Thursday, January 8, 2009

January 8 2009: Spontaneous deterioration

Harris & Ewing Spontaneity February 21, 1916
Bureau of Engraving and Printing, Treasury Department. Fire, spontaneous combustion." .

Ilargi: One day after I wrote at length about the bond markets, in The name is Bonds. Obama Bonds. , and the risks in connection with the projected overkill in issuance, everybody chimes in. That gives me the chance to move on to greener pastures. I thought I'd revisit two issues that won't go away. First, the need to save the housing market, and second, the need for banks to start lending again. And then, for both, how (not) to handle that.

Obama said this yesterday: "We’ve got to prevent the continuing deterioration of the housing market." My answer to that statement is three-fold (I try to keep it short): Mr. President in-less-than-two-weeks: First, you don't have to, second, you shouldn't, and third, you can’t. Here's why:
  1. You don't have to. There's no law that says governments have a place in housing, be it construction or mortgage lending, or need one. Let the market do the job. Government money can be put to better use elsewhere. And there's something else. See under 2.

  2. You shouldn't. You're the government. The only eventual result of government involvement in housing markets is that prices rise. Well, I should clarify that a bit, perhaps. If it were only the government, it would be sort of alright. But if the place of the government in the housing sector is to guarantee mortgage loans issued by private bankers, then we're looking at perversion. Cut out the bankers, and we have a model. Or cut out the government, fine too. But if both are involved, the majority of the government guarantees end up in the bankers’ pockets. And they didn't elect you, did they?

    If someone can't afford to buy a $100.000 home, a bank might lend her part of the sum. If she, and 100 million others, would qualify for the loan because the government guarantees potential losses, she now has to compete for that home with a lot of people. result: It now costs her $300.000. I'm sure you get that point. Look, after a disaster, like the 1930's, when millions of people live on the street, the government can help. But even then, bankers will need to be kept at bay.

  3. You can't. Because the US government has been dabbling in housing for 70-odd years, prices are much higher than they need be. The price for a home should have a reasonable correlation with the cost of building it. Most homes are sold for ten times that or more. That is not reasonable. And shelter is a basic need for people, not some profit object. If a jeweler wishes to sell a diamond ring with a 90% mark-up, he has my blessing. When a builder or developer wants that profit level, I bless him not, nor a farmer who does it, or a deliverer of drinking water.

    Still, that’s the situation we're in, and in the past ten years it’s gone berserk. President 43 and his Fed peer Alan Dry-Prune went on TV repeatedly to basically declare that God wanted his people inside a real estate office within the next half hour to purchase their piece of the promised land on earth. And like any Ponzi Pyramid, it worked for a while. It doesn't anymore today, though, does it, Barack?

    But you say that " We’ve got to prevent the continuing deterioration of the housing market", and I don’t think your talking about painting the porches and ceilings of America. You're talking about keeping up price levels. Well, that is not going to work. The chance of that happening is zero Kelvin. SO you'd better reconsider and come up with better plan, and a better understanding of the material, or you will be magically thinking the people who voted for you into a poorhouse and a debtor’s grave.

Why will it not work, what’s the problem? Simple. There are still people who clamor that credit rates are too high. They are wrong. The problem is that there is no credit. But we just gave the banks $1-2-3-4 trillion, they say. Nice try, but it's not enough. The banks are too broke. In fact they are so broke they shouldn't have received a penny. Their position is far too bad to be quenched with that sort of petty cash. If they would start lending again, and prop up those much-too-high real estate prices, they'd be signing their own demise. Not that that can be avoided, but the trillions do work to let them live a few more months, in which the staff can quibble over bonuses yes or no, and the resorts in which those questions need to be addressed. Thai massage, or Swedish?

The Bank of England, pirate nest of old, lowered its rate one more today, and yes, the line is: the banks will start lending if we do this. No, they will not. They are bankrupt. The bail-outs on either side of the pond have merely assisted in keeping that hidden longer. As have the accountancy rules. However, they will still have to fess up. In an ideal bankers world, all assets could be level 3 or off-balance, but we're not that crazy. Yet.

So Meredith Whitney gets to launch another warning. Under the great title Ring of Fire Redux: 5-Alarm Burner in 4Q, Oppenheimer's Barbarella says:
The "Ring of Fire," described simply, is that when a security is downgraded, a higher level of capital is required by banks to be held against that security. From July 2007 to date, over $5 trillion worth of securities have been downgraded, but our concern here is that the pace of downgrades has only accelerated through 2008. In fact, in the fourth quarter, over $2.3 trillion of securities were downgraded, or over 2.5X the amount of the prior quarter and almost the entire amount of securities downgraded between 3Q07-3Q08.

US banks will have to write down another $40+billion soon, they've used up all of the TARP money already, and they need much more, or else.
.... we have highlighted one persistent challenge that faces banks: the direct correlation between rating agency downgrades on securities and risk weighted capital requirements. Such a relationship combined with the massive devaluation of housing related assets has resulted in large capital voids at banks and subsequent hundreds of billions of dollars in new capital being raised for the industry. As fundamentals continue to devolve, more voids will be created in banks' core capital positions (even inclusive of new TARP infusions), and we believe the banks will once again have to raise fresh capital in 2009.
You read that right, sir, if you’re looking to "prevent the continuing deterioration of the housing market", don't look at the banks, they're trying to prevent their own downfall. And they'll fail at that too.

Obama Warns of Irreversible U.S. Economic Decline Without Government Action
President-elect Barack Obama warned that without immediate steps by the government to revive the economy, family incomes will drop, the unemployment rate could reach "double digits" and the U.S. risks losing a "generation of potential and promise." In excerpts of a speech he’s scheduled to give today at 11 a.m. New York time in the Washington suburb of Fairfax, Virginia, Obama says that while the cost of his economic recovery plan will add to a deficit already projected to exceed $1 trillion, he "won’t just throw money at our problems." "It is true that we cannot depend on government alone to create jobs or long-term growth," Obama will say. "But at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe."

Obama’s speech, which aides billed as a "major" economic address, is part of a broader pitch to Congress and the American public as he works on selling his $775 billion, two-year economic stimulus plan to pull the U.S. out of a recession. While the excerpts released by his transition office didn’t provide specifics of the plan, advisers said the full speech would expand on previously reported elements. He also will again call for using the government’s "full arsenal of tools" to unlock credit markets and "a sweeping effort" to stem home foreclosures. Obama also is promising to overhaul financial-markets regulations and crack down on "reckless greed and risk-taking" on Wall Street to restore confidence in markets.

Obama, who has made getting a stimulus package through Congress his top priority even before he takes office on Jan. 20, is pressing Congress to act quickly on his proposals, which include infrastructure spending aimed at creating or saving 3 million jobs and about $300 billion in tax cuts for individuals and businesses. Yesterday, Obama said that spending in the stimulus plan would have to be geared toward programs that foster long-term economic growth -- in energy, health care and education. As part of his effort to gain support from congressional Republicans, some of whom have questioned the price tag on the stimulus, Obama says his plan is "not just another public works program."

"The overwhelming majority of the jobs created will be in the private sector, while our plan will save the public sector jobs of teachers, cops, firefighters and others who provide vital services," he will say. The cost of the economic recovery package is at the high end of the range the president-elect’s advisers had been promoting and lower than the $1 trillion stimulus that some economists have called for. In the speech, he warns that it will widen the federal budget deficit, which the Congressional Budget Office yesterday forecast would hit $1.18 trillion this year. "It will certainly add to the budget deficit in the short- term," Obama will say. "But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy."

Obama has spent the bulk of his first full week in Washington since the Nov. 4 election meeting with advisers and congressional leaders to help craft the package and shore up support. He is under pressure from lawmakers in both parties to ensure strong oversight given the price tag. Yesterday he named Nancy Killefer, a director at management consulting firm McKinsey & Co. and formerly an assistant secretary of the Treasury in the Clinton administration, to a new post of chief performance officer. She is charged with making the government more accountable for the money it spends. In his speech, Obama will say the public will be able to use the Internet to view information about where the stimulus money is being spent and promises to create an economic recovery oversight board. He also will bar lawmakers from inserting pet spending projects, known as earmarks, into the legislation.

"Instead of politicians doling out money behind a veil of secrecy, decisions about where we invest will be made transparently, and informed by independent experts wherever possible," Obama will say. Obama’s speech comes as the Labor Department may report tomorrow that employers slashed jobs in December for a 12th consecutive month, putting total job cuts at 2.4 million for 2008, the most since 1945, according to the median forecast in a Bloomberg survey of economists. U.S. stocks slid yesterday after ADP Employer Services said employers cut 693,000 jobs in December. The Standard & Poor’s 500 Index fell 3 percent to 906.65, cutting its 2009 gain to less than 0.4 percent. The index’s 38 percent decline in 2008 was its worst yearly drop since 1937. Obama urged Congress to pass the measure, which has yet to be introduced, "as quickly as possible." "Every day we wait or point fingers or drag our feet, more Americans will lose their jobs, more families will lose their savings," Obama will say. "More dreams will be deferred and denied. And our nation will sink deeper into a crisis that, at some point, we may not be able to reverse."

Unemployment could get 'truly gruesome', analysts predict
The job market was even weaker than earlier thought at the end of 2008, according to new data that do not offer hope that the picture will brighten any time soon. The reports sent stock prices tumbling and boosted efforts in Washington to pass an economic stimulus package. Employers shed a seasonally adjusted 693,000 jobs in December, up from 476,000 in November, ADP and Macroeconomic Advisers said. It was the largest decline in the eight-year history of the report, which uses payroll data and statistical models to gauge the job market.

Macroeconomic Advisers Chairman Joel Prakken predicted more "truly gruesome" jobs numbers in coming months. Online help-wanted ads in December fell 507,000 to 3.861 million, the first time there were fewer than 4 million openings online since July 2006, the Conference Board said Wednesday. The gloomy news knocked down the Dow Jones industrial average by 245.40 points, or 2.7%, to 8769.70. The government will release official data on the job market in December based on surveys of businesses and households on Friday.

That report could show the unemployment rate jumped to 7% or higher, up from 6.7% in November. The jobless rate has not topped 7% in more than 15 years. The news hasn't gotten better in 2009. Already this year a number of firms, including aluminum producer Alcoa, Cessna Aircraft, clothing manufacturer Perry Ellis and health-services firm Cigna, have announced they are cutting jobs. Concern about rising unemployment is spurring Congress to move quickly on President-elect Barack Obama's proposal for $775 billion in new spending and tax cuts over the next two years.

Robert Reich, former Labor secretary in the Clinton administration who is now a professor at the University of California at Berkeley, warned lawmakers Wednesday unemployment could rise to 10% without a stimulus package, and underemployment — a broader measure of job market distress that includes people who have given up looking for work — could hit 15%.

U.S. Banks Need to Raise More Capital, Whitney Says
U.S. banks need to raise more capital after downgrades of mortgage-backed securities surged in the last quarter, Oppenheimer & Co. Inc. analyst Meredith Whitney said.   U.S. banks’ earnings will be hurt in 2009 by as much as $40 billion of further writedowns as asset prices continue to drop, and credit-ratings are cut on home loan-related securities, Whitney said in a note to clients Jan. 6. Downgrades force banks to hold additional capital in reserve, so U.S. lenders will need to raise more cash, according to Whitney.

Ratings cuts accelerated last year, with about $2.3 trillion of securities  downgraded in the fourth quarter, she said. "There is an undeniable correlation between downgrades and increased capital demands by the banks," Whitney wrote. "The banks will once again have to raise fresh capital in 2009." Credit ratings and capital ratios will be "of critical focus" in the first quarter, Whitney said. Tier 1 capital ratios, a measure of financial strength, are likely to decline "materially" for U.S. lenders, she wrote.  

Whitney’s report covered Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Merrill Lynch & Co., Morgan Stanley, Wachovia Corp. and UBS AG of Zurich. Goldman Sachs’s Tier 1 Ratio was 15.6 percent at the end of the fiscal year that ended in November, up from 11.6 percent at the end of the third quarter. Morgan Stanley’s was 18.3 percent, up from 12.7 percent a quarter earlier, Whitney said. Further downgrades on pools of mortgage-backed securities may lead to corporate ratings cuts, Whitney added.

Whitney: TARP funds go down the downgrade drain
La lutte continue. Forget the short-lived buzz of $300bn in TARP stimulus, pain for the banks is far from over. Real deleveraging is only just beginning to gather speed; the world economy has yet to enter its worst months, and there are certainly more writedowns to come.

Oppenheimer’s Meredith Whitney is - when it comes to banks’ capital positions - the analyst to turn to. And fortunately, she has a note out today:
We now believe that, at a minimum, capital ratios will be meaningfully lower in the fourth quarter versus post TARP pro forma levels. Aside from the greater than $40 billion in writedowns and provisions we expect for the group of bank stocks under our coverage, and earnings pressure related to chronic negative operating leverage, we also expect capital strains to become apparent from ratings change pressures. Accordingly, we maintain our cautious stance on our group.
The thrust of Whitney’s note is nothing new: she reiterates her “ring of fire” position, whereby ratings downgrades on securities owned by the banks punch huge holes in banks’ balance sheets thanks to onerous regulatory capital requirements. Lower rated securities require larger amounts of regulatory capital in reserve.And for anyone sceptical as to the significance of that relationship…

rating downgrades versus capital infusions

The interesting part of the latest note comes in quantifying the scale of the rating agency downgrades so far - and more importantly, demonstrating that the worst of them have only just worked through:

Rating agency total downgrades

Clearly, Q4 of 2008 was the worst period so far in terms of security downgrades by a country mile:

rating agency downgrades

The effect of those Q4 downgrades, estimates Whitney, will be to more or less drain all TARP money pumped into the system so far. Expressed below as Opco analysts on upcoming writedowns for Wall Steet’s finest:

Oppenheimer writedown estimates
Click the pic

Bank of England cuts base rate to 1.5%
The Bank of England's monetary policy committee has cut interest rates by half a percentage point to 1.5%, their lowest level since the central bank was founded more than 300 years ago. Today's cut was widely expected in the City after a run of poor news on the economy, but it disappointed business organisations who had clamoured for a cut of a full percentage point to 1% to unfreeze credit markets and prevent the recession from getting worse. The Bank said in a statement: "The world economy appears to be undergoing an unusually sharp and synchronised downturn. Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time."

It said that as there remained a "significant" risk of undershooting its 2% inflation target, and it decided to lower rates again today. The Bank expects UK output to fall sharply during the first part of this year, although it also noted that the "substantial" depreciation of sterling over recent months may help to moderate the impact on British exports of the global slump. Nationwide said it would pass on the cut in full, taking its base mortgage rate from 4% to 3.5% from 1 February. HSBC will also pass on the reduction to all its personal and business customers.

The British Chambers of Commerce said it was disappointed by the decision. David Kern, its chief economist, said: "The outlook is dire, and the MPC must act forcefully. In order to ensure that the economy does not slide into a prolonged depression, we urge the MPC to reduce interest rates to almost zero in the next few months. It must also supplement lower interest rates with vigorous quantitative easing." The Bank has slashed borrowing costs from 5% since October, and has admitted that it previously underestimated the severity of the financial crisis. Analysts expect further rate reductions in coming months.

If the base rate is cut further, lenders may soon have to cope with zero interest rates. Once the Bank's base rate hits 1%, people with mortgages that track a point below base rate will find themselves paying no interest. The economic situation appears to be getting worse by the day. Unemployment has shot up, the slump has spread across the economy from manufacturing and construction to the once-booming services industries, while the high street has shocked with a host of business failures, including well-known names like Woolworths. The housing market has ground to a halt, with house prices in freefall and new mortgages approved hitting a fresh record low of just 27,000 last month.

"Further out, we expect interest rates to fall to a low of 0.5% in the second quarter of 2009 and then stay there for the rest of the year," said Howard Archer of IHS Global Insight. "However, it is far from inconceivable that interest rates could come all the way down to zero." The chancellor, Alistair Darling, admitted yesterday that the recession is deeper than the government had expected. The pound has slid against the euro, pressured by the view that UK rates will fall further below those in the eurozone, currently at 2.5%. Since the last MPC meeting in December, the UK downturn has continued to deepen. Government figures due on 23 January are expected to confirm that Britain is already in recession. The contraction in GDP in the third quarter has been revised lower to 0.6% and the fourth quarter is likely to have seen an even sharper contraction of around 1%.

The Bank's governor, Mervyn King, has warned that Britain could enter a period of deflation later this year. Consumer price inflation has so far only fallen back to 4.1% from September's peak of 5.2%, but is expected to slow sharply in coming months in the wake of lower oil and food costs. Oil prices have dropped by more than two-thirds since hitting an all-time high over $147 a barrel last July. "While we maintain that the MPC will bring rates down close to zero by the second quarter, we are not sure exactly how low a floor the Bank will be happy to sanction," said Philip Shaw at Investec. The MPC has been making big cuts in borrowing costs since October when it joined forces with other major central banks in a coordinated half-point rate reduction as the financial system teetered on the brink of collapse. In November the Bank slashed rates by 1.5 percentage points - the biggest reduction it has ever made - followed by a one point cut to 2% a month later, which took borrowing costs to the lowest since late 1951.

European Central Bank deems Britain unworthy of euro
The European Central Bank has deemed Britain unfit for monetary union even if it wants to join following the dramatic slide in sterling and the explosion in the UK budget deficit. "Great Britain does not meet the entry criteria for the euro," said Lorenzo Bini Smaghi, the ECB's board member in charge of international affairs. "The public deficit will rise to around 6pc (of GDP) in 2009 and even higher in 2010. Sterling's exchange rate is not yet sufficiently stable," he told Italy's La Repubblica newspaper. The entry rules impose a deficit ceiling of 3pc of GDP, two years of currency stability, and a public debt limit of 60pc of GDP. The rules were waived for political reasons to let Italy, Belgium and Greece into EMU, but terms are becoming stricter as the ECB seeks to exclude East European states before they are ready.

If anything, Mr Bini Smaghi may have been too kind to Britain. The Treasury expects the deficit to reach £118bn in the 2009 tax year - almost 8pc of GDP - but there are now fears that this will rise even higher as tax revenues collapse. Some analysts have begun to warn that Britain will soon face a deficit of 10pc, the sort of catastrophic levels seen in Latin America in the 1980s. There is a mounting anger in EU circles over the slide in sterling, seen by some as a deliberate 'beggar-thy-neighour' policy evoking the Great Depression. "The 30pc fall in the pound is the biggest devaluation by any country in the single market since it was created in 1957," said one ex-commissioner. "There is going to be a serious political reaction to this in coming weeks."

Sterling makes up a quarter of eurozone's export basket - equal to the dollar - and Ireland's exposure is much higher. Irish retailers have been crippled as shoppers flood across the border into Ulster. But there is also a misunderstanding in Brussels, Paris, and Berlin over British motives - just as there was during the ERM crisis in 1992. The Bank of England's main concern has been to cut interest rates to head off a housing collapse and to ease credit strains. While it views the pound's fall as an added bonus in battling slump, this is a secondary effect. Countries such as France, Germany, and Italy tend to fret more about the exchange rate, and less about the interest rates. They have higher personal savings and lower debts so rate cuts are a mixed blessing for most people.

The pound's recovery this week from near parity to €1.09 may help blunt criticism. The euro's Winter rally is petering out as grim data emerges from across Europe. Eurozone producer prices fell 1.9pc in November, the biggest drop since records began in 1990. Consumer inflation has fallen to 1.6pc, the lowest since the launch of the currency. The region may be facing deflation by the middle of this year. "We believe that the ECB will eventually be cutting interest rates as low as 1pc," said Howard Archer, Europe economist at Global Insight. Frankfurt is loathe to follow the US, Japan, Switzerland towards zero rates, fearing that it could "run out of ammunition". It is also wary of emergency stimulus (quantitative easing), in part because this would blur the lines between the ECB and the national treasuries.

This is a political minefield. Berlin fears such a precedent could nudge the eurozone towards a debt union, enabling high-debt states to shift liabilities onto German taxpayers. Mr Bini Smaghi noted with annoyance that Anglo-Saxon commentators now use the term "PIGS" to describe the eurozone's Club Med bloc of Portugal, Italy, Greece, and Spain, which all have large current deficits or public debts. "This is not a term that's used in the euro area. They use it in other countries, perhaps to divert attention from internal problems," he said, referring explicitly to the City. He resisted the temptation of deriding Britain as the ultimate PIG.

Mr Bini-Smaghi's comment is a little unfair. The term `PIGS' was first put into play by a German from a eurozone bank in a private client note. It is now widely used by currency traders and analysts from European banks, regardless of nationality. The expression has become linked to London because the City is the global centre for currency trading. Native English speakers rarely use the term. It is the European press that has had most fun with the "PIGS" , unsually in playful pieces hinting at an Anglo-Saxon plot to do down the euro.

U.S. 3-year Treasuries sale heightens bubble worries
Signs of fraying demand for U.S. government debt on Wednesday, especially among foreign buyers, are adding to concerns of a bursting Treasury price bubble, with potentially huge consequences for the world's top economy. Foreign accounts, which own about half the $5.8 trillion U.S. Treasury market, bought less than usual at a record $30 billion sale of three-year U.S. notes. The auction was part of Washington's massive ramp up of some $2 trillion of debt issuance this year to pay for rescues of the U.S. financial system, the auto industry and for other measures to dig the economy out of its worst crisis in decades. Yields, or returns on shorter-dated Treasury notes, sank to record lows in mid-December as panicked investors scrambled to get out of riskier assets, such as stocks and company debt.

Now investors have started to balk at the record low yields that government securities offer, analysts say. Any spike in yields could add to borrowing costs for cash-strapped companies and homeowners, further crippling an already hobbled economy. "As the year has switched, a lot of people are starting to re-evaluate how low the Treasury yields are: the sticker shock," said William Larkin, portfolio manager with Cabot Money Management in Salem, Massachusetts. In the last days of 2008, investors started venturing tentatively into stocks and corporate bonds whose yield spreads over Treasuries had hit all-time highs. That is the first reason for the recent sell-off in the Treasury market, Larkin said, which has pushed the benchmark 10-year note yield up about 50 basis points from its five-decade low of 2.04 percent hit in mid-December. "The second part is the looming amount of debt the government will have to auction off," said Larkin. "There will be a huge amount of supply and even competing types of investments, including lots of new sovereign debt globally."

Foreign central banks may need to keep cash at home to support their foundering economies amid the global credit crisis and may invest less in U.S. debt, especially if the fiscal position of the United States deteriorates markedly, some analysts expect. Indirect bidders, including foreign central banks, took about 28 percent of Wednesday's 3-year note sale, below the 35 percent taken in a 3-year note sale in December. The U.S. government reintroduced 3-year note sales in November as part of its huge debt issuance acceleration. Not everyone is worried about foreign demand, most importantly from China and Japan, the two biggest foreign holders of U.S. Treasuries, owning more than $1 trillion of these securities. Such cash-rich Asian countries have funded much of the U.S. spending spree under the administration of President George W. Bush, and some analysts are concerned about such heavy reliance on these countries for financing.

