Monday, February 2, 2009

February 2 2009: You Are The Crisis

Russell Lee Yes, the Candy Man Can November 1937
Neon sign for Hector’s Palace of Sweets Cafe in Crosby, North Dakota

Ilargi: Oh no, we're not rid of the bad bank drivel yet, are we? I started out trying to make a point about the character of the paper a bad bank, wherever on the planet, would be set up to buy. And I wrote this:

It may well be wise, just so everyone gets a clearer picture of what we are talking about, to stop referring to all this paper as "assets" or "investments". In this case, these are misleading terms. An asset is something that exists in the real world. A derivative, on the other hand, can best be compared to the paper slip you receive at the racetrack when you place a bet on a horse. That paper slip doesn't buy you a part of the horse, it buys you the chance of winning an X amount of money if the horse wins the race you're betting on. When that race is run, you have either won that X amount or you have lost the money the wager has cost you.

Now, that took me back to something I wrote on September 29, 2008, the day the original TARP bail-out was defeated in the House, and the Dow fell 777 points. It was called: Monday at the Racetrack. Allow me please to quote myself, taking into consideration that the big Dow drop came after I wrote it.

Ilargi on September 29 2008: If you go to the racetrack and bet on a horse, you receive a piece of paper that confirms the bet you made. There are many different varieties of bets possible; for now, let’s say you simply bet on one specific horse to win the race. After the race is over, you have either won your bet or lost it. There’s nothing difficult about the process, anyone can -learn to- understand it, and everyone, except in very rare circumstances, accepts it, both the winners and the losers.

What is happening in world finance these days is that a group of very heavy betters have become very heavy losers, and they have done so with borrowed money. In the past few years, in order to hide their losses, they have turned to a very clever little trick: they want to make us believe that the race is not over, even though we can all see that it is. In fact, if they have their way, the race will never be over, unless and until their horse wins.

The US government has joined the argument on the side of the losing betters. They have allowed the losers - who are their friends-, for years, to hide their predicament, their losing tickets, through Level 3 and off-balance sheet "creative accounting". Now that the government’s betting buddies’ creditors are losing patience, and demand their money back, which the buddies don’t have, the Fed and Treasury want to buy all those losing tickets, with money that belongs to the taxpayers whose best interests they are presumed to represent.

And they up the ante today: the president declares that this will cost the taxpayer nothing; and if you believe that one, you’ll like the guys who claim that there are profits to be made on this avalanche of losing bets. Now there'll be plenty of "experts" who are more than willing to tell you that comparing mortgage-backed securities -to take just one sort of bet- with horse racing is inherently flawed. Their argument will be that there is true value behind the securities: the homes that were purchased with the underlying mortgages.

At first glance, that may look plausible: it seems clear that the homes are not all of a sudden worthless, so how could the mortgages and securities be? My first thought is that the horse you bet on is not worthless either just because it lost one race. But that doesn’t make you win your bet, does it? And the horse is still tired. There are deeper problems with the "the home still has value" argument. The most flagrant is the actual purchase prices, which doubled or tripled in a decade, while no value was added to the home itself. From that follows that many homes were sold at prices that people couldn’t truly afford. The US has for that reason already seen millions of foreclosures, with many more inevitably to come. And the elevated prices, of course. are also the ones the securities are based on.

So perhaps at some time in the future your losing horse might win a race, and perhaps at one point some money can be made on a new mortgage for a foreclosed home. But that makes no difference for your losing bet, and neither does it make the securities valuable again. Both races are over. For good. Which makes it impossible for the US taxpayer to play even on the losing betting tickets their government is about to buy with their money, while making a profit on them is too ridiculous to seriously discuss.

If home sales ever recover to any kind of extent, it will be at prices that are far lower than they have been so far in this millenium. That is the only way to make them affordable. And even if it happens, it is going to take years. In the meantime, the gambling losses will have to be paid. Your government tries to convince you that your life will be miserable without their losing betting buddies. If you ask me, it will be much worse with them, because if you want to keep them around, you’ll have to pay their debts. And they’ll just use the money to go bet on the next race. Maybe you should keep the money and buy your own tickets. That way you get to keep the profits too, if there are any.

But if I were you, I’d lay off the gambling for a while. It looks to me like a sure bet that you’re going to need every penny you have just to feed your children.

Back to today: I know the above is not perfect, but it still works for me. I must admit, as I read back, I’m sort of surprised myself how little has changed since then, with all the things that have happened, including of course the new US president. Who now is discussing doing the same thing: buying leftover paperslips from bets lost long ago. And doing so with your money. But that's not the only thing wrong with this.

Buying $1 trillion worth of toxic assets is nowhere near enough, it doesn't even begin make a dent in the mess. And if too much of the soiled casino bathroom tissue is left behind in the banks' vaults, two things inevitably will happen. First, no confidence is restored. None. And second, banks will have to keep hoarding cash to provide for the additional writedowns on the remaining assets, writedowns everybody knows (but doesn't tell) that are sure to come. The report from the Office of the Comptroller of the currency we discussed last week states that just the three biggest US banks -Citi, BofA, JPM- have over $170 trillion "worth" in derivatives positions. Their real assets are stated as just over $5 trillion, and even then we have to look at how real these are.

What lies in the vaults of the remaining 8500 US banks "insured" by the FDIC is an open question. Let's assume it's another $170 trillion when all is added up. There are scores of institutional investors, insurance companies, pension funds, hedge funds, mutual funds, etc., that have positions in these wagers. The essential point in all of it, I think, is that the bets have already been lost. That is, the paper is worth close to zero. You're about to just about literally purchase the emperor's clothes. As much as people like Tim Geithner, last week before the Senate Finance Committee, and the CEO's of the banks involved, shout at the top of their lungs that it's oh-so hard to value the paper, it's simply not. Just lay it out on the table, and you’ll know.

Thing is, if it were on that table for everyone to see, it would have to be marked to a market value of pennies on the buck, simply because that is the market value. Thing is also that as long as it's not on the table, it will be politically palatable to to shove additional trillions of dollars that belong to people not yet born, towards institutions whose "leaders" have amassed hundreds of millions for their individual selves, by cashing in on the 1-in-10 bets that won, while offloading the 9-in-10 that lost, onto the public coffer.

Today, your new president and his team are trying hard to find a way to make you believe the races haven't been run yet. But they have. And that's why it takes so long to get a bad bank plan together: They need to find the words and reasoning and excuses to make it politically palatable. That is what's hard, that is what's making it take so long. It's not about applying valuations to toilet paper. We all know what that's worth. It's about making you believe that the valuation is indeed difficult. Because if you believe that, more of your money, and that of your children, can be stolen from you. Geithner last week talked about computer models putting values on the paper, and about independent (yeah, right!) institutions doing so. Both have failed miserably. All that's left is a market that will slaughter the entire thing. And that's not what they want. And that's what makes it take so long. Nothing has changed since September 29.

Every single day, every single move by our governments digs us into ever deeper holes. Maybe you remember, or at least can imagine, how it was when you were five years old, and tried to cover a lie with another lie, and then another, and all the time you were afraid your mother would see right through you. See? That's the essence of the emperor's new clothes, an dof our new-fanged government policies.

Anyway, I'm just trying to tell you, once more, that assets are not necessarily assets, even if your president tries to make you believe that they are, or can be, or might be sometime in the future. So there you have it: if only 15% of the paper slips of only the 3 biggest US banks goes stale and stinky, there is a loss risk of over $25 trillion, roughly twice the annual US GDP. This is not a secret in banking circles. Therefore, $1 trillion will do nothing towards restoring confidence. It's like the emperor in his new clothes plays hide and seek. And you're it.

Ilargi: Stiglitz has some good ideas. But I despair when someone says: "Families matter just as much as firms". It may be out of context, but I sure could never get a line like that out of my mouth.

Let banks fail, says Nobel economist Joseph Stiglitz
The Government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice, according to Joseph Stiglitz, the Nobel Prize-winning economist. Professor Stiglitz, the former chair of the White House Council of Economic Advisers, told The Daily Telegraph that Britain should let the banks default on their vast foreign operations and start afresh with new set of healthy banks.

"The UK has been hit hard because the banks took on enormously large liabilities in foreign currencies. Should the British taxpayers have to lower their standard of living for 20 years to pay off mistakes that benefited a small elite?" he said. "There is an argument for letting the banks go bust. It may cause turmoil but it will be a cheaper way to deal with this in the end. The British Parliament never offered a blanket guarantee for all liabilities and derivative positions of these banks," he said. Mr Stiglitz said the Government should underwrite all deposits to protect the UK's domestic credit system and safeguard money markets that lubricate lending. It should use the skeletons of the old banks to build a healthier structure. "The new banks will be more credible once they no longer have these liabilities on their back."

Mr Stiglitz said the City of London would survive the shock of such a default because it would uphold the principle of free market responsibility. "Counter-parties entered into voluntary agreements with the banks and they must accept the consequences," he said. Such a drastic course of action would be fraught with difficulties and risks, however. It would leave healthy banks in an untenable position since they would have to compete for funds in the markets with state-run entities. Mr Stiglitz's radical proposal is a "Chapter 11" scheme for households to allow them to bring their debts under control without having to go into bankruptcy. "Families matter just as much as firms. The US government can borrow at 1pc so why can't it lend directly to poor people for mortgages at 4pc. ," he said.

Big Risks for U.S. in Trying to Value Bad Bank Assets
As the Obama administration prepares its strategy to rescue the nation’s banks by buying or guaranteeing troubled assets on their books, it confronts one central problem: How should they be valued? Not just billions, but hundreds of billions of taxpayer dollars are at stake. The Treasury secretary, Timothy F. Geithner, is expected to announce details of the new plan within weeks. Administration and Congressional officials say it will give the government flexibility to buy some bad assets and guarantee others in an effort to have a broad impact but still tailor the aid for different institutions.

But getting this right will not be easy. The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency. The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

The bond analyzed by S.& P. is just one of thousands that the government might buy or guarantee should it go forward with setting up a "bad bank" that would acquire $1 trillion or more of toxic assets from banks. The idea is that, free from the burden of carrying these bad assets, banks would start lending again and bolster the faltering economy. The bad bank set up by the government would, over time, sell the assets and recover some or most of what it had paid. While the government is considering several approaches to helping the banks, including more capital injections, buying or insuring toxic assets is likely to be a centerpiece. Determining the right price for these assets is crucial to success.

Placing too low a value would force institutions selling and others holding similar investments to register crushing losses that could deplete their capital and make it harder for them to increase lending. But inflated values would bail out the companies, their shareholders and executives at the expense of taxpayers, who would swallow the losses if the government could not recoup what it had paid. Some critics of the plan warn that the government should not buy the assets, because banks will try to get too high a price and leave taxpayers holding the bag. "To date, the banks have stuck their heads in the sand," said Lynn E. Turner, a former chief accountant for the Securities and Exchange Commission, "and demanded that they be paid the price of good apples for bad apples." But many believe that, given the depth of the problem and the fact that it keeps getting worse, the government has little choice.

Finance experts from Wall Street and academia are advising the administration on other options. To sidestep the thorny valuation problem, some have suggested that the bad bank acquire only assets that have already been marked down significantly and guarantee other assets, but officials would have just as difficult a task in determining how much to charge for insuring risky assets. Economists predict that the cost of the program will most likely exceed the $350 billion remaining in the $700 billion Troubled Assets Relief Program that Congress approved in October. They say the Obama administration may need upwards of $1 trillion in additional aid for banks — on top of the more than $800 billion the administration is seeking in an economic stimulus measure moving through Congress.

Many in Washington question whether the rescue has achieved its goal of stabilizing the financial markets. A report by the General Accountability Office on Friday concluded that whether the bailout program had been effective might never be known. "While the package helped avoid a financial collapse, many are frustrated by the results — and rightfully so," President Obama said in his weekly address on Saturday. "Too often taxpayer dollars have been spent without transparency or accountability. Banks have been extended a hand, but homeowners, students, and small businesses that need loans have been left to fend on their own."

Mr. Obama and many lawmakers have expressed anger that banks that received the first batch of aid money do not appear to have increased their lending significantly, even as some firms have spent billions on bonuses, corporate jets and other perks. In two weeks the House will hold a hearing to ask chief executives of the eight largest banks about their spending controls. As early as this week, the Treasury Department may impose new limits on the executive pay of companies receiving financial assistance. The Oversight Panel created by Congress to monitor the program is also expected to publish a report this week looking at whether the government paid too much to the large banks that they have provided with assistance.

A frequent refrain in Washington and on Wall Street is that there are no current market prices for toxic securities. But people who buy and sell these investments say that is a simplistic reading of the problem. They say most kinds of securities can be valued and are being traded, but trading has slowed as sellers and buyers disagree about what that the price should be. The value of these securities is based on the future cash flow they provide to investors. To determine that, traders have to make assumptions about the housing market and the economy: How high will the unemployment rate go in the coming years? How many borrowers will default? What will homes be worth?

The Standard & Poor’s group, Market, Credit and Risk Strategies, which operates independently from the company’s credit ratings business, has been studying troubled securities for investors and banks. The bond that is trading at 38 cents provides a vivid illustration of the dilemma in valuing these assets. The bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A. Michael G. Thompson, a managing director at the S.& P. group, says his computer models can easily calculate what the bond is worth under different situations. "This is not rocket science, this is straight bond math," he said. But determining what the future holds is much harder. "We are not masters of the universe who can predict the macroeconomic environment," he added

Some would-be buyers of these assets fear that a deep recession could drive up default rates and push down home prices much further. They also worry that a cataclysm like the failure of a big bank could send prices tumbling again, just as the collapse of Lehman Brothers did in September. Others see no reason to bid up prices because those who need to sell are desperate. Big banks and other owners of mortgage investments have argued that the low market prices reflect fire sales. Many have classified such securities as level-three assets, for which accounting rules allow them to determine values using computer models rather than the marketplace. Mr. Thompson estimates that at the end of September financial firms had $600 billion in such hard-to-value assets.

But critics like Mr. Turner say that the banks’ accounting for these assets cannot be trusted because they have an incentive to use optimistic assumptions. In some instances, the government has guaranteed losses on certain assets for big, systemically important companies like Citigroup and Bank of America. Policy makers have found such arrangements appealing because they do not require upfront payments and they can be customized for each bank, Douglas J. Elliott, a fellow at the Brookings Institution, wrote in a recent paper. Still, government guarantees need to be based on sound valuations, Mr. Elliott and others say.

If the government underestimates the risks of default, taxpayers could eventually lose tens of billions of dollars. The cost of insuring such assets in the private market is often several times greater than the price the government is charging banks. Whatever approach the Obama administration takes, investors and policy makers say it should provide more and clearer information about the health of banks and the risks that the government is taking. Many analysts do not trust what they are told about the quality of the securities and loans held by banks and other financial firms. Most banks provide only a very general description of their holdings, because they consider the information privileged.

But the government, using its power as a big investor, could compel the banks to divulge more specific data, without giving away the names of individual bonds or loans, analysts said. The market could then do its own analysis on what the assets are worth. "At least it would give the government one objective measure of the value of these assets," said Anthony Lembke, co-head of investments at MKP Capital Management, a hedge fund firm that is a big investor in mortgages. "In the absence of transparency and clarity, investors are going to assume a value that will be conservative and then add a risk premium."

A bad bank is a very bad idea
When rumors surfaced on Wednesday that the Obama administration may create a "bad bank" to buy toxic assets, financial stocks soared. Of course bank shareholders were happy; the plan is likely to be a titanic taxpayer hand-out. It has to be to achieve the administration's goal of keeping banks in private hands. To understand the banking crisis, and Obama's emerging solution, all you need to know is one equation: Assets = Liabilities + Equity. This equation explains why banks are dropping like flies. A bank's assets are the loans it makes to borrowers. Its liabilities are the dollars it borrows from lenders and depositors to fund those loans. Shareholder equity is what's left over. During the bubble, banks made loans for houses at vastly inflated prices. Say, for instance, a bank lent $1 million to a borrower buying a Miami condo in 2006. The borrower promised to repay $1 million over the life of the loan, so the bank valued this asset at $1 million.

Flash forward to 2009, and the condo is now worth $500,000. The borrower defaults because he'd rather lose the condo than pay a million-dollar mortgage on a property now worth half that. The bank forecloses on the condo and sells it for what it can get, the current market value of $500,000. The bank's asset, the loan, has fallen from $1 million, which the borrower owed, to $500,000, the amount recovered. A 50% loss. If borrowers default en masse, then the value of the bank's assets drops precipitously. Its liabilities, however, are fixed. The bank still owes its lenders and depositors the amount it borrowed. So bank shareholders, literally the owners of the bank's equity, have to absorb the losses. In our equation above, one side must equal the other. Since liabilities are fixed, assets and equity decline by a like amount. If losses are too big and the bank's equity cushion too small, bank shareholders are wiped out.  Losses systemwide are, of course, huge. According to the Case-Shiller index released this week, home prices have fallen 25% in the nation's biggest metro areas since their peak.

And bank equity cushions are tiny. Citigroup, for instance, had over $50 of assets (by another calculation over $200) for every $1 of tangible common equity. With leverage that high, assets need only fall 2% for equity to be wiped out entirely. Is it any surprise that Citi's stock has dropped more than 90% from its high? The Western world's entire financial system is suffering this sickness - huge asset losses and no equity to absorb them. Normally when a bank fails, the Federal Deposit Insurance Corp. resolves the issue. But the severity of the downturn and the degree of leverage on big bank balance sheets mean all of them have effectively collapsed. It would appear the government has no choice but to nationalize them. Unless, miraculously, bank asset values go back up, wiping out losses. But how can this happen? Our Miami condo is not going to sell for $1 million, so who on Earth would buy the loan for that much?

It appears taxpayers will. The administration's "bad bank" would buy up the bad assets clogging bank balance sheets. Shareholders are thrilled because Sheila Bair, head of the FDIC and the likely CEO-in-waiting of the bad bank, has made clear her intention to overpay for the assets. Take our example above. The government might buy the million-dollar loan for close to a million dollars - even though the condo itself is still worth just $500,000. But that's no longer the bank's problem. Since taxpayers now own the asset, they take the half-million dollar loss. While government reports suggest the bad bank will spend $1 trillion to $2 trillion to buy toxic assets, Goldman Sachs estimates that $4 trillion may ultimately be needed. And banks are likely to sell their most toxic trash to the bad bank, meaning the public's losses will be massive - certainly hundreds of billions of dollars, based on current fair value estimates. With taxpayers in line to absorb so much bad debt, is it any wonder bank stocks soared?

The problem at the core of all this is the administration's goal: It wants to avoid nationalizing banks at all costs, even if that requires a huge transfer of wealth from the public in order to inflate asset prices artificially. But this solves nothing. Unless assets are marked down, they won't trade and the economy will calcify. Marking down assets means losses have to be recognized. A better solution than forcing them onto taxpayers would be to nationalize the banks outright, wiping out shareholders and forcing bank creditors to absorb their share of losses. Yes, such a solution would be very painful, but it would be a solution. Bailing out banks - not to mention borrowing $1 trillion to fund "stimulus" and endless money-printing by the Fed - are not solutions. All of these simply represent more borrowing to re-inflate a debt bubble that sooner or later needs to deflate. The American economy is collapsing under the weight of too much debt. We will not rescue it by piling on more.

Obama's Bad Banks & Wall Street

Economists express doubts over Brown's ring-rencing plan for toxic debts in British banks
Doubts over the effectiveness and costs of drastic new measures in the United States, Britain and Europe to stabilise the global financial system were voiced in Davos at the weekend by leading economic and financial experts. Leading economists challenged the effectiveness of Gordon Brown's plan to ring-fence distressed loan assets in British banks through a system of government guarantees that may also be adopted by President Obama. Mr Obama is poised to announce a package this week to clean up US banks that is likely to include creating a "bad bank" to take over and hold the toxic assets clogging the American financial system.

Angela Merkel, the German Chancellor, is working on plans for a rescue based around a bad bank approach in Europe's biggest economy. There is speculation that the Irish Government is set to invest €7 billion (£6.1 billion) in the country's two biggest banks this week. Under the recapitalisation scheme, Allied Irish Bank (AIB) and Bank of Ireland would receive €3.5 billion each in preference shares, as well as government guarantees for more than €24 billion in bad loans. All UK Post Office accounts are operated by the Bank of Ireland. There were intense talks over the new scheme, which will supersede the Government's first plan to inject €2billion into each bank, over the weekend, sources at the Irish Department of Finance said. An AIB spokesman said that the new figures were speculation. It is understood that Dublin is keen to act before credit ratings agencies review Ireland's rating. Moody's has already put a "negative" outlook on the Republic. The Irish Government nationalised Anglo-Irish bank, the country's third-largest bank, last month.

Some of the world's leading policy experts in Davos were sharply at odds over whether a state-backed bad bank would prove effective in reviving stalled flows of credit to households and businesses. Banking and business leaders at the World Economic Forum expressed frustration at the lack of a consensus on how to combat the crisis and at the slow pace of government action. The expected US Treasury move to switch from bolstering banks with vast new capital injections, mirroring Britain's previous measures, back to an initial bad bank plan to buy distressed securities linked to past loans was attacked by Joseph Stiglitz, the influential Nobel laureate in economics.

