators usually just sing and then go home, 10,000 people besieged parliament. Iceland, Bulgaria, Latvia: these are not natural protest cultures. Something is going amiss. The LSE economist Robert Wade – addressing a protest meeting in Reykjavik’s cinema – recently warned that the world was approaching a new tipping point.

Starting from March-May 2009, we can expect large-scale civil unrest, he said. “It will be caused by the rise of general awareness throughout Europe, America and Asia that hundreds of millions of people in rich and poor countries are experiencing rapidly falling consumption standards; that the crisis is getting worse not better; and that it has escaped the control of public authorities, national and international.”

Ukraine could be the next to go. The gas pricing deal agreed with Moscow could propel the country towards a serious financial crisis. Russia, too, is looking wobbly. A riot in Vladivostok may have been an omen for things to come. What will happen when the wider economic crisis translates into higher food prices? Or if Gazprom has no choice but to increase domestic gas prices? Governments have so far managed to deflect attention from their role in the crash, their slipshod monitoring, by declaring themselves to be indispensible to the solution.

This may save the skins of politicians in wealthier countries who can credibly and expensively try to prop up banks and sickly industries. But it does not work in countries that are heavily indebted, with bloated and exposed financial sectors. There, the irate crowds are already beginning to demand: why hasn’t a single politician resigned? What has happened to ministerial responsibility? Who will investigate government failure? Good questions, it seems to me, in these unquiet times.

America’s banks need to hold a yard sale
by Meredith Whitney

A clear lesson learnt from this credit crisis has been to sell and sell early. However, it appears as if US banks are setting out to make some of the same mistakes of the past 18 months all over again. In many instances, those mistakes determined who survived and who did not. Throughout 2007 and 2008, when I asked managements why they were not more aggressive in disposing of assets, the common answer I received was that they believed current prices were too distressed and did not reflect the true underlying value. Unfortunately, the longer they waited, the less these assets were in fact worth. Such a strategy cost Merrill Lynch and Citigroup more than half of their per share capital. In the case of Lehman Brothers and Bear Stearns, capital all but vaporised. These are just some examples but in reality this applies to too many financial institutions.

Throughout 2008, hundreds of billions of dollars were raised to recapitalise US financial institutions, but this money simply went to plug holes created by holding on to assets with declining values. Until the fourth quarter, monies were raised from willing investors. However, beginning in the fourth quarter with troubled asset relief programme capital created to recapitalise these institutions, US taxpayers became the default investors. Now, when the average taxpayer finds him or herself overextended, he or she is forced to backtrack and, in situations of duress, sell stuff (otherwise known as a yard sale). In these cases, selling a set of snow skis for $15 or a prized record collection for $10 is not desirable but is necessary. Why should the US taxpayer be forced to fund behaviour that he or she would never have the luxury of indulging in? Citigroup provides a prime illustration to support this argument. Last Friday, Vikram Pandit, Citigroup’s chief executive, stated: “We are not in a rush to sell assets.” This comes from a company that has incurred more than $51bn (€39bn, £36bn) in writedowns and has called upon more than $45bn in Tarp money from the taxpayer.

At a minimum, this seems like a company currently operating under a different rule book from that used by taxpayers. What is more, taxpayer dollars will have increasing demands on them. Thirty eight states are underfunded: already California and Arizona have begged for more than $10bn in federal dollars, while at least 36 more states have shortfalls in their 2009 budgets totalling more than $30bn. I believe they will be forced to sell assets such as toll roads and airports. It is worth noting that the US is well behind the rest of the world in terms of private ownership of such assets. The fact is that there is money on the sidelines looking for opportunities to invest. One constant question I get from investors, who need somewhere to put their money, is: if I had to own something, what would it be? I am not very helpful to them at the moment as my answer is that I would own nothing. I do tell them that I believe that later in the year there will be fabulous opportunities to invest in new combinations of businesses that are currently “off the menu” to individuals. What I mean by this is that the system will eventually force disposals of assets: here I am just arguing that we need to get to it sooner rather than later.

Funding is the critical challenge to outsiders’ ability to bid more aggressively for assets. Many of these potential investors have clean balance sheets and, if provided with the appropriate funding concession (guarantees of long-term, low-cost capital from the government), could also more ably lubricate the financial system by making actual loans. These investors could be private-equity firms or existing public companies. The key here is government providing a funding concession and the banks being forced to sell assets that could raise capital and provide some tax relief to taxpayers. No one doubts that losses will go higher, so asset sales are certain to be heavily discounted just as initial bids for collateralised debt obligations and retail mortgage-backed securities were. However, in retrospect, those “discounts” were far less than the writedowns companies took just months later. While it is never pleasant to sell one’s “crown jewels”, the strain of this credit crisis and the overextension of many bank balance sheets will require that they sell what they can and perhaps not what they would like. After all, that is what the average taxpayer would be forced to do.

As banks teeter again, Wall Street looks for answers
Wall Street is losing faith in Washington's efforts to fix the financial crisis. As bank losses pile up and bank stocks plunge, investors have an urgent question for the new Obama administration: What's the plan? Timothy Geithner, Obama's pick for treasury secretary, had few answers as he began confirmation hearings Wednesday. He told lawmakers that two goals were to "get credit flowing again" and overhaul the $700 billion bailout, but he offered few details. There's a lot riding on the new administration. Several of the largest U.S. banks, saddled with soured mortgage-backed assets, are edging toward the danger zone despite injections of billions of dollars from the government last year. At the same time, the recession is gathering force, chewing up jobs by the hundreds of thousands and ruining many consumer and business loans that were once thought to carry little risk.

The first half of the federal bailout came with no requirement that the banks lend more. But even keeping the cash as a cushion hasn't stopped banks from sliding toward the precipice. "The size of the problem is growing faster than the banks' ability to handle it," said Joe Battipaglia, market strategist at Stifel Nicolaus. "We're halfway through the bailout money, and the banks are in worse shape than they were six months ago." Investors expect Obama's team to consider a range of options, including pumping more money into banks and creating a government entity to buy up bad bank assets so they'll start lending again. But those prospects all raise troubling questions: Would stockholders be wiped out? How much taxpayer money would ultimately be needed? What could happen if the government takes an even bigger role in the banking system? And perhaps the biggest unknown: Would a bigger bailout get banks to start lending again and help pull the country out of recession?

For now, the focus is simply on keeping the banks alive. Experts say household names like Citigroup and Bank of America, which have already received two government cash infusions apiece -- will need even more to offset future losses and stay afloat. The fear is that both banks are so big, so blended into the global financial system, that their collapse could trigger a catastrophe. The most troubled banks are "going to definitely go down" without more government help, said Jonathan Macey, a law professor at Yale University who wrote a book about a bailout of Sweden's banking system during the 1990s. "And they may go down with it," he added. "The pace of these bank losses is outrunning the infusions by the government." Sheila Bair, chairman of the Federal Deposit Insurance Corp., sought to allay those worries Wednesday in an interview with The Associated Press. Still, she acknowledged investors' concerns.

"There's a lot of fear out there," Bair said. "We're going to work through this. It's going to be hard. It's going to take time. But we will work through it." In the meantime, investors are agonizing. Citigroup's stock fell 20 percent to below $3 a share Tuesday. Bank of America shares tumbled 29 percent. Both banks rebounded some Wednesday, but experts say their troubles are far from over. So why hasn't the bailout worked? Experts say one big problem is it hasn't addressed the root cause of the trouble: the mortgages and other bad assets sitting on the banks' books. When the government announced the bailout three months ago, the plan was to buy those bad assets so banks could start lending again. But that approach was quickly scrapped, partly over concerns it would take too long to work. Plan B, injecting banks with cash, hasn't worked as Wall Street had hoped. The government has so far provided $192.3 billion to 257 large and small financial institutions in 42 states and Puerto Rico. But banks are mainly sitting on the money, not ramping up lending.

"The capital injections haven't worked," said Edward Yardeni, an independent market analyst. "It's been like giving blood thinner to a patient who needs to have their wounds clotted. The bleeding hasn't stopped." Some lawmakers want to force banks to boost lending if they accept taxpayer money, but none of the leading plans being debated on Capitol Hill include such requirements. If Washington decides to give banks more money, the question is how much. Bert Ely, an independent banking analyst in Alexandria, Va., has estimated the price could swell to as much as $1.5 trillion. "There's no reason why it couldn't go that high," Ely said.

But many on Wall Street are uncomfortable with the government's giving banks more money, believing it would amount to a federal takeover of the U.S. banking system that could wipe out shareholders. "What we're heading for is the dirty word of de facto nationalization of U.S. banks if we continue on the current path," Chuck Gabriel, managing director of Capital Alpha Partners in Washington. "How are you going to attract private capital to the banking system? That's the question they haven't come close to answering." One alternative to giving banks more cash is setting up a government-run bank to buy banks' bad assets. The idea is that by removing the assets weighing down the banks, they'll stop hoarding cash and start lending again. Gabriel said that could assure nervous investors that Obama's team is pursuing a new course of action.

"They need to come out and do something that's a departure" from only capital infusions, he said. "You could spend another $700 billion and some folks might think that's not enough." Experts say there's no option guaranteed to spur more lending. For one thing, banks have tightened lending standards, shrinking the pool of qualified borrowers. That makes it much harder for the government to "force-feed credit into the economy," Ely said. So what if the government decides not to give the banks more money? Experts say the consequences could be dire. In a report last week, Goldman Sachs estimated that financial institutions and investors worldwide will ultimately absorb $2 trillion in losses on U.S. loans -- but have recognized only half those losses so far. Unless the banking sector has a way to offset those losses, troubled banks could fall -- possibly triggering a panic. "You could see a total erosion of confidence among the government's ability to stave off another crisis," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research in Cincinnati. "I can't conceive of the government not doing anything."

Contemplating the Demise of Bank of America, Citi and JPMorgan
The collapse in the share prices of our country’s three largest money center banks over the last week has been truly stunning and is assuredly a crisis of confidence. What started out as a growing unease that the losses of the past year would continue into late 2009 and early 2010 for Bank of America, J.P. Morgan and Citigroup has now snowballed into utter fear that these banks, along with their European peers, could potentially face nationalization as government regulators strive to save a financial system that is still on the brink of cataclysmic failure.

Bank of America, Citigroup and J.P. Morgan have all reported results over the last week and they have ranged from being appalling and awful to just plain bad. One bright spot has been that each of these banks appears to have reduced their exposure to various mortgage securities and derivatives to acceptable levels when compared to where they were in 2007; however, this has come at an enormous cost. Primarily in the form of vast infusions of dilutive government capital that these banks have been required to take since the passage of the first half of the U.S. government’s TARP program.

While losses associated with Bank of America’s, Citigroup’s and J.P. Morgan’s exposure to securities tied to the credit market has likely peaked, each of these banks still face enormous pressures from the rapid economic deterioration that has engulfed the United States and the world. In essence, the banks that toiled in credit market sensitive instruments are facing a double blow; as they must now deal with deterioration in the core of their balance sheets as loans to consumer across the United States begin to deteriorate in quality.

What began with subprime mortgage backed securities and spread to the credit market and its alphabet soup of credit derivative products is on the verge of engulfing Main St. U.S.A. and the bread and butter of these institutions' productive assets. Whereas the regional banks received TARP money to bolster their balance sheets for what was widely viewed as a coming storm, it is painfully apparent that the TARP money received by Bank of America, Citigroup and J.P. Morgan was only used to help the companies recover partially from the implosion of the credit markets. This has left them acutely exposed to a worsening U.S. economy.

As it stands now, the big three U.S. money center banks are clearly unprepared to deal with a severe and deep recession. Had Bank of America, Citigroup and J.P. Morgan found themselves in a position where they did not have to worry about a deteriorating macroeconomic environment, the TARP money that they have already received would have been more than enough; however, this is not the case as December's unemployment data shows. With unemployment creeping up to 7.2% from 6.2% in September and with no sign of any improvement in payrolls we can be assured that the statement made recently by the Chicago Fed Board president that unemployment will rise significantly throughout 2009 and into 2010 is accurate.

For Bank of America, Citigroup & J.P. Morgan such a rise will likely be a deathblow as their significant earnings power will be unable to catch up to surging defaults in their consumer banking divisions. Given their current reserves and their own acknowledged expectations for unemployment rates going forward the balance sheets of these banks will begin to become impaired yet again as the unemployment rate rises above 7.5% and it is likely that they will face near catastrophic stress should the unemployment approach 8.5% - 9%. As a result, it is without a doubt that a significant portion of the second half of the TARP will be designated to these banks, as their capital bases will likely become impaired beyond self-repair in 2009.

In September, J.P. Morgan stated that the bank would face nearly $56 billion in loan losses should unemployment rise to 8% and $42 billion in losses should unemployment rise to 7.5%, yet in its most recent quarterly report, J.P. Morgan stated that it is only likely to experience $32 - $36 billion in losses going forward. This is curious as such a loss projection pays little attention to their past expectations and most importantly to the recent surge in the unemployment rate. Instead of breaking out their losses in relation to the unemployment rate, as they did previously, the bank is now correlating their losses to a decline in housing prices. Such a correlation is surprising as home prices could easily stabilize before the unemployment rate.

Given the bank’s $81 billion in tangible capital and $136 billion in tier 1 capital it is clear that it could survive under its current expectations but increasingly doubtful should the unemployment rate approach and pass 8.5%. If we use the bank’s September numbers as a guide, J.P. Morgan could face an additional $10 billion in losses for each .5% rise in the unemployment rate above 8%. In looking at Bank of America and Citigroup, one must be a little more creative as neither of these two banks are as open as J.P. Morgan is about their balance sheets and their potential exposures to assets that are in danger of becoming impaired. As a result, we must look at their current loss rates on important sections of their loan portfolios.

For Bank of America the key figure is the fact that the bank only had $1.3 billion of reserves tied to $255 billion in first lien mortgages or about .56%. Such a low reserve amount is shocking and will likely be the point by which Bank of America faces the worst pain going forward. The bank’s total managed consumer portfolio was better, yet still only had reserves of 2.83% on a $694 billion portfolio. In addition, its total commercial portfolio of $380 billion only had reserves amounting to 1.96%. In comparison, Citigroup sports a larger loan loss reserve pool that will be needed to support a portfolio that is performing significantly worse than either of its larger domestic peers. In a cruel twist of fate, Citigroup’s more global operations could very well prepare it better to deal with a surge in unemployment in the United States.

The future of Bank of America, J.P. Morgan & Citigroup is unquestionably tied to the rise of the unemployment rate in the United States. Should it peak at 8%, the current valuations on these companies make them the buy of a lifetime. On the other hand, should the economy deteriorate significantly and unemployment rise well above 8%, these three titans will become the primary recipients of the second half of the TARP fund. The United States, despite acting faster than its European peers to battle the credit crisis, is dangerously close to following them down the path of nationalization and must take whatever measures necessary to avoid such an event. With the inauguration of a new administration in Washington we can only hope that Obama’s massive stimulus plan will be expanded, that a national moratorium on foreclosures becomes a reality and that the idea of an “aggregator bank,” as proposed by the head of the FDIC, is given serious credence as these are likely the only steps that will limit federal ownership of Bank of America, J.P. Morgan and Citigroup to current levels.

US Home Construction Ends Worst Year Since 1959
New-home construction fell to record lows in December as jobless claims continued to soar, the government reported Thursday, another sign of the dire economic conditions facing the Obama administration. New-home construction fell 15.5 percent from November to December, to an annual pace of 550,000, the slowest pace on record, the Commerce Department reported on Thursday. Home builders have all but shut down projects as home values plunge and potential buyers stay on the sidelines of the troubled housing market.

“What you’re seeing is capitulation by home builders,” said John Lonski, chief economist at Moody’s Capital Markets. “The news you got today reinforces the view that stabilization of housing starts is well off into the future.” The pace new-home construction in December was 45 percent below its levels from a year ago. For all of 2008, the government estimated that 904,300 housing units were started, a drop of 33 percent from 2007. Last year would be the worse for housing starts since records started to be kept in 1959. The Federal Reserve has cut interest rates to record low levels of zero to 0.25 percent to try to revive the struggling economy and stem the losses in housing and introduced new programs to buy mortgage-secured debt, but homes sales and values have continued to decline.

