Thursday, February 5, 2009

February 5 2009: A King Among Clowns

G.G. Bain Full Frontal July 4, 1910
Train wreck near Middletown, Ohio


Dear Mr. President,

A funny thing happened to me today. I saw this headline in the Wall Street Journal: "Obama Creates Faith-Based Office", and I thought: you can say that again, and in fact I often have said it. Then, of course, I read the article, and noted that it wasn‘t talking about the Oval Office -once again- following faith based policy and the 'Change You Can Believe In' slogan, but that you had created an actual institution that is supposed to address faith-based initiatives, the White House Office on Faith-Based and Neighborhood Partnerships. In this context, I was amused to read these words from your July 1 ‘08 speech in Ohio:
I believe deeply in separation of church and state, but I don't believe this partnership will endanger that idea, so long as we follow a few basic principles.
Sounds a bit as if you believe [sic] that faith-based policy initiatives, and that's what we're talking about here, don't violate that separation. A sliding scale built in grey territory, I'm afraid. But then, I realize that in the US people risk being demonized for strictly applying this part of the constitution. The influence of religious leaders on American policies has been so strong for so long that the only options you have are to either change the constitution to have it accurately reflect reality, or to change your perception of reality in order to have it reflect the constitution.

Still, that's not the reason why my initial reaction was: you can say that again. I thought that because I had read your op-ed piece in the Washington post earlier in the morning, which addresses the urgency you say there is about your recovery plan before Congress:
Because each day we wait to begin the work of turning our economy around, more people lose their jobs, their savings and their homes.
I’m confident you are fully aware that people will lose jobs, savings and homes regardless of your plan, even, that is, if it does work. But let's focus on another point: What exactly do you mean when you talk about turning our economy around? Am I right to assume you mean getting back onto the same track it was on before? When everyone was borrowing money for cars, homes and toys? The economy that led to negative savings and enormous debts across the land? Or were you thinking of turning around back further in time? The past 8 years? Guess not, right? Nixon years: No. Bush 41: Nah. So Carter or Clinton? Eisenhower? Maybe not. What I mean to say is I suggest you stop using that "turnaround" phrase, it make little sense once you think about it. The country has to go forward, not turn around. And what lies ahead doesn't seem to look like what was before, unless you want to look at the 1930's.
And if nothing is done, this recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse.
This recession "might" linger for years no matter what you do. And you know that, sir. If you seek for people to believe in you, saying believable things would be a good place to start from. 5 million jobs lost? There were 589.000 in December, and that number has yet to be revised, which will undoubtedly be upward. At the current rate, 5 million more jobs will be lost by about the end of summer, and 14.5 million over the next two years. And the rate is in all likelihood accelerating. While your plan would create just 3 million. If it works, that is. Jobless claims in January rose to 626.000.

Unemployment has already reached double digits, just look at U6 numbers. Another important point for that believability: get rid of all the cooked government numbers that keep on being showered upon the nation. It's sort of surprising to see you write that the crisis at one point may no longer be reversible. There's that idea of the turnaround again. You need to define these things much better, it's all way too opaque, and you're not helping yourself. It's just feel good stuff. For you sir, from now on in, it all comes down to being believable. You're not. Not if people pay attention.

Then I saw this comment on your article, from AP:
”.... economic stimulus legislation is growing larger by the day in the Senate, where the addition of a new tax break for homebuyers sent the price tag well past $900 billion. "It is time to fix housing first," Sen. Johnny Isakson, R-Ga., said Wednesday night as the Senate agreed without controversy to add the new tax break to the stimulus measure, at an estimated cost of nearly $19 billion.

Isakson said the new tax break for homebuyers was intended to help revive the housing industry, which has virtually collapsed in the wake of a credit crisis that began last fall. The proposal would allow a tax credit of 10 percent of the value of new or existing residences, up to a $15,000 limit. Current law provides for a $7,500 tax break but only for first-time homebuyers. Isakson's office said the proposal would cost the government an estimated $19 billion.”
Is this what you mean by turning around the economy? Is it a good idea to push people into mortgages for homes that are quickly losing value, so they can get underwater later this year or in 2010? Are we going to try to save the mortgage, banking and building industries by luring gullible Americans into debts they will not be able to repay? How would you define the lawful role of government in that process? Isn't it true most independent analysts agree that average US home prices have much further to fall? That just about the only homes that sell are foreclosed ones? That many of the new homeowners this legislation seeks to create will lose their jobs in the near future? That it's real bad government to willingly create debt traps for one's own citizens?

Back to your letter:
"This plan is more than a prescription for short-term spending -- it's a strategy for America's long-term growth and opportunity in areas such as renewable energy, health care and education."
It's time to let go of the fallacy of perpetual long term growth. It's nothing but a harmful mirage which has visited deep and unlimited misery upon peoples and their habitats around the planet. It's where faith-based systems do real harm.
And it's a strategy that will be implemented with unprecedented transparency and accountability, so Americans know where their tax dollars are going and how they are being spent.
That one I'll have to see to believe. So far, I find that impossible. Harry Markopolos yesterday in his testimony on the Securities and Exchange Commission and the Financial Industry Regulatory Authority stated he would give FINRA an "A+ for corruption", for being in bed with the industry it's supposed to regulate. He based that conclusion on the time when FINRA was headed by Mary Shapiro, your pick to now chair the SEC, an organization Markopolos accused of gross incompetence. This sort of thing is no longer an incident. Bill Richardson, Tim Geithner (what on earth is he still doing in your administration?), Tom Daschle, the list is growing. Paul Volcker being elbowed aside doesn't look too good either. You have assembled quite a few clowns around you, and people have seen little accountability. It is already rubbing off on you.

Appointing Harry Markopolos to lead the SEC, as a bright voice today suggests, would be a good first step towards (re-)building the credibility that you are fast losing. He knows the material better than the SEC folks themselves and than the Congressmen who invited him. Throwing out the Rubin, Summers and Geithner cabal is a good second step. Better explaining $900 billion plans to the public follows on its heels. Explaining what lies in the people's future, in non-ideological or faith-based terms, is a no-brainer.

There is no doubt that London's bookies have a booming business in wagers on how much longer Gordon Clown will be in office in Britain. Your people are losing patience and faith too, Mr. President. What'll it be, king or clown?

The Action Americans Need
By Barack Obama

By now, it's clear to everyone that we have inherited an economic crisis as deep and dire as any since the days of the Great Depression. Millions of jobs that Americans relied on just a year ago are gone; millions more of the nest eggs families worked so hard to build have vanished. People everywhere are worried about what tomorrow will bring. What Americans expect from Washington is action that matches the urgency they feel in their daily lives -- action that's swift, bold and wise enough for us to climb out of this crisis.

Because each day we wait to begin the work of turning our economy around, more people lose their jobs, their savings and their homes. And if nothing is done, this recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse. That's why I feel such a sense of urgency about the recovery plan before Congress. With it, we will create or save more than 3 million jobs over the next two years, provide immediate tax relief to 95 percent of American workers, ignite spending by businesses and consumers alike, and take steps to strengthen our country for years to come.

This plan is more than a prescription for short-term spending -- it's a strategy for America's long-term growth and opportunity in areas such as renewable energy, health care and education. And it's a strategy that will be implemented with unprecedented transparency and accountability, so Americans know where their tax dollars are going and how they are being spent. In recent days, there have been misguided criticisms of this plan that echo the failed theories that helped lead us into this crisis -- the notion that tax cuts alone will solve all our problems; that we can meet our enormous tests with half-steps and piecemeal measures; that we can ignore fundamental challenges such as energy independence and the high cost of health care and still expect our economy and our country to thrive.

I reject these theories, and so did the American people when they went to the polls in November and voted resoundingly for change. They know that we have tried it those ways for too long. And because we have, our health-care costs still rise faster than inflation. Our dependence on foreign oil still threatens our economy and our security. Our children still study in schools that put them at a disadvantage. We've seen the tragic consequences when our bridges crumble and our levees fail. Every day, our economy gets sicker -- and the time for a remedy that puts Americans back to work, jump-starts our economy and invests in lasting growth is now.

Now is the time to protect health insurance for the more than 8 million Americans at risk of losing their coverage and to computerize the health-care records of every American within five years, saving billions of dollars and countless lives in the process. Now is the time to save billions by making 2 million homes and 75 percent of federal buildings more energy-efficient, and to double our capacity to generate alternative sources of energy within three years. Now is the time to give our children every advantage they need to compete by upgrading 10,000 schools with state-of-the-art classrooms, libraries and labs; by training our teachers in math and science; and by bringing the dream of a college education within reach for millions of Americans.

And now is the time to create the jobs that remake America for the 21st century by rebuilding aging roads, bridges and levees; designing a smart electrical grid; and connecting every corner of the country to the information superhighway. These are the actions Americans expect us to take without delay. They're patient enough to know that our economic recovery will be measured in years, not months. But they have no patience for the same old partisan gridlock that stands in the way of action while our economy continues to slide.

So we have a choice to make. We can once again let Washington's bad habits stand in the way of progress. Or we can pull together and say that in America, our destiny isn't written for us but by us. We can place good ideas ahead of old ideological battles, and a sense of purpose above the same narrow partisanship. We can act boldly to turn crisis into opportunity and, together, write the next great chapter in our history and meet the test of our time.

Obama Creates Faith-Based Office
President Barack Obama said Thursday he will establish a White House office of faith-based initiatives that will show no favoritism to any religious group and adhere to the strict separation of church and state. Addressing the National Prayer Breakfast, Mr. Obama spoke of how faith has often been a divisive tool, responsible for war and prejudice. But, he said, "there is no religion whose central tenet is hate. There is no God who condones taking the life of an innocent human being," and all religions teach people to love and care for one another. That is the common ground underlying his faith-based office, he said. In personal terms, he talked about the role of faith in his life, from his Muslim-born father and a mother skeptical of organized religion to his own embrace of Christianity as a young man.

"In a world that grows smaller by the day, perhaps we can begin to crowd out the destructive forces of zealotry and make room for the healing power of understanding," Mr. Obama told the gathering of lawmakers, dignitaries and world leaders. "This is my hope. This is my prayer." Dogged throughout the presidential campaign by rumors that he was a Muslim, Obama described his background in a household that wasn't religious. "I had a father who was born a Muslim but became an atheist, grandparents who were non-practicing Methodists and Baptists, and a mother who was skeptical of organized religion, even as she was the kindest, most spiritual person I've ever known. She was the one who taught me as a child to love, and to understand, and to do unto others as I would want done," he said.

Mr. Obama planned to sign an executive order later in the day creating the White House Office on Faith-Based and Neighborhood Partnerships. It would expand and refocus the faith-based office founded by former President George W. Bush. Mr. Obama said the organization will not favor any one religious group over another, will work with communities and will act "without blurring the line that our founders wisely drew between church and state." The president will also appoint Joshua DuBois, a 26-year-old Pentecostal minister who headed religious outreach for Obama's Senate office and later his campaign, to lead the partnerships office and name 25 religious and secular leaders to a new advisory board.

During his presidential campaign, Mr. Obama said he wanted to expand White House faith-based efforts begun under Mr. Bush. But while he endorsed Mr. Bush's initiative to give religious groups more access to federal funding, he also promised to make some changes to the office. Mr. Obama's advisers want to be certain tax dollars sent to the faith-based social service groups are used for secular purposes, such as feeding the hungry or housing the homeless, and not for religious evangelism. The administration doesn't want to be perceived as managing the groups yet does want transparency and accountability. Mr. Obama pledged during the campaign to allow taxpayer-funded religious institutions to hire and fire based on religion -- but only for the activities run on private funding. One question is whether the faith-based office will issue grants under the Bush rules while the hiring policy is worked out.

A king among clowns
Harry Markopolos needs to head whatever government agency is responsible for checking up on Wall Street. Period.

How could anyone come to any other conclusion after watching the man thoroughly dissect the regulatory failure that allowed Bernie Madoff's alleged Ponzi scheme to thrive? Markopolos not only knew exactly what Madoff was doing, he knew what regulators weren't doing and why. Just when you thought the financial crisis has created nothing but villains, along comes Markopolos, the bookish, humble whistleblower who courageously fought in vain for nearly a decade to get regulators to take a close look at Madoff. He took Capitol Hill by storm Wednesday, unleashing a double blow of written and spoken testimony that painted a devastating picture of the alleged Ponzi schemer Madoff and unleashed withering criticism of the Securities and Exchange Commission and Financial Industry Regulatory Authority.

"One would almost think that the SEC's top leadership was going out of its way to drive good people out of the SEC and destroy the morale of those who stay," Markopolos said in prepared remarks. As for FINRA, suffice it to say that Markopolos didn't push the Madoff case on the agency because he felt Madoff had too many ties to the organization. FINRA is "a corrupt organization" looking to protect its members, he said. Again, Markopolos demonstrated how Madoff's reliance on bullying and intimidation helped keep his scheme under wraps.

Even as respectful as senators were of him, Markopolos' oozing integrity and class made the room feel as if he were the one sitting high on the dais. Markopolos' common sense contrasted the pompous grandstanding from congressmen such Alabama's Spencer Bachus, the apologies from Lori Richards, an SEC compliance director, and the excuses from Stephen Luparello, FINRA's interim CEO. They came off pretty badly, but not as badly at Linda Thomsen, the SEC's enforcement director. After Markopolos delivered hours of testimony and hundreds of pages of evidence about how he had tried to alert the SEC about Madoff, Thomsen gave one of the most jarring answers we've heard in all these hearings about the financial crisis.

"If we knew that it was provable fraud, it (investigating) would be easy," she said. If you want to commit a triple homicide in front of police headquarters and get away with it, you better hope detective Thomsen is assigned to the case. Thomsen is just where the problems begin. Congressional leaders should be alarmed that they just signed off on Mary Schapiro to run the SEC. Schapiro's record at FINRA is one of multiple small-time settlements and fines while huge frauds, including Madoff, went unchecked. Her appointment is even more troubling considering the testimony offered Wednesday. Why President Obama has not offered Markopolos a senior job at the top of the SEC is baffling. Rep Michael E. Capuano, D-Mass., asked Markopolos if he would take an SEC job and Markopolos said he had family commitments.

Why should the government stop there with its offer? Call upon his sense of duty to his country. This is the only guy who has a track record of seeing the B.S. of con artists and regulators for what it really is. Let him run the SEC from Boston. Accommodate his family. Give him anything. Markopolos' cutting criticism is reminiscent of another Harry, Harry Truman. When the nickname "Give 'em hell Harry" made its way back to the former president, his reaction was just as quotable. "I don't give 'em hell," he reportedly said. "I give 'em the truth and they think it's hell."

Madoff Witness Talks of Other Possible Ponzi Cases
The private fraud investigator who tried for years to ignite a federal investigation of Bernard L. Madoff told lawmakers on Wednesday that he had discovered another possible fraud that he would report to regulators on Thursday. The witness, Harry Markopolos of Boston, said at a House subcommittee hearing that he would alert the Securities and Exchange Commission to the fraud, a $1 billion Ponzi scheme he has uncovered. Neither he nor his lawyers would provide any additional details.

Mr. Markopolos also said he would tell regulators about a dozen private foreign funds — which he said were "hiding in the weeds" in Europe — that raised money for Mr. Madoff and have sustained major losses. These funds have not yet been publicly identified, he said. And their silent victims most likely include investors of "dirty money," including Russian mobsters and Latin American drug cartels, he said. A lawyer for Mr. Markopolos said later that his client would meet with the agency’s inspector general and detail his concerns at that meeting and "through other channels." But the revelations were almost lost amid the torrent of criticism that Mr. Markopolos and lawmakers heaped on the S.E.C. and its senior staff members — several of whom were seated several rows behind the star witness.

Some complaints were serious — that the agency lacked the expertise to tackle major frauds by big players and had no systemic way of dealing with whistle-blowers. Others were sarcastic, with Mr. Markopolos saying regulators seated in Fenway Park in Boston would have trouble finding first base. Wednesday’s session was the second held by a House Financial Services subcommittee, led by Representative Paul E. Kanjorski, Democrat of Pennsylvania, aimed at exploring the lessons that the Madoff scandal offers for the redesign of the nation’s financial regulatory system. Mr. Madoff was arrested Dec. 11 at his New York apartment and charged with operating a Ponzi scheme whose losses could be as high as $50 billion. The case is still under investigation by federal prosecutors and the S.E.C., which the agency witnesses said restricted what they could say about the case at the hearing.

Mr. Kanjorski, the hearing chairman, condemned that argument as an expression of arrogance that was at the root of the agency’s regulatory failures. Congress is in the midst of creating regulatory changes that could change the agency’s fate, the congressman warned the panel of official witnesses. Lawmakers want immediate candor about the handling of the Madoff matter, not an "oatmeal" of generalities, he said. "We didn’t call you up here to hear a traveler’s guide of the S.E.C.," Mr. Kanjorski added. Linda Chatman Thomsen, the S.E.C. enforcement director, told lawmakers that the agency staff had demonstrated its willingness and ability to pursue major fraud cases, including 70 Ponzi schemes. Ms. Thomsen said the agency, under its new chairwoman, Mary L. Schapiro, would work hard to improve its receptiveness and responsiveness to whistle-blowers like Mr. Markopolos.

Her responses did not satisfy any of the half-dozen lawmakers who stayed at the hearing after Mr. Markopolos left. Their attacks were fierce and strident, with Representative Gary L. Ackerman saying at one point: "We thought the enemy was Mr. Madoff. I think it is you." The hearing at times seemed to enter verbal territory more often explored at organized crime hearings. Mr. Markopolos repeatedly referred to his fear that he would be killed if Mr. Madoff learned of his investigation. At one point, noting his experience in military intelligence, he described an offer he made to "go undercover" for the S.E.C. — a proposal that was rebuffed. And he recalled wearing gloves as he assembled a package of information he planned to slip to Eliot Spitzer, when he was New York’s attorney general, so he would leave no fingerprints. While one lawmaker asked whether this all wasn’t "a little paranoid," others agreed that Mr. Markopolos was wise to be cautious given the scale of the fraud he was trying to bring to light.

U.S. Initial Unemployment Claims Jump to 626.000, a 26-Year High
The number of Americans filing first- time claims for jobless benefits unexpectedly jumped last week to a 26-year high, signaling a deepening deterioration in the labor market. Initial jobless claims increased by 35,000 to 626,000 in the week ended Jan. 31, the highest level since October 1982, the Labor Department said today in Washington. The total number of people collecting benefits jumped to a record 4.788 million a week earlier. Companies ranging from Macy’s Inc. to PNC Financial Services Group Inc. are announcing job cuts as consumers and businesses rein in spending and that is likely to prompt even further pullbacks in coming weeks. The government is forecast to report tomorrow that the U.S. lost 540,000 jobs in January.

"We still have yet to see the worst of the layoffs and job losses," Michael Gregory, a senior economist at BMO Capital Markets in Toronto, said before the report. "The fact that the pace of job declines is quickening does add to the political pressure to get something done and to compromise." Treasuries rose, driving down yields, and stock index futures were lower. The benchmark 10-year note yielded 2.89 percent at of 8:35 a.m. in New York, down 4 basis points from yesterday. Futures on the Standard & Poor’s 500 Index were down 1 percent. Economists forecast claims would fall to 580,000 from a previously reported 588,000, according to the median forecast of 41 estimates in a Bloomberg News survey. Projections ranged from 480,000 to 620,000. Claims for the prior week were revised up to 591,000.

Productivity, a measure of employee output per hour, rose at a higher-than-forecast 3.2 percent annual rate in the fourth quarter following a 1.5 increase the previous three months, Labor also reported today. Labor costs climbed at a 1.8 percent rate, less than anticipated. The four-week moving average of claims, a less volatile measure, climbed to 582,250 from 543,250 the previous week, today’s report showed. "This is a very elevated level and consistent with large payroll losses," Michael Feroli, an economist at JPMorgan Chase & Co. in New York, said before the report. "If jobless claims remained in this range over the next couple weeks, they would signal another large payroll loss in February." The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 3.6 percent in the week ended Jan. 24.

Forty-eight states and territories had a decrease in new claims for the week ended Jan. 24, while five reported an increase. Economists project the government will report tomorrow that the unemployment rate rose to 7.5 percent in January, the most in 16 years, according to the median projection in a Bloomberg survey. The U.S. lost 2.6 million jobs last year, the most since 1945. Earlier today, Monster Worldwide Inc. said its employment index for January fell 26 percent from a year earlier. Compared with December, online job availability dropped in 18 of the 20 industry categories and 22 of 23 occupational categories. ADP Employer Services said yesterday companies in the U.S. cut an estimated 522,000 jobs in January. The U.S. economy is "in for a tough several months," President Barack Obama said Feb. 1 in an interview with NBC. "It’s going to take a number of months before we stop falling and then a little longer for us to get back on track."