Professor Stiglitz, former chairman of President Clinton's council of economic advisers, said: "You should not chase good money after bad money. This is a new version of the old idea that I thought had been discarded, which was the ‘cash for trash' idea. The new proposal is ‘buy garbage in bulk'." Professor Stiglitz said that the costs of operating a bad bank, which is expected to have an initial purchasing power of up to $1 trillion (£691 billion) in the United States, could escalate. "If we do not do it right, we are talking about a national debt that is hard to manage." However, the bad bank proposals being hatched in Washington and Berlin, and expected by some to follow in Britain, were defended by Alan Blinder, former vice-chairman of the US Federal Reserve and a Princeton economics professor. "What is the alternative? Leave the banks that are under water to drown?" he said.

Professor Blinder questioned the British plan to guarantee toxic assets while leaving them on bank balance sheets, which is being looked at in Washington. "You do not insure a risk that has already happened — you don't buy fire insurance for a house that has already burnt down," he said. Angel Gurría, Secretary-General of the Organisation for Economic Cooperation and Development, said that bad bank schemes were the least worst option. The absence of viable alternatives meant that there was no choice.

Obama to Require Banks Receiving Aid to Boost Lending
President Barack Obama will require banks to boost lending to consumers and companies in return for taxpayer aid from the $700 billion bailout fund, in a departure from Bush administration policy, a key lawmaker said. "You’re going to see the Obama administration," learning lessons from the first phase of the program, "push for much more lending," House Financial Services Committee Chairman Barney Frank, who helped write the financial-rescue law, said yesterday on ABC television’s This Week program. "There are going to be some real rules in there." Obama will include the restriction in a bank-rescue strategy he is expected to announce in coming weeks, responding to congressional criticism that firms receiving funds from the first $350 billion installment failed to pass on the aid. Obama last week blasted Wall Street executives for paying bonuses, and reports showed some aid helped recipients to finance mergers and acquisitions that may lead to job cuts.

The administration and top Democratic lawmakers are seeking to differentiate the next stage of the financial bailout in order to insulate against popular opposition to a Wall Street rescue. Lawmakers are questioning the effectiveness of the Troubled Asset Relief Program they enacted in October, saying the Bush team’s decisions on deploying the first $350 billion did little to stabilize the economy. While the Treasury may not announce its TARP overhaul until next week, the administration is likely to unveil in coming days a new, stricter set of rules reining in executive pay for the biggest recipients of taxpayer funds, an administration official said. The requirements, which may also restrict dividends, would apply to companies that get exceptional government aid.

Obama said today that the U.S. is suffering from a "massive hangover" from years of risk-taking and that some banks remain "very vulnerable." In an interview on NBC’s Today show, he said it’s likely some banks haven’t fully disclosed their losses. "They’re going to have to write down those losses, and some banks won’t make it," he said. Referring to the administration’s plan for the financial industry, he said "I do have confidence we’re going to get it right but it’s not going to be overnight." Treasury Secretary Timothy Geithner will meet today with Federal Reserve Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. Chairwoman Sheila Bair and Comptroller of the Currency John Dugan to continue discussions on regulatory changes. Frank will also meet with Bernanke.

Among other gatherings, Geithner is expected to attend a Democratic congressional retreat this week, while Citigroup’s incoming chairman, Richard Parsons, met with Treasury officials Jan. 30. "We’ve got to loosen up the credit markets," Senator James DeMint, a South Carolina Republican, said yesterday on ABC’s This Week. "The first round of TARP did not support lending, which was its whole point." Under former Secretary Henry Paulson, the Treasury allocated about half of the $700 billion program to inject capital into banks, help automakers, and guarantee assets for Citigroup Inc. and Bank of America Corp. In its rescue efforts so far, the Treasury has taken ownership stakes in more than 300 banks as a condition of providing aid.

"It is a mistake to assume that the Obama administration hasn’t learned from the mistakes of the Bush administration," Frank, a Massachusetts Democrat, said yesterday. "I believe they’re going to do it very differently." The U.S. House of Representatives last month approved legislation written by Frank that sets conditions for the release of the remaining $350 billion in funds. The bill, which Frank acknowledged wouldn’t immediately be taken up in the Senate, is meant to serve as a guide for the Obama administration for how lawmakers would like to see the money spent. It would require the Treasury to set up a foreclosure-relief program and direct banks to report how they are using the funds. During his confirmation hearing last month, Geithner told the Senate Finance Committee that he would expect banks to step up their lending activities in exchange for receiving government funding, particularly if the banks were in good shape to start.

"As a condition of federal assistance, healthy banks without major capital shortfalls will increase lending above baseline levels," Geithner said. The president in his weekly radio address on Jan. 31 said the new strategy will "help lower mortgage costs and extend loans to small businesses so they can create jobs." One part of that strategy will be addressing the toxic assets that are clogging lenders’ balance sheets and preventing them from expanding credit, people familiar with the matter said last week. Likely approaches include a government-run bad bank to buy and hold some of the securities, and insurance of other assets that remain on banks’ books. Officials and regulators are grappling with how to value the investments in a way that shores up the banking system while not exposing the taxpayer to potentially trillions of dollars of losses.

Buying illiquid assets amounts to swapping taxpayers’ "cash for trash," Nobel laureate Joseph Stiglitz said in a Jan. 31 panel discussion at the World Economic Forum in Davos, Switzerland. "You shouldn’t chase good money after bad." Stiglitz, a professor at Columbia University in New York and a former adviser to President Bill Clinton, said the plan would leave taxpayers paying for years of imprudent lending by banks. The same challenge of how to value the assets has been a sticking point ever since Paulson and Bernanke went to Capitol Hill to seek the original bailout legislation last year. At the time, Bernanke said the government would need to pay above "fire-sale prices." Paulson later ditched the plan, deciding that buying assets was too complicated and expensive, and switched the focus to capital injections in the hope that stronger banks could unwind their balance sheets on their own. That hasn’t happened, so the idea of purchasing troubled assets is under consideration again, posing the same set of issues.

"If you pay too much, the bank that’s selling the assets may inappropriately benefit," Michael Bleier, a partner at law firm Reed Smith in Pittsburgh and a former Fed lawyer, said in a telephone interview. "If you pay too little, you might crater the institution." Also, it takes a lot of staff to manage the assets once the government takes them on, Bleier said. Real-estate investments come with upkeep, tax and even development costs. That adds to the complexity of the project. Obama’s blueprint is also expected to include a program for alleviating foreclosures. One approach could resemble a plan unveiled last year by Federal Deposit Insurance Corp. Chairman Sheila Bair to have the government use TARP funds to guarantee modified mortgages. Bair’s proposal, which she said could prevent 1.5 million foreclosures through 2009, would create a program that would pay servicers $1,000 to modify a troubled loan by reducing the interest rate, forgiving a portion of the principal or extending the repayment plan. The government would then absorb as much as 50 percent of any loss if the modified loan re-defaults.

Democrats Indicate Areas of Compromise on Stimulus
The broad outlines of how the Obama administration’s near-trillion dollar stimulus package may change in the Senate began to become visible on Sunday, with Democratic senators indicating that they would be open to considering Republican amendments to the bill, particularly in the areas of housing and infrastructure spending. Senator Charles E. Schumer, Democrat of New York, said that Senate Democrats were interested in considering Republican proposals to do more to help the sputtering housing market, including instituting a $15,000 tax credit for all home buyers.

"One of the Republican proposals is to raise the $7,500 tax credit we give to new home buyers, raise it to up $15,000 and do it for all home buyers," Senator Schumer said on CBS’s "Face the Nation." "That’s something that we look favorably upon." Mr. Schumer, who is a member of the Finance Committee, also said he was also interested in passing legislation aimed at getting mortgage rates down to 4.5 percent, although he said he thought that might go in the next part of the bailout measure approved by Congress last year, not the stimulus package. He added, "I think we will get real agreement on the housing part."

Senators of both parties also said on Sunday that they expected a significant amount of additional money — about $20 billion to $30 billion — to go toward infrastructure spending on such things as roads and bridges. Senator Schumer also said he supported an additional $5 billion for mass transit spending. But there was significant disagreement along party lines over whether the additional spending should add to the bottom line dollar figure of the bill. With interest, the $819-billion version of the bill that passed the House last week could actually cost up to $1.2 trillion, the director of the Congressional Budget Office, Douglas Elmendorf, told the House Budget Committee on Tuesday.

Senator John Kerry, Democrat of Massachusetts, speaking on NBC’s "Meet the Press," said that he would be willing to "raise the total price tag" of the bill to include get the additional spending sought by the Republicans. But Senator Mitch McConnell of Kentucky, the Republican leader in the Senate, said, "There’s going to have to be a lot taken out of this bill for Republicans to support it." The Senate version of the bill is already substantially different from the House package, including a provision to protect millions of middle-class Americans from having to pay the alternative minimum tax in 2009 that brings the total cost of the Senate bill to nearly $890 billion.

Reconciling the two versions will require further negotiations with House leaders after the Senate acts. Floor debate is expected to last through next week. President Obama will meet with House and Senate Democratic leaders on Monday afternoon, the White House said on Sunday, at which the stimulus package is likely to be the chief topic of discussion. Indicating the types of cuts the Republicans would like to see to the bill, Senator Jon Kyl, Republican of Arizona, said on "Fox News Sunday" that he took issue with the Obama administration’s signature $500 tax credit to working families — which some economists have said will not result in sufficient additional spending — as well as with the creation of dozens of new government programs and the transfer of billions of dollars to the states.

Senator Kay Bailey Hutchinson, Republican of Texas, said on NBC’s "Meet the Press" that she wanted cuts to "social spending provisions" that total about $200 billion in the bill. Additional tax cuts, Ms. Hutchinson and other Republicans said, would be more effective than large-scale government spending programs. "The whole idea is to stimulate the economy immediately," she said. "I think we can do it more effectively with less money. Let’s do something timely, temporary and targeted, and do it on an overwhelmingly bipartisan basis. It still can be done." Senators from both parties also disagreed over how much of an overhaul the bill needs. Democrats continued to defend the measure in its broad outlines, with Senator Schumer indicating that four Republican senators have already indicated they will support the bill.

Democrats, who control 58 seats in the Senate, need to pass the filibuster-proof majority vote of 60 to get the legislation approved. "The overall bill is the right bill," Senator Schumer said. While there are certain spending programs that will come out of the current bill, "the changes will be small," he said. But Senator Kyl, the Republican whip, warned his party would withhold support for the bill unless there were "major structural changes to it." "I see support for this legislation eroding," he said. "I think the more people around the country see of it, the angrier they get, because it’s very wasteful. It spends way too much money."

The Obama administration and Democrats have already cut two provisions in the bill passed by the House of Representatives last Wednesday without a single Republican vote. Dropped from the bill was $200 million to fix up the National Mall and millions for family planning that Republicans said would finance contraceptives. As Mr. Schumer put it on "Face the Nation, "This will pass with Republican votes, because it’s a good package, and because we will make some changes around the edges."

U.S. Consumer Spending Falls for Sixth Straight Month
Consumer spending in the U.S. fell in December for a record sixth consecutive month, capping the worst year since 1961, a slump that is likely to persist as companies slash payrolls. The 1 percent drop in purchases was larger than forecast and followed a 0.8 percent decrease in November, the Commerce Department said today in Washington. The Federal Reserve’s preferred measure of inflation was little changed for a third month. The loss of almost 2.6 million jobs last year and record declines in home values have shaken confidence, indicating sales and prices are likely to keep retreating.

President Barack Obama is pushing Congress to approve a stimulus package that includes tax cuts intended to boost consumer spending. "Consumers continue to be pulling back, and the pace of that does not appear to be easing," said Julia Coronado, a senior economist at Barclays Capital Inc. in New York, which accurately forecast the drop in spending. "Consumers are not going to be spending anytime soon." Economists forecast spending would fall 0.9 percent, according to the median of 61 estimates in a Bloomberg News survey. Projections ranged from declines of 0.6 percent to 1.7 percent.

Today’s report also showed incomes fell 0.2 percent in December, the third straight decline, after a 0.4 percent decrease the prior month. It was the longest stretch of decreases since the three months ended in January 1954. The figures raise more concerns about deflation as prices cool. The price gauge tied to spending patterns increased 0.6 percent from December 2007. The Fed’s preferred gauge of prices, which excludes food and fuel, was up 1.7 percent from December 2007, the smallest gain in almost five years. Consumer spending rose 3.6 percent for all of 2008, the smallest gain since 1961.

Companies are slashing prices to attract shoppers during the recession, a move that is dragging down profits. EBay Inc., the world’s biggest Internet auctioneer, reported its first quarterly decline on Jan. 22. Revenue fell 6.6 percent to $2.04 billion as sellers cut prices and the company boosted promotions to lure more holiday customers. The decrease in spending pushed the savings rate up to 3.6 percent from 2.8 percent in November. A positive rate suggests consumers are earning more than they are spending. Disposable income, or the money left over after taxes, increased 0.3 percent after adjusting for inflation.

Today’s report showed inflation-adjusted total spending dropped 0.5 percent following a 0.3 percent gain in November. Price-adjusted purchases of durable goods, such as autos, furniture, and other long-lasting items, decreased 0.8 percent. Purchases of non-durable goods decreased 1.8 percent, partly reflecting the slump in gasoline, and spending on services, which account for almost 60 percent of all outlays, climbed 0.1 percent. Consumer spending dropped at a 3.5 percent annual pace in the fourth quarter after decreasing at a 3.8 percent pace in the previous three months, the Commerce Department said Jan. 30. It was the first time since records began in 1947 that declines in spending exceeded 3 percent in consecutive quarters. The economy shrank 3.8 percent, the most since 1982.

Consumers in U.S. Increase Savings While Spending Less
The latest economic data released Monday painted a picture of American consumers and businesses embarking on an era of thrift as the recession deepens, spending less on consumer goods, housing and big-ticket developments like office buildings and hotels. Americans cut their spending for a sixth month in December and, perhaps more significant, put more into their savings accounts, the government reported Monday, as they worried about losing their jobs and earning less in a deteriorating economy.

In another report, the Commerce Department said that construction spending in December declined 1.4 percent from November as housing values continued to fall and credit markets remained tight. Spending on residential construction in December plunged 22 percent from the same month last year. “If households are shying away from spending, what’s going to cause businesses to start spending again?” a senior economist at Moody’s, Aaron Smith, said. Consumer spending and business investment have slowed sharply. And in the last three months of 2008, the economy contracted at its fastest pace in a quarter-century.

As Americans shut their wallets and spent less at shopping malls, companies cut jobs and reduced their investment in heavy equipment, software and buildings to trim their costs. “The weakness is feeding on itself,” said James O’Sullivan, an economist at UBS. “You’ve had the spread of weakness from housing to Wall Street to main street. You’ve got a credit crunch, which is now affecting every part of the economy, including the consumer.” Economists and politicians say that the quickening pace of contraction highlights the need for an effective stimulus plan. The House has passed an $819 billion package of tax cuts and spending, and the Senate is set to take up debate on its version of the bill this week.

Wall Street offered a mixed reaction to the news on Monday. The Dow Jones industrial average was down about 50 points shortly after 1 p.m., while the broader Standard & Poor’s 500-stock index was essentially unchanged and the technology-heavy Nasdaq was slightly higher. The Commerce Department reported that personal spending fell 1 percent or $102.4 billion in December, after a drop of $77.8 billion in November. Economists said consumers were likely to continue cutting their spending as unemployment rose and employers kept announcing thousands of job cuts.

As they trimmed their spending, Americans saved 3.6 percent of their disposable income in December, up from a 2.8 percent savings rate in November, the government reported. “We have to expect spending to keep falling for some months yet,” Ian C. Shepherdson, chief United States economist at High Frequency Economics, wrote in a note to clients. “The concomitant rise in the saving rate, now at 3.6 percent compared to 0.8 percent in August, is good news in the long run but the key source of pain right now.” Adjusted for price changes, real income increased 0.3 percent in December while real spending fell by a slightly lower 0.5 percent. The so-called real rates reflect the continuing relief that lower gasoline and energy prices have offered consumers in a recession that began in December 2007.

Spending on durable goods fell 0.8 percent in December while purchases of nondurable goods fell 1.8 percent, after increases in November.
American consumers had driven much of the growth in the last few years, as they relied heavily on their credit cards and tapped home-equity loans to finance remodeling projects, new cars and trips to the mall. But that spending largely dried up as home values fell and credit tightened.
The unemployment rate has reached 7.2 percent, its highest point in 16 years, and some economists said it was likely to top 9 percent.

The economy shed some 1.9 million jobs in the last four months of 2008, and it is losing jobs at a rate of more than 500,000 every month. The government is scheduled to release the January unemployment numbers on Friday. “Consumers are rational,” said Joshua Shapiro, chief United States economist at MFR. “They respond to incentives and conditions, and right now the conditions and incentives are: spend as little as you can, and pay down as much as you can. You hunker down. That’s what the consumer’s doing.”

Construction spending posts record drop in 2008
U.S. construction spending fell for a third straight month in December, closing out a year in which building activity dropped by a record amount as housing continued to plunge. And economists don't expect a quick turnaround amid a severe recession and the ongoing financial crisis. The Commerce Department said Monday that total construction spending dropped by 1.4 percent in December, slightly worse than the 1.2 percent decline economists expected. For the year, construction spending fell by a record 5.1 percent, surpassing the 2.6 percent decline in 2007. The weakness in both years reflected huge declines in home construction, which fell 27.2 percent last year, the largest drop on records going back to 1993.

Housing construction surged earlier in the decade as both sales and prices climbed to all-time highs, but the boom ended after 2006. Builders have scrambled to cut back on production in the face of slumping demand and soaring mortgage foreclosures that are dumping more unsold homes on an already glutted market. For December, housing activity dropped 3.2 percent to a seasonally adjusted annual rate of $319.2 billion. Nonresidential construction also fell for the third straight month, dropping 0.4 percent to an annual rate of $417.9 billion. But for the year, nonresidential construction rose 15.3 percent, the third straight double-digit gain.

Still, with a severe credit crisis forcing banks to tighten lending standards, developers are finding it harder to get financing for new projects. Analysts expect further weakness in nonresidential construction in 2009, amid a recession now in its second year. Government spending dropped by 0.8 percent in December to an annual rate of $316.6 billion, reflecting a slowdown in state and local building, which fell by 1.5 percent. Construction spending by the federal government rose 6.3 percent in December. For the year, government construction activity rose 7.4 percent, following a 12.4 percent gain in 2007. President Barack Obama is pushing Congress to pass an $819 billion economic stimulus package that would include increases for government infrastructure projects such as highways and bridges.

Homebuilders are lobbying Congress for expanded aid for home buyers in the legislation. The stimulus bill, which passed the House last week and is now in the Senate, includes a $7,500 tax credit for first-time homebuyers who act in the first half of the year. The builders, however, are pushing a larger credit that would last for all of 2009. In earlier signs of the difficulties facing homebuilders, new home sales in December fell a worse-than-expected 14.7 percent to a seasonally adjusted annual rate of 331,000 while a key gauge of homebuilders' confidence sank to a new record low in January. Sales of existing homes did post an unexpected increase in December, as consumers grabbed cheap foreclosures in California and Florida. Sales of existing homes rose 6.5 percent from November's pace, the National Association of Realtors said last week.

The Cure-All for Our Financial System
Our pundits joined a growing chorus of market watchers sounding off on the government’s latest idea to get the nation’s ailing financial system back on solid footing. A so-called “bad bank” would serve as a repository for the toxic mortgage-backed assets that have been a major contributor to the economic downturn. The bank would hold these securities and then eventually sell them off once the dust settles. In concept, the plan would serve as a powerful complement to the $819 billion stimulus package that was passed by the House last week and is now working its way through the Senate.

The idea of a bad bank has its roots in former Treasury Secretary Henry Paulson’s original idea for the Troubled Assets Relief Program, or TARP, and even harkens back to how the government handled the collapse of the savings and loan sector in the 1980s. While details of the plan remain scant, it would probably be run out of the Federal Deposit Insurance Corporation. Sheila Bair, head of the FDIC, has argued her agency has the expertise to handle the job and it could finance it by issuing bonds.

The idea has its fair share of defenders—and detractors. Liz Ann Sonders, chief strategist at Charles Schwab, recently wrote “the bad bank structure could allow the government to rewrite some of the mortgages that sit under banks' toxic assets.” Bank of America Merrill Lynch economist David Rosenberg agreed. The entity would “buy the toxic assets from the banks at a price that won't require massive write-downs,” he said. It would “make a market for them and then sell them off, which, from our end, makes perfect sense.”

But some pundits noted that a fix may not be so easy this time around, especially since the recent calamities were fueled, in part, by firms far outside traditional banking circles. Bill Gross, Pimco’s longtime bond guru, said in his February Investment Outlook, the “recapitalization of banks has been the major thrust, in the hopes that banks would extend credit which would reinvigorate asset pricing.” He added: “Those who argue strongly for a recapitalization of the banking system, however, may be missing the distinction between the banking system as we once knew it, and the ‘shadow banking’ system that superseded it.”

Other experts think the crux of the problem lies elsewhere. Ed Yardeni, founder of Yardeni Research, believes the huge decline in home values – which were supposed to keep rising and hedge against the national debt frenzy we’ve worked ourselves into – must be addressed. If that doesn’t happen, he argued Jan. 26, no bank plan, good, bad or ugly, will work. “It is amazing and depressing to me that the new clowns in the Washington circus seem to be as clueless as the previous clowns about the imperative need to revive home prices,” he wrote.

“All the money they are spending is completely missing this vital objective. A large amount of it is simply throwing good money after bad into the TARP trap. It’s like shoveling sand into a sink hole and wondering why the hole isn't filling up.” Regardless of which camp our pundits fall into, though, there was one fact that couldn’t be denied: Both bulls and bears were clamoring for any news of the plan, as evidenced by mini rallies and declines all last week. That trend will continue. “If this plan is announced shortly the stock market may experience another relief rally,” LPL Financial strategist Jeffrey Kleintop wrote Jan. 26. “If not, there is a risk that the market may break the lows and our bear case may begin to unfold.”