“The magnitude of the housing bubble was unprecedented, and the corrective process promises to be a long and painful one,” Joshua Shapiro, chief United States economist at MFR, wrote in a note. The Labor Department reported that weekly jobless claims rose 62,000 to a seasonally adjusted 589,000 for the week ended on Saturday. The nationwide unemployment rate has risen to 7.2 percent, and economists warn that the economy could reach 9 percent as the year-long recession drags on. “The worst is not over,” Mr. Lonski said. “Rising unemployment and tightening credit conditions are worsening the prospects for housing, which by itself suggests that we could be surprised at how poorly the economy performs in the early part of 2009.” Shares on Wall Street opened lower on Thursday as investors grappled with the worse-than-expected economic news and an announcement that Microsoft would cut 5,000 jobs or 5 percent of its work force because of slowing sales.

US Home Prices Fell 8.7% in November on Defaults, Jobs
U.S. home prices fell 8.7 percent in November from a year earlier, led by declines in California and Florida, as foreclosures increased and companies shed jobs. The house price index is down 10.5 percent from its peak in April 2007, the Federal Housing Finance Agency said today in Washington. Measured monthly, the index fell 1.8 percent from October, greater than the 1.2 percent average estimate in a Bloomberg poll of 11 economists. U.S. foreclosure filings jumped 81 percent last year as falling house prices, tighter mortgage lending and the longest recession in a quarter century battered property owners, RealtyTrac Inc. said last week. The nation lost more than 2.6 million jobs in 2008, the most since 1945, and U.S. stocks had their worst performance since the Great Depression. President Barack Obama has said the country needs to prevent foreclosures to revive the housing market and economy.

The Pacific region that includes California led the annualized declines in the house price index, with a drop of 22 percent. The South Atlantic area, including Florida, was next with a decrease of 12 percent, followed by the Mountain region, including Arizona and Nevada, which fell 9.1 percent. The U.S. median home price probably tumbled 10 percent in 2008 to $197,000, according to a Jan. 6 forecast from the National Association of Realtors. Sales of previously owned homes likely dropped 13 percent to 4.9 million, the Chicago- based trade group said. U.S. builders broke ground in December on the fewest houses since record-keeping began as sales and credit dried up, signaling the real-estate slump will keep hurting economic growth.

Housing starts fell 16 percent last month to an annual rate of 550,000. That was less than forecast and the lowest since the government started compiling statistics in 1959, the Commerce Department said today in Washington. The housing reports came as Freddie Mac said today the average U.S. rate on a 30-year mortgage rose to 5.12 percent from 4.96 percent a week earlier. Last week’s number was the lowest since the McLean, Virginia-based mortgage buyer began keeping records in 1971. The average rate for a 15-year mortgage rose to 4.8 percent from 4.65 percent.

The housing crisis in the U.S. may last until 2010 and the decline in new home sales will be far worse than first forecast, Fitch Ratings Inc. said in a Jan. 15 report. New home sales will drop 16 percent to 409,000 in 2009, the New York-based credit rating company said in the report. In October, it forecast a decline of as much as 7 percent. “Fitch expects the housing weakness to persist through most, if not all, of 2009, despite recent government initiatives,” Fitch analysts led by Robert Curran wrote. “Should the current severe recession continue unabated through 2009, then the downturn could extend another year beyond our current forecast.”

California's median home price falls 38 percent
The median home price in California plummeted 38 percent in December from a year earlier as low-cost foreclosures boosted sales but lowered property values, a real estate tracking firm said Wednesday. The median price for California houses and condos dropped to $249,000 last month from $402,000 in December 2007, according to San Diego-based MDA DataQuick. The median price is the point where half the homes sold for more and half sold for less. The California median home price is at the lowest point since February 2002, when it was $245,000. It marks a 49-percent decline from the peak of $484,000 in the spring of 2007. An estimated 37,836 homes were sold in California last month, up 18 percent from November and 48 percent from December 2007, according to DataQuick.

The housing market is being driven by bargain hunters snapping up bank-owned foreclosure properties, which accounted for 58 percent of existing homes sold last month, up from 24 percent a year earlier. "The processing of these distressed properties is almost reaching a frenzied level," said John Karevoll, a DataQuick analyst. "Many of the banks just want to get these properties off their books. People are flocking to buy these foreclosure properties." Richard Green, director of the University of Southern California's Lusk Center for Real Estate, said the California housing market is being hammered by tight credit markets, expectations of further price declines, a rapidly deteriorating economy and rising unemployment. "Until the economy stabilizes, it will be hard to see the housing market stabilize," Green said. "If you see the unemployment rate turn around, that's when you'll start to see housing prices bottom and start turning in the other direction. Until that happens, I'm pretty gloomy."

DataQuick also reported Wednesday that the median home price in the nine-county San Francisco Bay area fell 44 percent, from $587,500 in December 2007 to $330,000 last month. That's the lowest since March 2000, when it was $320,500, and marks a 50-percent decline since the peak of $665,000 in the summer of 2007. A total of 6,889 houses and condos were sold in the Bay Area in December, up 20 percent from November and up 36 percent from December 2007, according to DataQuick. Most of the Bay Area sales took place in the East Bay counties hit hardest by foreclosures. The median home price fell 50 percent to $252,000 in Contra Costa County, 37 percent to $338,000 in Alameda County and 42 percent to $213,500 in Solano County. By contrast, it dropped 16 percent to $616,500 in San Francisco. Sales of more expensive homes have stalled as would-be homebuyers run into trouble securing mortgages.

The upper half of the Bay Area housing market won't recover until the market for "jumbo" loans for more than $417,000 recovers, Karevoll said. Such loans used to account for more than 60 percent of the region's real estate financing, but only made up 22 percent of loans last month. On Monday, DataQuick reported that the median home price in Southern California fell nearly 35 percent, from $425,000 in December 2007 to $278,000 last month, DataQuick said. The median price for the six-county region peaked at $505,000 in mid-2007. There were 19,926 homes sold in Southern California last month, up 19 percent from November. Foreclosures accounted for 58 percent of December sales. "It's very difficult, if not impossible, to predict what's going to happen," Karevoll said. "It's hard to project when the operating instructions for the market are no longer valid."

Housing Starts in U.S. Tumble 16% to Lowest on Record as Credit Dries Up
U.S. builders broke ground in December on the fewest houses since record-keeping began as sales and credit dried up, signaling the real-estate slump will keep hurting economic growth. Housing starts fell 16 percent last month to an annual rate of 550,000 that was less than forecast and the lowest since the government started compiling statistics in 1959, the Commerce Department said today in Washington. Building permits, an indicator of future projects, were also at a record low. Builders, whose shares have lost 76 percent of their value over the last three years, are slashing prices to compete with a record number of foreclosed homes coming onto the market. Barack Obama’s advisers say the president will use up to $100 billion in financial-rescue funds to ease the mortgage crisis.

“Homebuilders have no choice,” said Ryan Sweet, an economist at Moody’s Inc. in West Chester, Pennsylvania. “The market is bloated with excess supply and demand is weak. The pace of housing starts will remain depressed until 2011.” projected starts would drop to a 580,000 pace. Another government report showed the number of Americans filing first-time claims for unemployment benefits rose last week, matching a 26-year high. Initial jobless claims increased by 62,000 to 589,000, more than forecast, in the week ended Jan. 17, according to a Labor Department report today in Washington.

Economists had forecast starts would drop to a 605,000 annual pace from a previously estimated November rate of 625,000, according to the median of 69 forecast in the Bloomberg survey. Estimates ranged from 500,000 to 688,000. November starts were revised up to 651,000 in today’s report. For all of 2008, starts dropped 33 percent to 904,300, down from 1.335 million in 2007 and also the fewest since records began.
Building permits fell 11 percent in December to a 549,000 annual pace. They were forecast to drop to a 600,000 pace, according to the Bloomberg survey. Home prices dropped 1.8 percent in November, the biggest decline since records began in 1991, the Federal Housing Finance Agency reported today. Values were own 11 percent from the peak reached in April 2007. Construction of single-family homes dropped 14 percent to a 398,000 rate, today’s report showed. Work on multifamily homes, such as townhouses and apartment buildings, decreased 20 percent from the prior month to an annual rate of 152,000.

Housing starts declined in three of four regions of the country, led by a drop of 25 percent in the Midwest. Starts rose 13 percent in the Northeast. The National Association of Home Builders/Wells Fargo index of builder confidence slumped to a record low for January, the Washington-based association said yesterday. U.S. foreclosure filings in December were 41 percent higher than a year earlier, pushing up the inventory of unsold homes, RealtyTrac Inc., a seller of default data, said this month. Obama’s National Economic Council Director Lawrence Summers said last week the president intends to use between $50 billion and $100 billion of the remaining half of the $700 billion bank- bailout fund enacted last year to address the foreclosure crisis.

Falling borrowing costs have yet to reverse the downturn in sales. The average rate on a 30-year fixed mortgage fell to 4.96 percent earlier this month for the first time on record, Freddie Mac said in a report last week. KB Home, the fourth-largest U.S. homebuilder that caters to first-time buyers, reported a $307.3 million net loss on Jan. 9 for the fourth quarter and said the housing market would remain difficult this year. “The housing industry continues to confront unprecedented downward pressure,” Chief Executive Officer Jeffrey Mezger said in a conference call with analysts and investors. “These conditions persist nationally with no visible signs of lessening in the near term.”

New jobless claims rise more than expected to 589.000
The number of new unemployment claims jumped more than expected last week, as companies continue to cut jobs at a furious pace and more Americans turn to an extended benefits program. The Labor Department reported Thursday that initial jobless benefit claims rose to a seasonally adjusted 589,000 in the week ending Jan. 17, from an upwardly revised figure of 527,000 the previous week. The latest tally was well above Wall Street economists' expectations of 540,000 new claims. The total matches a 26-year high reached four weeks ago. The last time claims were higher was in November 1982, when the economy was emerging from a steep recession, though the work force has grown by about half since then.

The increase is partly due to a backlog of claims that piled up in recent weeks in several states that experienced computer crashes due to a crush of applications, a Labor Department analyst said. The four-week average of claims, which smooths out fluctuations, was 519,250, the same as the previous week. But the layoffs continued Thursday. Microsoft Corp. said it will cut up to 5,000 jobs as profit tumbles amid weakness in the personal computer market, and chemical maker Huntsman Corp. will slash 1,175 jobs this year, representing more than 9 percent of its work force, to reduce costs as demand slows amid the global economic downturn. Salt Lake City-based Huntsman also plans to cut an additional 490 contractors. Another sign of the deepening recession came in a Commerce Department report that showed new home construction plunged 15.5 percent to a record low last month. Construction of new homes and apartments fell to an annual rate of 550,000 in December, below analysts' expectations of 610,000.

The report capped a miserable year for new home construction. Builders broke ground on 904,000 units last year, also the lowest since records began in 1959. The Labor Department report showed that the number of people continuing to seek jobless benefits rose by 97,000 to 4.6 million. That was above analysts' expectations of 4.55 million and up substantially from a year ago, when 2.7 million people were continuing to receive unemployment checks. The Obama administration is proposing to extend jobless benefits, which typically last about six months, and overhaul the unemployment insurance system as part of an $825 billion stimulus package currently being considered in the House. The weak job market has caused millions of laid off workers who have exhausted their unemployment insurance to seek benefits under an emergency federal extension of the program authorized by Congress last June.

More than 2 million Americans requested benefits under the extended program in the week ending Jan. 3, the most recent data available. That's in addition to the 4.6 million people covered under the regular unemployment insurance system, though the 2 million figure is not seasonally adjusted and is volatile. Roughly 900,000 people sought benefits under the emergency program the week ending Nov. 29. The rapid increase since then is partly due to an extension of the program Congress approved Nov. 21, a Labor Department analyst said. Overall, the large number of Americans continuing to receive benefits is an indication that many laid off workers are having difficulty finding new jobs. Economists consider jobless claims a timely, if volatile, indicator of the health of the labor markets and broader economy. A year ago, initial claims stood at 324,000.

Companies from a range of sectors are hemorrhaging jobs amid a recession now in its second year. Consumers have dramatically cut back their spending, which accounts for about two-thirds of the economy, in response to declining home values and plummeting stock portfolios. On Wednesday alone, at least four companies announced layoffs. Intel Corp. said it plans to cut up to 6,000 manufacturing jobs as the company struggles with lower demand for personal computers. United Airlines parent UAL Corp. said it would eliminate 1,000 jobs, on top of 1,500 it cut late last year. Industrial parts and systems maker Eaton Corp. said it is cutting 5,200 jobs, and airplane maker Hawker Beechcraft Corp. said it would eliminate workers after laying off 500 last year, though it didn't provide details. Radio broadcaster Clear Channel Communications Inc., oil and gas company ConocoPhillips, and media company Time Warner Inc. also announced job cuts in the past week.

Now it's time to emigrate, Jim Rogers tells Britons
When asked his advice for a young person growing up in Britain, Jim Rogers, former partner of George Soros and one of the world's most successful investors, is forthright. "Move to China; learn Chinese." In an interview with The Independent, Mr Rogers warns that Britain will go bankrupt if the Government continues to follow its present policy of attempting to save the banks through subsidy and nationalisation.

He has sold all his sterling assets and has "no position" in sterling, but Mr Rogers reveals that he had been planning to short-sell sterling in the present financial crisis, before recent disparaging remarks about the pound's prospects from his own lips had put paid to those plans. "I should have kept my mouth shut." Mr Rogers had in mind a repeat of his previous coup, when he and Mr Soros's Quantum Fund famously "broke" the Bank of England in 1992, when sterling was forced out of the European exchange rate mechanism, costing UK taxpayers $1bn and making Mr Soros and Mr Rogers correspondingly wealthier.

Sterling is at a 10-year low against the dollar, and Mr Rogers is confident that it will fall to below its previous nadirs, though he has "no idea" where that floor may eventually be. His message is blunt: we used to have North Sea oil and the City of London, but now "you don't have anything to sell... it's a terrible shame". Mr Rogers is still more forthright in his advice to the Prime Minister, who he urges to resign, but not before abolishing the Bank of England. "They are the ones printing all this money," he said. "Central bankers are not gods or geniuses; why does anyone think they are?"

The US Federal Reserve, Mr Rogers thinks, is also on the road to bankruptcy, and he points out that the US has already had three central banks in its history. Instead, the Singapore-based billionaire urges the UK authorities to take the radical step of allowing the commercial banks to fail. He cites the example of South Korea, Russia and other nations where such financial violence was followed by a renewed burst of growth and prosperity, in a relatively short space of time. In the overwhelmingly likely event of Mervyn King and Gordon Brown ignoring Mr Rogers' advice, the "crushing" burden of debt and of taxation to service that debt will bankrupt the UK, "technically or de facto", with a "terrible" inflation to follow.

A colourful figure, Mr Rogers was born in Alabama and educated at Yale and Oxford. He has made it into Guinness World Records for some of his epic motorcycle journeys. He began collaborating with George Soros in the Seventies and more recently has specialised in commodities. In 2007, at the age of 63, he drew some attention for his decision to move from New York to Singapore, declaring that "moving to Asia now is like moving to New York City in 1907".

Ilargi: Oh, what the heck, we'l reiterate Jim Rogers from yesterday.

Jim Rogers: 'Sell any sterling you might have. It's finished'
Fresh concerns about the British economy and fears for the stability of the UK's financial system pushed sterling to new record lows against the dollar, euro and yen yesterday. One of the world's leading investors voiced the markets' concerns. Jim Rogers, of the Singapore-based Rogers Holdings and co-founder of the Quantum fund with George Soros, told Bloomberg Television: "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 added that the pound will fall below its record low of $1.0520 reached in February 1985. Given near parity with the euro, it raises the intriguing possibility that the pound/dollar/euro exchange rate could yield a "triple parity".

At the same time, the Office for National Statistics released the latest inflation figures, down sharply to 3.1 per cent in December, from 4.1 per cent in November. Investors took this as a sign of the weakness of demand in the UK economy, rather than of its fundamental strength. Before the official growth figures for the last three months of 2008, to be published on Friday, the Governor of the Bank of England, Mervyn King, warned that the world economy had "fallen off a cliff" and that, for the UK, "total output in the fourth quarter is expected to have fallen sharply. In the first half of this year, the rate of contraction is likely to continue to be marked". Some economists believe that the figure will be -1.5 per cent, one of the sharpest downturns since the Second World War.

Mr King also acknowledged the "risk" that inflation would drop below the target rate of 2 per cent in coming months, and confirmed that the Bank would embrace "unconventional measures" – also known as quantitative easing, or printing money – to stimulate the economy. Most economists believe that inflation will come close to zero before the end of the summer, and, on the RPI measure, will actually turn negative. The Bank and the Treasury have so far remained relatively relaxed about the decline in sterling, believing that a boost to exports and manufacturing would help "rebalance" the economy, but that may change as the depreciation shows signs of turning into a rout, because of a lack of confidence in the British authorities to manage the situation. Worries about the scale of government borrowings, the cost of bailing out the commercial banks and that the slump in sterling will become self-reinforcing helped to push the pound to an eight-year low against the dollar, an all-time low against the yen and back towards parity with the euro. In trading, the pound crashed as much as 4 per cent to lows of around $1.386, in its biggest one-day slide against the dollar since Britain fell out of the European Exchange Rate Mechanism in 1992.