U.S. President-elect Barack Obama said on Wednesday that an economic stimulus package he plans would likely be at the high end of estimates. Obama's economic advisers have put a price tag of about $775 billion on the package, while some economists have said it should be as much as $1 trillion to be effective. For now, weekly Federal Reserve data shows that foreign central banks continue solidly buying Treasuries, says Bill Sullivan, chief economist with JVB Financial Group in Boca Raton, Florida. "I don't think that will change any time soon. The custody holdings show very strong demand," Sullivan said. As the economy continues to deteriorate, safe haven demand for government securities should remain solid for some time to come, he added. Even so, bond investors viewed Wednesday's auction as weak and Treasuries swiftly accelerated their losses in the debt markets after the sale.  

"Certainly foreign demand is not as strong as what we had seen in the previous auctions as the foreigners are buying less of our Treasuries," said Mary Ann Hurley, senior Treasuries trader in Seattle at brokerage D.A. Davidson. "They have to devote more of their own cash reserves to domestic programs in their respective countries," Hurley said. A rebound in shorter-dated U.S. note yields, as the price offered by investors falls, may presage a huge jump in longer maturity Treasury yields, which are more vulnerable to the persistent effects of burgeoning government debt issuance. The next major test of demand for the benchmark 10-year note comes with a $16 billion auction of this maturity scheduled for Thursday.

Treasurys down after $30 billion auction
Treasury prices fell Wednesday - after a record $30 billion auction of 3-year notes - amid speculation that the new president will increase debt sales. Meanwhile, bank-to-bank lending rates eased. Bids for the $30 billion sale were 2.21 times the amount of the sale, a statistic known as the bid-to-cover ratio. That was higher than the 2.15 ratio in December, but still weaker than some had expected following strong auctions on Tuesday. Yields rose on the assumption that President-elect Barack Obama will increase debt sales as the government spends more cash and slashes taxes to encourage growth of the U.S. economy.

The demand for ultra-safe Treasurys outpaced supply in 2008, and yields on all maturity notes fell to record lows, prompting some retreat in the new year. In fact, Treasurys have already declined for four sessions in a row. "Investors have been flocking to Treasurys as a flight to safety," said Dave Hinnenkamp, CEO of KDV Wealth Management. "The pendulum has swung so far that they're starting to feel some confidence and want to take some risk." Investors are putting their money into corporate bonds, municipals and commodity stocks, which are higher-risk than Treasurys but still lower volatility than other markets, Hinnenkamp said.

"The Fed has discouraged us from being invested in Treasurys by slashing rates," he said. "The flock to safety feels good for a while, but when you're getting less than 1% on your money, you might start to look elsewhere." In December, investors were so jittery that they were willing to essentially pay the government to hold their assets. The 3-month yield hovered around the 0% mark throughout the month and yields on some of the other shorter-term bills actually turned negative. Treasury sold $53 billion worth of short-term notes Monday and $32 billion of government debt Tuesday. An auction of $8 billion in inflation-indexed notes Tuesday drew a yield of 2.25%, and bids were 2.48 times the available debt. That shows investors' concern that inflation will increase, as does government spending.

The price on the benchmark 10-year note sank 9/32 to 111-9/32, and its yield rose to 2.49% from 2.48% late Tuesday. Bond prices and yields move in opposite directions. The 30-year bond fell 26/32 to 128-16/32 and its yield edged up to 3.07% from 3.04% Tuesday. The price of the long bond sank almost 5 points Monday as investors dumped the longer-maturity Treasury, and moved into others, such as high-grade corporate bonds, which are more profitable.

Bond scare as German auction fails and British debt hits danger level
Fitch Ratings has warned that Britain's public debt will explode to almost 70pc of GDP by the end of next year, vaulting past Germany to become one of the most heavily-indebted states in the industrial world. "In terms of debt dynamics, the UK is by far the worst of the `AAA' club of countries. The underlying fiscal picture is terrrible," said Brian Coulton, head of sovereign rates at the credit agency. Mr Coulton said it would become increasingly hard for states to raise enough funds in the global bond markets to cover bank bail-outs and big budget deficits at the same time. Britain's bank rescue alone will cost 7pc of GDP.

The danger became all too real yesterday when even Germany failed to sell a full batch of government bonds at its annual `Sylvester Auction', which kicks off the debt season. Investors took up just two thirds of a €6bn (£5.6bn) sale of 10-year Bunds, leading to consternation in the markets. Bund price dropped sharply as the yield jumped 34 basis points to 3.29pc, with copy-cat moves by bonds across the eurozone. "It's very poor," said Marc Ostwald from Monument Secuirites. "In 20 years covering Bund auctions I can't remember the Bundesbank ever being left with a third of the bonds." Traders will be watching very closely to see whether today's bond auctions in Spain and France go ahead as planned, or whether the world is starting to see a "buyers strike" as deluge of sovereign debt floods the market.

There are fears that the next crisis in the global financial system could prove to be a rebellion by the bond vigilantes, already worried by talk of a bond bubble. This would push up rates used to fixed mortgages and corporate bond deals. Central banks can offset this for a while by purchasing bonds directly -- "printing money" -- but not indefinitely. The US alone is expected to issue $2 trillion (£1.3 trillion) of debt this year, and the Europeans are not far behind. Italy alone must tap the markets for €200bn as it rolls over its huge stock of public debt and meets the cost or recession. Fitch Ratings said Ireland, Greece, the Netherlands, and France face a heavy calendar of auctions as maturities fall due.

Britain is expected to issue £146bn this year, or 10pc of GDP. While a £2bn sale of Gilts went smoothly yesterday, the Debt Management Office has warned of possible trouble later this year. Robert Stheeman, the DMO's chief, says Britain may be nearing the limits of investor tolerance. "I'm not predicting that we will have a failed auction, but I can't rule that out. It's a big amount of debt to be sold. We are in a different world from a year ago," he told Bloomberg News. As long as Britain keeps its coveted `AAA' rating it should be able to the tap the bond markets at a reasonable price, but this rating is no longer entirely secure. Fitch says the UK will have jumped from 44pc of GDP in 2007 to 68pc by late 2010, a staggering rise for major country. It usually takes a war to do such damage.

Record issuance is bad news for bonds
A harbinger of things to come, or just an anomaly? To everyone's astonishment, the German government yesterday failed to raise the full €6bn it was looking for from an auction of 10-year bonds. It's not the first time an auction of German bunds has fallen short, but it was pretty much unheard of before the credit crunch, and as the first big euro debt issuance of the year, it has put the fear of God into governments around the world as they seek to raise record amounts of money from debt markets to fund their anti-recessionary policies. If even Germany, source of possibly the safest form of government debt on the planet, is struggling, what hope for everyone else?

Government bonds were about the only asset class to enjoy a bull market last year, with interest rates plunging to record lows. But the present rush to replace fast-disappearing private debt with public debt promises to produce unprecedented levels of supply, including £145bn from our own Government this year alone. Barack Obama, the US President-elect, has conceded this year's US budget deficit will break through the $1trillion mark for the first time, and was likely to get even bigger in subsequent years. Germany has announced a €50bn reflationary package, and so on.

All in all, more than $3trillion of sovereign debt is expected to be issued this year, more than three times as much as 2008. Can there really be the appetite for such mountainous quantities of the stuff? The bull market in bonds is driven primarily by fear of deflation. In a deflationary world, it doesn't matter how low the coupon gets, for as long as inflation is negative, the investor will still be getting a real rate of return. Other, higher-risk asset classes will, meanwhile, struggle to maintain their value. One of the other chief characteristics of a deflationary environment is much higher rates of saving, which, as aggregate demand retreats, we are already seeing in large parts of the world.

More saving equals more money for government debt issuance. Until investors rediscover their appetite for risk, government bonds remain the only game in town. Yet if one investment bubble is always followed inevitably by another, government debt is very definitely taking over from where mortgages left off. Government bonds are showing classic bubble-like characteristics now, with yields having fallen precipitously over the past three months, supported by comments from the US Federal Reserve that it might create money to buy longer dated T-bonds to help keep deflation at bay. In theory, then, there should be plenty of money around to absorb the eye-popping quantities of government debt awaiting auction, even if, bizarrely, governments themselves become some of the main buyers. Perhaps surprisingly, the British government had no difficulty in getting a £2bn tranche of 30-year gilts away yesterday. The issue was more than 1.7 times subscribed.

Nonetheless, the partial failure of the Germany bund auction suggests that there are limits. Assuming there is no long-term deflation, which is still the consensus view among economists, all this debt issuance is likely eventually to become highly inflationary. Indeed, it almost has to be if governments are ever going to get their finances back into any kind of shape following the present public spending binge. Britain has never defaulted on its debt, but it has been particularly adept at doing the next worse thing, which is to inflate it all away. On any kind of long-term view, government bonds have thus turned out to be a pretty poor investment. With Britain's history of inflation, gilts have been particularly bad, even if this hasn't been quite so true in recent years.

All this helps to explain what happened to the German bond auction yesterday. January promises to be a heavy month for debt issuance, particularly in euroland. By tradition, Germany is always the first euro bond issue of the year. By shunning it, investors are sending out an important message – in the long term, they expect inflation to climb back up again and therefore won't buy longer-dated bonds on such low yields. This is, in many respects, a good sign, for it suggests that markets don't expect deflation to take hold. They must be right about this, given the unprecedented quantity of policy action taken around the globe to ease the recession. The bear market in government bonds starts here.

China Is Losing Its Taste for American Debt
China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers. The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time. On Tuesday, President-elect Barack Obama predicted the possibility of trillion-dollar deficits "for years to come," even after an $800 billion stimulus package. Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasuries, which are government i.o.u.’s.

In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries. But now Beijing is seeking to pay for its own $600 billion stimulus — just as tax revenue is falling sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and medium-size enterprises, many of which are struggling with lower exports, and to local governments to build new roads and other projects. "All the key drivers of China’s Treasury purchases are disappearing — there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates," said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland.

Fitch Ratings, the credit rating agency, forecasts that China’s foreign reserves will increase by $177 billion this year — a large number, but down sharply from an estimated $415 billion last year. China’s voracious demand for American bonds has helped keep interest rates low for borrowers ranging from the federal government to home buyers. Reduced Chinese enthusiasm for buying American bonds will reduce this dampening effect. For now, of course, there seems to be no shortage of buyers for Treasury bonds and other debt instruments as investors flee global economic uncertainty for the stability of United States government debt. This is why Treasury yields have plummeted to record lows. (The more investors want notes and bonds, the lower the yield, and short-term rates are close to zero.)

The long-term effects of China’s using its money to increase its people’s standard of living, and the United States’ becoming less dependent on one lender, could even be positive. But that rebalancing must happen gradually to not hurt the value of American bonds or of China’s huge holdings. Another danger is that investors will demand higher returns for holding Treasury securities, which will put pressure on the United States government to increase the interest rates those securities pay. As those interest rates increase, they will put pressure on the interest rates that other borrowers pay. When and how all that will happen is unknowable. What is clear now is that the impact of the global downturn on China’s finances has been striking, and it is having an effect on what the Chinese government does with its money.

The central government’s tax revenue soared 32 percent in 2007, as factories across China ran at full speed. But by November, government revenue had dropped 3 percent from a year earlier. That prompted Finance Minister Xie Xuren to warn on Monday that 2009 would be "a difficult fiscal year." A senior central bank official, Cai Qiusheng, mentioned just before Christmas that China’s $1.9 trillion foreign exchange reserves had actually begun to shrink. The reserves — mainly bonds issued by the Treasury, Fannie Mae and Freddie Mac — had for the most part been rising quickly ever since the Asian financial crisis in 1998.

The strength of the dollar against the euro in the fourth quarter of last year contributed to slower growth in China’s foreign reserves, said Fan Gang, an academic adviser to China’s central bank, at a conference in Beijing on Tuesday. The central bank keeps track of the total value of its reserves in dollars, so a weaker euro means that euro-denominated assets are worth less in dollars, decreasing the total value of the reserves. But the pace of China’s accumulation of reserves began slowing in the third quarter along with the slowing of the Chinese economy, and appeared to reflect much broader shifts.

China manages its reserves with considerable secrecy. But economists believe about 70 percent is denominated in dollars and most of the rest in euros. China has bankrolled its huge reserves by effectively requiring the country’s entire banking sector, which is state-controlled, to take nearly one-fifth of its deposits and hand them to the central bank. The central bank, in turn, has used the money to buy foreign bonds. Now the central bank is rapidly reducing this requirement and pushing banks to lend more money in China instead. At the same time, three new trends mean that fewer dollars are pouring into China — so the government has fewer dollars to buy American bonds.

The first, little-noticed trend is that the monthly pace of foreign direct investment in China has fallen by more than a third since the summer. Multinationals are hoarding their cash and cutting back on construction of new factories. The second trend is that the combination of a housing bust and a two-thirds fall in the Chinese stock market over the last year has led many overseas investors — and even some Chinese — to begin quietly to move money out of the country, despite stringent currency controls. So much Chinese money has poured into Hong Kong, which has its own internationally convertible currency, that the territory announced Wednesday that it had issued a record $16.6 billion worth of extra currency last month to meet demand.

A third trend that may further slow the flow of dollars into China is the reduction of its huge trade surpluses. China’s trade surplus set another record in November, $40.1 billion. But because prices of Chinese imports like oil are starting to recover while demand remains weak for Chinese exports like consumer electronics, most economists expect China to run average trade surpluses this year of less than $20 billion a month. That would give China considerably less to spend abroad than the $50 billion a month that it poured into international financial markets — mainly American bond markets — during the first half of 2008. "The pace of foreign currency flows into China has to slow," and therefore the pace of China’s reinvestment of that foreign currency in overseas bonds will also slow, said Dariusz Kowalczyk, the chief investment officer at SJS Markets Ltd., a Hong Kong securities firm.

Two officials of the People’s Bank of China, the nation’s central bank, said in separate interviews that the government still had enough money available to buy dollars to prevent China’s currency, the yuan, from rising. A stronger yuan would make Chinese exports less competitive. For a combination of financial and political reasons, the decline in China’s purchases of dollar-denominated assets may be less steep than the overall decline in its purchases of foreign assets. Many Chinese companies are keeping more of their dollar revenue overseas instead of bringing it home and converting it into yuan to deposit in Chinese banks. Treasury data from Washington also suggests the Chinese government might be allocating a higher proportion of its foreign currency reserves to the dollar in recent weeks and less to the euro. The Treasury data suggests China is buying more Treasuries and fewer bonds from Fannie Mae or Freddie Mac, with a sharp increase in Treasuries in October.

But specialists in international money flows caution against relying too heavily on these statistics. The statistics mostly count bonds that the Chinese government has bought directly, and exclude purchases made through banks in London and Hong Kong; with the financial crisis weakening many banks, the Chinese government has a strong incentive to buy more of its bonds directly than in the past. The overall pace of foreign reserve accumulation in China seems to have slowed so much that even if all the remaining purchases were Treasuries, the Chinese government’s overall purchases of dollar-denominated assets will have fallen, economists said. China’s leadership is likely to avoid any complete halt to purchases of Treasuries for fear of appearing to be torpedoing American chances for an economic recovery at a vulnerable time, said Paul Tang, the chief economist at the Bank of East Asia here. "This is a political decision," he said. "This is not purely an investment decision."

Onerous issuance
This will be the year of government influence over the economy. So, for one, says President-elect Barack Obama, who is preparing a big stimulus package to be implemented shortly after his inauguration later this month. Indeed, so too does Dominique Strauss-Kahn, managing director of the International Monetary Fund, who travels the world repeating its view that "fiscal stimulus is now essential to restore global growth". The leaders of the Group of 20 industrialised and developing nations also agree. They pledged in November to "work together to restore global growth and achieve needed reforms in the world's financial systems". But all this talk of government action to restore the global economy to an even keel presumes governments can fund the huge quantities of additional spending they are planning.

Whether it is largely additional discretionary expenditure, as is likely in the US, or the more automatic consequences of higher welfare spending in Europe, where state safety nets are more generous, governments can make a difference only if they can borrow. That depends on the bond markets. The scale of the intended new issuance is dramatic. This year, borrowing in the US is likely to be close to $2,000bn (£1,360bn, €1,490bn), equivalent to some 14 per cent of gross domestic product. The planned £146bn ($215bn, €160bn) sale of UK government bonds amounts to close to 10 per cent of GDP. Thousands of billions of dollars of government-guaranteed bank and other private sector debt are being issued around the world. Even in Germany, where ministers rail against the "crass Keynesianism" of Anglo-Saxon stimulus packages, government borrowing is projected to surge. Across Europe, the large amounts of new bonds coming to market are testing the appetite of investors. This month issuance will run at more than $20bn a week - double the levels of previous years.

The risk is that some governments will not be able to raise as much money as they would like - or may find they have to pay higher interest rates to attract investors. In the worst case, the large amount of government issuance may also impede the reopening of credit markets in the private sector as investors switch to the increasing amount of safer sovereign securities that are available in the market. At first sight, everything appears all right in government bond markets. A flight to quality has ensured high demand, at least in the secondary market. Yields - which have an inverse relationship to prices - have fallen to lows not seen for 50 years in some economies. They have dropped to little more than 1 per cent in Japan, 2 per cent in the US and about 3 per cent in Germany and the UK, enabling governments to borrow cheaply. Some analysts even talk of a possible bubble as prices soar - the corollary of low yields.

This is because slumping economies and worries about the financial system have fuelled demand for the safety of government debt of the developed world, as it is regarded as risk-free: these countries are not expected ever to default. "Historically high levels of issuance have in the past seen yields fall. This is because the economies are usually doing poorly, which is supportive to bonds," says Peter Schaffrik at Dresdner Kleinwort. With interest rates falling to record lows as central banks attempt to kick-start their economies and fears rise of deflation, investors are likely to continue buying this debt because it offers a fixed rate of interest that will be boosted by falling prices and will not suffer from swings in stock markets. In fact, the possibility of deflation has raised the demand for government paper even further, as investors expect many countries soon to follow the lead of the Federal Reserve in suggesting the purchase by central banks of government bonds in order to help the economy avoid deflation.

Many analysts predict these supportive factors for bonds will remain for the time being. Analysts at Capital Economics, for example, expect yields will fall further. They say monetary policy is likely to remain exceptionally loose for a lot longer than many market participants think, with interest rates unlikely to rise until at least 2011. They also predict that deflationary pressure will intensify against a backdrop of rapidly slowing economic growth and falling asset prices.
Other indicators from the bond markets suggest, however, that not everything is quite as benign as the message from the yields on big-economy nominal government bonds. The yield on inflation-linked government bonds jumped last autumn as the financial crisis took hold. Because index-linked bonds strip out the effects of inflation expectations, they are arguably a better measure of investors' confidence in governments' ability to repay their debt - and that confidence is falling.

The suggestion from both nominal and real bond yields is therefore that investors expect inflation to plummet and want greater protection against default. The same message comes from the, admittedly thin, credit default swap market in sovereign debt where the cost of insuring against default has jumped for all advanced governments. These market movements could easily represent a bubble in nominal government bond prices, as suggested by the Institute of International Finance, the trade organisation for the world's largest banks, in its forecast for 2009. "It is hard to reconcile this bond market pricing with economic policies (both monetary and fiscal) designed to stimulate recovery," the IIF argues. But even if the bond market movements are yet another example of inefficient market pricing, it is nonetheless somewhat unsettling that real interest rates have risen as governments started to borrow.

Smaller European countries, which are suddenly faced with much higher yields on their bonds than Germany even though they share the same currency, provide a second cause for concern. At the end of 2007, the financing of government debt in Portugal, Italy, Greece and Spain was hardly more expensive than that of Germany. The difference in yields on 10-year benchmark bonds was greatest for Italy with a spread of 0.3 percentage points. But by the end of December 2008, those spreads had risen to a minimum of 0.8 percentage points for Spain, over 1 percentage point for Portugal and Italy and more than 2 percentage points for Greece. Ten years since the launch of the euro, bond markets have started distinguishing markedly between different credit risks within the single currency area - limiting the scope for borrowing by the less creditworthy members.

A third reason for concern has been the faltering performance of bond auctions in recent weeks. Roger Brown, head of rates research at UBS, says: "In the UK, we saw a very poor bond auction only a few days after it announced its fiscal expansion plans in its pre-Budget report. To see difficulties so soon, before the very large amounts are issued this year, was an ominous sign, suggesting at some point governments may have to pay substantially higher interest rates to encourage investors to buy their bonds." But it is not just the UK that has struggled. All the main issuers have faced difficulties, with the cautious Germans no exception. In November a German bond auction failed when the amount raised fell short of its target. This is particularly worrying as Germany has one of the world's biggest and most liquid bond markets. The Netherlands also failed to hit its target in an auction last month, while Belgium and Spain have cancelled offerings because of a lack of demand. Others such as the UK, France, Italy, Austria and Portugal have been forced to pay higher interest rates to encourage investors to buy bonds.

All these problems have come very early. The big tests will surely come this month, typically one of the heaviest for government bond issuance. Analysts expect a pipeline of about $150bn in Europe in January, nearly double the amount of past years. This heavy load will continue throughout the first quarter, with up to $350bn in bonds forecast to come to market. This is about $100bn more than 2008 and would beat all records for a first quarter. As bond auction failures mount, Dresdner's Mr Schaffrik says, the cost of issuing debt will rise: "At the moment, it is a question of price, not about investors refusing to buy. If you offer higher yields you can attract investors." To add to these concerns, a record amount of government-backed bank bonds are due to be issued this year, with estimates ranging to $2,000bn. These bonds will compete directly for investors with the governments themselves, as the guarantees give them the same risk-free status. The higher yields or interest rates they offer could encourage some investors to buy them instead of government bonds.

Meyrick Chapman at UBS says: "There is clearly a serious danger of crowding out . . . with too many bonds chasing too few investors, especially for long maturities and lesser credits. There are only so many investors out there at present." With so much competition from governments for funds, other companies will be nervous before tapping the bond markets. As that potentially delays economic revival, authorities particularly in the US may ramp up outright official purchases of private sector debt to reduce borrowing costs. The aim would be to ensure a direct government stimulus to the economy, no crowding out of the private sector, economic recovery and a reduction in the risks of deflation.

Perversely, if all that is achieved, the point of recovery may be the crisis point for government bond markets. "As economic activity increases, it is then that nominal yields would likely rise, making overall debt interest payments more costly," says Sean Shepley at Credit Suisse. "You would expect tax revenues to start to improve and unemployment benefits to become less of a drain, so there would be some cyclical improvement in government finances. But it could still intensify pressure to cut the budget deficit in many countries." Amid all of this, deflation worries will have disappeared, policymakers will look at raising rather than cutting interest rates, there will be no more talk of printing money to buy corporate debt - and investors will switch to riskier assets and sell their safe government bonds.

U.S. companies face $409 billion pension deficit: study
Volatile markets have saddled U.S. companies with a $409 billion deficit on pension plans, reversing a $60 billion surplus a year earlier, and will cut into earnings in 2009, consulting firm Mercer said. As of December 31, pension plans among members of the Standard & Poor's 1500 had $1.21 trillion of assets and $1.62 trillion of liabilities, Mercer said in a report released on Wednesday. At the end of 2007, pension plan assets totaled $1.66 trillion and liabilities totaled about $1.6 trillion, Mercer said. The S&P 1500 is a broad portfolio representing large-cap, mid-cap and small-cap segments of the U.S. equity markets. 