'Grimmest' Davos Ever Brings Anger, Finger-Pointing at Bankers
The theme of the World Economic Forum’s annual meeting was "Shaping the Post-Crisis World." Unfortunately, the assembled executives, policy makers and do- gooders were stuck in the here and now. The search for scapegoats and the worst economic prospects since World War II resulted in a gathering marked by fear, anger and bitterness, a far cry from the usual search for consensus. Turkish Prime Minister Recep Tayyip Erdogan stormed out of a panel discussion and Russian Prime Minister Vladimir Putin hectored the U.S. as the font of the world’s economic woes. Almost everyone blamed the few bankers who showed up for the near-collapse of the financial system.

Attendees were "less reluctant to criticize, and sometimes very vocally criticize, the U.S. and its capitalist system because of the problems we’re having," said David Rubenstein, co-founder of the Carlyle Group, who first came to Davos a decade ago. "Maybe that’s deserved, but it’s a big change." "Everyone I spoke to says it’s the grimmest Davos they’ve ever been to," said Kenneth Rogoff, professor of economics at Harvard University and a World Economic Forum regular since 2002. "The mood has been very depressed. It’s a low-burn depression." Another big change was the virtual absence of Wall Street figures among the 2,500 delegates at the conference, which ended yesterday.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon was the only U.S. banking chief who showed up. He made a concession to the mood of this year’s event by accepting some blame for the collapse that has led to more than $1 trillion of writedowns. He deflected the rest at regulators. "God knows, some really stupid things were done by American banks and by American investment banks," Dimon said. "To policy makers, I say: ‘Where were they?’" That attitude was tough for some to swallow. At one session, a call for curbs on bankers’ bonuses was met with applause by sections of the audience. "We should not trust these bankers," said Nassim Nicholas Taleb, author of the best-selling book "The Black Swan." "Look at their track record. The only way to stop the process is for the government to own those banks." With the world’s elite nursing a collective hangover after the greatest era of global prosperity came to an end, there was enough bile to go around.

Erdogan stunned a packed house on Jan. 29 by walking out on a debate on last month’s war in the Gaza Strip. He claimed that the session’s moderator didn’t give him equal time with Israeli President Shimon Peres and vowed never to return to Davos. By the time he met the press an hour later, he promised to reconsider. Anyone who thought Barack Obama’s election as president would temper criticism of U.S. policies would have been disappointed. Economists questioned his $819 billion stimulus plan, urged him to deliver another rescue package for banks and fretted about soaring national debt. "People are looking for the solution but don’t yet have the question formulated," Arif Naqvi, chief executive officer of Abraaj Capital Ltd., which manages $7.5 billion, said.

The need for action wasn’t in debate. Away from the slopes, U.S. stocks capped their worst ever January, the International Monetary Fund forecast the weakest global growth in 60 years and companies from Starbucks Corp. to Caterpillar Inc. cut jobs. That led many attendees to predict they’ll still be in a funk when they return in 2010. "We’re in a multi-multi year problem," Howard Lutnick, chief executive officer of Cantor Fitzgerald LP., said. "We’ve weathered horrible times before. That’s what lies ahead of us now." Delegates also took turns bashing America’s policies and its role in the world. Chinese Premier Wen Jiabao and Putin cited the U.S. for leading the world into recession in back-to-back speeches on the opening day. "Just a year ago, American delegates speaking from this rostrum emphasized the U.S. economy’s fundamental stability and its cloudless prospects," Putin said. To cap it off, Putin dismissed a query from audience member Michael Dell, head of personal-computer maker Dell Inc., about what the technology community could do to assist Russia. "We don’t need any help. We are not invalids," Putin said.

The spats gave this year’s conference a more balanced tone, said Bahraini banker Khalid Abdulla-Janahi, who remembers then- Vice President Dick Cheney "hammering the Russians, the Iranians and many others" during his 2004 visit. "This time, it was a two-way street," said the chairman of Ithmaar Bank BSC. "We heard Putin hammering the West and Erdogan standing up to Peres. That’s how it should be." Those who made it to the five-day Alpine retreat insisted that they weren’t wasting their time or their money --and they really didn’t mind the muted tone of the event’s party circuit. "People are conscious about throwing parties or even smiling this year," said Martin Sorrell, chief executive of WPP Group Plc. "It’s become a little too big, but it’s never been more relevant."

In Davos, protectionism is a dirty word
The beggar-thy-neighbour phase has begun in earnest. "Buy American" legislation has advanced from a barely credible threat to imminent reality on Capitol Hill in just weeks. The House has voted for a bill that prohibits the use of foreign steel in most infrastructure projects funded by Barack Obama's $820bn (£563bn) rescue package. The Senate is drawing up plans to widen that to all manufactured goods. This is what happens when a country loses half a million jobs a month, and when the state becomes spender-of-last-resort. Taxpayers are tribal. They do not want precious stimulus to feed the foreigner. Even so, this Dutch auction has the disorderly feel of the Smoot-Hawley Tariff debacle in 1930, though this time the collapse of commerce – if allowed to happen – will have very different consequences for the global balance of power. Mr Obama can veto the law, should he wish to pick a fight with Capitol Hill from day one. The world watches and waits in horror, especially in Davos. "Everybody here is talking about protectionism. There's not a prime minister present not talking about protectionism," said Peter Sutherland, former (GATT) trade chief and now chair of BP.

Days earlier, US Treasury chief Tim Geithner called China a "currency manipulator" – meaning that Beijing holds down the yuan to boost exports. The term is turbo-charged. It implies mandatory trade sanctions under US law. Mr Geithner's bluntness prompted an angry outburst by Chinese premier Wen Jiabao behind closed doors in Davos. Mr Wen later let rip against "blind pursuit of profit" and unstable economic models based on "low savings and high consumption". Not a word about China's role in accumulating $1.9 trillion of reserves and thereby helping to stoke a global credit bubble; Mr Wen clings to the fallacy that greedy banks alone created this disaster. A fat lot of good it will do him. The penny is starting to drop that the US is not going to be the greatest victim of this slump. Other parts of the world are starting to suffer more. Those countries – China, Japan, and the Asian tigers – that have staked their fortunes on exports to the West risk being slaughtered. So too does the whole nexus of commodity states that lived off the boom. They are all leveraged to America.

Nor is the US about to suffer its condign punishment for years of hedonism. It is not facing the predicted dollar collapse or the mass dumping of US Treasury bonds – yet. The dollar has surged against sterling, Aussie, rouble, rupee, and real. Yields on 10-year US Treasuries are 2.84pc – lower than Germany (3.3pc) or France (3.81pc). One-year notes are 0.46pc. The worse the crisis gets, the more the world wants to place its shrunken wealth in the care of Washington. The US Treasury is finding it all too easy to suck in enough global capital to fund trillion-dollar deficits. This is the "exorbitant privilege" of reserve primacy that so vexed Charles de Gaulle. You could hear the gnashing teeth at Davos. "They can print the dollars," said a weary Ernesto Zedillo, Mexico's former president. The injustice of it. The arch-sinner is dodging its own disaster, leaving scores of well-behaved countries starved of capital and exposed to the crunch from Hell. Russia's Vladimir Putin railed wildly, calling for a global putsch to topple the dollar. "The one reserve currency has become a danger to the world economy," he railed.

Kremlin aides hovered in the foyers, accusing the US of running a "beggar-thy-neighbour" policy. "All the free liquidity in the world will run into American Treasury bills. That is pretty selfish," said one. Herman Gref, former economy minister and now Sberbank chief, said the world should seize control of the Fed itself to force it to serve global needs. "Economies are facing collapse just because dollar credit has been withdrawn. That cannot be," he said. In hindsight, it is astonishing that the "decoupling doctrine" still passed for orthodoxy in Davos a year ago. It was a given that the Brics (Brazil, Russia, India, and China) were strong enough to power ahead under their own steam. "What were they smoking?" asked Nouriel Roubini, the prophet of the crisis. The evidence is in. Exports fell 42pc in Taiwan's last month of data. Japan's industrial output crashed 9.6pc. Korea's economy shrank at 21pc annualised in the fourth quarter. China is contracting on a month-to-month basis. "The decoupling dream has been shattered. China has hit a wall," said Stephen Roach, head of Morgan Stanley Asia.

The other penny starting to drop is that trade wars have asymmetric effects. The Great Depression taught us that they hit surplus states harder than deficit states. Britain avoided the worst of the 1930s, although – or should that be because? – it retreated into an Empire trade bloc. America has the strategic depth to do the same, should it wish to do so. It may conclude that this is the best way to rebuild the US industrial base (as Germany did from 1933 to 1938, with success). So, as the world's leaders awaken to the danger that the sole superpower may turn its back on the open system that keeps us all afloat, they line up to plead for free trade. China, India, and Russia were among the loudest in Davos, though all three have already taken steps to protect their own steel mills. Germany's Angela Merkel spoke darkly of "command economy experiments", and slammed US car-bail as a trade "distortion", even as she crafts a clever version for German cars. Gordon Brown says we all face ruin if we "let the protectionists take over", yet UK banks under the state's thumb are being told to cut foreign lending. France's Christine Lagarde says – with refreshing candour – that protectionism has become a "necessary evil". We are all mercantilists now.

World Leaders Wary of U.S. Economic Measures
This was supposed to be the year the United States came in from the cold at the annual gathering of world leaders here. But instead of receiving a warm embrace, American policies were rebuked again and again in rhetoric that recalled the anger of the Bush years — mainly aimed at what the world views as the new threat of protectionism by the United States. Certainly, there is a deep reservoir of good will for President Obama and the change in direction he represents. But despite the pledges to encourage international trade and economic cooperation that accompanied the closing sessions of the gathering, the World Economic Forum, on Sunday, there were clear signs that deep divisions between the United States and the rest of the world remained.

“There is such a level of concern, despair and anxiety that as welcome as the new president is, no one is inclined to cut the U.S. much slack,” said Richard Haass, president of the Council on Foreign Relations. Or as Niall Ferguson, the Harvard historian, put it, “If G.M. got a new C.E.O., does that mean people would suddenly want to buy their cars?” The criticism came from the usual sources, like Prime Minister Vladimir V. Putin of Russia and Premier Wen Jiabao of China, who both criticized a long pattern of excessive consumption, risky borrowing and inadequate regulation in the United States. But more significant, the brickbats also came from economic and political leaders of European allies like Germany and France.

Whether the issue was the recent bailout for the American auto industry or proposals favoring American steel producers in the stimulus package now being debated on Capitol Hill, foreign officials warned that any move toward protectionism would have serious consequences for Washington and the rest of the world. “We must not allow market forces to be completely distorted,” Angela Merkel, the German chancellor, warned in a speech on Wednesday. “For instance, I am very wary of seeing subsidies injected into the U.S. auto industry. That could lead to distortion and protectionism.”

By the weekend, as word of the “Buy American” provision in the stimulus package to help the United States steel industry spread through Davos, the tone had become sharper. “It’s extremely preoccupying that one of the first acts of the new Obama administration could be a measure that is clearly protectionist and a distortion of competition,” said Anne-Marie Idrac, the French trade minister, who tried to draw Pascal Lamy, director general of the World Trade Organization, into the battle. Mr. Lamy, however, said the organization would only act if there has been a “breach of the rules.” “I am not that big cop,” he added.

For all the global affection for Mr. Obama, Washington sent a relatively low-profile contingent to Davos, with Valerie Jarrett, a White House adviser, serving as the administration’s headliner here. Ms. Jarrett did not address the issue of protectionism directly in her brief speech on Thursday, preferring to stick with the big picture as well as Mr. Obama’s connection to Chicago, her hometown. Instead, the task of defending American economic policy fell to attendees like Representative Brian Baird, a Democrat from Washington State, who has served in Congress for the last decade.

“The steel issue is vastly overplayed here,” he said. “Even Adam Smith himself said certain key industries deserved to have protection.” Noting that his district is home to two steel plants — down from three a few years ago — he added, “Steel is one of those industries.” He suggested that this was not the time to push free-trade dogma on American taxpayers already worried about surging levels of unemployment. “If you want to kill the W.T.O., that would be the way to do it,” he said.

Davos has always stood for globalization, and the benefits of free trade are an article of faith here. But even Davos die-hards concede that national economic interests have come to the fore amid the global downturn, and voter support for easing trade barriers is at low ebb. To be sure, for all the foreign criticism over the help for the Detroit automakers, European countries including France, Britain and Sweden have offered up billions in aid for local auto manufacturers. What’s more, France has long protected the French companies it calls “national champions” from the threat of foreign takeover while providing huge subsidies for its farmers.

But beyond the public sparring, many foreign officials are also concerned about how the United States government will pay for Mr. Obama’s proposed stimulus package, which could ultimately cost $1 trillion. A binge of new borrowing by Washington could effectively crowd out other borrowers by pushing interest rates higher over the long term, and would be especially painful for developing countries that rely on foreign capital. Or, it could stoke inflation when the global economy eventually begins to recover. Ernesto Zedillo, the former president of Mexico who helped steer his country through a financial crisis in 1994, said developing countries were already having a hard time finding the capital they needed without competing with increased borrowing by the United States. And his country does not have the option of printing money, he said, because the Mexican peso is not a reserve currency like the dollar.

Even the praise for Mr. Obama from other leaders was balanced by criticism of Mr. Bush and past United States policies. “He seems to be very keen to interact with other nations as equals, rather than talking down,” said Kgalema Motlanthe, the president of South Africa. “It is a breath of fresh air.” But for all the complaining from abroad, no other economic power — not Europe, not Japan and not China — seems ready to step up and fill the role traditionally played by the United States. “The irony of the situation,” said Mr. Haass, of the Council on Foreign Relations, “is that everyone is still looking to the U.S. for leadership to fix things or at least make things better.”

Iceland's Warning to the World
First came the financial crisis, then the uproar: Iceland is the first European country to suffer the full effects of the global financial crisis. Is this a taste of what's in store for the rest of the world? It's snowing and soon it will be dark again. The evening begins here at about four o'clock in the afternoon, followed by a long, long night -- an Icelandic night here in Reykjavik, latitude 64 degrees north, just south of the Arctic Circle. If countries could export darkness, then Iceland would have nothing to worry about. Kristin Gunnarsdottir parks her small car in front of her modest home in the city's Garbabae district, gingerly walks along the slippery path to the front door and knocks the snow off her boots. She's in the mood for some hot coffee and a seat by the fireplace. She has just returned from her new and exhausting pastime -- demonstrating. "We have to save Iceland," she says.

For the past three months, Kristin Gunnarsdottir has spent her days in downtown Reykjavik. Armed with a pot and spoon, she and her fellow protesters have taken up position in front of the Icelandic parliament, the Althing, accompanied by a few hundred or -- as is usually the case -- a couple of thousand other demonstrators. Recently, she says, the wrath of the people was so great that the crowd was on the verge of storming the Althing, dragging out the government, and hanging them from the huge Christmas tree. The tree is no longer there. "Some of the demonstrators torched it," she says. "That was quite a fire." Things are heating up in Iceland as a result of the financial crisis. Kristin Gunnarsdottir grabs a thermos full of coffee, switches on the TV and is just about to settle down by the fireplace when she is stopped short. She stands there, awestruck, and points to the screen.

Kristin is in her mid-40s, red-haired and cheerful. She used to be a TV journalist, but is now a writer. Since the beginning of the financial crisis, she has been one of the leaders of a revolt the likes of which Iceland has never seen before, a revolution from below that aims to sweep away everything that existed before. "Incredible," she says, pointing to the television. Foreign Minister Ingibjörg Solrun Gisladottir is being interviewed. She is from the left-leaning Social Democratic Alliance, the smaller of the two coalition partners, and looks exhausted as she gazes into the camera and explains that she will only continue to support the government if a series of demands are met. Then come politicians who say that these demands cannot be fulfilled. "That's it," says Kristin, "I guess we won't have a government soon -- it's better that way." A few hours later, a government that once seemed unshakable collapses.

The stronger of the two coalition partners, the conservative Independence Party, ruled the country for nearly 18 years. This party led a government that was responsible for some 315,000 Icelanders who are all related to each other in one way or another and are, for the most part, very blonde, very nice, educated, pleasant people. Now the financial crisis and the scandals that it has brought to light have cast Iceland into turmoil and chaos. On the surface, life continues, yet everyone is shaken to the core by an unfathomable feeling of uncertainty. In that sense, Iceland is like a crystal ball that reveals the future of the rest of Europe. Iceland has become a kind of laboratory for the credit crunch: a small, compact country, closely linked to the international economy, without any safety buffer. It's a place where the effects of a crisis are felt intensely.

The first waves of layoffs have started to roll across the country. Everyone knows someone who has already lost his job or will lose it soon, everyone knows someone who knows -- and hates -- an investment banker. The coolest bars in downtown Reykjavik are conspicuously empty, like "101" and "b5", where financial high flyers were still enjoying wild parties during the midsummer nights of 2008. The country's image has been seriously tarnished. "How do we look now in the eyes of the world?" says Kristin. "Like the financial maniacs, the gamblers of Europe." Where -- and, more importantly, who -- are the culprits responsible for this mess? No one is sure. Since the collapse of the country's three large banks over three months ago, the government has presented no answers and has not even bothered to launch a serious investigation. This has sparked wild rumors throughout the country. According to one story, the richest Icelanders left the country months ago, their bags packed with cash as they boarded a private jet bound for Portugal. Supposedly they will return soon to cover up their tracks.

The Icelandic krona has lost a third of its value against the euro within one year and remains volatile. Nobody in the shops knows the current exchange rate anymore. An interim left-wing minority government, led by newly appointed Prime Minister Johanna Sigurdardottir, is now in charge of the country until new elections can be held, and it's very possible that the Left-Green Movement, with its Marxist leanings, will then emerge as the strongest party. Nowhere else in the world, so it seems, is the crisis as visible as in Iceland, nowhere else is it so concrete. The small size of the country also means that every citizen can easily calculate how much debt has accumulated in his or her name. Before they were nationalized, the three large banks had amassed arrears of $166 billion (€130 billion), equivalent to 10 times Iceland's gross domestic product. That comes to an additional $527,000 for every man, woman and child. An Icelandic plumber or fisherman who has a wife and two children to feed would thus all of a sudden find himself $2 million more in debt. How can the current generation ever work off this debt? Economists anticipate double-digit inflation and predict that the economy will shrink by 10 percent.

New names are suddenly on everyone's lips, now praised as heroes and saviors in the face of disaster, although they were generally ignored until recently. It is late afternoon, dark and icy, as Vilhjalmur Bjarnason drives to his university office in Saemundargata to do some more work. He's in a grim mood despite the fact that he is one of the most sought-after men in the country -- praised, interviewed, quoted in blogs, magazines and talk shows. Vilhjalmur, 56, a former banker, works as a university lecturer for macroeconomics, serves as the chairman of the Association of Small Investors and is a keen amateur athlete. Lately, he has been extremely irritated because he predicted everything that is now happening. He has always remained politically neutral because he believes that an economist should preserve his independence -- although it has also put the brakes on his career. Now he is under consideration to become the new head of the central bank or an adviser to the finance minister. "We've placed our economy in the hands of criminals," he says, "and the cleanup work will be a bloodbath." He knows some of the perpetrators very well. "They were my students," he says. After completing their studies they rushed into the banking business, "and that's when things got out of hand and we veered off the solid path."

For centuries, Icelanders lived in poverty and hardship: sod houses, misery and epidemics were facts of life. Then, says Vilhjalmur, they learned to tap into their unique natural surroundings, damming waterfalls to generate energy and using the hot water from geysers as a source of heat. According to Vilhjalmur, things could have continued that way -- but Iceland was infected by greed. Kristin Gunnarsdottir and many of her comrades-in-arms see the decision to launch one of the largest hydropower projects ever as the main factor that triggered a veritable orgy of borrowing. She says that the beginning of construction on the Karahnjukar power plant, which was to further boost the production of aluminum, was cleverly marketed around the world. "Suddenly Iceland was an insider tip for investors and received top ratings." The Icelandic krona soared by 20 percent and, although the central bank raised interest rates to cool down the market, an increasing number of Icelanders and companies promptly took out loans in foreign currencies, in yen, dollars and whatever the banks could arrange for them. These loans were relatively cheap as long as the value of their own currency continued to rise. Just before the crash, the central bank only had currency reserves of $5.1 billion and was unable to fulfill its role as watchdog of the country's banks. Capital flowed into the country because Iceland seemed incredibly safe. "That's when holdings were founded everywhere," says Vilhjalmur. "And holdings are minefields."

It was so easy, he says. A few ambitious businesspeople would get together with bankers and young business graduates to pool their money and contacts. They would raise, say, €10,000 and the holding was established. Then they went to one of the three large banks, which were formerly state-owned banks that had been privatized. The financial wizards were good friends with the banks' owners, but the banks were still considered solid. With a stake of €10,000, loans were taken out worth a hundred times that amount, in other words, theoretically €1 million. Afterwards, €990,000 of that amount was paid out to them and they bought shares in these same Icelandic banks, which in turn took out loans of their own and bought shares in companies and retail chains. "This is where reality comes into play," says Vilhjalmur. "Before that everything was virtual." Now all the holding founders had to do was wait, perhaps a year, until the price of their shares rose, since the Icelandic business model was seen as a hot tip. "All of a sudden their shares were worth €1.5 million, minus interest of, say, €100,000, leaving them with €400,000 in profits," Vilhjalmur explains.

