Friday, January 30, 2009

January 30 2009: Dangling a baby out a window

Ilargi: Things sure move fast these days. Two weeks ago, a bad bank would have been impossible to even seriously consider. Now it seems a given. We remember the fight over the TARP last year, and the limits set on it, $700 billion in two phases. Obama has been president for 10 days, and there are new numbers: $2 trillion for a new bank rescue, on top of the $350 billion TARP phase II that is still on the shelf. Goldman advisers form the second party today who call for $4 trillion, after the Peterson Institute yesterday. I called for $5 trillion earlier. I’ll soon be known for my conservative estimates. Something new at last. And we see brilliant notions about using the money on a basis akin to the Federal Reserve's fractional ways. Well, that would surely get to add up. But they wouldn't, would they? Remember how many times you've thought that over the past year and a half?

Despite the fact that I have criticized Robert Shiller and Nourel Roubini recently for not being able to draw the logical conclusions from their often good analyses, I still like both. And that makes it all the more harder for me to see them praise people like Bernanke and Geithner. Shiller praises Bernanke for having the courage to experiment, and conveniently forgets to mention that this is an $8.5 trillion experiment already, carried out with other people's money. It must be easy to forget that part when, like him and Nouriel, you are being fêted in Davos by the world's richest salt of the earth.

You would almost forget what the word experiment means, and that there is no certainty whatsoever Bernanke can provide that all the people's money won't simply be lost. Shiller's remark somehow made me remember Michael Jackson dangling his baby out a hotel room window. I don't remember Wacko Jacko being praised for his courage back then. I recall lots of comments, but not that one. Even though the risk involved was not nearly as high as the one takes by Bernanke, Paulson, Geithner and Obama these days. Why do you think that is? Who's the real Wacko here? I think I know the answer: You don't need to show people that you are capable of doing what you say you will, you just have to make them believe that you can do it.

But I still think it would be an excellent idea to have all of the finance masters put up all the money they have, and that of their children, and hand it over to the banks that their plans are reportedly designed to save. If they can do it with the American citizens’ money, it would seem only fair to include their own. I think we can guess what their answers would be. And that should make us think. That and the fact that the bank bail-outs have already cost us more than all major US endeavors put together, including all wars, land purchases, New Deal, Marshall Plan and NASA programs. In 2008 inflation adjusted dollars.

For the rest of this article, i want to focus on Asia, and do so by simply giving you a number of quotes from articles you can find below. We have a lot of talk about the US, Canada and Europe on a daily basis here, with pundits from each reassuring us that the others are doing worse. Well, Asia is sinking like a big bad boulder, and we need to start paying attention for real. Here goes:

  • In the fourth quarter of 2008, GDP probably fell by an average annualised rate of around 15% in Hong Kong, Singapore, South Korea and Taiwan; their exports slumped more than 50% at an annualised rate.

  • In the fourth quarter of 2008, real GDP fell by an annualised rate of 21% in South Korea and 17% in Singapore....

  • Asia’s richer giant, Japan, has yet to report its GDP figures, but exports fell by 35% in the 12 months to December. In the same period, Taiwan’s dropped by 42% and industrial production was down by a stunning 32%, worse than the biggest annual fall in America during the Depression.

  • Japanese industrial production fell a larger-than-expected 9.6 per cent and unemployment rose sharply to 4.4 per cent in December...[...] The deterioration in the jobs market was further underlined by the continuing fall in new job offers, which declined 12 per cent last month, following a sharp 23.7 per cent drop in November....

  • The Nikkei has lost more than 10% this year after shedding more than 40% last year.

  • South Korea’s annual production plunged 18.6 per cent from a year ago, following a 14 per cent drop in November, the national statistics office said. December output fell 9.6 per cent from November

  • In South Korea, net exports actually made a positive contribution to GDP growth in the fourth quarter, while consumer spending and fixed investment fell at annualized rates of 18% and 31% respectively. South Korea is an exception to the rule of Asian prudence. Its households’ debt amounts to 150% of disposable income, even higher than in America.

  • In Hong Kong average house prices have already fallen by almost 20% since the summer and Goldman Sachs, an investment bank, forecasts another 30% drop by the middle of 2010....

  • ... on average, emerging Asia’s exports amount to 47% of their GDP, up from 37% ten years ago. The share varies from 14% in India to 186% in Singapore (see chart 2). In Japan, which is often viewed as an export-driven economy, exports are only 16% of GDP.

  • Two decades ago, consumer spending accounted for 58% of Asia’s GDP. By 2007 it had fallen to 47%. Consumer spending in China is just 36% of GDP, half the American share.

  • Even if household saving rates have been falling, they are still high, at around 20% in both China and Taiwan.

Wall Street Bailout Exceeds Cost of All US Wars, the Louisiana Purchase, the New Deal, the Marshall Plan and the NASA Space Program Combined

Casey Research, of Vermont, has analyzed the costs of the government bailouts of the housing crisis, the credit crisis and others and has concluded that the total is $8.5 trillion, which is more than the cost of all US wars, the Louisiana Purchase, the New Deal, the Marshall Plan and the NASA Space Program combined. According to CRS, the Congressional Research Service, all major US wars (including such events as the American Revolution, the War of 1812, the Civil War, the Spanish American War, World War I, World War II, Korea, Vietnam, Iraq and Afghanistan, the invasion of Panama, the Kosovo War and numerous other small conflicts), cost a total of $7.5 trillion in inflation-adjusted 2008 dollars.

Is Iceland the Canary in the U.S. Coal Mine?
The collapse in late January 2009 of the Icelandic Government is being blamed directly on the collapse in 2008 of the country's banks after they were overleveraged to such an extent that the world-wide financial crisis caused investment values to implode. During a period of rapid growth, the banks amassed huge debts in financial implements that turned out to be based on little more than promises that the good times would last forever. Turns out forever had an expiration date. As a result of the banks' implosion, the currency has plummeted, unemployment is rising and inflation is growing as the value of the currency falls.

Iceland was unable to prevent the banks' collapse - it was simply too much, too quick. Elsewhere in the world, governments have been creating money hand over fist and pumping that money into banks by any means possible to avoid what happened in Iceland. Results are hard to quantify so far because the extent of losses seems to grow with each passing month. In the UK, the government there is talking of nationalizing banks, yet no one is talking about how much is still at risk in these banks. The general feeling is that if the true extent of the losses were made public, the pound would literally ‘take a pounding’ in the currency exchange markets.

Here in the US, the same problem is showing up. Predictions less than six months ago that the total losses of bad investments would be around a trillion dollars have now been surpassed, with new estimates putting the total losses over 2.2 trillion dollars. 350 billion dollars of government bailout has not righted the economic ship and proposals now include spending the rest of the 700 billion dollar stimulus, plus another 850 billion dollars in new spending and buying up the "bad" assets by the US government.

However, just as in Iceland, no one is willing to admit just how much "bad" assets will need to be purchased or guaranteed by the government to stem the crisis. No one is even willing to admit to just how much needs to be written off, although research by NYU economist Nouriel Roubini is now placing US banking losses at some 3.6 trillion dollars. If that is accurate, it is 16% more than the entire US budget for this fiscal year. The US continues to literally throw money at a problem that we are clueless about. The banks refuse to divulge any information that would make them look bad or create a "crisis in confidence" among their depositors, but it's okay to take government funds, paid as taxes by those same depositors.

Still, the problem for the government remains how to save the banks, which could be completely insolvent due to bad assets on their books, without further shooting the economy which is in a recession. Both appear to be drowning, and with Iceland as the most recent model of what follows a banking collapse, the US government may not be willing to lose banks that could trigger a political coup. For the average person in the US, the question may be one of getting the bad medicine over quickly, or a lingering illness that produces a long term Japanese Pseudo Recovery. For US politicians, it must appear as a no-win situation, and not a single politician wants to be accused of doing nothing while the crisis grows.

But ignoring the consequences of their actions as an excuse for throwing money at a problem is not the answer. 350 billion dollars already spent would have given every man, woman and child in the US about $1000 each. That would have allowed some people to postpone the repossession of their homes, allowed others to pay bills or buy Christmas presents or even save for a rainy day. Instead the money went into a banking black hole and for all visible purposes, vanished from sight. Banks won’t even say how they have used the funds. We may not be able to resuscitate this canary. The question may be, is there a better solution available or is it going to die anyway?

Ilargi: Interesting video interview at CNBC with Barry Ritholtz. Best toxic asset line ever from one on the interviewers:

"Won’t we basicallly have to take our military and force these assets on to Canada to get rid of them?

The Moral Hazard Of A 'Bad Bank'

As we’ve been telling you, the government is about to create a ‘bad bank’ to soak up toxic assets. But the person getting soaked, may be you! When word of a ‘bad bank’ plan first hit the Street earlier in the week, it was greeted with great enthusiasm. Investors bid the financials much higher on a belief that the initiative would quickly restore health to the financial system. In fact, financial sector's health has been the biggest hurdle for the market, fueling unease about stock performance in January, which is traditionally seen as a guide to the year's prospects.

It seemed investors felt a great weight had been lifted. And not just off the financials but off the entire market. That’s right, the ‘bad bank’ fueled euphoria well beyond financials – all the major indexes nearly erased year to date losses. Investors speculated the ‘bad bank’ would drive both consumer and business spending, and motivate investors. But the bloom is coming off the rose and now skepticism about the plan is starting to grow. According to Paul Miller, FBR Capital Markets head of financial services the plan is "just a lot of noise." Billionaire investor George Soros says the plan is little more than a Band-Aid.

And Barry Ritholtz, CEO and director of research at Fusion IQ calls the plan "an obscene taxpayer giveaway." He’s furious that the government would consider purging toxic assets from bank balance sheets without punishing the management. "It will encourage more of the same," he says. Instead "nationalize the banks, Ritholtz proclaims. "Wipe out the debt. Wipe out the shareholders. Get rid of management, Then spinout the clean bank that’s well capitalized with no debt."

Here Comes The BARF
Why creating a Bad Asset Repository Fund for Wall Street's toxic assets could make banking even sicker.

First there was TARP. Get ready for BARF. They haven't named it that yet, but calling a federal "bad bank" to soak up toxic assets the Bad Asset Repository Fund would be truth in advertising at least. Despite Washington's renewed enthusiasm for the idea, there is a strong case to be made against it. The problem boils down to bank profitability, which is depleted, and the industry's ability and willingness to lend. Offloading the worst assets into an aggregator fund would still leave banks with loan books under pressure from rising defaults. Banks would still be forced to build reserves at a time when their earnings power is reduced, and that earnings power would only shrink more with a smaller asset base.

And there is no way a "bad bank" will induce banks to lend. "Lending standards have tightened dramatically and there is an unavoidable restructuring of risk taking place," says Meredith Whitney, the Oppenheimer & Co. analyst who was among the first to point out the looming bank crisis. "Such causes money to come out of the system and lending to contract, with or without this 'bad bank' structure." But facing a mounting banking crisis, federal regulators and the new Obama administration have returned to the original idea of the Troubled Asset Relief Program as one way to solve the credit crisis. New Treasury Secretary Timothy Geithner said this week that a new plan is expected to be announced soon.

One idea is for the government to buy assets that banks have classified as "available for sale" and create a guarantee program for assets classified "held to maturity." The latter category avoids the need to mark the assets to market, and in recent months banks have moved "massive" amounts of assets from the "available for sale" category to "held to maturity" for this reason, says Joshua Rosner at Graham Fisher. That would create an incentive for banks to avoid the pain of marking down values of assets sold to a bad bank, Rosner notes. They could simply shift the assets to the category destined for the guarantee program, "delaying the day of reckoning."

Last fall, as Lehman Brothers failed and other banks scrambled for safety, thoughts turned to the revival of an idea from the last real estate lending crisis. The Resolution Trust Corp. came to life in 1989 after the failure of the Federal Savings and Loan Insurance Corp., then the thrift industry's version of the Federal Deposit Insurance Corp. (FDIC). In the thick of the savings and loan debacle, FSLIC was swamped by the collapse of 296 thrifts in a short span of time. It too failed. So Congress put together the RTC, funded it with $50 billion, and tasked it with taking on the assets of failed thrifts and working them off. The RTC lasted until 1995 and required additional injections of capital, ultimately totaling more than $100 billion.

It did serve its purpose, however expensive. In its six-year lifespan, the RTC worked with 727 failed thrifts, totaling some $394 billion of assets. Last fall, former Treasury Secretary Henry Paulson convinced Congress to approve the $700 billion rescue program for the banking system with a similar plan in mind. But that part of the TARP never got off the ground, mainly because the government couldn't figure out how to price the assets it was buying. Price them too low, and banks had no incentive to participate. Price them too high, and taxpayers wind up with socialized losses while banks benefit with private gains. Paulson decided to use $250 billion of TARP funds to take direct equity stakes in banks instead.

Some don't think a new RTC-like structure is needed. The FDIC already functions as a buyer of troubled bank assets. During the savings and loan crisis, the FDIC handled the failure of 1,911 banks, totaling $703 billion of assets, and didn't succumb to failure like the FSLIC. Concerns that the FDIC will run out of insurance funds to cover deposits are overblown, many say. For starters, the insurance fund isn't a separate account, as many imagine it to be. It is part of the Treasury Department's general fund, meaning it can be expanded to how ever big it needs to be. Analysts at Keefe Bruyette & Woods estimated in recent days that for a new or improved TARP to really be effective, the government would have to take on roughly 25% of the banking industry's assets, or $3.5 trillion.

An alternative to selling their loans at distressed prices to a bad bank structure is selling "crown jewel" assets, Whitney from Oppenheimer notes. Citigroup, which has taken $45 billion from the TARP in two installments and needed the government to back $300 billion of its assets, agreed to sell 51% its Smith Barney brokerage to a joint venture with Morgan Stanley for $2.7 billion. "Private capital will readily invest in businesses that make money and grow," says Whitney. "The banks do not fit this description."

Obama thinks bank losses will cost $2 trillion
President Obama is preparing to spend a further $2 trillion bailing out Wall Street as part of an ambitious plan to force America's financial institutions to resume lending. Mr Obama, Tim Geithner, the Treasury Secretary, Ben Bernanke, the Chairman of the US Federal Reserve, and Sheila Bair, the head of the Federal Deposit Insurance Corp (FDIC), discussed plans at a meeting on Wednesday to increase the size of the Troubled Asset Relief Programme (Tarp) and buy or underwrite up to $2 trillion (£1.4 trillion) of bad Wall Street debts. The Tarp was set up by Henry Paulson, the former Treasury Secretary in the Bush Administration, and contained $700 billion of taxpayers' money used to buy equity stakes in America's banks.

Mr Paulson tried to earmark half the fund for the incoming Administration, which took office last week, but it has become clear that both the size of the Tarp and the rationale behind it were insufficient to rescue Wall Street. Mr Obama is believed to be trying to produce a new plan, to be announced next week, to rescue the American banking system. The bailout scheme has three strands; one of which is to create a so-called bad bank, run by the FDIC, which would buy troubled mortgage-backed securities that are stagnating on the books of Wall Street's big lenders. These troubled assets would be those that have been heavily discounted, so the purchase by the bad bank would not trigger a large writedown by the lender, further depressing the value of its own books.

In the second strand, the US Treasury would guarantee lenders' remaining distressed debt which has, as yet, been unvalued. The dual measures would allow the lenders to either dump or underwrite their troubled debt, without crystallising a new loss. It is hoped that such a bailout, whose cost would be met by the American taxpayer, would inject confidence into the banks and encourage them to start lending again. Third, the enlarged Tarp would also be used to take more stakes in lenders, providing new capital to the banks. The group led by the President is considering how to increase the size of the Tarp and is exploring whether America's central bank could provide funding. Such measures come within days of the new Administration forcing through an $819 billion economic stimulus plan designed to dig the world's biggest economy out of what is expected to be one of the deepest recessions for decades.

Bank Bailout Could Cost Up to $4 Trillion: Economists
The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a "bad bank" that buys up souring assets. The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns. Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.

"Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset," they wrote in a note to clients. Obama and his economic advisers are expected to lay out their policy plan as early as next week. One idea that seems to be gaining traction is setting up an entity to buy troubled assets and hold them until they mature or resell them. The hope is that once banks get rid of those bad loans, they can attract private investors, get back to the business of lending, and help revive the economy. Vice President Joe Biden said Thursday that Treasury Secretary Timothy Geithner was considering all options to restart normal lending, but that no decisions had been made.

Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included. New York Sen. Charles Schumer has said that a number of experts thought that up to $4 trillion may be needed to buy the bad assets, an estimate that a Senate aide said was based on informal conversations with people in the industry. The Wall Street Journal said government officials had discussed spending $1 trillion to $2 trillion to help restore banks to health, citing people familiar with the matter.

At $4 trillion, that would be the equivalent of nearly 1/3 of U.S. gross domestic product. If the government had to fund that amount by issuing additional debt, it would intensify investor concerns about massive supply scaring off demand. Depending on how the plan is structured, the government may not have to put up the full amount, and since the majority of people are still paying their mortgages and credit card bills, there is a reasonable expectation that taxpayers would recoup a substantial portion of the cost. However, the potential loss is huge, and if more public money is needed to boost capital even after the bad assets are removed, the total would undoubtedly climb. The International Monetary Fund said Wednesday that worldwide losses on U.S.-originated loans may hit $2.2 trillion, well above its October estimate of $1.4 trillion. It said banks in the United States, Europe and elsewhere probably needed to raise $500 billion to cover losses coming this year and next.

For U.S. lawmakers who are already taking grief from voters over a $700 billion bailout approved last fall, passing another big spending measure carries significant political risk. At the same time, Obama's team wants to take action that is bold enough to fix the problem once and for all, hoping to avoid the sort of ad hoc approach that has been criticized for adding to investor uncertainty. Time is not on Obama's side. The more the economy weakens, the longer the list of potentially dodgy debt grows. That is why he faces enormous pressure from Wall Street to act fast. The government would not necessarily have to spend the full $4 trillion to buy the assets. If it follows the model used in a Federal Reserve program to support consumer and small business loans, the government could potentially put up just 10 percent of the total.

Spending $400 billion would certainly be more palatable to Congress than $4 trillion. It may not even require that much additional funding. Economists estimate that perhaps $250 billion of what remains in the $700 billion bailout fund could be devoted to the "bad bank." That money could buy bad assets, which would then be repackaged and sold to investors to raise more money which could then by recycled to buy more assets. Stephen Stanley, chief economist at RBS Greenwich Capital, said although that sounds similar to the sort of financial engineering that spawned the credit crisis in the first place, it would be structured so that the central bank or whichever agency oversees the program is last in line to take losses. "If things turn out so bad that the Fed ends up on the hook for $1 trillion in losses, then the financial sector, the economy, and everything else will be dead anyway," he said.

U.S. Economy Shrinks at 3.8% Pace, Most in 27 Years, as Spending Crumbles
The U.S. economy shrank the most in the fourth quarter since 1982 as consumer spending recorded the worst slide in the postwar era, a trajectory that’s likely to continue in coming months. The 3.8 percent annual pace of contraction was less than forecast, with a buildup of unsold goods cushioning the blow. Excluding inventories, the decline was 5.1 percent, the Commerce Department said today in Washington. A survey of purchasing managers also indicated today that business in January was the weakest in almost 27 years. "The economy carried a lot of negative momentum into the first quarter," former Federal Reserve Governor Laurence Meyer said in an interview with Bloomberg Television. Without President Barack Obama’s planned stimulus, the deepening recession will cause the jobless rate to soar to 9.5 percent or higher, he said.