The shortfall suggests that more companies will have to pump cash into their pension plans to ensure they can meet their commitments to retirees.  Mercer estimated pension expenses will increase to about $70 billion this year from $10 billion in 2008, reducing overall profitability by about 8 percent. "The decline in funded status will be capitalized and reflected in corporate balance sheets for many companies," Adrian Hartshorn, a member of Mercer's financial strategy group, said in a statement. He said this will reduce balance sheet strength and could affect companies' ability to make capital expenses, meet loan covenants and preserve their credit ratings. Mercer is a unit of New York-based Marsh & McLennan Cos Inc, which also runs a large insurance brokerage.

Why Banks Still Won't Lend
Despite more than $1 trillion in federal largesse, they still may not have the capital cushions to bear the risks of making fresh loans. American Apparel (APP) executives should have been focused on the sales of their leggings and T-shirts this holiday season. Instead, management spent most of the critical shopping period worrying about $125 million of debt due on Dec. 19. After weeks of intense meetings with major banks, the trendy retailer landed a last-minute extension on a loan. The onerous strings: a $2.3 million fee and limits on capital spending. "The credit markets are still frozen," says Chief Financial Officer Adrian Kowalewski. "Even companies that are performing well can't get loans at reasonable terms."

The financial challenges facing Kowalewski and other corporate executives pose a major quandary for the incoming Obama Administration and Washington policymakers, who are trying to kick-start the economy. Despite all the government's best efforts in recent months, big banks still aren't lending money freely. One sign of the crunch: New loans to large companies slumped 37% in the three months ending Nov. 30 from the preceding three months. "Banks are being extremely cautious," says Edward Wedbush, chairman of the Los Angeles brokerage Wedbush Morgan Securities. The industry is getting flak for hunkering down. After all, the Treasury has injected $187.5 billion into the nation's largest banks, including Citigroup, Bank of America, and JPMorgan Chase. The recipients of taxpayer money, say critics, should be required to open up their coffers. "The bad news [is] Treasury has no way to measure whether taxpayer funds are being used to increase lending," Representative Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said in December.

"The much worse news [is that Treasury] does not even have the intention of doing so." Banking chiefs defend their position. They argue that the government funds are designed to shore up capital and support lending, but that they have no obligation to make new loans. "It's not a one-to-one relationship," says BofA CEO Kenneth D. Lewis. "We don't write $15 billion in loans because we got $15 billion from the government." Right now there's little financial incentive to make fresh loans. In the current unease, new corporate loans are immediately marked down to between 60¢ and 80¢ on the dollar, forcing banks to take a hit on the debt. It's more lucrative, then, for them to buy old loans that are discounted already. At the same time, some banks no longer have the appetite to use leverage, borrowing money to amplify returns. Others say they would like to use leverage but can't easily find willing lenders who offer attractive terms. Leverage has long been a critical factor in profitable lending.

Whether the industry's stance is justifiable or not doesn't really matter. Either way, companies are having a tough time getting credit. And without additional intervention, the lending climate could remain cloudy for a while, threatening companies' prospects and weighing on the economy. Consider El Paso Corp. (EP). As commodities prices have cratered, the nation's largest natural gas pipeline operator has slashed capital spending by 16%, which means its overall production will remain flat this year. El Paso's higher debt costs will further crimp profits. Anxious to lock down financing amid lenders' woes, the energy company sold $500 million of junk bonds in December at an interest rate of 15%—more than twice its overall borrowing costs. "It was expensive," says Chief Financial Officer D. Mark Leland. "We weren't confident [about] when things would get better."

Banks don't seem to know, either. They also are hoarding capital out of fear. Under federal rules, banks are required to maintain a certain level of capital based on their assets. When they incur losses, they either have to raise more capital or sell assets to keep those ratios in check. After raising money from outside investors and receiving bailout money in recent months, most big banks comfortably meet the federal capital standards. But those calculations don't necessarily take into account all the problematic assets on banks' balance sheets. For example, they don't include securities whose losses seem to be temporary. In this environment, those losses can quickly become permanent, notes Stuart Plesser, an equity analyst with Standard & Poor's (MHP). Meanwhile, big banks face another wave of losses, which may only further erode their capital.

Companies have already taken huge hits from subprime mortgages and other risky debt. But other problems loom in credit cards, commercial real estate, and traditional home mortgages. In an interview with Maria Bartiromo, economics professor Nouriel Roubini of New York University's Stern School of Business said that credit losses will top $2 trillion, up from around $1 trillion today. Even if the government forks over the remaining $350 billion of its Troubled Asset Relief Program to banks, the capital will still be a drop in the bucket compared with the industry's total losses. Given that, Roubini and others figure it's only a matter of time before the government creates another bailout fund. "Banks don't have enough money to bear the risk," says Anil Kashyap, a University of Chicago Booth School of Business professor. "We're going to need Tarp II and Tarp III."

ECB still cool on big rate cuts
The European Central Bank is showing few signs of succumbing to mounting calls to slash interest rates at its critical monetary policy meeting next week and now appears more likely than not to leave them unchanged or modestly reduced. ECB policymakers enter their pre-meeting "purdah" week on Thursday, when they avoid public comment, without having sent any clear sign that their thinking has changed since early December. At that time, Jean-Claude Trichet, the ECB president, said interest rate cuts already announced and government rescue packages should be allowed to take effect – and warned of the risks of cutting borrowing costs too far. That did not rule out a reduction at Thursday’s meeting, even one larger than a quarter percentage point, but nor did Mr Trichet’s comments make a cut a certainty.

"The ECB’s consensus and stability-based approach implies that there is likely to be significant caution about further substantial easing," said Julian Callow, Europe economist at Barclays Capital. In December, the main policy rate was slashed by an unprecedented 75 basis points to 2.5 per cent, making the total reduction since early October 175 points. The economic outlook has since deteriorated further, fuelling speculation that another large cut is possible. Germany saw unemployment rising for the first time in three years on Wednesday; eurozone inflation could turn negative in the coming months on the back of lower oil prices; and producer prices saw a record fall in November, according to data on Wednesday. The ECB is not a dedicated follower of fashion, however.

Financial markets have shown some signs of stabilising, allowing a return to a more normal approach to monetary policy – with inflation risks at the top of its mind. Of little relevance are short-term falls in inflation, which will boost consumer spending power, stimulating growth. More important is the long-run outlook. José Manuel González-Páramo, an ECB executive board member, told a Spanish newspaper that monetary policy would continue to be "orientated towards its credibility in guaranteeing medium-term price stability". When oil and food prices are stripped out, eurozone inflation has remained more stable. While bond markets have priced in deflation in the US, expectations for eurozone inflation over the next five years do not necessarily point to a significant undershooting of the ECB’s target of an annual rate "below but close" to 2 per cent, weakening the case for early action.

Eurozone interest rates almost certainly have further to fall. If the main rate is not cut next Thursday, the February policy meeting is only three weeks later. Some policy easing is already in the pipeline – from January 21, the rate paid by the ECB on overnight deposits will fall by half a percentage point. But the strict, inflation-oriented strategy does not fit with the approach in the US, where a popular view is that interest rates should be cut as fast as possible. In another contrast to the US Federal Reserve, many at the ECB would not want interest rates falling too close to zero – even if there is no agreement where the floor should be. "We have to beware of being trapped at nominal levels that would be much too low," Mr Trichet, who sees the ECB as providing an anchor of stability, remarked last month.

Eurozone economic confidence collapses
Economic confidence across the 16-country eurozone has collapsed to levels not seen in Europe for at least 24 years, as unemployment soars and German exporters reel from tumbling global demand. The latest eurozone economic data, covering the end of 2008, indicated that the recession that began in the first half of last year is still gathering intensity. The European Commission on Thursday reported its economic sentiment indicator plummeted in December to the lowest level since its survey began in 1985, with steep falls reported across all economic sectors. "That is quite dramatic and suggests a significant worsening of what is going on," said Robert Barrie, European economist at Credit Suisse.

Eurozone gross domestic product probably contracted by 1 per cent in the final quarter of last year, Mr Barrie estimated, with a similar size fall likely in the first three months of this year. Such declines would be the sharpest on record since the euro was launched in 1999 and dwarf the contractions of 0.2 per cent seen in the second and third quarters of last year. "The economy is in meltdown," added Ken Wattret at BNP Paribas. Eurozone unemployment, meanwhile, continues to mount, jumping by 202,000 in November – only slightly less than the record 220,000 rise seen in October, according to Eurostat, the European Union’s statistical office. Lengthening jobless queues in turn have undermined consumer sentiment. Eurozone households, with the exception of those in Spain and Ireland, have not been hit by the effects of falling house prices.

But the region overall has been buffeted badly by the dramatic turn-for-the-worse experienced by industry in Germany, Europe’s largest economy. German exports slumped by a record 10.6 per cent in November alone, according to the country’s statistical office – a dramatic worsening after a fall of just 0.6 per cent in October. "We knew that external demand had dropped dramatically – and that is now reflected in the hard data," said Dirk Schumacher, economist at Goldman Sachs in Frankfurt. Worse is still to come, suggested separate data on German industrial orders – which offer a guide to future trends in activity. The economics ministry in Berlin said orders fell by 6 per cent in November, extending a 6.3 per cent fall in the previous month. The latest stream of gloomy data will add to the pressure on the European Central Bank to cut official interest rates further. But having already cut official borrowing costs by 175 basis points since October, the Frankfurt-based institution appears likely to leave the main policy rate unchanged at 2.5 per cent, or announce only a modest fall, after its governing council meeting next week.

Germany's Job Creation Machine Sputters
It was a good run. For over three years, the number of unemployed in Germany had been dropping. But statistics for December show that the trend has come to an end as the economic crisis hits the labor market. For years, Germany had seen its unemployment rate drop steadily, all the way down to a November total of less than 3 million. That downward trend, though, has now officially come to an end. According to a report released on Wednesday by the Federal Labor Agency, which tracks German unemployment statistics, the number of jobless rose by 114,000 in December, bringing the total to 3.102 million or 7.4 percent. Despite the late up-tick, 2008 will be remembered as one of the German labor market's best ever.

On average, the total number of unemployed last year was 508,000 lower than in 2007. Analysts, though, anticipate that 2009 will see increased job losses in Germany. "The December data shows that the economic crisis has reached the labor market," said Frank-Jürgen Weise, head of the Federal Labor Agency, in a statement accompanying the report. "As such, our optimism for the year 2009 is muted." The new report marks an end to the slide in German unemployment that has continued largely unabated since early 2005. After rising through much of the early part of the decade, the number of jobless spiked to over 5 million in January 2005. An increase in December was expected and most anticipate that unemployment will continue to rise throughout 2009.

Phillip Jäger of the Bundesbank, Germany's central bank, warned that the December numbers may not accurately reflect the true nature of the German labor market, pointing out that many companies have thus far reacted to the economic downturn by sending workers out on forced leaves rather than laying them off. He warned that job cuts would begin in earnest in January. Despite the bad news, the German Institute for Economic Research said on Wednesday that, while unemployment will be higher in 2009 than in 2008, it doesn't anticipate the situation to return to the days of persistently high unemployment seen in the middle of the decade. The institute also said it anticipates negative economic growth in 2009 of "a bit more than 1 percent," but expects 2010 to see a return to positive growth.

Chamber of Commerce Urges Large Stimulus Package
Forecasting unemployment rates as high as 9 percent this year, U.S. Chamber of Commerce president and chief executive Thomas J. Donohue today called on state and federal governments to fully fund programs for the jobless and pass a "significant" economic stimulus package. While the U.S. Chamber, which represents 3 million businesses and engages one of the best-funded lobbying forces on Capitol Hill, typically advocates for less government spending and regulation, the extraordinary economic stress in the United States -- which he likened to a heart attack -- demands extraordinary measures, he said.

"What we are talking about is a defibrillator," Donohue said. "We are trying to shock the economy." At a meeting to announce its annual "State of American Business" report, Chamber officials said the reported magnitude and composition of president-elect Obama's stimulus package are roughly in line with what they think appropriate. They said they like the fact that about 40 percent of the stimulus package is aimed at reducing the tax burden. "Based on the reports we have seen and the conversations we have had, the chamber is very encouraged by the direction the President-elect is taking with his recovery package," he said. "This includes not only tax cuts for workers and businesses, but also his strong emphasis on infrastructure."

But Donohue warned against the kind of massive and permanent government action that arose during the Great Depression. "We don't need and can't afford another New Deal," Donohue said. "The 2008 election was all about change. It's not change if you go backward to the policies and approaches of the 1930s . . . We've got to be very, very careful that we don't make a larger government." The chamber also outlined its annual lobbying goals for the year in a letter it has sent to Congress.

In it, the Chamber calls for government investment in transportation, broadband Internet, drinking-water and wastewater programs and energy; a tax credit that would encourage the purchase of vacant homes similar to one offered in response to the 1975 housing crisis; help to bolster credit markets for new commercial mortgages; an effort to encourage overseas tourists to come to the United States; and funding to jumpstart state-based broadband initiatives. Even as the Chamber laid out their expansive list of recommendations and wants, Donohue said one of the biggest challenges for the president-elect will be the high expectations he faces. "Everyone thinks he's going to wave his magic wand and everything gets better," he said.

Paulson Says Utility Model Better for Fannie, Freddie
Treasury Secretary Henry Paulson recommended replacing Fannie Mae and Freddie Mac with utility- like companies that would guarantee mortgages without maintaining investment portfolios. "A public utility-like mortgage credit guarantor could be the best way to resolve the inherent conflict between public purpose and private gain," Paulson said in a speech today to the Washington Economic Club. Paulson, in one of his last public addresses before leaving office, joined Federal Reserve Chairman Ben S. Bernanke in stating a need for a permanent government role in mortgage financing. The conclusions come after a collapse in private home-loan funding spurred by the biggest housing crisis in decades.

The Treasury chief’s comments represent a final push by the Bush administration to rein in the two largest sources of U.S. mortgage financing. Free-market advocates including Bush aides and former Fed Chairman Alan Greenspan have long sought to limit the ability of Fannie and Freddie to benefit from cheaper financing costs thanks to an implicit government backing, and to invest in securities for profit. Paulson and Federal Housing Finance Agency Director James Lockhart placed Fannie and Freddie in a government-operated conservatorship in September, ousting their chief executives and eliminating their dividends. Since then, regulators have pushed the new management to work harder at reducing foreclosures, through loan modification programs and other initiatives.

Paulson said the most effective way to address the "inherent conflict" between public funds and private gains may be to create one or two private firms governed by a rate-setting commission with a goal of making mortgages more widely available, Paulson said. Shares of Fannie and Freddie fell 98 percent in 2008. The U.S. housing market is in its worst slump since the 1930s. The National Association of Realtors index of pending home resales fell 4 percent in November, according to a report released this week. Pending resales are considered a leading indicator because they track contract signings. Paulson said the government should make the most of its temporary control of the mortgage agencies by using them to jumpstart a housing recovery. Fannie and Freddie can help households by keeping mortgage rates low and helping more households avoid foreclosure, he said.

"The GSEs must serve the taxpayers’ interest by assisting in turning the corner on the housing correction, which is critical to return normalcy to the capital markets and resume U.S. economic growth," he said. Under the public-utility model, much of the systemic risk Fannie and Freddie posed to the financial system would be removed because of the narrow mission of their replacements. Bernanke suggested a utility structure as one option for Fannie and Freddie in an October speech, when he urged some form of "government backstop" for the mortgage-backed bond market. President-elect Barack Obama’s transition team hasn’t weighed in on the issue. Obama takes office Jan. 20.

Fannie and Freddie have obligations totaling $5.4 trillion, equivalent to about 40 percent of the country’s economy, Paulson noted today. Paulson also said Congress and the next administration need to decide whether the government backs Fannie and Freddie debt and mortgage-backed securities. Government backing for the firms is an "untenable" situation, he said. The government has gone "about as far as we can" to stabilize Fannie and Freddie by taking the companies into temporary conservatorship, Paulson said. Permanent nationalization of the two companies is a "less than optimal model," he also said.

Paulson said that "in the mortgage market of the future" he expected Ginnie Mae and the Federal Housing Administration to play roles aiding first-time and low-income buyers. Beyond that, "policy makers must decide how much to further subsidize mortgage credit risk, if at all, and must decide the role of private capital in any subsidy plan." Congress and the next administration may be able to harness the two companies by instructing them to buy home loans with a low interest-rate target, possibly 4 percent, Paulson said. He cautioned that such programs could be expensive and require an increase in Treasury borrowing. "Given the bubble we have experienced, policy makers must ask what amount of homeownership subsidies are appropriate," Paulson said.

Watch the Dollar
The housing bubble was the first to burst, but it will not be the last in this global recession. These days, it’s the impending bust of the dollar bubble that should be getting more attention. The U.S. dollar has been severely overvalued since the late 1990s, which has led to an enormous trade deficit that peaked at almost 6 percent of U.S. GDP in 2006 ($900 billion in today’s economy). This is unsustainable. Eventually, it will force the dollar to fall to a level where trade is close to balanced.

That process was already gradually under way. The recent crisis, however, has sent investors scrambling to the dollar for safety, causing it to soar against most other currencies. The rising dollar, coupled with recessions in much of the rest of the world, will cause the trade deficit to rise again. But once the financial situation begins to return to normal (which might not be in 2009), investors will be unhappy with the extremely low returns available from dollar assets.

Their exodus will cause the dollar to resume the fall it began in 2002, but this time, its decline might be far more rapid. Other countries, most notably China, will be much less dependent on the U.S. market for their exports and will have less interest in propping up the dollar. For Americans, the effect of a sharp decline in the dollar will be considerably higher import prices and a reduced standard of living. If the U.S. Federal Reserve becomes concerned about the inflation resulting from higher import prices, it might raise interest rates, which could lead to another severe hit to the economy.

As for 2009, the ongoing collapse of the housing bubble, the coming collapse of the commercial real estate bubble, and the ensuing wave of bad debt will all be major sources of drag on the U.S. economy-even if the dollar bust happens later. Indeed, subprime mortgages were just the trigger for a much broader crisis. Plunging house prices are now leading to record default rates on prime loans as well, with most of the fallout ahead of us. We’ll also see much higher default rates on car loans, credit card debt, and other forms of consumer debt, because homeowners can no longer draw on their home equity to pay other debt.

Commercial real estate faces its own reckoning. When the housing market began to fade at the end of 2005, it kicked off a boom in nonresidential construction. In less than three years, this sector expanded more than 40 percent. There is now considerable excess capacity in retail space, office space, hotels, and other nonresidential sectors-leading to falling prices, plunging construction, and another major source of bad debts for banks. In short, beware the happy talk from those who say we are "turning the corner," ignore the daily ups and downs of the market, and tighten your belts. This is going to hurt.

Walking Away from the American Dream
While over one trillion dollars of American taxpayer money disappears into the murky world of bank balance sheets, housing prices continue to plummet. The most optimistic predictions are that the bottom will be reached next summer. However, there are several factors that should cause prices to fall for several more years, which would wipe out most middle class wealth in the USA.

Harvard University professor and former chief economic adviser to Ronald Reagan, Martin Feldstein, recently warned of dire problems during a speech at the Economists Club. He said that about 25% of all U.S. mortgages exceed the value of the homes the mortgages finance. In half of these, homeowners are paying a mortgage that is now 20% higher than the value of the home. Nevada leads all states with 48% of homes with negative equity. Florida and Arizona have 29% of homes with underwater mortgages, while 27% of mortgages in California exceed the home value. Before the recent housing boom from 2000 to 2006, homes increased in value at a historical annual rate of 2.3% when adjusted for inflation. This means that homeowners who owe 35% more than their homes' value will take 15 years just to recover and break even on their home investment.

Note that these declines are not since the housing slump began in early 2006 but declined since September 2007. If home prices fall another 10-15%, as measured by the Case/Shiller Home Price Index, then four out of every ten mortgages in the U.S. could be underwater. "At those levels, it's hard to see how many people are going to be willing to keep up with their mortgages," Feldstein said. This seems likely as the overall U.S. economic picture looks bleak. The world market for one of America’s best exports in recent years, mortgage backed securities, has died.

Meanwhile, there are three other factors that may collapse the U.S. housing market: no recourse loans, low interest "teaser" loans, and homeowners who are forced to move as part of normal job transfers are unable to sell their home and buy a new one. A "no recourse" or "nonrecourse" clause is part of most American mortgage contracts. They do not allow banks to attempt to collect outstanding debt as the result of a mortgage default. States like California require that all mortgages are no recourse, which means lenders cannot pursue foreclosed homeowners for additional money. This seems fair if one assumes that a person who defaults on a mortgage is broke, and shouldn’t be hounded by banks.

However, it has become common for homeowners who can afford their monthly payment to walk away from their contract obligation. For example, someone who purchased a $1 million home in San Diego in 2005 now finds it is worth only $600,000. His $50,000 down payment is gone, and he still owes the bank $950,000. History and inflation ensures that his home’s value will rise back to $1 million in two decades, but why should he make monthly payments when he can walk away from that $350,000 mortgage debt? An added bonus is that banks are so overwhelmed by foreclosures that non-payers can continue to live in the house rent-free for around six months until the bank officially takes title.

After a "walk away" moves, he simply mails the keys to the mortgage lender and pretends no contract was ever signed. In contrast, renegotiating a mortgage loan requires time, more contracts, upfront fees, and provides no guarantee that house prices will stop falling. You Walk Away (, based in San Diego, began a year ago to assist homeowners who want to let their homes go into foreclosure. "What if you could live payment free for up to 8 months or more and walk away without owing a penny?" its website asks prospective customers. For a small fee, they negotiate with banks to delay evictions and offer information on the limited consequences.

Many walkways can afford their monthly payment and may be wealthy; however, no recourse clauses allow a legal loophole to dump a bad investment. It also frees their resources so they can save for another home purchase in a couple of years when home prices are even lower. This may seem unethical, but anyone can claim they were victims of bad advice. Speculators who took advantage of no down payment and low initial monthly payment schemes during the housing boom are defaulting. This is because many loans were structured with low interest "teaser" terms in which monthly payments were low during the first five years so that subprime customers could qualify.

After five years, the interest rate and monthly payment rise sharply. Borrowers were told their income would be higher by then, or they could refinance their home after it increased in value and get cash back. In other cases, low payments were made possible with 5-year interest-only loans. The idea was that the borrower minimized his investment, and then sold the house for a big profit before the 5-year note became due. These were often a smaller second mortgage created by the cooperation of small-time mortgage brokers, builders, and real estate agents to cover the down payment, and often to fill the financing gap when the primary lender appraised the property lower than the inflated sales price.

This concept was sold to millions of Americans and it worked for a few years. One could buy a $300,000 home in a hot market like California, Florida, or Nevada with no money down. They could rent the house to cover the monthly payment. Four years later, they could sell the house for $500,000, payoff the mortgage, and pocket $200,000 in cash. This was such a sure thing that some loan officers didn’t worry about creditworthiness.