Vilhjalmur says that this borrowing frenzy gripped people from all walks of Icelandic society. However it was the ordinary people who were left saddled with debt while the tycoons kept their new yachts. Who were these tycoons? "I have a list of names on here," Vilhjalmur says, typing on his laptop. "Thirty men and three women. They are the main culprits. I can prove it. We could rescue a lot of money. They have to be brought to trial." Will this happen? "I'm not a policeman" he says with an irritated look on his face. "And I'm also not an optimist." In the microcosm that is Iceland, the financial debacle can probably be more accurately traced than anywhere else: how greed flares up, how easily livelihoods can be destroyed, how popular anger can erupt -- and who is responsible, who suffers the brunt of the crisis, and how a society very slowly finds its way to a new moral foundation. Kristin, the writer, sits in front of her fireplace. "We believed the bluffers, we put too much trust in people," she says, shaking her red curls. "Now we have to develop a culture of healthy mistrust."

China: Up to 26 million migrants now jobless
As many as 26 million migrant workers are unemployed as China's exporters reel from effects of the global economic slowdown, a top rural affairs official said Monday, noting that widespread unemployment could threaten the country's social stability. The figures were announced one day after Beijing warned of "possibly the toughest year" since the turn of the century, calling for development of agriculture and rural areas to offset the economic fallout. Though many Chinese cities have seen double-digit growth in recent years, the countryside has lagged far behind, forcing peasants to seek urban factory jobs churning out goods that are sold around the world. But a recent government survey showed that slightly more than 15 percent of China's estimated 130 million migrant workers have returned to their hometowns and are now unemployed, said Chen Xiwen, director of the Central Rural Work Leading Group, a central government advisory body.

Another 5 or 6 million new migrants enter the work force each year, he added. "So, if we put those figures together, we have roughly 25 to 26 million rural migrant workers who are now coming under pressures for employment," he said. "So from that perspective, ensuring job creation and maintenance is ensuring the stability of the countryside." In comparison, the U.S. unemployment rate climbed to a 16-year high of 7.2 percent in December, meaning about 11.1 million Americans are without jobs, or less than half the number of unemployed migrants in China. Adding to the pressure are millions of laid-off urban workers and college graduates trying to enter the work force. Chinese authorities have stressed that their priority in 2009 will be ensuring development in the countryside, where many have come to rely on remittances from migrants working in factories and on urban construction sites, amid fears of social unrest.

Many factory workers have already taken to the streets in recent weeks, demanding pay and protesting layoffs. Chen outlined a raft of existing policies geared toward helping migrants including encouraging companies to retain workers, investing in public projects to absorb rural workers and helping returning migrants set up businesses in their hometowns. "Maintaining the stability of the countryside is a focal point of upholding overall social stability," Chen said. China's economic growth -- once red-hot -- plunged to 6.8 percent in the three months through December, compared with a year earlier. Analysts have cut forecasts of 2009 economic growth to as low as 5 percent.

Premier Wen Jiabao said in comments published Monday that Beijing was considering new steps to boost economic growth. The Financial Times report did not give details of the potential plan, which would follow a 4 trillion yuan ($586 billion) package unveiled in November with heavy spending on public works projects. Meanwhile, China's communist rulers have told the military to strictly obey the Communist Party, reflecting insecurity among authorities as a result of the global downturn. Similar calls have been made in the past, underscoring the important role China's massive military plays in supporting one-party rule and maintaining social stability.

China falls into budget deficit as spending balloons
China's attempts to spend its way out of economic depression led to a fiscal deficit of 111bn yuan (£12bn) last year. Despite a near 20pc rise in tax revenues and a record surplus of 1.19 trillion yuan (£128bn) in the first six months of the year, the dramatic scale of government spending in November and December was enough to plunge the entire year into deficit. The figures are the first indication of how quickly and forcefully China reacted to the economic crisis after it announced a fiscal stimulus package of 4 trillion yuan in November to build new roads, railways, schools and hospitals. Government spending in December surged to 1.66 trillion yuan, more than triple the previous month's total and 31pc higher compared to the same month last year. The news came as Wen Jiabao, the Chinese prime minister, said that he was mulling over another fiscal stimulus package. "We may take further new, timely and decisive measures. All these measures have to be taken pre-emptively, before an economic retreat," he told the Financial Times.

Although Mr Wen did not mention any concrete details, it is widely believed that the Chinese government wants to put together a social benefits package, in order to encourage people to up their spending and reduce their saving. There are already some signs that consumers are reacting positively to government propaganda urging them to open their wallets and "buy Chinese" in order to keep the economy going. Retail sales rose by almost 14pc during the Chinese New Year holidays, compared to last year. The State Council, China's equivalent of a ministerial cabinet, has also promised to help farmers weather the downturn by increasing subsidies and raising the minimum purchase price for grain. It also said it would boost agricultural loans, and start to stockpile grain, cotton, cooking oils and pork. Stephen Green, an economist at Standard Chartered bank in Shanghai, said the Chinese government has enough money to keep spending. "The central government has been running a fairly conservative fiscal policy in recent years, and there is money in the bank. Central government debt was 18pc of GDP at the end of 2008, a low level," he said.

He has predicted that this year's fiscal deficit will reach 2.7pc of GDP as China continues to spend its way out of trouble. Beijing has also already commanded commercial banks to increase their lending and to loosen credit controls. Reports suggest that commercial banks have been ordered to make sure that 1 trillion yuan of credit is available for projects before the end of February. The banks are also likely to be forced to pay for a variety of local government projects, despite the risk of default. A fall-off in tax revenues during the third quarter also contributed to the budget shortfall, and there are anecdotal reports that Chinese tax offices have been commanded to increase their haul and step up their anti-evasion measures. More evidence emerged of China's slowdown as manufacturing figures showed a contraction for the sixth month in a row in January. The CLSA China Purchasing Managers Index rose to a seasonally adjusted 42.2 from 41.2 in December. A reading below 50 reflects a contraction.

South Korea's exports fall at record rate as protectionism fears grow
South Korea's exports fell by a record 32.8pc in January as fears grow that the global downturn will foster protectionism. The figure was worse than analysts had expected from the world's biggest producers of mobile phones, computer chips and ships. Global demand for technology-related goods is diminishing as consumers in key markets including the US and Europe cut back on spending. Exports to the European Union markets fell by 46.9pc, the figures from the Ministry of Knowledge Economy showed, and overall imports fell 32.1pc as the downturn took its toll on domestic demand. Fears about protectionism are rising up the political agenda as the global recession deepens. After a meeting with the Chinese Premier Wen Jiabao, Gordon Brown said: "Premier Wen and I agreed that the biggest danger the world faces is the retreat into protectionism, which is the road to ruin. The best attack on protectionism is to demonstrate today the benefits of trade for jobs, for businesses and for eventual prosperity."

Now Hiring: Lehman
It's bankrupt. Its reputation is in tatters. And it has been forced from its plush headquarters building. Yet working for Lehman Brothers Holdings Inc. -- what remains of it -- has become one of the hottest jobs on Wall Street. That's because Lehman, though a shadow of its former self after selling many of its businesses to Barclays PLC and Nomura Holdings Inc., retains a broad patchwork of assets. It has some $7 billion in cash and more than 1,400 private investments valued at $12.3 billion. Then there's a thicket of about 500,000 derivative contracts with 4,000 trading partners worth some $24 billion.

So for now, Lehman is seen as a relatively secure home for throngs of finance professionals thrown out of work in recent months. It's even become a place for former Lehman CEO Richard Fuld to informally hang his hat. "We're getting swamped with résumés," says Bryan Marsal, a turnaround expert who is now Lehman's chief executive officer. The inquiries, he says, are from people affiliated with marquee names such as Bank of America, Citigroup Inc., and Morgan Stanley. "It's just a tough, tough time, and there are a lot of good people out there looking for work." The wages are not great by past standards. But there are hidden benefits. It could take two years or more to wind down the firm. Such a timeline promises the kind of job security that's a rarity on Wall Street today.

Charged with untangling the mess is Alvarez & Marsal, the New York-based restructuring firm where Mr. Marsal is a co-founder. With 150 full-time employees working on the case, its chief task is to sell off Lehman's remaining assets and maximize recovery for creditors, which are owed more than $150 billion. Mr. Marsal says the goal is to dissolve the firm in 18 to 24 months from now, though several restructuring experts say that's an aggressive timetable. Alvarez & Marsal got the gig in September after Lehman's board appointed it to administer the bankrupt company's estate. To carry out the mission, Alvarez & Marsal kept 130 Lehman employees on the firm's payroll. It has also recruited back more than 200 former Lehman employees, and is still hiring staff to handle targeted areas such derivatives and real-estate holdings.

Behind the scenes is Mr. Fuld, the firm's former chairman and chief executive, who was widely vilified when Lehman collapsed in mid-September. Though Mr. Fuld was removed from the payroll on Jan. 1 and relieved of his company-provided black Mercedes, Lehman has agreed to let him keep an office at the firm. He's just around the corner from Mr. Marsal, who says he picks Mr. Fuld's brain about Lehman's business several times a week. "We asked him to stay if he has nowhere better to go," says Mr. Marsal. "He's been very good about making himself available for questions about Lehman assets." Through a spokeswoman, Mr. Fuld declined to comment.

Lehman's dismantling is an expensive process. Associated costs run about $30 million a month, excluding fees to lawyers and advisers on the case. Employees are paid a salary -- with modest retention bonus added as "a kiss" says Mr. Marsal -- to entice workers to stay at a place with a limited lifespan. The assignment is a lucrative one for Alvarez & Marsal, which is charging Lehman hourly fees of $550 to $850 for its top executives working on the case, with rich incentive fees for the firm depending on its recovery for creditors. Despite Lehman's assured dissolution, executive recruiters say it isn't surprising that the collapsed investment bank has become a desirable place to work.

"This is a well-paying job in one of the worst employment markets in history," says Skiddy von Stade, founder of New York-based executive placement firm F.S. von Stade & Associates. "Through the disposition of Lehman's assets, the employees will have a chance to demonstrate their strengths and skills for opportunities down the road -- possibly with the very buyers of these securities and investments." Mr. Marsal says compensation is in line with similar jobs on Wall Street, yet far below what it was at Lehman. He and his team are "very, very careful" about the expenses of the firm, which he says are generally lean. "The excess of Lehman was the size of the salaries and the expectations of people with the bonus plan," he says.

Gone are the pay and perks that came with being a top executive at pre-bankruptcy Lehman. Mr. Fuld and his management team sat on the 31st floor of Lehman's former headquarters, a state-of-the-art steel-and-granite building in Times Square. Barclays bought that site and took it over, so now Lehman's command center is a run-of-the-mill office on the 45th floor of the Time-Life building, which long served as Lehman overflow space. Mr. Marsal and his team are making due without weekly deliveries of fresh flowers and warm chocolate-chip muffins on Fridays -- perks enjoyed by the firm's former brass. Gone too is the executive dining suite where a private chef prepared lunch for Lehman's top executives. Instead, Mr. Marsal and his crew grab a bite in the cafeteria at Time Inc., which has granted access to the Lehman employees.

Henry Klein is part of Lehman's new topsy-turvy reality. A nine-year Lehman veteran, he oversaw a portfolio of investments in India from the firm's New York office. When Lehman failed, Mr. Klein was transferred to Barclays, but says he had little to do there. "I was at Barclays, but my assets were at Lehman." Mr. Klein left Barclays in mid-November, and then approached Alvarez & Marsal. Today, he's back overseeing the very assets he says he managed at Lehman. The 46-year-old Mr. Klein is currently focused on a small $36 million real-estate investment in Hyderabad, a large city in south central India. Lehman may continue to back the deal, but also may have to pull its funding. "It's a difficult decision," says Mr. Klein. "We don't have tons of time."

Luc Faucheux, 39, heads up the desk at the bankrupt entity that trades interest-rate swaps and other fixed-income derivatives. "I always wanted this job," laughs the former Lehman staffer who says he had a related, but less senior role. "Be careful what you wish for, because you might just get it." "Let's face it," he adds. "Given the state of the world we're in, the things I'm learning working on the largest bankruptcy in history are a set of skills that could be marketable for the foreseeable future." Rather than immediately sell assets into a depressed market, Alvarez & Marsal has opted to retain and manage a chunk of Lehman's holdings.

Last month, Alvarez & Marsal decided to keep a 49% interest in Lehman's money-management business, Neuberger Investment Management, selling the balance to Neuberger's management. It made a similar move with Lehman Brothers Merchant Banking, the firm's flagship private-equity business. The estate also has held on to more than 100 direct stakes in private companies. These include direct investments made alongside Lehman's private-equity clients in large boom-era buyouts such as First Data Corp. and Texas utility TXU Corp. So far, Lehman has more than doubled its cash reserves to $7 billion from $3.3 billion, in part through the sale of its headquarters to Barclays. It is also raising money by selling off the firm's sizable art collection, whose value Lehman has pegged at roughly $30 million. Some of the photographs and paintings still grace the halls of Barclays and Lehman's Neuberger unit.

Finally, there is a cavalry of corporate jets valued at $164 million. Lehman has already sold six jets, as well as interests in fractional shares service NetJets Inc. for $53 million. Still on the block: Six more planes, including a Boeing 767, and a Sikorsky chopper. Some of those jets Lehman owned as investments and only four were used for corporate purposes at any one time, according to a Lehman spokeswoman. "The fleet's been grounded," Mr. Marsal reassured the bankruptcy judge overseeing the case at a hearing last month. "Nobody is flying around these planes and no one is using the helicopter."

Europe’s bank falls into a false-logic trap
Question: "What does the ECB understand a ‘liquidity trap’ to mean?"
Answer: "We do not intend to have interest rates so low that their efficiency is meaningless."
From a Financial Times interview with Yves Mersch, a member of the governing council of the European Central Bank, January 26.

Mr Mersch is effectively saying that, by not cutting interest rates, one can avoid getting into a liquidity trap. It is hard to think of a statement about monetary policy simultaneously more absurd and more dangerous. A liquidity trap is a situation in which the conventional tools of monetary policy lose traction. Such a situation usually arises when official and market interest rates are all close to zero. In that case, the central bank cannot cut official rates, or achieve much by buying government bonds. But let us not mix up cause and effects. It is the liquidity trap that causes monetary policy to be ineffective. It is not that a particular level of interest rates causes the liquidity trap. This is the logic of a driver who refuses to brake when confronted with a potential accident for fear of losing traction.

Take the example of an economy with deflation of 5 per cent. If the central bank were to cut nominal rates to zero, then the real interest rate – the nominal rate minus expected inflation – would be 5 per cent. The economy would be trapped. But if the central bank had left interest rates at a positive 2 per cent, the economy would be even more trapped, since the real interest rate would then be 7 per cent. When faced with such a situation, a central bank should always cut rates to zero, not worry about efficiency and let fiscal policy do the rest. Mr Mersch’s reverse logic is false: not cutting interest rates would not avoid a liquidity trap. So how realistic is a liquidity trap in the eurozone? Some people have argued that we are already in a liquidity trap because the problem for borrowers at the moment is not the price of the loan, but getting the loan in the first place. However, a credit crunch does not mean that interest rate cuts have no macroeconomic effect. For example, borrowers whose mortgage or business loans are tied to the Euribor money market interest rate are currently enjoying a significant fall in repayments. Monetary policy undoubtedly has traction. The question is whether it is sufficient to a avoid a liquidity trap later in the year.

I would characterise the probability of a liquidity trap as low but rising. The latest estimate for annual inflation during January was 1.1 per cent according to Eurostat, the European Union’s statistics office. The International Monetary Fund expects average inflation rates in industrialised countries to remain below 1 per cent both in 2009 and 2010. The growth of credit to companies and households in the eurozone is now negative. The latest unemployment figures for Germany were awful. The eurozone economy has developed such a negative dynamic that we would be foolish to seek solace in the mean-reverting trend of our economic forecasts. I am not arguing, as some economists do reflexively, that real interest rates should be negative most of the time. Lorenzo Bini Smaghi, a member of the ECB’s executive committee, is right when he says that a sustained period of this could give rise to future asset price bubbles. But another rate cut from present levels implies a negative real interest rate only if current inflationary expectations are well anchored to the ECB’s target of "below but close to 2 per cent". Are they?

Inflation expectations are not a constant, nor are they a daily number you can look up in a financial newspaper. Even the market-based indicators of inflationary expectations, such as inflation futures or inflation-linked bonds, are not always helpful. They tell us mostly what we already know. We know that inflation expectations can change very quickly during sharp and long recessions. We may find that inflation expectations are indeed well anchored – until they are not. Then what? Obviously, the ECB can always wait and see. But that would contradict the notion of a forward-looking monetary policy. On the basis of what we know now, there is a greater risk of inflation expectations falling below 1 per cent than rising above 3 per cent. For that reason mainly, I would favour a 100 basis point cut now. If the optimists are right and growth resumes in the third quarter, they can always tighten policy without any danger of creating an inflationary boom. But if the optimists are wrong, as I suspect they are, the central bank can then cut rates to zero relatively quickly.

I know that some central bankers are reluctant to cut interest rates to such historically low levels for fear of repeating the mistake of the US Federal Reserve when it cut interest rates to 1 per cent during 2003 and 2004. But at that time, the global economy was expanding. Asset price bubbles were building up in various sectors. The financial services industry was booming. Today, we are on the verge of a systemic financial collapse, the worst global economic downturn since the Great Depression and falling asset prices. Surely, this is not the same situation. But whatever course of action the ECB takes, it needs to explain it with greater clarity and precision. And council members should be able to answer that liquidity trap question without getting trapped.

UK manufacturing downturn slows but jobs shed at record rate
The pace of decline in UK manufacturing slowed in January, the latest survey from the sector shows, but experts warned it was too early to celebrate as jobs were shed at the record rate of 30,000 a month. The closely watched manufacturing Purchasing Managers' Index (PMI), which combines orders and output levels in British factories, was 35.8 in January, slightly higher than the 34.9 recorded in December. Anything below the 50 mark represents a contraction in activity, while anything above is an increase. Despite the data being slightly better than expected, January's PMI reading was still the third weakest in the 17-year history of the series, which hit a record low of 34.4 in November.

Manufacturers are being hit from falling orders both at home and abroad as the global recession takes hold. "Purchasing managers in the UK manufacturing sector reported an anaemic opening to 2009 with record falls in employment as factory jobs were cut at an astonishing rate of 30,000 per month," said Roy Ayliffe, director at the Chartered Institute of Purchasing & Supply which publishes the report. "While the weaker sterling exchange rate acted as a precarious crutch to prop up new export orders in January, benefits were far offset by the downturn in global demand. On the home front, manufacturers continued to wrestle with floundering domestic demand as nearly three fifths of firms reported a decline in new orders. Unsurprisingly, the intermediate goods sector, which supplies to the ailing automotive and construction industries, was worst hit," he said.

The figures followed official confirmation last month that the UK is in the throes of its worst recession since the early 1980s, after gross domestic product fell by 1.5pc in the final quarter of 2008, much sharper than expected. Economists expect the Bank of England's Monetary Policy Committee to cut interest rates by half a percentage point to a new all-time low of 1pc on Thursday, as it tries to limit the effects of the downturn. "The limited improvement in the January manufacturing purchasing managers' survey does not disguise the fact that the sector is still deeply in recession and it does not significantly dilute the case for a further Bank of England interest rate cut on Thursday", said Howard Archer, chief economist at IHS Global Insight.

Unrest as hard times hit workers
European Governments are facing a rising wave of unrest and demands for workers to be shielded from foreign competition as they grapple with the economic crisis. With unemployment in the European Union's biggest countries rising, or set to rise, faster than at any time since the 1930s, strikes, demonstrations and blockades have shouldered their way into the vocabulary of political debate. In France last week, public-sector unions stopped work and more than a million people took to the streets to protest against President Nicolas Sarkozy's programme of economic reforms.

In Britain, several oil refineries and other energy facilities were hit by wildcat strikes over the hiring of foreign workers for a big construction contract. In Greece, farmers blocked border crossings with Bulgaria and Turkey, the country's low-cost agricultural neighbours. They ended the operation after the Government promised subsidies of 500 million ($1260 million) to buttress a slump in local prices. "Social unrest and protectionism are the two major risks of the world economic crisis," French Finance Minister Christine Largarde said at the World Economic Forum in Davos, Switzerland. "I think it's a risk in Europe. It's a risk elsewhere."

Unemployment in the countries that use the euro rose by nearly a quarter of a million people in December alone, boosting the rate to 8 per cent of the workforce, the highest in more than two years, the European Union's statistical agency, Eurostat, said. Economists warn that this is just the start of a vicious upward ratchet. According to provisional figures Germany, the biggest EU economy, suffered a jump in jobless of 387,000 in January, to almost 3.5 million, rising from 7.4 to 8.3 per cent. The European Commission expects unemployment in France to rise from 8.5 per cent as of last November to 10.6 per cent next year.

As the pain rises, so has resentment towards those held responsible. In September, the demise of the titans of the financial industry was viewed with glee in Europe, but as an abstract event. In January, as jobless queues lengthen, these figures are being publicly pilloried. In Britain, characters such as Fred "the Shred" Goodwin, former head of the Royal Bank of Scotland, have become figures of hatred, wizards who destroyed banks with crazed lending policies, ego-driven expansion programmes and over-generous bonuses. Acknowledging the shift in mood, many top bankers stayed away from the Davos huddle this year. Outside the Alpine venue, demonstrators marched with a banner reading, "You Are the Crisis".