Job cuts announced this month by companies from Starbucks Corp. and Pep Boys - Manny, Moe & Jack to Eastman Kodak Co. mean there’ll be little respite in the first half of this year, economists said. The Obama administration used today’s figures to reinforce its call for Congress to pass a stimulus package in excess of $800 billion to arrest the economy’s decline. "This is a continuing disaster for America’s working families," Obama said at the White House today. "They need us to pass the American Recovery and Investment Plan," designed to save more than 3 million jobs, he said. House lawmakers passed the stimulus Jan. 28, moving action to the Senate next week. Stocks slid, after futures rallied initially as some investors were encouraged by the smaller GDP drop than forecast. The Standard & Poor’s 500 Stock Index fell 1.8 percent to 829.99 at 11:27 a.m. in New York. Treasuries advanced, sending benchmark 10-year note yields to 2.82 percent from 2.86 percent late yesterday.

Today’s report underscored the hit to households from the biggest wealth destruction on record. Consumer spending, which accounts for about 70 percent of the economy, dropped 3.5 percent following a 3.8 percent fall the previous three months. It’s the first time decreases exceeded 3 percent back-to-back since records began in 1947. The Institute for Supply Management-Chicago said today its business barometer decreased to 33.3 from 35.1 the prior month. The index has remained below 50, the dividing line for contraction, for four months. Meanwhile, consumer confidence rose less than forecast this month, a Reuters/University of Michigan index showed. The gauge climbed to 61.2 from 60.1 in December. A separate report today showed that employment costs in the U.S. rose at the slowest pace in almost a decade in the fourth quarter as companies limited wage gains and benefits. The Labor Department’s employment-cost index rose 0.5 percent.

GDP was forecast to contract at a 5.5 percent annual pace last quarter, according to the median estimate of 79 economists surveyed by Bloomberg News. "Without the stimulus plan, the economy would be flat to declining in the second half of the year," said Meyer, who is now vice chairman of Macroeconomic Advisers LLC in Washington. With the recovery package, the unemployment rate may peak at 8 percent instead of 9.5 percent or higher, he added. The world’s largest economy shrank at a 0.5 percent annual rate from July through September. The back-to-back contraction is the first since 1991. Economists at Morgan Stanley and Deutsche Bank Securities Inc. in New York lowered their forecasts for growth in the first three months of 2009 following the report. They both now estimate the economy’s worst drop will occur this quarter. For all of 2008, the economy expanded 1.3 percent as a boost from exports and government tax rebates in the first half of the year helped offset the deepening spending slump.

The GDP price gauge dropped at a 0.1 percent annual pace in the fourth quarter, the most since 1954, reflecting the slump in commodity prices. The Federal Reserve’s preferred measure, linked to consumer spending and excluding food and fuel, rose at a 0.6 percent pace, the least since 1962. Unadjusted for inflation, GDP shrank at a 4.1 percent pace, the most since the first three months of 1958. The drop in so- called nominal growth explains why corporate profits slumped as the year ended. "This is a severe, steep, broadly based recession" with "no quick fix," Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in a Bloomberg Television interview from Davos, Switzerland today. Americans may pull back further as employers slash payrolls. Companies cut 524,000 workers in December, bringing total job cuts for last year to almost 2.6 million. The unemployment rate last month was 7.2 percent, up from 4.9 percent a year before.

More cutbacks are on the way. Kodak, Target Corp. and Texas Instruments Inc. are among U.S. companies that announced thousands of layoffs this week. Target, the second-biggest U.S. discount retailer, said this week it will slash 600 existing jobs and 400 open positions, mainly in its hometown of Minneapolis. It also said it will close a distribution center in Little Rock, Arkansas, later this year that employs 500 workers. "We are clearly operating in an unprecedented economic environment that requires us to make some extremely difficult decisions," Chief Executive Officer Gregg Steinhafel said in a Jan. 27 statement. The economic slump intensified last quarter as companies also retrenched. Business investment dropped at a 19 percent pace, the most since 1975. Purchases of equipment and software dropped at a 28 percent pace, the most in a half century. The slump in home construction also accelerated, contracting at a 24 percent pace last quarter after a 16 percent drop in the previous three months.

PPG Industries Inc., the world’s second-biggest paint maker, said this week that it may cut as many as 4,500 employees, or 10 percent of its workforce, because of weak global demand from automakers and homebuilders. "We are probably looking at the sharpest downturn that anyone working at our company has seen," Chief Executive Officer Charles E. Bunch said in an interview Jan. 27. "The regions outside of North America, which had been really helping PPG in the first three quarters of last year, have sort of caught the disease that started here in the U.S. with the credit crisis." The slowdown in global demand indicates American exports are unlikely to contribute to growth in early 2009. World growth will be 0.5 percent this year, the weakest postwar pace, the International Monetary Fund said Jan. 28.

Inventories grew at a $6.2 billion pace in the fourth quarter, the first gain in more than a year. Its contribution to growth was the biggest since the fourth quarter of 2005. The Fed this week said it’s prepared to purchase Treasury securities to shore up lending and warned inflation may recede too rapidly. Fed policy makers voted to leave the benchmark interest rate as low as zero. The GDP report is the first for the quarter and will be revised in February and March as more information becomes available.

On second thought, never mind about that bailout
A small but growing number of community banks are backing out of the government's bailout, which they see as fraught with hidden strings and government interference. About 20 banks so far that applied for or had been approved to receive about $1 billion combined in taxpayer money have reversed course in the past month and refused to take the money. That's just a fraction of the hundreds of billions of dollars the government already has spent, but it shows that taxpayers aren't the only ones anxious about the financial bailout. "The government's going to own a good portion of these banks," said David Heintzman, president of Stock Yards Bank & Trust in Louisville, Ky. The bank recently turned down $43 million in approved bailout money.

After Congress approved the $700 billion bailout in October, the government gave banks only a few weeks to decide whether they wanted to take part in the government investment program. Many applied to get a foot in the door, in case predictions of an economic collapse came true. "We drank the Kool-Aid," said Michael Ross, president of Fidelity Bank in Dearborn, Mich., which applied for about $29 million in November. But as details emerged, the deal didn't look so good. For Fidelity, taking the money would mean the government would have owned about 25 percent of the company's outstanding stock. Then Congress and the White House could start calling the shots, Ross said. He remembers the government's failure overseeing Freddie Mac and its sister company, Fannie Mae, the two housing companies so badly mismanaged they were taken over by the Bush administration.

"These are the guys who brought you Hurricane Katrina. These are the guys who were supposed to be watching Fannie and Freddie," Ross said. "I've not seen anything like this, where they really are talking about nationalizing banks." Much of the criticism about the bailout has focused on the lack of oversight, which allowed banks to take money and refuse to say where it's going. Wall Street executives, who make millions of dollars and enjoy lavish perks like private jets, earned the ire of consumer watchdogs who said taxpayers were getting a raw deal. But some community banks, which had little or nothing to do with the subprime mortgage crisis, say the deal didn't look great for them, either. Congress wants banks to make loans, so businesses can expand and people can start buying houses again. But lawmakers also want them to make only trustworthy loans. But there are only so many good loans to make in a weak economy with high unemployment. Explaining that to investors is easy. To politicians, it might look like you're hoarding taxpayer money. "Then what? Then they have a guy at our board meeting?" said William Campbell, president of Pamrapo Savings Bank, a Bayonne, N.J., bank that walked away from its $11 million bailout application.

The government also can force banks to cut dividends to shareholders, making a bank's stock less attractive to investors. President Barack Obama has said he wants to prohibit banks from buying other banks. And at any time, Congress can change the law and add new terms. "Are you going to enter into a contract that will cost you millions of dollars if you can't live with the rules and you don't even know what the rules are?" said Steve Buster, CEO of Richmond, Calif.-based Mechanics Bank, which refused $60 million in bailout money. "I don't know of any other forum that parties can change the contract at will. This is not fair." The banks that turned down the money said they were comfortable their own finances will allow them to weather the storm. For some, taking the money seemed riskier than turning it down. "We finally said, 'Hey do we really want to go down this path?'" said Michael Blodnick, chief executive of Glacier Bancorp of Kalispell, Mont. "I understand a lot of banks do, and a lot of banks need to."

Obama Officials, Wall Street Talk Bad Bank Plans

Officials from the Obama administration are holding around the clock meetings with senior Wall Street executives on how to create a new government bank to buy bad assets from major financial firms. However, people with direct knowledge of the talks tell CNBC there is no consensus on how such an entity would work or whether a plan could materialize any time soon or possibly ever. The meetings are being held by representatives of the Treasury Department and the Federal Deposit Insurance Corp., with input from the Federal Reserve and senior Wall Street executives, these people say. Under the plan being floated: The FDIC or some government agency would create a so-called 'bad bank'. The bank would snap up illiquid mortgage assets, such as bonds and loans, from banks and financial institutions in an effort to bolster the banking system's balance sheet and allow banks to resume modest lending to business and consumers, which has been drastically curtailed during the financial crisis.

The plan is similar to the initial bank bailout unveiled under the Bush Administration last September, and like its predecessor plan, the new initiative has recently hit a major snag. At issue: How to value the assets that are sold to the bad bank in a way that isn't so low that the financial firms selling the toxic assets aren't declared insolvent once they shed the securities and write down losses. On the other hand, government officials feel they can't simply buy the assets at levels significantly above what the market is valuing the securities, because taxpayers would be subsidizing Wall Street's excesses. One senior Wall Street executive says he explained the problem to government officials the other day this way: "What I told them is that our model may be valuing this stuff at 50 cents on the dollar, but the market values it at 22 cents. If we sell for 22 cents, we get creamed. But does the government want to pay us the difference?"

The answer coming from government officials is no, and that's why the plan is currently in limbo. According to people close to the discussions, the plan may morph into some hybrid of the various alternatives to the bad bank. The government may buy some of the bad assets, while other assets may be covered by insurance or some other guarantee. One problem, these people say, is that recently confirmed Treasury Secretary Timothy Geithner has yet to assemble his senior staff to craft a proposal to present to Congress. The bigger problem is the complexity of the issue. People close to the talks say that there will be no quick fixes to the problem of a banking system holding more than $1 trillion of illiquid assets. For that reason, there is no draft plan in place, and the way things are going, there might not be one for at least the next 10 days or even longer, according to people with direct knowledge of the negotiations.

In fact, congressional staffers have yet to be briefed on any initiative. In addition, the situation is so complicated that some people close to the talks say that the bad bank initiative might die just like the initial Bush plan. Rumors swirled on Wall Street and in Washington Thursday that the government had set up a meeting with Wall Street executives for the weekend to hammer out a plan. But people at the big banks say no such meeting has been set up, at least not yet. One reason is the lack of consensus on how to create the bad bank, also known as an aggregator bank.

U.S. Eyes Two-Part Bailout for Banks
The nation's top economic officials are discussing a new way to stabilize the financial system by buying a portion of banks' bad assets and offering guarantees against future losses on some of the remainder, in an effort to help banks while trying to mitigate the cost to taxpayers. This approach, which merges two competing ideas, was discussed this week at a meeting that included Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair, according to people briefed on the meeting. The emerging plan comes as the administration seeks to jolt the economy with an $819 billion stimulus plan and a series of additional moves designed to stem foreclosures, overhaul financial regulation and get credit flowing again.

Amid that flurry of activity, President Barack Obama stepped up his rhetorical attacks Thursday on the same banks his officials are planning to aid. Summoning reporters after a closed meeting with Mr. Geithner, Mr. Obama blasted earlier news that Wall Street had paid out $18.4 billion in bonuses, calling it "the height of irresponsibility" and "shameful." "There will be time for them to make profits, and there will be time for them to get bonuses," he said. "Now is not that time." The tough talk suggested a firmer stand from the administration in its oversight of banks. But it also had a political purpose: eliciting support for an expensive and unpopular bailout program that will likely require more cash from Congress. The latest bank-aid discussions represent one idea of several being contemplated by officials, who stressed that conversations are fluid and much could change. In addition, there have been disagreements among officials as to the best approach. Ms. Bair, for example, wanted the government to buy a larger amount of bad assets, but Treasury officials worried about the expense, according to people briefed on the matter.

The Obama administration has been working to craft what it calls a "comprehensive" approach to the financial crisis after months of ad hoc rescues. The decision on banks will be coupled with a broad program aimed to prevent foreclosures, White House aides say. Besides the stimulus bill and an overhaul of the financial regulatory system, officials are working on a plan to stabilize domestic auto makers. Mr. Obama called his stimulus plan "only one leg of the stool," adding that the other elements "will be rolled out systematically in the coming weeks, so that the American people will have a clear sense of a comprehensive strategy designed to put people back to work, reopen businesses and get credit flowing again." Mr. Obama met with former Federal Reserve Chairman Paul Volcker Wednesday to begin work on the regulatory overhaul. House Financial Services Committee Chairman Barney Frank (D., Mass.) said Thursday White House aides want a legislative plan ready for the meeting in London on April 2 of the Group of 20 developed and developing nations.

The Treasury, under the auspices of former Secretary Henry Paulson, has already committed $335 billion to help financial institutions. Mr. Obama's aid to homeowners could cost between $50 billion and $100 billion, and the so-called bad bank that would buy up assets could ultimately reach a size of $2 trillion, according to people familiar with the matter. The central question facing policy makers: How does the government help banks exorcise their bad bets? For many of these assets, there is no current market price. If the government buys the assets for more than they are ultimately worth, taxpayers will take the hit. If the government pays too little, banks will have to record losses on other similar assets, exacerbating the problem. Under the concept being discussed, the government "bad bank," possibly run by the FDIC, would buy only assets banks have already marked down heavily. This could avoid crushing the value of other assets held by banks. It could also potentially sidestep the pricing dilemma because banks have already recognized the low value of the assets being purchased.

Mr. Geithner discussed the latest idea Wednesday afternoon at the meeting with Mr. Bernanke, Ms. Bair and Comptroller of the Currency John Dugan, people familiar with the matter said. Mr. Geithner met with his staff throughout the day Thursday and with Mr. Obama in the afternoon. The remaining troubled assets -- likely a sizable amount -- would be covered by a type of insurance against future losses. This would apply to mortgages, mortgage-backed securities and other loans that banks are holding until they mature. Banks have probably given these assets an overly optimistic value because they plan to hold them. This would be similar to a structure set up recently to protect Citigroup Inc. and Bank of America Corp., in which the government and the bank would share future losses on a set pool of assets. In addition, the Treasury is also likely to make more capital injections into banks.

The plans under discussion suggest Washington expects Wall Street to pay a higher price for being bailed out. Mr. Obama's excoriation of Wall Street executives came a day after New York State Comptroller Thomas P. DiNapoli estimated that Wall Street firms paid $18.4 billion in cash bonuses last year to employees living in New York City. That represents a 44% decline from 2007; but that securities firms are issuing bonuses at all has fanned criticism Wall Street is disconnected from political and economic reality. Many banks have already said they won't pay 2008 bonuses to top executives. Some financial institutions, such as Citigroup and UBS AG, also are instituting a "clawback" provision that will allow a company to recoup payments under certain circumstances. On Thursday, UBS told managing directors in its U.S. investment-banking unit that they will get no cash bonuses for 2008.

In crafting an approach that covers the broad spectrum of the financial crisis, the White House is attempting to navigate a course between economists who say the president is doing too little and those saying he is trying to do too much. The incremental approach has not worked, said Sen. Charles E. Schumer (D., N.Y.) in an interview, but the risks of moving forward all at once are high. "A death of a thousand cuts is a very bad way to go," Mr. Schumer said, "but every one of the comprehensive solution has major problems." Both possible solutions to banks' woes are largely untested during a severe economic downturn. The bad-bank idea is similar to the Resolution Trust Corp., which was created to help clean up the savings-and-loan crisis. But the RTC only dealt with assets accumulated from failed institutions, not struggling ones. And the insurance aid for Citigroup and Bank of America is relatively new, and the ultimate cost to taxpayers is not known.

William Seidman, who led the FDIC and RTC during the savings-and-loan crisis, says the government could end up cobbling together too many initiatives that don't fit together. "This is a horse designed by a committee and it looks like a camel," he says. Each leg of the administration's approach depends on one of the others. Consumers may do little with their stimulus cash if they are threatened by foreclosure or can't get a loan from the bank, for example. Administration officials also say a rescue of the financial system won't be complete until they can assure investors that a stronger regulatory system will prevent another financial collapse. Some economists worry the White House will create pieces of the puzzle that will ultimately be too weak. "You have to decide, 'Should I pay Peter? Should I pay Paul?' You do have to make some choices here," says Martin Baily, a former chairman of the White House Council of Economic Advisers under Bill Clinton.

Mr. Baily and others have cautioned that tackling a financial regulatory overhaul in this environment, with so many other initiatives under way, will add uncertainty to the financial sector. Kevin Hassett, director of economic policy studies at the conservative American Enterprise Institute, sees the opposite problem. He says the administration should be doing more. As they confront the immediate economic crisis, for example, Obama aides have taken off the table a concurrent effort to solve long-term problems with the tax code and with Social Security and Medicare -- both of which the White House has pledged to tackle eventually. "They're not being ambitious enough," says Mr. Hassett.

Roubini Predicts More Global Gloom After Vindication at Davos
At the World Economic Forum two years ago, Nouriel Roubini warned that record profits and bonuses were obscuring a "hard landing" to come. "I really disagree," countered Jacob Frenkel, the American International Group Inc. vice chairman and former Israeli central banker. No more. "Roubini was intellectually courageous, and he called the shots correctly," says Frenkel, whose AIG survives only on the basis of more than $100 billion of government loans. "He gained credibility, and he deserves it."

This week, New York University’s Roubini returned to the WEF and the Swiss ski resort of Davos as the prophet of the worst economic and financial crisis since the Great Depression - - joining the ranks of previous "Dr. Dooms" who made their names through contrarian calls that proved correct. Even as he wins plaudits for his prescience, Roubini, 50, says worse lies ahead. Banks face bigger credit losses than they realize, more financial companies will require state takeovers and the world economy will keep shrinking throughout 2009, he says. "The consensus is catching up with me, but it’s still behind," Roubini said in an interview in Davos. "I don’t know what some people are smoking."

As long ago as February 2007, Roubini was writing on his blog that "the party will soon be over," and warning of "painful consequences for the U.S. and the global economy." By last February, his tone had become apocalyptic, raising the specter of a "catastrophic" meltdown that central banks would fail to prevent, triggering the bankruptcy of large banks with mortgage holdings and a "sharp drop" in equities. The next month, Bear Stearns Cos. failed, to be taken over by JPMorgan Chase & Co. in a government-backed deal. Then, in September, Lehman Brothers Holdings Inc. went bankrupt, prompting banks to hoard cash and depriving businesses and households of access to capital. The U.S. took over AIG, Fannie Mae and Freddie Mac, and the Standard & Poor’s 500 Index suffered its worst year since 1937.

"I was intellectually vindicated," Roubini says. "But I was vindicated by having an economic disaster which has political and social consequences." Roubini’s predecessors in the role of economic nay-sayer include some well-known names: Joseph Granville, publisher of the Granville Market Letter, who forecast the stock-market declines of 1976 and 2000; Henry Kaufman, who as a managing director at Salomon Brothers projected rising interest rates that led to a U.S. recession in the early 1980s; Marc Faber, publisher of the Gloom, Boom & Doom Report, who predicted the 1987 stock crash; and Yale University’s Robert Shiller, a former colleague of Roubini’s, who forecast the end of the dot-com bubble in his 2000 book "Irrational Exuberance." Granville, 85, says the key to being an outlier is not to doubt your analysis. "I don’t have anything to do with emotion," says Granville, who’s based in Kansas City. "Keep your head, follow the numbers and ignore the rest."