Neil MacKinnon, director and chief economist at ECU Group, said: "There's a real danger of the decline in sterling becoming a full-blown crisis. The Government and the Bank of England have to change their tune on the pound pretty quickly." However, John Higgins, of Capital Economics, said: "It is perhaps not surprising that investors are getting increasingly nervous about the health of the UK's public finances. The 5-year credit default swap for the UK government has widened by 25bp since early January. 'Printing press' headlines make for uncomfortable reading. But there is little reason to think that the adoption of quantitative easing should be negative for the pound, any more than for the dollar."

Unlike the dollar and the euro, though, sterling does not enjoy the backing of a large economic area, nor the status of a "reserve currency", its banking sector is unusually large in relation to national GDP (400 to 450 per cent), and the UK economy is forecast, by the IMF and others, to be due for the biggest contraction of any major advanced economy in 2009. Even weaker demand and output than previously thought is helping to push inflation down by the fastest pace since the recession of the early 1990s. The Government's VAT reduction and heavy pre-Christmas discounting on the high street drove the December CPI down to 3.1 per cent. The RPI, which includes housing costs, plunged from 3 per cent to 0.9 per cent, helped down by lower interest rates.

Reductions in clothing and fuel prices were the other significant factors; that the falls were not even bigger may be due to the precipitous fall in sterling. Some economists believe the RPI could decline to as much as –5 per cent for a time in the summer, with the CPI hovering around zero, all of which will keep up the pressure for bank rate moving down from its current level of 1.5 per cent. Colin Ellis of Daiwa Securities said: "The prospect of inflation getting below zero and staying there is the key reason the Monetary Policy Committee has been cutting bank rate aggressively – and was also arguing behind the scenes for the pot of money the Government gave it to fund security purchases. This asset-buying facility is not strict quantitative easing yet – it will be funded by T-bills, not by creating money – but it sets up a framework for how the MPC will try to reflate the economy once rates get down near zero. That is increasingly only looking like a matter of time."

Obama Deems China 'Manipulating' Yuan; No More TARP Funds Needed for Now, Geithner Says
Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, said the new U.S. administration believes China is “manipulating” its currency. Geithner also said, in written responses to questions from Senate Finance Committee members, that there are “no current plans” to request more financial bailout funds. He played down any need to nationalize U.S. banks, without specifically ruling out the option. The remarks on China may presage a tougher American line with the nation that is the biggest foreign investor in U.S. government debt.

Former Treasury Secretary Henry Paulson preferred diplomacy over confrontation with China to resolve trade disputes and, in semiannual reports, refrained from labeling the country an illegal “manipulator” of its currency. “President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency,” Geithner said in the remarks, which were posted on the Senate Finance Committee Web site today. “The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.” The finance panel is expected to hold a vote on Geithner’s confirmation today.

UK car production plunges by nearly 50%
UK car production almost halved in December as the slump in the industry worsened. A number of car makers such as Nissan, Honda and Jaguar Land Rover have cut production and jobs as the economic downturn hits credit and confidence among potential buyers of new cars. A total of 53,823 cars were manufactured in the UK in December, a fall of 47.5pc from a year earlier, meaning 1.45m were manufactured in 2008 as a whole, a decline of 5.7pc. Paul Everitt, the chief executive of the Society of Motor Manufacturers and Traders, said the figures demonstrated the "very dramatic" fall in demand for the final quarter of last year. However, the fact that 76pc of all vehicles produced in the UK are for exports to more than 100 markets shows the strength and importance of the sector, he added.

The car industry held talks with Lord Mandelson, the Business Secretary, late in 2008 about support for businesses through emergency loans and investment in new technologies, with Jaguar Land Rover being particularly vociferous about the need for assistance. General Motors and Chrysler have already received $17.4bn (£12.6bn) from the US government while France is looking to take a direct stake in its car industry. Mr Everitt said: "The automotive industry is of strategic economic and social importance, reflected in the measures to support the industry being discussed by governments across Europe and around the world. "SMMT has been in close discussion with UK government on the urgent need to improve access to credit and kick-start demand in the market, in order to sustain valuable industrial capability during this exceptionally difficult period. SMMT is looking forward to meeting with Lord Mandelson before the end of January to receive Government's response to the proposals we submitted at our November meeting."

Geithner Links Woes to Tax Software Used by 18 Million Americans
Maybe, next time, Timothy Geithner should pay an accountant. Or take a simple computer course. Geithner, President Obama's choice to run the U.S. Treasury and spearhead America's recovery from its financial crisis, is well on his way to being confirmed after the Senate Finance Committee voted 18-5 Thursday to forward his nomination to the full Senate.  But the endorsement came only after he underwent embarrassing scrutiny for his failure to pay all of his income taxes in 2001 and 2002 -- a mistake he blamed on an easy-to-use computer income tax program used by 18 million taxpayers a year. Geithner said he used the popular software program TurboTax to complete his income tax forms in those two years, and he failed to include self-employment taxes in his federal returns.

He said that, to his recollection, the program did not prompt him to report income and pay self-employment taxes. "I mistakenly believed that I was meeting my obligations fully, including self-employment taxes, but I did not prepare my returns in a way that caught that mistake initially," Geithner told the committee, adding, "these are my responsibility, not the tax software responsibility." But TurboTax itself says the program is designed for average taxpayers and prompts everyone to report any additional income or wages earned through self-employment. "The way TurboTax works, we ask you your personal information up front" and "walk you down an interview path that asks you the source of your income," said Scott Gulbransen, a spokesman for TurboTax. Even if you fill out a W2 tax form from a primary employer, "once you're done with that it will ask you if you had other sources of income," he told

"The whole idea of TurboTax is to make sure we have all your information," Gulbransen said. Intuit, the company that makes the software, estimates that its customers receive tax returns in the hundreds of millions of dollars every year, he said. "There's a lot of time that's put in to make sure that the product is easy to use for the average American," Gulbransen said. "The numbers speak for themselves." The tax program -- now in its 25th year -- is retooled annually, he said. "Because the tax laws change every single year, the code, we -- in essence after every tax season -- have to recreate the product from the ground up as far as tax code goes," Gulbransen said. "So from that perspective, we update it every year for not only the federal taxes, but also for each individual state that has income tax."

Dan Maurer, a senior vice president of TurboTax, issued a statement Wednesday saying user input is key. "TurboTax, and all software and in-person tax preparation services, base their calculations on the information users provide when completing their returns. TurboTax also has built-in error-checking tools that routinely catch common taxpayer mistakes. "Federal law and our own privacy policy prohibit us from discussing specifics of any customer's return," Maurer said.

Fiat shares plunge as dividend is scrapped
Shares in Fiat, the Italian carmaker, fell 11 per cent on Thursday after it said it would not pay a dividend this year and was forced to deny that it was considering a capital increase to take over Peugeot of France. The stock tumbled as the Italian automotive giant reported trading profits broadly in line with expectations, but revealed a 21 per cent fall in pre-tax profits and a big increase in net industrial debt to €5.9bn ($7.7bn), a figure that surprised investors. Fiat’s shares have been under pressure for the past few days after the abrupt departure of a key executive and fears that it is about to lose its investment-grade credit rating. The market also gave a lukewarm reception to Fiat’s announcement on Tuesday that it was taking a 35 per cent stake in Chrysler in exchange for a range of technology transfers to the ailing US automaker. The Italian daily newspaper La Repubblica reported on Thursday that Fiat was considering a bid for Peugeot and that the Agnelli family, the Turin-based group’s biggest shareholder, was prepared to support a €2bn capital increase to help finance the deal.

One banker in Milan said speculation that Fiat and Peugeot might merge surfaced regularly and that investors tended to shrug it off. Fiat, which is scheduled to hold a conference call with investors and analysts later on Thursday, said in a stock exchange announcement that the Peugeot report was “without any foundation.” Thursday’s results showed Fiat’s trading profit for 2008 amounted to €3.36bn – a 4 per cent rise on 2007. Annual revenues were rose 1.5 per cent to €59.4bn. Pre-tax profits fell 21 per cent to €2.2bn because of the impact of one-off items and mark-to-market accounting. Fiat said it had experienced “substantially weakened trading conditions” in the fourth quarter. It said it would not pay a dividend on the 2008 results in order to preserve liquidity. Earlier this month Moody’s Investors Service, a credit rating agency, said it was reviewing Fiat for a possible downgrading, which would mean the company losing its investment-grade credit rating. Fiat also issued a gloomy assessment of trading conditions in 2009. It predicted that demand would decline by 20 per cent this year and that its trading profit for the year would be “in excess of €1bn”. It would “continue to implement its strategy of targeted alliances, in order to optimise capital commitments and reduce risks.”

Europe's Banking Blues
The banking crisis in Europe stems from increased worries over the global economy, but investors are troubled by homegrown issues as well. Economists fear the downturn will last well into 2010. A cold wind is blowing from the City of London to the shores of Frankfurt's Main River -- and it has nothing to do with winter. Instead, the chill sweeping across the Continent's financial capitals owes to Europe's worsening economy, as analysts and policymakers revise downward their estimates for 2009 and banks come under renewed suspicion over the health of their balance sheets. The devastation in just the past few days -- especially in Britain -- has been nothing short of breathtaking. On Jan. 19, British Prime Minister Gordon Brown unveiled a new program to provide banks with unlimited insurance against further multibillion-pound losses and a £50 billion ($73 billion) fund to buy high-quality but illiquid securities.

Yet if anything, the latest bailout plan seems only to have made investors more skittish: Shares in giants such as Barclays and the "new" Lloyds, formed by the government-engineered merger of Lloyds TSB and Halifax Bank of Scotland, have since tumbled by 40 percent and 56 percent, respectively. Financial institutions on the Continent are also suffering from increased investor anxiety. Germany's stalwart Deutsche Bank is off more than 27 percent since it announced on Jan. 14 that it would post an unexpected 2008 loss of $6.3 billion from winding down exposure to risky financial investments. France's top bank, BNP Paribas, is down nearly 30 percent over the same period. And even Spain's thriving Santander is off 12 percent in the past week. The common theme provoking the banking meltdown is increased worry over the European and global economy.

To be sure, there are still concerns over exposure to bad American debt -- everything from risky hedge funds to monies parked in the alleged pyramid scheme run by banker Bernie Madoff. But now, with European gross domestic product in decline, unemployment rising, and market sentiment on the skids, investors are increasingly nervous about homegrown issues: the danger of local loan defaults, asset writedowns, and continued sluggish lending. "Last year, it was the banks that almost brought down the economy. Now, it's the economy that's threatening the banks," says Pete Hahn, a fellow at City University's Cass Business School in London and a former managing director at Citigroup. "We are no way near the bottom of this problem yet."

Nowhere is the situation worse than in Britain. Last October, British banks got a £50 billion (now $69 billion) cash injection from the government. But now the country is entering its third consecutive quarter of negative growth and most economists expect GDP to contract by at least 2 percent this year. Unemployment has jumped by two percentage points, to 6.1 percent, over the last 18 months, home prices fell 16 percent in 2008, and consumer confidence is at a 30-year low. For banks, that's translating into renewed balance-sheet risk. Nonperforming loans are on the rise and dozens of businesses are folding each day. No institution has been harder hit by such concerns than the Royal Bank of Scotland, which was flying high just a year ago when it anchored a joint takeover of Holland's ABN Amro. On Jan. 19, RBS -- now 70 percent owned by the British government thanks to an emergency rescue last year -- announced annual losses that could hit £28 billion ($38.6 billion), the largest in British corporate history. Investors weren't reassured by the government's backing and drove RBS shares down 66 percent in a single day. The bank is now worth just $6.8 billion, compared with $80 billion a year ago. "U.K. domestic banks are high-risk stocks at the moment," says analyst James Irvine at brokerage Dresdner Kleinwort in London.

The same certainly applies in Ireland, which was one of the euro zone's economic success stories over the past decade but has recently hit a wall. The economy there is now expected to contract 4.6 percent this year (compared with a 6 percent jump in 2007), and unemployment could skyrocket to 12 percent, up from 4.6 percent at the end of 2007. The downturn is whacking Irish banks. On Jan. 15 the government was forced to nationalize Anglo Irish Bank -- the country's third-largest lender -- after the tumbling domestic real estate market left the bank highly exposed to now-illiquid international money markets. The country's two biggest banks, Allied Irish Banks and Bank of Ireland, have also received state aid of $2 billion and $2.5 billion, respectively. Yet since the government nationalized Anglo Irish, both banks have subsequently lost more than half of their market value on fears that politicians may have to rescue them as well. Continental banks are faring better but still feeling pressure.

On Jan. 21 the French government announced a $13.6 billion cash injection into the domestic banking sector, taking total state aid to the French financial-services industry since last year to $27.2 billion. So far, only Société Générale, France's second-largest bank, has agreed to a further $2.2 billion recapitalization, although analysts expect the country's other major institutions, BNP Paribas and Crédit Agricole, to accept similar bailouts. "The [French] government's capital injection is not intended to compensate for weakness or failures. Rather, it is to head off any potential future problems," Bank of France Governor Christian Noyer told a conference in Abu Dhabi on Jan. 21. In Germany -- Europe's largest economy -- those problems have already started to hit. Munich-based Hypo Real Estate Bank, which has been battered by its investments in subprime loans, disclosed on Jan. 20 that the German government's Financial Markets Stabilization Fund has granted it an additional $15.4 billion in loan guarantees. The move brings the total aid the bank has received to $54 billion.

In addition, Frankfurt-based DZ Bank, which acts as the central institution for the nation's cooperative banks, said on Jan. 20 that it lost $1.3 billion in the fourth quarter because of its exposure to troubled Icelandic banks and insolvent U.S. investment firm Lehman Brothers. The cooperative institutions that own DZ Bank have pledged $1.3 billion in fresh capital to keep the bank afloat. Coming just a week after Deutsche Bank announced its unexpectedly large loss, the new revelations fueled fears that Germany's banking crisis is more severe than previously thought. A study by Germany's bank regulator estimates that banks there could be carrying as much $300 billion in bad debt on their books that may need to be written down, in addition to the $100 billion they have already reported. A spokesman for the regulator said the study is confidential and couldn't comment.

How much worse could it get? In Britain, at least, the specter of potential nationalization looms just over the horizon. The government has already taken over two failed mortgage lenders, Northern Rock and Bradford & Bingley. Now the City is rife with rumors the government might pick up the 30 percent of RBS it doesn't already own -- another reason the bank's shares have cratered. In the view of Cass Business School's Hahn, the British government would like to avoid further nationalizations but may have to bite the bullet. Public officials won't necessarily run the banks better; they'll simply provide safer cover for debt. "You can't ask civil servants to manage complex financial instruments," Hahn says. "The government would be getting into uncharted territory." True enough, but further drastic measures could be in the cards if the economies of Britain and its European counterparts continue to worsen. Economists now figure the global downturn will last well into 2010 and that banks will write down billions more in questionable assets between now and then. The chill could be here for a while.

Bank deposits at ECB drop sharply
The amount of cash eurozone banks park at the European Central Bank dropped dramatically and overnight market rates moved sharply lower as the full force of last week’s interest rate decision came into effect on Thursday. Bank deposits at the ECB were €72.7bn lower at €111.4bn as the rate of interest the central bank pays on this money was cut by 100 basis points to just 1 per cent. Deposits have now fallen by €171.5bn over the past two days and are almost two-thirds down from the record €315.3bn reached less than a fortnight ago. Jean-Claude Trichet, ECB president, announced an interest rate cut of 50bp last week, but also reminded markets of the earlier decision that the bank would widen the difference - known as the corridor - between the rates it pays on deposits from banks and what it receives on lending. Some believe that the ECB is pursuing two strategies in parallel: one focused on public inflation expectations through the so-called policy rate, or ordinary interest rate, and another strategy aimed at the private inter-bank lending markets. Others had criticised the decision saying that banks’ desire for liquidity over almost any kind of lending meant the move would have little affect on their behaviour - and so the cut in deposit rates would amount to little more than a tax on banks.