Millions of these speculators now find themselves owning an investment home that declined in value as their 5-year interest only loan comes due. In order to refinance, they need thousands of dollars in cash to cover the lower home value and pay off the 5-year loan. Most cannot or will not do this, so these homes are heading for foreclosure. As a result, millions of Americans have lost their home and damaged their credit, so they can’t qualify for a new mortgage for several years even if they have a good job. This will push home prices further downward. The last of the subprime loans with the five-year teaser rates of interest were made in 2006, so three more years of subprime defaults are expected.

Millions of working Americans move each year because of job transfers. They normally sold their home for a profit to buy another at their new location. The housing slump has made this impossible. For those who purchased homes 2-3 years ago, their home value has decreased by 10-50%. If they had put 5% down on a $300,000 home, they borrowed $285,000 and still owe almost all that amount since the first few years of payments on a typical 30-year amortized loan is nearly all interest. If they must sell because of a job transfer, and their home has declined 20% in value, it is worth just $240,000. Their 5% down payment is gone, and they must repay the bank ~$284,000 at closing. Since their home is worth just $240,000, they must add $44,000 in cash at closing just to pay off the mortgage, plus another $14,000 to pay their real estate agent. Most families find this impossible, not to mention they need a 5% down payment to buy another home, and many banks now demand 10% down.

They could file for bankruptcy, but that costs money, takes time, and leaves a big black mark on their credit report for ten years so they can’t buy a home. On the other hand, if a person "walks away" he can keep his credit cards and a decent credit score as the foreclosure leaves just one black mark that lasts just seven years. Since foreclosures are now common, lenders understand that black mark and if that person has a good job and no other black marks, he can probably obtain another mortgage loan in a couple of years. As a result, millions more Americans will simply "walk away" and leave homes for the bank to foreclose.

"For Sale" signs now litter American communities. According the U.S. government, 2.8% of homeowner houses and 10% of rental houses are now unoccupied, or a total of 17,890,000, which includes 4,558,000 seasonal vacation homes. This does not include occupied homes that are for sale. The historical average for vacant homeowner houses from 1995 to 2004 was only 1.7%, so around 1.4 million more houses are vacant today than in 2004.[5] Another million houses may be abandoned in 2009 as prices continue to plummet and homeowners walk away to escape debt bondage. More empty homes for sale only drives prices down further, so it is difficult to see when this spiral will end.

Frank Says Obama Agrees ‘In Principle’ to Limit Bank-Rescue Aid
House Financial Services Committee Chairman Barney Frank said he has "agreement in principle" with President-elect Barack Obama to release $350 billion from the U.S. bank-rescue fund in return for commitments to help homeowners and restrict executive bonuses. "I think there is general agreement between us and the administration," Frank said yesterday in a Washington interview as Congress returned. Lawmakers will release the remaining funds from the $700 billion package in return for requirements that companies spend the money on foreclosure relief, make more mortgage and auto loans, and restrict bonus and dividend payments, Frank said.

Frank, a Massachusetts Democrat, and other congressional leaders have faulted President George W. Bush and Treasury Secretary Henry Paulson for failing to set conditions on the initial $350 billion handed out last year. The lawmakers said some of the money should have been used to stem foreclosures. The Treasury is in talks with aides to Obama about plans for spending the remaining cash from the Troubled Asset Relief Program and no formal talks have started with Congress. Lawmakers must be notified before Treasury gets access to the funds and have 15 days after notification to block the funds.

"The president-elect has made it clear that he’ll do what’s necessary to stabilize and restore confidence in the financial system and is reviewing a number of options," said Stephanie Cutter, spokesman for the Obama transition team. "The markets need the same thing that the American people are demanding -- accountability, transparency, and a sense that we’re on a responsible, disciplined path forward." Some lawmakers have pushed Treasury to use the fund to aid the beleaguered U.S. automakers General Motors Corp. and Chrysler LLC, and Democratic legislators are also urging money for struggling homeowners. Frank has said the Bush administration ignored Congress’s intent to direct some of the rescue funds to help reduce home foreclosures.

The White House "abused the discretion, didn’t do what they said," and hasn’t requested additional funds, Frank said. In December, Frank sought agreement on releasing the remaining TARP funds with Obama and Paulson. Now, with Bush leaving office Jan. 20, Frank has shifted focus. "The Bush administration is now out of the picture, except that they could do Obama the favor of asking for it between now and the 20th," Frank said. "As soon as we can reach an agreement with the Obama administration about what will be done with it, then I believe we can prepare a bill."

Frank added he would like to see "a ‘no bonus’ rule" for executives above a certain income level among the conditions Congress sets. Separately, Senate Banking Committee Chairman Christopher Dodd said yesterday he will work with Frank to set conditions on the remaining TARP funds, saying lawmakers needed assurances the money will be spent appropriately. "I think everyone would feel a bit more secure about it if we had some statutory protections," said Dodd, a Connecticut Democrat. "We’re looking at that. That will be important for members to have some assurances along those lines."

Ilargi: There are reports of overwhelmed unemployment claims systems from many states in the US. Not much use posting them all. That's why I put this more generic one from ABC here. I suggest you Google "[your state], unemployment claims".

What this shows us is that real job loss numbers will be much worse than predicted by the media. The numbers coming from the government tomorrow may not reflect that, of course.

State Unemployment Claim Systems Overwhelmed
Electronic unemployment filing systems have crashed in at least three states in recent days amid an unprecedented crush of thousands of newly jobless Americans seeking benefits, and other states were adjusting their systems to avoid being next. About 4.5 million Americans are collecting jobless benefits, a 26-year high, so the Web sites and phone systems now commonly used to file for benefits are being tested like never before. Even those that are holding up under the strain are in many cases leaving filers on the line for hours, or kissing them off with an "all circuits are busy" message. Agencies have been scrambling to hire hundreds more workers to handle the calls.

Systems in New York, North Carolina and Ohio were shut down completely by technical glitches and heavy volume, and labor officials in several other states are reporting higher-than-normal use. "Regardless of when you call, be prepared to wait and just hang on. Try not to get frustrated," said Howard Cosgrove, a spokesman for the Wisconsin Department of Workforce Development, which boosted its staff of telephone operators by 25 percent last month to cope with a phone system that has been overloaded for weeks. "We sympathize, we're on their side, we're doing our best to help them out."

The nation's unemployment rate in November zoomed to 6.7 percent, a 15-year high. Economists predict it will rise to 7 percent in December, with another 500,000 jobs probably cut last month. The government releases its monthly employment report on Friday. Some states attribute the increase in call volume in part to an extension of federal emergency unemployment compensation from 13 weeks to 20 weeks in late November. More than 54,000 Pennsylvanians had exhausted their federal benefits after 13 weeks by the time that occurred, said David Smith, a spokesman for the Pennsylvania Department of Labor and Industry. "It really was a perfect storm," he said. New York's phone and Internet claims system started to buckle on Monday afternoon and was out of service completely for the first half of Tuesday while as many as 10,000 people per hour tried to get in, said Leo Rosales, a state Labor Department spokesman.

Although that was an unusually high number of calls, Rosales said it was a software glitch in an authentication system used to verify filers' identities that caused the system to crash. "It's designed to handle this volume of calls, but the authentication process didn't work as it should have," he said. Rosales said the glitch that caused the shutdown has been fixed, and the agency doesn't expect any more problems. About 256,000 people are collecting unemployment in New York, up from about 184,000 at this time last year. North Carolina's Web site crashed twice this week under a rush of claims as that state set one-day records for both the amount of benefits paid and the number of transactions.

On Sunday and Monday, the number of North Carolinians trying to sign up online for new or continuing benefits was about triple what it was before the economic slowdown started, according to the state Employment Security Commission. That volume, together with a phone line problem, overwhelmed the agency's computers and prevented some people from filing claims. The system was working again by Monday afternoon after the agency added another server and demand decreased, officials said. "Right now, everything is back to normal," agency spokesman Larry Parker said.

Mark Turner, 39, of Raleigh said Tuesday that North Carolina's site had an easy setup when he started using the site after he was laid off in November. But on Sunday, he couldn't logon to the site. "I basically gave up for the night at 10:30 after trying and not getting through," he said Tuesday. "Once you get on the site, you can be done in half a minute. Apparently that was too much." Turner, who's since landed a temporary job, suggested the site separate people trying to get recertified and people signing up for the first time. "I think it's going to get worse before it gets better," he said. Thousands were unable to get through to Ohio's unemployment hot line beginning Monday because of a crush of callers and technical problems, said Dennis Evans, spokesman for the state Department of Job and Family Services. He said the phone system was running normally again Tuesday afternoon, but the section of the state's Web site that enables people to make claims online remained down.

California has seen a record number of calls to an 800 number over the last few weeks. "During this holiday period we've been averaging a record of more than 2 million call attempts a day, and it took more than 20 times before people could get through to our UI call centers," said Employment Development Department spokeswoman Patti Roberts. That's about twice the one-day record of call attempts set in 2004 during an earlier recession, she said. Callers to Michigan's main phone line handling applications for jobless benefits got an "all circuits are busy now" message Tuesday afternoon. Officials in Michigan, which had the nation's highest jobless rate at 9.6 percent in November, recently began urging applicants to seek benefits through a state Internet site instead. Michigan counted about 473,000 people as unemployed in November, up from about 370,000 a year ago.

Unemployment agencies from Kentucky to Alaska also are reporting long hold times for callers and slowdowns for those filing online because of higher volume. Several states have added staff to their call centers to handle the surge, including Ohio, Oklahoma and Washington. Pennsylvania has hired temporary workers and expanded the hours of its unemployment benefits hot line to accommodate a surge in the number of calls, going from 600 employees to more than 800. Officials hope to eventually have 1,100 workers answering calls. New Mexico has extended call-center hours, upgraded the phone system and added 15 workers. Even so, "We still are receiving reports of people's inability to get through," said Carrie Moritomo, a spokeswoman for the state Department of Workforce Solutions.

In Kentucky, where claims rose to 40,400 in November from 23,400 a year earlier, a flood of new filers overwhelmed the state's unemployment Web site and phone lines on Monday, when more than 8,000 people filed initial claims, said Kim Brannock, a spokeswoman for the Kentucky Education Cabinet, which oversees the state unemployment office. "People seem to feel like they have to file first thing Monday morning," she said. "They don't have to, but they feel that way. It's just overwhelming to the system."

Bear rally over, the great dying begins
Everybody should have known the holidays would only delay it. The freight train of job cuts, plunging earnings and massive spending cutbacks set to hit the economy was, thankfully, pushed back a few weeks while stunned investors and workers across the globe caught their breath after the worst fourth quarter in decades. But now the great dying has begun, and I'm not talking about German billionaires throwing themselves in front of trains or French aristocrats slitting their wrists, as alarming as these incidents have been. No, earnings season, the time for companies to 'fess up just how bad it's been for them in the last three months, is here.

Alcoa Inc. kicked it off late Tuesday, announcing 13,500 job cuts. Intel Corp. came in early Wednesday with a statement that fourth-quarter sales plunged 23%. Few sectors were safe, as the carnage on the first awful day of the year for the stock market spread across the retail, energy, media and banking industries. The Dow Jones Industrial Average's decline of 245 points, or almost 3%, was the first evidence of 2009 that we are about to finally arrive at that time when "the worst is yet to come." A rally since late November in the markets gave hope that equity investors, a forward-looking indicator, may see the bottom for the economy in the first half of this year.

That may still be true, but we still have to get there. And the next few weeks of earnings warnings and then actual earnings, along with outlooks for the next three months, are expected to be littered with bad news. It's not just layoffs and plant closings, which are bad enough on hard-working folks and the surrounding economy. And it's not just bank failures, or collapsing investment banks and hedge funds. Companies will start going completely out of business, including retail firms, biotech companies, and many, many mom-and-pops out there in everything from auto parts to bars and restaurants. Much of it will be tied to consumers pulling in their horns. They were willing to buy the Christmas tree or the holiday trip to grandma's house. But now that we're in January, getting more exercise is no longer on the top of the annual resolutions list.

Investors won't be safe either, especially with time bombs like Wednesday's fraud at India's Satyam Computer Services going off with alarming frequency, causing its shares to fall almost 80%. This is the time in the cycle where all the frauds come out -- Enron, Worldcom, Madoff. They're all exposed when the tide goes out. You think Ken Lay isn't chuckling on some cloud somewhere about all this? Is it a coincidence that Jeff Skilling was back in the news this week? Already somebody is calling Satyam India's Enron. There will be more to come. So what will signal the turning point? Could it come during the worst of earnings season? Perhaps. But I expect it will come afterward, and that it will be tied to oil prices.

The collapse of the oil bubble was stunning in its ferocity, equally if not more stunning than the rapid inflation of the bubble itself. Likewise, crude is now oversold and while it looks set to fall below $40 a barrel and maybe well into the 30s, investors will flock back to it at the first sign of an economic rebound. That will in turn spark energy stocks, and probably financial stocks, and we'll be off to the races again. Obama's inauguration and the swift passage of his economic stimulus package will provide some gauze for the wounded markets, but there is still too much to work through to think the passing of the torch will be the catalyst.

In the meantime, financial advisers will continue to recommend the old saw that the best position for investors is indeed the fetal position, and asset managers sitting on cash and low-yielding bonds will be awaiting any sort of signal that the worst of the actual economic pain is over. When the economy does get ready to turn, the markets will react quickly. But it isn't there yet.

Wal-Mart Leads Retailers in Slashing Profit Forecasts
Wal-Mart Stores Inc., Macy’s Inc. and Gap Inc. cut earnings forecasts after recession-hit consumers pared their holiday-shopping lists and discounts squeezed profit margins. Wal-Mart, the world’s biggest retail chain, said today that fourth-quarter profit will miss its earlier forecasts after sales at stores open at least a year rose 1.7 percent last month, missing analysts’ estimates. Sales at Gap, the largest U.S. clothing retailer, fell 14 percent. December revenue at department-store chain Macy’s slipped 4 percent. "That does not bode well going into January-February, where we go into a lull period and there’s really no reason to buy until spring," Adrienne Tennant, an analyst at Friedman, Billings, Ramsey & Co. in Arlington, Virginia, told Bloomberg Television.

Rising unemployment and tightening credit may have spawned the worst holiday-shopping season in four decades. To attract customers, some U.S. retailers cut prices by as much as 65 percent, which threatens to erode their profit margins in the fourth quarter, the most important of the year, and into 2009. "The margins are getting killed," Tennant said. U.S. December same-store sales dropped about 1 percent, the International Council of Shopping Centers said this week. The New York-based trade group predicted sales would decline 1.5 percent to 2 percent in the last two months of the year. That would be the largest decrease since at least 1970, when it started tracking shifts from the previous year.

Retail Metrics Inc., working from a compilation of analysts’ estimates, predicted that comparable-store sales dropped 1.2 percent last month. That follows decreases of 0.5 percent in October and 1.8 percent in November. The Swampscott, Massachusetts-based research firm said yesterday that its index hasn’t posted three consecutive monthly declines since it started collecting the data in 2000. Some investors consider same-store sales the best measure of results because they exclude the effect of location openings and closings in the past year. There were a few bright spots. Target Corp., Wal-Mart’s smaller rival, posted a 4.1 percent loss in December comparable- store sales, beating Retail Metrics’ anticipated 8.8 percent drop. Children’s Place Retail Stores Inc. sales were unchanged, better than the 3.2 percent decline analysts expected.

Sears Holdings Corp., the largest U.S. department-store company, forecast fourth-quarter profit that exceeded analysts’ projections. Its sales fell 7.3 percent in December. "The consumer’s under more pressure than most people have anticipated," Retail Metrics President Ken Perkins told Bloomberg TV. Macy’s cut its fourth-quarter profit forecast to as little as 90 cents a share from a previous minimum of $1.10. It also announced the closing of 11 of its 859 stores. Same-store sales at luxury retailer Neiman Marcus Group Inc. sank 28 percent in December. Gap reduced its full-year profit forecast to as much as $1.30 a share from a previous high of $1.35 after December merchandise margins fell.

Bentonville, Arkansas-based Wal-Mart said fourth-quarter profit from continuing operations will be 91 cents to 94 cents a share, down from a November projection of $1.03 to $1.07. The shares, which climbed 18 percent last year on the New York Stock exchange, declined 7.7 percent to $51.29 at 9:03 a.m. in trading before U.S. exchanges opened. Half of consumers spent less this holiday season than in 2007, the ICSC and Goldman Sachs Group Inc. said this week. Their poll of 1,000 households was conducted Jan. 2 through Jan. 4 by research firm ORC. Most retailers record about half of their fourth-quarter sales in December, according to Betty Chen, an analyst at Wedbush Morgan Securities in San Francisco.

Limited Brands Inc. slashed its fourth-quarter profit projection to as little as 55 cents a share from a previous range of 85 cents to $1. The Columbus, Ohio-based owner of the Victoria’s Secret chain said December same-store sales fell 10 percent while profit margins declined because of higher markdowns to drive customer visits and clear inventory. J.Crew Group Inc., which sells $200 cashmere sweaters, slashed its full-year forecast for a fourth time. In the fourth quarter, it predicts a loss of as much as 29 cents a share, down from profit of as much as 10 cents, because of "aggressive inventory actions" to clear out merchandise. Bebe Stores Inc. reduced the low end of its earnings forecast to 5 cents from 12 cents.

"It’s almost like Pavlov’s dog," said Craig Johnson, president of retail-consulting firm Customer Growth Partners LLC in New Canaan, Connecticut. "Consumers have become so accustomed to markdowns that nobody wants to pay full retail anymore." The U.S. Labor Department may report tomorrow that employers slashed jobs in December for a 12th consecutive month, putting total job cuts at 2.4 million for 2008, according to a Bloomberg survey median. The U.S. Census Bureau may report Jan. 14 that retail sales, excluding automobiles, fell 1.4 percent last month.

US Commercial Property Loses Shelter
Delinquencies on mortgages for hotels, shopping malls and office buildings were sharply higher in the fourth quarter, as the weaker economy hit landlords and threatens to cause losses for investors in the $3.4 trillion market. Commercial real estate has held up better than the housing market, but began to struggle at the end of last year. New data from Deutsche Bank show that delinquencies on commercial mortgages packaged and sold as bonds, which represent nearly a third of the commercial real-estate debt market, nearly doubled during the past three months, to about 1.2%. The figure includes mortgages that are 30 days or more past due and in foreclosure.

The delinquency rate will likely hit 3% by the end of 2009, its highest point in more than a decade, says Richard Parkus Deutsche Bank's head of research on such bonds, known as commercial-mortgage-backed securities, or CMBS. "Throughout this year, we're going to continue to see a significant acceleration of problem loans," he says. "CMBS prices already have priced in a far greater delinquency rate on the underlying loans."
Delinquencies on commercial-real-estate loans held by banks and thrifts, which are big holders of this debt, also have risen strongly and many firms have suffered losses. According to research firm Foresight Analytics, soured commercial mortgages on banks' books jumped to 2.2% as of the third quarter of last year, from 1.5% at the end of 2007. The research firm estimates that the rate could rise to 2.6% in the fourth quarter of 2008.

Prices of securities tied to commercial mortgages have fallen sharply in recent months to the point that prices reflect a downturn even greater than the early 1990s, when default rates exceeded 30%. The $3.4 trillion of commercial mortgages in circulation is small compared with the $11.2 trillion of residential-mortgage debt outstanding, but it is still more than numerous other debt categories. Consumer credit, for instance, totals about $2.6 trillion. To be sure, commercial-mortgage delinquencies are much lower than subprime residential mortgages, the culprit for the current economic and financial crisis. About 30% of those loans to credit-impaired homeowners are at least 90 days past due.

Until recently, investors thought commercial real estate would hold up through the downturn. There was less speculative development than during previous boom cycles, and underwriting standards on commercial mortgages appeared to be better than those for residential mortgages. But evidence is emerging that the commercial-property market -- which runs from apartment and office buildings to shopping malls and warehouses -- had some of the same excesses as the housing segment. An unusually high number of the underlying CMBS loans that are going bad were made and securitized in the past three years. That is a sign that investors overpaid greatly for those properties and that underwriting standards were loose. In many cases banks lent money based on future income assumptions rather than current cash flows, experts say.

For example, one of the delinquent CMBS loans is a $125 million mortgage secured by a shopping center in Corona, Calif. called Promenade Shops. The property's annual cash flow was $6.3 million when J.P. Morgan underwrote the loan in July 2007. But the loan was based on the assumption that the cash flow would rise to about $10.5 million. "Delinquency rates among the most recent vintages are already surging ahead of those of older vintages. This speaks to the weakening in underwriting quality that occurred in recent years," Mr. Parkus says. Commercial-mortgage experts say this doesn't bode well for the thousands of loans that also were made with optimistic assumptions. For example, investors are closely watching CMBS issues that were used to finance the $5.4 billion acquisition of a sprawling Manhattan apartment complex in 2006 by a venture led by developer Tishman Speyer Properties and BlackRock Realty Advisors.

Moody's Investors Service recently downgraded some classes of those bonds. If there is a debt-service shortfall, the investors in the property would have to put up more cash or face the possibility of foreclosure. Tishman, which declined to comment, has said the partners are confident in the investment and would put more capital into the project if needed. Among the top 15 CMBS originators, loans made by Column Financial, a unit of Credit Suisse Group, currently have the highest 60-day-or-more delinquency rate, at 1.71%, according to Trepp, a New York company that tracks the market for commercial-real-estate financing. No. 2, at 1.63%, is LaSalle Bank, which is now owned by Bank of America Corp.

Banks and thrifts would suffer in a commercial-real-estate downturn because they own nearly 50% of all commercial mortgages outstanding. Many of these institutions are particularly vulnerable. According to Foresight Analytics, as of Sept. 30, 2008, some 1,400 commercial banks and savings institutions had more than 300% of their Tier 1 capital in commercial mortgages. Tier 1 capital is a key indicator of a bank's ability to absorb losses. Regulators consider anything over 300% to be excessive. At Mutual Bank Corp. in Harvey, Ill., for instance, the amount of commercial mortgages outstanding represented 752% of its Tier 1 Capital as of the third quarter of last year, according to Foresight Analytics. And delinquencies reached 11.9%.

"We've struggled the same as other banks with commercial real estate," says Thomas Pacocha, chief credit officer at the bank, which had $1.7 billion in total assets as of the end of September. "The economy caused the situation to a great extent. When the economy rectifies itself, the bank will see a great improvement in its balance sheet." Mr. Pacocha adds that since the third quarter, the bank has "made some progress in reducing dependence on commercial real estate."

Obama Promises Bid to Overhaul Social Security and Medicare
President-elect Barack Obama said Wednesday that overhauling Social Security and Medicare would be "a central part" of his administration’s efforts to contain federal spending, signaling for the first time that he would wade into the thorny politics of entitlement programs. As the Congressional Budget Office projected a record $1.2 trillion budget deficit for this year even before the costs of the nearly $800 billion economic stimulus package being taken up by the House and the Senate, Mr. Obama stepped up his effort to reassure lawmakers and the financial markets that he plans a vigorous effort to keep the government’s finances from deteriorating further.