Roubini was born in Istanbul, the son of an importer- exporter of carpets, and spent his childhood in Israel, Iran and Italy. It was while living in Milan from 1962 to 1982, he says, that he became attracted to economics: "Economics had the tools to understand the world, and not just understand it but also change it for the better." After a year at the Hebrew University of Jerusalem, he earned an economics degree at Milan’s Universita’ L. Bocconi and then his Ph.D. at Harvard University in 1988, where he specialized in international economics. Jeffrey Sachs, he says, became his "role model" at Harvard by demonstrating that economists could shape public policy -- as Sachs did by lobbying for poor countries to have their debts relieved by richer governments. Sachs is now a professor at Columbia University.

"You sensed there was something beyond academia, that you have to figure out the big issues of the global economy," says Roubini. "You have to be engaged, and can’t just be in an ivory tower." For much of the 1990s, Roubini combined academic research and policy-making by teaching at Yale and then in New York, while also spending time at the International Monetary Fund, the Federal Reserve, World Bank and Bank of Israel. By 1998 he had attracted the attention of President Bill Clinton’s administration, joining it first as a senior economist in the White House Council of Economic Advisers and then moving to the Treasury department as a senior adviser to Timothy Geithner, then the undersecretary for international affairs and now Treasury secretary in the Obama administration.

Roubini returned to the IMF in 2001 as a visiting scholar while it battled a financial meltdown in Argentina. He co-wrote a book on saving bankrupt economies entitled "Bailouts or Bail- ins?" and opened his own global consulting firm, which now employs two dozen economists and publishes a popular Web site and blog. "Nouriel has a rare combination of economics and the real world, and so has great insight because of that," says Shiller. "He looks into the details and rolls up his sleeves." Roubini says working on emerging-market blowouts in Asia and Latin America allowed him to spot the looming disaster in the U.S. "I’ve been studying emerging markets for 20 years, and saw the same signs in the U.S. that I saw in them, which was that we were in a massive credit bubble," he says.

With that bubble now popped, Roubini remains more pessimistic than economists elsewhere. The IMF forecasts global growth of 0.5 percent this year and bank losses from toxic U.S.- originated assets of $2.2 trillion. By contrast, Roubini sees the global economy shrinking this year, and banks writing down at least $3.6 trillion -- compared to the $1.1 trillion disclosed so far. While the U.S. government is resisting nationalizing its biggest banks, Roubini says it will have no choice because they are now "effectively insolvent." And the outcome may be even worse than even he anticipates if governments fail to take aggressive steps to recapitalize banks and revive their economies, he says: "The risk of a near-depression shouldn’t be underestimated." Roubini, who’s now working on a book about the crisis, says he takes no particular pleasure in his role as Dr. Doom or the attention it brings him. "I’m not a permanent bear," he says. "I’ll be the first to call a recovery, but I just don’t see it yet, and it’s getting uglier."

Ilargi: 6 million, professor? Try 16 million, just for starters.

Roubini Predicts Job Losses Will Hit 6 Million
The U.S. economy is mired in a "global, synchronized recession" and will shed 6 million jobs before things get better, according to New York University Professor Nouriel Roubini. Roubini, known to many as "Dr. Doom," offered that dire prediction this week on And by one Southland economist's calculations, his number may not be far off. "That's a pretty aggressive figure," said Nancy D. Sidhu, chief economist for the Los Angeles County Economic Development Corp. "But we were down 2.6 million jobs for last year and in 2009 I think we'll lose at least as many as we did in 2008." That would bring the nation's total number of job losses to 5.2 million.

Announcements made Wednesday by Boeing Co. and Starbucks Corp. appeared to punctuate Roubini's prediction. Facing falling air traffic and pressure on military budgets, Boeing announced plans to cut 10,000 jobs after reporting a surprise fourth- quarter loss of $56 million, or 8 cents per share, compared with profit of $1.03 billion, or $1.36 per share, a year earlier. And Starbucks Corp. said nearly 7,000 employees may lose their jobs amid a new round of store closures and cost cuts. The Seattle-based coffee chain said its profit fell 69 percent in its fiscal first quarter. The company plans to close 300 underperforming stores around the world by the end of the fiscal year in addition to the 600 it already planned to close in the U.S. The company has already shuttered 384 of those locations.

Last year's layoffs came in "drips and drabs" during the first eight months of the year, Sidhu said, but things kicked into high gear during the remaining four months. "Things really started to tumble and by the last two months of 2008 we lost an average of 550,000 jobs each month," she said. Southern California's retail, construction, finance and manufacturing industries have all been hammered by big losses. Retail chains, including Mervyn's and Linens 'n' Things, have already closed their doors. Circuit City, which filed for Chapter 11 bankruptcy protection in November, recently announced that it will close all 567 of its U.S. locations. The U.S. Postal Service is also considering a plan that would reduce services at its processing and distribution center in Industry. The plan -- which could shift as many as 700 locals jobs out of the San Gabriel Valley -- would move some of the facility's services to Santa Clarita or Santa Ana, officials said. No layoffs of full-time, career employees are expected.

Many California businesses have cut executive perks and implemented pay freezes, mandatory furloughs or four-day work weeks as a way of avoiding further job cuts. Bob Machuca, regional manager of business assistance for the LAEDC and the San Gabriel Valley Economic Partnership, said some manufacturing firms have adopted unusual -- but effective -- methods of avoiding layoffs. "They are having employees take on the cleaning of the inside of the building, like vacuuming or cleaning the bathroom," Machuca said recently. "And some of them are having employees come in to do the landscaping on weekends."

Cargo traffic at the ports of Los Angeles and Long Beach has also slowed significantly, offering yet another reflection of the global economic slowdown. "Ocean container traffic was down 19.9 percent in December," Sidhu said. "And the San Gabriel Valley has a lot of industrial space and companies that do importing and exporting." Don Sachs, executive director of the Industry Manufacturers Council, said import/export business has tapered off in Industry, although food-related industries seem to be doing well. Retail, however, is another story. "Clothing apparel, shoes and electronics are taking a big hit," he said. "Circuit City will be closing at the Puente Hills mall and Linens 'n' Things has already closed."

Time Warner Inc.'s AOL division said Wednesday that it is cutting up to 700 jobs, or about 10 percent of the online unit's work force. IBM Corp., meanwhile, has cut thousands of jobs in its sales, software and hardware divisions in the past week, without announcing specific numbers. Home Depot Inc., Pfizer Inc. and General Motors Corp. also have announced plans to lay off thousands of workers this week.

Roubini Says Financial System Risks More 'Disastrous' Bubbles
The world economy faces the threat of more "disastrous" asset bubbles unless financial regulators overhaul rules which allow banks to police their own behavior, New York University Professor Nouriel Roubini said. "We relied on self regulation when there is no regulation or market discipline that does not occur when there is irrational exuberance," Roubini told Bloomberg Television in an interview in Davos, Switzerland today.

"We have to change the entire system, otherwise we’re going to have another one of these massive asset and credit and leverage bubbles, and it’s going to be disastrous." Roubini reiterated his prediction that U.S. financial losses will more than triple to $3.6 trillion and said that most banks there are insolvent and should be nationalized. The International Monetary Fund said yesterday that the global economy will slow close to a halt this year, dragged down by more than $2 trillion of bad assets in the U.S.

The international bank regulatory framework must be completely overhauled if we are to avoid a "near depression," Roubini said. He also took aim at U.K. Prime Minister Gordon Brown’s policy for regulating the financial markets. "Light touch that means no touch, principles rather than rules -- the entire pillars of Basel II have been failing even before they’ve been implemented," Roubini said. "You have to rethink this global accord about capital adequacy and supervision in a different way, you need cooperation but you also need to be willing to do the right thing."

U.S. President Barack Obama’s current administration, such as National Economic Council director Larry Summers and Treasury Secretary Timothy Geithner "are as strong as you can get to understand policy, economics, finance and they’re going to do the right thing," Roubini added. "The problem is that even you have the best thing with the best program implemented unfortunately the recession and financial crisis train has left the station," he said. "If we do the right thing there will be slow recovery next year. If we do the wrong thing, we’ll have a near-depression."

Ilargi: And after talking about near depression and double-digit unemployment for years to come, both gentlemen sing the praises of Bernanke, Geithner and Summers. Roubini and Shiller are good at spotting the trouble, but fail conspicuously when it comes to the way out. There is one big behemoth problem with nationalizing banks: you buy their debts too.

Roubini Says Banks Insolvent, Shiller Wants Bridge Banks

Obama Calls Wall Street Bonuses 'Shameful'
President Obama fired a warning shot at Wall Street on Thursday, branding bankers "shameful" for giving themselves $18.4 billion in bonuses as the economy was spinning out of control and the government was spending billions to bail out many of the nation’s most prominent financial firms. Speaking from the Oval Office with Treasury Secretary Timothy F. Geithner by his side, Mr. Obama lashed out at the industry over a report, compiled by the New York State comptroller, Thomas P. DiNapoli, which found that over all, financial executives received the same level of bonuses as they had in 2004, when times were more flush.

It was a pointed and unusual flash of anger — if a premeditated one — from the president, and it suggested that he intended to use his platform to take a hard line against excesses in executive compensation. "That is the height of irresponsibility," Mr. Obama said angrily. "It is shameful, and part of what we’re going to need is for folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility. "The American people understand that we’ve got a big hole that we’ve got to dig ourselves out of, but they don’t like the idea that people are digging a bigger hole even as they’re being asked to fill it up," Mr. Obama said, adding that "there will be time for them to make profits and there will be time for them to make bonuses. Now is not that time."

News of the report, and Mr. Obama’s remarks, came a day after the president met privately at the White House with business leaders, including Richard D. Parsons, the new chairman of the board of Citigroup. This week, Citigroup, which received an infusion of taxpayer money last year, canceled its plans, at the administration’s urging, to buy a $50 million business jet. Mr. Obama did not spare the company in his remarks on Thursday, although he did not mention Citi by name. "Secretary Geithner already had to pull back on one institution that had gone forward with a multimillion-dollar plane it purchased at the same time as they are receiving TARP money," he said, using the acronym for the government’s $700 billion Troubled Assets Relief Program, intended to rescue shaky financial firms. "We shouldn’t have to do that, because they should know better."

Mr. DiNapoli’s report was compiled based on the annual December-January bonus season, mostly through personal income tax collections. In an interview published on Thursday, he said it was unclear if banks had used taxpayer money for bonuses. "The issue of transparency is a significant one," Mr. DiNapoli said in the interview, "and there needs to be an accounting about whether there was any taxpayer money used to pay bonuses or to pay for corporate jets or dividends or anything else." Earlier Thursday, the White House press secretary, Robert Gibbs, said Mr. Obama had a one-word reaction to the report: "Outrageous." He announced in advance that Mr. Obama would put forth his views in person, which he did at the end of a meeting with Mr. Geithner.

Wall Street Bonuses May Go Way of Dodo Amid Bailouts
The Wall Street bonus, considered a sacred ritual, may become the industry’s biggest casualty as governments worldwide bail out financial institutions. UBS AG was told to reduce bonuses after the Swiss government gave the country’s biggest bank a $59.2 billion lifeline. Bank of America Corp. is under pressure to scale back payouts after New York Attorney General Andrew Cuomo subpoenaed executives earlier this week for information on compensation and President Barack Obama said just yesterday that bonuses handed out by banks represent "the height of irresponsibility."

The current system of "asymmetric compensation," in which people are rewarded when they do well and aren’t required to return the rewards when they lose money, is detrimental to society and needs to change, said Nassim Taleb, a professor at New York University and author of "The Black Swan: The Impact of the Highly Improbable," in an interview. The worst economic crisis since the Great Depression, a $700 billion taxpayer bailout in the U.S. and the demise of three of the biggest securities firms -- Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. -- didn’t deter investment banks from offering year-end rewards to employees on top of their salaries. Financial companies in New York City paid cash bonuses of $18.4 billion last year, the sixth-most in history, even as they posted record losses, according to data compiled by the office of state Comptroller Thomas DiNapoli.

"We won’t arrive at a situation where there are no bonuses," Stephen Green, chairman of HSBC Holdings Plc, said at a press conference in Davos today. "There are always parts of companies that are profitable, and if somebody’s been working in a profitable business in a market where bonuses are a normal part of compensation, it’s difficult sometimes to say you won’t have any bonuses in that business." NYSE Euronext Chief Executive Officer Duncan Niederauer said today in Davos that "some compensation models need to be completely overhauled." He added that this would be difficult to legislate and companies will have to take the lead. "While a number of people clearly do create wealth by brain power, by use of the company’s balance sheet and by other resources, other people have been receiving incentives for basically turning up," Barclays Plc Chairman Marcus Agius said at the World Economic Forum. "That I don’t think is very smart. An incentive system properly designed and fairly calibrated is absolutely fundamental."

Credit Suisse Group AG’s investment bank decided last month to reduce the risk of losses from about $5 billion of its most illiquid loans and bonds by using them to pay employees’ year-end bonuses. The Zurich-based company’s leveraged loans and commercial mortgage-backed debt will fund executive compensation packages. The new policy applies only to managing directors and directors, the two most senior ranks at Credit Suisse, according to a Dec. 18 memo sent to employees. Credit Suisse, along with New York-based Morgan Stanley and UBS, also have added so-called clawback provisions that set aside portions of workers’ bonuses that can be recouped in later years if an employee leaves or is found to have behaved in ways that are harmful to the company.

Zurich-based UBS cut its 2008 bonus pool by more than 80 percent to less than 2 billion Swiss francs ($1.75 billion) after the company was forced to accept government funds in October. Chief Executive Officer Marcel Rohner, his 11 colleagues on the executive board and Chairman Peter Kurer won’t get any variable pay for last year. Former Merrill Lynch CEO John Thain was asked this week by the New York attorney general’s office for information about payouts made before the largest brokerage firm was acquired by Charlotte, North Carolina-based Bank of America. The U.S. Treasury agreed earlier this month to provide $20 billion of capital and $118 billion in asset guarantees to Bank of America, the country’s biggest mortgage lender, to help absorb losses at New York-based Merrill. Wall Street firms need to "show some restraint and show some discipline," Obama said yesterday, with Treasury Secretary Timothy Geithner and Vice President Joe Biden at his side.

Obama’s team is drafting a package of measures to address the credit crunch and details may be announced next week, people familiar with the matter said. Geithner met over the past two days with Federal Reserve Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. chief Sheila Bair and other regulators to work out the plan. The initiative may feature a concerted effort to remove toxic assets that clog lenders’ balance sheets. The FDIC probably will run a so-called bad bank to take on some of the securities; others will be insured by the government against losses while remaining on lenders’ books, the people said. Further capital injections for the biggest banks also are under consideration. Senator Banking Committee Chairman Christopher Dodd vowed yesterday to use "every possible legal means to get the money back." The Connecticut Democrat plans to summon executives whose companies received taxpayer aid to testify before his committee and explain their bonuses. "You’re never going to get any support for the continued tough decisions we have to make if this kind of behavior continues," Dodd said. "We can’t be underwriting to the tune of billions of dollars, whether it was used directly or indirectly. This infuriates the American people."

The Treasury Department has injected about $200 billion into banks across the country through its Troubled Asset Relief Program. Banks and financial companies have eliminated 265,000 jobs in less than two years. Charles Elson, director of the University of Delaware’s John Weinberg Center for Corporate Governance, said it would be "very difficult" for the Treasury to recoup bonuses. "Usually these bonuses were contractually made and paid out based on a formula unless you can show bad faith, some intentional misconduct," Elson said. "These are situations where monies were paid under a contract, and the worst you can accuse these people of is making very bad decisions."

People such as Robert Rubin, who received more than $100 million while serving as chairman of New York-based Citigroup Inc.’s executive committee, should be punished for their failure to understand the risks their institutions were taking, said Taleb, author of "The Black Swan." A spokesman for Rubin declined to comment. "These people make excuses, after the fact, saying that nobody saw it coming and that you couldn’t predict it," Taleb said in an interview. "That’s no excuse. If you know there are storms, don’t fly. And if you fly, fly with someone who knows about storms." Unless Rubin and others are required to return their bonuses or are punished in some way, Taleb said a regrettable system emerges "where profits are privatized and losses are nationalized."

Treasury has the authority under legislation that created TARP to issue regulations that claw back excessive executive compensation, and that may give the administration some authority to go after excessive pay, said Larry Hamermesh, a corporate law professor at Widener University in Wilmington, Delaware. "It was pretty clear from TARP that the secretary of the Treasury was supposed to establish a provision for executive claw-back," Hamermesh said in a phone interview. "How the secretary has implemented that isn’t clear." The Treasury could require companies that request additional funds to repay excessive bonuses as a condition of the further financing, Hamermesh said. "If they come around to ask again, they could say, ‘We’re going to deny it unless they cough up the bonuses,’" he said.

Taleb Says Nationalize Banks, You Can’t Trust Them
Bank nationalizations are "absolutely necessary" to stop them damaging the financial system further with more losses, said Nassim Nicholas Taleb, author of the best-selling finance book "The Black Swan." "You cannot trust the banks in taking risks," Taleb said in an interview with Bloomberg Television in Davos. "We have a very strange situation in which it’s the worst of capitalism and socialism, a situation in which profits were privatized and losses were socialized. We taxpayers have the worst." The global economy will slow close to a halt this year as more than $2 trillion of bad assets in the U.S. help sink economies from there to the U.K. and Japan, the International Monetary Fund said yesterday.

Taleb echoed comments from New York University Professor Nouriel Roubini, who says the majority of U.S. banks are insolvent. "You have to eventually nationalize U.S. banks, you have to take the problem by the horns," Roubini told Bloomberg Television in Davos today. "In my view actually most of the U.S. banking system is insolvent." Roubini, a former economist in President Bill Clinton’s White House, predicted the financial crisis as early as July 2006. Last February he forecast a "catastrophic" meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks with mortgage holdings.

Rare and unforeseen events are known as "black swans," after Taleb’s book, "The Black Swan: The Impact of the Highly Improbable." It was published in May 2007, about three months before the credit crunch rocked global markets and led banks to announce more than $1 trillion of writedowns and credit losses. "We should not trust these bankers; look at their track record," Taleb said. "They know we’re going to bail them out. They hold us as hostages" and "the only way to stop the process is for the government to own those banks, tell them what to do."

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, speaking at a panel at the World Economic Forum in Davos today, doesn’t agree. "JPMorgan will be fine if everybody stops talking about nationalizing banks," Dimon said. "Policy has been catch-as- catch-can. I haven’t yet seen people get all the right people in the room, close the damn door, put all the problems on the wall and come up with a solution." Deutsche Bank AG Chief Executive Officer Josef Ackermann said in an interview on Bloomberg Television that lenders will have to set aside more money for defaults as global economic growth stalls. "I’m a bit more concerned about the credit side and asset quality," he said.

Taleb today signaled he favors curbs on the trading of some financial instruments. House of Representatives Agriculture Committee Chairman Collin Peterson of Minnesota circulated an updated draft bill yesterday that would ban credit-default swap trading unless investors owned the underlying bonds. That might prohibit most trading in their $29 trillion market. "I don’t like credit default swaps," Taleb said. "We should probably stop trading derivatives, anything more complex than regular options" because "I am an options trader, and I don’t understand options. How do you want a regulator to understand them?"

As the founder of New York-based Empirica LLC, a hedge-fund firm he ran for six years before closing it in 2004, Taleb built a strategy based on options trading to bullet-proof investors from market blowups while profiting from big rallies. He now advises Universa Investments LP, a Santa Monica, California-based firm opened in 2007 by Mark Spitznagel, Taleb’s former trading partner, using some of the same strategies they’d run since 1999.