The two moves combined led in effect to the 100bp cut in deposit rates, which is aimed squarely at making it ever less economical for banks to deposit cash with the ECB instead of lending it out into the money markets. This had an immediate effect on Thursday as market overnight interest rates dropped by 65 basis points to just 1.498 per cent, exactly half between the policy rate of 2 per cent and the deposit rate of 1 per cent. Analysts expect this rate, known as Eonia, to drift into line with the deposit rate as its has consistently traded at just a few basis points higher than rate. In turn, this should help to reduce the longer term Euribor and euro Libor rates that govern the cost of borrowing for companies and individuals and have been a major focus of central bank efforts to get finance and credit in the economy moving again. Three-month Euribor, one of the most closely watched interbank rates, was down by just 6bp on Thursday at 2.254 per cent, leading to an increase in the spread or difference between this rate and Eonia, which has been watched as a key indicator of stress in the money markets in recent months. However, Euribor’s are often slower to react to interest rate changes. Analysts and European central bankers will be hoping to see a decline in these rates gather speed over coming days.

Fortis Bank to report 2008 loss up to €19 billion
Fortis Bank, principally owned by the Belgian state, said on Thursday it made a 14.1 billion euro ($18.30 billion) net loss in the first nine months of 2008 and expected a further 4 to 5 billion euro loss in the final quarter. The company, formed from the carve-up of listed Fortis by the Belgian, Dutch and Luxembourg governments at the end of October, said it made an underlying profit of 1.2 billion euros in the first nine months. However, a net loss resulted due to a 12.5 billion euro hit linked to the divestment of ABN AMRO and the carve-up transactions and 3.6 billion euros from the deterioration of its credit portfolio.

The bank said it expected its tier one ratio to be around 10 percent at the end of 2008. Fortis Bank is 99.93 percent in the hands of the Belgian state, with Luxembourg owning 49.9 percent of BGL, the Luxembourg subsidiary. The Netherlands separately owns the Dutch activities of Fortis following the October break-up transactions. However, these deals and a planned sale of Fortis assets to France's BNP Paribas have been frozen by a Brussels court, which ruled that the listed Fortis's shareholders must be given a say. The listed Fortis is a separate company holding Belgian and international insurance activities.

UK’s FSA gets tough on banking regulation
Lord Turner, chairman of the Financial Services Authority (FSA), announced dramatic changes to banking regulation last night, including much higher capital ratios and new liquidity requirements. In a lecture to business leaders, Lord Turner said: "We need to increase capital requirements not just marginally but by several times." Banks would be required to build up substantial capital buffers in good economic times - well above minimum levels - so they can run them down in tougher times. He accepted that these changes would result in "a significant contraction in the scale of trading books". In the future, the FSA would regulate liquidity as well as capital adequacy, he said.

In line with capital requirements, banks would have to have a certain level of liquid assets. Special investment vehicles and other tools to move assets off balance sheet and free up capital would no longer escape regulatory scrutiny. Lord Turner said: "If an economic activity is bank like and poses a significant risk to consumer or financial stability, regulators can extend banking style regulation." He held back from calling for a complete separation of retail and investment banking, but said: "We need to control the extent to which large universal banks can take the benefits of too big to fail status, and use them to fund unnecessarily large proprietary trading." The FSA will publish a paper in March on the proposals, plus actions on salaries and bonuses, ratings agencies, derivatives and accounting principles.

Bank of England plans corporate bond spree
The Bank of England will start to buy corporate bonds in large quantities within weeks, Mervyn King, its governor, said last night as he explained the next steps to be taken to limit the severity of the recession. Borrowing from Donald Rumsfeld, the former US defence secretary, he said such purchases would be "unconventional unconventional measures" designed to increase liquidity and trading and reduce the spread of corporate bond yields over government bonds. These differed from "conventional unconventional" policy, in which the Bank created money to buy assets with the aim of increasing the stock of money in the economy and the availability of credit while also raising spending. Although the Bank's monetary policy committee was not ready to use this weapon yet, he said, if inflation was likely to remain too low the MPC "might wish to adopt these unconventional measures as an instrument of monetary policy".

Speaking to employers at a CBI dinner in Nottingham, Mr King followed the prime minister's lead in turning up the heat on the banks. He insisted that all the official efforts to restore health to the banking system "are not designed to protect the banks as such. They are designed to protect the economy from the banks." "A pronounced contraction in spending and output is under way," he added, predicting "in the first half of this year, the rate of contraction is likely to continue to be marked". The banks needed to reduce the size of their balance sheets, but he insisted this reduction should not come at the expense of lending to non-financial companies and deepening the recession. Instead, he hoped banks would reduce their loans to other parts of the financial system.

"There is scope for a reduction in the leverage of banks without restricting lending to the 'real' economy," he said, insisting that the necessary "netting" of exposures needed to take place in an international setting, since many of banks' assets and liabilities were foreign. Mr King acknowledged that recent policy from the authorities had appeared contradictory, with officials urging banks to reduce the size of their balance sheets while continuing to lend freely. Consumers had been urged to spend while encouraged to reduce their dependence on debt. "Almost any policy measure that is desirable now appears diametrically opposite to the direction in which we need to go in the long term," he said.

Unusually for the Bank governor, he even came close to a mea culpa, for policy mistakes the Bank had made. "It is clear that policy did not succeed in preventing the development of an unsustainable position." But this failure was more one of circumstance than one of error in setting interest rates, he continued. To prevent the build-up of credit while inflation was under control in future, Mr King called for the Bank to be given "an additional policy instrument to stabilise the growth of the financial sector balance sheet".

Bank of Japan Cuts Forecasts, Considers Buying Corporate Bonds
The Bank of Japan cut its growth forecasts and said it will consider buying corporate bonds to prevent a shortage of credit from deepening the recession. The central bank may buy corporate bonds with a maturity of up to one year, it said in a statement released today in Tokyo. Governor Masaaki Shirakawa and his board forecast the economy will shrink until the year starting April 2010 and signaled a return to deflation in a quarterly review of the outlook. Exports plunged a record 35 percent in December, a report showed today, evidence the global recession is likely to keep hurting the world’s second-largest economy and discourage investment in Japanese companies. Central banks around the world are broadening the range of assets they buy to thaw credit markets that remain frozen even as interest rates approach zero.

“They’re trying to supplement corporate finance” as the economy deteriorates, said Tomoko Fujii, head of Japan economics and strategy at Bank of America Corp. in Tokyo. “That’s all they can do,” she said, adding that the government should spend more to spur growth. The policy board also decided unanimously to keep the key overnight lending rate on hold after cutting it to 0.1 percent last month from 0.3 percent. The Nikkei 225 Stock Average rose 1.9 percent to 8,051.74 at the close, paring its drop this year to 9.1 percent. The yen traded at 89.07 per dollar from 89.04 before the announcement. The world’s second-largest economy will shrink 1.8 percent in the year ending March 31 and 2 percent next year before recovering to expand 1.5 percent in the period through March 2011, according to median estimates of the eight board members.

Consumer prices excluding fresh food will drop 1.1 percent next fiscal year and 0.4 percent in the year to March 2011, they said. The economy is “likely to continue deteriorating for the time being,” the bank said in today’s statement. Shirakawa instructed his staff to “swiftly map out a concrete plan” for purchasing corporate bonds from financial institutions, the statement said. The bank also provided details of plans unveiled last month to buy commercial paper. “The mechanism of the corporate bond market has deteriorated sharply,” Shirakawa told reporters after the meeting. Given that the overnight lending rate is already at 0.1 percent, the central bank will focus on trying to bring down longer-term borrowing costs for companies, the governor said. At the same time, he added, the policy board isn’t considering additional steps to those announced today.

“It’s the right direction for the BOJ to shift its policy focus to measures to support corporate financing,” said Eisuke Sakakibara, former top currency official of Japan’s finance ministry and now a professor at Waseda University. “Deeper interest-rate cuts probably wouldn’t have any impact, and Governor Shirakawa is probably reluctant to do so.” Sony Corp. reduced its bond sales by a quarter from the planned amount to 37.5 billion yen ($421 million) last month as the recession worsened its earnings prospects. Kobe Steel Ltd. also reduced its offerings. About 1.3 trillion yen in corporate bonds will come due by the end of March, according to central bank estimates, putting pressure on businesses to find new sources of funding. A dozen Japanese companies, including Nippon Telegraph & Telephone Corp. and TDK Corp., plan to offer new bonds this month.

The bank will start buying up to 3 trillion yen of A1-rated commercial paper of up to three-month maturity this month, it said today. The purchases will include asset-backed paper, or securities based on receivables such as credit-card debt. The central bank described the purchases as an “exceptional measure” and said it would only buy the debt “for a term required and in an appropriate scale” to ensure the market doesn’t start relying too much on the operations. It said it would “properly manage credit risks” by setting limits on the quality and maturity of securities it buys. “The focus of the BOJ’s policy is shifting to the composition of its assets; what the bank will buy under what conditions,” said Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo and a former central bank official.

The bank also released details of plans announced last month to increase monthly government bond purchases to 1.4 trillion yen from 1.2 trillion yen and avoid holding too many securities of either short or long maturities. Central banks and governments globally are implementing additional measures to assist lenders and companies. The Bank of England this week won unprecedented powers from the British government to start buying assets as part of a broader plan to revive lending. The U.S. Federal Reserve plans to buy as much as $600 billion of bonds and mortgage-backed securities sold by federally chartered mortgage companies, and is also considering purchases of longer-term Treasury securities.

Japan exports drop 35 percent in December
Japanese exports plunged 35 percent in December, marking a third straight month of decline, the Finance Ministry said Thursday, underscoring the drop in global demand for automobiles, electronics parts and other products. Japan's trade deficit came to 320.7 billion yen ($3.60 billion) in December, staying in the red for the third straight month, the ministry said. It was also the fifth time Japan's imports exceeded its exports during 2008, with the country also posting trade deficits last January, August, October and November. Exports totaled 4.83 trillion yen ($54.27 billion), while imports fell 21.5 percent to 5.15 trillion yen ($57.87 billion), the ministry said. Japan's trade surplus shrank 80 percent in 2008 when compared to the previous year to 2.16 trillion yen ($24.27 trillion), as exports dropped 3.4 percent and imports grew 7.9 percent, the ministry said. Economists have warned that exports -- a mainstay of the world's second-largest economy -- would tumble further if the global economy remains bleak.

Battered by plunging global demand and a strengthening yen, major exporters such as Toyota Motor Corp. and Sony Corp. have scaled back production, jobs and earnings projections. Japan, which had for years faced criticism by its trading partners, especially the U.S., over its trade surplus, has turned into a net importer in recent months amid the global crisis. Exports to the United States., the world's largest economy, tumbled by a record 36.9 percent in December, marking the 16th consecutive year-on-year decline. Vehicle shipments to the U.S. plummeted by more than 50 percent in the month, while exports of automotive parts declined 41.8 percent and those of audio equipment fell 60.9 percent. Japan's exports to Europe tumbled by 41.8 percent, with vehicle shipment to the region plunging by 63.4 percent, the ministry said. Japanese exports to the rest of Asia fell by 36.4 percent as semiconductor shipments declined by 40 percent. Japan's exports to China alone fell 35.5 percent. Exports have also shrunk as the yen appreciated against the dollar and other key currencies. That means overseas sales in dollars and euros translates into fewer yen.

Asian economic woe grows as China slows and Japanese exports plunge
China's economy may have ground to a halt entirely between the third and fourth quarters of last year and Japanese exports plunged 35pc in December, underlining the scale of the slowdown in Asia. China's national statistics bureau said gross domestic product had grown at an annual rate of 6.8pc in the fourth quarter of 2008, compared to a gain of 9pc in the previous three months. The annual rate of growth for the world's third-largest economy was the lowest since the second quarter of 1998. "The international financial crisis is deepening and spreading with a continuing negative impact on the domestic economy," said Ma Jiantang, head of the statistics bureau.

Although the annual rate of growth was 6.8pc, economists speculated that the actual growth between September and December last year could have been zero, or even negative. "My rough assumption is that it was basically zero," said Stephen Green, an economist at Standard Chartered bank in Shanghai. However, he added, recent revisions to Chinese GDP figures made an accurate calculation impossible. Mr Green also predicted that GDP may not grow in the first quarter of this year, compared to the last quarter. Japanese exporters endured a torrid December as demand for a range of goods fell sharply. Exports to the US fell 26pc, those to Europe dropped 41.8pc and those to China were down 35pc. In China, much of the slowdown has been blamed on a lack of demand from the rest of the world for Chinese-made goods. Wen Jiabao, the prime minister, said earlier this week that the outlook for Chinese employment is "very grim" as factories shut down and foreign companies rein in their spending.

Mr Wen will visit the UK next week, and Gordon Brown has already called upon him to make sure that China plays its part in stabilising the global economy. "We need China to play a full role, in partnership with us, if we are to restore confidence, growth and jobs," said Mr Brown. China, however, has insisted that it must get its own house in order first, and there are indications that the government has already instructed banks to unleash credit into the market. The value of loans issued in November and December soared by nearly 19pc. "It is hard to overestimate the potential importance of this," said Mr Green. "Mature economies' banking systems are currently flooded with liquidity that is not being lent out. China's interbank market is similarly flooded, but the difference is that the banks are lending." The banks are likely to be ordered to finance a large chunk of the £400 billion fiscal stimulus package that the Chinese government announced in November.

There is a further £2 trillion of spending demands from local governments across China that they may also be called upon to help with, irrespective of the possibility of bad loans. Other bright spots included a slight rebound in industrial production growth to 5.7pc in December from 5.2pc in November, and a strong set of retail sales figures, where growth was 19pc. Goldman Sachs, which issued one of the most bearish predictions for Chinese economic growth in 2009, at 6pc, admitted that there are "rising upside risks" that they may be incorrect, given the money flooding into the market. "Our checks with commercial banks suggest the value of loans extended in January is likely to be even larger than the amount in December," said Yu Song, an economist at Goldman, adding that falling inflation also raised the possibility of further interest rate cuts. However, Goldman said that China could be hit by even weaker export demand and maintained its prediction for now. "It is way too early to even claim the worst is over," said Mr Green. "Exports and domestic consumption, as well as profit growth, are now slowing and they will continue to grind lower over the year. Property still looks fragile, as does private investor sentiment. Even if we reach 8pc growth for this year, it will not feel like it," he added.

France leads crackdown on rating agencies
The French financial regulator wants to strengthen the European Commission’s proposals for regulating credit rating agencies to give more power to a pan-European supervisor, according to its new chairman. Jean-Pierre Jouyet, who took over the Autorité des Marchés Financiers (AMF) from Michel Prada last month, told the FT that the power to co-ordinate rating agency supervision at the Committee of European Securities Regulators was necessary to ensure regulatory standards were maintained in every country. The AMF has been a leading critic of the agencies, whose ratings of complex credit products were at the heart of the subprime mortgage boom and the ongoing financial crisis. It will publish its fifth annual report, rating agency activities and ethics on Thursday. Mr Jouyet said he was pleased with Brussels’ proposed legislation to regulate agencies, which many in the union hope can be finalised by April, but added that the CESR should have a greater role in the co-ordination of supervision.

In the current proposal, CESR is responsible for registration of agencies and has a role as arbitrator if there are disputes between national regulators, who are responsible for supervision. Any attempt to give CESR greater powers is likely to face political objections from some regulators, which are less keen to see a more centralised system and demands for far greater staff and funding. Mr Jouyet said countries should also “work towards a joint supervisory body at a global level that includes the United States, Japan and emerging markets”. The AMF’s latest report on the agencies will say that, while they have taken steps to strengthen governance and sought to improve transparency, more needs to be done. Mr Jouyet also wants to see the role of agencies in the financial system reduced and more alternatives in the market. “We want to make sure that the agencies are not the alpha-to-omega of risk control and we want to ensure that investors do their own due diligence work when they make investment decisions,” he said.

Berlin Sees No Limits to Economic Intervention
As part of her efforts to combat the economic crisis, German Chancellor Angela Merkel is increasing the state's influence in the market, buying holdings in banks and bailing out individual industries and companies. Is Germany turning into a planned economy? Grayish-white slush is piled high along the streets in Selb, a town in the Upper Franconia region of Bavaria. The mood at the headquarters of Rosenthal AG, a fiercely traditional porcelain maker, suits the gloomy weather. Since Rosenthal's parent company, Ireland's Waterford Wedgwood, filed for bankruptcy, the company's 1,500 employees worldwide have feared for their jobs. "Many are deeply concerned about their livelihood," says labor representative Jörg Bauriedel. The company sees itself as a victim of the financial crisis. However, its plight is in fact a reflection of a lengthy decline. Rosenthal's expensive designer porcelain, which once adorned coffee tables in upscale living rooms during Germany's postwar Wirtschaftswunder economic boom, is now being sold in, among other places, discount stores. At the same time, low-wage manufacturers from China and India are whittling away at the German luxury brand's share of key markets in the United States and Asia.