Obama is urging Congress to quickly pass economic stimulus legislation. The House of Representatives last week passed a $819 billion package of tax cuts and spending. The Senate is currently working on a plan that would be closer to $900 billion. ArvinMeritor Inc., a U.S. maker of commercial-truck and auto parts, said yesterday it is firing more than 1,500 employees, extending shutdowns and reducing work weeks at all plants as it tries to cut costs. Other firms that have announced firings include Macy’s, which said this week it is cutting 7,000 jobs. Rockwell Collins Inc., an aircraft-parts producer, said on Feb. 3 it will eliminate 600 positions. The same day PNC said it plans to cut 5,800 jobs by 2011.

Fiscal expansions in submerging markets; the case of the USA and the UK
by Willem Buiter

On a number of occasions I have cautioned against deficit-financed fiscal stimuli in countries whose governments have weak fiscal credibility, that is, countries where current tax cuts or public spending increases cannot be credibly matched by commitments to future public spending cuts and tax increases of equal present discounted value. I believe that both the US and the UK fall into this category. I have spent a good part of my career as a professional economist working on developing countries and emerging markets - in South America, in Central and Eastern Europe and the former Soviet Union and in Asia. Increasingly, I find it helpful to analyse the crises afflicting the US and the UK as emerging market crises - perhaps they could be called submerging markets crises.

During the decade leading up to the crisis, current account deficits increased steadily and became unsustainable. Strong domestic investment (much of it in unproductive residential construction) outstripped domestic saving. Government budget discipline dissipated; fiscal policy became pro-cyclical. Financial regulation and supervision was weak to non-existent, encouraging credit and asset price booms and bubbles. Corporate governance, especially but not only in the banking sector, became increasingly subservient to the interests of the CEOs and the other top managers. There was a steady erosion in business ethics and moral standards in commerce and trade. Regulatory capture and corruption, from petty corruption to grand corruption to state capture, became common place. Truth-telling and trust became increasingly scarce commodities in politics and in business life. The choice between telling the truth (the whole truth and nothing but the truth) and telling a deliberate lie or half-truth became a tactical option. Combined with increasing myopia, this meant that even reputational considerations no longer acted as a constraint on deliberate deception and the use of lies as a policy instrument.

As part of this widespread erosion of social capital, both citizens and markets lost faith in the ability of governments to commit themselves to any future course of action that was not validated, at each future point in time, as the most opportunistic course of action at that future point in time - what macroeconomists call time-consistent policies and game theorists call ’subgame-perfect’ strategies. This morality tale has important consequences for a government’s ability to conduct effective countercyclical policy. For a fiscal stimulus (current tax cut or public spending increase) to boost demand, it is necessary that the markets and the public at large believe that sooner or later, measures will be taken to reverse the tax cut or spending increase in present value terms. If markets and the public at large no longer believe that the authorities will assure fiscal sustainability by raising future taxes or cutting future public expenditure by the necessary amounts, they will conclude that the government plans either to permanently monetise the increased amounts of public debt resulting from the fiscal stimulus, or that it will default on its debt obligations.

Permanent monetisation of the kind of government deficits anticipated for the next few years in the US and the UK would, sooner or later be highly inflationary. This would raise long-term nominal interest rates and probably give risk to inflation risk premia on public and private debt instruments as well. Default would build default risk premia into sovereign interest rates, and act as a break on demand. Beacause I believe that neither the US nor the UK authorities have the political credibility to commit themselves to future tax increases and public spending cuts commensurate with the up-front tax cuts and spending increases they are contemplating, I believe that neither the US nor the UK should engage in any significant discretionary cyclical fiscal stimulus, whether through higher public spending (consumption or investment) or through tax cuts or increased transfer payments. Instead, the US and UK fiscal authorities should aggressively use their fiscal resources to support quantitative easing and credit easing by the Fed and by the Bank of England (through indemnities offered by the respective Treasuries to the Fed and the Bank of England to cover the credit risk on the private securities these central banks have purchased and are about to purchase). The £50 bn indemnity granted the Bank of England for its Asset Purchase Facility, by HM Treasury should be viewed as just the first installment on a much larger indemnity that could easily reacy £300 bn or £500 bn.

The rest of the scarce, credibility-constrained fiscal resources of the US and the UK should be focused on recapitalising the banking system with a view to supporting new lending by these banks, rather than on underwriting existing assets or existing creditors. Other available fiscal resources should be focused on supporting, through guarantees and insurance-type arrangements, flows of new lending and borrowing. As regards recapitalisation and dealing with toxic assets I either favour temporary comprehensive nationalisation or the ‘good bank’ model. Existing private shareholders of the banks, and existing creditors and holders of unsecured debt (junior or senior) should be left to sink or swim without any further fiscal support, as soon as new lending, investment and borrowing has been concentrated in new, state-owned ‘good banks’. It is true that, despite the increase in longer-term Treasury yields from the extreme lows of early December 2008, recent observations on government bond yields don’t indicate any major US Treasury debt aversion, either through an increase in nominal or real longer-term risk-free rates or through increases in default risk premia – although it is true that even US Treasury CDS rates have risen recently to levels that, although low by international standards, are historically unprecedented.

In a world where all securities, private and public, are mistrusted, the US sovereign debt is, for the moment, mistrusted less than almost all other financial instruments (Bunds are a possible exception). But as the recession deepens, and as discretionary fiscal measures in the US produce 12% to 14% of GDP general government financial deficits – figures associated historically not even with most emerging markets, but just with the basket cases among them, and with banana republics – I expect that US sovereign bond yields will begin to reflect expeted inflation premia (if the markets believe that the Fed will be forced to inflate the sovereign’s way out of an unsustainable debt burden) or default risk premia. The US is helped by the absence of ‘original sin’ – its ability to borrow abroad in securities denominated in its own currency – and the closely related status of the US dollar as the world’s leading reserve currency. But this elastic cannot be stretched indefinitely. While it is hard to be scientifically precise about this, I believe that the anticipated future US Federal deficits and the growing contingent exposure of the US sovereign to its financial system (and to a growing list of other more or less deserving domestic industries and other good causes) will cause the dollar in a couple of years to look more like an emerging market currency than like the US dollar of old. The UK is already closer to that position than the US, because of the minor-league legacy reserve currency status of sterling.

Under conditions of high international capital mobility, non-monetised fiscal expansion strengthens the currency if the government has fiscal-financial credibility, that is, if the markets believe the expansion will in due cause be reversed and will not undermine the sustainability of the government’s fiscal-financial-monetary programme. If the deficits are monetised, the effect on the currency is ambiguous in the short run (it is more likely to weaken the currency if markets are forward-looking), but negative in the medium and long term. If the increased deficits undermine the credibility of the sustainability of the fiscal programme, then the effect on the currency could be be negative immediately. The only element of a classical emerging market crisis that is missing from the US and UK experiences since August 2007 is the ’sudden stop’ - the cessation of capital inflows to both the private and public sectors. There has been a partial sudden stop of financial flows, both domestic and external, to the banking sector and the rest of the private sector, but the external capital accounts are still functioning for the sovereigns and for the remaining creditworthy borrowers. But that should not be taken for granted, even for the US with its extra protection layer from the status of the US dollar as the world’s leading reserve currency. A large fiscal stimulus from a government without fiscal credibility could be the trigger for a ’sudden stop’.

So just don’t do it. Focus fiscal resources on getting the credit mechanism and other key parts of the financial intermediation process going again. Effective Keynesian fiscal policy requires a virtuous policy maker, capable of credible commitment - that is, commitment capable of resisting the future the siren calls of opportunistic reneging on past commitments. The Obama administration is new and has had but limited opportunity to abuse the trust placed in its promises and commitments. That puts it in a better position that the UK government, which has been in office since May 1997. But many of the top players in Obama’s economic team are strongly identified with the failed policies, regulations and laws that brought us the disaster we are facing. So the amount of credibility capital is severely limited even for Obama. Use it to get credit flowing again. Tax cuts for friends and favoured constituencies, replacing clapped-out infrastructure and even the fight against global warming will have to wait until trust - public credit - is restored.

US Treasury's Geithner to meet with top regulators
U.S. Treasury Secretary Timothy Geithner will convene his first meeting as Chairman of the President's Working Group on Financial Markets on Thursday, but the expanded gathering also will include top banking regulators and White House economic adviser Larry Summers. The group, created in the aftermath of the 1987 stock market crash to ensure orderly and efficient markets, is led by the Treasury and normally includes the heads of the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

When Summers held senior positions at the Treasury Department in the 1990s, the secretive group became colloquially known as the "Plunge Protection Team." The Treasury said in a statement that the 3:30 p.m. (2030 GMT) meeting will include Fed Chairman Ben Bernanke, new SEC Chairman Mary Schapiro and acting CFTC Chairman Michael Dunn as well as Federal Deposit Insurance Corp Chairman Sheila Bair, Comptroller of the Currency John Dugan and Federal Housing Finance Agency Director James Lockhart. In addition to Summers, the meeting also will include White House Council of Economic Advisors Chairman Christina Romer.

The meeting comes as the Obama administration is working on a comprehensive plan to stabilize the U.S. financial system and restore the flow of credit to the economy. Geithner next week intends to lay out a framework for how the administration plans to handle the second $350 billion in financial rescue funds and is expected to outline how the government plans to deal with toxic assets on bank books. Among ideas the officials have explored are setting up a "bad bank" entity to hold troubled assets, providing government insurance against losses on assets still held by banks and more direct capital injections into financial institutions. The Treasury also said Geithner spoke on Wednesday with Egyptian Finance Minister Youssef Boutros-Ghali and discussed the upcoming G-20 ministers and leaders meetings, which "will focus on the challenges facing the global economy." Boutros-Ghali is also chairman of the International Monetary Fund's policy steering committee.

US retailers report grim January
US retailers reported a grim set of January sales figures on Thursday, as the economic gloom weighed on a month that is traditionally a time for clearance sales and heavy discounting. Retail Metrics, which tracks the monthly sales numbers, said its index of same-store sales from leading retailers fell 1.8 per cent for the month, the fourth consecutive month the index has fallen. But Wal-Mart, the largest US retailer, again outperformed the rest of the sector, reporting on Thursday that its same-store sales were up 2.1 per cent for the month, ahead of its own forecast. The company also said it would stop giving monthly sales projections, and instead offer guidance every 13 weeks, as consumer swings become difficult to predict in such volatile times.

In contrast, Target, Wal-Mart’s more upmarket competitor, reported a 3.3 per cent fall in same-store sales, and lowered its fourth-quarter guidance, saying that profits would fall "somewhat lower" than estimates of 86 cents a share. Other mainstream retailers struggled in January. Sales at comparable JC Penney stores fell by 16.4 per cent last month. The department store chain said it expected weak consumer spending and negative sales trends to continue in 2009. Rival Kohl’s said that same-store sales fell by 13.4 per cent in January. Macy’s, the largest US department store chain, said that same-store sales were down 4.5 per cent last month. On Tuesday the company said it would cut 7,000 jobs as it presses ahead with a wide-ranging reorganisation of its business.

Clothing retailers were among the hardest hit last month, as shoppers tightened their belts. Gap, the biggest US speciality clothing retailer, said comparable-store sales were off by 23 per cent - including a 34 per cent fall at its Old Navy brand stores - while American Eagle Outfitters reported sales down 22 per cent. Buckle, the Nebraska-based youth retailer, again bucked the trend with a 14 per cent increase in same-store sales. At the top end of retail, Saks reported a 23.7 per cent fall in comparable sales at its luxury department stores, while its total sales fell 22.7 per cent to $147.1m, despite steep discounting.

Saks said it expected to report "a significant year-over-year increase" in its gross margin rate for the fourth quarter, citing "the degree and amount of markdowns" and "the fact that customers continued to shift purchases from regular price to promotional and clearance priced merchandise." Neiman Marcus, the leading US luxury retailer, said earlier this week that it expected to report a loss for its holiday quarter because of the level of discounting.

Deutsche Bank reports first loss in 50 years
Deutsche Bank today underlined the scale of the financial crisis by reporting negative revenues in the final quarter of 2008, plunging it into a full-year pre-tax loss of €5.7bn (£5.1bn). It slashed bonuses last year and will rein them back even further this year. Germany's biggest bank, hit by a collapse of debt and equity trading - the main source of revenues at its once-stellar investment bank in the City - is cutting the dividend to just 50 eurocents and warning of bleak prospects for the global economy. The investment bank, which has paid out lunar bonuses in the past, lost €5.8bn pre-tax in the final quarter alone and €8.5bn in 2008 as a whole. It is already shedding 1,200 jobs but Josef Ackermann, chief executive, indicated there would be no further job cuts - unless the downturn underwent an even more dramatic deterioration.

Amid reports that Europe's investment banks will slash bonuses by an average 50%, Deutsche reported that it had cut pay and benefits by 36% last year. Its board has already waived bonuses for last year. Hermann-Josef Lamberti, chief operating officer, said the cash payout in the coming years would be "limited," with the bulk of bonuses earned over a period of three to four years - depending on divisional and individual performance. Deutsche is moving towards adopting the drastically changed compensation models of Swiss banks UBS, which is shredding bonuses by 80%, and Credit Suisse. Lamberti told reporters in Frankfurt that a large part of future bonuses would also be paid out in shares - again earned over three to four years.

Confirming he is to step down at next year's annual meeting, Ackermann, admitted to being "very disappointed" at the bank's results and refused to give any guidance for 2009 despite insisting the bank had performed well in January. He said the recession would last all year and several big firms would collapse under their debts. Deutsche, making its first loss for more than fifty years, confirmed earlier statements last month that it had lost a net €3.9bn in 2008, going into the red to the tune of €4.8bn in the final quarter. Pre-tax losses in the last three months of 2008 were €6.2bn. But the bank's tier one capital ratio jumped to 10.1%. The bank said its business had shrunk dramatically in the unprecedented trading conditions of the post-Lehman Brothers final quarter: full-year net revenues collapsed to just €13.5bn compared with €30.7bn in 2007. Writedowns of assets totalled €7bn compared with €2.3bn a year earlier.

The crisis took its biggest toll on corporate and investment banking, the traditional engine of Deutsche's growth and earnings. The division saw net revenues go into complete reverse in the fourth quarter at -€3.8bn through the collapse of debt and equity trading even though money market and forex trading leapt on writebacks. Deutsche has stood aloof from Berlin's banking bail-out schemes and Ackermann reaffirmed that it had no need to access recapitalisation or loan guarantee funds. He said: "It's important to know we are determining our own fate," he told the annual press conference. "This bank will survive the biggest crisis since the great depression through its own efforts."

Deutsche cut the dividend from €4.50 but Ackermann insisted the decision to pay out at all was designed to retain shareholders's trust and "reflects our confidence in the bank's future performance." He declared: "Looking forward, we see continuing very difficult conditions for the global economy, posing significant challenges for our clients and for our industry. Nonetheless, we remain firmly committed to our business model." He added: "We've gone from record profits to record losses within one year but our business strategy remains intact." The shares, which drooped almost 10% in early trading, recovered most of their losses by midday and were 2.5% off.

ECB Leaves Interest Rates Unchanged, May Cut in March
The European Central Bank kept interest rates unchanged after four reductions since early October as officials gauge the severity of the recession before cutting borrowing costs again. Policy makers meeting in Frankfurt left the benchmark lending rate at 2 percent, as forecast by all but one of 53 economists in a Bloomberg News survey. The ECB will cut the rate to a record low of 1.5 percent in March, another survey shows. ECB President Jean-Claude Trichet has signaled a reluctance to follow the U.S. Federal Reserve in lowering rates to close to zero, even as Europe finds itself in the grips of its worst recession since World War II. At the same time, Trichet signaled as recently as Jan. 28 that the slowdown will probably force the ECB to act again next month.

"They really haven’t grasped the severity of the recession," said Laurent Bilke, an economist at Nomura International Plc in London, who used to work as a forecaster at the ECB. "Rates should be at 0.5 percent. They should have used the room they have much more forcefully." The euro dropped to $1.2832 from $1.2869. Trichet holds a press conference at 2:30 p.m. to explain today’s decision. Separately, the Bank of England lowered its key lending rate by half a percentage point to 1 percent, the lowest since the Bank’s creation in 1694. While the ECB has chopped 2.25 percentage points off its benchmark, the most aggressive easing in the bank’s 10-year history, it still has the highest rates among the Group of Seven industrialized nations.

Trichet said last week that the ECB’s next "important" meeting will be in March, suggesting it may resume cutting rates once it has its new quarterly economic projections. That wait-and- see approach is opening the ECB to criticism that it’s not acting fast enough to protect its economy. "They are wrong, they are doing too little, too late," Nouriel Roubini, the New York University Professor who predicted the global financial crisis, said in a Bloomberg Television interview yesterday. "They are making the situation worse." Europe’s service and manufacturing industries contracted for an eighth month in January and confidence in the economic outlook fell to a record low. Spain’s industrial production plunged by 19.6 percent in December and in Germany, Europe’s largest economy, factory orders extended their worst slump on record. The International Monetary Fund predicts the economy of the 16 euro nations will contract 2 percent this year.

Inflation, which the ECB aims to keep just below 2 percent, is also slowing rapidly. The rate dropped to 1.1 percent in January, the lowest since July 1999 and down from a 16-year high of 4 percent just seven months ago. While ECB officials have said inflation may approach zero later this year, they expect it to pick up in the second half and have dismissed the risk of deflation. "Deflation is less likely" in Europe than in the U.S., council member Erkki Liikanen said Jan. 30. "We should keep that in mind when discussing how low the ECB benchmark rate can go." Cabin crew at Deutsche Lufthansa AG, Europe’s second-largest airline, last week went on strike at airports in Berlin and Frankfurt in pursuit of a 15 percent pay increase and bigger bonuses. Workers at German railway company Deutsche Bahn AG this month won a 4.5 percent wage increase after strikes disrupted services across the country.

Council member George Provopoulos said in an interview on Jan. 16 that the scope for further rate cuts is "limited" and markets would be wrong to bet on the benchmark dropping to 1 percent. Investors expect the ECB to lower its key rate to 1.25 percent next month, Eonia forward contracts suggest. Athanasios Orphanides is the only ECB council member so far to have advocated the idea of zero rates. The suggestion that monetary policy becomes ineffective when rates are close to zero is a "dangerous" fallacy, Orphanides said in a Jan. 28 speech. The ECB council "has difficulties with radical moves," said Holger Schmieding, chief European economist at Bank of America Corp in London. "It needs more time to think things over."

Bank of England Cuts Main Rate a Half Point to 1%
The Bank of England lowered the benchmark interest rate to 1 percent, extending the most aggressive round of cuts in its three-century history as officials try to limit fallout from the deepening recession. The nine-member Monetary Policy Committee, led by Governor Mervyn King, cut the bank rate to 1 percent from 1.5 percent. That’s the lowest since the central bank was founding in 1694 by William III to fund a war against France. The move matched the median estimate of 61 economists of a Bloomberg News survey.

The U.K. economy will shrink the most since 1946 this year and faster than any other industrialized country, International Monetary Fund forecasts show. Prime Minister Gordon Brown’s government has given the central bank powers to spend up to 50 billion pounds ($73 billion) on bonds and commercial paper as interest rates lose their potency to aid economic growth. "The global economy is in the throes of a severe and synchronized downturn," the central bank said in a statement. "Business and household sentiment in many countries has deteriorated. The supply of credit remains constrained."

King will present the bank’s updated economic forecasts on Feb. 11. Minutes of this month’s meeting, showing how the members voted, will be published on Feb. 18. The pound rose against the dollar and the euro, trading at $1.4611 and 87.76 pence per euro as of 1:24 p.m. in London. The Bank of England has now lowered its rate by 4 percentage points since October. The U.S. Federal Reserve has reduced its key rate to a range between zero and 0.25 percent. The European Central Bank kept its rate at 2 percent today. "We have a deep recession and a credit crunch," said Michael Saunders, chief Western European economist at Citigroup Inc. in London. "Why wait? The debate is about how the economy can ever recover, and the Bank of England has the answer to that in its hands."