Nassim Taleb: ‘I Was Happy Lehman Went Bust’
Never have so many people signed up to hear bad news. A packed room of financiers turned out to hear from the world’s leading doomsayers at a dinner Wednesday night. Niall Ferguson, the history professor and author of "The Ascent of Money: A Financial History of the World"; Nouriel Roubini, known as Dr. Doom (he actually introduces himself that way to people); Nassim N. Taleb, author of "The Black Swan: The Impact of the Highly Improbable"; Robert Engle, a professor at New York University, and Daniel Kahneman, a Nobel award winner; all regaled the room with prognostications of more financial gloom.

The dinner was supposed to be about the 36 hours around Lehman Brothers’ bankruptcy and whether that was a trigger for the crisis. Most of the panelists said that it wasn’t — that it was just a symptom of a larger problem — and tried to move the conversation on to the future of the global economy. But before the conversation turned, Mr. Taleb had some fighting words for Wall Street that surprised many in the room. He said, "I was happy when Lehman went bust," explaining how he had shorted the company and literally danced when he heard the news. (The dinner was off the record, but Mr. Taleb and some of the others said they were so passionate about the issues that they could — and in Mr. Taleb’s case "should" — be quoted.)

He went on to say, "I hate traders" and explained that the business of creating and trading derivatives is solely about finding a way to take advantage of clients. Mr. Ferguson was only slightly more sympathetic. He suggested that the crisis was bound to happen, in part, as a result of "stupidity" by so many. He also suggested that we are about to enter what he calls a "global lost decade." It will be worst in he United States, he said, marking "the twilight of the American hegemony." After all of that, most people in the room needed a drink.

Nassim Taleb's rules for living
Nassim Nicholas Taleb, author of The Black Swan, gives his 10 rules for surviving an unpredictable world with dignity."

1 Scepticism is effortful and costly. It is better to be sceptical about matters of large consequences, and be imperfect, foolish and human in the small and the aesthetic.

2 Go to parties. You can't even start to know what you may find on the envelope of serendipity. If you suffer from agoraphobia, send colleagues.

3 It's not a good idea to take a forecast from someone wearing a tie. If possible, tease people who take themselves and their knowledge too seriously.

4 Wear your best for your execution and stand dignified. Your last recourse against randomness is how you act if you can't control outcomes, you can control the elegance of your behaviour. You will always have the last word.

5 Don't disturb complicated systems that have been around for a very long time. We don't understand their logic. Don't pollute the planet. Leave it the way we found it, regardless of scientific 'evidence'.

6 Learn to fail with pride and do so fast and cleanly. Maximise trial and error by mastering the error part.

7 Avoid losers. If you hear someone use the words 'impossible', 'never', 'too difficult' too often, drop him or her from your social network. Never take 'no' for an answer (conversely, take most 'yeses' as 'most probably').

8 Don't read newspapers for the news (just for the gossip and, of course, profiles of authors). The best filter to know if the news matters is if you hear it in cafes, restaurants... or (again) parties.

9 Hard work will get you a professorship or a BMW. You need both work and luck for a Booker, a Nobel or a private jet.

10 Answer e-mails from junior people before more senior ones. Junior people have further to go and tend to remember who slighted them.

Global Worries Over U.S. Stimulus Spending
Even as Congress looks for ways to expand President Obama’s $819 billion stimulus package, the rest of the world is wondering how Washington will pay for it all. Few people attending the World Economic Forum question the need to kick-start America’s economy, the world’s largest, with a package that could reach $1 trillion over two years. But the long-term fallout from increased borrowing by the United Stated government, and its potential to drive up inflation and interest rates around the world, seems to getting more attention here than in Washington. "The U.S. needs to show some proof they have a plan to get out of the fiscal problem," said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. "We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening."

Mr. Zedillo said that Washington, unlike most other countries, had the option of simply printing more money, because the dollar was a reserve currency for the rest of the world. Over the long run, that could force long-term interest rates higher and drive down the value of the dollar, undermining the benefits that come with its special status. Until now, most fears about surging government debt have focused on borrowing by European countries like Spain, Greece and especially Britain, which is also in the midst of a sizable bank bailout. That recently forced the British pound to a 23-year low against the dollar. While the dollar’s status as refuge in a time of turmoil should prevent that kind of sell-off for now, a number of financial specialists warned that if fundamental factors like the lack of American savings and bloated budget deficits did not change, the dollar could eventually fall sharply .

"There aren’t that many safe havens," said Alan S. Blinder, a Princeton economist who is a former vice chairman of the Federal Reserve in Washington, explaining why the dollar’s status as a reserve currency is unlikely to be threatened. Instead, it is the dollar’s long-term value against other currencies that is vulnerable. "At some point, there may be so much Treasury debt, that investors may start wondering if they are overloaded in dollar assets," Mr. Blinder said. While the focus in Washington has been on putting together a stimulus package that will attract broader political support when it comes up for a vote in the Senate, here in Davos the talk has been about the coming avalanche of Treasury debt needed to pay for the plan on top of the bailout measures approved last fall, like the $700 billion Troubled Asset Relief Program, or TARP.

The stimulus was approved Wednesday by the House without Republican support, and could grow larger — mostly likely with additional tax cuts — to attract a bipartisan coalition. American officials maintain they are aware of the challenge. A top White House adviser, Valerie Jarrett, promised in Davos on Thursday that once the stimulus plan achieved its intended affect, the United States would "restore fiscal responsibility and return to a sustainable economic path." To be sure, Congress and the White House will ultimately need to refill the government’s coffers, but how they might do that is barely on the radar screen in Washington at this point. "Even before Obama walked through the White House door, there were plans for $1 trillion of new debt," said Niall Ferguson, a Harvard historian who has studied borrowing and its impact on national power. He now estimates that some $2.2 trillion in new government debt will be issued this year, assuming the stimulus plan is approved.

"You either crowd out other borrowers or you print money," Mr. Ferguson added. "There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long-term." Mr. Ferguson was particularly struck by the new borrowing because the roots of the current crisis lay in an excess of American debt at all levels, from homeowners to Wall Street banks. "This is a crisis of excessive debt, which reached 355 percent of American gross domestic product," he said. "It cannot be solved with more debt." While Mr. Ferguson is a skeptic of the Keynesian thinking behind President Obama’s plan — rather than borrowing and spending to stimulate the economy, he favors corporate tax cuts — even supporters of the plan like Mr. Zedillo and Stephen Roach of Morgan Stanley have called on the White House to quickly address how it will pay for the spending in the long-term.

"It’s huge," Mr. Roach, the chairman of Morgan Stanley Asia, said. "President Obama has now laid out a scenario of multiyear, trillion-dollar deficits." The stimulus is widely expected to pass, but once it does, Mr. Roach said the focus would shift to "who foots the bill and what is the exit strategy. We don’t have the answer to either question." Mr. Zedillo, who remembers how Mexico was forced to tighten its belt when it received billions from Washington to keep its economy from collapsing in 1994, was even more blunt. "People are not stupid," Mr. Zedillo said. "They see the huge deficit, the huge spending, and wonder what comes next."

So, when does the contrition start?
In normal times, the World Economic Forum at Davos kicks off with a tub-thumping session in which executives congratulate themselves on another record-breaking year, claim none of it would have been possible without free markets, privatisation and de-regulation, and warn governments not to blunder in and ruin everything. These, though, are not normal times and this year one of the opening sessions in Davos featured Benjamin Zander, the conductor of the Boston Philharmonic Orchestra, showing how it was possible for the former masters of the universe to cheer themselves up by singing along to Beethoven's Ode to Joy. But it would be wrong, dangerously wrong, to assume that the events of the past 18 months have changed the world forever. Sure, there is a recognition that things went badly awry during the bubble. Yes, there is the mantra – always familiar at the bottom of any economic cycle – that this must never be allowed to happen again. But there is, as yet, little evidence of an action plan and – to be honest – little real appetite for radical measures either.

Gerard Lyons, the chief economist at Standard Chartered Bank, says the problems of the global economy can be summed up as the three G's – Glass-Steagall, Greenspan and greed – and it is a compelling argument. Glass-Steagall was the enforced split between retail and investment banks forced on Wall Street by Roosevelt in the 1930s, but after years of lobbying it was repealed by Bill Clinton in the late 1990s. The repeal of Glass-Steagall allowed commercial banks to forget about their ordinary customers and act like high-rolling investment banks. Alan Greenspan's over-lax monetary policy meant there was plenty of cheap money sloshing around the global economy. And greed meant that a very large chunk of this excess liquidity ended up, not in productive uses, but in risky speculative plays.

How much of this has changed? Not much. Far from severing investment banks from retail banks, the crisis of the past year has created a small number of megabanks. Interest rates are heading for zero, or are already at zero, across the developed world. And there has been scant evidence of an end to the corrosive bonus culture of the past decade. Such contrition as is in evidence in Davos is tempered by a plea from banks, hedge funds and private equity that government should not "throw the baby out with the bath water" through excessive regulation. That, it is said with an apparent straight face, would risk killing the goose that lays the golden egg.

Three thoughts spring to mind. The first is that there were no second chances for big labour when it was blamed for the stagflation of the 1970s; regulation – and plenty of it – was imposed and been kept in place. Second, the sort of regulations required – global action to clamp down on tax havens, legal curbs on bonus packages that encourage systemic risk, the banning of new products until they have been approved in the way that new drugs have to be sanctioned – are a long way off. Third, the sad fact is that real reform will not take place unless this crisis gets a whole lot worse. Which, if the mood in Davos is anything to go by, it easily could.

S&P 500 faces a 40% slump
Even though last year proved disastrous, most US strategists are undaunted. The average forecast in a Bloomberg survey last week foresees a 27% rise in the S&P 500 by the end of the year. But the index has made a shaky start. It has slid by around 6% amid turmoil in the banking sector, the deteriorating economic outlook – America looks set for the worst recession since the war – and constant earnings disappointments. Investors were hoping that fourth-quarter results would bring at least "a glimmer of light at the end of the tunnel", says Eric Savitz in Barron's. "It turns out that no one can even find the damned tunnel." Last March, analysts were expecting a 55% rise in S&P 500 profits for the fourth quarter. About a fifth of the results are in, and so far earnings are down by 47%, undershooting the 32% fall currently expected.

A sustainable rally surely depends on the financial sector at the centre of the crisis returning to health, which isn't likely to happen soon. Banks are "traumatised" by their losses, says Douglas Duncan of Freddie Mac, and are fearful of new ones as the economic downturn intensifies. So they're not passing on interest-rate cuts and are tightening loan criteria, despite recent capital injections. Only 50% of applications are resulting in mortgages being granted this month, down from an average of 70% over the past 18 months, according to Credit Suisse. More capital will be needed: Nouriel Roubini of New York University estimates that US banks will lose a total of $1.8trn in this credit crisis and will need about $1trn to "restore capital ratios to adequate levels".

Another problem is that while the supply of credit is constrained, demand is also down – people don't want to borrow. This lack of demand is now "driving the deleveraging process and deepening the recession", says David Roche of Independent Strategy. The key is a sea-change in the attitude to credit among consumers, says David Rosenberg of Merrill Lynch. Consumers, who account for over 70% of the economy, have finally stopped spending on the never-never and are cutting back. Official surveys show that "household willingness to add to their debt burdens is virtually nil", while over the past six months spending on discretionary goods has fallen at an average annual rate of 15%.

No wonder. Between the peak in mid-2007 and the end of last year, the slide in equity and house prices meant that household wealth fell by around $13trn, or an unprecedented 20%, calculates Rosenberg. The process isn't over, with house prices set to fall another 15%. History shows that this will boost the savings rate as consumers hunker down. The negative wealth effect implies a drain on consumer spending of 2%-3% a year over the next two to three years. This year it could lower GDP by $350bn, and that's before job losses and lower wages cause even more consumer jitters. Factor this in and the drag on GDP in 2009 could be about $875bn, reckons Rosenberg. Government measures are likely to merely soften the blow.

Increasing the overall downward pressure is the fact that private-sector debt is still 50% above its pre-bubble norm at 172% of GDP. There's a huge amount of debt to pay down before the credit cycle can resume. In short, what most pundits don't seem to realise is that this isn't just a nasty recession. It's a deflationary credit-bubble collapse, and with inflation already heading for zero, a Japan-style slump is a real possibility. Throw in the fact that US equities typically bottom with p/es in single digits after major bear markets – we are still at 16 – and there's still lots of downside. In fact, Albert Edwards of Société Générale sees the "deflationary quagmire" wiping another 40% off the S&P.

A proposal to prevent wholesale financial failure
y Lasse Pedersen and Nouriel Roubini

The worst financial crisis since the Great Depression has highlighted the risks from the collapse of systemically important financial institutions. Huge bail-outs were undertaken based on a fear that the collapse of such institutions would cause havoc, with collateral damage to the real economy. Examples include Bear Stearns, Fannie, Freddie, AIG, Citigroup, the insurance of money market funds and new US Federal Reserve programmes for banks and broker-dealers. Allowing Lehman Brothers to collapse had such severe systemic effects that the global financial system went into cardiac arrest and is still dealing with the aftermath.

We propose a way to measure and limit this systemic risk and reduce the moral hazard and the cost of bail-outs. Our proposal is to impose a new systemic capital requirement and systemic insurance programme. The current situation leaves the system vulnerable to financial contagion when big banks (or many small ones) go bust. The root of the problem is that banks have little incentive to take into account the costs they impose on the wider economy if their failure prompts a systemic liquidity spiral. This is akin to when a company pollutes as part of its production without incurring the full costs of this pollution. To prevent this, pollution is regulated and taxed.

Unfortunately bank regulation, such as the Basel accord, ignores systemic risk since it analyses the risk of failure of each bank in isolation. It seeks to limit the probability of failure by each bank, treating isolated failures and systemic ones in the same way (and also ignoring how much a bank loses if it fails). However the move by many large banks to lever their balance sheets with similar mortgage-backed securities is more dangerous than if they had made loans to diverse borrowers. More broadly, a systemic crisis that feeds on itself is more dangerous than the isolated failure of smaller banks. A small bank will probably be taken over with a smooth transition of operations – it does not bring down the economy.

There are two challenges associated with reducing the risk of a liquidity crisis. Systemic risk must be first measured and then managed. We propose to define a bank’s systemic risk as the extent to which it is likely to contribute to a general financial crisis. This measure can be estimated using standard risk-management techniques already used inside banks – but not across banks, as we propose – to weigh how much each trading desk or division contributes to the overall risk of a bank. We set this out in an NYU Stern project on restoring financial stability.

With this measure of systemic risk in hand, a regulator can manage it. We propose two ways to manage systemic risk. First, the regulator would assess each bank’s systemic risk. The higher it is, the more capital the bank should hold. This would seek to ensure that the banking system as a whole had sufficient capital relative to the system-wide risk. This is just like the headquarters of a bank charging each trading desk or division for use of economic capital measured by its contribution to overall firm risk.

Second, each institution would be required to buy insurance against its systemic risk – that is, against its own losses in a scenario in which the whole financial sector is doing poorly. In the event of a pay-off on the insurance, the payment should not go to the company, but to the regulator in charge of stabilising the financial sector. This would provide incentives for a bank to limit systemic risk (to lower its insurance premium), provide a market-based estimate of the risk (the cost of insurance), and reduce the fiscal costs and the moral hazard of government bail-outs (because the company does not get the insurance pay-off).

Since the private sector may not be able to put aside enough capital for all the systemic risk insurance, government could provide part of it. Government already provides such partnership on insurance with the private sector in terrorism insurance. We believe our proposal offers several advantages by explicitly addressing systemic risk based on tools already in use by private companies to manage internal risks. Our proposal is a better way to deal with the trade-off between letting a large institution go bust (Lehman, for example) and causing a global cardiac arrest of the financial system or being forced to spend trillions of dollars of taxpayers’ money to bail out such systemically critical institutions.

Japan’s production falls record 9.6%
Japanese industrial production fell a larger-than-expected 9.6 per cent and unemployment rose sharply to 4.4 per cent in December, highlighting the rapid deterioration in economic activity in the face of fading global demand. The fall in industrial production marks the second straight month of record declines, following an 8.5 per cent month-on-month drop in November. "We haven’t experienced such a sharp fall in the past," said Kaoru Yosano, Japan’s economic minister. "This drop is likely to continue." The deterioration in the jobs market was further underlined by the continuing fall in new job offers, which declined 12 per cent last month, following a sharp 23.7 per cent drop in November.

Meanwhile, core consumer price inflation slowed more than anticipated with the CPI falling to 0.2 per cent in December, while household consumption fell for the tenth straight month. The figures, which painted a grim picture of the state of Japan’s economy, reflect the broadening damage that falling exports, particularly in the transport, machinery and electrical equipment sectors, are inflicting on the domestic economy. In recent weeks, electronics manufacturers have reported savage declines in demand. Toshiba expects to report a record Y280bn net loss this year while Sony is forecasting a Y260bn annual net loss. The subsiding inflation and worsening economic conditions are stoking deflation worries, as in other major economies, which may prompt more central bank steps to support the staggering economy and unfreeze credit markets that are starving key companies of cash.

Economists said fourth-quarter GDP figures, due out in February, would likely show Japan’s economy shrinking at an annual rate of around 10 per cent -- the sharpest fall since the first oil crisis in 1974 and bigger than any during the Japanese banking crisis 10 years ago. Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities, said early 2009 also looked bleak. "As output adjustments continue, weakness in the overall economy will persist in January-March, and the degree of worsening depends much on how exports turn out," he said. "It is already a consensus view that core consumer inflation will turn negative soon, but we must watch if a worsening of the economy pushes Japan into a deflationary spiral even though the Bank of Japan sees no signs of that happening right now."

Japan heads for worst recession since second world war
Japan could be heading for its worst recession since the second world war after figures released today showed industrial output fell almost 10% last month and unemployment rose at its fastest pace for more than 40 years. Production fell 9.6% in December, the trade ministry said, surpassing November's huge drop by more than one percentage point. The global recession has sent shock waves through Japan's economy, forcing once-powerful exporters to rein in production, slash jobs and close factories in response to plummeting demand for cars and consumer electronics. NEC, the computer chip maker, announced it would make 20,000 workers redundant worldwide as it struggles to cope with falling demand, while carmakers Toyota and Honda said their losses would worsen this year.

Today's figures, however, offered evidence that the malaise had spread to the domestic economy. Unemployment rose to 4.4% in December, its biggest monthly rise for 42 years, from 3.9% a month earlier. The jobless total has risen over the last year by 390,000 to 2.7 million, as the spectre of deflation and flat consumer spending returned to haunt companies and their employees. Household spending fell by 4.6% in December, the 10th consecutive monthly fall, while core consumer inflation edged up a mere 0.2%. "Companies are not only cutting production but also cutting employment, which is deeply unsettling for households," Martin Schulz, senior economist at the Fujitsu Research Institute, told

"We are now looking at a domestically driven recession. The domestic economy is at risk of falling apart, and if that happens we are looking at a really deep, long recession. Even if that doesn't happen, things are already bad enough." With Japan's non-regular employees, who now comprise a third of the workforce, at increasing risk of being laid off, families are refusing to spend, and analysts say the government's much-derided handout of ¥12,000 (£94) for every individual is unlikely to have any impact. Predictions of further falls in production in the coming months are making prime minister Taro Aso's boast that Japan will be the first to emerge from the recession look increasingly hollow.