The ailing company could soon be getting assistance from an unlikely source. Federal and state government authorities, fearing the loss of hundreds of thousands of jobs in a recession, have declared saving companies as one of their main objectives -- and have seized upon Rosenthal as a worthy contender. Senior politicians from Bavaria's conservative Christian Social Union (CSU) party are campaigning in Berlin to support Rosenthal with government assistance, if necessary. Peter Struck, the floor leader of the center-left Social Democratic Party (SPD), which governs together with Merkel's Christian Democrats in a grand coalition, has even volunteered government support for the company. "We will have to discuss the issue," says Struck, "if the company continues to face difficulties." The government in Berlin is undergoing an astonishing change of heart. Only a few weeks ago, Chancellor Angela Merkel spoke out against "arbitrary, unfocussed economic stimulus programs" and large-scale government intervention in the real economy. She made it clear that under no circumstance should "the government acquire permanent new responsibilities in the economy."

But now, suddenly, it seems like the public sector's economic intervention cannot be forceful enough for the administration. Last week, Merkel introduced the biggest economic stimulus program in German postwar history, as well as giving her blessing to a series of government interventions into companies and industries, the likes of which the country has not seen since German reunification. The government has acquired a 25 percent share of Frankfurt-based Commerzbank, and it plans to purchase a majority stake in the ailing Munich-based mortgage lender Hypo Real Estate. It is looking into providing assistance to the highly leveraged Schaeffler Group, based in the Bavarian town of Herzogenaurach, and has made several hundred billion euros in additional guarantees available to companies. The grand coalition hopes to stimulate business in the auto industry with a so-called "scrap premium" to encourage drivers to take old vehicles off the road, and the conservative Christian Democratic Union (CDU) leadership is debating measures that the party would have derided as the work of the devil in the past: direct government investment in companies.

The government has many strong arguments to support what the Frankfurter Allgemeine Zeitung has called a "boom in government." The international financial crisis has ballooned into the worst recession in German postwar history, and has taken many banks to the brink of bankruptcy. Even fundamentally healthy companies are often only able to get loans at terms that would make virtually any business unprofitable. Many major corporations will have to take out billions in loans this year, warned CDU business issues spokesman Laurenz Meyer at a meeting of his party's parliamentary leadership. "What happens if they have to pay interest of 8 or 9 percent on those loans?" This, in Meyer's opinion, would be "unacceptable" to the coalition government. Such fears have led experts to take a positive view of the government's decision to fight bottlenecks in the credit markets and, after prolonged hesitation, to unveil a clear economic stimulus program that will combine additional government spending with tax cuts. But experts also criticize the many measures in the package with which the government will intervene in the economy to an unnecessary extent. With its investment and lending programs, the Merkel administration is promoting questionable merger projects, turning itself into something of an über-entrepreneur in many industrial sectors and, by placing the state-owned KfW in a key position, promoting precisely the financial institution that acquired the reputation of being "Germany's stupidest bank" during the financial crisis.

"With this economic stimulus package, Germany is moving a step closer to the French approach to industrial policy," warns Bert Rürup, chairman of the German Council of Economic Experts. Proposals like the scrap premium for cars, says Rürup, benefit "an individual economic sector in a targeted way," even though the recession "should not be fought with sector-specific measures." Merkel's new course has triggered unease, even among senior members of her own party. At a recent CDU meeting in the eastern city of Erfurt, Christian Wulff, the governor of the state of Lower Saxony, proposed excluding direct government investment in private companies from the final statement. But his counterparts Roland Koch and Jürgen Rüttgers, the governors of Hesse and North Rhine-Westphalia respectively, were against the restriction. "It is possible," said Rüttgers, that ailing companies "will have to be bailed out in the form of a temporary government investment." Merkel herself maneuvered herself between the fronts, as she so often does. Although she spoke out at length against "socialist experiments" last week, she was unwilling to rule out nationalization altogether. Worried CDU/CSU supporters wonder whether Angela the Fainthearted is turning into Angela the Unprincipled.

The Social Democrats, for their part, took advantage of the friction within the CDU leadership to paint themselves as the true heirs of former Chancellor and Economics Minister Ludwig Erhard, a CDU politician famous for his role in postwar economic reform. The CDU/CSU had apparently rediscovered the "days of state monopoly capitalism," Finance Minister Peer Steinbrück, a member of the SPD, said derisively. The dispute is about more than the usual party wrangling leading up to an election. It has to do with the question of whether the government, in times of financial crisis, should continue to hold fast to the principles of the market economy, or whether the state ought to intervene in the country's economy. The government's planned investment in Commerzbank reveals the extent to which the usual standards are threatening to slip. The roughly €18 billion ($24 billion) that the government plans to invest in the Frankfurt-based bank will supposedly make the institution "weather-tight, in light of the heightened financial crisis," says Michael Blessing, the spokesman of the board of Commerzbank. In reality, however, the main purpose of the government investment is to bolster the questionable merger of Commerzbank and Dresdner Bank and protect the Allianz insurance company, which owned Dresdner until recently. Under the rules of the bank rescue package, it ought to have been up to Allianz to place its ailing subsidiary under government protection. But then it would have been far more difficult for Commerzbank to fund the Dresdner takeover, a deal the federal government wants to see happen, so as to create a "strong player next to Deutsche Bank," says Finance Minister Peer Steinbrück.

Now the government is acquiring more than a quarter of all Commerzbank shares and pumping additional billions into the bank in the form of a so-called silent participation. The problems are obvious. On the one hand, it is questionable whether the shaky bank will ever be able to service the interest for the government's financial injections. On the other hand, Berlin's rescue operation distorts competition. Cooperative banks and savings banks are already complaining that the new state-backed bank is trying to steal their customers with cutthroat terms. Even more objectionable is another merger case that the Berlin government is seeking to promote under the auspices of fighting the recession. The Herzogenaurach-based Schaeffler Group, a manufacturer of antifriction bearings, acquired tire maker Continental, a much larger company. Now Schaeffler is deeply in debt, and the Economics Ministry in Berlin is deciding whether to help the company with a loan guarantee. At stake is the future of more than 210,000 employees, who produce tires, brake systems and other parts. But what Economics Minister Michael Glos sees as a consequence of the financial crisis is in fact the result of faulty corporate decisions. The story began in late 2007, when Continental acquired VDO, the automobile division of electronics giant Siemens. The executives at Hanover-based Continental not only failed to recognize that VDO was something of a problem child, but they also paid too much for it and have been deep in debt ever since.

Continental might have been able to overcome its problems alone. But the situation became dangerous when Schaeffler acquired its competitor. Instead of bringing together the economic strengths of both companies, as hoped, the new entity merely combines their debts -- to a grand total of €20 billion ($26 billion). As a result, two once-healthy companies have gotten themselves into trouble through takeovers. This happens occasionally. But in the past hardly anyone would have hit upon the idea of the government using taxpayers' money to iron out the mistakes made by management during corporate takeovers. But now that the financial crisis has taken hold in large sectors of the economy, there are apparently no longer any limits imposed when it comes to imagining how the state's influence can be expanded. But where is the limit? Under what criteria does the government decide into which industries it should and should not intervene? Most of all, how can it recognize whether a company's difficulties are attributable to the crisis or to bad corporate policies? One thing is clear: Any intervention distorts competition, and weakens those competitors that are unable to crawl underneath the government's protective shield. Ironically, these are often the healthier companies.

The planned government bailout program for auto finance companies is a case in point. Chancellor Merkel and Finance Minister Steinbrück have already promised BMW, Daimler and VW that their banks will be able to resort to government loan guarantees should they run into problems. But why? Until now, the principal purpose of auto finance companies has been to artificially stimulate sales. By offering low interest rates and attractive leases, they ensured that consumers who would normally have opted for a used car could afford a new vehicle. The system was especially beneficial to BMW, Mercedes-Benz and Audi. But in the financial crisis, it is becoming more difficult for the auto finance companies to secure capital. They are forced to charge higher interest rates and are thus no longer able to offer discount financing to their customers. This may be bad news for the manufacturers, but it is not a justification for injections of government capital, as long as the auto finance companies do not run into difficulties themselves. Nevertheless, Volkswagen Financial Services and its subsidiary, VW Bank, have already applied for government loan guarantees for more than €10 billion ($13 billion). They are expected to receive between €4 billion and €5 billion. This enables them to borrow new capital at attractive interest rates and, in turn, offer low-interest car loans.

Even worse, the aid for VW Bank has triggered greed among the competition. Daimler CEO Dieter Zetsche says that his company's bank is not in trouble. But if competitors are begging for government bailouts, he cannot exactly hold back, he says, noting that failing to do so would put his company at a competitive disadvantage. Economists call this phenomenon a "spiral of intervention," when one government bailout triggers a series of new rescue programs. It is no accident that the government is especially susceptible when it comes to the auto industry. To quote Chancellor Merkel, the auto industry is part of the "core of our industrialized nation." This attitude is reflected in politicians' reactions to the carmakers' proposals, even when it comes to such questionable plans as the scrap premium. Under the proposed program, anyone who agrees to scrap his car when it is at least nine years old and buy a new one instead will receive a government subsidy of €2,500 ($3,300). The government hopes that the incentive program will stimulate car sales. But whether the plan will actually work remains to be seen. It is clear that companies like Mercedes-Benz, Audi and BMW will hardly benefit from it, because consumers who drive such old vehicles are more likely to buy an inexpensive small car -- an Opel or a Ford, say -- than an expensive luxury car after scrapping it. They might even choose an Italian or South Korean car. Thus, the scrap premium could certainly save jobs, but not necessarily in Germany.

The notion that aid for individual companies or industries can prove to be useless is nothing new. From the government guarantee for the ailing Holzmann construction group to the rescue of the Maxhütte steelworks, politicians have often attempted to keep struggling companies afloat with government funds. But they have rarely been able to avert bankruptcy, in most cases merely succeeding at delaying it somewhat. It is no less dangerous to turn the government into an arbitrator of competition. The government is about to find this out with its planned guarantee program. It intends to provide up to €100 billion to ensure that major corporations can secure loans at reasonable terms. The program is well-intentioned, but it means the government will have to permanently grapple with difficult questions like: Which companies are in hot water through no fault of their own, and deserve to be saved? "No government official has the answer to questions like that," says Johann Eekhoff, a spokesman for the Kronberg Circle, a group of liberal economists. "They lack the necessary expertise."

There is a risk that ailing companies will be kept alive artificially and for too long -- and at taxpayer expense. In addition, the program will result in the state-owned KfW becoming involved in the traditional business of private financial institutions. There can be few objections to this, as long as non-state-owned banks continue to refuse to issue loans. But who can guarantee that the government's economic promotion agency will withdraw from the market in a timely manner, so that the banks can reclaim their turf? "There is no exit strategy," says Rürup from the German Council of Economic Experts. He believes that the government must clearly define when it plans to withdraw again. "The planned guarantee and loan program should only be a temporary measure, and it should expire once lending by banks and the capital markets is functioning properly again." There are also those who question whether KfW is even capable of living up to its expanded responsibilities. During the financial crisis, the actions of the Frankfurt-based government bankers bordered on incompetence on several occasions. For months, they failed to notice the dangerous speculation activities of KfW's subsidiary, IKB. Their naiveté cost billions.

KfW became the laughing stock of the industry when it transferred €350 million ($462 million) to Lehman Brothers after news of the investment bank's impending bankruptcy had become public. At that time, KfW itself was on the verge of liquidation -- and now it is supposed to save the German economy. This is only one of the reasons why many economists fear that the government is taking on too much. Politicians run the risk of overextending the government's financial strength with the billions in bailout programs, says Clemens Fuest, an economist at Oxford University and chairman of the economy advisory board at the Federal Ministry of Finance. According to Fuest, the government lacks the necessary expertise and personnel to invest in companies on a large scale. "There aren't even enough deputy ministers to serve on all those supervisory boards." In the current crisis, Fuest advises, the government should rescue the banks and cushion the recession with economic stimulus programs. But he has a low opinion of targeted assistance for individual companies or sectors. All this does, says Fuest, is impair their willingness to help themselves. This could well be the case with ailing porcelain manufacturer Rosenthal. To preserve the company, a spokesman said last week, Rosenthal is currently in negotiations with a rescuer with no government mandate: a private investor from Italy.

Home Raffles Spread to Austria and Germany
With real estate prices down, homeowners are getting creative about selling their houses. A Munich man has created a quiz contest to get rid of his property -- while many in Austria have turned to raffles. All Volker Stiny wanted to do was to sell his parents' house. His father died in 2006, his 86-year-old mother had since moved into a retirement home and the house, located in the village of Baldham on the outskirts of Munich, was too expensive for him to keep. As Stiny quickly found out, though, selling property these days is easier said than done. Despite lively interest in the 156 square-meter (1,680 square foot) home, no offers were forthcoming. German banks have been hit hard by the financial crisis, and property loans are hard to come by. Stiny was in a bind. He stumbled on a solution that an ever-increasing number of people are turning to, both in the United States and in Europe.

With no hope of getting anything close to market value through a traditional sale, why not raffle off the property? Numerous homeowners in the United States have already tested the waters and the method has become something of a trend in Austria in the last two months. Stiny, though, is the first to import such a sales strategy to Germany. "I really wasn't prepared for the interest it would generate," he told SPIEGEL ONLINE. Stiny said he was also having difficulties because the number of people signing up for his contest had crashed his bank's electronic money wiring system.

Alternative trends in selling property have gained momentum in recent months as sellers have trouble getting market value -- and as market value plummets. Home values in some parts of the US have dropped by 35 percent or more, in Spain they are down 36 percent in the last 12 months and in Ireland, an economist with the University College Dublin has warned, housing prices could fall by as much as 80 percent. In response, sellers are becoming creative. Last autumn, a man in the United Kingdom offered to give his Lamborghini to anyone who would buy his house. Chicago real estate broker Marni Yang told USA Today that "one couple even offered the buyer a complete refund of their purchase price later, when the sellers died." Others have offered large-screen televisions, gift certificates or even "tryouts," allowing prospective buyers to stay in the home for a few days to see how it feels. Raffles have proven particularly popular. And successful: On Tuesday Walter Egger became the new proud owner of a luxury villa in southern Austria after buying a raffle ticket for €99 ($128) in a contest which rapidly sold out in December. The home's seller, Traude Daniel, said the Klagenfurt house had been on the market for about six months before she decided to raffle it off.

She said the house had an estimated market value of some €830,000 (close to $1 million) -- leading to her offer 9,999 tickets. They all sold, and the money received in excess of the market value went to cover expenses related to the administration of the raffle. In the end over 18,000 people registered for the contest, and latecomers had their ticket price reimbursed. "Nobody could have guessed that the interest would be so great," Daniel told Austrian television on Tuesday during a live broadcast of the number drawing. "We were all taken by surprise and steamrolled by the number of people who signed up." Daniel has found numerous imitators. In Austria alone there are some 40 Web sites offering property raffles. A few have even thrown in their cars. And a couple of ambitious Austrian entrepreneurs have started up a Web platform ( in German only) for those wanting to raffle off property. "When we heard about the first raffle in the beginning of December, we thought the idea was very good, but realized that a lot of individual Web sites would be useless because of the interest each contest has to generate," Bernd Asbeck, who runs the site, told SPIEGEL ONLINE.

Asbeck's site currently has about 15 properties listed, but, he says, they have "30 to 40 properties" ready to pop up on the site. He says the plan is to keep the homes on the site for a few weeks to guage interest. If it is high enough, then they will start a raffle and pocket a percentage of the proceeds. No raffles have yet begun on his site -- and he says he rejects roughly half of those wanting to advertise. "People want a castle in the mountains or a villa on the beach," he said. "They won't join a raffle for a small apartment worth €70,000 on the outskirts of some city." Still, it's unclear just how far the trend can spread. Traude Daniel was careful to check the legality of her raffle with the Finance Ministry in Vienna. But it remains unclear how the courts might react. Asbeck is currently spending most of his time with his lawyers to come up with a water-tight legal foundation for his business. Others didn't prepare quite as meticulously. Conor Devine of Northern Ireland launched his raffle last November in an effort to raise 650,000 pounds (€707,000) for his home just outside Belfast. Interest was slow, though tickets were sold for just 100 pounds each. And last week the company processing the online payments withdrew, fearing legal consequences of participating in a legally murky "cash competition."