The former United Nations rapporteur on human rights, Jean Ziegler, lashed the gathering of the elite as "the vampires' ball". "There's still an overwhelming focus on the fact that this is just a financial crisis. There's almost no acknowledgment that it's a crisis of unemployment, which is a social timebomb," said Sharan Burrow, head of the International Trade Union Confederation. A backlash against globalisation will inflict internal stresses in the EU, whose border-free labour market enables individuals and companies to bid for work and contracts across the 27-nation bloc.

Last week's unexpected strikes in British oil refineries were directed at the use of Italian and Portuguese contractors for a 222 million building project at a plant in Lincolnshire. The strikers said the jobs should have gone to British workers. The British Government has taken a tough line, pointing out that many Britons benefit from working in the EU under its internal market regulations. United States President Barack Obama has inherited some unexploded bombs from the Bush era when it comes to transatlantic trade.

There is already a tit-for-tat tariff war, in which the US has slapped high duties on European products, including France's cherished Roquefort cheese, in retaliation for a ban on American hormone-treated beef. These disputes were politically containable before the crisis, but now are being seized upon by vocal interest groups. With European governments weakened and the EU institutions divided by the crisis, the rows could provide the raw fuel for a protectionist conflict if Obama yields to Congressional pressure for "America-first" trade policies

Ilargi: This is getting ugly fast. It may be a greater threat to the European Union than the monetary situation.

Thousands may strike over 'British jobs' dispute
The wave of strikes that swept the UK last week is expected to escalate today with thousands more employees planning walkouts in protest at the exclusion of British workers from construction contracts. The centre of last week's dispute, Total's Lindsey refinery on the Humber estuary, will again be the focal point, with workers from around the country pledging to join the 500 wildcat strikers who gathered outside the desulphurisation plant on Friday. Elsewhere, up to 900 contractors at Sellafield nuclear power plant are due to meet this morning to decide whether to walk out.

A union source said feelings were running "extremely high" at scores of other sites, adding that the action appeared to have been co-ordinated via mobile phones, text messages and online forums. "This is unofficial action so it is impossible to say with any certainty what will happen but it seems fairly clear from what we are hearing that this is only going to grow." On Friday up to 3,000 workers from at least 11 oil refineries and power plants in England, Scotland, Wales and Northern Ireland mounted protests and unofficial strikes over the granting of an estimated 300 jobs to European contractors at the Total refinery in Lincolnshire.

In an apparently co-ordinated action, 700 workers at the Grangemouth oil refinery near Falkirk walked out, and 400 more downed tools at the Wilton chemical site in Cleveland. There were also protests at eight other facilities in Scotland, Wales and Northern Ireland. Last night Paul Kenny, general secretary of the GMB, called on the government to address the workers' concerns. "Understandably UK workers are angry that they are excluded from jobs simply because they are British. The Labour government has been made aware of this issue and had promised to sort it out but they have failed to keep their promise," he said.

Fears that work on the 2012 Olympic site could be caught up in the dispute were played down yesterday. Alan Ritchie, general sectary of construction union UCATT, said that although it was monitoring developments, the site was one of the best regulated in the UK with workers directly employed and wages well above industry minimums. "Seventy per cent are British and Irish," he said. "Of the remaining 30%, which is fewer than 350 workers, most have lived in the area for over 20 years, but hold foreign passports." The biggest demonstration is expected outside the Lindsey refinery from 6am today, although forecast snow may disrupt plans. Supporters are expected from across the country and organisers hope to block access to the plant.

Total last night issued a statement stressing it had never been its policy to discriminate against British workers. It said it would work with subcontractors "to ensure that British workers are considered in the same way as anyone else". But staff at the site said they planned to get in early to avoid confrontation. It was confirmed that the Italian and Portuguese workers at the centre of the dispute will be confined to their barge hostel in nearby Grimsby docks. The situation in the port and at neighbouring Immingham was described as "volatile and nasty" by one of the workers at the refinery yesterday. He said that rumours were rife about the far right BNP attempting to exploit the issue and extremists "looking for the Italians in bars".

"It is disgusting," said the man, who did not want to be named. "They're decent people who've come here to work, just like our people – including plenty from Grimsby – go over there to do." The conciliation service Acas was asked to mediate by the government on Friday and last night Derek Simpson, joint general secretary at Unite, said he had met ministers over the weekend to call for the creation of "a corporate social responsibility clause" that would force companies to give all workers fair access to jobs. "We need an urgent meeting with the government and the employers this week to address the issues raised so we can bring this to a speedy and satisfactory resolution."

Nuclear workers strike over foreign labour
Hundreds of nuclear workers joined nationwide protests against the use of foreign-contracted labour on Monday, saying Britons were losing out at a time of rising unemployment and economic recession. About 900 contractors at the Sellafield nuclear processing plant in northern England walked off the job, joining more than 1,000 others in the fuel and energy industries who have carried out impromptu strikes over foreign labour in recent days. The work stoppages began when British workers at the Lindsey refinery in eastern England, owned by French oil giant Total, launched a protest against the use of Italian and Portuguese contractors on a major construction project.

Total has said the foreign workers were employed according to European and British law and has said that no British workers were discriminated against in the hiring process. It is holding talks with unions and negotiators to try to resolve the issue. While unions have not called for the strikes, the industrial action appears to be spreading at a time of deepening economic uncertainty, with Internet forums encouraging workers to carry out wildcat sympathy work stoppages. Despite the interruptions, the National Grid said there had been no impact on gas or electricity supplies.

The widening action is a reflection of growing worker unease as the economy moves deeper into recession and unemployment climbs. Almost two million Britons are now jobless, with the unemployment rate over 6 percent and rising. Organisers denied the sympathy strikes were anti-foreign, saying they wanted to create a level playing field for all. "We are not trying to stop foreign labour coming to Britain, we are trying to stop them coming in and being paid less than we are and under-cutting us," Bill Eilbeck, a union organiser at the Sellafield plant, told reporters. "We are really asking for equal rights, not just for us but for the foreign workers as well. If the government do not listen to us the situation could escalate even further and you will be seeing more strikes, which we do not want to happen."

The labour unrest in Britain follows economic protests in Greece, Russia, France and China, prompting analysts to caution about more widespread economic nationalism. "It is always worrying when you hear of more anger and rhetoric against foreigners particularly from unions," said Lars Christensen, head of emerging research at Danske Bank in Copenhagen. "It is certainly worth watching." The dispute is proving an embarrassment for Prime Minister Gordon Brown who in a speech after taking power in mid-2007 pledged "British jobs for British workers." On Monday he expressed sympathy with those struggling to find work but also said strikes were the wrong course of action.

"I recognise that people are worried about their jobs at the moment and I want them and their colleagues to be treated fairly," he said. "But I do not believe that the strike action that is happening is anything other than counterproductive." Brown faces a parliamentary election by mid-2010 and is concerned unrest could damage his Labour party, traditionally the party of the working classes and funded by the unions. Labour trail the Conservatives in opinion polls. The foreign-labour dispute threatened to spread beyond Britain's borders, with Italian unionists registering their disapproval at the way Italian workers were being treated. Italy's infrastructure minister, Altero Matteoli, said Britain needed to realise it was part of Europe "where there is freedom of movement for workers."

US banks sought foreign workers as Americans were laid off
Major U.S. banks sought government permission to bring thousands of foreign workers into the country for high-paying jobs even as the system was melting down last year and Americans were getting laid off, according to an Associated Press review of visa applications. The dozen banks now receiving the biggest rescue packages, totaling more than $150 billion, requested visas for more than 21,800 foreign workers over the past six years for positions that included senior vice presidents, corporate lawyers, junior investment analysts and human resources specialists. The average annual salary for those jobs was $90,721, nearly twice the median income for all American households. As the economic collapse worsened last year — with huge numbers of bank employees laid off — the numbers of visas sought by the dozen banks in AP's analysis increased by nearly one-third, from 3,258 in the 2007 budget year to 4,163 in fiscal 2008.

The AP reviewed visa applications the banks filed with the Labor Department under the H-1B visa program, which allows temporary employment of foreign workers in specialized-skill and advanced-degree positions. Such visas are most often associated with high-tech workers. It is unclear how many foreign workers the banks actually hired; the government does not release those details. The actual number is likely a fraction of the 21,800 foreign workers the banks sought to hire because the government only grants 85,000 such visas each year among all U.S. employers. During the last three months of 2008, the largest banks that received taxpayer loans announced more than 100,000 layoffs. The number of foreign workers included among those laid off is unknown. Foreigners are attractive hires because companies have found ways to pay them less than American workers.

Companies are required to pay foreign workers a prevailing wage based on the job's description. But they can use the lower end of government wage scales even for highly skilled workers; hire younger foreigners with lower salary demands; and hire foreigners with higher levels of education or advanced degrees for jobs for which similarly educated American workers would be considered overqualified. "The system provides you perfectly legal mechanisms to underpay the workers," said John Miano of Summit, N.J., a lawyer who has analyzed the wage data and started the Programmers Guild, an advocacy group that opposes the H-1B system.

David Huber of Chicago is a computer networking engineer who has testified to Congress about losing out on a 2002 job with the former Bank One Corp. He learned later the bank applied to hire dozens of foreign visa holders for work he said he was qualified to do. "American citizenship is being undermined working in our own country," Huber said in an AP interview. Beyond seeking approval for visas from the government, banks that accepted federal bailout money also enlisted uncounted foreign workers, often in technology jobs, through intermediary companies known as "body shops." Such businesses are the top recipients of the H-1B visas. The use of visa workers by ailing banks angers Sen. Chuck Grassley of Iowa, the senior Republican on the Senate Finance Committee. "In this time of very, very high unemployment ... and considering the help these banks are getting from the taxpayers, they're playing the American taxpayer for a sucker," Grassley said in a telephone interview with AP.

Grassley, with Sen. Richard Durbin, D-Ill., is pushing for legislation to make employers recruit American workers first, along with other changes to the visa program. Banks turned to foreign workers before the current economic crisis, said Diane Casey-Landry, chief operating officer for the American Bankers Association. The group said a year ago that demand exceeded the pool of qualified workers in areas like sales, lending and bank administration. Now with massive layoffs, the situation is different, Casey-Landry said. The issue takes on a higher profile as the government injects billions of dollars into the economy and President Barack Obama pushes for massive government spending to create jobs nationwide, on top of the $700 billion already approved for the ailing banks.

"You're using taxpayer dollars and there's an expectation that there are benefits to the U.S.," said Ron Hira, a national expert on foreign employment and assistant public policy professor at the Rochester Institute of Technology. "What you're really doing is leaking away those jobs and benefits that should accrue to the taxpayers." But New York Mayor Michael Bloomberg believes more access to "worldwide talent pools" will better position U.S. financial companies against global competitors, spokesman Andrew Brent said. The U.S. Customs and Immigration Service declined to disclose details on foreign workers hired at the banks that have received federal bailouts. The AP has requested the information under the U.S. Freedom of Information Act.

Nearly all the banks the AP contacted also declined to comment on their foreign hiring practices. Arlene C. Roberts, spokeswoman for State Street Corp. of Boston, which has received $2 billion in bailout money, said the company has reduced H-1B hiring in recent years, and just hires for specialized positions. Jennifer Scott of Yreka, Calif., a retired technical systems manager at Bank of America in Concord, Calif., said in 2004 she oversaw foreign employees from a contractor firm that also sent overnight work to employees in India. "It had nothing to do with a shortage, but they didn't want to pay the U.S. rate," she said, adding that the quality of the work was weak. "It's all about numbers crunching."

Ease off banks' capital ratios, investors urged
Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney are calling on investors to ease the pressure they are putting on banks to hold capital rather than lend it. In a shift that reflects the evolving nature of the struggle against the financial crisis, Canada's top economic policy makers are becoming less critical of bankers' lending practices and resetting their sights on shareholders.

Their message? It's time the markets showed some faith in the unprecedented steps governments and central banks have taken to backstop the financial system. "They are heavily, too heavily, discounting the very clear commitment from the G7 that no systemically important institution will be allowed to fail," Mr. Carney said during a panel discussion at the World Economic Forum in Davos, Switzerland, over the weekend. "That is the first line of the Oct. 8 communiqué, which was literally typed by the finance ministers themselves. The power of that and the degree of commitment to that has been underestimated."

Mr. Carney's remarks echoed comments by European Central Bank President Jean-Claude Trichet at the conference, suggesting policy makers in the Group of Seven richest industrial nations are becoming frustrated that the unprecedented steps they have taken to stabilize the financial system haven't yet restored confidence. "We have said that we'll do what's necessary to protect the Canadian banking system," Mr. Flaherty reiterated on Saturday from Davos during a conference call with reporters.

At that October meeting to which Mr. Carney referred in his remarks, finance ministers and central bank chiefs from the G7 made the extraordinary promise to save any big financial institution. Within days, governments from the group pledged hundreds of billions to provide financial institutions with capital, buy bad assets and guarantee lending. Despite all that, bankers, including the chief executive officers of Canada's big lenders, say pressure from the market is forcing them to keep their cash reserves at higher levels than even regulators require.

They say they find themselves in a quandary because issuing more loans in a deteriorating economy eats away at their capital ratios. Shareholders and analysts are placing a new level of importance on capital ratios in the wake of the credit crunch, rewarding banks that keep them high. That's complicating governments' efforts to restore life to credit markets and revive the lending necessary to reverse the global financial crisis. By speaking out on the issue, policy makers such as Mr. Carney appear to be accepting the banks' assertion that they would lend more if they could, and are now shifting their focus to convincing shareholders that their money is safe.

"The market is demanding more capital requirements than we consider appropriate," Mr. Trichet said last Friday. "We have to correct systematically as much as we can the pro-cyclicality," Mr. Trichet added, referring to the tendency of investors to exacerbate booms and busts by becoming too exuberant when times are good and behaving too cautiously when things turn bad. Mr. Flaherty will be at the forefront of the international efforts to restore faith in capital markets.

Canada and India are leading a working group that is studying the regulatory changes needed to avoid another financial meltdown like the one that occurred last year. Mr. Flaherty said one of the initiatives he is pushing is to have the International Monetary Fund act as something of an auditor for countries' regulatory regimes, a change that would help restore confidence in the financial system, he said. The task won't be easy, as one of Mr. Flaherty's Indian counterparts pointed out in Davos. "It's been said that confidence grows at the rate the coconut tree grows and falls at the rate at which the coconut falls," said Montek Aluwalia, deputy chairman of India's planning commission.

Threat seen to Russian privatisation gains
RUSSIA risks reversing the process of privatisation in its response to the current downturn, even if the government doesn't intend it, according to Anatoly Chubais, the man who sold off state industries to so-called oligarchs in the 1990s. When Russian Prime Minister Vladimir Putin said in a speech Wednesday that his government had no interest in running more of the economy, many in the audience were skeptical. "Good luck with that," quipped former US President Bill Clinton, speaking at a later session of the World Economic Forum here. The Kremlin's control over the economy, particularly the energy sector, has grown dramatically in recent years, despite officials' insistence there is no policy behind it.

Still, according to Mr Chubais, Mr Putin probably meant what he said. The latest bout of state intervention in Russia was no more planned in Moscow than in Washington or Europe, he says. The problem, he says, is that the result may be the same, even if it wasn't intended. "We have a very bad tradition in Russia, where strategy comes from tactics. So what I am afraid of is that this tactic (of taking government stakes in companies) will become a strategy, which is a real risk," said Mr Chubais, who was in Davos when Mr Putin made his speech. Mr Chubais is an unusual figure in Russia who still flies the privatisation flag. Last year, as the state was swallowing up once-private oil companies, he made himself redundant by breaking up RAO UES, the state electricity monopoly he ran, selling the pieces to private buyers.

He is now chief executive of Rusnano, a $5 billion ($AUD 8 billion) government fund to develop a Russian nanotechnology industry. The severity of the downturn in Russia has shown just how dependent the country remains on commodities, which account for more than 80 per cent of exports, Mr Chubais said. Russian towns still depend on single industries for their survival, making them hugely vulnerable should they shut down. Small and medium-size businesses account for less than 20 per cent of the economy, compared with well over 50 per cent in most industrialised nations. By the time the downturn is over, says Mr Chubais, some of the companies the government is now bailing out may not exist. He gives the country a 50/50 chance of escaping without political turmoil.

Other Russian businessmen in Davos this week were equally concerned about the outlook. Ruben Vardanian, chief executive of Moscow-based investment bank Troika Dialog said, "In emerging markets, people are finding out that the new system isn't perfect. The risk of going back, not to communism but to something very worrying, is quite dangerous.” Mr Chubais said Russia has ignored a resource that could help broaden the economy and provide high-value jobs outside the commodities sector - its scientists. His fund, Rusnano, was started in 2007 and now has around 800 applications for projects. It plans to invest on average $1 billion a year. A lot of projects will be for the aerospace, nuclear and resource industries, where Russia has ready buyers, as well as medicine, electronics and other areas, Rusnano says. Russian officials up to Mr Putin and President Dmitry Medvedev have long said they recognise the need to broaden Russia's economy and to encourage the growth of small companies that would create jobs fast and make the economy more resilient. But so far it hasn't happened.

Greek Farmers Clash With Riot Police
Two people were injured Monday when Greek riot police clashed with hundreds of farmers from the southern island of Crete who sailed to the Greek mainland and tried to drive tractors and farm vehicles to the capital to push demands for financial aid. The clashes come at a time of growing social unrest in Greece, as the center-right government of Prime Minister Kostas Karamanlis struggles to restore its credibility after student riots in December. Protests have spread across Europe — most recently in France and Britain — as the global economic crisis bites into jobs and incomes.

In the clashes on Monday, the farmers, who sailed into the port of Piraeus, made a convoy of some 300 tractors, trucks and other farming vehicles. Some of the vehicles tried to ram a police van that was blocking the port gates. Live television broadcasts showed at least two people injured in the scuffle, including a female lawmaker who was knocked down by one of the tractors. Two protesters were arrested for pelting police officers with rocks, potatoes and tomatoes. Heavy farming vehicles are barred from the capital’s motorways, and the authorities in Athens said they had advised the protesters to proceed on foot.

“All we wanted was to drive our tractors to the Agriculture Ministry in a peaceful, symbolic protest,” one farmer mounted on a red tractor festooned with two black flags told a private television broadcaster. He said the farmers would stay put until the authorities came to them. Thousands of farmers have been protesting across Greece since Jan. 20, blockading the country’s main roads and starving the capital of food and medicine as they demand government aid and tax breaks following a harsh winter and a drop in commodity prices.

Most of the blockades eased last week after the government promised a $645 million aid package and Bulgaria’s truckers association vowed to take legal action against the Greek authorities for hampering trade. But the farmers from Crete rejected the package, saying it offers too little for their region. Other agricultural groups are keeping a crucial border crossing with Bulgaria closed, complaining that the government assistance plan provides no long-term solution to their declining income. Greek farmers’ income has shrunk by almost 24 percent in the last decade, according to their national labor union.

YES WE CAN!! have a global depression if we really continue to work at it…
by Willem Buiter

I used to be optimistic about the capacity of our political leaders and central bankers to avoid the policy mistakes that could turn the current global recession into a deep and lasting global depression. Now I’m not so sure. I used to believe that the unavoidable protectionist and mercantilist rhetoric would not be matched by protectionist and mercantilist deeds. Protectionism was one of the factors that turned a US financial crisis into a global depression in the 1930s. Protectionism imposes large-scale structural sectoral dislocation, as exporters are ejected from their foreign markets and domestic producers that depend on cheap imported imports suddenly find themselves to no longer be competitive, on top of the global effective demand failure we are already suffering from. I used to believe that our central bankers would overcome their natural conservatism, caution and timidity to do what it takes to bring to bear the full measure of what the central bank can deliver on a disfunctional financial sector and on a depressed economy, at risk of deflation. Now I’m not so sure. While the Fed is turning on most of the taps (albeit in a unnecessary moral hazard-maximising way), the Bank of England and the ECB are falling further and further behind the curve. What the Bank of Japan does, no-one fully understands, and I will observe a mystified, if not respectful silence.

I used to believe that our fiscal policy makers would, when faced with a combination of national and global disaster, manage to come up with a set of national fiscal packages that would be modulated according to national fiscal spare capacity and that would be designed not only to boost domestic and global demand but also to eliminate or at any rate reduce the underlying global imbalances that are an important part of the story of this global crisis. Instead we find the US engaged in fiscal policies that will aggravate the underlying global imbalances. The odious US House of Representatives has tagged a Buy American clause onto the Obama administration’s $819 bn (or more) fiscal stimulus bill. If this were to become law, US federal spending would, wherever possible, be restricted to goods and services produced by US companies. The main promotor of this act of global economic vandalism was the US steel industry, but other import-competing industries have lobbied also. It is quite likely that the Buy American net will be cast even more widely when the Senate gets its turn at the fiscal stimulus act.

There is little doubt that if the Buy American provisions of the Economic Stimulus Package were to become law, this would amount to an economic declaration of war on the rest of the world. The response of the assembled non-US finance ministers in Davos made this clear. Retaliation from the EU countries and the rest of the world would follow swiftly. Because this disastrous US Congressional actions follows so closely on Treasury Secretary Geithner’s declaration that China is manipulating its currency, it is essential that the Obama administration draw a clear line in the sand. If anything like the Buy American clause inserted by the House survives in the bill president Obama gets on his desk, he must veto it. The questionable value of the fiscal stimulus is overwhelmed by the unquestionable domestic and global harm caused by the Buy American clause. If president Obama fails to veto a protectionism-laced bill, it will be clear that we have a wuss in the White House. If such is the case, God help us all. The US is not alone in moving down the protectionist track. Since the last G20 meeting (with its unanimously endorsed call to avoid protectionism), virtually all the emerging market member nations of the G20 have introduced or announced protectionist measures.