Speaking at a news conference in Washington, he provided no details of his approach to rein in Social Security and Medicare, which are projected to consume a growing share of government spending as the baby boom generation ages into retirement over the next two decades. But he said he would have more to say about the issue when he unveiled a budget next month. Should he follow through with a serious effort to cut back the rates of growth of the two programs, he would be opening up a potentially risky battle that neither party has shown much stomach for. The programs have proved almost sacrosanct in political terms, even as they threaten to grow so large as to be unsustainable in the long run. President Bush failed in his effort to overhaul Social Security, and Medicare only grew larger during his administration with the addition of prescription drug coverage for retirees.

Mr. Obama also promised a more intensive effort to weed inefficient and bloated programs out of the federal budget in the short run, creating a White House position to "scour this budget, line by line, eliminating what we don’t need, or what doesn’t work, and improving the things that do." He named Nancy Killefer to the post, called chief performance officer. "If we do nothing," Mr. Obama said, "then we will continue to see red ink as far as the eye can see." In an interview later in the day with CNBC and The New York Times, Mr. Obama suggested that he would hold his economic stimulus proposal to the low end of the amounts that economists think will be necessary because it was likely to grow in size as it moved through Congress. He said that he intended to propose a broad overhaul of financial regulation by April, and that he was working with Congressional leaders on his promised plan to limit foreclosures in the wake of the mortgage crisis. "We’ve got to prevent the continuing deterioration of the housing market," he said.

Mr. Obama met privately on Wednesday with Mr. Bush, then had lunch at the White House with Mr. Bush and the three living ex-presidents, Jimmy Carter, George Bush and Bill Clinton. In the interview, Mr. Obama said the other presidents had offered him good advice about the job: "How do you make sure that you get good information?" he said. "How do you make sure that people aren’t just telling you what you want to hear?" The bad fiscal news underscored how, on his first week in Washington since the election, Mr. Obama is being challenged by a broad array of problems, some inherited and some a result of his own missteps, a departure from a transition that until now had been praised as orderly and swift. The fighting between Israelis and Palestinians will present him with a complex foreign policy challenge immediately upon taking office.

The week opened with the first casualty among Mr. Obama’s cabinet appointments, as Gov. Bill Richardson of New Mexico withdrew as his choice for commerce secretary amid questions about whether he had been adequately vetted. Then Mr. Obama had to apologize to Senate leaders for not informing them of his choice to lead the Central Intelligence Agency, Leon E. Panetta. On Wednesday, Mr. Obama backed away from his opposition to seating Roland W. Burris as his successor in the Senate, after initially saying that Mr. Burris was unacceptable because he had been chosen by Gov. Rod R. Blagojevich of Illinois, who has been accused of trying to sell the seat. These events are testing the resilience of Mr. Obama’s honeymoon, the depth of public support for him and how much people are willing to move beyond the familiar partisan rancor because of the gravity of the crises when he assumes power.

"When you hit a bump, it may not be obvious at the time whether it’s a mountain or a molehill, but they are rarely mountains," said David Axelrod, a senior adviser to Mr. Obama. "There are going to be things that go better than other things. The question is, Are we moving in the right direction? The answer is yes." The dustup over Mr. Obama’s selection of Mr. Panetta to lead the C.I.A. appeared to cool Wednesday. Senator Dianne Feinstein, a California Democrat and incoming chairwoman of the Select Committee on Intelligence, dropped her criticism, saying, "I believe all systems are go." Mr. Obama also was poised to name Cass R. Sunstein, an American legal scholar, to an existing White House post as the administrator of the Office of Information and Regulatory Affairs. A transition official said late Wednesday that Mr. Sunstein would oversee government regulations and devise new approaches for government efficiencies.

For now, Mr. Obama is seeking to keep the spotlight focused on the economic recovery plan he is urging Congress to pass. He is set to offer a campaignlike address explaining the proposal on Thursday at George Mason University in Virginia, his first speech since winning the election. In the interview, he offered some soothing words to Republicans and the financial markets about his ideological approach, saying it was only the scale and urgency of the economic crisis that led him to support a huge stimulus plan. "I’m not out to increase the size of the government long- term," he said. "My preference would be that the private sector was doing this all on their own." On Capitol Hill, some Republicans warned that the deficit would be even larger than the Congressional Budget Office has projected, perhaps as much as $1.8 trillion once additional spending bills are approved. Senator Judd Gregg of New Hampshire, the senior Republican on the Budget Committee, and his House counterpart, Representative Paul D. Ryan of Wisconsin, said the extensive borrowing by the government could be a disaster if Congressional Democrats and the new Obama administration did not also work on long-term solutions including changes to Social Security and Medicare.

Big Slide in 401(k)s Spurs Calls for Change
The stock-market rout has ignited a crisis of confidence for millions of Americans who manage their own retirement savings through 401(k) plans.
After watching her account drop 44% last year, Kristine Gardner, a 35-year-old information-technology project manager in Longview, Wash., feels no sense of security. "There's just no guarantee that when you're ready to retire you're going to have the money," she says. "You either put it in a money market which pays 1%, which isn't enough to retire, or you expose yourself to huge market risk and you can lose half your retirement in one year." Many retirement experts have come to a similar conclusion: The 401(k) system, which has turned countless amateurs like Ms. Gardner into their own pension-fund managers, has serious shortcomings.

"This is the biggest test that the 401(k) plan has seen to date, and it has failed," says Robyn Credico, head of defined-contribution consulting at Watson Wyatt Worldwide, noting that many baby boomers are ready to retire. "We've put people close to retirement in a very challenging position." The most obvious pitfall is that 401(k) plans shift all retirement-planning risks -- not saving enough, making poor investment choices, outliving savings -- to untrained individuals, who often don't have the time, inclination or know-how to manage them. But even when workers make good choices, a market meltdown near the end of their working careers can still blow their savings to smithereens. "That seems like such a fundamental flaw," says Alicia Munnell, director of Boston College's Center for Retirement Research. "It's so crazy to have a system where people can lose half their assets right before they retire."

Congress has begun looking at ways to overhaul the 401(k) system. At hearings in October, the House Education and Labor Committee heard from a variety of witnesses. Some proposed setting up "universal" retirement accounts, which would cover all workers. One such plan called for establishing accounts that would receive annual contributions from the federal government, and would offer a guaranteed, but relatively low, rate of return. Another proposed automatically investing contributions in an index fund that holds stocks and bonds, with the mix getting more conservative as workers approach retirement. Other witnesses proposed less drastic changes, such as providing better education.

About 50 million Americans have 401(k) plans, which have $2.5 trillion in total assets, estimates the Employee Benefit Research Institute in Washington. In the 12 monthsfollowing the stock market's peak in October 2007, more than $1 trillion worth of stock value held in 401(k)s and other "defined-contribution" plans was wiped out, according to the Boston College research center. If individual retirement accounts, which consist largely of money rolled over from 401(k)s, are taken into account, about $2 trillion of stock value evaporated. The losses are hitting as baby boomers, the first generation to rely heavily on such plans, are beginning to retire. Workers age 55 to 64 who have been in their current plans for 20 years or more saw their 401(k) account balances, on average, drop roughly 20% last year, according to the Employee Benefit Research Institute. Since those figures include new cash contributions to the plans, they understate investment losses.

Participants in 401(k) plans contribute chunks of their pretax pay to an account, which may be invested in stocks, bonds, money-market instruments and other holdings. Each employee typically decides on his or her own mix. At many companies, if an employee contributes to the plan, the company also kicks in some money. For many workers, 401(k)s have come to replace "defined benefit" pension plans, which pay a specified amount to employees who retire after a set number of years. As such, the plans represent a key component of the broad shift in recent years toward an "ownership society," in which individual Americans are expected to play a bigger role in managing large financial risks such as saving for retirement and paying for health care. In most plans, "it's been the Wild West of 401(k) investing," says Jerry Bramlett, president and chief executive of 401(k) record-keeping firm BenefitStreet Inc. "You show up at work, they give you a list of funds and send you on your way."

Defenders of 401(k)s say the plans shouldn't be judged prematurely. The 401(k) "is doing what it's supposed to do, which is generate retirement savings," says David Wray, president of the Profit Sharing/401(k) Council of America, an association of employers who offer such plans. "When the entire American work force has 30 or 35 years in the 401(k) plan, then you'll see very substantial balances." While 401(k) participants have been through stock slides before, now they are also grappling with declines in home values and tighter consumer credit. What's more, health-care costs are rising fast, and people are living longer. These converging pressures are prompting many 401(k) savers to postpone retirement and adjust to a lower standard of living.

Some are rolling the dice in an attempt to make up for losses. Jeff Goodman, a 38-year-old computer programmer in Indian Trail, N.C., watched his 401(k) slide more than 40% last year. He's not happy with the plan's investment options, which have almost all been hammered in the downturn. He's only contributing enough to get the company's matching contribution. About two months ago, he opened a brokerage account and started trading stocks and options. He lost roughly $3,000 on a complex options trade. Still, he's not convinced the 401(k) is the best savings vehicle. "In a recessionary time, you just can't do the buy-and-hold thing anymore," he says.

Part of the problem, critics say, is that the 401(k) is trying to fill a role it was never designed to play. The plans were born with little fanfare in 1978 when Congress added section 401(k) to the Internal Revenue Code. Initially, many employers saw them as a supplement to company-funded defined-benefit plans and Social Security -- and a way for executives to stash some of their compensation in tax-deferred accounts. But the legislation marked the beginning of the end of professionally managed pensions that provided guaranteed benefits to retirees. As big employers recognized that 401(k)s are substantially cheaper than defined-benefit plans, the employee-managed accounts moved from supporting role to center stage. Many workers didn't even participate in the voluntary plans, which meant that employers didn't have to make matching contributions. What's more, employers aren't required to contribute to the plans at all.

The plans appeared near the beginning of a long bull market. For years, strong stock-market returns smoothed the transition from guaranteed pensions to worker-driven plans, masking careless investment choices by individuals and high fees charged by some companies that administer plans. But according to Boston College's retirement-research center, Americans were becoming less prepared for retirement. Four of 10 working-age households were at risk of being financially unprepared for retirement in 1998, according to the center, up from less than one-third in 1983. By 2006, the figure stood at 44%. Not saving enough has always been a big problem for 401(k) participants. The tough economic times are exacerbating that tendency. In 2007, the median account balance for 55- to 64-year-olds in defined-contribution plans such as 401(k)s administered by Vanguard Group was just $60,740, and only 10% of all participants saved the maximum dollar amount in the plans. Over the past year, about one in five workers age 45 or older have stopped contributing to a 401(k), IRA or other retirement account, according to a recent survey commissioned by AARP, an advocacy group for older people.

Peg Kelley, a 58-year-old small-business consultant in Watertown, Mass., didn't contribute anything to her 401(k) last year. Instead, she's been focused on paying down credit-card debt and building up an emergency fund in case the bad economic times turn worse. She's also still paying off an $8,000 loan she took from her 401(k) plan four years ago to buy a new car. Afraid of reliving the dot-com market meltdown, which knocked $100,000 off her retirement savings, she moved her entire 401(k) from diversified stock and bond holdings into cash-like investments early last year. "I'm not going to get rich on my 401(k)," she says, "but also don't want to get poor because of it." She had hoped to retire early, but now she figures she won't quit work before age 65.

Matching contributions from employers are a major incentive for workers to contribute to their plans. The typical matching contribution amounts to 3% of pay. But some employers are cutting back. General Motors Corp. and FedEx Corp., for example, are suspending 401(k) matching contributions. One proposal floated at the congressional hearings was to require companies to make contributions. Plan participants typically are presented with a complex investment menu that includes some risky and expensive options. In 2006, Congress passed pension legislation that encouraged employers to automatically enroll workers in 401(k)s -- except for workers who opt out -- and to invest their contributions in broadly diversified products.

Employers rushed to add "target date" funds to their 401(k) menus. Such funds gradually shift to a more conservative investment mix as a worker's retirement date approaches. Fund companies raced to roll out target-date products, often stuffing them with their own pricey mutual funds and adding an extra layer of fees on top. As stocks climbed, some fund companies increased the stock allocations of their target-date funds, setting them up for a steep fall if the market headed south. Assets in target-date funds in defined-contribution plans more than quadrupled in the three years ending in 2007, to $122 billion. But the funds haven't offered investors much protection. The average target-date fund dropped 32% last year, slightly better than the Standard & Poor's 500 stock index's 38.5% decline. Funds with a target date of 2010, designed for investors on the brink of retirement, didn't fare much better, losing nearly 25%.

Many 401(k) plans don't give workers straightforward, low-cost investment options, such as funds that track markets indexes, which often beat stock-picking fund managers over the long haul. Rep. George Miller, a California Democrat who is chairman of the House committee looking into 401(k)s, wants to encourage all plans to offer at least one index fund. The plan offered to federal employees, he notes, is full of low-cost, index funds. "We see very often that the worst-performing funds are marketed at the highest cost to the least sophisticated investors," Mr. Miller says. "That's contrary to the national interest to get more people saving earlier and longer." Nearly half of plans include an option to invest in company stock, according to a 2007 survey by consulting firm Hewitt Associates. Many employers offer matching contributions exclusively in company stock, which often leads employees to invest more of their own contributions in those shares, retirement experts say. One of the "universal" plans proposed to Congress included rules against excessive investment in company stock.

The sharp market swings have led some investors to dump stocks at depressed levels, locking in losses that may severely diminish their retirement savings. Last year, participants shifted around 5.7% of plan assets, compared to 3.3% in 2007. Most of the money went into low-return investments such as cash, bonds and funds designed to hold their value, says Pamela Hess, director of retirement research at Hewitt Associates. The chunk of 401(k) assets in stocks, roughly 54%, is now at its lowest level since Hewitt began tracking the data in 1997. Many 401(k) providers have long argued that participants just need more education to make appropriate investment decisions. Some in the industry are giving up on that notion. "Let's face it, participant education has been an abject failure," says Mr. Bramlett of 401(k) record-keeping firm BenefitStreet. In the plan that BenefitStreet offers its own employees, workers don't cobble together their own investment mixes; they can choose from just five premixed, diversified portfolios with different levels of risk.

Even if workers follow the golden rules of 401(k) investing -- saving early and diligently, holding a broadly diversified investment mix, never tapping their savings until retirement -- their success can still depend largely on the luck of the stock-market draw. Boston College's retirement-research center recently ran scenarios that assumed workers had contributed 6% of pay to a plan for 40 years, had invested in a target-date fund, had never touched their savings until retiring and had annuitized the assets at retirement. The chunk of preretirement income these savers could replace in retirement varied dramatically depending on when they retired. Those retiring in 1948 could replace just 19%; those retiring in 1999, 51%; and 2008 retirees, 28%.

Julien Pierre has been a model 401(k) saver. The 32-year-old Santa Clara, Calif., software engineer started contributing to a 401(k) when he was just 19, and he has made the maximum contribution for the past eight years or so. He has a well-diversified investment mix, including large-cap, midcap, small-cap and international stock funds. He started last year with about $220,000 in his 401(k), but about $90,000 of that has been wiped out in the market meltdown. What's more, his employer recently announced thousands of layoffs. Though he's still maxing out his 401(k) contributions, he sees his plans to retire early crumbling and thinks it may take years to determine whether his faith in the plan has been justified. "I obviously don't feel very good about things," he says. "I'm not looking forward to working that many years."

UK jobs market is getting tougher by the month
Recruitment company Hays has warned that "every month is getting harder than the last" for the job market, with a significant slowdown not just in the property and finance sectors but also IT, human resources and legal. Hays revealed a 22pc fall in revenue from UK recruitment in the fourth quarter, as demand for permanent positions continues to fall at an increasing rate. Across its international business, revenue tumbled 10pc on weak performance in the UK, Australia and Asia.

Finance director Paul Venables said it is unlikely that the market will recover any time in 2009, with the company expecting a decline in profits when it reports. He warned that the employment market is "tough and will get tougher" even though the majority of sectors have already been hit by companies scaling back their staff, including Hays itself. "Right now, you want to be a credit controller, or a project manager working on the Olympics," Mr Venables said. "Only six months ago I could have given more areas that were strong than were weak, but that's not the case now."

Another 10pc of the workforce, a total of 500 positions, was cut at Hays this quarter, taking the total job losses to 20pc of global staff this year. However, temporary recruitment grew 4pc in the quarter as employers turned to short-term workers to cover their staffing needs. There was also growth of 10pc from public sector clients, particularly in the healthcare, social housing and education areas, as the Government became the UK's biggest advertiser for the first time since 2001.

Rival recruitment company Michael Page also reported a slowdown, with fourth quarter profits falling 7pc to £119m and full-year pre-tax profits down 5pc to £140m. "Market conditions became noticeably more difficult during the fourth quarter, with many jobs being cancelled or put on hold," said chief executive Steve Ingham. The company cut 509 jobs, or 9pc of the workforce, in the fourth quarter, as reacted to the "cautionary behavious of clients and candidates" by reducing its costs. "Life remains challenging for Michael Page International, although there is comfort in the strong cash pile," said David O'Brien, an analyst at Altium Securities.

California may delay tax refunds amid budget impasse
State officials on Tuesday braced for the possibility of delaying tax refunds to millions of Californians, along with student grants and payments to vendors, as the latest round of budget negotiations between Gov. Arnold Schwarzenegger and Democratic legislators collapsed. With little more than a month's worth of cash left in the state treasury, the governor and lawmakers have been unable to agree on how to erase a budget gap projected to reach $41.6 billion by the middle of next year. Democrats announced Tuesday that two weeks of discussions had ended in an impasse and sent Schwarzenegger the $18-billion fiscal package they passed last month. The governor vetoed it, as he had promised to do.  State Controller John Chiang has said that as early as Feb. 1, his office may begin issuing promissory notes if lawmakers have not resolved the budget crisis. The state has done this only once before since the Great Depression -- in 1992.

"We have not made any decision about deferring payments or using IOUs, but they are possibilities if the governor and Legislature don't come to some agreement soon," Chiang spokeswoman Hallye Jordan said Tuesday. Under the state Constitution, schools and bondholders get first rights to any cash in the state's coffers.  Among the first to get IOUs instead of payments would be business and individual taxpayers who are expecting refunds, local governments and recipients of grants from the California Student Aid Commission. Last year, more than 10 million taxpayers received state refunds totaling $8 billion. Court-appointed lawyers, 1,700 judges, legislators and their staffs would also go unpaid. And officials are preparing to delay a popular program that helps elderly and disabled Californians by paying their property taxes. Last year, nearly 5,500 homeowners benefited from the 32-year-old Property Tax Postponement Program, which was created to help keep low-income elderly people from being forced to sell their homes or lose them to foreclosure.

California has already suspended financing for public works projects because its dismal financial situation has made investors balk at lending the state money. In 1992, amid a budget crisis triggered by a deep recession, natural disasters and the Los Angeles riots, California ran short of cash and was forced to send out thousands of IOUs. They resembled checks but included a notice that they could not be paid by California "for want of funds."
Schwarzenegger and Democratic lawmakers' inability to break the most recent fiscal impasse was striking, because the two sides had already agreed on the basic outlines of the plan that the governor vetoed. It would have raised $9.3 billion in new and increased taxes on gasoline, sales and personal income and cut schools, health and other state programs. But Democrats had refused to accede to all of the spending cuts Schwarzenegger demanded, or to his requests that some environmental laws be relaxed and government construction projects be opened to private contractors.

Assembly Speaker Karen Bass (D-Los Angeles) and Senate President Pro Tem Darrell Steinberg (D-Sacramento) told reporters at a news conference that they offered major concessions in all these areas but that Schwarzenegger kept raising new objections. "These measures would prevent what the governor has called 'fiscal Armageddon,'" Bass said. "However, the governor cannot ward off Armageddon if he keeps moving the goal posts." In a letter sent to the Democrats on Tuesday night explaining his veto, Schwarzenegger wrote: "The measures you sent me punish people with increased taxes, but do not make the serious cuts in spending necessary to balance our budget; do nothing to help keep California families working during this recession; and do nothing to help Californians facing foreclosure in this mortgage crisis."

In the letter, the governor insisted he had never "minced words" about his views of the Democratic plan. But he announced for the first time that he did not support the Democratic proposal to raise the gas tax by 13 cents a gallon. The Democrats said they were willing to continue negotiations. But even if the governor signed a revised version of the plan into law, it could still unravel in court because of the untested legislative maneuvers Democrats employed to pass the tax increases without a two-thirds vote of lawmakers. They used a complex strategy that hinges on the legal difference between taxes and fees, and passed the package on a simple majority, without any of the Republican votes they typically would have needed.   Every GOP legislator joined a lawsuit Tuesday intended to nullify the package, which they said violated the provision in Proposition 13 that prohibits a simple majority of the Legislature from passing broad-based tax increases. "This dishonest effort to raise taxes without a two-thirds vote is a dagger at the heart of Proposition 13 and every California taxpayer," said Jon Coupal, president of the Howard Jarvis Taxpayers Assn., which filed the lawsuit in a state appeals court in Sacramento.

Spanish unemployment surges above 3 million
Nearly a million people in Spain lost their jobs last year, with unemployment rising 47 per cent to reach 3.1m in December, according to figures released by the labour ministry on Thursday. Maravillas Rojo, secretary-general for employment, said 2009 would be a "very difficult" year. "Unemployment will continue to increase due to the fall in economic activity and demand." Spain, already in recession, has been particularly hard hit by the collapse of its housing market after a long construction boom.

Nearly 140,000 people lost their jobs in December, half of them in the construction sector. The unemployment rate has already reached 13 per cent of the workforce, the highest rate in the European Union. Unemployment also rose in services and in industry, which has been badly affected by a sharp fall in the demand for cars. Over the whole of last year, the number of registered jobless increased by 999,416. Economists say the Spanish economy will continue to shrink this year, pushing the jobless rate to 17 per cent or more in the months ahead.

Citgo Continues U.S. Oil Gifts Program
Citgo Petroleum Corp. on Wednesday said that it is not suspending charitable contributions of home heating oil to low-income U.S. households. On Monday, former U.S. Rep. Joseph P. Kennedy II had said his Boston-based nonprofit, Citizen's Energy, would stop receiving fuel shipments from Venezuela after Citgo re-evaluated its social programs due to the world economic downturn and plunging oil prices.

Citgo didn't have any comment that day, but on Wednesday, the company's Chief Executive Alejandro Granado said in a statement that the decision to continue the program "is the result of a strong commitment and a big effort on the part of Citgo and our shareholders in light of the current global financial crisis and its impact on the oil industry in general." Last winter, Citgo provided Citizen's Energy with $100 million of fuel that was distributed throughout the Northeast. Citgo is a subsidiary of Petroleos de Venezuela S.A., Venezuela's national oil company.