Laws prohibiting such contests are on the books in Germany as well. But Stiny has found a way around them. Those interested in winning his home must pay €19 before being allowed to take part in an online quiz contest. Those 100 players who do the best on the quiz qualify for the final drawing. The house is the grand prize, but there are numerous other prizes, too. As such, Stiny explained, his contest does not depend purely on luck. He said the skill element keeps him within the law. "It took a while to find a lawyer who was able to find a way through the various regulations," Stiny said. "It could be a way for people in other countries to stage similar contests as well." Stiny is hoping for 48,000 participants, which will then cover the value of the property, the cost of the other prizes (second prize is a compact car), administrative costs and a donation to charity. The Munich native likely won't have long to wait. Already, 25,000 people have signed up for the competition. He's growing tired of it all and can't wait until it's over. He's set to do three television interviews in the next two days. "I don't have time to eat or to sleep," he said.

California's median home price falls 38 percent
The median home price in California plummeted 38 percent in December from a year earlier as low-cost foreclosures boosted sales but lowered property values, a real estate tracking firm said Wednesday. The median price for California houses and condos dropped to $249,000 last month from $402,000 in December 2007, according to San Diego-based MDA DataQuick. The median price is the point where half the homes sold for more and half sold for less. The California median home price is at the lowest point since February 2002, when it was $245,000. It marks a 49-percent decline from the peak of $484,000 in the spring of 2007. An estimated 37,836 homes were sold in California last month, up 18 percent from November and 48 percent from December 2007, according to DataQuick.

The housing market is being driven by bargain hunters snapping up bank-owned foreclosure properties, which accounted for 58 percent of existing homes sold last month, up from 24 percent a year earlier. "The processing of these distressed properties is almost reaching a frenzied level," said John Karevoll, a DataQuick analyst. "Many of the banks just want to get these properties off their books. People are flocking to buy these foreclosure properties." Richard Green, director of the University of Southern California's Lusk Center for Real Estate, said the California housing market is being hammered by tight credit markets, expectations of further price declines, a rapidly deteriorating economy and rising unemployment. "Until the economy stabilizes, it will be hard to see the housing market stabilize," Green said. "If you see the unemployment rate turn around, that's when you'll start to see housing prices bottom and start turning in the other direction. Until that happens, I'm pretty gloomy."

DataQuick also reported Wednesday that the median home price in the nine-county San Francisco Bay area fell 44 percent, from $587,500 in December 2007 to $330,000 last month. That's the lowest since March 2000, when it was $320,500, and marks a 50-percent decline since the peak of $665,000 in the summer of 2007. A total of 6,889 houses and condos were sold in the Bay Area in December, up 20 percent from November and up 36 percent from December 2007, according to DataQuick. Most of the Bay Area sales took place in the East Bay counties hit hardest by foreclosures. The median home price fell 50 percent to $252,000 in Contra Costa County, 37 percent to $338,000 in Alameda County and 42 percent to $213,500 in Solano County. By contrast, it dropped 16 percent to $616,500 in San Francisco. Sales of more expensive homes have stalled as would-be homebuyers run into trouble securing mortgages.

The upper half of the Bay Area housing market won't recover until the market for "jumbo" loans for more than $417,000 recovers, Karevoll said. Such loans used to account for more than 60 percent of the region's real estate financing, but only made up 22 percent of loans last month. On Monday, DataQuick reported that the median home price in Southern California fell nearly 35 percent, from $425,000 in December 2007 to $278,000 last month, DataQuick said. The median price for the six-county region peaked at $505,000 in mid-2007. There were 19,926 homes sold in Southern California last month, up 19 percent from November. Foreclosures accounted for 58 percent of December sales. "It's very difficult, if not impossible, to predict what's going to happen," Karevoll said. "It's hard to project when the operating instructions for the market are no longer valid."

Why You'll Work Through Your Retirement
The recession is only one of several trends combining to change the way Americans live out their golden years. There is a major social and cultural message in the current economic collapse for the future retirees of America: Forget retirement. That's right. The recession is making clear what we've suspected for a long time. The concept of not working and embracing leisure for the last third of one's life isn't practical for most people. Put it this way: Survey after survey has shown that a majority of aging baby boomers plan on working in retirement. Well, that plan is coming true. Economic downturns often accelerate change. For instance, in the latter part of the 19th century, the country moved from a rural, farm economy to an urban, industrial one. The wealthy associated old age with leisure, but for everyone else it usually meant involuntary unemployment and a humiliating dependence upon family, charity, or community organizations for shelter and food. Policy reformers agitated for some kind of a financial safety net for the nation's impoverished and isolated elderly.

Not much happened until the Great Depression. It was an economic disaster for families, especially the elderly "as they watched their hard-won assets vanish, and with them their hopes for an independent and secure old age," write historians Carole Haber and Brian Gratton in Old Age and the Search for Security. (Sound familiar?) Traditional middle-class objections to a national safety net crumbled with the Depression. Social Security became law in 1935. "The real or incipient collapse of individual households helps to explain the widespread popularity of Social Security," say Haber and Gratton. Our image of retirement is still shaped by the early decades after World War II. The elderly poverty rate plunged thanks to Social Security. Older Americans gained universal health-care coverage with Medicare in 1965. And Corporate America offered workers defined-benefit pension plans based on a salary and years-of-service formula. It was in these years that retirees developed a distinct lifestyle captured by the mass migration to Sunbelt communities, traveling in RVs and bus tours, spending long mornings on the golf course, and other recreational pursuits. The development of modern retirement is a great social achievement of the 20th century.

But in the 21st century, the underlying economics of retirement are changing. On the positive side, we're living longer. Average life expectancy is now about 78 years, up from 61 years when Social Security became law. We're healthier, too. Disabilities among the elderly are declining, thanks to a combination of healthier lifestyles and medical advances. A seismic shift in the economy and workplace is making it easier for an aging population to labor longer. An information- and services-dominated economy will ease the transition to longer working lives. Simply put, toiling away on a computer in medical diagnostics or government bureaucracy is far less demanding than manning an auto assembly line or mining for gold.

The rise of an economy based on intangibles and longer life expectancy is behind more than a decade's worth of scholarly research, aging conferences, and popular press articles trying to redefine retirement. The day of retirement reckoning is here for less happy reasons, too. For the second time in eight years, savers have watched in horror as their 401(k)s, 403(b)s, and other retirement savings were hit with sharp declines. This time around, the household wealth destruction is even greater because of the nationwide fall in home prices. For instance, from the last quarter of 2006 through the third quarter of 2008, the real value of homes and household holdings of stocks plummeted by $5.6 trillion, according to a recent report by Hoisington Investment Management Co. in Austin, Tex. It predicts that the wealth loss may exceed $10 trillion when the fourth-quarter figures are calculated.

Indeed, the current pension system is making everyday retirement insecurity worse. Employers have embraced defined-contribution savings plans like 401(k)s. But 401(k)s don't deliver a steady stream of income during one's golden years. There's also plenty of evidence that workers with access to defined-contribution savings plans aren't taking full advantage of them, either. But wait, there's more: The health insurance system is widely acknowledged to be broken and is a strain on family finances. Even with Medicare coverage after age 65, the elderly are finding it necessary to pay for a greater percentage of their overall medical bill. The comedian George Burns used to get a laugh saying, "Don't stay in bed, unless you can make money in bed." It's no longer a joke. Many aging workers simply can't save enough to create a solid foundation of savings that will maintain their standard of living in retirement. The solution: work longer. After all, earning a paycheck in your latter years can make a huge difference in retirement living standards. Pocketing even a slim income often allows retirement portfolios to compound over a longer period of time.

Take this calculation by economist Robert Shackleton of the Congressional Budget Office, which posits a married couple is in their early 60s earning $100,000 pretax a year. They'll need nearly $66,000 a year after taxes to replace 80% of their preretirement income. (The 80% is a standard rule of thumb when it comes to making this kind of retirement calculation.) If both retire at age 62, they'll receive more than $25,000 in total Social Security benefits and require a portfolio of at least $891,000 to generate the income they need to live the good life through their normal life expectancy. (The calculation comes from a paper written several years ago, so the Social Security numbers will have changed a bit over the years. Yet the basic calculation remains true.) But if our couple waits until age 66 to retire, their Social Security benefits go up and the time they need to bank money shrinks, so $552,000 in savings will suffice. Retire at age 70? All they require is a portfolio worth some $263,000. And so on.

More than making ends meet, work is physically and mentally energizing. It keeps the mind active and dementia at bay. For many people, the workplace is a social environment, with birthday celebrations and coffee klatches. To be sure, you may want to say goodbye to your current office mates for the last time. But that doesn't mean you won't want to work. Of course, not all senior citizens will be physically and financially healthy in retirement. Especially vulnerable are less educated workers. So are single-parent households. Both groups are far less likely to have a pension plan and own their home. And then there's the lingering problem of ageism: Some employers are still hostile to aging workers with sagging middles and graying hair. Nevertheless, the recession has made it clear that retirement and work will be woven into a new cloth for many Americans. The challenge for all of us—employees and employers—will be making the best of the situation.

Kerviel Probe Drags on a Year After SocGen Trade Loss
A year after Jerome Kerviel was blamed by Societe Generale SA for its record trading loss, he remains free after deflecting efforts to brand him a rogue. Kerviel, who met investigating judges today for what may be the last of almost 40 meetings, was described by Societe Generale Chairman Daniel Bouton as a “fraudster” and a “terrorist” on Jan. 24, the day the 4.9 billion-euro ($6.3 billion) loss was disclosed. The 32-year-old Frenchman has since inspired a fan club, T- shirts and even a comic book, while stating that the Paris-based bank knew or should have known about his actions. The criminal probe has already lasted twice as long as lawyers for either side initially estimated, and it may be another year before a decision on whether Kerviel’s case goes to trial, legal experts said.

“I would have expected things to have moved quicker,” said Stephen Pollard, a lawyer at Kingsley Napley in London who represented Nick Leeson, whose $1.4 billion loss brought down Barings Plc in 1995. Leeson was sentenced to prison about 10 months after his crime was uncovered. “Rogue trading cases are less difficult to establish than other types of fraud.” Societe Generale raised 5.5 billion euros from shareholders in March to offset the trading loss. The 145-year-old bank said yesterday it earned about 2 billion euros in 2008, and broke even in the fourth quarter. The company will get 1.7 billion euros from the French state, as the government pumps cash into the nation’s banks for a second time to boost capital and lending.

Bouton, 58, ceded his position as CEO to Frederic Oudea, 45, in May, while holding onto the chairman post. Jean-Pierre Mustier, 48, who ran the investment banking unit at the time of the loss, became head of asset management. “The Kerviel affair already seems quite far away,” said Eric Vanpoucke, an analyst at Bank Sal Oppenheim in Paris who has a “neutral” rating on Societe Generale. “For sure it will remain for posterity, but the context has totally changed.” In the past 12 months, the global financial industry has gone through the biggest upheaval since the Great Depression. New York-based Lehman Brothers Holdings Inc. went bankrupt in September, the same month the U.S. rescued Fannie Mae, Freddie Mac, and American International Group Inc. Governments from Washington to Paris to Berlin have pledged trillions of dollars to bolster ailing banks.

The crisis has made Kerviel “miss the bank and my trading work,” he said in an article in today’s newspaper Le Parisien, which cited interviews in November and December. “I can’t say today for sure what I would do if I was back on a trading desk. I can’t be sure that I would behave like a sensible trader.” In an interview broadcast today on radio station RTL, Kerviel said the conversations had been off the record and his quotes were taken out of context. Societe Generale has fallen 63 percent in Paris trading since the record loss was announced, compared with a 62 percent drop in BNP Paribas SA, France’s largest bank. A Bloomberg index of Europe’s biggest financial-services companies declined 67 percent in the period. Judges Renaud Van Ruymbeke and Francoise Desset, who’ve led the inquiry since its start, plan today’s meeting to be the last before they report their findings to prosecutors.

“Today, Jerome Kerviel really is alone,” his lawyer, Francis Tissot, said during a break in questioning. The trader’s former boss, Eric Cordelle, joined the meeting, which yielded no new information to prove the bank management knew about Kerviel’s actions, Tissot said. Kerviel has said that his superiors knew what he was doing and that his gains were registered in the bank’s accounts. He told police during his initial interrogation that “as long as we were winning and it wasn’t too visible, things worked out, no one said anything,” according to transcripts confirmed by prosecutors and his lawyers. Kerviel cooperated when the bank called him back from a weekend trip last January, and turned himself in when the criminal probe began. He admitted to lying, faking authorizations and using others’ logins and computers. He said he gained nothing for himself, which the bank hasn’t disputed. He’s under investigation for breach of trust, falsifying documents and hacking the bank’s computers after a charge of fraud was dropped by the investigating judges last January.

“The most difficult thing to establish is whether this was deliberate, to make the trader money,” said Pollard. Leeson, now 41, ultimately pleaded guilty and spent four years and four months in jail. Kerviel earned less that 100,000 euros in his last year at the bank, which fired him in March. Kerviel hired new lawyers in July to more aggressively push his defense that the bank condoned his behavior. Soon after, France Banking Commission fined Societe Generale 4 million euros for risk control failures, a conclusion supported by the lender’s internal review, which found at least 75 alerts on Kerviel had gone unheeded. Jean Veil, a lawyer for Societe Generale, said the delay tactics employed by Kerviel’s defense team have worked to the bank’s advantage. “With each new defense request, the bank has responded with more information, and these additions have helped” prove Societe Generale’s assertion that it acted immediately to stop Kerviel once it realized what he’d done, Veil said.

Political Interference Seen in Bank Bailout Decisions
Troubled OneUnited Bank in Boston didn't look much like a candidate for aid from the Treasury Department's bank bailout fund last fall. The Treasury had said it would give money only to healthy banks, to jump-start lending. But OneUnited had seen most of its capital evaporate. Moreover, it was under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives' use. Nonetheless, in December OneUnited got a $12 million injection from the Treasury's Troubled Asset Relief Program, or TARP. One apparent factor: the intercession of Rep. Barney Frank, the powerful head of the House Financial Services Committee.

Mr. Frank, by his own account, wrote into the TARP bill a provision specifically aimed at helping this particular home-state bank. And later, he acknowledges, he spoke to regulators urging that OneUnited be considered for a cash injection. As President Barack Obama's team sets about revising the $700 billion TARP program, following last week's release of the second half of the money, among the issues it faces is widespread dissatisfaction with way the program has been implemented. Treasury Secretary nominee Timothy Geithner, testifying Wednesday at his Senate confirmation hearing, acknowledged "there are serious concerns about transparency and accountability...confusion about the goals of the program, and a deep skepticism about whether we are using the taxpayers' money wisely."

Bankers, regulators and politicians complain of a secretive and opaque process for deciding which banks get cash and which don't. The goal of aiding only banks healthy enough to lend -- laid out by the Treasury when the program began -- clearly seems to have shifted, but in a way that's hard to pin down and that the Treasury has declined to explain. Part of the problem is that some powerful politicians have used their leverage to try to direct federal millions toward banks in their home states. "It's totally arbitrary," says South Carolina Gov. Mark Sanford. "If you've got the right lobbyist and the right representative connected to Washington or the right ties to Washington, you get the golden tap on the shoulder," says Gov. Sanford, a Republican.

Several Ohio banks received funds after Ohio's congressional delegation complained bitterly about the treatment of Cleveland-based National City Corp., which regulators forced into a merger rather than provide with cash. And in Alabama, the state's top banking official says a windfall there -- five banks are slated to receive funds -- is testament to the influence of two powerful Alabama lawmakers who sit on key congressional committees. A link between such lobbying and the release of TARP cash can't be proved. Treasury officials have said that political influence plays no role in the selection process. "The decisions are made by a committee of officials at Treasury based on recommendations and data provided by the regulators through the applications process," said Brookly McLaughlin, who was a spokeswoman for the Treasury until the Bush administration ended on Tuesday.

Treasury and Federal Reserve officials have repeatedly said the TARP program was successful in its primary purpose, which was to bring the credit markets back from the precipice. The task of further restoring credit flow now falls to Mr. Obama's team, which has spoken in favor of pumping more money into banks, as has Fed Chairman Ben Bernanke. The new administration is weighing a range of ideas, including using at least $50 billion of the TARP money to prevent foreclosures, and possibly other measures such as setting up an "aggregator bank" to hold toxic assets now burdening banks' books. The federal plan to invest in banks was controversial from the start. The Treasury said it would acquire preferred stock in banks, and sometimes warrants for common stock as well, but not any voting or management rights. Within the broad structure known as TARP, this is called the Capital Purchase Program.