The bank said there is "a substantial risk" that inflation will fall too far below the 2 percent target even though rate cuts since October, a 20 billion-pound package of tax cuts, cheaper commodities and a sharp drop in the value of the pound are likely to provide "a considerable stimulus." "The key is the line that credit conditions have tightened further," Brian Hilliard, chief U.K. economist at Societe Generale SA in London, said on Bloomberg Television. "That’s the key emphasis for the government and the bank, they’ve got to continue to do things about it. And the asset purchase facility is the next button to press."

King’s next step may be to pump additional money into the financial system. He said Jan. 20 that the central bank will buy "high-quality" assets within "weeks and not months" to ease market strains, a policy in line with similar measures pursued by Fed Chairman Ben S. Bernanke. Brown and King are trying to rescue an economy that will contract 2.8 percent in 2009, according to IMF forecasts. House prices fell an annual 16.4 percent in January, mortgage lender Halifax said today.

Ford Motor Co. said today it plans to cut up to 850 jobs in the U.K. as demand for autos and commercial vans slumps. As many as 5,000 British companies may file for bankruptcy this year, a report by accounting and insolvency firm KPMG showed. The downturn is cooling inflation. Consumer prices rose 3.1 percent from a year earlier in December, compared with 4.1 percent the previous month, the biggest drop in the annual rate since records began in 1997. The central bank’s target is to keep inflation at 2 percent. Brown said yesterday that the world is suffering a "depression," suggesting he may increase measures to stimulate the economy. The government has already pledged hundred of billions of pounds to prop up banks, and the pound has fallen 26 percent against the dollar and 16 percent against the euro in the past year, making British exports cheaper.

"There are many stimulus factors in place, cuts in interest rates, various fiscal packages will help," said Nick Bate, an economist at Merrill Lynch & Co. in London and a former Treasury official. "But given that we’re in a world where many central banks are cutting severely, the ability to fine tune the economy has passed." The Federation of Small Businesses said yesterday that recent interest rate cuts aren’t helping companies because they cannot get access to loans. More than two-thirds of small businesses wanted the central bank to keep the rate unchanged, according to an FSB poll. The Building Societies Association, representing customer-owned lenders, also called for no change. For now, the central bank may still have little choice but to keep cutting. "The fundamentals are still weak and there is still some scope for orthodox policy easing," said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. "It’s preferable to nudge rates further now than to turn to the printing presses."

Executive pay cap could have unintended consequences
Salary caps have changed the way pro sports leagues run their businesses and pay their stars. Now it's Wall Street's turn to deal with the wrenching changes caused by capping salaries. The government's move Wednesday to slap a salary cap on top Wall Street executives at firms who hit up taxpayers for big cash infusions will have bigger ramifications than just shrinking the million-dollar paychecks of financiers, compensation experts say. By limiting annual pay to $500,000 and dishing out additional pay in restricted stock that can't be cashed in until the government bailout money is paid back, a host of unintended consequences may result, ranging from a brain drain of top talent to a potentially less-generous approach to paying employees at other financial firms.

"The new guidelines will have a chilling effect on executive compensation at most financial companies," says Ira Kay, an executive pay consultant at Watson Wyatt. The aggressive push to limit executive pay follows a backlash caused by last week's revelation that Wall Street firms paid out more than $18 billion in cash bonuses in 2008, one of the worst years in financial market history. President Obama has called the rich payout "shameful," as it was doled out during tough economic times and after taxpayers injected hundreds of billions of dollars into the banks under the Troubled Asset Relief Program. It also comes ahead of the government's soon-to-be-released plan on how it will dispense the $350 billion in remaining TARP funds to banks in an effort to get credit flowing again.

In announcing the new pay limits, which apply only to firms that accept fresh TARP money, Obama said that he doesn't want to deny wealth to heads of successfully run U.S. businesses. "But what gets people upset — and rightfully so — are executives being rewarded for failure. Especially when those rewards are subsidized by taxpayers," he said. Compensation experts say this is the first step in fixing what critics say is a Wall Street compensation system gone wild. "It will go far beyond these handful of firms, even beyond the financial services industry," says Bruce Ellig, author of The Complete Guide to Executive Compensation.

Ellig says it could usher in a new era of how Wall Street pays its workers: Firms will likely rely less on cash bonuses and increase the use of stock with longer holding periods to reward bankers, traders and others. One risk of the plan is putting the survival of firms at risk by handcuffing their ability to pay top performers, says compensation consultant Alan Johnson. Some fear executives at banks who take TARP money will go to banks with no pay restrictions. "The unintended consequence is you end up killing the institution you tried to save," says Johnson. "You drive away the good people.

The 'Guarantee' Morgue
To much political fanfare, President Obama yesterday unveiled new limits on compensation for bank executives. Populists on the right and left applauded, but taxpayers shouldn't be fooled. The real drama is taking place behind-the-scenes as the biggest banks lobby to have the federal government guarantee their toxic assets, and the political class seems ready to oblige. The compensation caps are no doubt politically satisfying as revenge for Wall Street's role in creating the current financial mess. Heaven knows it's hard to sympathize with Goldman Sachs, which yesterday expressed its desire to leave the Troubled Asset Relief Program on the very day the new bonus limits were announced. We assume this means that from here to eternity Goldman will not be too big to fail.

Taxpayers need to realize, however, that Members of Congress want to impose salary and bonus limits to give themselves political cover when they are next asked to provide more bailout cash. Congress wants to seem to be tough on bankers in return for the cash, even if in reality the feds aren't tough at all. This is where the toxic asset guarantee gambit comes in. The Obama Administration is debating several new bailout options, and the favorite of bankers is federal guarantees. The idea is that the government would agree to absorb any potential losses on dodgy paper, perhaps after some small initial loss by the bank. With the losses thus insured, the theory goes, investors won't fear a bank failure and the rest of the bank can go about its business lending and rebuilding its balance sheet and earnings. Chuck Schumer, the Senator from Wall Street, told Bloomberg this week that insuring bad bank paper "is one possibility that seems to be gaining some currency." And no wonder: For bankers and politicians, the benefits are clear. The bankers know their losses have been limited, which means their bad lending choices become largely the taxpayer's problem. Unlike a public capital injection, a guarantee also doesn't by definition dilute current shareholders. When the Federal Reserve guaranteed $29 billion in Bear Stearns paper for J.P. Morgan Chase last year, it came with no strings attached.

For Congress and the Obama Administration, a guarantee is also a thing of political beauty. As a mere promise to pay in the future, it requires no Congressional appropriation -- and thus no popular uprising against bailouts. And unlike a federal resolution agency or a "bad bank" that would buy toxic assets from banks, a guarantee doesn't get into the messy political business of how to value those rotten assets. It's a bailout without the political fuss. The problem is that guarantees don't do much to clean up the mess. The bad assets are still sitting on bank balance sheets, resting in a kind of financial Rue Morgue. The bankers have little incentive even to manage the assets because the taxpayer is ultimately responsible for any losses. The assets could end up sitting on bank books like dusty coffins that no one wants to open for fear of the horrors they might find. Private investors will know the mortuary is still there, however, which will continue to deter new private capital from entering the banking system. And what happens if in two or four years the assets are still rotten? Will a Treasury Secretary take the political risk of removing those guarantees, even in stages?

The Bush Treasury has already used guarantees to save Citigroup and Bank of America in roughly this way, to little good effect so far. For BofA, the partial guarantee on $118 billion was recompense for forcing it to follow through on buying Merrill Lynch. Citigroup received its $301 billion in taxpayer underwriting merely because it was deemed too big to fail. At least the Treasury insisted on a preferred-share stake in both cases, though bank management and directors suffered few consequences. Yes, those assets are still worth something, and the bankers and politicians claim the guarantees will probably never have to be honored. Then again, where have we heard that before? Oh, yes, at Fannie Mae, Freddie Mac, the federal home loan banks, the Pension Benefit Guaranty Corp., among many others. The value of the Fed's Bear Stearns-J.P. Morgan assets has already declined on paper, so taxpayers would take a loss if the Fed were obliged to sell them today.

In pitching for guarantees, Mr. Schumer argues that a huge federal "bad bank" is too expensive, and he's right. That could put taxpayers on the hook for trillions of dollars in more outlays, especially if housing and other asset values keep declining. The better alternative is to do the hard work of addressing banks and their bad assets case by case. George Soros made the sensible suggestion on these pages yesterday of cordoning off bad assets within individual failing banks along with a certain amount of bank capital. The bad assets in that "side pocket" could then be worked off over time. In our view, this process could be helped with a federal resolution agency that could create a market for those assets, buy and hold them if it makes sense, and then sell them.

Meanwhile, the "good bank" that was left behind could begin to earn its way out of trouble while also attracting new private capital. This is akin to what happened some years ago with the Mellon Bank of Pittsburgh. Taxpayers would still have to inject public capital into the banking system, but far less than with a huge new "bad bank," or assuming the risks of bottomless guarantees. The bitter reality is that at this stage of our mania turned to panic turned to recession, there is no miracle financial cure. The way out is a long, hard slog, bank by bank, asset by asset. No one should be fooled if our bankers and politicians claim they can solve everything by putting even more financial risks onto taxpayers.

Banks could still find wiggle room in pay caps
The squeeze on big paydays for executives of bailed-out banks will probably leave Wall Street plenty of wiggle room. Consultants on executive pay say the caps imposed by President Barack Obama on Wednesday will probably apply only to a few executives — not star traders, brokers and salespeople who routinely earn whopping pay packages. Others note Wall Street typically finds ways to exploit loopholes and figure this time will be no different. "You've got a lot of people on Wall Street who are not executives but still make extremely big salaries," said Mark Borges, a principal at compensation consulting firm Compensia Inc. "I suspect this doesn't impact them at all."

The new rules require banks that receive "exceptional assistance" from the government to cap salaries, including cash bonuses, at $500,000 for senior executives. If those firms wanted to pay their executives more, they would have to use stock that couldn't be sold until the bank had repaid the bailout money. The rules apply only to the future, not to banks that have already received bailout money. Healthier banks that will receive bailout money technically would also face the $500,000 cap. But they could avoid it by providing full public disclosure and holding a nonbinding shareholder vote.

The White House is trying to stem rising public concern that financial firms are using billions in federal bailout dollars to pay for executive bonuses, corporate junkets and other perks. "This is America. We don't disparage wealth. We don't begrudge anybody for achieving success," Obama said. "But what gets people upset — and rightfully so — are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers." The salary caps could also have other consequences — sending would-be U.S. bank executives fleeing to foreign firms or hedge funds, or discouraging banks from tapping into the bailout money.

And there are still unanswered questions about the salary caps. For example, the rules do not define what constitutes "exceptional assistance" from the government. But the rules note that injections of federal cash similar to those given to JPMorgan Chase & Co. and Wells Fargo & Co., which each got $25 billion in bailout money, and many other banks would not necessarily trigger the new salary caps. By contrast, far more costly emergency bailouts, such as the $100 billion given to American International Group Inc. and the $40 billion given to each Citigroup Inc. and Bank of America Corp., would qualify as "exceptional assistance" and would subject such institutions to pay restrictions.

And the rules don't spell out how many executives would be subject to the cap. Compensation experts predicted anywhere from five to 25 executives per bank could face the new restriction. That would still represent only a tiny fraction of a large firm's brass. Still, the $500,000 limit will hit some executives in their wallets. In 2007, Bank of America CEO Ken Lewis received compensation valued at more than $20.4 million, according to a regulatory filing. That included $1.5 million in salary and more than $18 million in bonus, stock and option awards and other benefits. Executive pay consultants say firms are sure to seek ways to get around the new rules anyway.

That's what happened in 1993, when Congress limited the corporate tax deduction on executive pay to $1 million. That move fed the boom in stock option grants, which weren't subject to the limits. And the new rules would still allow big restricted stock awards — they'd just postpone the payoff. So executives could still walk away with big money if their firms eventually repaid the government. "There's plenty of wiggle room," said David Schmidt, a senior consultant on executive pay at James F. Reda & Associates. "There's no constraints below the senior executive level, so the question becomes, will the restrictions trickle down?"

On the other hand, with public anger growing over corporate excess, some compensation experts doubt Wall Street firms would risk incurring even further wrath by trying to get around the rules. "They would get eaten alive if they tried to cheat," said Alan Johnson, managing director of compensation consulting firm Johnson Associates. "No one is going to be that stupid." Others worry the salary caps will spark an exodus of star performers just when they're needed to lead ailing firms out of the abyss. "We've always been a society where extraordinary work led to extraordinary payouts," said Alexander Cwirko-Godycki, research manager at Equilar Inc., an executive compensation research firm.

For many on Wall Street, the idea of capping pay is "a very foreign concept," Cwirko-Godycki said. But will the tougher rules really force Wall Street executives to flee? Analysts say the most elite bankers could decide to quit, along with key associates, and start boutique firms rather than accept big pay cuts. Others could defect to foreign banks or hedge funds without pay restrictions. Should they leave bailed-out banks, though, formerly well-paid executives will find the outside opportunities aren't what they used to be.

In years past, "I would see a lot of them walking out the door. Today, I am not sure where they would go," said Richard V. Smith, senior vice president at Sibson Consulting. Still, others worry the caps on pay could influence elite-performing Wall Street workers to forgo ambitions of rising to the executive suite."It will certainly encourage those performers down below to say 'I don't want a promotion,'" said Patrick McGurn, special counsel at RiskMetrics, a corporate governance advisory firm.

Wall St., a Financial Epithet, Stirs Outrage
Monday was the last day of Iris Chau’s 11-year career at JPMorgan Chase and she says there’s a lot she’ll miss about the job, including her colleagues, her paycheck and her role managing a technical support team. But one thing she won’t miss about JPMorgan: telling people that she works there. "For a long time, it was kind of glamorous and I had friends who’d ask me ‘Can you get me a job there?’ " says Ms. Chau, 35, who was part of a recent round of layoffs at the firm’s Manhattan headquarters. A few weeks ago, she mentioned her work to a photographer she’d met through a friend. "And he looks at me and says, ‘Oh, you’re one of them.’ "

Nobody in the investment banking world is expecting pity, or even a sympathetic ear, these days. But while the rest of the country fumes over the billions spent on government bailouts and year-end bonuses, the financial industry is focused on its new role as national pariah and its own lengthy list of anxieties. There are the endless rounds of corporate implosions to sweat. There is the widespread sense of being unfairly singled out for vilification in a crisis that a host of players helped create — among them homeowners, who were only too happy to feast on the bounty that Wall Street helped cater in the flush years.

On top of all that, there is a lot of wincing about the profession’s catastrophic loss of cultural cachet. Wall Street has become a target of populist rage, raw material for talk-show tirades, the occasional street protest and a lot of punch lines. A recent political cartoon in The Record, a newspaper in Hackensack, N.J., shows rats fleeing a sinking ship, labeled "Wall Street," with treasure chests held aloft tagged "CEO" and "Bonus." There are "I Hate Investment Banking" T-shirts for sale online. Last week on "The Daily Show," Jon Stewart rolled a clip of John A. Thain, Merrill Lynch’s chief executive, defending bonuses as a way to keep "your best people." "You don’t have ‘best people’!" Mr. Stewart shouted. "You lost $27 billion! Do you live in Bizarro World?"

All of this has taken a toll on the few industry veterans willing to discuss the subject. "I’d almost rather say I’m a pornographer," said a retired Wall Street executive who, for self-evident reasons, asked not to be identified. "At least that’s a business that people understand." Financiers tell their not-for-attribution account of the mortgage crisis like this: Americans undersaved and overspent for decades, relying on rising property values to bankroll their lifestyles. But nobody on Wall Street forced United States homeowners to take out loans on houses they couldn’t afford, or refinance mortgages to spend money on cars they shouldn’t have bought. The esoteric securities underneath the current mess are, to the people who invented and marketed them, analogous to pharmaceutical drugs. Used correctly, they can enhance your life. Abused, they are lethal.

Of course, mistakes were made on Wall Street, says Emanuel Pleitez, a 26-year-old former Goldman Sachs employee who resigned from his job a few months ago to run for Congress in his hometown, Los Angeles. But to a great extent, he says, those mistakes were born of misplaced trust. "Look, you can talk about collateralized debt obligations all day long," he said, referring to a type of asset-backed security that has turned famously toxic. "But there were ratings agencies that were supposed to tell us how risky these securities were. We essentially closed our eyes and said, ‘O.K., you say this is rated triple-A, fine, I believe you.’ " In hindsight, he said, "Everyone should have been more skeptical."

You hear a lot about the failure of regulators, too. But it’s difficult to find anyone in the financial trenches who thinks the problem is Wall Street itself. Difficult, but not impossible. "People say ‘Well, the Fed is to blame because there was all this loose money,’ " said Luis E. Rinaldini, a former partner at the investment banking firm Lazard Frères, now at the merchant bank Groton Partners. "But guys who run banks are paid to be cautious when there’s loose money around." "I mean, if you had a bus driver who went 100 miles an hour on an icy road, you’d think he was crazy," he adds. "But if his boss said, ‘It’s our policy to drive faster as the roads get icier,’ you wouldn’t be surprised if the boss ended up in jail."

By historical standards, this is not Wall Street’s worst bout of infamy, though it might come pretty close. Last week, President Obama branded Wall Street bankers "shameful" for giving themselves nearly $20 billion in bonuses, even though the average bonus, $112,000, was down by 36.7 percent from the prior year. That criticism isn’t quite the buggy whippings that Franklin Delano Roosevelt routinely gave "unscrupulous money changers." And the recent rallies in front of the New York Stock Exchange — with chants of "You bought it, you broke it" — are downright peaceful compared to the 1920 bombing of J.P. Morgan’s offices, which killed more than 30 people.

Still, if your business card bears the name of an investment bank — or did before you were laid off — odds are good you’ve endured some very awkward moments of late. Stephen Chen, a former vice president in equity research at Bear Stearns, heard a lot of sarcastic comments when he went home to the Bronx for Christmas, where his family of 36 gather each year. When the story of another bank closing was broadcast on a TV, a cousin muttered, "Good riddance." "A lot of my family are small-businessmen who own restaurants and Laundromats," Mr. Chen said. "They just see Wall Street as overpaid and they don’t have a very clear idea of what it does. I try to explain that there’s this intimate connection between Main Street and Wall Street, that banks were created to provide liquidity for small businesses, so they can expand." His relatives listen, but seem unconvinced, Mr. Chen said. "It’s kind of tiring having the same conversation over and over again."

The irony is that despite public perceptions, the outcry over Wall Street greed is happening just as the firms are getting stingy. At JPMorgan, Ms. Chau said, management clamped down on office supplies to the point where employees now need to ask a secretary for the key to the supply room for pens. At the San Francisco branch of Goldman Sachs, the days of free soy milk and Diet Cokes are over, and one day, the water cooler was wheeled right out of the office. "Word went around pretty quickly," says Mr. Pleitez. "Bring your own water." And for all the talk about taxpayer-financed bonuses, a lot of junior and midlevel executives have been told that they shouldn’t expect anything but their salaries this year. In a business where your bonus is often five times your base pay, that’s devastating news. And we’re talking about a line of work in which virtually all satisfaction is paycheck-dependent.

"Fact is that this is a terrible way to make a living — except for the money," Ken Miller, a former vice chairman at Credit Suisse First Boston and now a private investor, said. "The lifestyle is terrible — the hours, the sucking up. These guys must feel like they’re the victims of a capricious god." That’s especially galling to the many in investment banks who had nothing to do with the mortgage end of their company’s business. Maria Anguiano, who works in Barclays’ municipal finance department, has yet to hear if she is getting a bonus this year, but she thinks she deserves one, given the millions her department earned. "If you just take your base home, the question becomes, why not just work at a nonprofit from 8 to 4 instead of a bank where you’re expected to work weekends and every night till 10 or 11?" she said.

Ms. Anguiano isn’t the only one asking that question. As money and prestige drain out of Wall Street, and as layoffs mount, other careers are starting to seem more appealing. Mr. Chen has helped start a retail company, GreenSoul Shoes, that sells sandals made by Cambodian villagers out of discarded rubber tires. He calls it a for-profit business with a social mission. Ms. Chau, a friend, is going to be joining him soon. To some longtimers in the industry, this reordering of priorities is overdue. Robert J. Birnbaum, the former president of the New York Stock Exchange, sees an upside to Wall Street’s diminished reputation. "It’s taken a hit, but so what?" he said. "We don’t need all the bright people going to Wall Street, chasing money. There’s a lot of things bright people can do. Like find a cure for cancer."