In the UK, prime minister Gordon Brown is reaping the protectionist storm he sowed with his infamous protectionist and xenophobic call for "British jobs for British workers". What was he thinking? Follow the logic: ‘British jobs for British workers’,'Scottish jobs for Scottish workers’ (along with ‘It’s Scotland’s oil’), ‘Welsh jobs for Welsh workers’ and ‘English jobs for English workers’. Why not London jobs for London Workers, or London jobs for native-born London workers, or even London jobs for white Christian native-born London workers? How divisive can you get? British workers are demonstrating against workers from elsewhere in the EU - Italian and Portuguese workers are currently at the centre of a rather disgusting series of altercations at UK oil refineries, gas terminals and power stations, following a dispute at Total’s oil refinery at Killinghome in Lincolnshire, where an Italian engineering company was bringing its own staff from Portugal and Italy for a egnineering construction project. Under British law, conforming to EU Treaty obligations, there are no jobs earmarked for British workers in Britain. With the exception of some transitional arrangements for workers from new member states and a few jobs where nationality still matters for national security or similar reasons, any EU worker can compete freely with any other EU worker in any EU country. So Italian and Portuguese workers can be brought in to complete a contract in the UK if this makes commercial sense to the contractor, just as British workers can compete, individually or as part of team of workers, under the excellent Posted Workers Directive, for jobs and projects in the rest of the EU.

I feel some sympathy for British workers who, because of the poor state of the British educational system, and the lamentable state of foreign language education in particular, are less competitive outside the UK than workers from elsewhere in the EU are in Britain. But that is another argument (if one were needed) for doing something about educational standards in British (and more specifically in English) secondary schools, not an argument for denying workers from elsewhere in the EU the right to compete for work in the UK. The protectionist tide in Britain is rising. £2.3 bn worth of state aid to the British-based car manufacturers is unlikely to be the last state aid with protectionist consequences. Britain has company, of course, with the US, France, Germany and Sweden among the countries announcing measures to prop up their automobile manufacturers.

Financial protectionism is on the rise everywhere. This is partly the inevitable result of the belated discovery of the truth that cross-border banking must be severely restricted as long as regulation, supervision and tax-payer-financed bail-out support for banks is arranged at the national level. The post-crisis world will no longer have cross-border branch banking, with the foreign branches controlled by the parent, its depositors guaranteed by the parent, home country regulation and supervision and no independent capitalisation. Instead we will have just independently capitalised and financially ring-fenced subsidiaries (no Lehman UK last-minute raid by the failing parent on the local kitty), with host country regulation and supervision, deposit guarantees provided by the host country and with fiscal bail-out support provided by the host country Treasury or by no-one.

Beyond this unavoidable re-nationalisation or repatriation of cross-border banking and cross-border financial intermediation generally, there have been other, quite unnecessary manifestations of financial protectionism, in the UK and elsewhere. In the UK, banks involved in the government’s recapitalisation scheme, or benefiting from the ever-expanding range of liquidity facilities and guarantees provided by the Bank of England and the Treasury, are being pressured to lend to SMEs and to households and to exercise patience and leniency in their dealings with over-extended residential mortgage borrowers. It is clear - not surprisingly as the British tax payer is ultimately underwriting all these schemes - that only lending to British SMEs and British households and forbearance vis-a-vis British residential mortgage borrowers is expected and demanded. And the banks are responding. Foreign lending by British banks is way down. So, of course, are foreign deposits in, loans to and investment in British banks.

The world is engaged in an accelerated form of financial de-globalisation. With banks short of capital and having to retrench, their foreign activities will be the first to suffer and the ones to suffer most. Government pressure and conditionality re-inforce the natural tendency of headquarters to withdraw the legions from the periphery of the empire to defend Rome when the barbarians are at the gate. It doesn’t help, of course, when the barbarians are already inside the gate. The hypocrisy and chutzpah of politicians knows no bounds. In Davos, UK prime minister Gordon Brown - the same man who launched the ‘British jobs for British workers’ missile and who leads a government that is brow-beating British banks to favour domestic lending over foreign lending - pontificated about the dangers of protectionism in general and the need to stand up to financial protectionism in particular. He is right to be worried about financial protectionism. The coming re-patriation of cross-border banking will affect London more than any other financial centre. Given the dismal prospects for real economic activity and the sharp decline of inflation everywhere, the task of the monetary authorities in the US, the Eurozone and the UK is really rather easy: set the official policy rate at zero and engage in large-scale quantitative and qualitative easing. The Fed is doing this. The UK and the Eurozone are behind the curve. Indeed, the Eurozone is now getting so far behind the curve that, if the ECB were on an Olympic race-track, it would be looking itself in the back.

At the ECB, a special branch of voodoo monetary theory has been developed that sees insurmountable problems and dangers associated with getting the official policy rate below some value that is well above the zero floor set by the zero nominal interest on currency. The exact location of this mysterious liquidity trap lower bound has never been revealed, but on the basis of the stammering, incoherent and incomprenhensible statements in this regard from Jean-Claude Trichet, Jurgen Stark, Gertrude Tumpel-Gugerell, Lorenzo Bini-Smaghi and Ives Mersch (to name but a few), it appears to be migrating south slowly from around 2.00 percent. The ECB’s blabbering about a possible liquidity trap above a zero percent nominal interest rate is complete and utter nonsense. The only floor, if there is one at all, is the zero floor. There are no conceptual or operational problems operating monetary policy with a zero official policy rate. Even at the Bank of England there are some operational types who argue that they cannot conduct overnight operations with Bank Rate at zero. What they mean to say is that they cannot continue to implement overnight operations with their arcane, unwieldy and unnecessary existing management procedures. All they have to do instead is the following. During what is now called a reserve maintenance period (i.e. between scheduled MPC rate-setting meetings), accept, 24/7, any amount of overnight deposits from banks at a zero rate and/or lend, 24/7, any amount overnight to the banks at a zero rate against the highest grade collateral (UK sovereign debt instruments or better). That is what it means to set the risk-free overnight nominal interest rate at zero. If the Bank of England’s staff cannot do it, I volunteer to do it for them, against a small fee.

Once at the zero floor, quantitative easing and qualitative easing are the only instruments open to the central bank. Both quantitative easing (increasing the base money stock by purchasing government securities) and qualitative easing (purchasing private securities outright, including possibly illiquid private securities and/or private securities subject to substantial default risk) without increasing the monetary base, can also be pursued when the official policy rate is positive, of course. Indeed, at this conjuncture, I consider qualitative easing (what Bernanke calls credit easing) to be more important even than getting the official policy rate to zero as soon as possible. Of course, there is no reason not do do both if you can. In the UK, quantitative easing is not terribly urgent, because longer-term government rates, while higher than they were at the end of last year, are still rather low. The key problem are the availability and cost of credit to the private sector, as reflected in part in the large spreads of private interest rates over the corresponding maturity government and central bank yields. The Bank of England should therefore engage in qualitative easing (spread hunting) on a large scale. The asset purchase facility (APF) is designed to do just that. The Bank buys private securities (high-grade, supposedly, but I doubt whether there are many of those left). The Treasury sterilises the resulting increase in the monetary base by issuing Treasury Bills and deposits the proceeds in its account with the Bank of England (a liability that is not part of the monetary base). The Treasury gives the Bank of England an indemnity, currently up to £50 bn, to insure it against any losses it may make on its purchases of risky private instruments.

The amount is clearly too small. I expect to see it go up to £300 bn before long, and it may well reach £500 bn, as the socialisation of finance proceeds. Clearly, well before that point the sterlisation of the increase in the monetary base will also stop, and the Bank of England will engage in a combination of quantitative and qualitative easing: increasing the monetary base (’printing money’) as the counterpart of the purchase of private securities, under an indemnity from the Treasury. The ECB, after being the leader of the pack in fighting the liquidity crunch - it accepted as collateral in its repos and at the discount window anything that did not move and a few things that did - has become the laggard as regards the outright purchasing of private securities (qualitative easing). It is even reluctant to engage in significant quantitative easing. There are no obstacles to quantitative easing by the ECB/Eurosystem to be found in the Treaties. The ECB/Eurosystem is banned from lending directly to national governments and from buying government securities directly in the primary or new issues market, but there is nothing to stop it from purchasing all the govenment securities it wishes in the secondary markets. All it takes is a decision by the ECB’s Governing Council. The question as to how much of each government’s debt instruments to buy is something it should not take longer than 5 minutes to decide. The obvious solution is to first decide how much in toto to buy and then to determine the shares of the debt instruments of each of the 16 national governments in the Eurozone, by setting these equal to their (normalised) shares in the capital of the ECB. Whether these shares should refer to market value or notional/face value can be decided by the flip of a coin.

According to the rule book there are no counterparty restrictions in what would be structural outright purchases by the ECB/Eurosystem. The instruments have to be marketable and satisfy high credit standards, to be assessed using ECAF rules for marketable assets. For marketable assets to be eligible as collateral, they must be rated at least BBB- (reduced from A- at the beginning of the crisis). I assume (it is not stated explicitly in the ECB’s manual) that the same creditworthiness criteria apply to marketable securities purchased outright. This means that even the recently downgraded government debt of Greece, Spain and Portugal is eligible, as well as the soon-to-be-downgraded sovereign debt of Ireland. As regards outright purchases of private securities (sterlised or non-sterilised), the reluctance of the ECB/Eurosystem is understandable. This issue brings out a yawning gap in the ECB/Eurosystem edifice: the absence of clear fiscal backing of the ECB/Eurosystem for losses incurred in the conduct of monetary policy and liquidity operations, including the outright open market purchases of private securities that the ECB/Eurosystem should be gearing up to do very soon. For losses incurred in the normal market operations used for monetary and liquidity management by the Eurosystem (which are implemented in a decentralised manner by the national central banks (NCBs) of the Eurozone), there is the rule that such losses are shared by all the NCB’s in the Eurosystem in proportion to their relative shares in the capital of the ECB.

For losses incurred because of an NCB acting as lender of last resort towards one or more specific banks in its jurisdiction/country, the national Treasury of that country would have to indemnify the NCB in question. Indeed the NCB would only act as lender of last resort to assist specific institutions as an agent of the national Treasury, and not in its capacity as a member of the Eurosystem. A prior commitment by the national Treasury to indemnify the NCB for any losses incurred during a lender-of-last-resort-operation would be required before the NCB could engage in such an action. The structural outright open market purchases of private securities by the ECB/Eurosystem involved in qualitative easing would also be performed bilaterally by the NCBs, but since they are aimed at unclogging financial markets and enhancing liquidity in the Eurozone as a whole, the fiscal backing should be provided by the fiscal authorities of the Eurozone jointly. The 16 national fiscal authorities of the Eurosystem must, as soon as possible - and preferably immediately - provide the ECB/Eurosystem with an indemnity of, say, €500bn to begin with, to enable to ECB to engage in qualitative and/or combined qualitative and quantitative easing in the very near future. Again, the shares of each of the 16 national Treasuries in the aggregate indemnity should be determined by the (appropriately scaled) NCB shares in the ECB’s capital.

As alternative to such a binding, ex-ante Eurozone fiscal burden-sharing rule for ECB/Eurosystem losses incurred as a result of quantitative and qualitative easing operations, would be the creation of a Eurozone-wide fund that would indemnify the ECB/Eurosystem. Effective fiscal stimuli involving increased government deficits can only be provided by governments with fiscal credibility, that is, governments that can cut taxes and increase public spending now and credibly commit themselves to future tax increases and public spending cuts of equal magnitude. The relentlessly procyclical behaviour of most fiscal authorities in Europe and North America during the past decade means that in the north Atlantic region, at the beginning of the crisis, only Germany and Spain had any significant fiscal credibility and spare capacity. As far as I can tell, the US and the UK have little if any. In the emerging market universe, China and Brazil have some fiscal elbow room. Few other countries do. This means that the contribution of fiscal policy to the recovery of global demand will (a) be limited and (b) have to be modulated according to national fiscal spare capacity. That means little if any fiscal stimulus in the USA and the UK and a large fiscal stimulus in Germany and China. Germany is being dragged, reluctantly, towards the Halls of Reason. The US and the UK seem intent on expansionary fiscal actions that are likely to more than exhaust their government’s credibility capital. These fiscal actions by the US and the UK will also re-invigorate the underlying global imbalances that provided some of the combustible material that caught fire on August 9, 2007.

We can go down in history as the generation that created the Great Depression of the Noughties. Just keep on beating the protectionist drums. Keep on the footdragging that prevents effective qualitative and quantitative monetary policy easing in the Eurozone and the UK. And go ahead with unsustainable fiscal stimuli in the US, the UK and elsewhere that will spook markets, push up long-term interest rates and raise the spectre of sovereign default by countries not belonging to the group of usual suspects. Yes we can! I hope we won’t.

Natural gas glut could hit U.S.
As many as seven massive natural gas export terminals are expected to start up overseas this year, expanding worldwide capacity by 20 percent and flooding markets with new supplies of the key power plant and heating fuel. Dozens of new tankers capable of carrying natural gas in a liquefied form are slated to hit the seas. Just as these new supplies come on line, worldwide demand is expected to drop as the global recession deepens. Operators of these new facilities are unlikely to cut back production, however, so shipments of liquefied natural gas will most likely head to the deepest markets with the greatest amount of natural gas storage capacity — the United States.

"It’s completely counterintuitive," said Murray Douglas, a global LNG analyst with Wood Mackenzie in Houston, who is predicting U.S. LNG imports will grow 30 percent to 456 billion cubic feet this year and to more than 1.1 trillion cubic feet by 2013. "We don’t believe Asia and Europe will be in a position to absorb this new production, and the U.S. is the only market that can take it, that has a large amount of storage." The wave of imports might even be strong enough to challenge growing domestic natural gas production from various shale formations, including the Barnett Shale near Fort Worth and Fayetteville Shale in Arkansas.

"This can put pressure on U.S. gas prices and could delay the full development of some of the new shale projects," Douglas said. Other analysts, including Houston-based Waterborne Energy and Raleigh, N.C.-based Pan Eurasia Enterprises, agree that an American gas import surge may be coming. Even the Department of Energy updated its LNG import predictions for 2009 recently to include the possibility of such a surge. Natural gas accounts for 23 percent of total energy consumed in the U.S., according to the Department of Energy, much of it used to fuel power plants. Twelve percent of the gas comes from foreign suppliers, most of it through pipelines from Canada, and about 3 percent comes from overseas aboard LNG tankers.

Natural gas turns into liquid at minus 260 degrees Fahrenheit. In that condensed form, it can be transported in specially designed oceangoing tankers. When the tankers reach a gasification terminal, the liquid is heated back into gas for transport by pipeline. 2007 was a record year for LNG imports into the U.S., with some 770 billion cubic feet arriving through five terminals. Three terminals came on line in 2008, including Houston-based Cheniere Energy’s terminal on the Louisiana side of the Sabine Pass south of Port Arthur and Freeport LNG’s terminal on Quintana Island south of Houston. The third, owned by The Woodlands-based Excelerate Energy, is near Boston.

The timing was bad. U.S. imports slowed as tankers were drawn both to Europe — where prices spiked recently because of ongoing supply disputes with Russia — and Asia, where economic growth and the shutdown of a large nuclear power plant in Japan because of earthquake damage led to greater demand for natural gas to run other power plants. More of the same was expected for this year. Some equity research firms even stopped tracking LNG terminal operators. But the coming wave of new export terminals, where the gas is liquefied and loaded on tankers, is centered largely in the Asia-Pacific region, said Steve Johnson, president of Waterborne Energy. That means those markets will be well-served, leaving more tankers available for Atlantic markets — with the U.S. being the deepest and most liquid.

One might expect the new LNG exporters to delay opening, or at least cut back their output given the lower demand. But the gas liquefaction projects have been planned over many years and cost their host governments many billions of dollars, Johnson said. "Shutting it down is the last thing they will do," Johnson said. LNG can be competitive priced as low as $3 per million British thermal units, said Zach Allen, head of Pan EurAsian Enterprises, a management advisory firm that follows LNG markets. That’s a price the U.S. hasn’t seen since 2002. While LNG generally is sold in contracts between importers and exporters, its price is influenced by the price of natural gas traded on the New York Mercantile exchange, which closed Friday at $4.42 per million Btu.

"Some cash is better than none, especially for producers who rely heavily on that cash for social and other programs that would be politically explosive to cut off or cut back," Allen said. Some of Qatar’s natural gas fields produce other valuable liquids that are stripped out and sold at prices that essentially cover all production costs before the gas even makes it to market, Douglas said. "They are essentially producing the gas for free," Douglas said. The cost of getting the LNG from its foreign origin to other markets can be relatively low, Johnson said. The 43-day round trip from the huge export terminal in Qatar to the Lake Charles, La., LNG terminal costs $2.09 per million British thermal units. From Egypt to Lake Charles takes 30 days and $1.29 per million Btu.

Chrysler turns the screw on beleaguered parts makers
Chrysler has stepped up pressure on beleaguered North American automotive parts makers by demanding price cuts as part of its drive to meet the conditions for receiving $4bn in US government loans. The Detroit carmaker, which is also seeking an additional $3bn from Washington, is understood to be seeking a 3 per cent reduction in parts costs, although suppliers with long-term contracts providing for price reductions above the target will not be required to make further cuts. While declining to confirm specific figures, Chrysler said that it "strongly believes that this is the time for shared sacrifice in the automotive industry". Production cuts by carmakers have already put the parts industry under immense strain.

"I suspect there will be some relatively large [car parts suppliers] that will go into Chapter 11 in the near future," said Thomas Manganello, head of the auto industry practice at Warner Norcross & Judd, a Detroit law firm that represents numerous suppliers. Contech, a maker of light-weight castings that had 1,100 employees, filed for bankruptcy protection last Friday. Also on Friday, American Axle, which depends on General Motors for about three-quarters of its sales, disclosed that its customers expect to close their assembly plants for a cumulative total of 35 weeks between January and March, double the shutdowns in the fourth quarter of 2008. The squeeze will intensify as plants are reopened, with suppliers having to ship components and meet expenses while waiting 45 to 60 days for payments to roll in.

Some are expected to demand immediate payment for raw materials. "There's going to be a problem jump-starting things at some point in time, even if everything else is done right," one banker said. American Axle's shares tumbled by 22 per cent on Friday after it reported a fourth-quarter loss of $112.1m, more than quadruple the shortfall a year earlier, and suspended its dividend. Numerous suppliers are scrambling to renegotiate their debt as a way of keeping their heads above water. But they are paying a hefty price in the form of higher interest costs, special fees and other conditions. Hayes Lemmerz International, the world's biggest steel and aluminium wheel maker, disclosed on Friday that its bankers have eased leverage and interest-coverage ratios for the coming year.

Besides an increase in interest rates, Hayes Lemmerz has agreed to cut its capital spending and apply proceeds from asset sales to repay its term loan. Lear, which makes vehicle interiors, is in talks with its bankers after acknowledging that it is in breach of loan covenants. According to Brian Johnson, analyst at Barclays Capital, the lenders "likely realise it is in their best interests to work with Lear in order not to see it file for Chapter 11". Even so, Standard & Poor's lowered Lear's credit-rating on Friday with a warning that "its credit measures will worsen substantially". Mr Manganello said that while some of Chrysler's suppliers have agreed to further price cuts, others are "standing firm".

General Motors and Ford Motor are also reviewing their supplier relationships. Ford has more than halved its global production supply base from 3,300 companies in 2004 to 1,600 last year. It aims to bring the number down to 750, but has not set a target date. A Ford spokesman said that "we have not issued any across-the-board price cuts. Our approach is to work collaboratively with our suppliers on reducing costs". The supply sector is seeking at least $10bn of federal bail-out funds from the US government's troubled asset relief programme.

Folding dealers shock car buyers with unpaid liens
The national wave of auto dealership closures has come crashing down on thousands of people who are on the hook for used-car loans that dealers were supposed to absolve. When a car buyer still owes money on a vehicle he is trading in, the dealer promises to pay off the outstanding loan, then resells the vehicle. But as more dealers go out of business, some are sticking consumers with the bill. Lenders can then go after the previous owner who thought the debt was paid, or repossess the car from the new owner who assumed it came with clear title. "It's devastating for people when it happens because they have two car payments and they can't afford them," said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento-based nonprofit that lobbies on behalf of vehicle owners. "Their credit is destroyed for no fault of their own because the dealer defaulted."

Regulators in California and other states, including Florida, Iowa and Washington, are seeing a surge in consumer complaints. They warn the problem is sure to grow this year because of the deepening recession and continued trouble in the auto industry. About a quarter of all car buyers are vulnerable because they still owe money on their trade-in or lease when they buy another vehicle, according to industry tracker It's become more common for a driver to owe money on a trade-in as people stretch their car payments over six or seven years to make them more affordable. Inga and Brian Randle of Elk Grove, a Sacramento suburb, are among those who got burned. In 2006, they bought two 2001 Mercedes vehicles, a CLK430 convertible and an E320 sedan, finding out afterward that the small Sacramento dealer had not paid off the previous owners' liens.