At a hastily arranged meeting on Oct. 13, then-Treasury Secretary Henry Paulson basically forced the chiefs of the country's nine biggest banks to accept cash infusions. The government invested $125 billion in the nine. Citigroup Inc. and Bank of America Corp. subsequently returned for more money. A further $125 billion was committed under the Bush administration to buy stakes in some of the remaining 8,500 U.S. banks and thrift institutions. More than 250 have received cash or commitments so far, totaling about $68 billion. The recipients range from large regional banks to Saigon National, a 12-employee lender catering to Vietnamese-American businesses in Southern California. The procedure for getting a capital injection is complex. State and federal regulators sometimes complain that even they don't understand how it works.

A bank applies through its federal regulator, which either recommends to the Treasury that the bank receive money or quietly tells the bank to pull its application. A public turndown could be a death sentence because it would tell investors and consumers the government thinks the bank isn't viable. If the regulator forwards the application, the Treasury decides whether to approve it. If the Treasury's reviewing team is uncertain, it sends the request to a panel of federal regulators to debate the matter. The results have many in the industry scratching their heads. Two banks in Green Bay, Wis., have received federal investments. But in Arizona, a state hit hard by the housing slump, officials say they are perplexed that a dozen or so state-chartered banks haven't heard back from Treasury about the status of their applications.

Arizona's banking superintendent, Felecia Rotellini, says she is teaming up with local bankers and state legislators who plan to start lobbying Arizona's congressional delegation for help. "Some states are getting better treatment, and we just want it to be a level playing field," Ms. Rotellini says. "I think it's just a question of advocacy. It has to be a congressional voice." A body set up to monitor the program, the Congressional Oversight Panel, has said the process of allocating money lacks transparency and accountability. The Treasury declines to explain why one bank is chosen for a federal investment and not another. Those that receive federal cash sometimes boast they have a government seal of approval, leaving banks that are shut out facing awkward questions about why they didn't.

In mid-October, days after summoning the nine big-bank executives to Washington to accept aid, the government took a far different approach with Cleveland's National City, which was struggling with soured real-estate loans. National City executives consulted with their examiners at the Office of the Comptroller of the Currency, which is a division of Treasury, about whether they should apply for a capital injection. Local OCC officials gave them the green light, according to people familiar with the matter. In Washington, National City got a chillier reception. The company was facing mounting losses stemming in part from its ill-timed purchases of two Florida banks shortly before the state's real-estate market imploded. Comptroller of the Currency John Dugan informed National City executives they shouldn't apply because their bank was too weak. Instead, he told the bank to sell itself. Within a week, it agreed to a $5.6 billion takeover by PNC Financial Services Group Inc. in Pittsburgh. (PNC declined to comment.)

A political firestorm erupted in Ohio when it became clear the government had turned down National City, a 163-year-old bank with deep roots in Cleveland. Ohio's congressional delegation sent dozens of letters to Messrs. Dugan and Paulson and threatened to hold hearings on how the Treasury had supposedly wrecked a bank they said wasn't in immediate danger of collapsing. Some lawyers, bankers and analysts say the case marked a turning point in the Treasury's handling of capital injections. For one thing, since then, some weak regional banks have pocketed billions of dollars in TARP funds. In addition, Ohio banks are now faring better. Twelve Ohio banks have subsequently received a total of $7.7 billion in taxpayer funds. In neighboring Michigan -- like Ohio, hurt by the auto-industry slump -- only two banks have had federal infusions and a third has preliminary approval, for infusions totaling $638 million.

Among the Ohio beneficiaries is Huntington Bancshares Inc., of Columbus. It received a $1.4 billion federal investment in November, even though, like National City, it was hurt by souring real-estate loans and the weak regional economy. Amid mounting losses, the bank last week replaced its chief executive. In Alabama, Colonial BancGroup Inc. asked for Treasury cash in November. With its application blessed by its state regulator and the Federal Deposit Insurance Corp., the Montgomery bank figured it was a shoo-in for funds, say people familiar with the bank. But because Colonial was weighed down by real-estate loans, the Treasury sent the bid to its panel for reviewing controversial applications, consisting of four federal regulatory bodies: the FDIC, the Fed, the OCC and the Office of Thrift Supervision. Negotiations lasted several weeks. Eventually, the Treasury gave preliminary approval to Colonial's request for $550 million in capital.

The slow process infuriated Alabama officials. The same day that Colonial announced its application had been approved, Trabo Reed, Alabama's deputy banking superintendent, wrote a letter to Rep. Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, complaining that the government had dragged its feet and kept banks and state officials in the dark. The letter didn't specifically cite Colonial (which had no comment). Rep. Bachus's office forwarded the letter to the heads of bank regulatory agencies and asked them to examine the situation. Since the letter was forwarded, two more Alabama banks have received TARP funding. Five Alabama banks, including Colonial, are slated to collect a total of about $4.2 billion. In all, about 50 state-chartered Alabama banks applied, according to state banking superintendent John Harrison. He says his office helped shepherd them through the process, figuring that "the more applied, the more had the chance to get it."

Mr. Harrison says that in addition to Rep. Bachus, Alabama Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, "has been a big proponent for Alabama state-chartered banks...and he was really concerned that the TARP money went here." The banking official added: "We're blessed with a U.S. senator that was on the banking committee and Spencer Bachus being the ranking Republican" on the House panel. "I think [the Treasury] got the message." Aides to Rep. Bachus said he did nothing more than forward Mr. Reed's letter and ask for consideration. Sen. Shelby has consistently opposed the financial-system bailout. His office denied that he was involved in helping Alabama banks get money. "Sen. Shelby has never intervened on anyone's behalf for TARP money," an aide to the lawmaker said. The bank that Rep. Frank of Massachusetts went to bat for, OneUnited, saw its capital level sink in early September after the U.S. took control of the overextended mortgage giants Fannie Mae and Freddie Mac. OneUnited, a closely held Boston-based lender with offices in Florida and California too, held large amounts of Fannie Mae preferred shares. Their value plunged after the U.S. put Fannie and Freddie into a federal conservatorship, acquired preferred shares in them and took warrants entitling the government to nearly 80% of their common stock.

The moves left OneUnited's capital badly depleted. A measure called "Tier 1 risk-based capital" equaled only 1.88% of assets at the bank, versus a desired level of about 6%. A OneUnited lawyer, Robert Cooper, says he called Rep. Frank and Rep. Maxine Waters of California, both Democrats, to complain that the Treasury's move had hurt the bank. Rep. Waters heads the House Financial Services subcommittee on housing, and until last spring her husband, Sidney Williams, was a OneUnited director. Rep. Frank, besides heading the Financial Services Committee, has longstanding ties to OneUnited, and recalls having had a deposit account at a predecessor bank in the 1960s. Later that month, Rep. Frank was intimately involved in crafting the legislation that created the $700 billion financial-system rescue plan. Mr. Frank says that in order to protect OneUnited bank, he inserted into the bill a provision to give special consideration to banks that had less than $1 billion of assets, had been well-capitalized as of June 30, served low- and moderate-income areas, and had taken a capital hit in the federal seizure of Fannie Mae and Freddie Mac. "I did feel that it was important to frankly try and save them since it was federal action that put them into the dumper," Mr. Frank says.

On Oct. 27, the FDIC and Massachusetts bank regulatory officials, alleging poor lending practices and executive-compensation abuses by OneUnited, slapped it with a strong enforcement action, a cease-and-desist order. Among other things, the officials told the bank to get rid of a 2008 Porsche for executives. Mr. Cooper, the bank's attorney, dismisses the order as a "hastily cobbled together" action. "What we are talking about is a hiccup, a blip on the screen of an otherwise-stellar enterprise," he says. Asked whether the bank had sold the Porsche, he said only that it was complying with the order. Mr. Frank -- who has played a leading role in both the initial design of TARP and current planning to revamp it -- says he spoke with a federal regulator and asked that OneUnited be given consideration for TARP money, "without in any way impinging on their general safety and soundness rules." Mr. Frank said he didn't remember which federal regulator he spoke with.

On Dec. 19, OneUnited received $12 million from the Treasury, on condition it raise $20 million from its shareholders, which it did. Ms. McLaughlin, the spokeswoman for the Bush administration Treasury, said that OneUnited's application was subject to the same review process as other banks faced. Mr. Frank said he didn't try to interfere with the regulatory process. "We have never told the regulators that they should ease up on them or not order them to do this or that," he said. He cites the bank's status as the state's only financial institution owned by African-Americans. "We did say, yes, I thought it would have been a social tragedy if the one minority bank in Massachusetts that has been working so hard and had been overextended into housing was to be wiped out by a federal action, the Fannie-Freddie preferred [shares] thing, and that's why I think it was important to try to help them." Rep. Waters said she was unaware that the bank received money. OneUnited was "just a small" bank, she said.

The Day the Earth Still Stood
Inauguration day! Gazillions of Americans descended on Washington. The rest of us were watching on TV or checking out streaming video on our computers. No one was paying attention to anything else. Every pundit in sight was nattering away all day long, as they will tomorrow and, undoubtedly, the next day about whatever comes to mind until we get bored. And in the morning, when this post is still hanging around in your inbox, you'll be reading your newspaper on… well, you know… the same things: Obama's speech! So many inaugural balls! Etc., etc. So I'm thinking of this post as a freebie, a way to lay out a little news about the world that no one will notice. And all I can say -- for those of you who aren't reading this anyway, and in the spirit of the clunky 1951 sci-fi classic, The Day the Earth Stood Still -- is: Klaatu barada nikto!

Okay, no actual translation of that phrase (to the best of Wikipedia's knowledge) exists. We do know that, when invoked, the three words acted as a kind of "fail-safe" device, essentially disarming the super-robot Gort (which arrived on the Washington Mall by spacecraft with the alien Klaatu). That was no small thing, since Gort was capable not just of melting down tanks but possibly of ending life on this planet. Still, I remain convinced, based on no evidence whatsoever, that the phrase could also mean: "Whew! We're still here!" Though I skipped the recent remake of the film, which bombed (so to speak), I consider this post my remake, though with a slightly altered title:

January 20, 2009: The Day the Earth Still Stood.

Klaatu barada nikto has, by the way, been called "the most famous phrase ever spoken by an extraterrestrial." After watching the final press conference of George W. Bush, I wonder. Now, whether Bush was the extraterrestrial and Dick Cheney the super (goof-it-up) robot, or vice-versa, is debatable, but whatever the case, let's celebrate the obvious: We're still here, more or less, and they're gone. Dick Cheney to fish and shoot. George W. to think big, big thoughts at his still-to-be-built library. Let's face it, on the day on which Barack Obama has taken the oath of office, that constitutes something of a small miracle. But a nagging question remains: just how small? Or rather, just how large is the disaster? If the Earth still stands, how wobbly is it?

In fact, our last president -- in that remarkable final news conference of his ("the ultimate exit interview," he called it) in which he swanned around, did his anti-Sally Fields imitation (you don't like me, right now, you don't like me!), sloshed in self-pity while denouncing self-pity, brimmed with anger, and mugged (while mugging the press) -- even blurted out one genuine, and startling, piece of news. With the Washington press corps being true to itself to the last second of his administration, however, not a soul seemed to notice. Reporters, pundits, and analysts of every sort focused with laser beam predictability on whether the President would admit to his mistakes in Iraq and elsewhere. In the meantime, out of the blue, Bush offered something strikingly new and potentially germane to any assessment of our moment. Here's what he said:
"Now, obviously these are very difficult economic times. When people analyze the situation, there will be -- this problem started before my presidency, it obviously took place during my presidency. The question facing a President is not when the problem started, but what did you do about it when you recognized the problem. And I readily concede I chunked aside some of my free market principles when I was told by [my] chief economic advisors that the situation we were facing could be worse than the Great Depression.

"So I've told some of my friends who said -- you know, who have taken an ideological position on this issue -- why did you do what you did? I said, well, if you were sitting there and heard that the depression could be greater than the Great Depression, I hope you would act too, which I did. And we've taken extraordinary measures to deal with the frozen credit markets, which have affected the economy."
Hold onto those "worse than the Great Depression… greater than the Great Depression" comments for a moment and let's try to give this a little context. Assumedly, our last president was referring to his acceptance of what became his administration's $700 billion bailout package for the financial system, the Emergency Economic Stabilization Act of 2008. He signed that into law in early October. So -- for crude dating purposes -- let's assume that his "chief economic advisors," speaking to him in deepest privacy, told him in perhaps early September that the U.S. was facing a situation that might be "worse than the Great Depression." By then, the Bush administration had long publicly rejected the idea that the country had even entered a recession. As early as February 28, 2008, at a press conference, Bush himself had said: "I don't think we're headed to a recession, but no question we're in a slowdown."

In May, his Council of Economic Advisers Chairman Edward Lazear had been no less assertive: "The data are pretty clear that we are not in a recession." At the end of July in a CNBC interview, White House Budget Director Jim Nussle typically reassured the public this way: "I think we have avoided a recession." By late September, the president, now campaigning for Congress to give him his bailout package, was warning that we could otherwise indeed "experience a long and painful recession." But well into October, White House press spokesperson Dana Perino still responded to a question about whether we were in a recession by insisting, "You know I don't think that we know." Lest you imagine that this no-recession verbal minuet was simply a typical administration prevarication operation, for much of the year top newspapers (and the TV news) essentially agreed to agree. While waiting for economic confirmation that the nation's gross national product had dropped in at least two successive quarters, the papers reported increasingly grim economic news using curious circumlocutions to avoid directly calling what was underway a "recession." We were said, as former Fed Chairman Alan Greenspan put it in February, to be at "the edge of a recession," a formulation many reporters picked up, or "near" one, or simply in an "economic slowdown," or an "economic downturn."

At the beginning of December, the National Bureau of Economic Research, a private group of leading economists, made "official," as CNN wrote, "what most Americans have already believed about the state of the economy" (no thanks to the press). We were not only officially in a recession, the Bureau announced, but, far more strikingly, had been since December 2007. For at least a year, that is. Suddenly, "recession" was an acceptable media description of our state, without qualifiers (though you can look high and low for a single major paper which then reviewed its economic labeling system, December 2007-December 2008, and questioned its own coverage.) Recession simply became the new norm. Now, as times have gotten even tougher, it's become a commonplace turn of phrase to call what's underway "the worst" or "deepest" economic or financial crisis "since the Great Depression." Recently, a few brave economic souls -- in particular, columnist Paul Krugman of the New York Times -- have begun to use the previously verboten "d" word, or even the "GD" label more directly. As Krugman wrote recently, "Let's not mince words: This looks an awful lot like the beginning of a second Great Depression." But he remains the exception to the public news rule in claiming that, barring the right economic formula from the new Obama administration, we might well find ourselves in a situation as bad as the Great Depression.

Now, let's return to our last president's news conference and consider what he claims his "chief economic advisors" told him in private last fall. His statement was, in fact, staggeringly worse than just about anything you can presently read in your newspapers or see on the TV news. What was heading our way, he claimed he was told, might be "worse" or "greater" than the Great Depression itself. Admittedly, John Whitehead, the 86-year-old former chairman of Goldman Sachs, suggested in November that the current economic crisis might turn out to be "worse than the [Great] depression." But on this, he was speaking as something of a public minority of one. Stop for a minute and consider what Bush actually told us. It's a staggering thought. Who even knows what it might mean? In the United States, for example, the unemployment rate in the decade of the Great Depression never fell below 14%. In cities like Chicago and Detroit in the early 1930s, it approached 50%. So, worse than that? And yet in the privacy of the Oval Office, that was evidently a majority view, unbeknownst to the rest of us.

It's possible, of course, that Bush's "chief economic advisors" simply came up with a formulation so startling it could wake the dead or make a truly lame-duck president quack. Still, doesn't it make you wonder? What if, a year from now, the same National Bureau of Economic Research announces that, by January 2009, we were already in a depression? I'm only saying that, on the question of just how steadily the Earth now stands, the verdict is out. Recent history, cited above, indicates how possible it is that, on this question, we are in the dark. And one more thing, while we're on the subject of recessions and depressions, what if what's happening isn't, prospectively, the worst since the Great Depression, or as bad as the Great Depression, or even, worse than the Great Depression. What if it's something new? Something without a name or reference point? What then? How do we judge what's still standing in that case?