Recession creates a load of problems for truckers
In early December, trucker Joe Rini learned that his own personal recession had just gotten worse.  One of his best clients called about a load of building materials that needed to travel to the Pacific Northwest, Northern California and Colorado -- normally a $4,400 job. Rini offered to do it for $3,400.  But before Rini's truck had arrived to pick up the load, the Cleveland-area customer of more than four years called back. Another trucker had offered to do the job for $400 less. Would Rini match it?  The answer, which was hard to spit out, was no. "I didn't want to bid that low in the first place," said Rini, speaking from the road as he completed a trip from Ohio to California and Arizona and back to Ohio. "I start down that slope and I'm out of business." "This has been going on a lot lately. People willing to bid so low just to get anything in their trucks," Rini said. "Finding loads in the areas you need has become a hair-pulling experience." There are few occupations that feel every jolt along the nation's economic highway as deeply as trucking does. Every fuel price surge, such as when diesel hit $5 a gallon last summer, is an immediate hit that can turn a profitable run into a money-loser. The average American might not notice an auto plant closing or business bankruptcy. For truckers, such events represent another loss of steady work. And with so many industries cutting back, 2008 will go down in modern trucking annals as the worst year ever.

After October -- which is normally the busiest month on the road for the holiday season -- turned out to be the worst October for hauling cargo by truck in five years, the American Trucking Assn. reported a slight rise in business in November. But the trade group's chief economist, Bob Costello, warned that "the freight outlook remains bleak." A total of 785 trucking companies with a combined fleet of about 39,000 trucks went out of business in the third quarter, bringing the number of company trucks idled in the first nine months of 2008 to more than 127,000, or 6.5% of the industry, reported Donald Broughton, trucking analyst and managing director of Avondale Partners. "Never have more trucks been pulled off the road in a shorter period of time than in the first three quarters of this year," Broughton wrote in his third-quarter analysis of the trucking industry. That has pushed tens of thousands of drivers who had been on company payrolls out to compete for slices of the smaller cargo pie with the nation's independent owner-operator drivers, who were already struggling. It's the reason for the desperately low bids facing Rini of Grand River, Ohio, and other truckers.

"I would estimate that we probably lost work for about 100,000 drivers in the first half of 2008 when diesel hit that record high price," said Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Assn. "It's hard to know exactly because they don't report it anywhere. They just go away, and they haven't been missed that much yet because the economy has been so bad." Worse, Spencer said, are all the regulations in what he calls the "supposedly unregulated" trucking industry that are making it more difficult for the average driver to survive. Spencer cited work-hour regulations that allow for 11 hours of driving followed by a requirement of at least eight hours of sleep, which many truckers find difficult to do all at once. Spencer also pointed to post-9/11 security concerns and the commercial encroachment of land formerly set aside for rest areas and truck stops, making it increasingly difficult to find places around the U.S. where it's acceptable for a driver to park his rig for several hours. In addition, more states such as California are adopting tougher environmental regulations that require drivers to use the newest, cleanest and most expensive rigs.

"Most of our members are trying to find a niche -- earn enough to stay in business this year," said Spencer, noting that the group's average member is 50 years old, has been driving for about 20 years, owns 1.8 trucks, has no medical insurance or retirement plan and clears about $40,000 annually after taxes. Driver DuWayne Marshall of Watertown, Wis., found a niche more than a year ago when he got the chance to work directly for the five Brennan's Markets, headquartered in Monroe, Wis., instead of working through a freight broker. "If I didn't have them, my business would be dead," Marshall said. "I'd be out there struggling for work just like everyone else." When Brennan's and other customers saw Marshall's fuel costs spiraling out of control last spring and summer, running his costs per mile up from 53 cents to 93 cents, they were willing to pay a fuel surcharge to keep his truck rolling.

To compensate for the fact that even Brennan's orders were getting smaller, Marshall redoubled his efforts to find alternative cargo to carry, so much so that he expected to gross more than $300,000 in 2008 -- which would be his best year ever. It sounds like a lot, Marshall says, until he starts subtracting. There was $109,000 spent on fuel through mid-December, even after the collapse to about $2.40 a gallon from diesel's all-time record national average of $4.764 a gallon July 14. He's paying $2,580 a month for his $133,000, 2007 Kenworth W900 rig, $980 a month for the $74,000 refrigerated trailer he's paying off and $7,910 for the refrigeration unit. Insurance costs him an additional $850 a month. And in the back of his mind is January and beyond, when he suspects there will be more layoffs and even more truck drivers out there looking to undercut his rates. "If a plant closes and a guy has been hauling freight for them no longer has that business, the easiest way for him to find another haul is to cut someone else's rate," Marshall said, with only a trace of sarcasm in his voice as he drove north on California 99 to pick up a load of raisins, oranges and carrots for Brennan's. "It's the free-enterprise system at work."

In Long Beach, Ventura Transfer Co. has been in the bulk-products hauling business since the 1860s. The company hauls liquid cargo such as fuel additives, cleaning agents and solvents, and dry cargo such as various kinds of plastics, as well as some hazardous cargo. It also maintains its own rail yards for transloading, which is shifting cargo from one mode of transportation to another. But 2008 was the first year in which the company, which owns 40 rigs, 100 trailers and uses both employee drivers and independent owner-operators, struggled to find new ways of earning money just to keep pace with 2007. "We have put tremendous pressure on our salespeople," said Brian Oken, chief executive of Ventura Transfer. "Gone are the days where you can own a trucking fleet and just rely on the demand of the marketplace," Oken said. Ventura Transfer has begun repairing damaged cargo containers and markets itself as available to quickly transfer the cargo out of any damaged container and move it into a new box quickly enough to avoid shipment delays.   "We can't be a jack of all trades, but we can pick two or three new jobs and be really good at them," said Oken, who added that the new work has helped the company avoid any layoffs. "If we were in transportation only now," Oken said, "we would be dying."

When It Comes to Cash, A Thai Village Says, 'Baht, Humbug!'
One way to beat the world's credit crisis: Start printing your own money. The villagers of Santi Suk began creating their own cash here on the sun-bleached plains of northern Thailand following Asia's financial crisis a decade ago.  Decorating their money with children's sketches of water buffaloes and Buddhist temples, the villagers conceived it as a do-it-yourself attempt to protect themselves from the whiplash of vast outflows of speculative money which undermined local currencies and threw Thailand -- and much of Asia -- into recession in 1997-98. At the time, some villagers faced questioning before Thailand's central bank and were accused by local government officials of plotting a secessionist revolt. Now, with Thailand's economy slowing sharply, the DIY cash is beginning to flow freely again. 

"We need our own money more than ever now," says Phra Supajarawat, the wiry, orange-robed abbot of the local Buddhist monastery, who doubles as a "governor" of Santi Suk's tiny, one-room bank. "Things are turning bad in Thailand and people need something they can believe in," he says. Homemade currencies, sometimes known as community or complementary currencies, have a habit of popping up during economic crises. Some towns in the U.S., Canada and Germany introduced their own scrip during the Great Depression. Similar schemes have emerged more recently in Japan, Argentina and Britain. One of the more successful programs has been in Berkshire County, Mass. Residents there pay $10 to get 11 "BerkShares," which are widely accepted in local stores, encouraging people to shop at home instead of using dollars to buy goods online or at large retail chains. Launched in 2006, BerkShares are still being used.  The idea is that by using local currencies, residents don't spend so many dollars, Thai baht or euros, thus helping to keep more resources within their communities. And because local currencies can't be banked away to earn interest, users keep spending it, providing a boost to their area's economy.

Pattamawadee Suzuki, an economics professor at Bangkok's Thammasat University, has studied the phenomenon closely. She says she is unsure whether there really is a significant financial benefit to using local currencies such as that used in Santi Suk. "When times are good, villagers prefer to use Thailand's national currency," she says. "But there is a very strong social benefit to using local currencies," Ms. Pattamawadee adds. "That place, Santi Suk, is more self-reliant than other rural areas of Thailand. They don't depend on remittances from relatives in Bangkok." Many villagers -- who use the local notes as a means to barter for everyday goods -- corroborate Ms. Pattamawadee's analysis. A visit to the village's early morning market reveals a brisk trade in freshly harvested vegetables and a couple of butchers are hard at work selecting cuts from a side of beef. Shoppers haggle and gossip, clutching scrip depicting local rural scenes. "We've learned to depend on our own work," says Buasorn Saothong, a robust 54-year-old rice farmer, who also dabbles in creating herbal hangover cures. ("Just chew on this paste and five minutes later you'll throw up and feel much better," she says.)

Over the years, there has been stiff opposition among Thailand's authorities to the Santi Suk villagers' experiment. The central bank, the Bank of Thailand, declared the villagers' currency "a threat to national security" in 2001 and brought Phra Supajarawat and other villagers to Bangkok for a scolding. "If groups in the country issue something that might become a currency, it's not allowed," says Chatumongkol Sonakul, who was governor of the Bank of Thailand at the time.  The villagers of Santi Suk launched their currency, which they called "bia," the local dialect word for "seedling," in the wake of the 1997-98 crisis. At the time, many were struggling with debt problems and were receiving fewer and smaller remittances from relatives working in the Bangkok area because of the financial crisis.

Two young foreigners from international volunteer organizations, Canadian Jeff Powell and Dutchman Menno Salverda, visited the area and suggested the villagers adopt a local currency to better manage their problems.  The villagers agreed. They approached Phra Supajarawat, now 68, to be the governor of the new village bank, which still consists of a safe housed in a hut that the villagers are happy to open up for anybody who wants to see the stacks of local currency piled inside. A competition was held among the local children to see who could come up with the best designs for the village's new money.  A few months later, in 2000, local government officials and police officers arrived in the village. Phra Supajarawat went along to see what the fuss was all about. Government officials told him he was treading on the toes of the central bank. "I thought, 'Oh no, the police are going to arrest me for counterfeiting,'" he recalls, laughing. That didn't happen. But over the following months villagers, including Phra Supajarawat, were regularly taken to Bangkok to explain their rogue currency to the authorities. In the meantime, Santi Suk's "bia" notes went underground, used in secret by a handful of families. 

In 2001, Nakorn Chompoochart, a lawyer with Thailand's Law Society, offered his services to help the villagers start circulating their currency again. "I told the villagers that people in other countries also had their own local currencies, and that if anybody tried to prosecute them, I'd defend them," he says. Phra Supajarawat says Mr. Nakorn's offer of legal support gave people of Santi Suk the confidence they needed to persevere. To this day, no legal cases have been filed against them, although to make their currency absolutely legal, Thailand's Ministry of Finance would have to officially authorize its use. That still hasn't happened. A spokesman for the Finance Ministry declined to comment. A breakthrough came when Phra Supajarawat learned from the central bank that one of its biggest objections to the villagers' currency was its name. The term "seedling" -- "bia" -- was the same as the word for "money" in the central Thai dialect used by the central bankers in Bangkok.  So the villagers changed the name of their currency to the Thai term for "merit" instead, and circulation began to steadily increase.

The government dropped its objections, and Santi Suk-style currencies have since begun to slowly spread across the rest of northeastern Thailand as neighboring villages adopt the idea. Other villages are switching to barter trade for business instead of using Thailand's national currency, says Ms. Pattamawadee, the economics professor.  Today, interest in Santi Suk's monetary experiment is picking up again. Visitors from other parts of Thailand and nongovernment organizations are streaming into Santi Suk to see how it works, despite the currency's murky legal status.  "It was a big coup for us when the local rice mill began accepting it," says Ms. Buasorn, the hangover expert. "The mill is the focal point of the local economy. It means other people now realize our money is a real alternative."

Paulson to Discover Fate of His $500 Million Fortune
Treasury Secretary Henry Paulson, a $500 million man when he entered office, said he’s about to discover how much of his fortune remains after two years of financial market turmoil. "I’ve got to find out where my money has been invested," Paulson, 62, said today after a speech, drawing laughter from the Washington Economic Club. The former chairman of Goldman Sachs Group Inc. sold his 3.23 million shares of the investment firm before he was sworn in as Treasury secretary in July 2006. As a government worker, he’s bound by ethics rules that require him to put his wealth in a blind trust and in assets that don’t present conflicts of interest.

"You know the old joke about how you make a small fortune? And that is, give a large fortune to a person in a blind trust," he said today. "I haven’t even thought about how I’m going to be investing my money." According to disclosure filings he signed in May 2008 that list his financial assets in ranges, more than $50 million of Paulson’s money was in the HMP Qualified Blind Trust. Between $25 million and $50 million was in institutional shares of the Vanguard Prime Money Market Fund. The fund last year returned 2.8 percent, down from 5.1 percent in 2007.

Another $1 million to $5 million of Paulson’s money was in the Vanguard STAR Fund, which lost 25 percent in 2008 after a 6.6 percent gain a year earlier. Before taking the Treasury job, Paulson sold his Goldman Sachs shares and wasn’t required to pay capital gains taxes, according to a June 2006 divestiture notice about a stake that was valued at the time at about $485 million. If he had held onto them, his shares of Goldman today would be worth $278 million.

He also had a $5 million to $25 million interest in Little St. Simons Island, a 10,000-acre nature preserve accessible only by boat off the coast of Georgia. Paulson, the former chairman of the Nature Conservancy, has said his next endeavor will include work with the environment. "I’m not contemplating a line of work in government and I’m not contemplating a line of work that’s commercial," he said when asked about his future. "I’m going to look for other areas of engagement."

Leaders must act together to solve the crisis
by Kevin Rudd, prime minister of Australia

The stabilisation of financial markets and stimulation of the global economy will require unprecedented policy co-ordination among the world’s political leaders in 2009. Failure to co-ordinate in this way will slow recovery and reduce the aggregate impact of the stimulus packages being contemplated or implemented by individual governments. Worse, fragmented actions could yield incrementally to "beggar thy neighbour" policies that run the risk of accelerating rather than ameliorating the crisis. The International Monetary Fund estimates the global economy needs a fiscal stimulus of at least 2 per cent, or $1,200bn (€882bn, £798bn), in 2009 to ward off the worst effects of the crisis. Economists acknowledge that much more may be required if shattered confidence sets off a spiral of deleveraging, declining asset values, falling income and rising unemployment.

Some action has been taken by individual governments through both monetary policy and significant fiscal stimulus announcements. The truth is much of this will not be delivered in 2009 but in later years. Also, some of the fiscal stimulus measures that have been announced are reannouncements and therefore unlikely to have any additional effect on growth projections. Individual national measures, meanwhile, will not capture the benefits of co-ordinated international action. Such benefits are significant. First there are real and psychological gains. Stimulus measures from one country spill over to their trade partners, creating an additional boost. Co-ordination is also important to mitigate the volatility in currency and bond markets that can be an unintended consequence of uncoordinated policies.

Second, co-ordination is an important defence against beggar-thy-neighbour policies. We are already beginning to see worrying early forays into protectionism. The number of anti-dumping cases rose by 40 per cent in the first half of 2008 and there has been a gradual creeping up of tariffs. Even within their World Trade Organisation commitments, there is scope for countries to raise tariffs. If all nations put up tariffs to their bound rate (the highest rate consistent with their WTO commitments), exporters from middle and high income countries could face tariffs twice as high as current levels. Then there is the remaining challenge of concluding the Doha round – where lack of progress represents a continuing failure of global political will.

Third, international co-operation is essential because this crisis has important implications for developing countries. They did not create this crisis but have been badly damaged by it. The global recession in advanced economies has weakened export opportunities for emerging countries. In addition, the financial crisis has restricted credit flows – with spreads on debt to developing countries having widened significantly. This means many developing countries will struggle to finance their existing deficits, let alone fund the kind of fiscal rescue packages being contemplated by developed economies. Loans from multilateral development banks to developing countries totalled $41bn in 2007. This needs to be significantly increased across the board consistent with the World Bank’s recent decision to quadruple its lending. Aid must be increased, currency swaps need to be extended and the IMF must expand the scope of its short-term liquidity facility.

A fourth reason for co-ordinated action is the unprecedented oppor?tunity the crisis presents to combine shorter-term stimulus requirements to boost growth and employment in 2009 with the longer-term requirement to lift global productivity growth and accelerate the transformation to a lower-carbon economy. The development of a global response to this crisis is a complex task. The good news is that the Group of 20 summits in Washington last November and in London this April will have created a mechanism for effective, co-ordinated action – bringing together for the first time the main developed and developing economies, which represent between them 85 per cent of gross domestic product, 80 per cent of world trade and two-thirds of the world’s population.

In the immediate period ahead, G20 governments will need to work out the quantum of stimulus necessary for 2009 to offset the anticipated contraction in the private economy and the consequential impact on unemployment; to agree on the optimal content of stimulus policies to balance short and long-term economic needs; to co-ordinate the implementation of these measures; and to develop a medium-term exit strategy to ensure that surviving this crisis does not shackle us with long-term inflation. All these measures will require unprecedented co-operation among governments. If we fail, the consequences will be grave. If we rise to the challenge, not only will we reduce the impact of long-term unemployment, but we will also have begun to fashion a new form of economic governance that the underlying forces of globalisation have long been calling forth.

Is Chrysler a lost cause?
Even by the standards of battered automakers, Chrysler is in dire shape. Its sales in December were down a stunning 53 percent, far worse than Ford or General Motors, and analysts say it probably won't survive the year as an independent company -- despite $4 billion in government loans and the possibility of more. Things were so bad last year that a single Toyota model, the Camry/Solara midsize car, outsold the entire fleet of Chrysler LLC's passenger cars. "Basically they're done," said Aaron Bragman, an auto analyst with the consulting company IHS Global Insight in Troy, Mich. "There is no real possibility of turning this thing around as an independent company in my opinion." Chrysler will not comment on speculation about its future, spokeswoman Shawn Morgan said Wednesday. "We are completely focused on our plans to ensure the future viability of our company," she said.

U.S. sales of Chrysler, Dodge and Jeep brand vehicles fell 30 percent last year, the worst decline of any major automaker. It lost more market share than any of its peers, down to 11 percent. Analysts say most of Chrysler's products, especially its cars, don't look, feel or drive as well as the competition's. Chrysler plans to introduce an electric car in 2010, but until then, there are few promising models to boost sales. Many analysts predict that by 2010, Chrysler will be acquired by another automaker or sold in pieces by its majority owner, New York private equity firm Cerberus Capital Management. Chrysler's chief financial officer has said the company needs $7 billion every 45 days to pay parts suppliers, and analysts question whether the company's meager sales are generating enough cash to make those payments. Analysts also say an acquisition by General Motors Corp. is still possible. The two companies discussed it late last year before GM backed away to focus on its own cash issues. Nissan Motor Co. could be interested in buying Chrysler's truck business. Chrysler is already signed up to make pickup trucks for the Japanese company.

Jonathan Macey, a Yale University law professor who has been critical of U.S. automakers' management, said Chrysler's sales numbers are "further evidence of an unviable entity." When automakers went to Washington late last year, their aim was to get enough money to become viable again. They wound up with only enough help from the Bush administration to get them through March, when President-elect Barack Obama will be in office and might provide more aid. Macey said giving the carmakers any money is burning cash. "I'm a big fan of not throwing good money after bad," he said. "The idea that you would enter into a financing relationship like this without any parameters is more evidence of the complete insanity of all this." A Treasury Department spokeswoman noted that the agreement for the government's automaker loans required that the administration designate someone to keep analyzing the companies' finances and viability. Macey, author of a book on corporate governance, said it's too late for Chrysler and GM to solve their problems, including high labor costs and union work rules that hinder competitiveness. To get the loans, GM and Chrysler had to agree to negotiate concessions from creditors and the United Auto Workers union, but the specifics have yet to be worked out. The government can call in the loans March 31.

Chrysler Chief Executive Robert Nardelli, in a presentation to the Senate Banking Committee last month, said the company could stay alive in the long term with reasonable concessions, a $7 billion bridge loan and $6 billion more out of the $25 billion Congress allocated to develop new fuel-efficient technology. The Bush administration provided a $4 billion loan. Now, Chrysler is counting on an additional $3 billion in aid for its financing arm, Chrysler Financial. Some lawmakers say automakers need time to wring out the concessions, and point out that the recession and nearly frozen credit markets are at least partly to blame for poor sales. "You could make a car that could run on air or could fly and people wouldn't buy it," said Senate Banking Chairman Christopher Dodd, D-Conn. "I'm hoping that we may see some of that investor consumer confidence come back." Chrysler, based in Auburn Hills, Mich., and Ford Motor Co., in nearby Dearborn, are also waiting on a decision from the Federal Deposit Insurance Corp. on whether they can become industrial loan corporations. That would mean the government could guarantee their debt, making it more appealing to investors, whose cash Chrysler could use to make more car loans at better terms.

Some lawmakers have noted that foreign automakers, including Japan's Toyota Motor Corp. and Germany's BMW AG, have the industrial banks, placing the domestic auto industry at a disadvantage. Sen. Carl Levin, D-Mich., whose state is home to Chrysler, GM and Ford, said much will depend on how the Obama administration executes the terms of the auto bailout. In his presentation to Congress, Nardelli used charts that showed Chrysler could post an operating profit of $400 million this year if Americans buy about 11 million light vehicles overall. But in this economy, analysts predict the figure will come in smaller. Nardelli said Chrysler will improve fuel economy on 19 models this year, about three-quarters of its product line. Besides the electric car, it also has a deal with Nissan to produce a Chrysler subcompact in 2010. Last month, Chrysler showed off prototypes of a new 300 sedan, Charger performance car and Jeep Grand Cherokee, as well as new, more luxurious interiors under development for nearly all of its products. The problem, says Bragman, is that significant new products don't arrive for another year. And Chrysler may not make it until then. "The good stuff doesn't come in time," Bragman said. "They don't have any help coming really for 2009."

Detroit Fights to Survive amid Global Downturn
Detroit, America's legendary automotive capital, has been in a permanent state of crisis for more than 30 years. But the current downturn is different. This time the industry's very survival is at stake.

Ford was his life. Ford provided him with security, prosperity and happiness. Pictures of Henry Ford hung on his walls, and Ford's words were quoted in his home like verses from the Bible. His grandfather, one of the legendary figures at Ford, was vice-president for production, responsible for the Rouge plant in Dearborn, a symbol of the rise of capitalism in the 1920s. His grandfather worked closely with Henry Ford I and later with Henry Ford II. He owned a mansion in Detroit and a house in Palm Beach. Throughout his life, his grandfather owned more cars than he could ever drive in his scant free time. Today, Rob Eaton is sitting in his garage in a Detroit suburb, railing against Ford. A lot must have happened for someone like Eaton to be criticizing Ford. In fact, he loves Ford. Just as he loves his garage, with its carpeting and its underfloor heating, because it's nice and warm in the winter and because it's a place where he can be alone with his car, a Ford Mustang GT '94. The car, which he calls "my baby," is all that is left of Eaton's dream. Eaton was an engineer at Ford, doing exactly what he had always wanted to do. He drove test cars from zero to 60 in a matter of seconds, dipping sharply into curves and testing their performance in ice, rain and wind. And then he made the cars better.