Revelations About Cabinet Nominees, Wall St. Bonuses Spark Outrage
President Obama, who swept to the White House on a message of hope and inspiration, is struggling to contend with a different emotion -- anger. Americans are livid about lost jobs and decimated retirement accounts, and a stream of lurid dispatches provides a sharp contrast with their own losses -- the $18 billion paid out in Wall Street bonuses last year, the $35,000 commode for the Merrill Lynch CEO's office. This week, they got a new target: an Obama Cabinet nominee who had earned millions and failed to pay all his taxes.

"I think everybody needs to be held to task right now," Keith Igoe, 46, a roofer in suburban Denver and an ardent Obama campaign volunteer, said of Thomas A. Daschle after he stepped down yesterday as Obama's nominee for health and human services secretary and White House health policy czar. "I don't know I'd hold him any less accountable than anybody else." Obama, whose even demeanor and temperament do not lend themselves to populist declamations, has searched for the right tone for holding the guilty accountable while not crossing into glib point-scoring that could spook the business class.

His indignation has ratcheted upward over the past two weeks. He made passing mention at his inauguration to "greed and irresponsibility," declared last week that the wave of Wall Street bonuses was "shameful" and today, in announcing limits on executive compensation, decried a "culture of narrow self-interest and short-term gain at the expense of everything else" and "executives being rewarded for failure." Some of the biggest decisions of Obama's administration -- on the next round of Wall Street bailouts, on financial regulation, on tax reform -- will be defined by how aggressively he decides to come down on the financial elite, many of whom generously supported his campaign.

But even as Obama seeks to negotiate and direct the currents of public anger with his rhetoric and policy, he has found them targeting his own administration. Daschle and Timothy F. Geithner are not billionaire Wall Street titans, but the questions surrounding their failure to pay taxes were all the more acute for the White House given the uproar against a privileged upper echelon perceived as having profited over the past decade at the expense of others. On one level, Daschle's troubles were a typical Washington tale of the ethical gray area walked by those working the revolving door between elected office and the influence industry Obama pledged to rein in. But the symbolism -- the car and driver provided by a financier friend, the millions in pay since leaving the Senate, the flight to the Bahamas on a student loan company's plane -- also tapped into the broader ire unleashed by Wall Street's collapse.

In a string of interviews yesterday, Obama said he only belatedly appreciated that the disconnect between his rhetoric about a "new era of responsibility" and the fact that his nominees' issues were adding to the resentment building in the country. "I take responsibility for this mistake," he told Fox News. "We can't send a message to the American people that we have two sets of rules -- one for prominent people and one for ordinary people." Obama himself set a life course that skirted easy money. After a year at a business job in New York City, he took up community organizing on Chicago's South Side. A few years later, instead of following his Harvard Law classmates to big firms, he returned to Chicago to prepare for an entry in public office, starting in the less-than-glamorous Illinois state senate.

But as a result of his Ivy League education and time in New York and Chicago, he was on more than passing terms with the financial elite. The finance, real estate and insurance sector was Obama's second-largest source of campaign contributions after lawyers, giving him $37 million, according to the Center for Responsive Politics. His supporters in the financial world ranged from executives such as UBS America's Robert Wolf and Citigroup Vice Chairman Louis Sussman to a host of younger hedge fund managers who felt a kinship in the youthful and urbane Obama. His administration is full of disciples of former treasury secretary and Citigroup executive Robert Rubin, such as Michael Froman, a managing director of Citigroup and law school friend of Obama's who has been named to a joint position with National Security Council and the National Economic Council.

Early in his campaign, Obama signaled that he was willing to call out Wall Street excess, declaring in a September 2007 speech at the Nasdaq that "a mentality has crept into certain corners of Washington and the business world that says 'what's good for me is good enough.' " He called on the stump for raising taxes on the wealthy and fixing the private-equity loophole that allowed his friend and adviser Warren Buffett to pay a lower tax rate than his secretary. But he never came close to the high-pitched populism used by his rival, John Edwards, the former North Carolina senator, or, later in the campaign, by Hillary Rodham Clinton. Even after the markets collapsed in September, Obama's response tended more to sober and morally disapproving than laden with full-throated righteousness.

The starkest contrast might be with Franklin D. Roosevelt, who at his 1933 inaugural, excoriated the financial elite, accusing it of "stubbornness," "incompetence," and "false leadership" that had been "rejected by the hearts and minds of men." "The money changers have fled their high seats in the temple of our civilization," he declared. By 1936, he had this to say of the "economic royalists": "They are unanimous in their hatred of me, and I welcome their hatred." Obama's inaugural was mild by comparison, framing the current crisis as a "collective failure to make hard choices and prepare the nation for a new age." The day before his comments about "shameful" bonuses last week, he met with 13 chief executives at the White House and offered no scolding.

"We really didn't get off into any side things about car-company guys taking jets or stuff like that," said Michael R. Splinter, chief executive of Applied Materials in Silicon Valley. "I mean, because he knows that, you know, we're all working hard to improve our companies, and if we improve our companies it will be a big part of the economy improving. A lot of the GDP was represented in the room today." There are those, of course, who believe that undue business-bashing has downsides. Retired Rutgers historian Elliot Rosen says it would be unwise for Democrats to launch a sequel of the Pecora Commission, which held aggressive hearings in 1932-34 into the causes of the 1929 crash. "There is danger in that because this is still a business-led system and business and banking have to recover," he said.

But William Leuchtenburg, a retired University of North Carolina historian, says the effect of Roosevelt's rhetoric has been overstated. "The trauma of the Great Depression was so great that investors were not going to invest again anyway," he said. "His rhetoric didn't affect investment decisions -- it simply made the DuPonts and others mad as hell." In Manhattan, opinions are divided about Obama's gradual shift to harsher rhetoric. Manish Vora, 29, who left his lucrative Wall Street job last year to launch a networking service for artists, said Obama's language was resonating with younger bankers who have developed misgivings about their business, with its 80-hour weeks and eye-popping bonuses.

"There's always been this kind of dissatisfaction with the job, even though people were getting paid a lot, this sense from young people that it was kind of absurd," he said. "Most people are thinking that the rage, the anger against the executives is pretty justified." But Robert Schwed, a partner in the corporate practice at WilmerHale, was more skeptical. Schwed, who attended Obama's speech at Nasdaq, remembered being struck by its moralistic edge. While Obama's warning about excess turned out to have been prescient, Schwed said, there was some hypocrisy in the "high dudgeon these political leaders are in."

"Obviously, folks on Wall Street tend to have a tin ear from time to time, but I don't think [the rhetoric] appreciates what the deal is on Wall Street -- people make a minimal salary, and the bonus is what it is," he said. "Heaven forbid someone earns $400,000 from a company getting TARP money. Well, maybe leaders in Washington should be paying their taxes?"

Two Senators Seek to Strip $200 Billion From Stimulus Bill
Anxious over the ballooning size of the proposed economic stimulus package, now at more than $900 billion, lawmakers in both parties are working on a last-minute plan to strip $200 billion from the bill. The effort is being led by two centrist senators — Ben Nelson, Democrat of Nebraska, and Susan Collins, Republican of Maine. Among the initiatives that could be cut are $50 million for the National Endowment for the Arts, $14 million for cyber security research by the Homeland Security Department, $1 billion for the National Science Foundation, $400 million for research and prevention of sexually transmitted diseases, $850 million for Amtrak and $400 million for climate change research. But so far, none of the suggestions come close to being enough to shrink the package on the scale proposed.

The final Senate vote on the stimulus package, expected late on Thursday, looms as a major test of President Obama’s ability to build bipartisan consensus, especially given his extraordinary personal lobbying effort. He has made numerous telephone calls in support of the package, visited Republicans on Capitol Hill, and held meetings in the Oval Office on Wednesday with moderate lawmakers, including Ms. Collins and Mr. Nelson. The Senate’s version of the stimulus bill started at a projected cost of $884 billion, roughly $64 billion more than the version passed in the House, because of a provision that would protect millions of middle-class Americans from paying the alternative minimum tax in 2009. But this week, the Senate added more than $30 billion in additional spending, including tax breaks for purchases of homes and cars.

Critics of the stimulus measure, including lawmakers and economists, have warned that it included too many long-term spending programs, which may represent laudable public policy goals and certainly reflect Democratic priorities, but that were unlikely to provide the quick boost in job creation and consumer spending needed to halt the economy’s downward spiral and spur a recovery Ms. Collins, one of just a few moderates left in the diminished Republican minority, and Mr. Nelson, one of the most conservative members of the strengthened Democratic majority, have teamed up before to bridge partisan gaps, including an effort in July 2007 to change the mission of American troops in Iraq while not setting the hard deadline for withdrawal opposed by President Bush.

On Wednesday, Ms. Collins and Mr. Nelson met together at the White House with President Obama, who earlier in the day had met one-on-one in the Oval Office with another Republican moderate, Senator Olympia J. Snowe, also of Maine. Ms. Snowe personally delivered a list of cuts, totaling about $100 billion, that she said should be made. On leaving the White House, she said it was imperative that "every provision has a job creation component." But even as Mr. Obama expressed continued willingness to compromise, he warned critics of the stimulus bill that they were standing in the way of his agenda, and he urged Congress to act fast. "I’ve heard criticisms of this plan that echo the very same failed theories that helped lead us into this crisis, the notion that tax cuts alone will solve all our problems, that we can ignore the fundamental challenges like energy independence and the high cost of health care and still expect our economy and our country to thrive," he said.

"I reject that theory," Mr. Obama continued, "and so did the American people when they went to the polls in November and voted resoundingly for change. So I urge members of Congress to act without delay." Later, in a series of votes on amendments to the bill on Wednesday evening, Senate Democrats easily beat back a number of efforts by Republicans to vastly change the stimulus measure by stripping out spending programs and broadening the tax cuts. In a number of those votes, the Democrats were joined by Ms. Collins and Ms. Snowe, as well as Senator Arlen Specter of Pennsylvania and George V. Voinovich of Ohio. For procedural reasons, at least 60 votes are needed to advance the legislation and with those four Republicans voting in favor, Democrats could muscle the bill through.

The Democrats currently hold 58 out of 99 seats in the Senate, with one vacancy because of the contested election in Minnesota; this week only 57 Democrats have been voting because Senator Edward M. Kennedy of Massachusetts has been absent, due to illness. But while the majority leader, Senator Harry Reid of Nevada, has sought to lower expectations in recent days, winning passage of the stimulus with just 60 or 61 votes would be a clear setback for Mr. Obama, who has pledged to bring about a new spirit of cooperation in Washington. Presuming Senate Democrats muscle the bill through, the final legislation must be reconciled with the measure approved last week by the House. No House Republican voted for that bill last week, though some are expected to switch in favor of it once the legislation is finalized. The measure includes extended jobless benefits and new health-care subsidies for the unemployed that would be difficult to oppose for lawmakers from many states where unemployment is high.

Republicans would also be hard-pressed to block the entire bill, given the grave state of the economy and the support of economists from across the political spectrum for an aggressive government stimulus program. In debate this week, the Senate added provisions aimed at spurring major purchases, including a tax credit for homebuyers of up to $15,000 that Republicans had championed as addressing a root cause of the recession. The homebuyer tax break, which would cost about $18.5 billion and which the Senate approved by voice vote without opposition, was the second amendment in two days intended to encourage consumers to make major purchases. On Tuesday, the Senate approved a tax incentive for car buyers, sponsored by Senator Barbara A. Mikulski, Democrat of Maryland, that would allow the deduction of sales tax and loan interest on purchases made this year.

But while both of those incentives were applauded by lawmakers who said the bill should quickly induce consumer spending, some economists said they were short-sighted and lacked the forward-thinking approach Mr. Obama has demanded. Adam Posen, deputy director of the Peterson Institute of International Economics, said that homebuyers would have trouble getting loans because of the continued tightness in the credit markets, and that the car buyer incentive fell short by not focusing on fuel-efficient vehicles. He said the money might be better directed at mass transit. "They are also structurally unsound," Mr. Posen said of the two provisions, "reinforcing the attempts of industries that are too large — housing construction, automobile production — to survive based on government distortions." He called them both "terrible, pandering ideas." But Senator Johnny Isakson, Republican of Georgia, a former real estate broker, who was the prime sponsor of the homebuyer credit, along with Senator Joseph I. Lieberman, Independent of Connecticut, said it was modeled after a similar, $2,000 homebuyer incentive that helped lead the country out of recession in 1975.

"We do have a history in this country with housing and it goes back to the crash of 1974, which actually in terms of inventory and price declines was comparable to what’s happening now," Mr. Isakson said at a news conference. "Within one year of the inception of that tax credit, two-thirds of the available inventory that was on the market was gone. The market moved back to a balanced inventory, values stabilized and things became very healthy. The only reason I know all of that is I was selling houses in 1974, that’s what I was doing to feed my family and make a living." The tax credit would give buyers 10 percent of the price of a primary residence bought within one year, up to $15,000, and is intended to stabilize plummeting home prices, which caused a wave of foreclosures and led to the near collapse of the financial system as Wall Street firms wrote down billions in mortgage-backed assets.

US credit card delinquencies at record high
US credit card delinquencies hit a record high in January, and further deterioration is likely as the economy slows down and unemployment rises, Fitch Ratings says. Payments at least 60 days late rose almost half a percentage point last month to a record 3.75 per cent, said Fitch. Credit card lenders also wrote off loans to delinquent borrowers at close to record levels, and such "charge-offs" were expected to breach records in the coming months. Michael Dean, managing director at Fitch, said: "US consumers continue to struggle in the face of mounting pressures on multiple fronts from employment to housing to net worth."

Late payments on credit cards crept higher throughout 2008, said Fitch, but signs of borrower stress rose in the fourth quarter as late payments surged by 18 per cent. Charge-off rates in January were 40 per cent higher than a year ago at 7.5 per cent and were expected to approach 9 per cent during the second half of 2009. Late payments and defaults on credit cards have been closely linked with levels of unemployment, which have risen dramatically. Non-farm employment fell 524,000 in December, contributing to the biggest decline in payrolls on a three-month moving average since 1945. The unemployment rate jumped to a 15-year high of 7.2 per cent, from 6.8 per cent in November.

Rising late payments and defaults on credit card loans would hurt the performance of securities backed by credit card receivables, Fitch said, but downgrades would be limited in the near-term because of lower funding costs. Securities backed by credit card receivables have rallied in recent weeks, in part because of such lower cost funds, and as investors look forward to the launch of a new Federal Reserve programme to lend against such asset-backed securities. However, analysts at Barclays Capital warn the rally could be short-lived amid continued economic deterioration and proposed bankruptcy legislation that could boost charge-off levels.

Credit card lenders have also suffered as consumers rein in their spending. Fourth-quarter earnings reports from JPMorgan, Citigroup and Bank of America showed a steeper-than-expected drop in card volumes: down 8 per cent, 15 per cent and 13 per cent, year on year, respectively. Credit card lending has historically accounted for between 15 and 25 per cent of pre-tax income at JPMorgan, Bank of America and Citigroup, according to Moody’s. Analysts expect these businesses to shrink as lenders tighten credit standards and cut credit lines.

Summers Warns Deflation Is ‘Real Risk’ for Economy
White House economics director Lawrence Summers urged swift passage of a stimulus bill and pledged further taxpayer funds for major banks, warning that the economy is in danger of sustained declines in consumer prices. "Deflation is a real risk facing the economy," Summers, the director of the National Economic Council, said today on a conference call with reporters. "We do not have time to wait" to approve the fiscal-stimulus package the Obama administration is pushing in Congress, he said. A prolonged slide in prices would worsen the recession by making debts harder to pay off and banks even less likely to make new loans. Summers’s remarks come as the administration seeks congressional approval of the stimulus by the end of next week.

"This bill is imperative for our economic security," Summers said. "I’ve got great confidence that in our country we do the right thing. So I expect a bill to be signed into law." House lawmakers approved a measure last week, and the Senate is deliberating on the bill this week. Treasury Secretary Timothy Geithner held meetings today with Senate Democrats and House leaders. The stimulus package alone won’t be enough, said Summers, a former Harvard University professor and Treasury secretary in the Clinton administration. Policy makers are readying an overhaul of the Treasury’s financial-bailout program, which may come early next week, and a strategy to stem record mortgage foreclosures.

The focus of the financial recovery plan "will be on maintaining the overall flow of credit" in the economy, Summers said. It will include "government support for the credit markets" and "capital infusions into major financial institutions." Summers said the stimulus package is aimed at helping fill a $2 trillion gap between the economy’s potential growth and its actual performance in 2009 and 2010. President Barack Obama today called on Congress to quickly complete the legislation, saying that a failure to act "will turn crisis into a catastrophe and guarantee a longer recession." The economy shrank at a 3.8 percent annual rate in the fourth quarter of 2008, the most since 1982, and analysts anticipate a deeper contraction in the first three months of this year. The unemployment rate likely climbed to 7.5 percent in January, compared with a 4.9 percent rate a year before, according to the median estimate in a Bloomberg News survey ahead of a Labor Department report due Feb. 6.

Bank of America Slides on Concern for Nationalization
Bank of America Corp., the nation’s largest bank, declined to its lowest level in New York trading since 1984 on concern regulators may seize the company after a $138 billion U.S. bailout package failed to halt the slide. The bank fell 55 cents, or 12 percent, to $4.15 at 10:44 a.m. in New York Stock Exchange composite trading, and earlier declined as much as 20 percent to its lowest level since October 1984. The stock of the Charlotte, North Carolina-based company has dropped for six days and lost more than two-thirds of its value this year.

The descent follows the U.S. government’s latest infusion of $20 billion in fresh capital and a plan to share losses on $118 billion in mortgages, corporate loans and derivatives. The U.S. previously committed $25 billion to the bank and Merrill Lynch & Co., acquired earlier this year. Bank of America lost $1.79 billion in the fourth quarter, its first deficit since 1991, as more borrowers fell behind on paying their loans. "Washington is dithering while the banking stocks are going to zero," said Nancy Bush, an independent bank analyst in Annandale, New Jersey. Trading is being driven by speculation that the government may take over Bank of America and other lenders as part of a plan to bolster the nation’s financial system, she said. Scott Silvestri, a spokesman for the bank, said the company declined to comment on its stock price.

"You have got to nationalize the banks," said Paul Miller, analyst at Friedman, Billings, Ramsey Group Inc. in an interview yesterday, adding that the public may not be ready for Bank of America and Citigroup Inc. to be seized. "We’re past the tipping point, and the government is taking small steps." Citigroup, which dropped as much as 8.3 percent today, fell 11 cents, or 3.2 percent, to $3.38. Bank of America’s risk increased after it acquired Countrywide Financial Corp., the largest U.S. home lender, and Merrill Lynch, the world’s largest brokerage, said David Dietze, president of Point View Financial Services Inc. in Summit, New Jersey, in an interview late yesterday. Merrill lost $15.3 billion in the fourth quarter. "There is this lurking shadow of nationalization which haunts the banks, but particularly Bank of America," he said. "It’s pretty spooky."

Bank of America CEO under pressure as stock sinks
Bank of America Corp shares sank to their lowest level since 1984 on Thursday on swelling fears about losses tied to a bad economy and its acquisition of Merrill Lynch & Co, adding to pressure on Chief Executive Kenneth Lewis. Its shares fell 50 cents, or 10.6 percent, to $4.20 in morning trading after earlier falling to $3.77. The daily drop was the Charlotte, North Carolina-based bank's sixth straight. Scott Silvestri, a Bank of America spokesman, declined to comment.

"With eroding capital and weakening balance sheets, investors are trying to flee," said Joseph Battipaglia, market strategist at Stifel Nicolaus & Co in Yardley, Pennsylvania. "(It) looks like there's no magic remedy that doesn't require the dilution of shareholder interest." Shares in Wells Fargo & Co also slumped, falling as much as 15.9 percent before recovering about half their drop. Both Wells Fargo and Bank of America made major acquisitions late last year that many investors now see as driving further losses. Wells acquired Charlotte-based Wachovia Corp, which like Merrill had tens of billions of dollars of toxic mortgages and other debt on its balance sheet.

Thursday's decline in Bank of America followed an article in The Wall Street Journal about events leading up to the Merrill acquisition, citing various unnamed sources. The article said federal regulators pushed Bank of America to close the Merrill acquisition even after it had become apparent that Merrill's losses were far higher than expected. It said Bank of America began to have doubts around Thanksgiving Day, eight days before shareholders of both companies voted for the merger, on December 5. Bank executives debated prior to the votes whether Bank of America should back out, but lawyers urged that it not do so, the article said.