Creditors called, and the Randles found they owed $40,000 on the old loans. "I stopped paying on both of those loans because I couldn't afford to keep paying. It's a huge stain on my credit — and I had very good credit," Inga Randle said. "Our life has really been affected by what's going on here." The Randles now drive 15-year-old vehicles they own outright. Brian Randle is working more overtime to rebuild their savings, and the couple has been dragged into the dealership's bankruptcy proceedings. A few states have programs that require dealers to post substantial insurance bonds to repay victimized car buyers. Consumers in states with no such program, or a poorly funded one, have little recourse but to sue and hope for at least a small slice of the assets if the dealer has filed for bankruptcy. Authorities have brought charges in rare cases where they have proof of intentional wrongdoing, but local prosecutors, motor vehicle departments and state attorneys general are paying more attention as the problem grows.

California state Sen. Ellen Corbett, a Democrat from San Leandro, has introduced legislation that would require dealers to prove they are paying off a vehicle's lien before transferring the title. That's already a requirement in some states, said Jason King, spokesman for the American Association of Motor Vehicle Administrators. Corbett's bill would require auto dealers to post bonds as high as $250,000 with the California Department of Motor Vehicles so liens could be paid off if a dealership collapses. "It's becoming a serious problem because the consumer, through no fault of their own, may be facing financial ruin just because they purchased a car," Corbett said. California is hit particularly hard because it has the nation's largest auto market, more dealers going out of business, and more buyers who owe money on their trade-ins. DMV spokesman Mike Marando said the agency had 319 open investigations on dealers for failing to pay off liens or register a vehicle as of December, up from about 200 cases at the same time a year ago. It fielded 1,655 vehicle-transfer complaints against dealers from July to September, nearly double the number of consumer complaints for the same period in 2007.

Complaints also are rising in Florida. Between March 1 and Sept. 1, 2008, Florida officials deemed valid 103 complaints regarding auto dealers' delinquent loan payments. By comparison, there were 37 confirmed complaints during the same period in 2007. Florida also received more than 1,886 confirmed complaints of delays in title transfers during that five-month period in 2008, compared with 900 a year earlier, said Ann Nucatola, spokeswoman for the state's motor vehicle department. Data regarding auto loan defaults are not compiled nationally, but other states have similar problems, according to the National Automobile Dealers Association, National Consumer Law Center, prosecutors and private attorneys who are suing bankrupt dealerships. Washington state created a task force in October after an agency that oversees dealer licenses saw a 4 percent increase in complaints against dealers who failed to transfer titles.

Officials are having trouble helping consumers who still owe money on trade-in vehicles if a dealer defaults, said Mary Lobdell, an assistant attorney general for the state. For now, they are advising consumers to hire attorneys and seek a share of the dealer's $30,000 bond. "The problem is once they've gone out of business, there's no money. You can't get blood from a turnip," Lobdell said. Nevada Department of Transportation investigator Gordon Rogers said he is dealing with about four cases a month, double the number of a year ago. More than 5,000 new and used car dealerships closed nationwide last year, according to industry groups. That includes 450 in California. "Unfortunately, with this economy, we can expect to see a growing number of dealers go out of business in the next year," said Iowa Assistant Attorney General Bill Brauch, who heads the National Association of Attorneys General auto working group. "I think there are going to be problems around the country with consumers having to be made whole and consumers having to eat significant costs." Iowa, like California, requires dealers to post a $50,000 bond, but some states' bonds are as low as $5,000. Even $50,000 is often too little to cover defaults, Brauch said.

California lawmakers took an extra step by creating a Consumer Recovery Fund in 2007, with money coming from a $1 fee on each vehicle sold. Ohio, Virginia and West Virginia also have restitution funds, according to the National Consumer Law Center and the Ohio attorney general's office. But California's fund cannot be used yet because the state is still forming the agency that will consider claims and distribute the money. Consumers are left to sue the dealer, which typically has declared bankruptcy and has no money to reclaim, said Armando Botello, a spokesman for the California DMV. He said the state can suspend the dealer's license or refer the dealer to local prosecutors but cannot recover buyers' money. Before they land in trouble, used-car buyers should insist on seeing a vehicle's title to make sure it has no liens, consumer advocates say. They also say buyers offering trade-ins should first pay off the loan themselves if possible, or deal only with high-volume dealers who are part of a larger auto group and thus are less likely to fold. "You've got to check out the dealer's financial health as best you can if you're going to let them handle your vehicle resale," said Jesse Toprak, executive director of automobile industry analysis for Edmunds.

U.S. Homelessness Surges as Funding Falters
Shelters across the country report that more people are seeking emergency shelter and more are being turned away. In a report published in December, 330 school districts identified the same number or more homeless students in the first few months of the school year than they identified in the entire previous year. Meantime, demand is sharply up at soup kitchens, an indication of deepening hardship and potential homelessness.

As snowstorms blew into this Northwest city and the economy iced over in December, the occupants of a shelter nestled among industrial buildings on the north side prayed for divine intervention. "We were hoping for the Christmas miracle," says Glen Dennis, 41, who was working his way through a residential drug-treatment program at the CityTeam Ministries shelter. Dennis and the other 11 guys in the long-term program -dubbed the "disciples" - also worked each day to prepare for some 50 to 60 overnight shelter guests, and dish up free hot meals to about 100 people. "We kept doing what we were doing, and hoped someone would come by and drop off a big check."

But the check did not come - even after a coalition of other shelters, nonprofits and local churches tried to pull together a rescue package to keep the shelter open. On Dec. 27, CityTeam Ministries, based in San Jose, Calif., closed the Seattle facility - leaving scores of people to seek food, shelter and sobriety elsewhere. For Dennis, who had been free of crack cocaine for nearly 11 months, the upheaval led to another painful relapse out on the streets. "It's a real loss," says Herb Pfifner, executive director of the Union Gospel Mission shelter in downtown Seattle. "We're all scrambling to try to handle the growth of homelessness because of the economic situation ... and then the closing of another mission adds more pressure."

The CityTeam closure is a piece in the expanding problem of homelessness across the nation: Shelters and related services for the homeless are facing funding shortfalls as the downturn takes its toll on state budgets and corporate donations. And while individual donors in many cases are keeping up gifts - or even digging a little deeper for charities that help with urgent needs like food and shelter - the service providers say they are faced with a rapidly growing demand from people losing jobs and homes in the economic crisis. "A downturn in (overall) funding in this case is accompanied by a surge in demand, so a homeless shelter, food pantry, or job-training program is going to feel it first," says Chuck Bean, executive director of Nonprofit Roundtable of Greater Washington, in the District of Columbia. "Even if they have 100 percent of their budget compared to last year, they now see a 50 percent surge in demand. Then (they) get into the tough decisions: Do you thin the soup, or shorten the line?"

Even as census-takers fan out in cities across the country this week in an attempt to count homeless populations, advocates and experts point to a bevy of evidence that homelessness is rising and will continue to, most notably among families with children. Shelters across the country report that more people are seeking emergency shelter and more are being turned away. In a report published in December, 330 school districts identified the same number or more homeless students in the first few months of the school year than they identified in the entire previous year. Meantime, demand is sharply up at soup kitchens, an indication of deepening hardship and potential homelessness. "Everything we are seeing is indicating an increase," says Laurel Weir, policy director at the National Law Center on Homelessness and Poverty. "And homelessness tends to lag the economy. So we're probably seeing the tip of the iceberg here."

In the foreclosure crisis, the people being displaced from homes won't likely be on the street immediately, explains Michael Stoops, director of National Coalition for the Homeless. "The people who have lost homes or tenants in homes that were foreclosed ... have downsized, and if that doesn't work they will move in with family and friends," says Stoops. "After a while, they will move into their RV in a state campground. The next step is a car. And the worst nightmare for a working, middle-class person or even a wealthy person who has never experienced homelessness is knocking on a shelter door." As the case of Seattle's CityTeam shelter illustrates, many nonprofits serving the poor are working on a shoestring, even in better times. Seattle-area donations to the shelter had to be supplemented from general funds, said Jeff Cherniss, chief financial officer of CityTeam, which operates shelters and food programs in five other U.S. cities.

"We were hoping (the Seattle shelter) could become self-sustaining," says Cherniss. CityTeam Ministries, a Christian organization funded by donations from individuals, corporations and churches, kept the Seattle facility afloat with help from its general fund for most of a decade, but the 2008 crisis prompted them to retrench. Every major source of funding is under pressure in the current environment: Charitable foundations - which rely on corporate profits for their seed money and investments to preserve and build those funds - have been forced to pull back grants after taking a massive hit as corporate earnings faltered and stocks plunged. The National Council of Foundations recently estimated that philanthropic foundation endowments have lost $200 billion in value during the economic crisis.

A few of the largest foundations have, despite losses, promised to maintain or give at higher levels in the face of the crisis. The Bill and Melinda Gates Foundation this week said it would increase its giving to 7 percent of its assets from 5 percent. And the John D. and Catherine T. MacArthur Foundation announced three gifts totaling $34 million to help homeowners in Chicago avoid foreclosure and keep renters in homes. Still, the casualties are mounting. Among them: Atlanta nonprofit Nicholas House, which closed a shelter for families in mid-January so it could safely keep other housing services open. Nearly all corporate donors gave to the organization at lower levels this year, says Dennis Bowman, executive director of the 26-year-old agency. The final straw came when a corporate donation ended, and was not renewed. "It was directly because of the economy - the business has suffered in this economy, and so can't provide the funding, which was well over $100,000 a year," says Bowman.

The organization is scrambling to find other options for the 12 families - 45 people in all - who lived there, by squeezing them into other parts of its own programs or openings with other nonprofit programs. Arguably, no single event in the economic crisis has caused a greater ripple of concern among advocates for the homeless than the government takeover of mortgage giants Freddie Mac and Fannie Mae in September. In 2007 alone, charitable giving through the Freddie Mac Foundation and the Fannie Mae philanthropic division topped $47 million - the bulk of which goes to programs that shelter and feed homeless Americans, and establish affordable housing.

In Washington, D.C., where Fannie and Freddie had been the largest corporate donors, dozens of organizations were up in the air as government auditors reviewed the corporations' records, including their charity operations. Linda Dunphy, executive director of Doorways for Women and Families, a shelter program that has been receiving funding from Freddie Mac since 1996, says the takeover of the mortgage company threw a promised $300,000 grant into limbo. Meantime, Doorways watched other substantial corporate donations drain away - including some $50,000 that had been coming through an annual walkathon from financial companies Morgan Stanley and Merrill Lynch.

Fortunately, when the review of Fannie and Freddie's charitable operations ended in late December, the Freddie Mac grant came through for Doorways, averting the need to shut down a family shelter - for the next six months, at least. "But then we face a whole new fiscal year, and our concerns about what is going to happen at (Freddie Mac Foundation) and whether they can continue to keep giving at the level they have been giving," says Dunphy. The Alternative House for homeless mothers in northern Virginia was not as lucky. Freddie Mac had been giving $35,000 to $60,000 a year to this nonprofit. The Freddie Mac money was spent on providing developmental assistance for the babies, who are often behind because of their chaotic beginnings. Last week, Judith Dittman, who runs the program, got word that the funding was cut.

Up to now, another major source of funding for nonprofits providing homeless services came from state budgets. But entering 2009, at least 45 states faced budget deficits, according to the Center on Budget and Policy Priorities, which estimates combined state budget gaps for the remainder of this fiscal year and state fiscal years 2010 and 2011 at more than $350 billion. The trend bodes very badly for programs that benefit the poor and homeless. The leading example of state budget problems is California, which has eliminated funding for emergency housing assistance this year as it struggles to pare its $40 billion deficit. In Ventura County just north of Los Angeles, the cut of about $60,000 delivered an immediate blow to three homeless operations. The largest, a winter shelter run by St. Vincent de Paul that provides beds for 100 people, was forced to cut 30 nights from its schedule.

"Because they operate on a shoestring, it's a significant hit to them," says Karen Schulkin, program coordinator for homeless services in the county. "The winter shelter at the National Guard Armory can only stay open for the number of days they have funding for." Local government funding often provides seed money for nonprofits, who leverage it to drum up foundation money and other donations. So, according to Bean of the Nonprofit Roundtable of Greater Washington, the local deficit - about $1.5 billion in the case of D.C. and surrounding areas - could present an even bigger problem than the uncertainty over the future of Fannie Mae and Freddie Mac Foundation. "This will put a huge strain on the ability to invest in the safety net. ...The challenge for a lot of nonprofits is that local government support will be down, foundations will be down," says Bean. "The question will be what happens with individual donations."

To be sure, out of the crisis come tales of inspired giving as communities scramble to raise new funding. The town of Danville in southern Virginia rallied to reopen a shelter that closed at the end of December after 15 years in operation. A drive prompted a $20,000 anonymous gift, which was more than matched by dozens of other local contributions. By Jan. 22, the money and a new director were in place to reopen the 20-bed shelter-offering some reprieve, at least, in a town with an estimated 150 homeless. "The people of Danville ... opened up their hearts and pocketbooks with $23,100 in matching funds," reports Pastor Donnie Anderson of the Riveroak Church of God, who spearheaded the fundraising. "We are so grateful! The shelter is open as House of Hope and is ready for any who may need a warm place to stay and hot meals to eat."

On Capitol Hill, as part of the $819 billion economic stimulus package, Congress included a boost in funding for emergency shelters. The $1.5 billion provision doubles the annual federal funding for alleviating homelessness. In addition, the bill includes $200 million to help people who are behind on mortgage or rent payments. The bill, now being debated in the Senate, is "a good step forward," says Maria Foscarinis, executive director of National Law Center on Poverty and Homelessness. But the organization is also calling for the federal government to renew its commitment to affordable housing, which she says ended with large cuts for low-income housing in the 1980s. The NLCPH calls for Congress to make a large infusion of funding to the National Housing Trust Fund, tasked with building affordable housing.

"The growing gap between wages and housing costs has long been hard for low-income people," says Foscarinis. "Now we're seeing people who are middle-income who are being squeezed." While that debate continues, local churches and homeless activists are still trying to revive the CityTeam shelter, though hope for a breakthrough is dwindling. Glen Dennis was lucky. His former CityTeam friends dusted him off after his relapse and helped him get into a rehab program at Bread of Life Ministry in downtown Seattle. He is starting over again. Charles Capizano, who lives with three other graduates of the rehab program in a house secured for them by Bread of Life, is cautiously planning his future, but worries about the many people who scattered when the shelter closed. "Once you lose everything, it's very hard to get back to the surface again," he says. "You get a good lead on a job and you think, 'how am I going to get there, how can I dress for work?' Not having a place to cycle out of that is really tough."


Anonymous said...

I thought this was interesting in light of your post today. How do they package the garbage in the most palatable way possible and not be around when it blows up...

Anonymous said...


Nice betting slip analogy. It reminds me of an old Dilbert cartoon where Dogbert is selling yesterday's lottery tickets for half price claiming they only represent a 1 shot less in a million chance of winning so are a bargain at a 50% reduction in price.

Martin_B said...

They only talk of the Bad Bank, never of the Bad Bankers.

Is there no such thing as personal responsibilty any more?

Erin Winthrope said...


If your analysis is correct (and I think it is), I'm confused why it makes sense to invest one's money in any type of Treasury Security. If international banking circles already know that this whole bad bank endeavour is a fool's errand, then any government that attempts it will be punished mercilessly in the international debt markets. A debt crisis will rapidly develop and anyone holding even short term government debt securities could be at risk of losing principal.

Anonymous said...

The banks are fighting for survival and won't give up. Their needs come first and they are powerful.

If so, is it not possible to accommodate their need for survival and financial stability?

Possible Solution:
1.Govt guaranteed all deposits AND guarantees survival of banking system.
2.Banks write down all their bad debts and declare bankruptcy
3.Govt decrees new banks will be started up with fresh capital injections
4.Barclays can become New Barclays, Goldman becomes New Goldman, New JP Morgan etc.

So basically it's like a fresh start, if we combined this with a moratorium on foreclosures and capping home prices at 3-3.5 times median income with 20% down. This will cause home prices to fall to affordable levels as well.

No one is fired in the "NEW banks" atleast in the first one year, so basically we have the same institutions being run by the same people. So the banks don't lose their power which they are so fighting to keep.

If we ensure their survival, they will ensure ours. It's a bit twisted but it's possible.

rachel said...

"They need to find the words and reasoning and excuses to make it politically palatable. That is what's hard, that is what's making it take so long."
ilargi, for me this is one of your best quotes ever. so beautifully so tragically, expressed.
I imagine them agonizing over the decision, kind of like choosing which town to drop a nuclear bomb on, only maybe, worse. All the while, thinking THEIR bunkers are safe…

Anonymous said...

I don't think anyone responded to your question yesterday about whether you should continue to make payments on your life ins. policy. Lately, the insurance co's. have been in the news, trying to get congressional approval to reduce their requirement for reserves. It did not pass. They did not do well during the great depression. We just made a similar decision at our house, in deciding to cash in a variable annuity which was to be used for retirement income someday. These are difficult decisions, but each of us has to do what our gut tells us is best. Our feeling was that once you're in line behind everyone else, it's too late. (Something taught by our illustrious leaders here.)

Anonymous said...

I liked the combo of the guy yelling about keeping the british foreign workers in one article, followed by the closing of soup kitchens in the next.

This is ugly. Can locals still vote if they don't have an address? What happens next probably depends on that.

scandia said...

VK said " If we ensure their survival they will ensure ours"
So far since the crisis began I see not one iota of evidence that the bankers are interested in our survival. They have placed Obama in the White House to ensure their survival. Obama seeks advice only from Wall St. I agree totally with Ilargi that the delay is in how to get away with shafting America,the world in fact. Seems the only choice Geithner wants us to have is whether we are shafted in English,Chinese or Japanese. Geithner thinks he can outmanoevre/bully China. If I were a betting person I'd bet against him! A little pip squeek who cheats on his taxes doesn't deserve to speak with the mandarin of mandarins, Wen.
A Chinese mob would have him on a spit before he could say confucius. That's if an American mob doesn't get to him first.
what's so hard folks. The first step to recovery is to put the" bets" on the table. Why is that completely off the rader for politicians and economists. Such a simple action that prevents trillions going down a black hole. I cannot grasp a gov't willing to leave the nation destitute for the sake of the top 5% earners. We are way past moral hazard now.
VK, with each passing day I'll take my chances without the broken financial system. Let 'em go down!

Anonymous said...

I've been through Crosby, ND. When When I take my absurd luxury, my motorcycle, out of the Midwest across the plains to the high country most every year I sometimes pass that way. In recent years further south through the Sand Hills of Nebraska.

I love the big empty heart of the continent. Essentially the Depression never ended out there on the Great Plains. It's a hard place. Not that prosperity ever took root either.

North West North Dakota was homesteaded in the early 1900's, only a century ago. There was population growth if never prosperity. That growth stopped in the early 1920's and never came back. Three years ago most of the wheat planting had stopped. That's what the homesteaders planted. Persistent low prices and low rainfall putting tillage to an end. Maybe with last years higher prices the winter wheat went back into some of those fields. A tough gamble with fuel prices what they were then. Was there any credit for them? I don't know.

All apropos of nothing perhaps. It's just a feeling one gets out there, or I do anyway. The limitless horizon against all those other limits.

Anonymous said...

"Ilargi: This is getting ugly fast. It may be a greater threat to the European Union than the monetary situation.
Thousands may strike over 'British jobs' dispute" You said you were dissappointed over the few comments about your articles. Let me comment on this. NO CHANCE OF THAT. The EU is called 'La Europa de los Mercaderes' in intellectual circles. No chance of a breakup over industrial disputes.
That said, the British workers have some reason in their complaint. They have made the owners of that refinery very rich, now they see their livelyhood threatened. So what if they hire workers from the neighbourhood, no big deal.
On the other hand (as Truman famously said of the economists) one of the workers said, "So what if the Italians do it better, and faster? British jobs for British workers." That is part of the problem, that the British workers are the laziest in Europe, they put two hours work, get pay eight hours and that's why the contractors, who know this very well, try to get other people.
Some years ago I used to go to Oxford every Monday. They were changing the pavement of Cornmarket St -it is thre blocks long, 300 yards say. I'm not a brickie, I couldn't care less but one Monday I noticed that the street was the same as one month before. And so it was, week after week, after week. It took them one year to change the pavement of Cornmarket St and it is the shoddiest work I've seen in my life. It was seeing them (not) working, drinking tea with biscuits! chatting in groups of four or five, not one with tools in their hands, taking money from the ATM machines, chatting up the girls, etc. I took photos of that, it is a laugh.
A Spanish crew would have finished the job in less than a month.
On the other hand (there's that again) the Spanish brickies destroy their bodies working too hard, too many hours. The Brits have this Wonderful invention, the Brick Hod carrier. It is a contraption with three sides, a handle and carries 3-4 bricks. The Spanish brickie carries a bucket filled with bricks in each hand, his arms get so long he can scratch his knees, and his spine gets busted and applies for early retirement on medical grounds. I think the Brits, after all, have the right idea: work is tiring, try to do as little as possible.

jal said...

The longer that it takes to shed light on the toxic assets the better.

More and more people are learning about TAE and more and more of the pundits are saying the same thing as TAE.

The longer they take the worst their long term survival looks.

Anonymous said...

If we simply allow the bad banks to fail, wouldn't we (the tax payer) still be on the hook for the liabilities to the depositors? Granted, the shareholders equity would be wiped out, as well as the equity of the other lenders; but the gov't stands behind the deposits for up to 250,000 per account.
Under this scenerio, how much cheaper would it be for the taxpayer to let the bad banks go bust, rather than creating a bad bank, injecting equity, nationalizing, guaranteeing the toxic assetts, or any of the other alternatives being bandied about?
And given the fact that the shareholders and/or other lenders are also taxpayers, who would probably take it in the shorts via their retirement accounts, etc., wouldn't the net result of all the above be roughly the same?