The economics minister, Kaoru Yosano, admitted the economy was "in a very grave situation". "Japan is being hit by a wave of weakening global demand," he said. The plight of Japan's exporters was underlined yesterday when Toshiba forecast record annual losses. Toyota, meanwhile, could be heading for an operating loss - its first for more than 70 years - of about ¥400bn for the year to the end of March, reports said today, while Sony is bracing itself for record losses this year. Although factory production is at its lowest level for 20 years, cuts in output have barely dented bloated inventories, prompting speculation there could be more reductions.

Exporters' desperate attempts to climb out of the crisis are being hampered by the strength of the yen, which gained 23% against the dollar and 29% against the euro last year. Economists predict that fourth-quarter GDP figures, due out next month, would show the world's second biggest economy shrinking at a double-digit annual rate. In addition, the International Monetary Fund warned that Japan's GDP would contract by 2.6% this year, the gloomiest prediction of all the G7 countries except Britain. If the IMF forecast is correct, it would be the worst contraction since the end of the second world war. "As output adjustments continue, weakness in the overall economy will persist from January to March, and the degree of worsening depends on how exports turn out," said Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities.

"It is already a consensus view that core consumer inflation will turn negative soon, but we must watch if a worsening of the economy pushes Japan into a deflationary spiral, even though the Bank of Japan sees no signs of that happening right now." The gloomy data stopped in its tracks a three-day rally by the Nikkei, sending the benchmark index tumbling 3.1% in Tokyo. Nintendo shares sank 12% after the video game maker cuts its earnings and sales forecasts. The company, which had enjoyed huge sales of its DS and Wii game consoles, said yesterday that annual operating profit would fall by 16%. Honda, Toyota, Sony and Toshiba were also down. The Nikkei has lost more than 10% this year after shedding more than 40% last year.

The Bank of Japan is buying up corporate debt and recently brought interest rates down to just above zero, while the government this week passed a $53bn stimulus package and launched a $16.7bn fund to buy shares in struggling firms. But Schulz said Japan's financial authorities were running out of options to save the economy from a deeply damaging recession. "The government has few tools left to deal with this. Japan managed to shield failing companies during the last recession – the so-called zombie firms – but you cannot protect companies from a breakdown in demand in the domestic economy."

South Korean industrial output falls 9.6% in December
South Korea’s industrial output suffered its largest ever monthly drop in December, underlining the deepening slump in Asia’s fourth-largest economy and prompting the central bank governor to raise the possibility of economic contraction for this year. Annual production plunged 18.6 per cent from a year ago, following a 14 per cent drop in November, the national statistics office said. December output fell 9.6 per cent from November as major Korean companies cut output to cope with cooling demand. The dismal data led Lee Seong-tae, the Bank of Korea governor, to mention the possibility of the country’s first full year of recession. "If we see the fourth quarter as the beginning of the economic slump, we will certainly see minus growth this year," he told a meeting, adding that it is hard to rule out the possibility even if the economy hit the bottom in the past quarter.

"The hopes that the crisis will be over in the first half are fading and it is hard to say for sure that [the economy] will get better next year," he said. Mr Lee’s comments raise the prospect for the BoK to revise down its 2 per cent growth target for this year as the export-driven economy is battered severely by the global recession. South Korea’s economy shrank by 3.4 per cent in the fourth quarter, the biggest contraction since the Asian financial crisis a decade ago. Mr Lee hinted at additional rate cuts, saying that future monetary policy decisions will be made to maximise their effects on the economy. He added that the central bank is preparing to take "bolder and extraordinary measures" if necessary to overcome the crisis.

The BoK has cut interest rates by 275 basis points since early October to a record low of 2.5 per cent. Analysts expect the central bank to cut the rates by another 50 basis points at its next monetary policy meeting on February 12. Expectations for additional rate cuts were boosted after the BoK data showed yesterday that the country posted its first current account deficit in 11 years in 2008. South Korea suffered a $6.41bn shortfall last year, hit by higher oil prices and the weaker won. "It is not surprising even if the economy shrinks this year, considering how much the economy is dependent on exports," says Huh Chan-gook at the Korea Economic Research Institute. "Exports have dropped in recent months and we see no signs of a recovery in domestic demand to pick up the slack."

US lawmakers see efforts to calm Chinese currency row
President Barack Obama is expected to contact his Chinese counterpart soon and assure Beijing that Washington is not seeking a "currency war" a lawmaker closely involved in U.S.-China issues said on Thursday.  Representative Mark Kirk, co-chair of the U.S.-China Working Group, said he and others in the bipartisan congressional group were told by administration officials that "the president will undercut the anti-currency message pretty directly." "My understanding is today or tomorrow there will be an Obama call to Hu Jintao in which the talking points are basically that the president will commit that we are likely not to have a currency war," the Illinois Republican said. The currency issue would likely be taken up in the Obama administration's version of the Strategic Economic Dialogue with Beijing, a process initiated by the Bush administration, Kirk and other sources said. The White House declined to comment.

Beijing reacted angrily last week when U.S. Treasury Secretary Timothy Geithner told senators at his confirmation hearing that China was manipulating its currency. Some U.S. lawmakers, labor groups and manufacturers have long complained that China has intervened to hold the value of its currency artificially low to keep its exports competitively priced. Many U.S. economists argue that China's currency is undervalued by as much as 20-30 percent, but the International Monetary Fund said this was not the time to push China on its yuan currency. Some experts argue it would be dangerous to ratchet up trade tensions with China during a world recession. "There's a real danger that Congress will forget what we did in 1931," said Kirk, referring to U.S. tariffs measures that helped turn a U.S. recession into the Great Depression.

Although there is no currency-specific legislation in the works, the U.S. House of Representatives on Wednesday approved a controversial "Buy America" steel provision as part of Obama's $825 billion economic stimulus package. Obama's call to Hu would follow remarks by Vice President Joe Biden on Thursday that the Obama administration had made no formal finding on currency manipulation and would not impose on China "restraints that benefit our economy inconsistent with international trade agreements that exist." The working group's Democratic co-chairman, Representative Rick Larsen, told Reuters the global recession's simultaneous impact on the United States and China showed that "these two economies are nearly joined at the hip" and scapegoating wouldn't work.

"It's hard for me to point at any one country and say that we are getting a cold from their sneeze," said lawmaker from Washington state. The Alliance for American Manufacturing, however, says trade figures for November showed China was responsible for $23.1 billion of that month's total $40.4 billion trade deficit. "It's painfully clear that China is manipulating its currency for a trade advantage and it's the cause of inflated trade imbalances in the U.S.," said Scott Paul, the nonprofit group's executive director. Steve Dunaway, former IMF China mission chief, said China's exchange rate policy needed to be addressed because it was a major factor in the build-up of global financial imbalances that in turn led to the current financial crisis. "It might not be the immediate concern, but you still have to be concerned about the Chinese exchange rate and you have to be concerned in the short term about policy actions they might take to make things worse," he said.

Just two months ago, the Canadian cabinet was saying the economy was strong and resilient. But it wasn't when they said it. They have access to all the numbers they want. But who cares about such trivialities? The same people remain in place who were so ridicuously wrong all the time. They’ll keep on being wrong. But again, who cares? And do include the Bank of Canada nitwits in this. Boss man Mark Carney predicts 3.8% growth in 2010. Write that down. Throw it at him when the time comes.

Canada economic slide deeper than feared
The Canadian economy shrank for the second straight month in November, figures released Friday show, adding weight to the view of the Bank of Canada and many private sector economists that the country has joined the global recession. Statistics Canada said gross domestic product declined by 0.7 per cent during the month, having slipped by 0.1 per cent in October, as "essentially all major sectors reduced production." The November decrease was almost twice as deep as the consensus forecast among economists, which pegged the likely contraction at 0.4 per cent. By contrast, November GDP in the United States was not as weak as expected, dropping 3.8 per cent rather than 5.4 per cent as economists there had forecast.

In Canada, manufacturing sector activity continued to decline, contracting 2.1 per cent, StatsCan said, with 18 of the 21 major groups losing ground. Construction dropped by 1.2 per cent, utilities by 1.1 per cent, and mining and oil and gas by 0.5 per cent, the agency said. However, agriculture, forestry, fishing and hunting saw their combined output climb by 0.3 per cent. Wholesale trade activity fell by 3.1 per cent in November, StatsCan said, with the most notable decline coming in machinery and equipment, home and personal products and the so-called "other" category, which includes agricultural, chemical, recycled material and paper products. Economists did not welcome the worse than expected numbers.

"November's decline ... pulled the year-over-year rate into negative territory for the first time since the early 90s [-0.8 per cent year over year], and will likely be viewed as the breaking point for the Canadian economy this cycle," BMO Nesbitt Burns economist Robert Kavcic said in a commentary on the numbers. "Another weak month can be expected in December — we already saw 34,000 job losses, and a turnaround in consumer and housing activity is a long shot." The "bottom line," he added is that "it's looking more likely that we'll get a contraction of about 3 per cent annualized in Q4, the sharpest decline since the 1991 recession." Charmaine Buskas, senior economics strategist at TD Securities, expressed similar views, saying the November figures "set up a very weak backdrop" for the fourth-quarter GDP report.

"This is the first back-to-back decline in monthly GDP since the beginning of the year," she said in a note to clients. "In addition, this is the largest monthly decline in activity since August 2003, when the blackout occurred." Ms. Buskas suggested that even if December delivers a "flat reading," GDP for the final quarter of 2008 could still shrink by between 2.5 and 3 per cent. "The decline in economic activity has been increasingly broad based and suggests that recession's grip on the Canadian economy is indeed, strong," she said.

The Bank of Canada has expressed a more optimistic view of the nation's economy than that of many private sector forecasters. It said last week that it expects GDP to shrink by 1.2 per cent in 2009 but then expand by 3.8 per cent next year.

Irish Debt Outlook Cut to ‘Negative’ at Moody’s
Ireland’s government debt-rating outlook was lowered by Moody’s Investors Service, which said the financial crisis is likely to "significantly impact" the country’s economic strength. The outlook on the Aaa rating was changed to "negative" from "stable," Moody’s said in a statement today. The risk of holding Irish debt rose to the highest in Europe after the decision, credit default swaps showed. Ireland’s government is seeking an agreement with labor unions and employer lobby groups to cut public spending and narrow a widening budget deficit as the economy slips deeper into a recession. The economy will contract 5 percent this year, the most of any euro-area nation, and the budget deficit will soar to almost four times the European Union limit, according to the European Commission. The Aaa rating remains "appropriate at this point," Dietmar Hornung, a Moody’s analyst in New York, said in today’s statement.

BNP Takes on More Toxic Assets to Save Fortis Deal
BNP Paribas SA, France’s largest bank, will take a smaller part of Fortis’s Belgian insurance unit and more of its toxic assets to salvage a rescue led by the government and challenged in court. BNP rose as much as 7 percent in Paris trading after it agreed to buy 10 percent of Fortis Insurance Belgium SA for 550 million euros ($709 million) and take 12 percent stake of structured-credit assets backed by a 5 billion-euro guarantee from the Belgian government. The Brussels Court of Appeals blocked on Dec. 12 an agreement that called for BNP to buy all of the insurance unit, because it wasn’t approved by Fortis shareholders.

"There’s much more chance to see the deal accepted than the previous one," said Benoit Petrarque, an Amsterdam-based analyst at Kepler Capital Markets, which recommends buying Fortis. "It gives some more comfort to the shareholders to get this deal done, and then finally BNP will be able to start integration," said Petrarque, who rates BNP "hold." Fortis was forced to sell most of its assets to governments in Belgium, the Netherlands and Luxembourg over three days last October after running out of short-term funding and seeing its share price plummet. Investors are now challenging some of the rescues negotiated when the worldwide banking system verged on collapse. Shareholders sued Bank of America Corp., the largest U.S. lender, this month for failing to tell them about $15.3 billion of losses at Merrill Lynch & Co. before their vote on the acquisition.

The board of Fortis, Belgium’s largest financial service company before the 2007 takeover of assets from ABN Amro Holding NV backfired, approved today’s changes, Belgian Prime Minister Herman Van Rompuy said in a statement. Fortis shareholders will vote Feb. 11 on the revised deal. Under the original deal, BNP Paribas agreed to buy all of Fortis’s Belgian insurance business for 5.5 billion euros in cash. The Paris-based bank will still buy a 75 percent stake in the banking unit in an all-stock transaction now valued at 3.58 billion euros. Belgium will retain 25 percent of Fortis Bank NV and get about 121 million BNP shares. The acquisition of Fortis Bank will make BNP Paribas the largest bank by deposits in the 16 nations sharing the euro. BNP Paribas will get about 3.3 million retail clients in Belgium and Luxembourg, as well as 1,458 branches, including ones in Poland, Turkey and France.

BNP Paribas rose 4.8 percent 30.92 euros at noon in Paris, valuing the company at 28.3 billion euros. Belgium’s stock-market regulator suspended today’s trading in Fortis. The shares fell 89 percent in the past 12 months and closed yesterday at 1.55 euros, valuing the company at 3.65 billion euros. "At first sight, this may push the value of Fortis shares above 2 euros," Petrarque at Kepler Capital Markets said. "All depends on the valuation of the insurance business." Fortis will retain 90 percent of Belgium’s largest insurance company and its international insurance operations. It will also have to provide 1 billion euros in equity, or half the amount that was originally agreed, for the separate entity holding 10.4 billion euros of structured-credit investments. Fortis Bank will provide 6.5 billion euros of debt funding for the structured- credit portfolio, backed by the state guarantee.

"The new transaction should enhance BNP Paribas’s solvency by at least 48 basis points," said Guillaume Tiberghien, an analyst at Credit Suisse Group in London, in a note today. "BNP will continue to be exposed somewhat to the 10 billion euros of most toxic assets of Fortis, but maximum risk should hover around 1 billion euros." Tiberghien raised his recommendation on BNP Paribas to "outperform" from "neutral." In addition, Belgium will distribute gains from selling BNP Paribas shares to Fortis for six years after a two-year lockup ends. BNP Paribas will no longer receive 2.35 billion euros in compensation from Fortis for declines in the value of Fortis shares linked to convertible notes known as CASHES. "The Fortis Belgium Insurance transaction was fairly priced in the original transaction," Albert Ploegh, an Amsterdam-based analyst at ING Groep NV, wrote in a note to investors. "We see more upside in owning a stake in Fortis Bank," assuming the unit is valued at the "nationalized price," said Ploegh, who rates Fortis a "hold."

BNP Paribas and the Belgian government started renegotiating the transaction after a five-member panel, appointed by the Brussels court that blocked the original deal in December, published a preliminary report on Jan. 27. Niels Lemmers, a spokesman at Dutch investor group VEB, didn’t immediately return a phone call seeking contact. Brussels lawyer Mischael Modrikamen, who has begun legal proceedings against last year’s Fortis transactions, wasn’t immediately available to comment. "We doubt whether the revised deal terms are attractive enough to vote in favor of the transactions," Ploegh said. Sheng Ruisheng, a Shenzhen-based spokesman for Ping An Insurance (Group) Co., Fortis’s biggest shareholder, said he’s not yet aware of the revisions to the Fortis rescue plan. Ping An, China’s second-largest insurer, has been closely following the Fortis developments. We will do everything to maximize and protect the company’s interests.’’

Iceland to be fast-tracked into the EU
Iceland will be put on a fast track to joining the European Union to rescue the small Arctic state from financial collapse amid rising expectations that it will apply for membership within months, senior policy-makers in Brussels and Reykjavik have told the Guardian. The European commission is preparing itself for a membership bid, depending on the outcome of a snap general election expected in May. An application would be viewed very favourably in Brussels and the negotiations, which normally take many years, would be fast-forwarded to make Iceland the EU's 29th member in record time, probably in 2011.

Olli Rehn, the European commissioner in charge of enlargement, said: "The EU prefers two countries joining at the same time rather than individually. If Iceland applies shortly and the negotiations are rapid, Croatia and Iceland could join the EU in parallel. On Iceland, I hope I will be busier. It is one of the oldest democracies in the world and its strategic and economic positions would be an asset to the EU." Rehn's support for swift Icelandic membership was echoed by senior European diplomats in Brussels. "We would like to see Iceland join the EU," said one. The current and next holders of the EU presidency, the Czechs and then the Swedes, are also strong supporters of EU enlargement and will deploy their agenda-setting powers to help Iceland.

The conservative government in Reykjavik, in power for 18 years, collapsed this week, the first government to fall as a result of the financial meltdown which has wrecked the Icelandic currency, the krona, wiped out savings and pensions, required a massive IMF bailout, sparked unprecedented riots in Reykjavik, and forced the formation of a caretaker centre-left government until new elections can be held, probably on 9 May. EU membership will be a central theme of the election campaign, with the social democrats - the senior partner in the coalition interim government with the anti-EU Left Greens - pushing to join the EU and to swap the krona for the single European currency as soon as possible. "The krona is dead. We need a new currency. The only serious option is the euro," said a senior Icelandic official.

The financial disaster in Iceland has triggered extreme volatility among voters. While there is support for joining the euro as a currency safe haven to protect Iceland from a battering by the markets, there is less enthusiasm for full EU membership, particularly among those in the vital fishing sector. This factor has fuelled talk of "unilateral euroisation", meaning that Iceland might join or use the single currency without being admitted to the EU. This is dismissed in Brussels as nonsense. Though deeply indebted and in dire straits, the Icelandic economy is minuscule compared with the main EU member states and therefore unlikely to prove a destabilising force. Iceland has already secured a multibillion pound IMF loan and is unlikely to prove a drain on the EU budget.

But joining the euro is a different question. Despite growing sentiment in Iceland that Brussels and the single currency might be the remedy to the worst crisis the country has seen, the road to the euro is likely to be fraught with problems because of the strict rules governing the eurozone under the Maastrict treaty. Although the economic and financial crisis has seen a loosening of the single currency rulebook, current Icelandic interest rates of 18% would pose big problems for mainstream single currency members. Already Christian Democrats in the Netherlands, the party of the prime minister, are coupling their hostility with Turkey's membership of the EU to criticism of Iceland's ambitions. Such hostility might increase but senior figures in the European commission believe that Reykjavik brings more assets than liabilities to the EU.

A million on strike as France feels pinch
More than one million French workers downed tools yesterday in the first general strike to hit a major industrialised nation since the start of the global financial crisis. Unions said more than two million public and private sector workers took to the streets across France to protest against President Nicolas Sarkozy's handling of the economic crisis, saying too much had been done to bail out fat cats and banks, and not enough to protect jobs and help workers make ends meet. Air traffic controllers, train drivers, teachers, nurses, and tax inspectors were joined by private sector workers including bank clerks and staff from the firm that runs the Paris stock exchange. Some schools were shut, flights were cancelled, and the Palace of Versailles cwas losed in a rare show of unity between unions, although "Black Thursday" did not bring total transport paralysis.

After dark, as crowds dispersed from the Paris protest, more than 100 people clashed with police at Place de l'Opéra, throwing bottles, overturning cars, and starting fires in the street. Thirteen people were arrested. "This is a broad anti-Sarkozy protest to say, crisis or no crisis, we don't like the way society is going," said a university lecturer at the start of the march. France has not experienced the kind of banking meltdown seen in Britain, Ireland or Spain. But it has seen a marked rise in unemployment - the root of unrest in recent years. France is entering its first recession in 16 years and jobless figures are rising at the fastest rate in more than 10 years. Unemployment is predicted to top 10% next year, and the young are being hit hardest.