Eaton liked Detroit, and he liked what Detroit stood for. With a little hard work, anyone could make $100,000 (€74,000) a year there. The automakers even paid life-long pensions and provided health insurance for their employees' entire families. Over the course of a century, a social welfare state developed in Detroit that existed nowhere else in America. The United Auto Workers (UAW) union became a unique force in Detroit. Detroit itself became a place resistant to war and crisis alike. Those who, like Eaton, had employment contracts with Ford were sufficiently free of other cares to devote their full attention to cars. "I carry Ford in my heart," says Eaton. That was until a few years ago, when he noticed that things were no longer moving forward at Ford. Eaton wanted to close the gap that separated his employer from other carmakers, and it irritated him that BMW was consistently ahead of Ford. But his bosses did nothing but issue new rules and procedures and order more and more pointless tests. The dictatorship of the bean counters had begun. "All we were doing were the things that the boss wanted because his boss wanted them," says Eaton.

He doesn't like to be reminded of those days. He feels cheated by Ford, cheated out of his passion. At some point, he says, Ford lost interest in developing its own products, instead striving to deliver what the foreign competition had already been making for a long time. Benchmarking was the new catchword, copycat products were developed and Eaton often found himself driving BMWs on Ford's test tracks. Ford wanted to emulate what its competitors were doing, as far as that was possible. But with each new model, Detroit fell further and further behind. It was then that Eaton removed the photos from his wall, the shots of his grandfather next to the Fords, sitting, standing, in a conference room, at Christmas parties and in the plant. When his second wife became pregnant again, Eaton made a decision. It was the most difficult decision of his life, he says, even more difficult than the decision to divorce his first wife. It was the end of 2006, things were not going well at Ford once again, and his friends were being laid off. Eaton went to his boss and told him that he was finished with Ford. He was asked to sign a document stating that he would never work for Ford again, and in February 2007 he received his last salary and severance pay. He never returned to his office at Ford.

Eaton is now a stay-at-home dad and drives a BMW 3-series, his secret act of revenge against Ford. He keeps the Mustang in the garage, except on special occasions. But he retains a glimmer of hope, perhaps because he still loves Ford, or perhaps because his two children were born on the same days as the great Fords, his daughter on the birthday of Henry Ford I and his son on the birthday of Henry Ford II. He feels the coincidences are a good omen. Maybe Detroit will finally learn its lesson, when the crisis gets too big, Eaton thinks to himself. Maybe Detroit will make a comeback, and maybe Ford will then produce a hybrid automobile that people will remember in 50 years, just as people today remember the old Ford Mustang or the 1953 Corvette. For more than 30 years now, ever since the southern states began competing with Detroit for car and truck plants, Detroit has been in a permanent state of crisis. In those three decades, the Big Three -- Ford, General Motors and Chrysler -- have shed more than half of their jobs. Unemployment in Detroit is at 16.2 percent, and almost one-third of the city's population lives below the poverty line. In the 1950s, Detroit, with its then population of close to 2 million, was America's fourth-largest city. Nowadays the city has a mere 917,000 inhabitants.

Nevertheless, there was always the sense that things could have been worse. Because the industry knew that it could expect financial assistance from Washington when in need, all Detroit's crises never made the Big Three any wiser -- only more arrogant. Somehow Detroit always managed to keep going. But then along came October 2008, which many observers regard as one of the worst months in Detroit's history. The three major US automakers reported their biggest declines in sales since World War II. October sales at Chrysler and Ford were a third lower than in the previous October, while General Motors' sales were down by 45 percent over the same period in 2007. Industry executives insisted that without a government bailout, only Ford would stay in business. General Motors and Chrysler, they said, needed immediate financial help from Washington to avert bankruptcy within a matter of weeks. This is a different kind of crisis. This time there is no stability anywhere in Detroit, where everything is in crisis: the real estate market, the banks, the Big Three, politics and the media. To cut costs, the city's two biggest daily newspapers have reduced home delivery to three days a week -- Thursdays, Fridays and Sundays. The city's young mayor, Kwame Kilpatrick, is now in a prison cell in downtown Detroit, after being forced to step down after lying under oath and using taxpayer money to pay for sex parties. The Detroit News commented sarcastically that Detroit now has its very own Nero, and that at a time when the city is heading for a budget crisis and an education disaster. Only one-third of all children in the city graduate from high school.

Although the government in Washington is now sending money to Detroit -- Chrysler and General Motors will receive $17.4 billion (€12.9 billion) in emergency funding by March 2009 -- this does not solve the problem. Aside from money, what Detroit lacks is the right cars. The vehicles it does produce are out of step with the times. They are too big, too dirty and too loud. And they cost too much to produce -- the Big Three spends up to $2,200 (€1,630) on employee benefits for every car it makes. There is no light at the end of the tunnel, nothing the city can look forward to. It is now a matter of life and death for Detroit residents. Detroit is filled with people with no places to live, no families and no jobs. All they have left are their guns. This harsh reality is what prompts Michael Shannon to loudly announce his presence whenever he enters an empty hallway, and to clearly identify himself as "Mike the real estate agent," so that he doesn't get shot. Shannon is a large, amiable man, portly enough that he doesn't look threatening. He remains consistently calm and levelheaded, but determined enough to survive, especially when the "homies" try to shoot him from behind or when he catches them squatting in the houses he lists for sale, burning roof beams in the bathtubs to stay warm. He always wears jeans and sneakers, never a tie, he says, and he deliberately drives an old Jeep, not a Jaguar. Understatement is a market niche in Detroit. In keeping with his low-key image everyone, including the secretaries, calls him Mike. "There is no such thing as Mr. Shannon in my world," he says.

Shannon is standing in front of a house at 3880 Scotten Street. The house has four bedrooms, one bathroom, a garage and a garden the size of a tennis court. It was built shortly before Henry Ford brought the automobile to Detroit, when he opened his first plant to build the Model T and promised a daily wage of $5 for all workers. That was 100 years ago. The house is as old as the auto industry, which brought prosperity, good incomes and job security to Detroit. Those days are now long gone. The bank recently foreclosed on the house on Scotten Street and evicted the owners. It ended up being listed by Shannon, which usually happens when a house is on its last legs. By then, the houses are often dilapidated, because the owners have long given up spending money on upkeep and repairs. Up to 16,000 houses now go into foreclosure in Detroit each month. No other American city is disintegrating as quickly. The "American dream thing," says Shannon, has wreaked havoc. He draws large quotes in the air with his fingers to indicate that this is a dream he no longer believes in. Shannon says that he saw how the dream tricked people, every time he entered their homes and saw how they were filled with stereos and TV sets they couldn't afford, with expensive cars parked outside. They believed that they could have everything, spending time in the new casinos in Detroit's Greektown neighborhood and forgetting about their jobs. "People were suddenly living in places where they really didn't belong," says Shannon. "Seventy percent of people in Detroit are underwater. They owe more on their mortgages than their houses are worth."

Today, Shannon feels disgusted by the houses he lists, because they have, in fact, ceased to be real houses. He uses antiseptic wipes to get rid of the stench of decay, the dirt and the bacteria. "What you see here are no longer houses, just termite festivals." But there are few other opportunities to make money in Detroit these days. People have to once more learn to be satisfied with what they have, says Shannon. The last time Shannon was here, people had ransacked the house, taking away the sink and the toilet. They also cut a large hole into the living room wall to search for copper pipes -- the metal can still be sold to scrap dealers for a little money. Detroit has reached a new level of desperation. Shannon walks around the property one last time, checking for garbage in the front yard, making sure that the grass outside isn't too high and that all the windows are intact. These things can get expensive, because the city imposes steep fines for such violations, and Shannon could end up paying more in fines than the house is worth. The city too has to find a way to survive, even if it means making money from its own demise. It's every man for himself in Detroit these days, as the city cannibalizes itself. The house now costs $780 (€578), less than a good color TV set, says Shannon. But even this is too much for most people in Detroit today. The buyers come from other states, from New York, California, Florida, sometimes even from abroad. Every day, they buy up another piece of Detroit -- but merely to take advantage of tax breaks and government subsidies. They already own half the city, says Shannon. "Detroit stopped belonging to us a long time ago."

Detroit has never been this weak, and the politicians who previously adopted a hands-off approach to the city suddenly want their say. The Democrats, and even the Republicans, have suddenly discovered the environment and are putting pressure on Detroit. They want it to clean up its act, produce smaller cars and better satisfy emissions standards. The pressure is coming from all sides. In California, Governor Arnold Schwarzenegger is pushing for stricter emissions standards. "The auto industry is the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil," said President-elect Barack Obama. In May 2008, Business Week published a story about General Motors entitled "GM: Live Green or Die." Detroit will not be able to wiggle its way out of its current predicament. Nowadays, the city is marked by a sense of helplessness. Detroit, of all cities, the city that dictated its tastes to the world for so long, that designed unforgettable cars with tail fins and put a generation of muscle cars on the streets, is losing control over itself. Until now, Detroit was able to sell anything. No one fundamentally questioned its products, Detroit could afford the best social standards, and the cars that rolled off its assembly lines became part of a cult. They were mentioned in songs by artists from Bob Seger to Bruce Springsteen. And now outsiders are about to determine their fate? What do they know about Detroit? Wasn't Detroit much too big to fail?

This arrogance now threatens to spell disaster for Detroit. The auto executives merely looked on as foreign carmakers, from Toyota to Honda to BMW, built factories in the southern states and gained political clout there as a result. They were asleep at the wheel when Toyota entered the world of NASCAR racing and proceeded to become more American than the Americans. And while the rest of the world developed more fuel-efficient cars, Detroit kept making bigger and bigger SUVs. In Detroit, the green wave always remained an empty promise. The Big Three did develop electric and hybrid cars, and they promised "super-cars" when it came to fuel efficiency, but in the end they just kept on producing more giant cars and trucks. In Detroit, the departure into a green future was always nothing but a half-hearted attempt. And yet few in Detroit felt any pangs of self-doubt as a result. The green revolution contradicted the city's self-image. For years, it successfully resisted developing a significant public transportation system, and it secretly remains slightly proud of its filth, of downtown ruins like the old Packard plant, formerly known as Motor City Industrial Park. Luxury cars were assembled there until 1956, when the factory was shut down and began to decay. Today, the site contains 325,000 square meters (3.5 million square feet) of garbage. It's a morbid place popular among tourists. The wind picks up clouds of dust at the abandoned plant and carries it through much of downtown Detroit. Detroiters live with it, imagining that the site resembles Baghdad after the American invasion. It represents part of their approach to life at the edge of the abyss, a way of thinking they dub the "fuck-you mentality." It's an attitude that allows them to go on, stoic and undaunted to the very end.

One of those Detroiters is Dan Frost. Frost owns the larger of two Hummer dealerships in Detroit. There were once three, but the third dealership recently closed. The Hummer, produced by General Motors, is Detroit's biggest monster vehicle. Its mileage is around 16 mpg (15 liters per 100 kilometers), and it symbolizes everything that has gone wrong in Detroit in recent years. While the rest of the world worried about the environment, while climate change shifted the political agenda in America, and while Toyota introduced a mass-market hybrid car, the Prius, into the US market in 2001, Detroit kept on building eight-cylinder vehicles and emphasized decadence and opulence. Frost is a small, wiry man who wears a suit and tie. His short arms always seem to be in motion. Whenever he wants to make a point, he shows his own newspaper ad and says: "Do you see this article here? It says that 24 other cars have worse emissions levels than the Hummer." Frost despises all the talk of a green economy. It comes from California, he says, where no one takes the terror attacks of Sept. 11, 2001 seriously and "where the fruits and nuts grow." Sept. 11 was a transforming event for him. It was Sept. 11 that proved him right, and afterwards he sold more Hummers than ever before. His annual sales grew tenfold in the first year after the attacks. Only a quarter year later, his sales were 20 times what they had been before Sept. 11. Americans yearned for more security, a yearning that extended to their cars, and they needed a new status symbol of power. General Motors also made a lot of money with the Hummer. At the time, the company turned a profit of more than $10,000 (€7,400) for each Hummer sold.

But now GM wants to sell its Hummer division, arguing that the Hummer spoils its image. "I don't care who buys Hummer," says Frost. "Let the Chinese take it over, or even, for all I care, people from the Middle East." He doesn't sound enthusiastic, but he also has no intention of abandoning ship. Frost doesn't like to be forced to do anything. But perhaps compulsion is the only way to bring about change in Detroit. A few weeks ago, when the CEOs of the Big Three went to Washington for the first time to make their case for a government bailout, they did not convey the impression of wanting to change anything. They arrived separately, each traveling in his own private jet -- as if they hadn't noticed that the rest of the world is talking of conserving energy. They arrived without a plan, and without answers to pressing questions. When Congressman Peter Roskam asked the men whether they would do without their salaries if the government bailed them out, the three executives responded flippantly. "I don't have a position on that today," said GM CEO Rick Wagoner. "I think I'm okay where I am," said Ford CEO Alan Mulally, referring to his annual salary of $21 million (€15.5 million). The excursion turned into a PR disaster for Detroit, and the three chief executives flew home empty-handed. Detroit is apparently incapable of bringing about the necessary change on its own, so the political world must force Detroit to change. On their next visit to Washington, the three CEOs arrived in a hybrid car and vowed to reduce their salaries to just $1 each per year.

It is a Sunday before Christmas, and the service begins at 11 a.m. at the Greater Grace Temple, Detroit's largest church. A massive structure as brawny as the cars Detroit produces, it cost $35 million (€26 million) to build. Bishop Charles Ellis III is standing on the stage, calling upon his parishioners to fast with him on behalf of the auto industry. "We have to do a little bit more," he says. "We have to pray a little more." Ellis gave a major sermon last week, entitled "A hybrid hope." Three hybrid vehicles were driven onto the church stage, a Ford Escape, a Chevrolet Tahoe and a Chrysler Aspen -- all hefty SUV's, but hybrids at least. "God existed before the automobile came along," he said. He was flanked by men from the union, who said that they had done everything they could, and that their only choice now was to do what every doctor does when he no options left: to entrust his patient to the good Lord. Ellis believes that everything will improve again once the crisis is over. He also believes in the Second Coming of Jesus Christ. He says that he doesn't know how far along we are already, or which crisis will trigger the return of Christ. It could have been Hurricane Katrina, he says, or perhaps the crisis in Detroit's auto industry.
"Salvation will come," he says, "if the crisis is big enough."


el gallinazo said...

I think Obama's first priority is to insure that Bush be historically assigned the role of Hoover for the Greater Depression. He must dig the foundation for this future truism to root during the next two weeks.

Anonymous said...

Anonymous said...

It seems that we are just slaves on a great financial plantation. The plantation owners don’t want to lose the plantation to their uppity populations. An insurrection would be catastrophic. They will feed you bread and provide circuses to divert your attention, keep you quiet, tell you how things will get better, if not in your lifetime then in the great beyond.

They, your financial masters and their government enablers will twist the truth, regularly, it keeps the slaves confused and moving in different directions, never to organize adequate force to overthrow their masters. Maybe they will focus your attention on some overseas “enemy” and send you to fight wars that only further enrich the plantation owners.

Instead of importing cheaper and harder working Chinese and Indian slaves, an unseemly act, the masters simply established new plantations overseas where individuals gladly place shackles upon themselves just in order to survive. Whether you are a tier one slave overseas or a tier two slave in the West, you are still a slave. Now the U.S. slaves have become too expensive to maintain, but not for long. Soon all slaves will be on the same base level and your master’s plantations, after some consolidation, will again thrive, for awhile.

The plantation owner has the capital and you are their slave. They will lend you money for many purposes, but they will make sure that it is returned to them with interest. A bank can basically create money out of thin air but requires “real” collateral. A bank typically collects interest up front so that it can take payments and your collateral too, if need be. I hope some day you can be wise and disciplined enough buy your own freedom, but time is running out. Good luck.

Gravity said...

Please review my comment at the end of the last rattle, I dont know what to make of it.
Apparently, shops offering 70% discounts dont sell more than those still offering 50%, where does this end?

*** said...

el gallinazo

Thanks for that memorable postscript...

but but but he can read "my pet goat..."

Anonymous said...

The tone of rhetoric that is coming from the Obama camp is starting to sound more and more like that of Paulson and friends this past summer. Is this a setup of truth or dare, or are we at the edge of the cliff looking below and there is nothing but rocks on which to land? John

Anonymous said...

In yesterday's comments I made the following observations.
Mugabe said
Half the world is nuts, and survival depends on guessing which half.
In a new model, the financial service provider ceases to be a middleman, or credit intermediary, and becomes a pure service provider. The fact is that in the Internet age there is no need for credit intermediaries, whether private banks or central banks.

The media worsens the crisis by not telling people the truth about how bad it is and will get, which in turn keeps their audience from making the right decisions.
Obama tells the truth
Remarks of President-Elect Barack Obama
As Prepared for Delivery
American Recovery and Reinvestment
Thursday, January 8, 2009
The financial system took 50% of my savings.
Obama's plan is the only one that is being implemented.
If nothing was done ... I expect that I would lose the remainder of my savings and take the actions recommended by TAE.

I think that we can hope that the Obama team can read and will consider this blog and recommend changes in the detail of the infrastructure package so that there can be a recovery without hitting the bottom of the black hole.

el gallinazo said...

Pluto (from yesterday's page)

"AND, homes would have gently fluttered down to a more affordable level over time without destroying a nation.


All it required was that loans be extended to 40 years from 30 years in duration. Ta dah!!

And don't think that bankers wouldn't have sold their souls to do that."

First, good luck on your dental appointment. Hope that whatever correction you receive will not reduce the intensity of your rants.

Second, why stop at increasing mortgages to 40 years? Why not 60 years with your first born son co-signing and perhaps a grandchild or two adding a toe print? The Japanese adopted this stroke of genius in the 90's which resulted in "the lost decade." But let's not quibble. ¡We are Americans! We could lose a generation.

The Lizard said...

Spiegel article gets my vote for Best Quotes From Deluded Fundie Fools award.

Pampered cretins have not the slightest notion what a real disaster looks like.

Anonymous said...

@ Gravity,

Your questions are very good questions and I think the answer is simply this - no one really knows. I think we all have been trying to figure out what kinds of products we should be making now. That's some of what makes this process so unsettling. How do we even being to determine how much we have overbuilt and overproduced? Plus, right now we have one foot in the our old-credit world and one foot in our new reality, so we are all quite off balance. That's why this blog is even more important now because it's the best place I know to try to start figuring it out.

Linda S.

Anonymous said...

Anon (john)

Cliff. Rocks. Yes.

On another note if you look at a wide variety of economic data, then it appears that a "super" bubble of sorts was ignited by a confluence of key factors that took place from about 1975-82 and were then accelerated in 95.

After digging through data for months, my current best guess is that a dow of 2-3K would be a stable point for the US and about where we would be today if the super bubble had not been ignited.


el gallinazo said...


"I think that we can hope that the Obama team can read and will consider this blog and recommend changes in the detail of the infrastructure package so that there can be a recovery without hitting the bottom of the black hole."

You are absolutely right, Jal. We can hope for such. That is what is so wonderful about hoping. I think it even burns off calories.

My current bumper sticker reads "Like a Rock! But dumber!" But I need a new one in two weeks. I am considering "Don't blame me! I voted for the tooth fairy." Of course it's a lie. We can't vote for el presidente in the USVI.


How about taking in each others laundry for a fee? That should give a few meters per second to the velocity of money.

Starcade said...

Anon 1336 is right -- we are no more than slaves.

I think people forget something, something which ensures the deaths of millions once TSHTF:

The very existence of most human life, to The Powers That Be, is the very same level of a profit vehicle that housing is to them.

We do not exist as autonomous beings to them. We exist as vehicles which can be abused and spit on to make money for The Man, with little expectation of return for the individual being.

When you get that, you get one idea of how screwed we -- as an economy, a currency, a nation, and a culture -- we truly are...

Anonymous said...

If you think you're bad, in Spain the jobless now number more than 3 million, one million more in one year -and that's just official figures the real number is easily 4 million: they don't count first job seekers, students, people in training and lots more. A graphic in
With four pillars of the Spanish economy cracked -housing, cars, tourism and fishing- the house is falling down. No food stamps in Spain, or Job Seekers Allowance either, when unemployment benefit ends (max. 1 year and a half) go to the church/Caritas for a plate of soup. But fear not, the Spaniards are not going to YUMA to get a job, they are rubbish at languages and they don't speak English.

scandia said...

Gravity, I'm thinking about stuff not selling even at 70% off.
I began to notice how much stuff we have here in the West a couple of years ago. Mountains donated to Value village, yard sales, church bazaars etc. Its gotten so crowded in our cupboards that Freecycle was started. Never mind trying to sell what most people already have. Just give it away. Even that isn't so easy anymore.
I've been clearing out the useless, unloved stuff to make room for what is truly needed. Also don't want to get stuck paying increasing garbage fees. The other face of this stuff disaster is that the ships are not taking our garbage to the East for recycling. So in this context who in their right mind wants to buy more stuff?
Due to economic contraints I haven't shopped retail for some time. Why do so when much of what I need can already be bought at Value Village for pennies on the dollar. Some people are programmed to have " New". I now think they are silly people.
Ilargi, you are so funny ...The name is Bonds...the description of Whitney as the Barbarella of Wall St. Right on!

bluebird said...

1/8/09 Madoff Exposure Spreads to Labor Union Pension Funds

CNBC has learned that one union, the Carpenters local in Syracuse, N.Y., has lost the majority of the $100 million to $150 million it had in pension money because of its dealings with Madoff, people close to the matter said.


Anonymous said...

@ Pluto - Here is one place I disagree with you. I don't view this as a problem that can be solved by taking specific steps.

Maybe this is a male/female viewpoint thing, but I see this crisis as a whole new reality and believe that what we have to do now is adjust and cope. My view is that there is no way of avoiding escaping the consequences of our collective past actions, we will have to go through it and it will be awful for everyone. Most likely the suffering will not be mitigated based on any previously held beliefs about your individual merit or virtue and that is the point I thought your first rant made to me.

I have been trying to figure out how to phrase what I find to be the biggest flaw in libertarian thinking and here is my shot. I think libertarians think the reality they inhabit is only shaped by the consequences of their own decisions and is never touched by the collective. Thus, it is unfair for someone who "followed the rules" and only got into "conservative" amounts of debt for a home to be punished for the "foolish" actions of others. But, our markets are designed to bring in many individuals and accordingly, we are all connected to some degree to other people's choices and our participation is a tacit agreement to partially bear the risk of other peoples' "failures." Thus, these ideas of "fairness" are irrelevant in what's coming next and are an unproductive exercise in attempting to find an "other" (such as illegal immigrants, poor people, etc.) to blame. This is a very human response and completely understandable, but I think it diverts mental energy away from more effective uses of our time and money.

Linda S.

Anonymous said...

RE: Pavlov

"Consumers have become so accustomed to markdowns that nobody wants to pay full retail anymore."

This is sadly ironic.

My grandfather used to take me out to, in his words, learn how to do business. His first rule: Never do business with anybody who doesn't really want to do business with you. His reasoning: No matter how you think it's going to work out, it will never be satisfactory to either party.

I was amazed to go with him one day to a department store to purchase a major piece of furniture. He spent a long time looking over the merchandise and ignoring the sales pitches tossed at him. In the end, he chose what he wanted and informed the clerk what he was willing to pay for it. The clerk was flustered and I, slightly embarrassed. I told him, "You can't do that. That's not how things work" to which the clerk quickly agreed. My grandfather insisted upon speaking with the manager and 15 minutes later walked away with the deal.