Also, I grasp the concept that the problem of too much debt cannot be solved by incurring more debt. But what instead, if the payments on existing debt (I'm thinking endless and increasing payments we make on our fossil energy mortgage) were simply transfered to a fixed, low cost,and termed payment on renewable energy, weatherization,or conservation. For example, financing, via low cost loans, the replacement of your gas guzzler with a high mileage vehicle. The savings in gas make the monthly payments on the car. Or photovoltaics on the roof. The savings on the electric bill go toward the payments of the pv. In neither case is further debt incurred- the payments that are made now create well paying jobs, decrease our balance of payments, and mitigate climate change.
It is this creation of well paying jobs that stands a much better chance of creating a floor under housing prices than all the other schemes I've seen presented so far

Anonymous said...

I honestly don’t think we have a derivative problem. Most failures to date have shown very little in net exposure - one bet netted against another bet. The real toxic assets are the loans…mortgage, commercial, CRE, credit card, auto, other – somewhere between 20 and 30 trillion worth including securitizations. Total losses might be ten percent of that which will be very painful. The Govt. one way or the other is likely to be in the banking business, but that is unlikely to improve our appetite for credit or diminish our urge to save so I can’t imagine anything but a slow and unsteady recovery that lasts a long time, perhaps a decade.

Anonymous said...

Ilargi oversimplifies the problem and thereby exaggerates and proposes a toxic and unwise course of action. “Toxic assets” is a value laden term. Some “bad assets” are worth more than others. I can’t imagine that collapse of current banking system replaced by complete nationalization of all of the banks would be wise. I understand that the great bulk of those “$170 trillion "worth" in derivatives” held by the 3-biggest US banks cancel out so that the net value is a miniscule fraction of that stated amount. Mortgage backed securities held by banks vary a great deal. Current market value is very low because of current financial panic, yet if the assets are managed prudently, then loss might not be anywhere close to what you think. Many banks have real estate loans that are in default with uncertain value. For example, I understand that Regions Bank - a large regional bank doing most of its business in the southeast - has chosen to sell the notes for as much as they can get for them as soon as the note goes more than 90-days delinquent. Other banks are holding firm and both beating on and cooperating with the borrowers to try and get the bank whole or as close to whole as practical.

I think it was wise for the US Treasury to invest in preferred stock with banks. And still prudent to invest more in the same way. If the bulk of banks were forced to liquidate, then those assets would bring a fraction of underlying value, FDIC would be busted and US Treasury would have to print money in order to cover deposit redemptions. I suspect that the total cost to US Treasury would be much much greater with that “get tough” approach than current attempt to shore up the banks with equity infusion.

Nevertheless, I still think most of the “Stimulus” government programs stifle market recovery and do much more harm than good.

Ilargi said...


You think and you think and you think some more and you can't imagine and then you 'understand'. And no derivatives problem either.

But you give no data for any of your thoughts and imaginations and understandings. Not very convincing, is it?

Why not start out explaining why all those fine firms try so hard to hide what according to you needs no hiding, what is no threat?

Anonymous said...

Important ! Joaquin Almunia says today in "No chance of any one leaving the euro. The British pound will probably join the euro, soon".

Wyote said...

Funny how North Dakota is still in the surplus column along with my home state Wyoming. The oil and gas boom, while it lasted, helped. But more so I believe, is the deeply ingrained sense of frugality. The knowledge that the good times never do last.

I, for one, appreciate your comments. Keep 'em coming, and my regards to R. Pirsig should you meet up with him out there.

I love your gravity man. One question I have for you is: Did you bend your own hoop steel for the greenhouse? And if so, could I rent your jig?


Anonymous said...

@Armando Gascon:

I was under the impression that Britain couldn't currently meet the requirements needed to join the Euro, with its finances in tatters. And that was a month ago.

So I have to wonder how that would be possible without some special arrangements.

I'd also have to wonder if that would be good for the rest of Europe.

I honestly don't know, but that info doesn't jibe with other claims made in the past.

So without some more information here, I'd be dubious of the claim made by Almunia.

Anonymous said...

I'm curious, if, say, just Citi and BofA went belly up, how much FDIC coverage would be required?

In general, people (elsewhere) seem to have a rather lackadaisical attitude towards this. Sort of like "Oh well, I'm covered".

There's a lot of trust in the system, with the belief that more money would be printed.

Are there any actual numbers (or even estimates) of the Tier 1 assets that would be covered? For individuals and businesses.

I'm sure it's well under the $50 Billion that the FDIC used to have on hand. But is it under a Petabuck (trillion).

Anonymous said...


That should've been "well over" not "well under".

jal said...

Orion said...
I'm curious, if, say, just Citi and BofA went belly up, how much FDIC coverage would be required?

In general, people (elsewhere) seem to have a rather lackadaisical attitude towards this. Sort of like "Oh well, I'm covered".
AND my question was
"The gov. has a guarantee of 100K, (some countries more) for deposits of the individuals.
What does that total amount add up to?

If the banks go under??? Would the gov. be able to meet those obligations?
A good presentation outlining the size of the problem would be needed ...hum..hum ... cough ... cough

Anonymous said...

The talk of the Credit mess on food has died down over the past month. Here's an interesting statement by the Chaiman of Nestle SA:

Food to Rise on Lack of Credit, Nestle’s Brabeck Says.

"Many farmers over the world didn’t have access in October, November, December for credits,”

“They were limited in acquiring seed and acquiring fertilizer.”

There are some interesting numbers there.

Anonymous said...

@Jal: I'm just trying to keep it simple, by asking about the two biggest banks. Not the whole system.

Not that the rest aren't important. Just something that I can take home to laypeople.

Anonymous said...

Wyott,I inherited a bunch of hoops from my place to get hoops cheap[50-80$]Oregon Vally aurora,outside Canby.better than the other corp place.


Anonymous said...

@Jal: Ok, from a not-so-quick Google search, on 7/2008, Michael Brush claimed:

"Surprisingly, about 37% of the nation's $7.07 trillion worth of deposits at the end of the first quarter was uninsured, according to a Wall Street Journal report."

That was then. But it's for the whole U.S., not just Citi and BofA.

Anonymous said...

Vince, there's really no point in telling us what you think. Unless you agree with Ilargi, you are wrong; it's really just that simple.

Ilargi is always right. About everything. He has never been wrong about a single thing. As he constantly reminds us, his judgment and insight are infallible -- you must be new here.

Anonymous said...

Great analogy on the derivatives, Ilargy.

What they are doing with this whole banking fiasco sounds like “problem, reaction, solution”. The governments by direction of the PTP, are making the problem of the financial crisis worse by, one: looting the world’s populace for generations to come under the guise of reaction to the problem, and two: creating the situation where the only solution is to consolidate the debt in ‘bad banks’ which they in turn will be consolidated in a new financial order.

Life Liberty and Pursuit of Happiness for some people, especially in western society, has been achieved at least superficially, by the accumulation of wealth. Now that the wealth is gone or about to go, it is time for many of us to look deep within for what provides real lasting happiness -- for that little Light, (if we still have it) which will sustain us through the difficult times ahead.

jal said...

Orion said...

That was then. But it's for the whole U.S., not just Citi and BofA.

I like your approach ... this problem is growing and will surprise a lot of decission makers.

Anonymous said...


You're right about about the historical boom and bust economies of many western states fostering a certain sense of economic reserve and apprehension regarding the future.

I am very familar with the state of Wyoming. As a kid I was riding across some desolate central Wyoming dirt road outside of Medicine Bow listening to an Orson Welles War of The Worlds rebroadcast the night of the first moon landing. Very desolate country with rivers that are home to magnificient trout, or at least that was the case years ago. Once in a while a pronghorn antelope can be enticed to gallop alongside an automobile going 55mph. Very curious animals.

And there is nothing like the smell of sagebrush after a Wyoming thunderstorm.

People from severe and isolated northern climates tend to be more self-reliant and independent as their survival often depends on it--in my opinion.

And now the beautiful people have taken over Jackson Hole--sight of the greatest Western ever filmed, Shane.

I am not sure if the metaphorical equivalent of Jack Palance is once again donning a diabolical pair of black gloves for the bad guys, but more than a few Alan Ladds and Van Heflins are pleading to uproot some very stubborn roots hidden below the surface.

Either way, it looks like somebody or something will ride off into the sunset.

Anonymous said...

Ilargi oversimplifies the problem and thereby exaggerates and proposes a toxic and unwise course of action.

I don’t know about "unwise", but I do hope he exaggerates.

Current market value is very low because of current financial panic

What is the difference between market value and market value because of financial panic? Is There no problem? What is a market value inflated with fake money and greed?

If the bulk of banks were forced to liquidate, then those assets would bring a fraction of underlying value, FDIC would be busted and US Treasury would have to print money in order to cover deposit redemptions.

This sounds more like a threat, or should I say exaggeration. Too big to fail? Don’t mess with the banks and pay? The little people can not possibly live without the big guys?

And this one I don’t understand

Nevertheless, I still think most of the “Stimulus” government programs stifle market recovery and do much more harm than good.

Are you agreeing with the "unwise" course of action, or the toxic deal is a steal and banks should not sell at this cheap bargain (so more money needed?)? Or stimulus actually opposes the principle of free market?

Let’s say you know or are aware of a detailed specifications and weight bearing capacity of a bridge and it is not safe anymore for a person to pass on it. How will you explain that to your brother that has been using that bridge forever? How will you explain that to a stubborn stranger? Thinking about it I might be caught exaggerating with at least one. (Now If I only knew enough about bridges)

scandia said...

Vince and anon, re Ilargi always being right. Ilargi and Stoneleigh encourage debate. For the standards here to remain high there needs to be evidence to support the conclusion. Just saying I think doesn't meet that criteria.
As for me I am genuinely interested to know how you reached your conclusion.I could use some good news.
The nagging unsurmountable question is why hide " the assets" in off balance sheet accounts? Why were the new accounting rules designed to create trust in the system postponed for a year? If there is value in the black hole surely now is the time to declare it and put the value to immediate good effect rather that burden the next generation with debt slavery. If there is value in the shadow system doesn't it seem reasonable to announce it with pride? I speculate only that when those balance sheets are brought into the light of public scrutiny a mega flock of tax evaders,mafia members will flutter upward. We'll all be gathered round with nets catching most if not all. Without reliable data people like me have the most fanciful imaginings.
The ones I catch I'm going to rent to Snuffy.Ilargi could use a couple of the fit ones to help with the logging. Both work so-o hard and could use a helping hand. Stoneleigh, I know it wouldn't be easy to share your space with a Clintonista but Hillary could relieve you of the drudge work, scrubbing floors, doing the wash.
I'd put the Man from Raytheon, Geithner's chief of staff, in a tent beside an Alberta tailings pond. He'll be required to walk the perimeter daily testing air and water quality. He will be required to imbibe 1/4 cup of the tailings daily to demonstrate non toxicity. Not sure I'd be able to protect him from the locals though who can no longer drink the water.
Vince, we all think all kinds of crasy things when the lid is still on the black hole. Me included.

Unknown said...

A telling comment by Garth Turner in his latest post:

"A year ago, as I related in my recent book, the real estate editor of a major newspaper who gave “Greater Fool” a full-page review (critical, but interesting) told me months later that was the kiss of death. After advertisers complained, he ended up on the overnight layout desk. The new real estate editor writes about funky paint colours and throw cushions."

No wonder why reporters don't ask the hard questions.

scandia said...

Qually, me too, I forgot this tid bit for you. Several weeks back there was an article in the Cdn press that AIG wants the Cdn gov't to guarantee the policies written. Hardly inspires confidence in the ins. industry.

Anonymous said...


Thanks for your response. My gut tells me not to pay the premium. And any day I can cease feeding the beast of giant Conglomco corporate america is a good day indeed.


Unknown said...


Just remember, of course, to replace that insurance with a clutch of emergency cash.

Anonymous said...


Maybe you understand the derivatives market, and maybe you don't. How can I tell? I for sure don't. I've been reading this blog on and off for some time and I still don't understand. I get the idea that there is a problem, but how bad is it? 25 trillion dollar losses? I don't understand how can anybody talk about hundres of trillions of derivatives, when this kind of money simply doesn't exist, never existed.

Since so much of what you say hinges on the derivatives issue, would you be kind to explain more?

For example, a question that has bothered me for a while, how is it that the Lehman brothers CDS wind-down did not result in a catastrophy of the kind you and Stoneleigh are forecasting? I think at the time you said it was rigged. Well then why can't "they" rig the rest of the problem? Or perhaps indeed the net-problem is small, as claims cancel each-other?


Unknown said...

Oh, plenty o' good links this morning.

Mike the Mad Biologist quotes the NYT on Wall St. employees who have lost their bonuses and find they "can't" live on $150k-180k annually because, not only are they not used to it, but they've racked up huge amounts of personal debt in expectation of future bonuses, which they never considered wouldn't arrive.

"After you pick your jaw up off the floor, re-read it, and then consider:

1. They never expected a downturn.

2. They never saved any money for a rainy day (or a monsoon).

3. Even if they didn't save, they compounded the problem by not spending last year's bonus (i.e., money that they actually had), but, instead, by going into debt.

Before I get to the "They can't live on $150 to $180,000" statement [cough], isn't the list above the exact thinking that created the crisis in the first place?

Anonymous said...

I am finding the rising cries of "protectionism" interesting and disturbing. They seem to be a government's version of the torch and pitchfork parade.

Two of the main concerns about the U.S. trillion dollar stimulus package are that it isn't big enough to kick the economy, and it won't be implemented fast enough to do so. If we take the trillion dollars, pour it into the pockets of private enterprise, let them pour it into the pockets of worldwide enterprise (and labor), wait for it to have some effect on worldwide economies such that they can then begin to buy U.S. goods (and hire U.S.workers? never happen), then how much more money will it take to have any effect? What would be the result of waiting for the effect to cycle around the world?

The people crying protectionism need to understand that this is not the blanket economic policy of a country. It is a stimulus program. This is a bunch of taxpayers deciding to try to buy jobs and infrastructure projects with their tax dollars. Should they also be required to buy roads and schools for any trading-partner country? Government needs to be allowed to provide for the welfare of their citizens. This argument seems to be saying that it's the job of business to provide for everyone's welfare.

If a WTO approach is required for any country attempting to stimulate their economy, the money will flow to business executives, who will then hire out the cheapest labor and products they can find, and use the bulk of the cash to line their own pockets (again), producing neither jobs, nor infrastructure, and stimulating nothing.

It's also interesting that the discussions of protectionism seem to include labor in the EU countries, but so far, in the US, labor has not entered the discussion to my knowledge.

Unknown said...

Clues, it's a hard world, but we all have to live in it. The crucial fact is that no country has cheap access to all the resources it needs to run a nice, shiny economic engine. The moment the US or anyone else starts blocking exports, so does everyone else.

On the other hand, I will give you this: requiring a government-funded spending plan to direct money to sources within its own borders is far, far different from imposing import/export tariffs or bans. It doesn't restrict private business at all, it just limits the beneficiaries of the gov't spending pie. It's not *really* protectionism.

Unknown said...

This is priceless for its naivité:

"Here, ladies and gentlemen, is the crux of the problem: We are reliably informed that whatever part of the economic crisis can’t be pinned on Wall Street — or on mortgage-related financial insanity — can be pinned on consumers who overspent. But personal consumption amounts to some 70 percent of the American economy. So if we don’t spend, we don’t recover. Fiscal health isn’t possible until money is again sloshing into cash registers, including those at this mall and every other retailer.

In other words, shopping was part of the problem and now it’s part of the cure. And once we’re cured, economists report, we really need to learn how to save, which suggests that we will need to quit shopping again.

So the mall we married has become the toxic spouse we can’t quit, though we really must quit, but just not any time soon. The mall, for its part, is wounded by our ambivalence and feels financially adrift.

Malls aren't really the issue, NYT. The problem is an economic system predicated on continual growth in a country that long ago stopped growing productively, in a world running up against physical limits to growth. Give it time, and hopefully you will start to understand.

Anonymous said...

Thought the following article by Catherine Autin Fitts might be of interest to TAE readers:

"Financial Coup d'etat"

Anonymous said...


I agree. If it's our taxdollars being spent on our infrastructure, in order to create jobs here, that should be encouraged right now.

There's something VERY wrong with spending our tax dollars and giving it straight to another country.

That's what got us into this mess. There is no such thing as Free Trade; and the U.S. has been played as a sucker for over the past 10 years.

All the countries whining about it are the first ones to protect their own industries to our disadvantage.

What you're seeing is a bunch of greedy S.O.B.'s clamoring for a bailout by the U.S. Taxpayer. Sorry. That should stop at the border.

The complainers should get over the broken and failed idea of "Free Trade". It doesn't work, it hasn't worked, and it won't work in our current environment.

Fair Trade is a different issue.

The bottom line remains the same. Unless and until the U.S. middle class has decent paying jobs, this country is going no where. And the notion of "Free Markets" and "Free Trade" are broken, failed, flawed and responsible for amplifying this mess we're in

Anonymous said...

RE: "Vince and anon, re Ilargi always being right. Ilargi and Stoneleigh encourage debate."

They permit the posting of differing opinions, true enough, but that's not exactly the same thing as encouraging debate.

Ilargi never truly engages in debate. He occasionally will shout down an opinion that he doesn't like, without presenting any of the data or facts that he claims to be so enamored of, by calling the poster a fascist or comparing him/her to a Nazi.

Ilargi repeatedly stresses that he's been right about everything. He has a downright Bushian certainty in the rightness of his opinions and the wrongness of anyone who questions him.

I read this site for the news and the comments, and because I think Ilargi and Stoneleigh are largely right about the general trends, but I've been around here long enough to know that it's futile for anyone to try to talk to Ilargi as an equal, because he has no equal, on this earth or in the heavens above.

Anonymous said...

@anon 12:15

As the person who was called "facist" and a "nazi" by Ilargi (which was later retracted, btw), I have to respectfully disagree. If you've noticed, he does shut up when he can no longer defend his views.

The debates here have improved over time. That is the goal, is not not? I do believe that you need to give Ilargi a bit of more credit than you have.

I'm still here and active in debates when they come up. And I would encourage others to do so as well. But, yes, if you come here with fuzzy-headed thinking, and no data to support your belief (such as Vince), DO expect to be shut down quickly. I'll help, too.

But if you CAN defend your views with data and logic, I will be grateful for the education.

That's how we ALL learn.

Personally, I thought Ilargi was rather polite.

Anonymous said...

I was deeply saddened to learn that two-right wing ideologues --talk show host Mike Rosen and former congressman Tom Tancredo--stand to lose a substantial amount of money in the free for all, dog eat dog marketplace they have philosophically championed day in and day out for years.What a tragedy (sniff sniff).

Anonymous said...

"So the mall we married has become the toxic spouse we can’t quit, though we really must quit, but just not any time soon. The mall, for its part, is wounded by our ambivalence and feels financially adrift."

Anthropomorphicizing malls. Weird.

Anonymous said...

"Anthropomorphicizing malls. Weird."

No, it's poetic.

Or, in other words: Whoosh!

Stoneleigh said...

We like differing views here, and lively debate. Sometimes it gets a little heated, but being passionate about your subject is no bad thing, and I like to think there's usually more light than heat.

We don't always get as many chances as we'd like to participate in the debate due to time constraints, but we join in where we can manage it. Ilargi already spends 10-12 hours day staring at his screen, so composing long replies in the comments as well isn't always feasible. I work full time, and have a farm and family to deal with, so I can't drop in as often as I'd like to either.

My view is that no matter what one may know, there's always room to learn from others with different experiences.

Ancora imparo

rachel said...

well stated learning!
most of what I know will be of little use in the new economic reality we are I am always open to learning. In fact right now I am learning about rabbits and red worms (which I would have never considered however thanks to you and ilargi I have been reevaluating my skills and way of life)...who would have thought!

Anonymous said...

Yes, it's important to learn even from one's enemies. But, if I may confess, I do "enjoy" reading TAE when Ilargi's anger is provoked by bigots and directed at bigots.

It's good to be passionate about peace and justice and the environment. So many nowadays are sooooo lethargic. :)

Gravity said...
This comment has been removed by the author.
Gravity said...

You want to debate?

Not all large financial bodies
are insolvent;
every body that is insolvent
is dissolveable.

Seems fair to me, who really needs all these too big to fail things?

However, if a country can only function if it has at least one solvent bank in operation,
it may be wise to keep some of them around, lest the country itself is dissolved, but the citizenry should also be protected against insolvency, these priorities have
a natural tension.

can a nation-state or market-state function without any (solvent) banks at all?

If it cannot, the nation-state factually no longer exists,
and should be defined as a market-state, with international boundaries. (globalism)

Bring back the post-office!

Also, all Capital has mass, and is subject to (compound) Gravity,
or it would simply float away.

The invisible hand of the markets is a Gravity-based power phenomenon, which acts between capital mass of critical density, even that mass which is dark.

All fall down. Gravity wills it.

Anonymous said...

Anonymous said -

I read this site for the news and the comments, and because I think Ilargi and Stoneleigh are largely right about the general trends, but I've been around here long enough to know that it's futile for anyone to try to talk to Ilargi as an equal, because he has no equal, on this earth or in the heavens above.

Alternate TAE blog title, "Ego Strokin' It to the Apocalypse".