Bank of America has said Merrill lost $15.31 billion in the fourth quarter. The bank faces many shareholder lawsuits over its failure to disclose Merrill's losses either before the merger closed on January 1 or before the shareholder votes. The losses prompted Bank of America to get U.S. government help, which included $20 billion of new capital and a sharing of losses on $118 billion of troubled assets. The scale of the losses has also prompted speculation the bank may come under U.S. government control, but not everyone believes that this is likely. "Whatever plan the government is going to come up with, I don't think nationalization is in the cards," said Ben Wallace, an analyst at Grimes & Co in Westborough, Massachusetts, which holds Bank of America shares.

Wallace said the government learned a lesson after allowing Lehman Brothers Holdings Inc to go bankrupt in September. Many believe this deepened the financial crisis, and was equivalent to a nationalization in that it wiped out shareholders' investments. But uncertainty still prevails. "Folks have not been rewarded for sticking around with uncertainty in these markets," added Wallace. Some critics have called for Lewis, 61, to be replaced as Bank of America's chairman and chief executive, or at least to give up the chairmanship.

Congress considers changes to mortgage aid program
With fewer than 500 applications and only two-dozen homeowners helped so far, House lawmakers moved Wednesday to revamp a new program that was intended to help hundreds of thousands of borrowers avoid losing their homes. The changes approved by the House Financial Services Committee come as Congress and President Barack Obama refine the most dramatic steps yet to boost the ailing U.S. housing market. Treasury Secretary Timothy Geithner is expected to announce a new approach for aiding borrowers and rescuing the flailing financial industry next week. The Obama administration wants to spend up to $100 billion in financial bailout money to help borrowers stay in their homes. Meanwhile, the Senate voted Wednesday night to give a tax break to homebuyers in hopes of revitalizing the U.S. housing market. The proposal, pushed by battered homebuilders, would allow a tax credit of 10 percent of the value of new or existing residences, up to a $15,000 limit.

Democrats readily agreed to the proposal, although it may be changed or even deleted as the massive economic stimulus measure makes its way through Congress over the next 10 days or so. The government's efforts to stem the foreclosure crisis thus far have relied on voluntary cooperation of the lending industry. The plans have not stopped a dramatic surge in foreclosures that is likely to worsen as workers lose their jobs amid a deepening recession. "We will have to do more -- substantially more -- to fix this crisis," Geithner said Wednesday. During the presidential campaign, Obama said banks that receive federal bailout money should be required to halt foreclosures for 90 days, but that hasn't happened yet. "I voted for Obama just for that reason," said Leroy Hernandez, 52, who lives outside Richmond, Va., and fears foreclosure is imminent on his home loan. "Maybe I'm just gullible."

The company that collects payments on Hernandez's loan, Litton Loan Servicing, is owned by Goldman Sachs Group Inc., which has received $10 billion in federal bailout money. Litton spokeswoman Donna Marie Jendritza said Hernandez was denied a modification because he did not provide proof of his income, but added that he is welcome to apply again. "If proof of income is not provided, we cannot go forward," she said. Nick Shapiro, a White House spokesman, said in an e-mail that Obama "is working very hard on a significant foreclosure prevention program that will be substantially more sweeping than the ideas put forward in the past." Congress last year created the Hope for Homeowners program, which was supposed to allow 400,000 troubled homeowners swap risky loans for traditional 30-year fixed-rate loans with lower rates. But only 25 loans have been approved since the program started in October out of 451 applications, despite more than 66,000 calls to the Federal Housing Administration about it from consumers and lenders.

Under the bill approved by the House committee, several restrictions on the program would be lifted in hopes of allowing more people to qualify. Meg Burns, the federal housing official in charge of the program, testified this week that tight restrictions on who can qualify and high fees have led to the disappointing results. The bill approved Wednesday would reduce those fees and lift some of those restrictions. Republicans were skeptical. "While Americans all over this country are struggling with their own mortgages, should they be forced to pay their neighbors?" said Rep. Jeb Hensarling, R-Texas. "There are basic questions of fairness." However, some consumer advocates argue the changes aren't enough. "It's not the magnitude of help that's needed," said John Taylor, president of the National Community Reinvestment Coalition, a consumer group in Washington that's pressing the administration to buy up distressed loans in bulk and modify them so borrowers stay in their homes.

While plans to assist homeowners likely will anger those who oppose subsidizing borrowers who may have acted irresponsibly, the Obama administration appears to agree that such action can help stem the financial crisis. "We're not going to be able to eliminate all foreclosures, but can certainly keep that number from getting out of control," said Robert Litan, a senior fellow at the Brookings Institution, a liberal-leaning think tank. By doing so, "you should be able to reduce some of the losses on the securities which are driving the banks under." The committee also approved a bill to protect companies that collect mortgage payments from lawsuits after they modify loans, and legislation that makes permanent the Federal Deposit Insurance Corp.'s $250,000 limit on insured deposits. That limit was raised from $100,000 last year.

What Falling Prices Are Telling Us
The world is awash in goods—and government programs to spur spending won't be enough to balance supply and demand. Consumer prices in the U.S. fell at a breathtaking annual rate of nearly 13% in the last three months of 2008. Prices plummeted for all sorts of goods, ranging from clothing to TVs to furniture, as retailers advertised sale after sale. But deflation missed big chunks of the economy. For all of 2008, college tuition and fees increased by 5.8%, followed closely by price increases for hospitals and legal services. Even fees for preparing tax returns are going up. This inconsistency in prices casts doubt on the usual explanation for the recession, which is that it's mainly due to the credit crunch and the resulting squeeze on demand. It also hints at why government efforts to fight the downturn have been ineffective so far.

Here's the big idea: If the lack of demand that the Obama Administration is fighting were the only problem, you'd expect prices to fall across the board. Instead, it appears that supply—that is, oversupply—is at least as important a factor. The sectors in which prices are falling are those plagued by an excess of factories and ways to get goods to consumers, often because of huge investment in plants in China and other developing nations. Most services, in contrast, are not in severe oversupply and have domestic labor as their main ingredient. Consider this: Prices of goods fell 4.1% last year; prices of services rose 3%. The government's deflation-fighting weapons—low interest rates, financial bailouts, and spending packages—can boost demand but do little to deal with oversupply. As Microsoft CEO Steven A. Ballmer and General Electric CEO Jeffrey R. Immelt have observed, long-term demand growth has been "reset" downward. The world's productive capacity is simply too big. That means prices need to fall further, or more factories need to close in the U.S. and abroad, or some combination of the two.

That's not to say the Obama Administration is on the wrong track with its nearly $900 billion-plus stimulus plan. But it's important to have realistic expectations. The stimulus can ameliorate the downturn, but not prevent continued contractions in the sectors of the economy where global overcapacity is the most extreme. Examples? The world is able to make 90 million vehicles a year, but at the current rate of production, it's making only about 66 million, according to estimates from market researcher CSM Worldwide. Global production of semiconductor wafers is running at only about 62% of capacity, estimates market researcher iSuppli. Such overhangs hurt not only manufacturers, but retailers who sell goods and the truckers who distribute them, not to mention the financial wizards around the globe who abetted the buildup of overcapacity through foolish lending and financial inventions. (Finance is one service sector where prices are falling, in part because banks lent so heavily in housing.)

For the U.S., global overcapacity will mean bargain prices for consumers in 2009 but tougher-than-ever competition for domestic producers that compete with imports, such as carmakers and steel producers. "Pricing power is now deteriorating," Morgan Stanley economist Richard Berner wrote on Feb. 3, describing a "vicious circle" of declining output, prices, and profits. In the North American steel industry, 16 of 29 blast furnaces are temporarily shut down, says Michael Wessel, a member of the U.S.-China Economic & Security Review Commission. At the end of 2008, North American auto plants were running at just 70% of capacity even after massive shutdowns. "It's going to get worse," says IHS Global Insight economist Michael Montgomery, because inventories of manufactured goods piled up before producers realized how badly demand had fallen. Says Montgomery: "My first boss in the steel industry told me, nobody thinks there's any inventory until they look out the window and say, 'Oh my God, what's all that stuff?'" The picture is dramatically better in education and health care, to name two robust service sectors. Enrollment is rising at many community colleges. Hospitals are still adding workers.

For economists, overcapacity is a tricky concept. Human wants are unlimited, so how could the world ever produce too much of a good thing? The key is what people can pay: In many goods sectors, prices still aren't low enough to bring forth enough buyers. There will have to be some combination of falling prices and destruction of productive capacity before supply and demand come back into balance. The question is how that balance will be achieved. Global overcapacity in major industries will provide a critical test of the statesmanship of G-20 world leaders, who next meet on Apr. 2 in London. The economic crisis is transnational, says Paul A. Laudicina, a vice-president for consultant A.T. Kearney. "The conundrum is that we [tend to] make decisions nationally." China is under pressure to help soak up its overcapacity by switching from investment to domestic consumption. Trouble is, its economy isn't geared that way. Toy manufacturing in China is a "disaster area" because export orders are drying up and factories can't crack their own home market, says David Wong, vice-president of the Chinese Manufacturers Assn. in Hong Kong. "There are so many obstacles to selling domestically," he says. "Even we from Hong Kong are outsiders."

In any case, China is far less influential as a consumer than as a producer. At the World Economic Forum in Davos, Switzerland, in January, Bank of China Group Executive Vice-President Zhu Min told BusinessWeek Editor-in-Chief Stephen J. Adler in a panel discussion that even rapid growth in Chinese consumption can't make up for weaker spending in the U.S., the world's No. 1 shopper. What can companies in overcapacity-plagued sectors do? For one thing, the strongest producers among them will be able to buy the weakest. "Deflation will be an opportunity for companies to be able to buy assets 10% to 20% below their replacement value," says Nicholas Heymann of brokerage Sterne Agee & Leach. Companies can also benefit from the increased buying power of people who still have jobs. Wages and salaries outpaced inflation by 2.6% in 2008, the biggest gain for workers since at least the early 1980s. Some American companies that buy low-priced merchandise from China are not squeezing suppliers on price but instead are trading up to a better class of supplier by offering to pay in as little as 10 days instead of 60, says Peter Brown, a retail strategist and vice-chairman at Kurt Salmon Associates, a global consulting firm. Says Brown: "The savvy buyers are saying, 'I know I can get some reductions, but I also know it doesn't help me if the supplier is not there to ship in six months.'" Deflation is a signal that all is not right. For businesses and policymakers, the key is to diagnose the malady correctly.

Goldman, Others Getting Aid Are Eager to Pay It All Back
Goldman Sachs Group Inc. said it is determined to repay the $10 billion it got from the federal government as soon as possible, a move that would end the toughened scrutiny that came with the money. "Operating our business without the government capital would be an easier thing to do," David Viniar, Goldman's chief financial officer, said at a Credit Suisse Group conference in Naples, Fla. "We'd be under less scrutiny and under less pressure." Mr. Viniar's comments fueled a 6.2% rise in Goldman shares to $87.97 in 4 p.m. New York Stock Exchange composite trading Wednesday. The jump suggested that investors think the move could give Goldman a freer hand to run its businesses and decide how to compensate traders, investment bankers and executives. The Troubled Asset Relief Program sets limits on pay, dividends and a wide range of other activities.

The move was discussed internally at a Goldman partners meeting last month, where Chairman and Chief Executive Lloyd Blankfein told about 250 top-ranking employees that repaying the TARP money was a priority for the investment firm. Other financial institutions that got TARP money also are eager to return it. "We will redeem the TARP preferred [shares] as soon as is practical and in close coordination with the Treasury and the Federal Reserve," said a spokesman for Bank of New York Mellon Corp., which received $3 billion. Inside some companies, including Morgan Stanley, executives have grumbled about the government's growing involvement. Especially prickly are executives at firms that didn't want or ask for TARP but were persuaded to take the money. TARP recipients Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co. declined to comment.

But getting back to life without the government as a major shareholder is easier said than done. Repaying the investments can be accomplished through a public offering or private-equity sale, but raising money in the public markets is a shaky proposition these days. Floating new common shares would dilute the holdings of existing shareholders. Getting capital from a private investor in return for newly issued preferred shares wouldn't dilute common shareholders, but private-equity investors likely would demand a higher return than the 5% dividend that the federal government is getting now. "It would be ridiculous not to think it through, but it is effectively not repayable right now," said one senior executive at a bank that received TARP funds at the same time as Goldman. "It would be hard to part with the government money if it's not exorbitantly expensive."

It isn't clear whether sophisticated investors would want to invest in TARP recipients at any price. Last year, big private-equity firms got badly burned by pouring money into financial institutions that later stumbled or went out of business altogether, including Washington Mutual Inc. Meanwhile, private-equity firms are feeling pain from other investments that are being hit hard by the recession. Particularly troubled financial institutions, such as Bank of America, which got a second TARP infusion in January related to its purchase of Merrill Lynch & Co., will likely remain unattractive to investors until signs of a rebound emerge. Despite the market's apparent dislike of government ownership, buying taxpayers out of their investments in the banks also could be risky.

Some shareholders could criticize a bank for returning the TARP money at a time when corporate profits and capital levels are still deteriorating. And it isn't clear how soon lending markets will begin to recover. In his comments Wednesday, Mr. Viniar indicated that Goldman wouldn't make a move on TARP without approval from the Treasury Department and Federal Reserve. While the strings attached to TARP funds are "not really restricting the way we do business," the firm still would "like to get out from under" the curbs, he said.

More Call for Probe on Financial Crisis
Demand is growing in both parties in Congress for an investigation of the causes of the nation's financial crisis, with many members calling for an independent commission modeled after the one that investigated the Sept. 11, 2001, terrorist attacks. Leaders of the House and Senate had previously shown little interest in studying what led to reckless mortgage lending and the spread of high-risk investments throughout the financial system. But support for an in-depth examination is gaining traction, with dozens of lawmakers from both parties signing onto bills that would create a commission. Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, said Tuesday that such a serious probe is imperative. He called on his own committee to conduct one as it did during the Great Depression.

Proponents say a thorough look at past errors is needed as Congress prepares for a sweeping overhaul of the financial-regulatory system. Pressure for a review also reflects the opinion that ongoing criminal probes aren't sufficient. Attorney General Eric Holder took office this week promising to hold people accountable for misconduct that contributed to the financial meltdown. But Justice Department officials say their probes are aimed at uncovering fraud, not at explaining regulatory or policy failures. Rep. John B. Larson of Connecticut, chairman of the House Democratic Caucus, said that during a recent meeting with hundreds of his Middletown, Conn., constituents, there was a clamor for a rigorous review of what happened. "We really do need a comprehensive look at this, not just a hodge-podge approach based on the issue du jour," said Mr. Larson, the fourth-ranking Democrat in the House. He is proposing that Congress name a panel of economists, academics and business people whose findings could inform the congressional debate on revamping regulation.

Congress, consumed in past months with legislation first to bail out banks and now to jump-start the economy, has spent little time looking back at the forces that led to the collapse of several banks and Wall Street firms and which threatened to dry up credit throughout the economy. Neither Democrat leaders nor the White House has endorsed the idea. "The top priority is to actually do something that directly addresses the economic crisis rather than study it for a few months and issue a report," said a spokesman for Senate Majority Leader Harry Reid. But demand for such an investigation is growing among rank-and-file members of Congress. A bill similar to that proposed by Mr. Larson has been offered by Rep. Darrell Issa, the ranking Republican on the House Government Reform and Oversight committee. In the Senate, a bipartisan bill was introduced two weeks ago.

"I think it's very important we look very specifically at the underlying causes of this crisis and then design a regulatory structure that deals with those causes," said John Sununu, a former Republican senator and a member of a panel appointed by Congress to monitor the Treasury's use of $700 billion in bailout funds. Members of that panel say they don't have the staff, subpoena power or the mandate for such an investigation. A House oversight panel last fall did some investigation, demanding documents and summoning finance executives in a half-dozen hearings. But the panel is reorganizing now that its longtime chairman, Henry Waxman, has moved on to head the Energy and Commerce Committee.

Meanwhile, at the Justice Department, Mr. Holder faces the challenge of how to tackle white-collar crime amid public pressure to prosecute those blamed for the crisis. While Mr. Holder has pledged an aggressive push on financial-fraud cases, the cases so far are focusing largely on individuals, rather than companies. That partly reflects fears that indicting companies for wrongdoing could cause them to collapse, putting innocent employees out of work at a time of economic distress. William Black, former savings and loan regulator, said companies involved in malfeasance should still be targeted. "There are excuses not to prosecute corporations: People are scared to death of the pushback, politically, if you cause a company to fail. As long as we have that kind of attitude, you will have no deterrence," said Mr. Black, now a law professor at University of Missouri at Kansas City.

Auto suppliers request $20.5 billion in U.S. aid
U.S. auto parts suppliers are asking for up to $20.5 billion in federal aid to survive the worst industry downturn in decades, the Automotive News reported on Wednesday. Suppliers are asking for $10 billion in direct loans from the U.S. Treasury Department, the magazine said, citing Neil De Koker, president of the Original Equipment Suppliers Association. The suppliers made the request on February 1 through the Motor & Equipment Manufacturers Association, according to the report. The Original Equipment Suppliers Association did not immediately return a call for comment, and a spokeswoman for the Motor & Equipment Manufacturers Association was not immediately available for comment.

Automotive News reported that the suppliers had asked for another $10.5 billion that would flow through the Detroit automakers so that suppliers could be paid in 10 days for delivered parts instead of the traditional 45 days. Production cuts from all three U.S. automakers and steep declines in sales have are pressuring parts suppliers. Analysts have said they expect many small auto parts suppliers to fail. The federal government already has pledged $17.4 billion to automakers General Motors Corp and Chrysler LLC.

Cities' grim outlook on economy
More than eight in ten cities are in financial trouble, up from 64% six months ago, according to a survey released Wednesday. The recession is straining cities' ability to meet their financial needs, according to the National League of Cities. Some 84% of cities reported facing fiscal difficulties, the highest percentage since the group starting doing surveys in 1985. The nation's cities are counting on billions of dollars from the economic stimulus package now being debated in the Senate. Mayors gathered in Washington, D.C., to meet with White House advisers and House Speaker Nancy Pelosi, D-Calif., on Wednesday to urge Congress to pass the recovery bill. The mayors are eager to get funding for transportation and infrastructure projects that will put their residents to work. While most of those meeting Wednesday have budget deficits, they are not looking for federal money to close those gaps.

"If we're going to invest to stimulate our economy, we need to invest in our cities," said Miami Mayor Manny Diaz. "Cities are ready to go. This money comes in and goes right back out to create jobs." The mayors have put together a "Ready to Go" report that details 18,750 local infrastructure projects in 779 cities that can be started as soon as funding is received. The projects, which represent an investment of $150 billion, would create 1.6 million jobs in 2009 and 2010 and range from creating bridge guardrails in Bessemer, Ala., to renovating elementary schools in Norfolk, Va. The economic stimulus package sets aside billions of dollars for highway construction, transit improvements, school modernization and community development block grants. Things will remain tough in 2009. Some 92% of the cities surveyed expected to have trouble meeting their city needs during this year. To cope, they are implementing hiring freezes and layoffs, delaying capital expenditures and instituting service cuts.

Some 69% have instituted hiring freezes or layoffs, while 42% are delaying or canceling infrastructure projects. Another 22% have instituted across the board cuts. Cities are seeing their tax revenues decline as property values drop, shopping slows and unemployment rises. On top of that, nearly one in two city finance officers report difficulties in access to credit and/or bond financing. To bring in more revenue, they are adding to raising fees. Nearly half are increasing charges for services, while 28% are increasing the number of fees. Fewer are raising taxes. Some 14% have increased property taxes, while 6% have hiked sales taxes. "Cities are responding as best they can," said Donald Borut, the league's executive director. "Their citizens have increasing needs for services just at the same time that revenues are declining." City finances tend to lag the overall economy by 12 to 24 months, the league said. The weakening economic conditions will be felt by cities through 2009 and likely through most of 2010, the league said.

Worker Anger Sees Gordon Brown Facing Winter of Discontent
Spreading strikes, reduced workweeks and tens of thousands of job cuts are throwing British Prime Minister Gordon Brown back to the 1970s.
With 16 months before he has to call an election, Brown is facing the toughest test of a Labour premier since James Callaghan’s so-called Winter of Discontent in 1979, after which the party was cast out of office for almost two decades. "They’ve sold us down the river," said Charles Hilton, 61, an electrician from Hull in northern England who was out on strike yesterday with local oil-refinery workers. "We’re going to see civil unrest in this country. It’s already started. It will grow unless things are sorted."