It's taken me many years to fully appreciate his wisdom.

Starcade said...

Armando Gascon: When the only thing you have left is "We are better off than they are", it's really little more than the sheeple trying to deny that "they" are only going to be lemmings going off the cliff before we do.

(I, in no way, say that to deny what you are claiming. I just hear that far too often as a denial defense.)

scandia: Last night, my friend/roommate and I shopped in the local mall. We were stunned, basically, as to the uselessness of the entire process. It's all designer crap this and $$$name-brand$$$ that. That's one of the reasons I think a lot of stuff is no longer selling.

Or is it that they know they will be able to loot the entire mess when TSHTF (hypothetically, speaking of the time frame) within weeks, or even days?

Gravity said...

Thought-Crime is Growth.
Thought-Crime does not entail Growth, Thought-Crime is Growth.

I have been reading your articles
on the Automatic Earth.
You write very eloquently,
and that is not my own opinion.
What I wanted to say was,
there were one or two unwords,
only very recently...

Growth as we know it has ended.
I believe we are suffering an energy-ratio inversion cascade,
in which any "growth" in the traditional sense of industrial output or GNP, now has negative marginal gains. It has become damaging to all functional systems,
economic and ecological.

I also assume we now have negative marginal gains on any added population, so that the seventy million annual arrivals will only reduce the resources of the rest,
and further damage the biosphere.

If this catastrophic deflationary depression ends in ten years or so,
(being optimistic) by that time we may have another sevenhundred million additional people to provide for.

The growth of population will slow during a depression, but we should really work towards a much lower population, preferably five billion, and possibly less than three.
This could be a form of "growth"
if it increases the available resources per capita, and slows the biosphere-destabilisation.

Of course, since starvation is now likely for hundreds of millions,
we will get to a lower global population anyway, but in a very unpleasant way.
In my opinion, this is even more repugnant than if we had implemented forced birth-control when we reached five billion some time back.

The word "growth" is utterly corrupted, functioning as a viral memeplex in political language,
it has no meaning beyond "the good"

We need another word to replace it, one that more accurately describes the direction and movements of our society in this era. Gravity?

Gravity said...

If the global economy contracts by 50%, and by some means (pandemic)
the global population contracts even more, say 60%, would this not also be "growth" of the economy per capita?
What a mess.

Greenpa said...

el gallinazo-"I think Obama's first priority is to insure that Bush be historically assigned the role of Hoover for the Greater Depression. He must dig the foundation for this future truism to root during the next two weeks."

I was thinking much the same thing! I'll go further- my Prediction is: Obama will announce that this is no longer a recession- but it really is a Depression - in the next 6 months. (My sense of timing is different from yours.)

The extra time gets him several bennies, and no quick actions are going to help anyway. 1) It doesn't look like he's just pointing fingers, he can sell the idea that his team has really looked hard at it (and probably took some time to uncover cooked books in a lot of places.) And- 2) kind of the bottom line in a real Depression is - all the experts are out the window- NOBODY knows what to do; and everybody admits it.

So- that gives him much more of a free hand. If he said "Everybody plant rooster eggs in your Victory Gardens! We're all going to get rich selling eggplants to New Zealand!" -- everybody would do it; cheerfully.

Lots of power there; nothing to gain by pretending it's not a depression.

Anonymous said...

So T-bills will see a resulting rise in yields due to decreased demand. This in turn will worsen the financial crisis. Meaning that the mid 2009 recovery is pushed back to mid 2019?

What a mess these folks are making, solving this crisis would be as simple as 1-2-3.

1) Guarantee all private and a percentage of institutional deposits
2) Let the banks fail, bad debts and derivatives are whisked away
3) Create 1000 regional banks and inject 700 million dollars in capital into each of them. Fresh start and no bad debts, the finance professionals can be relocated to each of the 1000 regional banks.

Greenpa said...

Scandia: "Gravity, I'm thinking about stuff not selling even at 70% off."

among my other weirdnesses, I've given lectures in marketing... though few know it, it's embarrassing.

There's a BIG reason the grocery stores pay clerks to walk around keeping shelves full, the orange bin- full.

It's rather counter intuitive, but extremely well documented- a bin of oranges that is SO tasty and well priced that it sells almost out- will stop selling. Customers will look at the remaining oranges (or the mostly empty shelf) - and where they were grabbing the identical item when the stock was nearly full- they will quit buying when it's nearly empty.

It's like there's something repulsive about the last stuff on the shelf.

Low prices have a similar efffect- they can actually kill the consumer appetite "ew, nobody else wanted that, why would I?" sort of thing.

More positive feedback in the down-cycle.

Greenpa said...

Slaves!? Ha. You guys are still too optimistic.

We are krill.


*** said...

Armando Gascon,

Le doy muchas gracias para poniéndome al tanto de su sita de Internet.

No tiene una idea cuan ocupado estoy, siempre en busca de aprender mas español! Hoy entra un maestro nuevo y espero tener todo el soporte con el.

Pero me resta enterarme de todos modos de hablar en español, el mundo financiero en particular.

Gracias y lo mejor para Usted en este ano y los que vienen.

Anonymous said...

De nada, 'Adios a Babilonia', pleased to be of some help. My site is a very poor thing. Spanish is not the most difficult language to read. Two newspapers worth reading, El País -liberal left, lots of economic news, a wonderful cultural Saturday supplement, Babelia. The other is the conservative -I don't want to use a stronger name- ABC Wonderful if you want to learn economic terms, and they offer a change from the anglo press.

Anonymous said...

@ Greenpa

Thanks for the interesting comments regarding the full shelves.

I've also read that stores like to display fresh fruits and flowers nearer to the entrance.

Shiny and bright stuff is placed at the bottom to entice young kids.

The stores sometimes spray scents that make you hungrier, apparently when you're hungry you buy more.

Also most of us have the same pattern of going through a store we go to regularly, so that actually makes us buy more.

Most shopping is actually done by women, it's like retail therapy for a stressed out mind.

Shop till you drop! (well atleast until the economy drops) :-)

*** said...


Gracias por millones. Al ver "no seas tímido, deja su comentario" al pie de su blog, espera que me abrevaría responder.

And for those others who are learning Spanish... vamos a reunirnos en esa blog de vez en cuando, no?

Anonymous said...

Adios ...

Me alegra encontrar algo escrito en Espanol aqui. :)

Buena suerte con el nuevo maestro. Espero que el te de todo el apoyo que necesitas.


*** said...


"me atrevo" - the spellcheck is thwarting me again!

Anonymous said...

I think for maximum effect, Obama has to announce the depression status at the inauguration. Yeah, that is a party pooper move, but it would be the correct moment. With a one trillion dollar plus works project administration already slated to sign as soon as he can possibly get it to his desk, the economy is far past a mere recession. Do people really need an announcement? I guess they do, so make one already.

Anonymous said...

Jan. 8 (Bloomberg) -- Consumer borrowing dropped by a record $7.9 billion in November as Americans scrambled to boost savings in face of the deepening recession and amid an investor exodus from securities backed by credit-card and other loans.

The slump brought consumer credit down to $2.57 trillion, and capped the first back-to-back monthly decline since 1992, the Federal Reserve said today in Washington. The biggest decrease came in securitized assets, an area where Fed policy makers are creating a new $200 billion lending program to shore up credit.

Today’s figures foreshadow a prolonged drop in consumer spending as households try to reduce debt with their net worth declining and job losses accelerating, analysts said.

“Consumers have clammed up,” said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, who forecast a decline. “The reduction in consumer credit doesn’t stop here, and will spill over into 2009. Households are bolstering their balance sheets.”

The Fed’s figures don’t cover borrowing secured by real estate. In October, credit fell by $2.8 billion, previously reported as a drop of $3.5 billion.

Economists had forecast credit would be little changed, according to the median of 28 estimates in a survey conducted by Bloomberg News. Projections ranged from a gain of $6.9 billion to a decline of $5 billion.

Jobless Claims

A report from the Labor Department showed the number of Americans collecting unemployment benefits surged to 4.6 million two weeks ago, a 26-year high, as the labor market worsened. Initial jobless claims, which have been plagued by efforts to adjust the figures for the holidays, unexpectedly fell by 24,000 to 467,000 in the week that ended Jan. 3, the lowest level in almost three months.

Total consumer borrowing fell at a 3.7 percent annual rate in November, the biggest percentage decline since January 1998, the Fed said today. The decline in dollar terms was the biggest since records began in 1943.

Revolving debt such as credit cards decreased by $2.8 billion. Non-revolving debt, including auto loans, dropped $5.2 billion for the month.

Fed Actions

Fed policy makers last month cut the benchmark interest rate target to as low as zero for the first time to prevent the recession from worsening. They also are taking steps to ease the flow of credit and reduce borrowing costs.

“Credit conditions continued to tighten for both households and businesses, and ongoing declines in equity prices further reduced household wealth,” according to minutes of the Fed’s December meeting. Policy makers also “expected economic activity to contract sharply in the fourth quarter of 2008 and in early 2009.”

The drop in wealth and lack of credit are forcing consumers to cut back. Wal-Mart Stores Inc., Macy’s Inc. and Gap Inc. slashed earnings forecasts after the worst holiday-shopping season in at least four decades, industry figures showed today.

Automakers are also struggling. Car sales fell 36 percent in December, capping the industry’s worst year since 1992. General Motors Corp. and Chrysler LLC, which got emergency federal loans to help stay in business, this month broadened incentive programs to boost sales.

Credit-card companies, facing rising defaults, are taking steps to get government funds and retail deposits. Discover Financial Services in December won approval to become a bank holding company, and rival American Express Co. also is converting into a bank, allowing it to obtain capital under the Treasury’s bailout plan.

The rate of delinquencies on indirect auto loans, which are made through third parties such as car dealerships, reached a record 3.25 percent in the third quarter, the American Bankers Association reported yesterday.

Late payments on eight different types of loans, including auto lending and personal loans, rose 8 percent from the previous quarter to a 29-year high, the group said.

Iconoclast421 said...

I can just picture Barack (or one of his handlers) reading that and saying, "Who the heck is Kelvin?"

Obama will attempt to keep housing high. That is one of the primary goals of the elite rulers. They must have overblown property values so that property taxes can be kept high. In a time of deflation, high property tax puts a de facto end to property rights. You now have to play politics in order to get money to pay your property taxes. Any sane person who saves their money will lose it all and their home to property taxes. Then the SWAT team comes and drags them away. It is the Israeli model, being prepared to be unleashed on a grander scale. Dont roll your eyes. Israel is and always was a proving ground for horrific deeds. You better figure out how this works... Total destruction of the USA, brought to you by the CFR and Zionist NWO fronts.

Greenpa said...

"Economists had forecast credit would be little changed..."

ok, MY turn to rant.

WHYONGODSGREENEARTH is ANYBODY reporting- or listening to- ANYTHING an "economist" would have to say????

WHY WHY WHY??? Uh- have they EVER been right? Just once? Only when predicting what happened yesterday- they get that right as often as they guys at the bowling alley do.

The future? never, not once. And yet- we- including us here- STILL keep LISTENING to these morons.

I just don't get it. To quote Ilargi.

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

Gravity said...

"If the global economy contracts by 50%, and by some means (pandemic)
the global population contracts even more, say 60%, would this not also be "growth" of the economy per capita?
What a mess."

Capitalism is messed up yes?

Unknown said...

@ el gallinazo

You're a funny one.

First, good luck on your dental appointment. Hope that whatever correction you receive will not reduce the intensity of your rants.

Check. I had my braces tightened. Just point me toward an ass that needs kicking....

Forty years is an amortization that might have matched the payments, pre-gouging. If not, 45 years. What's the big deal?

They stay in their home and then sell it when the kids leave 15 years later. The asset doesn't appreciate much, which it makes it affordable for new buyers. Meanwhile, the nation survives until the next time we elect another shitweasel monkey who kills it once and for all.

You know the drill.

Anonymous said...

Hi Greenpa!
WHYONGODSGREENEARTH is ANYBODY reporting- or listening to- ANYTHING an "economist" would have to say????
Who is listening?
50% of the people are 3 paychecks from bankruptcies, not listening.
Of the other 50%, 30% are retired and living on their gov. retirement benefits, savings.
I would guess less than 20% are listening.
They just happen to be those that still have money.

Unknown said...

@ Linda S.

I am very reluctant to repond to your comments -- because I suspect I may have written them myself. Unless... I'm really you and I have multiple personality disorder.

I have only two things to say:

1. You're reading me wrong.
2. Who you callin' a boy?

The Lizard said...

iconoclast:"Total destruction of the USA, brought to you by the CFR and Zionist NWO fronts."

I've SO been waiting for someone to broach this zone.

Unknown said...

What's the CFR and do they have a paypal site I can donate to.

Chaos said...

That last article on Detroit (the city, and the automakers) had so much truth and good writing in it that it was painful to read. Of course, it came from a German newsmag...we're not literate here in the Empire of Sorrows.

porsena said...

Illargi said: You can't. Because the US government has been dabbling in housing for 70-odd years, prices are much higher than they need be. The price for a home should have a reasonable correlation with the cost of building it. Most homes are sold for ten times that or more. That is not reasonable. And shelter is a basic need for people, not some profit object. If a jeweler wishes to sell a diamond ring with a 90% mark-up, he has my blessing. When a builder or developer wants that profit level, I bless him not, nor a farmer who does it, or a deliverer of drinking water.

That's a curious view of the development business. In my suburban neighbourhood, a vacant lot sells for almost as much as one with a good house on it. Put a new, standard house on it and the builder's cost breakdown might be 50% land, 50% house, or the house might be worth less than half. A 90% profit potential? Not in his wildest dream.

Governments want to keep housing prices up because anarchy lies in the other direction. You can't blame them for trying, though I agree the effort could well, in the end, be more destructive than doing nothing.

*** said...

Al contrario, Ahimsa, gracias a ti.

Que curiosee, ¿fuiste nacido un hispanohablante? Mas, ¿escritas de donde si no te moleste decirme? (Disculpe si a veces me falta el modismo correcto)

*** said...

Kenneth, hi

I like your comments.

Economists? Our walk this afternoon provoked the following conclusion on them: we took some carrots to our favorite horses, and by and by an irritable pregnant mare started a fight over them. While I grew up riding horses, hubby is just learning about them, and brought to mind the old mule and carrot adage after seeing what animals will do to get hold of one.

So it goes with economics. They seem to adjust the size of the carrot, the length of the stick, but it's always the same in the industrialized ponzi society. Darned if TPTB didn't bait and switch old fashioned slavery for a yet more irresponsible kind with debt peonage.

I don't believe TPTB ever want the people out of debt. Hence the drive to warp all law and see "home ownership" mushroom in the US. Say what anyone will, but I see the mortgage debacle as utterly deliberate campaign to trap people into fear/debt peonage. And I believe plenty of economists threw the humanities over their collective shoulders with a Bronx cheer, basing their careers on kidding the public that there's any happy reunion with carrot. Ever.

As for England's miserable colonies, the one who thinks she won independence owes some half of the national public debt to the same banks who financed the fight against her colonists.

Which is why we love Mexico. I believe one secret to the warmth and kindness of the people (inland that is) has to be the personal security of so many extended families owning land free and clear. Fighting to keep both nostrils above water just makes people mean up north. Debt-based social systems will just never work out, IMO.

Anonymous said...

Anger in SF

Anonymous said...

>>"I've SO been waiting for someone to broach this zone."<<

And I'm so waiting for Ilargi to nip it in the bud!!

el gallinazo said...


"What's the CFR and do they have a paypal site I can donate to."

CFR - Council on Foreign Relations. Yeah, Robert, send them your paypal donation. You can see they are starving. David Rockefeller has to sleep in his limo.

The Americans who subsequently returned from the conference became drawn to a discreet club of New York financiers and international lawyers who had organized previously in June 1918 and was headed by Elihu Root, J. P. Morgan's lawyer;[16] this select group called itself the Council on Foreign Relations.[10] They joined this group and the Council was formally established in New York on July 29, 1921, with 108 founding members, including Elihu Root as a leading member, geographer Isaiah Bowman as a founding Director, and John W. Davis, the chief counsel for J. P. Morgan & Co. and former Solicitor General for President Wilson,[16] as its founding president. Davis was to become Democratic presidential candidate in 1924.
Other members included John Foster Dulles, Herbert H. Lehman, Henry L. Stimson, Averell Harriman, the Rockefeller family's public relations expert, Ivy Lee,[20] and Paul M. Warburg and Otto Kahn of the investment bank Kuhn, Loeb.[16]
The Council initially had strong connections to the Morgan interests, such as the lawyer, Paul Cravath, whose pre-eminent New York law firm (later named Cravath, Swaine & Moore) represented Morgan businesses; a Morgan partner, Russell Cornell Leffingwell, later became its first chairman. The head of the group's finance committee was Alexander Hemphill, chairman of Morgan's Guaranty Trust Company. Economist Edwin F. Gay, editor of the New York Evening Post, owned by Morgan partner Thomas W. Lamont, served as Secretary-Treasurer of the organization. Other members related to Morgan included Frank L. Polk, former Under-Secretary of State and attorney for J.P. Morgan & Co. Former Wilson Under-Secretary of State Norman H. Davis was a banking associate of the Morgans.[16] Over time, however, the locus of power shifted inexorably to the Rockefeller family. Paul Cravath's law firm also represented the Rockefeller family.[21] Edwin Gay suggested the creation of a quarterly journal, Foreign Affairs. He recommended Archibald Cary Coolidge be installed as the first editor, along with his New York Evening Post reporter, Hamilton Fish Armstrong, as assistant editor and executive director of the Council.[16]

el gallinazo said...

Linda S.

Excellent, well thought out comment to Pluto. I learned something from it. Sorry I picked on you last week :-)

Bigelow said...

“The president-elect has made his fundamental priorities clear – for anyone who wants to see them. The war machine and the financial markets will continue to be gorged and comforted in their wonted manner. Programs to help ordinary citizens, programs to enhance the quality of life for individuals and the well-being of society, will be the first – perhaps the only – areas to feel the budget axe. Whatever you may think of the efficacy of such programs, this ordering of priorities -- war and profits over people -- bespeaks the same depraved sensibility that has prevailed for generations in Washington. It is the same old rancid swill in a stylish new container.”
The Enduring Priorities in Obama's Time of Change

Anonymous said...

Hi Bigelow!
I cannot agree with your reference.
(The Enduring Priorities in Obama's Time of Change)
See Obama's presentation.
Remarks of President-Elect Barack Obama
As Prepared for Delivery
American Recovery and Reinvestment
Thursday, January 8, 2009

SanderO said...

The 800 pound gorilla in the room is the pent up anger which has not been unleashed by the public as they feel the boot of the capitalists on the back.

There will come a point when too many people will realize that they have nothing left to lose, they could give a shit about their credit rating and their debts to bankers and capitalists who suck them into slavery.

There will come a time when they turn of the tele (if they still have one) stop watching sports, following pop non sense at RIOT yes RIOT..

Those with any belief in the "system" cast a vote for hope, for a change in the status quo. They are watching an waiting to feel the winds of change. If they don't in a year and it's more bitter cold, confrontation will be the order of the day.

We'll see another Boston Tead party and wall street will probably be one of the targets with the only saving being they are so isolated from the working people they have driven into slavery.

The change needed is not restating the old gas guzzling soot spewing engine. If this is what they try to do, and I don't expect the capitalists to want anything but that, there is defintely going to be a reckoning.

As we slide deeper and deeper into despair, there becomes no other choice than struggle. Billlionaires becoming millionaires is not pain. People becoming homess and jobless IS.

The only real hope is that these slackers get completely run off the island and most will probably do just that and seek haven in the Caymans or some other offshore paradise where the people can't get at them. It's gonna happen.

The worst is yet to come.

knutty knitter said...

Greenpa...This little krill from new zealand wouldn't know what to do with an eggplant and never did think much of economic types in general.

This site has somewhat changed my mind by saying things I have thought about for years. Nice work people and please keep it up :)

viv in nz

Anonymous said...

What about the timing of Obama's Address yesterday?

If I am correct, that hasn't been done before - President Elect delivering a major address just 12 days before inauguration.

Was he trying to light a fire under Congress to have something ready? Was he fearful of what the next 12 days would bring in the economy\market without this address? Did he think that he didn't have 12 more "stable" days to wait on something like this?

Stoneleigh - watching waves and cycles on this level is new for me, and I'm having a hard time seeing how the Inaugural Bounce\Rally develops. Do you still see a spring\summer sucker's rally forming?

*** said...


I've been a fan of many of your comments. But I don't think you quite see what lurks for merikur more than any other naton on earth.

Namely the "factor" of its phenomenally centralized infrastructure (hence the ability of the gummnt to simply turn off electricity (hence water, sewage, heating, etc) in response to civil unrest), multiplied by its climate (most of its land not conducive to agriculture many months of the year, in addition to citizens being very vulnerable to freezing temps in eggcrate housing come the absence of electricity etc.), then again quantified by some ratio something like debt peonage over lack of knowledge of how to simply create one's own food.

Heh I'm no mathematician, but I think you get the jist. These people are easily crippled by sheer want of water and food, see. If the gubmnt doesn't first utterly shut down trucking - your only way of receiving food from mostly very distant sources - the truckers themselves will cease delivering goods the instant the masses draw all those guns out against one another. The cab of a truck is not sufficient armor for a guy. Truckers - and I know some - won't bother fighting their way through.

The republic has been designed for self-destruction (or mass enslavement, whatever) by dislocating people from the land, on top of spoiling them by making agriculture into a distant "out-sourced" commercial class. When over 98% of a people have no employment in agriculture, you have a people who are living a lie. This is not democracy, for then some out-sourced state (think south of the border) is forced into agricultural servitude.

Ah but they believe what they hear on teevee... and so on with destruction of empire.

"It's the guns." It is so primed to fail.

Anonymous said...

In truth,I don't know how the coming collapse will shake out.Those who believe that the complexity of delivery systems doom that sort of resistance ,fail to think of the "death by 1000 cuts"a disgruntled population may inflict on the wealthy.

The bright folk are starting to see whats coming now,and starting to take whatever steps they can to begin the transformation to a new society.EVERYONE sees the system is broken/doomed except those whose position does not allow them to see...or who dont wish to.

We are on the knife edge I think.Obama has info sources much better than this blog,And my guess he sees clearly the shit-storm headed this way.And the guy is scary-smart.I know he is a compromised chicago politician,with all that implies,and you don't get where he is w/o selling your soul to various devils,but,he is one of the few men who have made it to the pinnacles of power,and still retains the commen touch I think.I may be wrong,but I think I would much rather have this guy at the helm than anyone who has spent most of their life in the cesspool of washington politics.

We all know the change is coming.Get your water wings on,and your liferaft ready.Its not going to be long...


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

babilonia - spouse says the government would not purposefully turn off electricity. That would certainly create civil unrest. With Obama as president, he is going to create millions of jobs to keep people working. There would be ways to get food and water to the people. Amercia might be a bit different in the future, but it is not going to self-destruct.