If I were the Obama administration, I might be exceedingly curious about a couple of other "standing" questions right now. Here's one I might ask, for example: Just what kind of a government are the Obamanians really inheriting? When, tomorrow, they settle into the Oval Office -- or its departmental and agency equivalents -- and begin opening all the closets and drawers, what are they going to find that Bush's people have left behind? This is no small matter. After all, they are betting the store on an enormous economic stimulus package -- approximately $550 billion in pump-priming government spending, and another $275 billion in tax cuts of various sorts, according to the present plan in the House of Representatives. All kinds of possibilities are being proposed from daringly experimental renewable energy projects to computerizing health-care records and building a national "smart" electricity grid, not to speak of rebuilding an infrastructure of bridges, roads, levees, and transport systems known to be in a desperate state of disrepair.

But what if the federal government slated to organize, channel, and oversee that spending is itself thoroughly demoralized and broken? What then? We know that, after eight catastrophic years, some parts of it are definitely in an advanced state of wear and tear. The Justice Department is a notorious, demoralized wreck. So, infamously, is the Federal Emergency Management Agency. So, for that matter, is the whole Department of Homeland Security, as it has been ever since it was (ill) formed in 2002. So, evidently, is the CIA. Who knows what condition the eviscerated Environmental Protection Agency is in, or the Housing Department, or the Interior Department, or the Treasury Department, or the Energy Department after these years of thoroughgoing politicization in which all those crony capitalist pals of the Bush administration and all those industry lobbyist foxes were let loose among the federal chickens meant to oversee them? In those same years, huge new complexes of interests formed around certain agencies, especially the Department of Homeland Security, and all sorts of government functions were privatized and outsourced, often to crony corporations and often, it seems, expensively and inefficiently. Who knows how well any parts of our government now function?

All I'm saying is that it can take months, or even years, to restore an agency in disrepair or a staff in a state of massive demoralization. In the meantime, how effectively will those agencies and departments direct the Obama stimulus package? The manner in which the Treasury Department threw $350 billion down a banking hole in these last frenetic months should certainly give us pause, especially since the banking system has been anything but rescued. In the end, the U.S. government can order up hundreds of billions of dollars, but applying them well may be another matter entirely. What if, that is, the government now supposed to save us isn't itself really standing? What if it, too, needs to be saved? And let's not forget the world out there. If you watched Secretary of State designate Hillary Clinton breeze through her confirmation hearings, she seemed like the wonky picture of confidence, mixing the usual things you say in Washington ("We are not taking any option off the table at all") with promises of new policies. Looking at her, or our other new and recycled custodians of empire, it's easy enough to avoid the obvious thought: that they are about to face a world -- from Latvia to Somalia, Gaza to Afghanistan -- which may be in far greater disarray than we imagine.

Only the other day, for instance, in a hardly noticed report, "Joint Operating Environment (JOE 2008)," the U.S. Joint Forces Command on worldwide security threats suggested that "two large and important states bear consideration for a rapid and sudden collapse." One -- Pakistan -- was no surprise, though all sorts of potentially catastrophic scenarios lurk in its nasty brew of potential economic collapse, tribal wars, terrorism, border disputes, and nuclear politics. The other country, however, should make any American sit back and wonder. It's Mexico. Here's the money passage in the report: "The Mexican possibility may seem less likely, but the government, its politicians, police and judicial infrastructure are all under sustained assault and press[ed] by criminal gangs and drug cartels. How that internal conflict turns out over the next several years will have a major impact on the stability of the Mexican state. Any descent by Mexico into chaos would demand an American response based on the serious implications for homeland security alone."

Of course, it could just be a matter of part of the U.S. military looking for new arenas of potential expansion, but let's remember that we're no longer in the frightening but strangely orderly Cold War world, nor even on a planet any longer overshadowed by a "lone superpower," the "New Rome." No indeed. Events in Mumbai reminded us of this recently. There, ten trained terrorists armed with the most ordinary of weapons and off-the-shelf high-tech equipment of a sort that could be bought in any mall managed to bring two nuclear-armed superpowers to the edge of conflict. Ten men. Imagine that. We don't know what the world holds for us in the Obama years, but it's not likely to be pretty and some of what's heading our way may not be in any of the familiar playbooks by which we've been operating for the past half century-plus. We don't yet know if whole countries, even whole continents, may collapse in the economic, or environmental, rubble of our twenty-first century moment, or what that would actually mean. I'm no expert on any of this, but on this day of anxious celebration, here's my question: Is the world still standing? Do you know? Really? Does anyone?


Anonymous said...


Sorry to hear of your loss, it sounds like she was a great lady.

Linda S.

Honest John said...

Very sorry to hear.....
Also, no need to explain your excellent selection of photos, those who read often know your heart is in the right place....

Honest John said...

Chuck Schumer on Charlie Rose last night...These people really don't have a clue as to what to do...listen to what he says, it's scary

Anonymous said...

What Schumer says on Charlie Rose probably bears no resemblance to what he knows. He has to edit himself so as not to hurt confidence.

Now Bush probably did think the economic fundamentals were strong. Words to that effect I recall he spoke in the summer, and McCain disastrously around early September. For those two are obviously clueless but would have said the same no matter what.

If Bush was lying about this or was ignorant is of no importance for lying carries now more penalty than igorance. Now honesty in politicians and leaders of all sorts is nothing new but somewhere in the 90's I think it reached a new level. That was when it came to be that if a question was asked and answered with a lie the one asking knew the answer was a lie and the liar knew the questioner knew they were lying. And no penalty was involved.

Let's go to the tape.

Obviously they were lying. Everyone in the world knew they were lying. It was their duty to lie everyone agreed, or at least knew, for the good of their shareholders. And so it goes.

Anonymous said...


obviously I should proof read

for lying carries no more penalty than ignorance. Now dishonesty ....

Honest John said...


Notice the part when Schumer says "We are like Columbus sailing from Spain, these are uncharted waters"...The tape cuts, then they're you think a little editing was done there, hmmmm.... He did use the "D" word at least twice....It just makes my stomach turn....bad things man, bad things

Anonymous said...

If you didn't get Dan W.'s story then read mine from 10 Jan

Last week, the friendly banker convinced my grandpa to take $50,000 from his mattress and put it in the bank and get 1% interest. (This is a true fiction story)

The next day, the friendly banker went and bought a new car because he had made a loan of $40,000 to the car dealer at 6% so that the car dealer would be able to buy a car from the car factory who had borrowed from the Chinaman savings to build the car.
The car dealer sold the car to the banker because the banker was going to make money from the 6% interest and would be able to make his monthly car payment to the dealer.

Yesterday, grandpa went to his friendly banker and wanted his money to buy a new car. He was told that he would not be able to get his money back because the banker had lend out $40,000 of the money at 6%. However, the banker offered grandpa a loan at 6% to buy a new car. Grandpa, smelling something fishy refused the loan.
So the banker said come back tomorrow and I’ll see what I can do.

The banker went to the car dealer and asked for the $40,000. The car dealer could not give the banker his money because the dealer had spent the money to buy the a new car from the car manufacture etc.
In return the car dealer asked the banker to give back the new car.

The next day, grandpa went and talked to the banker. The banker explained that he had made a bad loan with grandpa’s money and all that he could give grandpa would be $10,000 and that he knew of great second hand car that grandpa could buy from the car dealer for that money.

What’s the moral of this story?

Honest John said...

Sorry, one more thing. He keeps referring to how the Government needs to get a return on the investment into the "bad" banks, he says it like 3 times...NO CHUCK, it the TAXPAYERS that need a return, not the government...where does he think the money is coming from? Oh that's right, from the printing press, so that makes it ok.

scandia said...

I " spoke" to a few friends again about the banks, about " the fork in the road" decision that Obama has to make sooner than later...Still the same, rolling their eyes response. Frustrating.
They still think this is a mere wrinkle in the otherwise smooth upward mobility of their lives. They have confidence that it will be handled properly by gov't. sigh...the spirit of entitlement still reigns supreme.

jewishfarmer said...

I am very sorry for you loss.


Starcade said...

scandia: Then the only question left is when your friends will be killed by all this, and by whom.

To many of us who do know, TSHTF might well be fatal.

To those with their heads in the sand, it will be.

Anonymous said...

from Mish:

"Stunning Miss By Microsoft Calls Into Question Its Business Model"

Open Office is killing the aging gorilla, too bad.

He ends his post by saying:

"Open Office is the epitome of deflation. You can't beat free."

(Gee and Apple is doing just fine. Is there a pattern here?)

Anonymous said...

John Lanchester, in the London Review of Books:

"Grim stuff – though when the car industry is held up as a barometer of economic well-being, a voice inside my head always wishes that someone was making the counter-argument against a thriving car industry. Thomas Friedman recently said in the New York Times that the Detroit bail-out was ‘the equivalent of pouring billions of dollars of taxpayer money into the mail-order-catalogue business on the eve of the birth of eBay’. There’s something in that; when I hear that new car sales are down – a fact which is always announced in sepulchral tones – part of me wants to cheer."

The concluding paragraph is worth your attention as well, though it won't come as news to readers of this site.

For a novelist, Lanchester seems to have a firmer grip on reality than most economists. His article in The New Yorker (10 Nov 2008) is a cracker.

Anonymous said...

IIlargi,My heart goes out to you.One of the things that they don't tell you about growing up and being a "adult"is that you gradually lose all those in your family you hold dear,to time.Over time,your circle of family "blood"grows smaller and smaller,especially if you have,as I have,decided not to have children.I have "family"by marriage,whom I love dearly,but none of my own.I am still blessed with a incredible 94 year old grandmother,who is still sharp as a tack,and a wise old bird to whom I listen to carefully.

As to the news now streaming from those in power now...I know that there was a deliberate attempt to kneecap[hell,gutshoot]every dept in the federal government.Bad managers can really screw a dept.badly. but, I can pray that as damaged as the .gov is ,with a new bunch of folks who believe IN government,they will rebuild at a very fast rate.

El Gallinazo,

..Old bird,I wont bore you with the long tale of my attempts to work to mitigate the coming storm here in my own state..except to say that I started in the state government, beating the drum about the need for seedbanks..[presentations to the legislature w/audiovisual content..the works.]and succeeded in scaring the hell out of some politicians[great effect]as well as on a county level with the ag extention service,and trying to get the master gardener program involved with emergency planning on a state level[nearly got run out of a wonderful program due to a ag agent who did NOT want this to happen and successfully torpedoed the proposal,as well as making my time in the Master Gardeners volunteer program very rough for 2 of the last 4 years.I have spent one hellava large bit of my own time and money to try and make a difference.With very little success.Understand,the emergency management pros in the .gov here KNOW whats coming.They WANT to see localization of foodsuppy,smallscale ag,ect ect.

They got no money...

the funds that got spent went for armored trucks/choppers and toys for the police..not for setting up alt food systems....They will try with what they got...

Sooo...I am sorry

I have made a careful ,rational decision to look no farther than my own street,my own neighbors,my own family.To spend what little time is left preparing to help strangers who don't seem to give a good,jolly god-damn on their own,seems a bit wasteful,and foolish.

I have done my best to do what I feel is the duty of every citizen for the community.Now the flood is coming and I have my own to look after...

Its late,old bird,and I am tired...


el gallinazo said...


Under current conditions you made absolutely the right decisions. That was the point I was trying to make when I used you as an example. Good luck!

Anonymous said...

Mike Ruppert: "What will count most immediately -- and what will show us the Heart of Barack Obama -- will be what he does on the economy and he is going to have to make some very UGLY decisions within two weeks at most."

Anonymous said...


So sorry about your favorite aunt ...

Anonymous said...

Mike Ruppert, linked above, is right on target.

Anonymous said...

Sorry to hear about the passing of your Aunt Ilargi. Best wishes to you and your family.

Anonymous said...

"You see, when it comes time to face death, is is every animal's instinct to go home. It is what I did."
Mike Rupert

Loved the above quote, very true. Rupert in the article was refering to the Dubai bust, where thousands of indians are fleeing for home as their jobs vanish.

Anonymous said...

(CBS) Over the years, booming oil prices helped turn Dubai into a land of opportunity and playground for the ultra rich.

But that was then and this is now. And as CBS News correspondent Sheila MacVicar reports, even Dubai is feeling the pinch of the worldwide economic crisis.

The gulf city state's property prices went up as fast and as high as the towering buildings. But reality has suddenly intruded.

One investor said it was as if someone had thrown a switch, as the global credit crunch slammed a city that was, in effect, the world's biggest construction site

It took just 20 years for Dubai to go from a desert outpost with a handful of office towers to a world metropolis, where one fifth of the world's cranes operate, and property became a very hot commodity, with some people playing real estate the way others play poker.

"People were buying and flipping properties on a launch basis," says Manesh Khadri of Century 21 Real Estate. "You launch a property and you flip it within the same day."

Before an apartment was even built you could away with tens, or even hundreds of thousands of dollars.

Developers promised: Pay $140,000 for an unbuilt apartment, and within six months, reap a $46,000 profit. So as fast as the city expanded, investors snapped up the real estate, taking on big debt.

American Internet entrepreneur Mahmood Panjwani understands the risk of building a business

But, "I really did not know what risk was until I came here," Panjwani says. "I mean Dubai is like Silicon Valley on steroids from a risk perspective."

Buying real estate with little money down and lots of debt is risky indeed. Panjwani saw trouble coming and got his cash out of the market.

"There's a lot of fear," he said. "How low can it go down? How long will it stay down?"

(AP Photo/Nousha Salimi)
Left: The Burj Dubai tower rises in Sheik Zayed highway in Dubai, United Arab Emirates, in this September, 2007 file photo. The world's tallest building is still under construction, but prices there tumbled 50 percent as Dubai's once booming economy and real estate market have gone bust.

Take the world's tallest building, the Burj Dubai, which remains under construction. In the last month prices there dropped at least 50 percent.

House prices on the man-made Palm - the iconic frond-shaped island colony - down 40 percent.

A seven bedroom villa? $10 million last year, under $6 million now.

Banks aren't lending. Projects are shelved. And the normally secretive government has had to acknowledge it has one of the highest levels of per-capita debt in the world -- and not enough oil to pay for it.

"The worst is still yet to come in the sense of people losing properties" Khadri says. "That will happen."

Of course, Dubai will come back eventually, many say, perhaps without the speculators and the insane price increases. So while the fizz might be gone, they insist, the water still sparkles.

Anonymous said...


My condolences on your loss. Aunts are wonderful assets to one's lives in my experience.

digitalfilosophy said...


My condolences on your loss. It's hard to be away.

Anonymous said...

More on Dubai Most British crooks who were touting time-sharing and properties in the Costa Blanca, Spain, are now in Dubai and Egypt.
David Beckham doesn't own an Island in the World Dubai project, neither does Jackie Stewart. Sure, they let themselves get invited, they charge a fee, some time in a 7 star hotel, they smile for the TV cameras, that's that. They are clever, they are rich and they want to stay rich.
It is the same set up as was in Marbella some years ago. In Dubai they promise the Brits they are going to duplicate their money in a couple of years, they take them to visit -I saw them on TV, they are very painful people: middle aged, some life savings, not a clue, they leave their brains behind when they take the plane- and sell them a small flat (a mortgage, rather) in a tower block (and how the British hate tower blocks in their own country!) worse than the ones in Benidorm, in a country where it gets 50ºC/122ºF in the shade and you can't swim in the sea, so hot is the water.

They built their own social environment over there, a posh version of a Daily Mail World: Hairdressers (lots: it is the only business that flourished in Britain during Blair/Brown), and private (sorry: Public) Schools, Yoga classes, Pubs with Sat TV, local Newspapers in English, everybody trying to be a Middle Manager of some kind, mostly selling property to other dewy-eyed British.
Just three months ago the property sellers were calling people who stay in Britain, in their own country, 'failures', boasting about how they duplicated their money in five years.
Now they are running away from Dubai -and from Talinn in the Baltic and from the Costa Blanca- leaving their debts behind.

Anonymous said...

I've just removed your lemonade stand from my bookmarks. Grow up.

Anonymous said...

I am sorry for your loss

Anonymous said...

I am sorry for your loss

ogardener said...


Sorry to hear of your loss. My condolences to you and yours.

Anonymous said...

Sincerely sorry for your loss.

Reportedly Omega-3 oil may help during grief. YMMV.

Thanks for everything you do.


el gallinazo said...

Ilargi, my condolences for your loss.


"Some fear that these conditions will produce a dangerous spike in inflation, but the greater risk is for a kind of global "stag-deflation": a toxic combination of economic stagnation, recession and falling prices. "

Roubini is going into newspeak now. Too many $1000 a plate presentations. Dr. Doom Lite is becoming Dr. Lite. Just call it deflation Nouriel. Economic stagnation means less than a one percent change in the absolute value of an annual GDP. They wish. Capitalism as we know it cannot survive on no growth. The planet cannot survive on further grow. We don't have the extractable energy to grow anyway.