Public anger is mounting as the unemployment roll approaches 2 million for the first time since 1997 and companies reduce working hours to cut costs. Contract workers at oil refineries, power plants and a nuclear facility this week staged walkouts as Britain dug out of its worst winter storm in 18 years. Brown’s confrontation with his party’s base comes as he commits hundreds of billions of pounds to rescue banks and fends off calls to nationalize lenders amid the global credit crunch. Support for Labour is crumbling in former industrial regions of northern England and Scotland. Hilton, who calls himself a traditional Labour voter, said he’ll back David Cameron’s opposition Conservative Party in the next election. Brown, 57, "is in danger of losing heartland support," said Steven Fielding, director of the Centre for British Politics at Nottingham University in central England. "Without their support, he’s got no chance."

Thirty years ago, a series of strikes allowed the Conservatives to portray the country as out of control. Margaret Thatcher took over in May 1979 after lashing Labour with the slogan "Labour Isn’t Working." To be sure, Brown, who took office in 2007, faces a landscape transformed by Thatcher and a decade of growth under his Labour predecessor, Tony Blair. In the 1970s, an average 12.9 million man-days were lost to strikes each year. In 2007, it was 1 million, according to the Office for National Statistics. In contrast to the confrontations of the 1970s, unions are now working with employers to save jobs by cutting hours. Bentley Motors Ltd., a unit of Volkswagen AG, has scrapped its night shift as sales declined. At JC Bamford Excavators Ltd., a closely held U.K. manufacturer of construction equipment that employs 4,800 people in Britain, 332 jobs were saved as it trimmed production to four days a week, company spokesman John Kavanagh said.

That doesn’t make things any easier for Brown. The National Institute of Economic and Social Research said yesterday gross domestic product will drop 2.7 percent in 2009. The Conservatives have a 12 percentage-point lead, a Jan. 31 poll in the Guardian showed. The newspaper didn’t say how many people were surveyed or provide a margin of error. The gap had narrowed to 1 point in December after Brown announced his bank- rescue proposals. His troubles mounted last week when about 600 workers at Total SA’s Lindsey refinery in the north walked out Jan. 28 to protest the hiring of an Italian contractor with its own staff to do construction work. Unions claimed the imported workers were undercutting their wages and the strikers only returned today after promises that 102 jobs would be given to Britons. The strikes spread across the country. About 800 people at the nearby Humber refinery and the Immingham power facility owned by ConocoPhillips and 500 contractors at two Scottish Power Ltd. coal-fired plants also put down their tools.

Ian Smith, 55, a welder who was on strike at the Lindsey refinery and counts himself as a Conservative supporter, said workers are more determined than they were in the 1970s. "Brown is definitely out of touch, he should be leaping to our defense," said Smith, wrapped up from the cold in the parking lot opposite the Total refinery where strikers had gathered. "I’ve been working as a welder since I was 15 years old and I have never seen this sort of solidarity." The government says the protests are groundless and that the companies involved are acting legally. In response, the strikers carried placards bearing Brown’s 2007 promise to create "British jobs for British workers." Brown says he was referring to providing training opportunities, not restrictions for foreign workers. Matthew Worley, a history lecturer at Reading University and author of a book on the Labour Party in the 1920s and 30s, sees a parallel to Depression-era politics.

"There was a big fear of unemployment; a lot of people saw themselves as skilled people yet they were being undermined not by better labor, but by cheaper labor," Worley said. "And you see again the idea that what happens somewhere else today will happen to us next." Also reminiscent of the 1930s is the growing presence of a nationalist party. The anti-immigrant British National Party has had representatives at all of the demonstrations at refineries and plants, said Simon Darby, its deputy leader. Back at the Lindsey refinery, strikers said they have nothing against foreign workers, they are just trying to protect their livelihoods as the economy worsens. Paul Gale, 58, a rigger at the plant, said the protest had nothing to do with xenophobia. "It’s not to do with racism, it’s to do with the rise of unemployment in this country," Gale said. "We feel let down by the government."

UK house prices show first rise in months
House prices recorded their first rise in 11 months, Halifax said yesterday, suggesting the market may be showing the first signs of stabilizing. Britain's biggest mortgage lender said average prices unexpectedly rose in January by 1.9 per cent to £163,966. But economists warned home owners not to read too much into a single month's figures as changes in house prices tend to be volatile. A better indicator of the underlying trend is the 5.1 per cent drop in house prices in the past three months compared to the previous three months, they said. Seema Shah, a property economist at Capital Economics, said: "January's rise in the Halifax house price index is not a sign that the housing market is recovering. Not only are monthly house price indices volatile, but with the economy on course for the deepest recession in decades and unemployment soaring, house prices have much further to fall." And Martin Ellis, Halifax's housing economist, said: "There are some very early signs that market activity may be stabilising, albeit at quite a low level. Nonetheless, continuing pressures on incomes, rising unemployment and the negative impact of the dislocation of the financial markets on the availability of mortgage finance are expected to mean that 2009 will be a difficult year for the housing market."

But in a further glimmer of hope for the housing market, the National Association of Estate Agents reported that proportion of first-time buyers looking to put a foot on the property ladder more than doubled in the first two weeks of 2009. It said 22.5 per cent of registered buyers were first-time buyers, up from 10 per cent in December and 14.5 per cent in January 2008. Peter Bolton-King said: "These statistics are evidence that consumer confidence is slowly being restored but I must counter this by saying that unless lenders respond to consumer demand, then any green shoots will wither and die on the branch." Figures from the Bank of England showed that the number of outstanding mortgages approved to individuals was £896.8 billion at the end of December, down by £42.9 billion from the end of September. It comes as the Bank said the number of mortgages approved in November for those buying a new home slumped to a record low of just 27,000. The bank also revealed that net mortgage lending was limited to just £740 million in November. While up from £477 million in October, it was still one of the lowest levels on record and less than one-tenth of the £8 billion level seen in November 2007.

Middle England is caught in debt trap as house prices fall and job hopes dim
Increasing numbers of middle-class families are being caught in the debt trap as house prices continue to fall and job prospects diminish, a new report suggests. Plunging property prices have cut off access to additional funds for many homeowners who relied on remortgaging their property to pay off credit-card debts and personal loans, forcing many into financial difficulties as they struggle to meet their repayments. The proportion of homeowners being forced to declare insolvency has doubled since 2007 and is set to rise further, figures from Grant Thornton, the accounting firm, show. Homeowners accounted for nearly 70 per cent of applications for individual voluntary arrangements (IVAs) received by Grant Thornton in 2008's second half, up from 58 per cent in its first half and about 35 per cent in 2007's first half.

Official figures released tomorrow are expected to show that the number of insolvencies jumped again in the final three months of last year after an 8.8 per cent rise in the third quarter. IVAs, which are open to those with unsecured debts of £15,000 or more, give families or individuals a greater chance of staying in their home as part of the arrangement, whereas those who go bankrupt are usually forced to sell their property. Mark Allen, head of IVAs for Grant Thornton, said that the "middle-class" IVA was becoming increasingly common. "The credit crunch has proved a double-whammy for homeowners who have been consolidating their debts by topping up their mortgages," he said. "The practice is now more difficult and those with high levels of personal debt either have insufficient equity or negative equity and no chance of raising additional money."

Michael Saunders, a Citigroup economist, said that about 1.2 million homeowners had been plunged into negative equity after a 20 per cent dive in house prices since the market peaked in autumn 2007. He expects this figure to double to three million by early next year as house prices continue to slide. There are about 12 million homeowners in the UK. Chris Tapp, of Credit Action, a debt charity, said: "Middle England has been hit really hard by the recession, particularly by higher mortgage costs at the start of last year and falling house prices. "The trend may soften slightly as more borrowers benefit from recent interest-rate cuts, but the spectre of unemployment is likely to more than offset this, and so unfortunately in 2009 we expect the number of IVAs to continue to rise."

The news came as a leading debt charity said that the impact of further rate cuts for those in debt is likely to be muted. The Consumer Credit Counselling Service said that homeowners who have little or no equity in their home are likely to see little if any reduction in their mortgage rate and are prevented from remortgaging to a cheaper deal because they do not have a hefty deposit. A further surge in repossessions of homes is expected as increasing numbers of homeowners fall behind with mortgage repayments. Repossessions are estimated to have leapt more than 70 per cent to 45,000 last year and are expected to hit 75,000 this year. Nearly 170,000 homeowners were three or more months in arrears between July and September last year, figures from the Council of Mortgage Lenders show.

RBS warned over exorbitant bonuses
Business Secretary Lord Mandelson today told the Royal Bank of Scotland it risked alienating the public by offering "exorbitant" bonuses to its traders and senior bankers. The troubled bank - which is being propped up with £20 billion of public money - was preparing to make payouts to thousands of the firm's senior staff, according to The Times newspaper. Lord Mandelson said: "What I would say is please be mindful about how this looks and what public opinion will be."

Lord Mandelson said the bank must strike a balancing act between keeping its best staff while considering public opinion. He added: "Obviously you have to work in a market where you have got to recruit the best people, keep the best people in place and motivate them. "But they have also got to consider how it looks and how it seems when those mistakes and losses have been made." He said some of the reported bonuses could be perceived as "exorbitant" by people around the country.

RBS's investment banking division paid £1.83 billion in salary during 2007 - mostly in bonuses - and while payments for last year would be smaller, they would be made, according to The Times. After being asked about the proposed bonuses, a spokeswoman for the bank said: "No decisions have been taken yet." Lord Mandelson was speaking at the launch of a £3 billion cash injection involving RBS for small businesses. The NatWest parent said it would make the funding available to small and medium-sized enterprises (SMEs) through 12 regional funds.

RBS, now 68% owned by the Government, is due to report its 2008 results in three weeks, when it will confirm a loss of several billion pounds. Lord Mandelson added: "I think for all the banks pay and bonuses is a really sensitive subject and people are going to have sharp opinions one way or another. "Of course you have got to do all you can to recruit the best people and keep the best people in place - there is a huge job on our plates. "On the other hand the banks have got to be sensitive to public opinion and I think they need to think about what is the best way forward."

Downing Street said today that the Government would only support any bonus payments to RBS staff through UK Financial Investments if they were consistent with the taxpayers' interest. "As the majority shareholder in RBS, UK Financial Investments is in discussions about possible approaches to remuneration," a Number 10 spokesman said. "Any proposal would only be supported by UK FI if it is consistent with the taxpayers' interest."

The spokesman also voiced strong support for US President Barack Obama's 500,000 dollar (£346,450) cap on payments to American bank executives who participated in the US bale-out. "We have already set out our views on executive pay and we strongly agree with President Obama that we need a new approach to rewards for senior executives," the spokesman said.

Swiss Re Gets $2.6 Billion From Buffett After Loss
Swiss Reinsurance Co., the world’s second-biggest reinsurer, turned to Warren Buffett’s Berkshire Hathaway Inc. for 3 billion Swiss francs ($2.6 billion) to shore up capital depleted by record losses. Swiss Re fell as much as 27 percent, the most since at least 1990, after posting a 2008 loss of about 1 billion francs and announcing plans to cut the dividend. The Zurich-based company also will disband its financial-markets unit and may seek more capital. Berkshire’s investment may give it a stake of more than 20 percent as Swiss Re struggles to keep its credit rating. "Both the magnitude of the additional writedowns and the resulting need to raise capital are outside of our expectations," Standard & Poor’s Ratings Services said today in a statement following Swiss Re’s announcement. The ratings company said it may lower Swiss Re’s long-term credit ratings from AA-. "We currently do not expect to lower the ratings by more than one notch."

Chief Executive Officer Jacques Aigrain is abandoning his attempt to increase profit by trading securities such as credit- default swaps. The foray led to writedowns of 6 billion francs last year, depleted shareholder equity and took two-thirds off the insurer’s market value in 2008. Swiss Re became the world’s biggest reinsurer after buying GE Insurance Solutions in 2005 and now has only one third the market value of Munich Re. While the 2008 results are disappointing, Buffett’s decision to increase his investment in Swiss Re "is a testament to the strength of our franchise," Aigrain said. "The contacts were extremely recent, and the solutions were developed in an extremely short time-frame, leading to a signing of our agreement during the night," Aigrain told reporters today.

Swiss Re was down 26 percent at 22.44 francs as of 12:30 p.m. in Zurich, valuing the company at 7.9 billion francs. The stock has plunged 55 percent in 2009, making it the worst performer in the 35-member Bloomberg Europe 500 Insurance Index as investors anticipated the writedowns. Credit-default swaps on Swiss Re fell 59.5 basis points to 468, the lowest since Nov. 17, according to CMA Datavision prices at 11:45 a.m. in London. A decline in credit-default swaps, financial instruments used to hedge against losses or speculate on a company’s creditworthiness, indicates an improvement in the perception of credit quality. While Swiss Re said it has more capital than regulators require, it needed at least 1.5 billion francs on Dec. 31 to keep its credit rating. The company plans to get approval to sell as much as 2 billion francs of additional stock, it said.

Swiss Re’s shareholder equity was less than 20 billion francs as of Dec. 31, down from almost 32 billion francs at the end of 2007, it said. Still, the company said it doesn’t expect to need government assistance, Aigrain said. "We have never been contacted, nor contacted the national bank or government," he told reporters. Berkshire Hathaway’s latest investment comes in the form of convertible notes paying a 12 percent coupon, Swiss Re said. Berkshire can convert them to Swiss Re shares after three years at a price of 25 francs apiece or continue to receive "perpetual" payments of 12 percent a year. "The terms of the Berkshire capital raising indicate a cautious view on the potential for other risks in the balance sheet," said Tim Dawson, an analyst at Helvea in Geneva who has a "neutral" rating on the company. "Clearly there were market concerns."

Buffett bought 3 percent of Swiss Re in January 2008, ceding 20 percent of its property and casualty business to Berkshire Hathaway over five years to free up capital. "I’m very impressed by Jacques Aigrain and his management team," Buffett, 78, said in the statement. General Electric Co., Goldman Sachs Group Inc. and Harley- Davidson Inc. are among the companies that have gone to Buffett in the last year after the global credit crunch made it more difficult to get funding. The Omaha, Nebraska-based billionaire also is the largest shareholder in American Express Co. Buffett’s investment vehicle bought $5 billion of preferred stock in Goldman Sachs in September. It pays a 10 percent divided and can be converted to common stock at any time at a 10 percent premium. The company also received warrants to buy $5 billion of common stock at any time until 2013. Buffett gets 15 percent interest on $300 million of notes sold by Harley Davidson.

Swiss Re has been plagued by losses on contracts sold to protect clients against declines in fixed-income securities after the worst U.S. housing market since the Great Depression sparked a global credit crunch. The company is now disbanding its financial markets unit as part of the "derisking" strategy, Swiss Re said. Remaining assets will be split between the asset-management division and a new "legacy" unit to hold the company’s credit-default swaps, which provide guarantees against corporate bond defaults. Aigrain ramped up Swiss Re’s sales and trading of securities in 2006 and 2007, when the reinsurance business was trying to cope with stagnant premiums. While the strategy boosted profit in 2006, the credit crunch and rising bond defaults forced record writedowns in 2008. About a third of Swiss Re’s markdowns last year were tied to credit default swaps, it said. "Our business is reinsurance risk in all and any form, but only reinsurance risk," Aigrain said on the conference call. "All activities not strictly related to that are in runoff."

The financial markets unit cut 40 jobs worldwide between the end of 2007 and Oct. 31, 2008, Swiss Re said. It also eliminated 80 technology jobs. "You can never rule out job cuts," Chief Financial Officer George Quinn said on the conference call. "The firm has significant scope to improve its cost base." Swiss Re is reviewing its target of 14 percent return on equity, Quinn said. The revisions will "take account of improvements in reinsurance and expected lower returns on capital," he said. The Swiss Exchange said yesterday it is probing what Swiss Re told analysts, investors and the press about its risks. Chairman Peter Forstmoser said in July 2008 he didn’t expect additional writedowns at Swiss Re, according to Handelszeitung.

Australia facing debt-driven depression
The world is facing a "full-blown depression" and Australia needs to drastically rethink its attitude to debt if it is to climb out of its current economic trap, says leading economist Steve Keen. Dr Keen, an Associate Professor from the University of Western Sydney, says Australia is facing years of weak economic growth because of high debt levels. "The scale of what we're in for is driven by the level of private debt that's been built up in a speculative bubble that in Australia has been going up for 45 years and in America for 65," he said. "We've got to the stage where we literally have twice as much debt as we had prior to the Great Depression compared to incomes. That's what caused the Great Depression and that's what's going to cause this one."
Dr Keen predicts Australia will have double-digit unemployment figures by 2010,

"It's certainly approaching ... in terms of unemployment levels of 7, 8, 9 per cent. Certainly I think double-digit unemployment next year and getting worse and staying there for some substantial period," he said. Dr Keen says Australia's economic outlook will not improve until the Government "shifts direction" and recognises the current financial crisis was caused by far too much money being loaned irresponsibly. "The problem is you've got to cancel that debt either by abolishing it formally or by trying to refloat the economy and cause inflation and reduce the debt burden, but we're still at least a year or two away before that realisation will sink in," he said. "Japan is still in a recession/depression 18 years after it fell in a similar trap to us, with far too much debt being used for speculative lending, particularly on real estate and shares in Tokyo.

"Until we realise the debt should never have been issued in the first place and then go about resetting, and frankly a biblical way, the old classical way of abolishing debt, we're going to be stuck in this trap. "For Australia, even so, we've lost our manufacturing base, we've got to rebuild manufacturing to have the income that will generate sustainable demand in the future." Dr Keen says today's expected 100 basis point cut in interest rates will go some way to reducing Australia's debt burden but nowhere near enough. "It will certainly help a bit but, if you put it in perspective, each 1 per cent cut in rates reduces the interest payment burden on our economy by roughly $20 billion. That's because our debt level is currently about $2 trillion," he said. "Now when people start to try and reduce their debt level, even if they try and knock it off by 5 per cent per annum that involves a $100 billion drop in their spending.

"Now the Government is talking nothing of that scale to try to counteract in the other direction, so inevitably this is going to push us down." Dr Keen says he would not be surprised to see the Reserve Bank of Australia slash rates by 125 basis points. "In terms of the rate cut, it's like guessing which cockroach is going to cross the line first in Changi, how the Reserve is going to react," he said. "But my punt is that they're going to go for slightly more than 1 per cent and slightly less than the New Zealanders went for, so I'd say 1.25 is feasible." Dr Keen says on a small minority will come out of the economic crisis better off. "There aren't going to be too many winners out of it except those that are cashed-up - cashed up with a secure job," he said.

Australia: No One Gets Out of This Financial Crisis Alive
Australia’s budget surplus is history. That’s the upshot of the government’s plan to spend A$42 billion ($26.5 billion) on grants and infrastructure to keep the economy out of recession. It will produce a A$22.5 billion shortfall, the first since fiscal 2001-02. Given the state of the global economy, that’s more than appropriate. The implications of this go beyond Australia’s 21 million people. It’s as clear an indication as any that no economy, small or large, will escape the global crisis unscathed. Or, as Bill Evans, Westpac Banking Corp.’s chief economist, quips: "No one gets out of this one alive." Australia had been a prime candidate for avoiding the worst of the credit meltdown that began in the U.S. Six months ago, many saw Japan as a haven. Not quite. Asia’s biggest economy is now in a deepening recession. With Europe also sliding, Australia had stood out as an oasis of stability.

Forget that idea. Australia’s economy has probably followed the U.S., U.K., Japan and Europe into its first recession since 1991. Gross domestic product rose a scant 0.1 percent in the third quarter, the weakest pace in eight years. The fourth quarter was an ugly one around the globe. Australia is facing greater obstacles than officials in Sydney and Canberra acknowledge. It would have been better to issue a more specific warning about recession risks. Can Australia really avoid negative growth? It’s doubtful. Relative to the most developed economies and Asia’s developing ones, Australia looks pretty good. Even after yesterday’s 100 basis-point interest-rate cut, Australia’s central bank has 3.25 percentage points worth of ammunition. That compares with essentially zero in the U.S. and Japan. Australia also has some fiscal room for maneuver after years of surpluses. That makes Australia look like an adult in a room full of irresponsible adolescents, according to former Prime Minister Paul Keating.