Sarkozy unveiled a €26bn (£23bn) package at the end of last year to encourage investment and protect major industries during the crisis. But union leaders said yesterday that he should follow Britain's example and offer help for consumers. "The president is taking workers for idiots," said Guy Rouget, a member of the powerful CGT union, marching with Renault workers. "People have had enough, they can't keep going any longer on low pay with daily fear of losing their jobs." The strike was a big test for Sarkozy's self-styled image as the only man brave enough to face down street protests and reform France. For the first 18 months of his presidency, he dismissed strikes and pushed through state pension reforms and the dismantling of the country's 35-hour week.

But amid a mood of social unease at the global downturn, the president has shown signs of faltering. Last month, fearful that Greek youth riots could spread to France, he shelved a contested high-school reform plan after teenage pupils staged street protests. "France is a difficult country to govern," he admitted to journalists this month. This week he was careful to avoid commentary that would inflame tensions and anger unions. "I see this as a general protest against Sarkozy's reforms. He is breaking the public service," said Habib Mouaci, a university student on the Paris march. About 70% of the French public approved the strike but the education minister, Xavier Darcos, told French TV: "The government will not stop reforming a country that needs it."

Strikes spread across Britain as oil refinery protest escalates
A series of unofficial strikes broke out across Britain today over plans by a major oil company to give jobs to construction workers from Portugal and Italy. The contractors were to work on the giant £200m Lindsey oil refinery at North Killingholme, Lincolnshire. Workers at refineries and power stations in various parts of the UK walked out, some holding placards quoting the words of Gordon Brown: "British jobs for British workers". The wildcat strikes mark the latest in a series of protests over the use of foreign rather than domestic labour by large companies in the UK. More than 700 BP and INEOS workers at the Grangemouth oil refinery in Scotland walked out this morning after an 8am union meeting. Police were called to the Aberthaw power station, near Barry, South Wales, and 400 workers at a refinery in Wilton near Redcar, Teesside, have also downed tools.

Workers walked off the site at Total's Lindsey oil refinery on Wednesday, after weeks of discontent over the contract to build the plant's HDS-3 de-sulphurisation unit. The plant's owners put the contract out to tender with five UK firms and two European contractors bidding for the work. The Italian company IREM won the contract and supplied its own permanent workforce, accommodating them in large, grey housing barges moored off Grimsby docks. It is understood 100 Italian and Portuguese workers are already on the site and 300 more are expected next month. Asked about the refinery strikes at a news conference in Davos today, the prime minister said: "I understand people's worries about their jobs. I understand people's anxieties about employment across the country. But we are doing everything we can both to get economic growth moving in our country and to help people who are unemployed, to help them into new jobs."

Brown also stressed that protecting jobs was one of his key political aims. He said: "I came into politics to help people out of unemployment, to help people who were poor by building an economy that was confident and strong to weather this storm. I believe that the action we have taken to help people in work stay in work, to help people who lose their jobs get jobs again ... is the way to do it." Protesters at the Lindsey refinery ended their action at around 10am, but vowed to be back on Monday morning. Bobby Buirds, a regional officer for Unite in Scotland, said the workers at Grangemouth were striking to protect British jobs. "The argument is not against foreign workers, it's against foreign companies discriminating against British labour," he said. "If the job of these mechanical contractors at INEOS finishes and they try and get jobs down south, the jobs are already occupied by foreign labour and their opportunities are decreasing. This is a fight for work. It is a fight for the right to work in our own country. It is not a racist argument at all."

Around 500 workers walked out at Scottish Power's Longannet power station, and just over 100 at its Cockenzie power station, while around 80 stopped work at British Energy's Torness facility. In Lincolnshire, several hundred protesters gathered in a car park opposite the sprawling Lindsey refinery. Clutching placards and banners, two of which read "Right to Work UK Workers" and "In the wise words of Gordon Brown UK Jobs for British Workers", they listened as union leaders called on them to stand together in their protest. Unite union regional officer Bernard McAuley addressed the men from a flat-bed truck. "There is sufficient unemployed skilled labour wanting the right to work on that site and they are demanding the right to work on that site. Our general secretary of Unite and the GMB have called upon the prime minister to call an urgent meeting with the heads of industry in the engineering and construction industry to clients and the trade unions to get round the table," he said. "We want fairness. We want the rights of our members to have the opportunity to be employed, not just on this job but on all jobs around the United Kingdom."

In heated exchanges, some protesters called on their colleagues to march on Downing Street to protest at the situation. Shop steward Kenny Ward addressed the crowd and told them they had to stand together and take on the "greedy employer". He said: "This is what it's about, it's about collective strength. I'm a victim, you are a victim, there are thousands in this country that are victims to this discrimination, this victimisation of the British worker." He said colleagues across the country in Scotland and Wales were "standing shoulder to shoulder" with the protesters here. Total issued a statement about the Lindsey strike this morning. It said: "We recognise the concerns of contractors but we want to stress that there will be no direct redundancies as a result of this contract being awarded to IREM and that all IREM staff will be paid the same as the existing contractors working on the project.

"It is important to note that we have been a major local employer for 40 years with 550 permanent staff employed at the refinery. There are also between 200 and 1,000 contractors working at the refinery, the vast majority of which work for UK companies employing local people. "On this one specific occasion, IREM was selected, through a fair and competitive tender process, as the most appropriate company to complete this work. We will continue to put contracts out to tender in the future and we are confident we will award further contracts to UK companies."

Trichet is bounced into defence of the euro
Europe's top officials have been forced into repeated assurances that the eurozone is in no danger of falling apart, despite growing stress in the Greek, Italian, Irish, Spanish and Austrian bond markets. "There is no risk that the euro will break apart," said Jean-Claude Trichet, the European Central Bank's president, speaking at the World Economic Forum. Yesterday was the second day Mr Trichet has had to parry questions about the viability of monetary union. He seemed ill at ease when asked whether Greece and Italy had become so uncompetitive they might be forced out of the EMU. EU officials are furious over comments this week by Dominique Strauss-Kahn, head of the International Monetary Fund, who said the euro could prove unworkable unless the member states give up some control over fiscal policy. "Otherwise, differences between states will become too big and the stability of the currency zone is in danger," he said.

The yield spreads on Greek 10-year bonds have reached post-EMU highs of 265 basis points over German Bunds. The spreads have jumped to 236 for Ireland and 153 for Italy, levels unthinkable just months ago. The spreads are watched by traders as the eurozone's stress barometer. They also imply a large jump in funding costs for the budget deficits of heavily indebted states such as Italy and Greece. The Italian treasury needs to raise €200bn (£184bn) of debt in 2009. José Manuel Barroso, the European Commission's president, insisted that the single currency had more than proved its worth since the crisis erupted. "The euro has acted as a very important shield," he said. "Just compare Ireland with Iceland. I don't agree at all that the euro is at risk."

However, the questions refuse to go away. Investor George Soros said it was far from clear whether EMU's weaker states would be able to uphold their bank guarantees, given the "structural weaknesses" of a system where each country is in charge of fiscal policy and EU bail-outs are prohibited. "There has to be agreement at EU level on spreading risk. Germany has been reluctant to reach into her deep pockets for countries like Italy," said Mr Soros. Mr Trichet denied the ECB was unable to take the sort of measures being considered by the Bank of England and US Federal Reserve. "We could engage in non-standard actions and, indeed, have already done so. What we have done is extraordinary," he said. The ECB has increased its balance sheet by more than the Fed, accepting housing debt as collateral from banks. But it has not gone to the next stage by purchasing bonds outright.

Such a radical move would open a political can of worms, raising suspicions that German taxpayers were funding a covert bail-out of Club Med. Italy's finance minister, Giulio Tremonti, who was sitt-ing on the same Davos panel, nevertheless called for the issue of a "union bond". Any such instrument would amount to a huge leap forward for an EU debt union. Mr Tremonti said Italy had been unfairly singled out. While its public debt is high at 107pc of GDP, its private debt is very low. Indeed, Italy has avoided the sort of housing bubbles that are affecting other states. "Our banking system is quite solid. They don't speak English," he said.

Troubled tigers
It seems so unfair. Most Asian economies have been models of prudence. While American and European households were borrowing up to the hilt, Asian ones were tucking away their savings. While rich-country banks were piling into ever-riskier assets, Asian banks kept their holdings of such assets small. And while America and Britain were sucking up the world’s savings, Asian governments piled up vast stocks of foreign reserves. Yet many of Asia’s tiger economies seem to have been hit harder than their spendthrift Western counterparts. In the fourth quarter of 2008, GDP probably fell by an average annualised rate of around 15% in Hong Kong, Singapore, South Korea and Taiwan; their exports slumped more than 50% at an annualised rate. Share prices in emerging Asia have plunged by almost as much as during the Asian financial crisis a decade ago. That crisis was caused by Asia’s excessive dependence on foreign capital. This time the tigers have been tripped up by their excessive dependence on exports.

Asia’s emerging economies have long been the world’s most dynamic, with GDP growing at an annual rate of 7.5% over the past decade, two and a half times as fast as the rest of the world. Only last summer, many of these countries were being warned by foreigners that they were growing too fast and needed to raise interest rates to prevent a surge in inflation. Now, many seem to be in free fall and the news is likely to get grimmer. In the fourth quarter of 2008, real GDP fell by an annualised rate of 21% in South Korea and 17% in Singapore, leaving output in both countries 3-4% lower than a year earlier. Singapore’s government has admitted the economy may contract by as much as 5% this year, its deepest recession since independence in 1965. In comparison, China’s growth of 6.8% in the year to the fourth quarter sounds robust, but seasonally adjusted estimates suggest output stagnated during the last three months.

Asia’s richer giant, Japan, has yet to report its GDP figures, but exports fell by 35% in the 12 months to December. In the same period, Taiwan’s dropped by 42% and industrial production was down by a stunning 32%, worse than the biggest annual fall in America during the Depression. Asia’s export-driven economies had benefited more than any other region from America’s consumer boom, so its manufacturers were bound to be hit hard by the sudden downward lurch. Asian exports are volatile anyway (see chart 1). And though the 13% fall in the region’s exports in the 12 months to December was slightly smaller than in 1998 or 2001, those dismal records seem certain to be beaten soon. The plunge in exports has been exacerbated by the global credit crunch, which made it harder to get trade finance. Destocking on a huge scale has further slashed output. Trade within Asia has dropped by even more than the region’s sales to America or Europe. Exports to China from the rest of Asia were 27% lower in December than a year earlier, partly reflecting weaker demand for components for assembly into goods for re-export.

Shocking as the export figures are, they are not entirely to blame for Asia’s woes. A closer look at the numbers reveals that in most countries imports have fallen by even more than exports, and that weaker domestic demand explains a larger part of the slump. In China, for example, weaker domestic spending—mainly the result of a collapse in housing construction—accounted for more than half of the country’s slowdown in 2008. In South Korea, net exports actually made a positive contribution to GDP growth in the fourth quarter, while consumer spending and fixed investment fell at annualised rates of 18% and 31% respectively. South Korea is an exception to the rule of Asian prudence. Its households’ debt amounts to 150% of disposable income, even higher than in America. The banking system, which borrowed heavily abroad to finance a surge in domestic lending has also been badly hit by the global credit crunch, making it harder for firms to finance investment.

Domestic spending has collapsed elsewhere. Over the past 12 months, retail sales have fallen by 11% in Taiwan, 6% in Singapore and 3% in Hong Kong. As big financial centres, the two city-states have been battered by the global storm. Both have high levels of share ownership, so tumbling stockmarkets and property prices are depressing consumption. In Hong Kong average house prices have already fallen by almost 20% since the summer and Goldman Sachs, an investment bank, forecasts another 30% drop by the middle of 2010. A recent report by Frederic Neumann and Robert Prior-Wandesforde, two economists at HSBC, a large bank, argues that Asia is suffering two recessions: a domestic one as well as an external one. Domestic demand had been expected to cushion the blow of weaker exports, but instead it was hit by two forces. First, the surge in food and energy prices in the first half of 2008 squeezed companies’ profits and consumers’ purchasing power. Food and energy account for a larger portion of household budgets in Asia than in most other regions.

Second, in several countries, including China, South Korea and Taiwan, tighter monetary policy intended to curb inflation choked domestic spending further. With hindsight, it appears that China’s credit restrictions to cool its property sector worked rather too well. The two recessions reinforced one another. Part of the slump in domestic spending is attributable to falling exports, which force firms to cut investment and lay off workers. This makes it hard to say whether domestic or external demand is more to blame for Asia’s distress. The importance of exports to the Asian miracle has long been controversial anyway. The crude figures show that, on average, emerging Asia’s exports amount to 47% of their GDP, up from 37% ten years ago. The share varies from 14% in India to 186% in Singapore (see chart 2). In Japan, which is often viewed as an export-driven economy, exports are only 16% of GDP.

But this ratio overstates a country’s dependence on external demand if exports have a high import content. China’s exports account for 36% of GDP, but about half of them are "processing exports", which contain a lot of imported components. Thus the impact on GDP growth of a fall in exports is partially offset if imports fall too. Estimates suggest that domestic value-added from Chinese exports is a more modest 18% of GDP. An alternative measure of the importance of exports is the change in net exports in real terms. Between 2002 and 2007 the increase in net exports contributed only 15% of real GDP growth in China. In contrast, net exports accounted for half of all growth in Singapore and Taiwan. This measure understates the total impact, though, because it ignores the spillover effects of exports on business confidence, investment, employment and consumer spending. Either way, the smaller economies, Hong Kong, Singapore and Taiwan, are heavily export-dependent; the giants, China and India, less so.

Asia’s recoveries from previous downturns have been led by a rebound in exports to the rich world. This is unlikely in the near future. The question is, might domestic demand now take up some of the slack? There are reasons to think so. Falling commodity prices are boosting consumers’ purchasing power, just as they squeezed it last year. More important is the impact of monetary and fiscal expansion. With the exceptions of South Korea and India, Asia has so far been spared the financial dislocations that are plaguing the West. The HSBC economists reckon that the region is more likely to suffer a credit pinch than a full-scale crunch. In contrast to America and Europe, where excessive debt could depress spending for years, most Asian households and firms (except in South Korea) have modest debts. And, because of healthier banking systems, Asian banks are less likely than Western ones to react to the crisis by refusing to lend. Hence interest-rate cuts and the easing of credit controls should be more potent than elsewhere. No less important is Asia’s massive fiscal pump-priming. This is also likely to be more effective than elsewhere because the private sector is in better shape and able to respond by spending more.

Asia has never before deployed its monetary and fiscal weapons with such force. Every country across the region has cut interest rates and announced a fiscal stimulus. In previous downturns, Asian governments were often constrained by dire public finances or the need to support currencies. But most countries entered this downturn with small budget deficits or even surpluses. All the main Asian emerging economies apart from India have relatively low ratios of public debt to GDP. Though the true size of the fiscal stimulus in some countries, notably China, is probably less than the headline-grabbing figures suggest, they are still impressive. After correcting for double counting and unrealistic measures, China, Singapore, South Korea and Taiwan will all enjoy a fiscal stimulus of at least 3% of GDP in 2009. China has signalled that more measures may follow over the next couple of months; it can certainly afford to spend more. On January 22nd, Singapore’s government announced a package of measures equivalent to 8% of GDP. For the first time, this will be financed partly by dipping into the government’s vast reserves.

The effectiveness of fiscal easing depends on its composition as well as its size. Income-tax cuts planned in South Korea and Taiwan will have only a modest impact if the money is saved not spent. Corporate tax cuts, planned in Singapore, may not spur investment when profits are plunging. Taiwan’s government is attempting to boost consumer spending by issuing shopping vouchers worth NT$3,600 ($107) per person. Economists are sceptical about whether this will produce new spending, but the scheme is being watched closely by other Asian governments. More promising is the fact that every country is planning to boost infrastructure spending. In the short term, this is probably the best way for governments to boost spending and jobs; in the longer term better roads and railways should boost productivity. Fiscal tightening in emerging Asia after the 1998 crisis caused governments to reduce capital spending; as a result, public infrastructure in some countries, notably Indonesia and Thailand, is probably worse than a decade ago. So there is plenty of room to spend more.

If (still a big if) China and others fully implement their stimulus plans, domestic demand could start to recover in the second half of this year even if exports remain weak. Average growth in emerging Asia might fall to only 4-5% in 2009 as a whole, half its pace in 2007 and the slowest rate since the Asian financial crisis. But it would be well above the trough of 2.4% in 1998 (see chart 3). That average conceals a wide variation. The economies of Hong Kong, Singapore, South Korea and Taiwan will all contract this year, while the bigger, but less open economies of China, India and Indonesia should hold up better. However, Asian governments have more than this year’s growth rate to worry about. Beyond the immediate crisis, where will growth come from? America’s consumer boom and widening trade deficit, which powered much of Asia’s growth over the past decade, has come to an end. America’s return to thrift is unlikely to prove a cyclical blip. For years to come, Americans will have to save more and import less. Asia’s export-led growth therefore seems to have reached its limits.

It needs a new engine of growth: in future it must rely more on domestic demand, especially consumption. In recent years, it has been doing the opposite: consumer spending has fallen as a share of GDP, while the share of exports and investment has climbed (see chart 4). Two decades ago, consumer spending accounted for 58% of Asia’s GDP. By 2007 it had fallen to 47%. Consumer spending in China is just 36% of GDP, half the American share. An analysis by CLSA, a broking firm, finds that the weight of exports in GDP now exceeds that of private consumption in six of the 11 Asian countries it tracks. So how can Asia lift consumption? That depends on why it has been declining in the first place. The popular explanation is that it is all because frugal households have been saving a bigger slice of their income in response to uncertainty over pensions and social welfare—uncertainty that will presumably increase in a recession. But this doesn’t quite fit the facts. In many countries, notably South Korea and Taiwan, household savings have fallen relative to income in the past decade; in China they have been broadly flat. (The rise in China’s savings rate comes from firms and the government, not households.)

If households are not saving more, why has consumer spending declined as a share of GDP? The answer is that wage incomes have fallen relative to GDP. In China the share of wages dropped from 53% in 1998 to 40% in 2007. One reason for this is that job creation has slowed as governments have encouraged capital-intensive industries. Across Asia, and particularly in China, low interest rates have encouraged investment and policies such as undervalued exchange rates and subsidies have favoured manufacturing over labour-intensive services. So if Asia is to shift the mix of growth towards consumption, the usual prescription of urging households to spend more will not be enough. A raft of government policies will have to change to lift households’ share of national income. They include: reducing the bias towards capital-intensive manufacturing; speeding up financial liberalisation to lift the cost of capital; scrapping subsidies and tax breaks which favour manufacturing over services; and attacking monopolies and other barriers to services. Stronger exchange rates would also shift growth away from exports and boost households’ real spending power by reducing the cost of imports in local currency terms.

In contrast, some in China are foolishly calling for a devaluation of the yuan to support the economy. This would do little to bolster exports, which have been hurt by weak external demand rather than declining competitiveness, but would hinder the necessary economic adjustment. Even if household saving rates have been falling, they are still high, at around 20% in both China and Taiwan. This partly reflects the fact that younger populations tend to save more for retirement. An IMF study estimates that as populations age and retired workers run down their savings, this could push up consumption-to-GDP ratios in some countries by eight percentage points or more in the next decade. Policy changes can also help nudge up saving rates. In poorly developed financial systems, households find it hard to borrow and so need to save for a rainy day. Easier access to credit could reduce such saving. But the recent credit boom and bust will make governments even more cautious about financial reform.