"The G-7 is made up of debtor countries, countries like the U.S., Britain, France, Italy -- these are all borrowers," Keating told Australian Broadcasting Corp.’s Lateline program this week. "There are no surplus countries in that." Keating’s argument is that an overhaul of the global financial framework is needed to stem this crisis. Neither the Group of Seven nations nor the International Monetary Fund is up to the challenge as the U.S. deals with a debacle that might last six or seven years, he said. "Get rid of the old G-7," Keating said. "We’ve got to get rid of the old IMF. We’ve got to bring the surplus countries into the political framework." It’s a valid point. Why should it be left to the U.S. and other nations that created the system now crashing around us to concoct a new one? Steps taken to date in the U.S. seem aimed more at saving the old financial arrangements than presenting something new or different. Australia has done a solid job of managing its economy, so it should have a bigger say in a new financial world.

"Things are going to be very difficult," says John Edwards, chief economist at HSBC Bank Australia Ltd. in Sydney. "But we also need to be conscious that our circumstances are very different. We limped through the fourth quarter last year, whereas other countries were in the most desperate circumstances." Those circumstances will become less unique as global growth cascades lower. A slump in world demand is cutting profits at companies, boosting unemployment and eroding household sentiment. Hence the central bank’s five interest-rate reductions since September and the government’s sudden willingness to go into deficit. There can be no doubt that the full weight of the credit crunch has arrived on Australia’s doorstep. There are some complications worth considering. With short- term rates at a 45-year low, Australia is "getting to the point where monetary policy can do no more," Evans says.

Household debt has almost doubled since 1999 to about 160 percent of incomes, a higher ratio than in the U.S. and U.K., AMP Capital Investors said in November. And the specter of a Chinese recession bodes poorly for Australian trade, which makes up one- fifth of the economy. Australia was too fast to rely on a developing nation for growth and may pay a price this year. The China angle is clearly weighing on Prime Minister Kevin Rudd’s mind. On Feb. 2, Rudd said China’s slowdown and the global crisis would punch a A$115 billion hole in government revenue over the next four years. If China bears are right and growth in the third-biggest economy slows to less than 5 percent, Australia is in for an even more difficult 2009. The question is whether Australia is truly less vulnerable to global events than its peers or experiencing the crisis in slow motion. The answer is anyone’s guess, though one senses an odd optimism in Sydney as global trends darken and head this way. Australia won’t get out of this one without some bruises.

Each to their own
Strikes against the use of foreign workers in the UK; French carmakers told to buy domestic components and not close factories in France; a minister in Spain urging consumers to buy Spanish: protectionism in Europe appears to be rising by the day. Warnings over the attendant risks are also on the increase. “Protectionism would be a sure-fire way of turning recession into depression,” says Lord Mandelson, the UK business secretary. The historical parallel is all too clear. Eight decades ago the US, followed by governments in Europe and elsewhere, launched a wave of protectionist measures that heightened tensions and aggravated the economic crisis. Could it be about to happen again? Europe’s willingness to confront the US over the Buy American provisions in its economic stimulus package suggest the times have changed somewhat. Barack Obama, US president, even received a lecture from France when its trade minister said the plan to use only US steel was “a very bad signal” and “clearly protectionist”.

Governments across Europe do indeed face a juggling act as they try to protect their citizens from the full force of the economic downturn. Yet so far, the signs are that trade protectionism is unlikely to make a comeback, due largely to World Trade Organisation and European Union rules that limit the scope for tariffs to be raised. Instead, other forms of economic nationalism are coming to the fore, from demands to reserve “British jobs for British workers” to invocations to patriotic consumption. Most insidious of all, say some observers, is the threat of what has been dubbed financial protectionism. Banks are withdrawing to their home markets as government rescues force them to think more along national lines. That, in turn, is adding to the political pressure for bail-outs of other industries. “There is a very strong law of unintended consequences taking place after all the bank bail-outs. We will see more and more activist government policies that distinguish economic activities according to the nationality of the actors. It should be a big concern to everybody,” says Nicolas Véron of the Bruegel think-tank in Brussels.

The consequences of such protectionism are likely to test Europe economically, politically and legally. “Unravelling the integration of the banking market will cause a lot of damage. It will throw things back 10 years, but not 30. But the rest of the protectionist measures we see will be marginal, providing the economy doesn’t get totally out of hand,” says Daniel Gros of the Centre for European Policy Studies. Protectionist pressures in Europe have emerged as a serious concern at the European Central Bank and Jean-Claude Trichet, its president, could step up warnings about the potential impact on growth after its interest rate-setting meeting on Thursday. Mr Trichet last month described “the emergence and intensification of protectionist pressures” as one of the main downside risks facing the eurozone economy. Some of the financial integration that EU policymakers laboured to promote during the good times has already been rolled back by measures such as the splitting up along national lines of Fortis, the Belgo-Dutch finance group. Bank bail-outs, meanwhile, have generated pressures in other jurisdictions, with France offering to inject €21bn ($27bn, £19bn) into the country’s six largest banks to ensure they were not at a competitive disadvantage to UK or US rivals.

Arguably more worrying is the withdrawal of many banks from lending outside their home markets. Rüdiger Günther, the finance director of Arcandor, a German retailer, says: “You see a famous UK bank that is saying to its bankers: ‘Don’t invest in Germany any more.’ It is creating some very difficult situations for some companies.” Instead, such banks are under growing pressure from government to increase lending at home. Richard Lambert, director-general of the Confederation of British Industry, says international banks used to account for up to 40 per cent of lending in the UK. “They have now gone, and that’s why we have a funding problem and a credit crunch,” he adds.

But some question whether what we are seeing is really financial protectionism or just banks sensibly cutting back their borrowing. “I think it is both. We are certainly seeing the financial crisis used by some as a cover for financial protectionism,” says Razeen Sally, co-director of the European Centre for International Political Economy. Ironically, some of the strongest warnings against financial protectionism have come from Gordon Brown, the UK prime minister, who oversaw the banking bail-out and has sought to persuade UK banks to lend more at home. “The greatest risk after the events of the last few months is a retreat into what I would call financial isolationism,” he told the FT recently.

Nowhere is the threat of financial protectionism felt more than in eastern and southern Europe, where there are growing fears that banks could repatriate capital, particularly from the ex-communist emerging markets. George Provopoulos, the Greek central bank governor, says he has warned Greek banks against using funds from a €28bn government support package to support their Balkan subsidiaries. Groups should “lend on the basis of availability of local funding, taking into careful consideration local economic conditions”, he adds. Elsewhere in the continent’s east and south, financial supervisors are monitoring the local subsidiaries of international banks to ensure that they do not transfer funds abroad. Their concerns are not baseless. Serbia’s central bank injected €600m in extra liquidity into the local foreign currency market in December only to see foreign-owned banks siphon the money back into their head offices in Austria, Italy, Greece and elsewhere. Mr Véron sees threats to integration: “For me, the big risk is of economic misery in central and eastern Europe. If you see a big divergence between that region and western Europe then it will be a big blow to the EU.”

The political test is likely to be felt on both the national and the European level. Financial protectionism is leading to national support for other industries as European governments realise they have to be seen to help not just the banks. Even the free-market Nordics are getting in on the act, with Sweden putting together a rescue package for its car industry. Like many of the rescues across Europe, it is focused on national priorities, with loans and guarantees providing the money is spent in Sweden. Similarly in France, the government is making carmakers promise not to transfer jobs or production outside France in return for €6bn of support. Nicolas Sarkozy, France’s president, believes judicious intervention by the state during a severe recession will help foster support for globalisation and forestall a downward protectionist spiral. That explains actions such as launching its own sovereign wealth fund, taking a stake in a shipyard and providing guarantees to customers of Airbus, the aircraft maker. Italy’s approach of “managed globalisation” takes a similar tack and explains how it kept Alitalia, the lossmaking airline, in Italian hands but let Libya acquire 10 per cent of Eni, the state-controlled oil company. Germany, as the world’s largest exporter, has tried to avoid being seen as protectionist even if some of its moves to prop up banks and proposals for supporting industry have flirted with the idea.

Spain has taken a more unusual approach, with Miguel Sebastian, minister of industry, trade and tourism, urging Spaniards to buy more local products. “Right now there is something that our citizens can do for their country: bet on Spain, bet on our products, our industry and our services – bet, in short, on ourselves,” he said last month, in a call echoed in the UK by Sir Alan Sugar, the businessman. At a European level, there is concern over what all this means for countries’ commitment to the single market. “It is threatening in terms of the coherence of the single market. It is creeping protectionism and it is dangerous as fiscal stimulus programmes are likely to make things worse. But I don’t see it as system-wrecking,” says Mr Sally. All this comes at a time when the European Commission, coming to the end of its term, is having difficulties standing up to the demands of national governments. “The Commission will fight a losing battle,” says Mr Gros.

Eastern European countries are nervously watching western bail-outs, particularly for the car industry, which is important for Poland, the Czech Republic, Slovakia and Hungary. Gordon Bajnai, the Hungarian economics minister, warned at a recent business conference of a “very serious” risk of countries abandoning market-oriented policies. He forecast that the next year would see different countries adopting different paths, with some falling prey to “populist wishful thinking” and others sticking to market-oriented policies. Such a backlash is also likely over immigrant labour. Experts see the UK protests as only the start and the EU is reviewing the rules that oversee the free movement of workers. “All these countries that had a big influx of foreign workers on the back of a building boom – so Spain, Ireland, the UK – will see, now that the bubble has burst, that those foreign workers are no longer welcome,” says Mr Gros. Another potential problem is over currencies outside the euro, especially the pound. Peter Sutherland, the former head of the World Trade Organisation and current chairman of BP, suggests that the steep devaluation of sterling can be seen as a protectionist act: “It is a big challenge for the internal market when you get a precipitous drop in a currency in a single trading area.”

The third test is legal and reflects how all the rescue packages for banks and companies have to be vetted under the EU’s competition rules for state aid. Mr Sutherland, who is also a former European competition commissioner, says: “I would be worried that governments pushed by vested interests seek to bend the rules in terms of state aid. We must not jettison the law due to populist sentiment.” Concessions have been made to the EU’s state aid regime over the past six months – making it easier for governments to channel funds to banks and businesses – but the rule-book has not been abandoned. Officials have also insisted that these rule relaxations should not persist once economies pick up. Countries are at least paying lip-service to that, with France vowing to act within EU rules even if it attacks Brussels for being too inflexible. Ultimately, however, the question of how serious the rising protectionism in Europe will become may well depend on actions elsewhere in the world, particularly in the US. Mr Véron describes the “US leadership effect as huge”. If it follows protectionist policies such as the Buy American provisions then “it can be seen in Europe as a licence to do the same,” he adds.

Numb and numb-er: Is trillion the new billion?
In that strange intersection of economics and politics, there is a new fashion: Trillion is the new billion. A billion is a thousand million, and a trillion is a thousand billion. To provide some perspective on just how big a trillion dollars is, think about it like this: A trillion dollars is the number 1 followed by 12 zeroes. Or you can think of it this way: One trillion $1 bills stacked one on top of the other would reach nearly 68,000 miles (about 109,400 kilometers) into the sky, or about a third of the way from the Earth to the moon.

Some Republicans are hardly over the moon about the growing size of the proposed economic stimulus plan. Senate Republican leader Mitch McConnell said this week that Americans have become desensitized to just how much money that is. "To put a trillion dollars in context, if you spend a million dollars every day since Jesus was born, you still wouldn't have spent a trillion," McConnell said. CNN checked McConnell's numbers with noted Temple University math professor and author John Allen Paulos. "A million dollars a day for 2,000 years is only three-quarters of a trillion dollars. It's a big number no matter how you slice it," Paulos said.

Here's another way to look at it. "A million seconds is about 11,5 days. A billion seconds is about 32 years, and a trillion seconds is 32,000 years," Paulos said. "People tend to lump them together, perhaps because they rhyme, but if you think of it in terms of a jail sentence, do you want to go to jail for 11.5 days or 32 years or maybe 32,000 years? So, they're vastly different, and people generally don't really have a real visceral grasp of the differences among them." Everyone is tossing around the words million, billion and trillion. With the national debt now topping $10 trillion, following a $700 billion bank rescue and proposed $800 billion-plus stimulus package, have we become numb to the numbers?

" 'Number' itself can be parsed 'number' or 'numb-er.' And maybe in this case, the latter is a better pronunciation," Paulos said. "I think to some extent, we have ... evolved in a context where such big numbers were completely foreign." Perhaps a better way to get a "grasp of the numbers," Paulos said, is to use them to describe the budgets of government programs. "The [Environmental Protection Agency's], for example, annual budget is about $7.5 billion. So, a trillion dollars would fund the EPA in present dollars for 130 years -- more than a century. Or the National Science Foundation or National Cancer Institute have budgets of $5 [billion] or $6 billion. You could fund those for almost 200 years," he said.

Times have certainly changed. Back in 1993, President Bill Clinton wanted a $30 billion jobs and investment package. He didn't get it. Just last year, President George W. Bush signed an emergency economic stimulus of $168 billion --- a tally that seems paltry compared with the amount requested today. The economic problem, many say, demands huge spending. Former Federal Reserve Chairman Paul Volcker has called it "the mother of all crises." The numbers are big, but so is the United States economy. The gross domestic product, which measures the total value of goods and services produced in a country, is about $14 trillion. Still, many wonder if we can afford it.

"So we do have a big economy that may not be as vibrant as it was, but it is still a powerful economic engine. Knock on wood, we'll see what happens," said Paulos. Last week, the House passed an $819 billion emergency stimulus, and the Senate version is approaching $900 billion. In the end, whatever lawmakers hash out probably won't reach $1 trillion. But consider this: If all of the financial market interventions, loans, guarantees, bailouts and rescues total more than $7 trillion.

Arrests made in what could be biggest investment scam in Japanese history
It is a bizarre tale of a bedding company, a megalomaniac businessman and a make-believe currency. And today it culminated in a series of arrests in what could be the biggest investment scam in Japanese history. Kazutsugi Nami, the chairman of L&G, which stands for Ladies & Gentlemen, a bankrupt bedding supplier, and 21 other executives are suspected of defrauding hundreds of thousands of investors of at least $1.4bn (£1bn) over the past eight years. In return for their money, Nami promised investors cash returns of 36% a year plus their original investment. Those who paid at least ¥100,000 (£770) also received an equivalent sum in Enten - or Paradise Yen - a virtual currency Nami claimed would become legal tender in a post-recession era in which he would be "world famous".

Until that day arrived, members of the scheme were invited to part with their Enten, which was wired to their mobile phones, on anything from vegetables and clothes to jewellery and immune system-boosting futons, on L&G's online bazaar. Moments before his arrest in front of the TV cameras, Nami was unrepentant as he held court over breakfast in a restaurant near his Tokyo office. "Please shoot the face of the biggest conman in history," he said, sipping from a glass of beer at 5.30am. "Time will tell if I'm a conman or a swindler. I'm leading 50,000 people. Can they charge a company this big with fraud?" Shortly before being led away by police, he was asked if he felt sorry for his cheated investors. "No. I have put my life at stake," he said. "Why do I have to apologise? I'm the poorest victim. Nobody lost more than I did. You should be aware that high returns come with a high risk."

In happier times the 75-year-old businessman enjoyed cult-like status among investors; this week the media is calling him Japan's version of the alleged US fraudster Bernard Madoff. Nami and his associates are accused of pocketing at least ¥126bn from 37,000 investors, although some reports put the sum as high as ¥226bn. That would make the alleged scam the biggest since Toyota Shoji conned thousands of investors out of ¥202.5bn to buy gold bars in the late 1980s. The L&G scheme began to fall apart in early 2007 when it started paying dividends in Enten instead of cash, and then refused to allow investors to cancel their membership. By September that year the company had sacked most of its staff and filed for bankruptcy with debts estimated at ¥42.3bn. According to media accounts, Nami has a penchant for improbable business schemes and self-aggrandizement.

In 2005 he set up a research institute called the Akari Laboratory whose mission, it said, was to revitalize local economies. As vice president of a car parts dealer in the 1970s, he drew 250,000 people into a pyramid scheme involving exhaust pipes, and set up another company that sold stones that, it falsely claimed, could purify tap water. According to lawyers representing hundreds of investors, one woman lost ¥100m to the scam. In an interview with the Jiji Press, a 70-year-old woman who lost ¥2m said of her involvement with L&G: "I had fun and a lively life ... I was stupid. But it's my fault as I was greedy."

In a rambling, barely coherent blogpost last week, Nami claimed he was being persecuted by the police. "They told me they would arrest me without fanfare, so why are all the newspaper saying I'll be arrested within the week? If that happens, it means the police lied to me," he wrote. "Even if I say I didn't do anything wrong, they'll just use circumstantial evidence to find me guilty." Likening himself to the powerful 16th century warlord Oda Nobunaga, Nami predicted countries around the world would adopt the Enten in a matter of years. "I will start shining and become world famous. I will certainly move the world."

Guess What? Cheney's Still a Dick!
It was an eerie foreshadowing of things to come perhaps. Former vice president Dick Cheney, at President Barack Obama's inauguration, looking an awful lot like a cross between the Grim Reaper and Mr. Potter, the sinister banker from the classic film It's a Wonderful Life. Well, he hasn't disappointed. The world's most infamous dick proved yet again that he never tires of scaring the bajesus out of Americans. The human Orange-Alert gravely warned that because of Obama's policies there's a "high probability" that the United States faces "a 9/11-type event where the terrorists are armed with something much more dangerous than an airline ticket and a box cutter - a nuclear weapon or a biological agent of some kind" targeting a major city. Boo!

Cheney warned that the proposed closing of the Guantanamo prison, along with greater restrictions and limitations on interrogation tactics, puts the nation at severe risk of terrorist attack: "The United States needs to be not so much loved as it needs to be respected. Sometimes, that requires us to take actions that generate controversy. I'm not at all sure that that's what the Obama administration believes."

It seems Darth Vader believes the Obama team's simply gonna sit arm-in-arm with our enemies and sing Kumbaya while America's targeted for a horrific attack: "When we get people who are more concerned about reading the rights to an Al Qaeda terrorist than they are with protecting the United States against people who are absolutely committed to do anything they can to kill Americans, then I worry."

Let it be known for the record that the biggest terror attack in U.S. history occurred on Cheney and Bush's watch, and that acts of terrorism around the world increased significantly while those two fear mongers were at the controls. Lastly, that seven years passed since the 9-11 attacks is not necessarily something Americans should rest assured by. Keep in mind it was eight years between the 1993 and 2001 World Trade Center attacks. Maybe it's still a bit too early for Cheney's self-aggrandizing. Cheney defended the harsh tactics he and his former boss employed in the war on terror. Protecting America is "a tough, mean, dirty, nasty business," Cheney asserted. "These are evil people. And we're not going to win this fight by turning the other cheek." And he ought to know. He's the toughest, meanest, dirtiest, nastiest most evil person to ever hit Washington.

Stopping Survivor Guilt
As a senior manager in an era of massive layoffs, it's your job to stave off survivor guilt before it lowers the morale and productivity of remaining employees.The subject of survivor guilt—the despair employees feel when co-workers fall victim to downsizing— comes up during every recession, but 2009 promises a uniquely virulent strain of the affliction. "The layoffs are just starting," says Shafiq Lokhandwala, chief executive officer of NuView Systems, a maker of human resources software. "I think we have only seen about 25% of what's coming." According to the Bureau of Labor Statistics, in December alone the U.S. lost 524,000 jobs, for a total of 11.1 million unemployed Americans. With the exceptions of health care and education, the recession has hurt every type of industry. In addition to the impact of their sheer volume, the current layoffs present less hope and more complications for folks cut loose by their employers. "In the past layoffs, there was the feeling laid-off people would get similar jobs to the ones they lost," says Sheryl Spanier, a Manhattan career coach. "Today whole types of jobs are going to be eliminated." So if you lived through the 1987 stock market disaster and 2001 dot-com bust, that was just a warm-up exercise in the survivor guilt arena.

Members of the Baby Boom generation on your staff may be particularly vulnerable to the anxieties surrounding layoffs. "Younger people are more comfortable with the idea of people moving around and changing jobs a lot," says Roy Cohen, a career counselor and executive coach based in New York City. "But baby boomers have the idea that you're supposed to stay in the same place." So why do surviving employees, with their newly enlarged workloads, spend their time feeling guilty about layoffs they had no hand in perpetrating? "It's not a rational reaction, but it's only human to think 'Why them? Why not me?' " says Spanier. "They feel sympathetic toward the people who lost their jobs and worry about their well-being, their economic situation." Wikipedia defines survivor guilt in general as "a mental condition that occurs when a person perceives himself or herself to have done wrong by surviving a traumatic event." As an adjunct to the sympathy they feel for laid-off co-workers, employees go through three self-centered stages, says Jason Zickerman, president of the Alternative Board, an executive consulting firm based in Denver.