Inadequate social-welfare nets do encourage people to save. So higher public spending on health, education and welfare support could encourage households to save less and spend more. The recent news that China plans to spend 850 billion yuan ($125 billion) over the next three years to provide basic health care for at least 90% of the population by 2011 is therefore welcome. But the details are sketchy. After the Asian crisis, many foreigners were quick—too quick—to pronounce the regional miracle dead. Economies bounced back not just because of the appetite of American consumers, but also because Asia still had the key ingredients of growth: rising productivity; high savings to finance investment; low import barriers to spur competition. These will help Asia remain the fastest growing region in the world. But a bigger share of those gains needs to go to workers and consumers. Asia’s low rate of consumption and borrowing means that it has huge scope to make consumption the engine of growth over the next decade. In previous downturns, Asians were forced to take nasty medicine. Having to go out and spend would surely make a nice change.

Mayor Bloomberg's grim doomsday budget cuts 23,000 city jobs
Mayor Bloomberg's bare-bones budget for next year will slash the city work force by 23,000 and drastically increase its sales tax, officials revealed Thursday. The plan hinges on the shaky prospect of help from the federal and state governments and from stubborn unions. The mayor will introduce his executive budget today; it also calls for cuts in big-ticket construction projects and for city employees to cough up cash for health care, according to those briefed on the plan. Homeowners will lose their $400 rebates - but won't be hit with new property taxes, a proposal City Council members had vowed to block.

Although Bloomberg would not hike income taxes, he is pushing for a $900 million increase in the city's sales tax, officials said. The proposal would raise the sales tax to 8.75% from 8.375%, officials said. "It's not a good-news budget," said City Councilman David Weprin, who chairs the Finance Committee. Bloomberg's scaled-back plan plugs a $4billion deficit, but officials warned that the work force will shrink further if the state and feds don't approve reforms to city pensions, employee health care contributions and Medicaid relief. "In order to close this deficit without destroying the core services New Yorkers rely on, the mayor will need help from all of our partners, from the municipal unions to the leadership in both the state and nation's capitol," said Deputy Mayor Ed Skyler. "We all will have to do our part to get through these tough times," he said.

Bloomberg proposes to reduce the city head count by approximately 23,000, a feat he plans to achieve through layoffs and attrition. Among those on the chopping block will be roughly 15,000 teachers and other educators, a move United Federation of Teachers President Randi Weingarten warned "would be devastating" to schools. The budget also includes another 3,000 job cuts that Bloomberg announced last year, including eliminating this month's Police Academy class and firing 500 Housing Authority workers. The Council has until July 1 to approve his fiscal blueprint, which is likely to change dramatically if Albany comes through with school funds or the economy takes another nosedive. Gov. Paterson's budget shaves $770 million from city schools.

The city staved off a deeper budget gap for next year because Bloomberg and the Council in November raised property taxes 7% and trimmed $1.5 billion from all agencies. Even with those measures, the deficit hovered at $1.3 billion and swelled in recent months because of dwindling tax revenue. Bloomberg's doomsday budget comes as Controller William Thompson released a report Thursday that shows the city lost 65,000 jobs between October and December. Thompson also found sales tax collections had dropped 5.1% in the last quarter of 2008, Manhattan office vacancies rose to 8% and the average market value of one-family homes in the city fell 6.8%. The bleeding is not likely to stop. The Independent Budget Office pegs the city budget hole over the next 2-1/2 years at $11.3 billion.

Hidden Bonuses Enrich Government Contractors at Taxpayer Cost
U.S. Senator Kit Bond shifted in his chair at a 2005 congressional hearing, poised with a question on national security. He turned to Treasury Secretary John Snow, who was seated at a witness table. Was Snow sure, asked Bond, a Missouri Republican, that a Treasury Department computer on order for $8.9 million would help detect terrorist money laundering? "Yes, absolutely," Snow said. A year later, in July 2006, the U.S. Treasury Department abandoned the project. The computer didn’t work. The department had spent $14.7 million -- a 65 percent increase above the original budget -- for nothing. There was a final ignominy: Under the terms of the contract, Electronic Data Systems Corp., the vendor, collected a bonus of $638,126. As the federal government’s $700 billion bailout of banks sputters, there’s an object lesson for the new administration of President Barack Obama: Federal departments, including Treasury itself, routinely squander tens of billions of dollars a year in taxpayer money as they farm out public business to private corporations.

Obama, like presidents before him, said during his bid for the White House that he wanted to curtail waste in government. With contracting, he faces a mismanaged system that accounts for almost 40 cents of every federal dollar spent outside of mandatory obligations such as Social Security and Medicare. When compared with all federal contracting, just a fraction of U.S. spending waste comes from so-called earmarks, which elected officials often criticize as the unnecessary pet projects of politicians. The "Bridge to Nowhere" in Alaska, for example, had a price tag of $398 million. By contrast, the government spent $368.4 billion on all contracts in 2008, and Republican Oklahoma Senator Tom Coburn estimates that about $100 billion of that was wasted. U.S. spending on 3.7 million contracts in 2008 represented an increase of 76 percent over 2000 levels. "We have a broken, broken system that rewards incompetence," says Coburn, 60, who has been examining purchasing breakdowns since his election to Congress in 2005. "We need to totally change contracting." Bureaucrats, not elected officials, run the U.S. purchasing system, well out of public sight. And their bosses keep the spending secret by not releasing complete contract files to the public.

Just as taxpayers can’t find out how the Treasury and the Federal Reserve used the first half of the bank bailout, Americans are often denied access to public records that provide details on how hundreds of billions of taxpayer dollars are spent in contracts. Bloomberg News filed Freedom of Information Act requests with the Treasury Department, the Commerce Department and the Fed asking for documents on the bailout and routine contracts. As of Jan. 12, seven months after receiving the first request, the three agencies had provided incomplete documents with blacked-out words or nothing at all. In many cases, bureaucrats are motivated to give millions of dollars in bonuses to contractors no matter how poorly a company performs because generosity with taxpayer money may help them land better-paying jobs after they leave the government. Contractors on dozens of jobs at federal departments collected more than $8 billion in what federal auditors said were unwarranted bonuses from 1999 to 2005.

In 2007, military radio maker Harris Corp. developed a hand- held computer for the 2010 census that failed to work in tests in a California heat wave. Still, the Commerce Department’s Census Bureau awarded Harris $14.2 million in bonuses in a contract that more than doubled in price to $1.3 billion from $600 million, according to federal investigators. "Contracting is a total mess," says John Lehman, who fought procurement waste as secretary of the Navy from 1981 to 1987 partly by banning costly contract changes once work was under way, according to Navy records. "I don’t think in the history of the country it’s been as bad as it is today," says Lehman, 66, now chairman of J.F. Lehman & Co., a New York-based private equity firm. "You have a system where no one is in charge and no one is held accountable." As Obama was gearing up for an economic stimulus starting with about $825 billion in taxpayer money, he said at a news conference on Jan. 6 that the government had to find savings in the federal budget. Because of his rescue package, Obama warned that the budget deficit might exceed $1 trillion for years to come.

He didn’t provide specifics about cuts, including how he might attack contracting waste. Obama’s spending plan will create new federal contracts as the government pours money into education, public works and expanded technology. Unless the new president bores in on those projects and existing contracts to examine how funds are being used, he’ll overlook billions of dollars in potential savings, says Thomas Schatz, president of Citizens Against Government Waste, a Washington-based nonprofit. "There are always efforts to try to make things more efficient, and I’m sure the Obama administration will do the same," Schatz says. "But the agencies don’t necessarily pay much attention to what’s going on at the White House, and you may get business as usual." Obama’s pledges to cut waste mimic promises of previous presidents, including Ronald Reagan and Bill Clinton. Reagan’s Grace Commission -- named for its chairman, J. Peter Grace, chief executive officer of chemical maker W.R. Grace & Co. -- scoured the government in a quest to streamline.

Clinton championed a campaign called Reinventing Government by cutting thousands of jobs and turning work over to private companies. None of those efforts stemmed the bulge of federal contracting and waste. Most Cabinet secretaries don’t probe for waste in contracts on their own and don’t push procurement subordinates to police work that’s farmed out. That lack of accountability holds true even when projects make up significant chunks of their budgets, says Todd Zinser, inspector general at the Commerce Department. "What happens is, a lot of senior leaders don’t view that as part of their job," he says. "But if you’re going to head up an agency whose mission is relying on a large acquisition, then it’s a necessity that that leader be hands-on." The public may be perplexed when federal agencies such as Treasury and Commerce dribble away billions of dollars a year on wasteful contracts, says Daniel Guttman, a lawyer who teaches public administration at George Washington University in Washington.

He’s studied federal contracting since the 1970s. After all, he says, those departments are supposed to act as beacons for good business conduct and are typically run by former Wall Street or corporate executives. "The truth is, we have a tradition of great businessmen who’ve been the worst contract managers," he says. Much of the squandering occurs through so-called cost-plus contracts, which have been in use for almost 100 years. The system, which originally was intended to reward defense contractors for fast and efficient work during World War I, offers bonuses for exceptional performance. Federal departments have long since abandoned the intended purpose of cost-plus, and bureaucrats who run contracts routinely award bonuses for almost everything, even when a program fails completely, Lehman says. "There’s too much gold plating and little accountability with most programs being done on a cost-plus basis," he says. "We’re paying through the nose."

From 2002 to 2005, Los Angeles-based Northrop Grumman Corp. collected $123 million in bonuses on a Commerce Department-led project for a weather satellite system that became the subject of four congressional hearings because of billions of dollars in waste. The payments were authorized by contract manager John Cunningham, a retired Air Force colonel with a walrus mustache who worked for the National Oceanic and Atmospheric Administration from a 10th-floor federal office in Silver Spring, Maryland. It was his first major federal procurement assignment. Cunningham, 60, didn’t respond to telephone, e-mail and in- person requests for comment. Closeness with contractors develops through repeated hiring of the same companies, often without competitive bidding and even after vendors admit in criminal cases that they cheated the very agencies that gave them work.

Treasury Department agencies, including the Internal Revenue Service, currently have more than $13 million in auditing and telecommunications service contracts with a firm that the Treasury Department had referred to federal prosecutors. KPMG LLP of New York, the fourth-largest accounting firm by revenue, paid $456 million in 2005 to settle a Justice Department complaint that it had sold phony tax shelters to wealthy clients, wrongly diverting $2.5 billion that should have gone to Treasury. That wasn’t the only time KPMG has been accused of cheating the government. In 2006, a year after the tax shelter case, KPMG and three other consulting companies paid $25.7 million to settle federal civil lawsuits accusing them of overbilling the Treasury Department and various agencies for travel. KPMG didn’t admit or deny wrongdoing. Still, the department continued to award contracts to KPMG. Treasury spokeswoman Courtney Forsell says agency contracting meets federal rules. KPMG spokesman Daniel Ginsburg declined to comment.

Mostly, the contracting system goes wrong through spending waste and not lawbreaking. When the Census Bureau hired Harris Corp. in 2006 to provide a hand-held computer for the 2010 nationwide survey of Americans, the agency heralded the $600 million contract as a milestone in census modernization. Census director Louis Kincannon said the computer would cut down on paper by allowing canvassers to electronically survey households that didn’t return census forms. "We are revolutionizing the census," he said in a press release on March 30, 2006. In June, three months after the contract was signed, Coburn peered down at Kincannon at a congressional hearing and asked what would happen if the computers didn’t work. "They will work," Kincannon said. "You might as well ask me what happens if the Postal Service refuses to deliver the census form." They didn’t work.

In 2007, the bureau tested some of the devices. The small computers shut down during a heat wave in California’s Central Valley. At other times, the machines took five minutes, instead of just seconds, to send information to a central computer, says Barbara Ferry, manager of the census office in Stockton, California. Kelli Hermesch’s frustrations with the device came on a lonely dirt road in North Carolina. Hermesch, a census quality control leader, says that during the 2007 trials she and a co- worker kept tapping their location into the computer, trying to get it to validate the address. The computer said they were standing someplace else, she says. Hermesch says such snafus wore crews down. "I had people quit on me," she says. "It was definitely frustrating." Today, the revolution is largely a bust. Last April, the Census Bureau said it would go back to pen and paper for canvassing and use the computers only to verify addresses of households.

The project has cost $1.3 billion -- more than double the original estimate. In a big gaffe, both the government and Harris had miscalculated the cost of a help desk for canvassers. Harris and the agency had originally budgeted $5 million. The price has since jumped to $220 million, a 44-fold increase, according to government records. Perhaps worst of all, Coburn says, was that Harris collected $14.2 million in bonuses. "It’s ridiculous," he says. "They didn’t even perform competently. You could do what they tried to do on a cell phone." At a congressional hearing last April, Representative Alan Mollohan, a West Virginia Democrat, questioned Commerce Secretary Carlos Gutierrez about the reason for the payout. Gutierrez said officials handling the census contract appeared to have let Harris get away with unacceptable work. "Well, the bonuses were given on the basis of goals that were set," Gutierrez said. "I think the right goals weren’t there, and they got paid a bonus for something that proved to be less than what they should have delivered." Cheryl Janey, president of civil programs for Harris, told a congressional hearing in 2007 that the company was still working with the Census Bureau on using other features of the hand-held computer. She said the device was reliable. The bureau’s repeated requests for changes to the computer - - 419 in all -- slowed the project, Janey testified. In a written statement, Harris said it was committed to finishing the job. "We are pleased with the progress we are making and remain significantly involved in helping modernize the customer’s data and technology," the company wrote. The Treasury Department had a similar flop in 2004 and 2005.

After the Sept. 11, 2001, terrorist attacks, the agency’s Financial Crimes Enforcement Network hired Plano, Texas-based EDS, the world’s second-biggest computer services provider, to install a computer that would let outside law enforcement agencies uncover money laundering by terrorists. The computer, replacing outdated systems at Treasury and the IRS, would house bank and brokerage reports of large cash transactions. EDS, which was bought by Palo Alto, California-based Hewlett-Packard Co. in August, won the job in competitive bidding in June 2004. Treasury gave the company a tough deadline. It wanted the system by October 2005 -- about 15 months later -- and guaranteed the company a bonus to spur it to deliver. Within weeks, the project had veered off track, according to audits in 2006 by a team of investigators from the Treasury’s inspector general’s office and the Government Accountability Office. Treasury and EDS didn’t assign enough staff and put inexperienced people on the job, causing delays lasting months, according to the reports. When former Treasury Secretary Snow appeared before Congress in April 2005, he was upbeat about the system’s promise. He said nothing at the time about whether he knew of growing breakdowns.

By late 2005, the project was in disarray. The system couldn’t cope with millions more cash transaction reports than were expected. In tests, simple computer inquiries took longer to complete than under the old system, according to the inspector general’s report. In 2006, an internal Treasury review team said the system couldn’t be trusted because no one conducted sufficient examinations of the information it stored. "Pressure on the network and contractor staff intensified, risk increased, milestones slipped, costs increased and quality degraded," the team wrote in its report. Robert Werner, who had been on the job as network director for two weeks, halted the contract in March 2006. Treasury went back to the old system. "In good conscience, I could devote no further resources to the project when I can find no guarantee that any amount of added spending would ever produce the desired result," Werner said in a Treasury announcement.

In the end, $14.7 million was gone -- plus the $638,126 bonus EDS had negotiated when it signed the contract. EDS said it did what it was asked. "EDS was disappointed when the agency decided to terminate the contract, but we respected and supported our client’s decision to reassess the project," company spokesman Bob Brand says. "At all times during our involvement with the contract, EDS was responsive to the client’s requirements." Snow, 69, declined to comment. He’s now chairman of Cerberus Capital Management LP, a New York-based private equity firm. Northrop Grumman says it also has been doing all it can to finish what it started. When NOAA awarded the company a contract, with bonus provisions, to build the $6.5 billion weather satellite system in 2002, the Commerce Department touted the job as a breakthrough in contract cooperation among federal agencies. For the first time, the Defense Department, the National Aeronautic and Space Administration and NOAA agreed to avoid duplication and jointly build satellites that would conduct both weather surveillance and military reconnaissance.

Best of all was the cost savings: NOAA said in a project description in 2002 that the joint project would save the government $1.6 billion. "Count on us," contract manager Cunningham told the American Meteorological Society in a speech in Seattle in 2004. The project called for launching six satellites to replace ones that were wearing out. The first launch was scheduled for 2008. It hasn’t happened, and the program has gone from an economic boon to a taxpayer catastrophe. The budget has doubled to $13.1 billion and a test satellite isn’t scheduled to be launched until next year. NOAA laid the blame on planning that underestimated the complexity of the project and on breakdowns of a satellite sensor to measure global warming. An independent team of scientists that reviewed the contract traced project failures in 2005 to NOAA, saying the agency ceded too much control to Northrop. "The program office needs to decide if it should provide a more proactive oversight for the program rather than delegate so much to the prime," the team said. "This would help ensure mission success." The breakdowns didn’t keep Cunningham, who quit NOAA in 2005, from paying Northrop as if the company were a master manager. From 2002 to 2005, he gave Northrop bonuses of $123 million. NOAA officials, including agency head Conrad Lautenbacher, never explained Cunningham’s actions in congressional hearings.

After leaving government, Cunningham went to work for Scitor Corp., a Herndon, Virginia-based defense contractor, according to a 2005 NOAA newsletter. "My question is why you even keep a job, much less get a bonus," says Representative Bart Gordon, a Tennessee Democrat who heads the House Science Committee, which investigated the satellite breakdowns. "It’s embarrassing, and it really makes you angry." Cunningham authorized the payments even though he rated Northrop’s performance in one evaluation period in 2005 as unsatisfactory. Cunningham shouldn’t have had the authority to approve the bonuses, a 2006 audit by the Commerce Department inspector general said. His goal as project manager to make the work succeed blurred his oversight of Northrop, the audit said. Agency head Lautenbacher, who left his post in October, said in congressional testimony in 2006 that he intervened when he learned of the failures. He said the project’s major fault was that it was too ambitious and its planners expected to achieve too much.

Northrop says it’s striving to overcome technical breakdowns, including satellite instrument failures. "Northrop Grumman takes responsibility for its role as the prime contractor very seriously and is committed 100 percent to successfully delivering this program to the customer," the company said in a written statement. With the federal budget soaring, the Obama administration will have to decide what it will do about giveaways to contractors. Promises from previous administrations to clean up led nowhere. "This situation is beyond troubling," says Senator Thomas Carper, a Democrat from Delaware. "More than ever, taxpayers need to know that their hard-earned money is being used wisely. The financial strain on everyone is daunting. I just shake my head when taxpayer money is wasted like this." Obama set up a government performance office two weeks before he was inaugurated. He picked Nancy Killefer, a director of management consulting firm McKinsey & Co., to run it. Whether Washington curtails contract waste may depend on how much she delves into the ways in which agencies dole out work -- and how sharp her pencil is.

Got a Mortgage or Credit Card? Don't Pay Them
Finally something that we can all get behind: Don't pay your bills. It's not my idea, although it has appeal. It's the Fed's and it's the cornerstone of the new Homeownership Preservation Policy. To qualify for aid, the homeowner must be at least 60 days past due on his or her mortgage payments. (This program is for mortgages acquired from Bear Stearns and AIG rescues. Another program begun in December 2008 required that the homeowner be 90 days late.) At the same time, the mortgagee must be able to make a reduced monthly payment, therefore, must have some income, presumably a job. The having a job part might be tough; the missing two payments part, easy.

And more good news for mortgage delinquents; several mortgage lenders have suspended foreclosures, at least through January 2009. Among them are: Fannie Mae and Freddie Mac -- together a good half of the market; Bank of America/Countrywide; Citi; and several foreign banks. If your mortgage is not held by one of these lenders, you still may be in luck. Several cities and states have suspended enforcing foreclosures; to name a few: Chicago, Philadelphia, Baltimore and Illinois and Florida. Initially, delayed-foreclosure preference was given to mortgagees who lived in their houses. It now has been extended to having an occupant in the house. An unintended consequence: what's this going to do to the rental market and the commercial mortgagee's ability to make payments? They will be subjected to the full force of the free market I guess.

Those who do not have mortgages must be asking: What about me, what can I not pay? Here's a suggestion -- credit cards. And there're a slew of them not to pay: bank, store, gas, travel. You did your patriotic duty by running up this debt in the first place. Now join your neighbours and default. The approximate $2.6 trillion in consumer-credit outstanding as of November 2008 is at serious risk. Charge-offs are expected to rise from the current 5.62% to as high as 13%, according to Nouriel Roubini. The all-time high was 7.85% in 2002. Consumer-credit defaults are tied to unemployment. Some banks have increased their assumptions on 2009 unemployment to 8.7%, which is as much as they say they can handle; beyond this level they would be in trouble.

Well, they're in trouble. According to the BLS, the rate of unemployment as measured in U-6 is already 13.5%, well into the banks' danger zone. And this number is far below the almost 18% computed by Shadow Stats (the people who came up with the definition of recession that is universally accepted), which also puts us in depression territory. The televised Congressional Hearings/Jerry Springer Show on the new stimulus bill carried on all day. They should give up on everything except social programs at this point. Little of what they've done has worked and the trigger for the next major leg down will be out of their control by definition and could even come from outside the US.

P.S. Just found out the stimulus bill passed. They're gonna send me a check and broadband comin' out to my summer place. I take back all the bad stuff I just said.

Steep drop in world wheat crop forecast
The world’s wheat harvest is likely to "fall sharply" in 2009-10 as farmers cut the acreage devoted to the cereal, the International Grains Council said yesterday in its first forecast for the incoming crop. The London intergovernmental body said the 2009-10 season wheat crop would fall to 650m tonnes – down about 5 per cent from a record 687m tonnes last season. "The largest declines are expected in the EU, Russia, Ukraine, the US and China," the IGC noted in its monthly report. The lower output is likely to support forward cereal prices. But traders warned that near-term prices would remain under pressure from the large stock build from the 2008-09 harvest.

In Chicago, soft red wheat yesterday traded at about $5.80 a bushel, down 2.5 per cent on the day. Further damaging the immediate price outlook, traders said a lack of access to credit was forcing wheat-importing countries to buy on a hand-to-mouth basis, reducing immediate demand. Food aid organisations have warned that the world’s poorest countries are facing difficulties in obtaining credit lines to buy agricultural commodities. Wheat prices have risen about 25 per cent from December’s low of $4.55 on concerns about the impact of a severe drought in Argentina, the world’s fourth largest exporter. But wheat prices remain higher than they were 18 months ago.

"While the immediate supply and demand outlook for grains remained generally bearish, with global stock forecasts mostly adjusted upwards, increasing concerns about South America’s crops and continued firm international demand for wheat attracted buying interest in futures markets," the IGC said. The record harvest last season came as farmers, encouraged by record high prices, increased planting. The IGC said the steep decline in prices from last year’s peak, when soft wheat hit an all-time high of $13.34? a bushel, as well as the high costs of inputs such as fertilisers, prompted farmers to cut the world’s planted area by about 1 per cent.

'Immortal' jellyfish swarming across the world

An 'immortal' jellyfish is swarming through the world's oceans, according to scientists. The Turritopsis Nutricula is able to revert back to a juvenile form once it mates after becoming sexually mature. Marine biologists say the jellyfish numbers are rocketing because they need not die. Dr Maria Miglietta of the Smithsonian Tropical Marine Institute said: "We are looking at a worldwide silent invasion." The jellyfish are originally from the Caribbean but have spread all over the world.

Turritopsis Nutricula is technically known as a hydrozoan and is the only known animal that is capable of reverting completely to its younger self. It does this through the cell development process of transdifferentiation. Scientists believe the cycle can repeat indefinitely, rendering it potentially immortal. While most members of the jellyfish family usually die after propagating, the Turritopsis nutricula has developed the unique ability to return to a polyp state. Having stumbled upon the font of eternal youth, this tiny creature which is just 5mm long is the focus of many intricate studies by marine biologists and geneticists to see exactly how it manages to literally reverse its aging process.


Unknown said...

Jellyfish, banks, what's the difference? They should die, but they're somehow transdifferentiationed into younger versions of themselves.

You know those 'interesting times' the Chinese used to curse people about? We're living in them.

Unknown said...

First link to the article relating to the total bailout cost needs a fix.

el gallinazo said...

Why is the Euro plummeting and the Pound skyrocketing over the last two days? The amount of change in the currency markets is unprecedented.

Ilargi said...

mille grazie rumor

got it

Anonymous said...

Ilargi, you are such a pessimist. You forgot to mention the one great asset that the U.S. has.

When it comes to creating a Bad Bank, no one else in the world has as much experience as the rocket scientists in Washington and on Wall Street!

I'm quite confident they can create the worst bad the world has ever seen.

Yes, I'm kidding here. Unfortunately, there's a lot of truth in that.

Anonymous said...

two questions, si vous plais:

1. Is this the end of the growth phase of industrial civilization?

2. If so, what does that mean?

Unknown said...

1. Maybe.

2. No one knows; although many people will talk and act as if they do.

Anonymous said...

Ilargi -

I don't doubt your projection of 16 million job losses, but was wondering if you could briefly describe how you derived this figure, e.g. is it a certain % from different sectors, etc.

Thank you

Greenpa said...

The public drumbeat for the bank execs needs to be not "shameful"; but "UTTERLY INCOMPETENT!"

Both are true; but when you're incompetent, people start to really want to fire you.

The top 3 tiers of executives need to be removed, immediately. Tier 1 is guilty; the next two have been studying the top tier for years, in order to copy them.

Hire some CPAs, and just drop them into those slots.

Ilargi said...


I don't doubt your projection of 16 million job losses,

Note that this is Roubini's number for the entire crunch, not just one year, while the December '08 number was 589.000, and there have been several projections of 1 million a month in 2009. We can be sure that in December, less people were fired than in January, because stores were still hopeful about sales. January will be awful.

So we're looking at anywhere between 12 times Dec, about 7 million, to 12 million+ just for 2009. That is, unless the economy picks up. And that won't happen for years, if ever. 16 million is a very low number, once you start adding it all up, and Roubini's 6 million is ridiculous.

Note also the difference between U3 and U6, which is indicative of US government numbers fiddling.

Anonymous said...

If it's my money being used, which it is -together with my kid's and grandkid's money, why not create a cadre of "good" banks that are initially financed by the Gubmint and chartered specifically to provide liquidity (and, oh yeah, behave responsibly). Take all you want to fund these startups that are free of hidden nuclear waste and let the other banks figure out what "Quod dedas recepas" means.

Give these "good banks" a month or two and see if the private sector wants to invest in them and phase out public ownership.

Bigelow said...

Nassim Taleb also says the banks should be nationalized and then treated like Utilities.

Since he hasn't broken anything or been indicted, he isn't qualified to fix anything.

Anonymous said...

Look, we all know how this is going to end, so we might as well start planning on how to actually go about restoring our Constitutional form of government.

When the whole thing comes crashing down and parts of the country are under martial law, the time will have arrived when the People are able to effect some primary changes.

Future civics lessons will recognize Ilargi and other bloggers as the Thomas Paines of their day.

Greenpa said...

Not exactly economics; but totally hilarious- the US Republican Party has just elected it's first... black! National Chairman (after 9 ballots).

I'm cracking up. Yep, they're still shooting themselves in the foot, as fast as they can.

"Hey, look, we have no imagination whatsoever!", they announce to the world.

And- talk about forgetting your base! The RNC Chair's main job is raising MONEY.

I can just see the Palindrones and Limbergers coughing up big bucks for their own Magic, um, person.

Real death throes, perhaps.

Anonymous said...

Questions … Questions …
What am I to do?
Decisions … Decisions …

THEY took 50% of my savings.

Are the banks bankrupt?
Will THEY take the remainder of my savings? (Do I really have 50% of my savings left?)

Should I leave my remaining savings their care (banks)?
Did they really give me a distribution/dividends from their surplus cash positions?

Why are the raising cash by issuing preferred shares?

Should I go on spending spree?

What if I spend all my savings and all I can get is an income from the gov.?
Will the gov. be able to give me an income?
Will I be able to survive on the income from the gov.?


scandia said...

Ilargi,that jackson photo always clenches up my gut! Would you have been able to even breath if present at that moment? And the world is still holding its breath wondering if the boyz are going to drop the economy? Hillary Clinton recently described the world as exhaling. I don't think so Hillary. We are turning blue holding our breath in anticipation of worse yet to come.Are the world leaders going to drop my baby? I think so. They will drop the baby and take " a runner".

Gravity said...

Wacko Jacko doesn't realise that Gravity is a recursive algorithm.

He would make an exellent economist.

thethirdcoast said...

I work at one of the companies mentioned in the Bloomberg article about defense contracting waste.

I'd estimate anywhere from 50% to 75% of US defense expenditures are now lost to waste or corruption.

I'm fond of reminding my generally conservative peers that we get a bit more Soviet every day.

Anonymous said...

That jelly fish is crazy! You get younger after shagging. Thats like a dream come true. Now if we could only splice those genes into me.

Anonymous said...

Third Coaster, I feel ya.
The height of cognitive dissonance for me was realizing that my years of work for a government contractor would all be wasted and lost forever, and that that was the best possible outcome. I shudder to think of what an efficient, effective defense sector could do with all that expensive, exotic technology.

Anonymous said...

We've been trying to imagine how the euro zone might fragment - are there any precedents for such multi country currency break ups?
Is it possible that euro deposits in banks in member countries could be replaced with enforced scaled down local versions?
If so, how would you value euros in cash which are of "no fixed abode"?

Anonymous said...

Stoneleigh, Ilargi
What do you think about this rise in gold?

Stoneleigh said...

Today's intro is now a diary over at Daily Kos.

Anonymous said...

FWIW - Here's one article over on techcrunch about some data on consumer spending. Here's the link:
The Economy According to Mint

"Consumers are hurting, but if Mint’s data is indicative of the economy as a whole, it is not as bad as you might think."

"As an engineer, and founder of a company where one of our core values is “quantify everything”, lack of numbers bothers me. How bad are things really? Answers like “really bad” or “worst since the Great Depression” just don’t do it for me. What does it mean in dollars and cents?"

And the summary:
"But what the data, the hard facts, mean for you – if you run a consumer business – is that your customers are spending $400 less each month than they were a year ago, have burned through half of their savings, and on average have taken on an additional $5k in debt."

thethirdcoast said...


The Pentagon's and Wall Street's books are so out of control and poorly maintained that they cannot even begin to audit them, much less meet any type of rigorous accounting standard.

As Rage Against the Machine would say, all that crap we heard about "responsiblity", "accountability", "attention to detail", and "pride in your work", is just some B*LLSH*T we heard in school.

thethirdcoast said...

Anonymous @ 7:07:

Thanks for the empathy. I'm only 30, so I'm really struggling to find a way to accept things as they are or find a way out of the soul crushing predicament I've got myself into.

Like many others out there, I die a little more inside every day I continue to report to my cube.

Anonymous said...


I presume you were talking to someone else?

The techcrunch data has nothing to do with either Wall St. or the Pentagon.

Anonymous said...

@ Greenpa,

The RNC hasn't forgotten its base at all; they have again pandered to it:

More important than being an African American, Michael Steele is a Catholic opposed to abortion, birth control, gays etc and like the GOP base he is not afraid to put the power of government behind his religious convictions.
That is the main reason why he was chosen as a running mate for MD Gov. Ehrlich who was widely seen as a moderate republican on reproductive choice issues.

Like Palin, the fact that he is also a minority is just a way to undercut the other party's claim to diversity on the ticket.
"who us? we're not [sexist, racist...etc] at all!"

Anonymous said...

re the jellyfish syndrome: sounds like an onion article! :^)

if I understand the scientific concept correctly, they revert back to juvenile state.
applied to humans, this immortality prospect would necessarily involve
reliance on legal guardians again...

thethirdcoast said...

@ Orion:

I was attempting to illustrate that that lack of solid, quantitative data is commonplace at our "leading" institutions and that it is hardly surprising the consumer data is at least as poor.

I guess my argument was not strong enough.

Third Chimp said...

Anon -the worst bank ever- you are spot on ! Can it be far behind that to receive IMF or World Bank support a country in trouble will have to create an acceptably bad bank (like the First Boondoggle Bank of America) ?

Anonymous said...

Ther mainstream news and bloggers are promoting ...

No one can demonstrate that they have more responsibility than the president of the USA. Therefore, bonus etc. should be lower than that of the president of the USA.

Anonymous said...

While nobody was paying much attention the long end of the Treasury market took a huge stumble this week. Rising interest rates have been seen by many as one of the most likely causes of the next leg down in the capital markets.

Why would rates rise now that it is official that we have price deflation? At the deepest level it's because of doubts about Uncle Sam's ability to pay off on his debts. A less Apocalyptic reason would be that the huge supply in the short term is overwhelming the demand so prices are falling (interest rates are an inverse of bond prices. As bond prices fall rates rise, and vice versa)

The huge flood of supply coming down the pike with the StimPack and other bailouts is very likely to crush the markets. The crowding out effect even the main stream mentions now.

The mood of the MSM is keyed almost totally to the stock and financial markets. For this is where all the media people live. They put on the concern face and voice for layoff news but the real panic sets in on those 200 point down days on the DOW.

There is a good possibility that the next down leg is upon us. Maybe maybe not. When it comes hope will take another blow. Because the media will be taking the blow and transmit the fears to everyone.

In a bizarre display today the some clown on CNBC complained that the market was down because the government was not helping the banks with the StimPak. The GOP has started transmitting this one too. Even as they vote against TARP2.

Houyhnhnm said...

Taleb says nationalize bank because you can't trust them? Hmm. I've read something similar, something about banks at least needing serious regulation. Now where did I read that?

Oh yeah, Adam Smith's Wealth of Nations.

IMO, deregulation was thought up by people who had read little of what Smith actually said.

Anonymous said...


Thanks for clarifying that. The confusion is due to the Mints' data not claiming to be quantitative, but rather a statistical sampling. With 900,000 data points, that's an excellent sampling. But certainly not quantitative.

Which begs the question of whether the Pentagon or Wall Street would be better served by statistical sampling?

That's a joke, btw. Hmmm. Perhaps I'd better be quiet lest I start a new Kabuki dance on Wall Street. Statistical accounting as quantitative. Ya, that's the ticket. The next wave after mark-to-model.

Bigelow said...


IMO, deregulation was thought up by people who wanted to rob the world.

scandia said...

Bigelow, What world? These people are clinically narcistic. Its either narcotism or narcissism in the drivers seat.
I hope " the world" finds a way to impress our presence upon them!

Rik said...

Roubini: I'm a layman, he's the trained & highly payed econ. But I feel he's behind the curve.

Taleb: I think 'Black Swan' is Gould/Eldridge's 'punctuated equilibrium' (punc eeq for short) applied to markets. Where it is nonsense, because markets as we know them are not in equilibrium.

Solution: hold a jubilee. When the cost of saving the economy hits $8.2 trillion and is still rising, the status quo is efffectively dead. Get over it.

Jellyfish: "able to revert back to a juvenile form once it mates after becoming sexually mature" - err, without the mating, more or like a human, at least mentally...

Greenpa said...

Anonymous 9:46 "The RNC hasn't forgotten its base at all; they have again pandered to it:"

Well, sure, I knew all those bits. Necessary window dressing. What I was trying to dance around, obscurely, was the fact that quite a few of the RNC "base" types are rabid racists. It's taboo to discuss this in the press. But very true.

I live in a Republican district, in MN, not even in the south. Quite a few of my nice polite neighbors, who don't say racist stuff in public- in fact are totally racist in private, and say very ugly things. This segment of the Republican party is not ever going to work with - one of those.

I'm waiting to hear what our friend Rush has to say- he could wind up blurting out some fascinating stuff.

Anonymous said...

Question on "a jubilee"

When people use that expression, do they mean forgive all debts and loans; All debts and loans would be cancelled?

What does that mean for the people who only saved their money and put it into the bank for safekeeping?

Does that mean that they would loose their saving since the banks lent out that money?

This does not sound like an organized bankruptcy?
It sound more like looting during a riot.

Anonymous said...

Japan has announced, at Davos, that it will be spending $17B (that means some of its US t-bills), in the Asian countries. As expected/forecasted, those with money are buying/investing.

Anonymous said...

If you are interested in getting comments on what is happening in Davos go to this BBC link

Anonymous said...

Does bad behavior in business go undisciplined because we think they're just "being corporations?"

General Motors to Invest $1 Billion in Brazil Operations -- Money to Come from U.S. Rescue Program
“SAO PAULO -- General Motors plans to invest $1 billion in Brazil to avoid the kind of problems the U.S. automaker is facing in its home market, said the beleaguered car maker.

According to the president of GM Brazil-Mercosur, Jaime Ardila, the funding will come from the package of financial aid that the manufacturer will receive from the U.S. government and will be used to "complete the renovation of the line of products up to 2012."”

Jim R said...

Interesting that you punctuate today's entry with the note on the jellyfish. It's a mark of a compromised ecosystem when one humble species propagates out of control like that. You have too little diversity in the marine ecosystem where there isn't a parasite, predator, or filter-feeder around to scoop up the excess. It seems there was a rogue alga in the news a while back for similar reasons.

Perhaps there's an analogy for our simplified economy somewhere in that...

Starcade said...

jal: Then the only question is who riots when. If a Jubilee is just a sanctioned riot (which is what I'm reading you asserting), then, we are truly screwed beyond ****ed beyond done. At that point, we might as well just bend over and kiss our asses goodbye.

There's only three ways this can end: Abject disorder and mass extermination, a Jubilee, or debtors' prisons.

Anon 0946: So he's a f***ing self-loathing Uncle Tom. Right up the Rethugligpigs alley.

Chaos said...

From today's news articles:
"The 3.8 percent annual pace of contraction was less than forecast, with a buildup of unsold goods cushioning the blow."

A NYTimes article explains it better: "The actual decline in the gross domestic product — at a 3.8 percent annual rate — fell short of the 5 to 6 percent that most economists had expected for the fourth quarter. But that was because consumption collapsed so quickly that goods piled up in inventory, unsold but counted as part of the nation’s output."

So, here we have another misleading (to the downside) government statistic, which, at minimum, should have a big asterisk beside it. Counting unsold goods as "output"? I don't think so.

Anonymous said...

Ilargi and Stoneleigh--

I think this piece will interest you:

"The only way that Bernanke’s “printing press example” would work to cause inflation in our current debt-laden would be if simply Zimbabwean levels of money were printed—so that fiat money could substantially repay outstanding debt and effectively supplant credit-based money...

To make a serious dent in debt levels, and thus enable the increase in base money to affect the aggregate money stock and hence cause inflation, Bernanke would need to not merely double M0, but to increase it by a factor of, say, 25 from pre-intervention levels. That US$20 trillion truckload of greenbacks might enable Americans to repay, say, one quarter of outstanding debt with one half—thus reducing the debt to GDP ratio about 200% (roughly what it was during the DotCom bubble and, coincidentally, 1931)—and get back to some serious inflationary spending with the other (of course, in the context of a seriously depreciating currency). But with anything less than that, his attempts to reflate the American economy will sink in the ocean of debt created by America’s modern-day “Roving Cavaliers of Credit”."