1. Whew! I made the cut.
2. I have to do all this work.
3. They don't appreciate me.

"You'll see changes in personality. Outgoing people now being silent. Work isn't as good, and absenteeism rises," he advised. "There's anxiety and pressure, the beginning of depression in the case of some. For employees, layoffs are not in their control, and whenever someone else is holding the puppet strings, it's stressful." Soon, the business itself can feel the effects of survivor's guilt on its bottom line. Fortunately, business consultants say, survivor's guilt is highly responsive to treatment if senior management acts early and often. Organizations that offer terminated workers continuing assistance in the form of outplacement counseling, job referrals, and assistance with Cobra red tape are already off to a good start. "If you take care of the laid off, they won't be complaining about stuff to people who still work there," Lokhandwala says. "The No. 1 way to prevent guilt is communication," says Zickerman. Some corporations make the mistake of not letting their good deeds for laid-off workers be known. Whether via blog, e-mail, or memo, HR should publicize its continuing assistance, so surviving employees know their old friends are still cared about.

Senior managers and their reports also should keep communicating informally with their old work buddies after the lay-off. Spanier suggests starting immediately with an e-mail simply saying, "I'm thinking about you." "One reason survivors don't call laid-off friends is that they feel bad they have no job to offer them," Spanier said. "It's O.K. to call just to say hello. People who are laid off tell me the most hurtful thing is how their old co-workers didn't say a thing to them about it afterward." In situations where it's not necessarily good-bye forever as far as the jobs once held by laid-off employees, you can mitigate survivor guilt. "Make it clear to your reports you care about these people and you will hire them back if you can," Zickerman says. And when laid-off workers land jobs with other employers, you should spread the good news, according to Suzanne Bates, author of Motivate Like a CEO: Communicate Your Strategic Vision and Inspire People to Act! (January, McGraw-Hill, 2009)(BusinessWeek is a unit of The McGraw-Hill Companies (MGH). "Not necessarily by e-mail, but in conversation you might bring it up," she says.

As much as people genuinely may care about their ex-colleagues and feel great empathy for them, don't be surprised if you see some anger surface, too. "Resentment is the other side of guilt," points out Spanier. What starts as sympathy for others turns into disgruntlement over employees' own harried work lives, a perceived lack of appreciation, and fear they'll end up tossed aside forever as their former colleagues were. Of course, regardless of what happens to their former colleagues, employees are likely to end up with a bigger workload and fewer people to help them with it. "My work has increased by one to two hours a day," says Jackie Carter (who asked that his real name not be used), a vice-president at a construction firm that recently had layoffs "We ran a tight group—conference calls and exchange of ideas and sending e-mails saying, 'Hey, have you ever dealt with this?' And now those people aren't here." If the layoffs result in more work for those remaining, senior management needs to acknowledge it right up front. "Seek out survivors and ask them, 'What can we take off your plate?' " Zickerman says. "Let them remove work that isn't top priority or critical."

Some corporations hold employee focus groups and informal "town meetings" to let people express their doubts and concerns about their new responsibilities and the direction of the business. "You want to engage the survivors," says Bates. "Walk around, talk to people, listen to them, and ask them to come up with solutions. If anything, you want to over-communicate with your employees in times like these." You also need to convey that you, as a senior executive, found the lay-offs painful to make and that you're in the trenches yourself, contending with a bigger work load just as your reports are. This is no time for prima donna behavior from senior managers. "Tell people, 'Yes, we've been through a difficult time and we may have more, so here's what I'm going to do—I'm giving up my bonus,' " says Spanier. By making such efforts, you'll ultimately convey to surviving employees that the layoffs were part of a master plan that will realign resources to make the business stronger, and you need their efforts to succeed at it. "It's critically important that management or owners understand this is no time to not show leadership," Zickerman says. "If they don't understand that their leadership is needed, maybe they're the ones who should have been laid off."

Finally, with so much bad news swirling about in the recession economy, you should make use of social media to let your people know about any good news regarding your company, says Bates. Winning a small contract, receiving praise or good publicity from trade publications, or increasing sales in any sector of your business should be made public knowledge to everyone at your organization. "Even just getting to the next level of a prospective deal is something to celebrate," says Zickerman. "Send out an e-mail thanking employees for helping the business get to this point." That way you'll get employees thinking about the here and now instead of the good old days with their now-departed colleagues. "Tell them you're preparing for growth," says Bates, "and you're counting on them to get there."

Predicting 60% Decline for Manhattan Property; TARP for Trump?
A very effective guide for long term home values is actually median home price to income. Houses actually don’t gain in value over the long haul. Urban density and usage shifts can dramatically change the value of real-estate, but outside of that real estate is just a flat asset. Here is an academic paper showing the value of prime real estate in Amsterdam over a 400 year period, it's a break even proposition. A home is only worth what people can afford to pay for it. If you can squeeze more people onto a given area of land and create more homes then you can maximize the value of the land such as in Manhattan over the last few decades.

Over time the utility function of real estate is scarcity relative to the available income of those seeking the homes. I mention this relative to an article posted in June 2007 which anticipated a 20% nationwide property decline using this metric. Historically relative to growth and all things being equal, homes are worth about 3 times the median income of a household. Please note this includes adjustments for cultural shifts in 2 income households over time. Economists see real estate more as a positional scarce good. Housing capital with a life of 50 years for example has a replacement rate of 2% year. If a housing market starts growing beyond that rate and the increased population something fishy is going on. Securitization magic anyone?

The U.S. grand daddy real estate market is the metropolitan New York area which has been relatively immune to decline. The excuses for why New York real estate is special equates to the number of residents in the city. Unfortunately the quantity isn't equitable to quality. Because people want to believe they are special they parrot messages they have heard to that effect. Such ethnocentric or industry centric myopia is the nectar for those wonderful bubbles that pop up every 10-20 years. According to the BEA, the MSA metropolitan statistical area known as "New York-Northern New Jersey-Long Island, NY-NJ-PA" has an average per capita income of $53,428 as of 2007. If one assumes 1.8 wage earners per household we end up with a household income of $96,170. Using the crude 3:1 rule of thumb, housing should be priced at $288,510. The reality according to Realtor for Q3 2008 is at $452,500 per home. Reversion to the mean indicates a 36% decline is reasonable to expect.

Sadly the decline in financial jobs which ballooned to a ridiculous percentage of S&P 500 earnings means a drop of %50 from peak to trough is not unimaginable in the New York MSA. The same figures if plotted for Manhattan are even worse as the distortions of increasing density and influx of high flying finance jobs which was a positive force for property values is now going to go in reverse with a multiplier effect. Predicting peak to trough declines of 60% does not seem egregious, especially when one considers the shift in desirability for certain neighborhoods as services diminish and vacancies increase. The tide of hip, cool or gentrified that crested after the Starbucks arrived on the corner is now ebbing rapidly. The city has a 23% poverty rate. Grande Latte soy mochaccino anyone?

Although dangerous, to put a number and a date to an opinion, my guess is a 60% peak to trough decline in 12-16 months for Manhattan residential property. As things decline rapidly in the metro area. We are all living faster now, still not sure what the rush is about, but we if we keep those Blackberry's and i-phones humming we feel connected and thus must be winning. The only caveat I put on this prediction is please keep it in nominal terms as the printing presses are humming at the fed. Oh and if you liked paying for bankers bonuses you’ll love the catch phrase "TARP for Trump!"

S&P Slashes Thousands of RMBS Ratings
There’s a saying about death by a thousand paper cuts, and that’s clearly been taking place for most of the private mortgage-backed securities market over the course of the past twelve months. On Monday, Standard & Poor’s Ratings Services lowered the boom — again — on thousands of Alt-A and subprime RMBS, moving them all to a ‘D’ rating, as well as cutting hundreds of formerly AAA-rated securities multiple notches from their previous perch atop the ratings heap. The agency also began cutting ratings on prime deals, as well. The rating agency said it had lowered its ratings to ‘D’ on 1,078 classes of mortgage pass-through certificates from 650 U.S. Alt-A RMBS transactions from various issuers, while also placing 2,111 ratings from 143 of the affected transactions on CreditWatch with negative implications.

Approximately 81.82 percent of the ratings on the 1,078 defaulted classes were lowered from the ‘CCC’ or ‘CC’ rating categories, and approximately 98.98 percent of the ratings were lowered from a speculative-grade rating, S&P said in a statement. Outside of Alt-A, S&P also hammered its ratings on subprime securities, dropping 737 classes of mortgage pass-through certificates from 516 U.S. subprime issuances to a ‘D’ rating as well. Roughly 97 percent of the ratings on the 737 defaulted classes were lowered from the ‘CCC’ or ‘CC’ rating categories, S&P said. That was just for starters, apparently. S&P also lowered its ratings to ‘D’ on 117 classes from 94 different prime jumbo deals, 89 classes from 68 U.S. closed-end second-lien deals, as well as 73 classes from from 48 U.S. scratch-and-dent deals.

Despite all of the cuts to securities that were already considered speculative grade, it’s perhaps more telling that S&P also took the hatchet to AAA-rated classes — an example of a few Wells Fargo deals involving 32 classes is here, but there are others. These downgrades weren’t to a ‘D’ level, of course, but a fall from the AAA perch is likely to be comparatively far more painful for an investor. And for those really, really geeked out by this sort of stuff: some of the 2007 deals being downgraded here now have cumulative loss projections exceeding 20 percent. For the ENTIRE issue. That’s nearly unheard of outside of the subprime space. The bottom line here is this: for all of the pain felt in this area already, plenty of banks large and small are still generally carrying securities on their books at a level justifiable against current ratings levels, which is partly why trades in this space have been frozen. Buyers know the securities aren’t worth the AAA rating they’ve got, and frankly so too do any would-be sellers, but nobody can sell a security still at AAA at C-level prices and then justify the hit that so doing would have on the rest of their books.

With many of these AAA high-fliers falling officially off their perch, expect two things to take place: one, further mark-downs to portfolio holdings among those institutions that hold a good amount of private-party Alt-A and other RMBS. Second, you might actually see some trades materialize as the number of AAA downgrades pick up and would-be sellers can no longer justify their ridiculous marks. There is a reason there is so much discussion — heated discussion — around a bad bank right now. Financial institutions are quite aware these downgrades are coming in waves, and are trying to figure out how to get out from underneath the second wave of soon-to-be bad debt as fast as they possibly can. Because there is still plenty of bad debt hiding on the books at most companies that were players in the private party mortgage market; and even before this round of downgrades, most of the TARP capital that has been doled out was done to offset the first round of write-downs. I tend to think Oppenheimer’s Meredith Whitney hit the nail on the head in suggesting last month that banks are going to need far more capital than what’s been committed to weather this mess.

A Nation of Mortgage Slaves
A recent op-ed in the WSJ echoed many of my same sentiments around the current housing market with respect to foreclosures, and the need to encourage sustainable financial situations as opposed to homeownership at all costs:
(From the WSJ): "Preventing foreclosures has become a top priority of politicians, economists and regulators. In fact, allowing foreclosures to happen has merit as a free-market solution to the crisis. If the intent is to help homeowners, then foreclosure is undoubtedly the best solution. Household balance sheets have been destroyed by taking on too much debt via the purchase of inflated assets. With so little savings, a household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet. Credit may be damaged, but homeowners can rebuild it. And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford.

If the intent is to help the credit markets, then foreclosure is undoubtedly the best solution. The securitization model has proven to be flawed. Slicing loans horizontally into tranches created asset classes that have conflicting interests in a dissolution strategy of the same underlying asset. The holder of a senior tranche would be agreeable to modification, since his position is secured; the holder of a junior tranche would essentially be wiped out. The lower tranches are worthless but are still legally an encumbrance, hindering any type of sale or work-out effort. Consider a property that sold for $500,000 at the peak, financed with a $400,000 first lien and an $80,000 second lien, which is now worth $300,000. The second lien is worthless, but the lien will remain as a cloud which complicates any modification effort by the senior lien holder. There is no incentive for the junior lien holder to voluntarily agree to a modification. Foreclosure would be the best and finite action. It wipes the slate clean."

Understandably there are a lot of emotions wrapped up in home ownership both at the political and every day citizen level, which makes it difficult to sell the idea that some people are better off letting go of their homes and becoming renters. However I think these people need to ask themselves: do they want people to own homes for the sake of owning them, or do they want people to be in healthy and sustainable financial situations? Nothing comes out of helping someone stay in a home they can't afford, especially when all you're doing is both delaying the inevitable and magnifying the financial impact of the inevitable foreclosure. At the end of the day it's not "renter vs. homeowner" that defines a stable financial situation, it's income vs. liabilities and savings. Better to be a renter that saves 10% of his/her income, than a homeowner who can't make ends meet. Activists, politicians, and various other policy makers will be able to create more long-term home owners by helping people get into healthy financial situations, than they will by focusing their energies on stopping foreclosures.

In Merrill Deal, U.S. Played Hardball
Kenneth Lewis is getting a hard lesson in the new balance of power between Washington and Wall Street. The Bank of America Corp. chairman and chief executive had agreed to buy brokerage giant Merrill Lynch & Co. in September, possibly saving it from collapse. But by early December, Merrill's losses were spiraling out of control. Internal calculations showed Merrill had a horrifying pretax loss of $13.3 billion for the previous two months, and December was looking even worse. Mr. Lewis had had enough. On Wednesday, Dec. 17, he flew to Washington, ready to declare that he was through with Merrill, people close to the executive say. "I need you to know how bad the picture looks," Mr. Lewis told then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, according to accounts of the conversation by people inside the government. Mr. Lewis said Bank of America had a legal basis to abandon the deal.

Messrs. Paulson and Bernanke forcefully urged Mr. Lewis not to walk away, praising the bank's earlier cooperation -- but warning that abandoning the deal would be a death sentence for Merrill. They said the move also could undercut confidence in Bank of America, both in the markets and among government officials. Despite the blunt talk, Bank of America executives interpreted the comments as a signal that the government was willing to work out a compromise. Two days later, in a follow-up conference call, federal officials struck a harder tone. Mr. Bernanke said Bank of America had no justification for ditching Merrill, according to people who heard the remarks. A Federal Reserve official warned that if Mr. Lewis did so and needed more government money down the road, Bank of America could expect regulators to think hard about their confidence in management. Mr. Lewis was told that the government would consider ousting executives and directors, people close to the bank say.

The threats left no doubt: The federal government saw itself as firmly in charge of U.S. financial institutions propped up since October by infusions of taxpayer-funded capital. During the four weeks that followed Mr. Lewis's conference call, federal officials and Bank of America hashed out a deal to salvage the Merrill takeover. The government agreed to provide $20 billion in additional aid for the Charlotte, N.C., bank, and to provide protection against losses on $118 billion in troubled assets. The money is coming at a price. Six months into the great bailout of U.S. finance, Washington's rescue attempt has helped shore up the system. But that emergency effort, planned on the fly, has taken the government on a risky journey deep into the heart of American capitalism. Bureaucrats are calling the shots behind the scenes at some of the nation's largest enterprises. Critics of the bailout program say its rules are opaque and its execution ad hoc, leading to a lingering lack of confidence in the financial system. Some lawmakers are scrambling to steer funds to favored lenders.

Federal officials have said little publicly about their oversight of the institutions that received capital from the Troubled Asset Relief Program. Initially, the government seemed reluctant to use the ownership stakes it got in banks ranging from J.P. Morgan Chase & Co. to Saigon National Bank as leverage over bank executives. But the tough negotiations with Bank of America, along with recent moves by federal officials related to executive compensation and other issues, suggest that the government's attitude toward the troubled banking industry has changed, as financial markets have deteriorated further and political ire has risen.
When Citigroup Inc. took $25 billion in TARP funds in October, the executive-pay section of its pact with Treasury was just two sentences long and vaguely worded. A second rescue, for $20 billion in December, limits Citigroup's executive bonus pool for 2008 and 2009, requiring that a majority of 2008 bonuses be paid on a deferred basis.

Tough talk by President Barack Obama and other officials about bonuses and perks is making bank executives uncomfortable. Last week, under pressure from Treasury officials, Citigroup canceled its order for a corporate jet. The bank recently has explored its options for modifying the terms of a nearly $400 million marketing deal with the New York Mets. On Wednesday, Mr. Obama unveiled a series of executive pay curbs, including a strict limit on executive salaries for companies that receive an "exceptional" level of government assistance. The story of Merrill Lynch's troubles and subsequent rescue negotiations, pieced together from interviews with people who participated in the process, suggests that the government's extension of control over the U.S. banking system is evolving on an makeshift basis. Despite agreeing to pump $25 billion into Bank of America and Merrill in October, the government had no idea the securities firm was hemorrhaging money until it was too late to avoid a second bailout.

By the end of November, two months into the fourth quarter, Merrill had accumulated $13.34 billion in pretax quarterly losses, according to an internal document reviewed by The Wall Street Journal. Some Bank of America executives expressed concern about proceeding with the takeover, people close to the bank say. On the advice of their lawyers, the bank decided to go ahead with Dec. 5 shareholder votes on the deal. Shareholders of both Merrill and Bank of America gave their approval. In September, when the deal was announced, it was viewed as a rare piece of good news during a week when much of Wall Street appeared to be teetering on the brink. On the same weekend that Lehman Brothers Holdings Inc. prepared to seek bankruptcy protection, the 61-year-old Mr. Lewis found a motivated seller in John Thain, Merrill's chairman and chief executive. Mr. Thain was worried that Merrill might follow Lehman down the drain.

After less than 48 hours of due diligence, Bank of America struck an agreement to buy the battered securities firm for $50 billion in stock, or $29 a share. (The value of the deal has since declined along with Bank of America's share price.) "I look forward to a great partnership with Merrill Lynch," Mr. Lewis said, toasting the deal with a glass of champagne. A month later, Mr. Lewis was at the Treasury Department along with eight other chief executives of large U.S. financial institutions, summoned there by Mr. Paulson. The Treasury secretary wanted the executives to accept a round of government capital totaling $125 billion as a way of shoring up confidence in the banking system. Mr. Paulson explained that saying no wasn't an option, according to a person who attended the meeting. "We are going to do this," Mr. Lewis replied, urging the other CEOs to call their boards if they needed approval. After persuading the nine financial institutions to take taxpayer money, the government, at first, refrained from flexing its muscles.

Bank of America executives remained confident about the deal. Doubts began to creep in shortly before Thanksgiving. With more than a month to go until the end of the fourth quarter, the pretax quarterly losses at Merrill were approaching $9 billion, according to people familiar with the figures. By month's end, the figure had exceeded $13 billion, or $9.29 billion after taxes. Most of the losses were coming from the securities firm's sales and trading department. But business was even suffering in Merrill's lucrative wealth-management unit, which saw its revenue drop to $797 million in December, from $1.08 billion in October. Still, not all the losses, which included expected write-downs on assets such as Merrill's investment in rental-car company Hertz Global Holdings Inc., should have come as a surprise to Bank of America. In meetings with Merrill managers, Mr. Thain acknowledged big losses, but said they weren't any worse than those of the firm's Wall Street rivals, noting that November had been a horrible month for everyone, say people who heard his remarks.

At Bank of America, executives debated whether Merrill's losses were so severe that the bank could walk away from the deal, citing the "material adverse effect" clause in its merger agreement. Merger agreements typically specify certain "adverse" conditions that give an acquirer the right to abandon a deal. But lawyers from inside and outside the bank concluded that the losses likely were in line with other firms, and recommended that Bank of America move forward with the purchase, according to people familiar with the discussions. The deliberations continued up until a few days before shareholders of Merrill and Bank of America were scheduled to vote, one of these people says. Senior Bank of America executives had "mixed emotions," this person says, but "everyone wanted to see the deal go through." On Dec. 5, the deal was approved at separate shareholder meetings in Charlotte and New York. Nothing was said about Merrill's problems. "It puts us in a completely different league," Mr. Lewis said about the deal's completion.

On Dec. 8, Merrill's board gathered in Manhattan for its last meeting. Mr. Thain said the firm faced continuing losses, but they weren't unusual, given upheaval in the markets, directors recall. The next day, Bank of America Chief Financial Officer Joe Price gave a detailed presentation to the bank's directors about its financial situation and Merrill's fourth-quarter woes, according to a person familiar with the meeting. Within a few days, Merrill's quarterly net losses had swelled to about $14 billion. People close to Bank of America say the losses ticked higher due to trading losses, as well as further asset write-downs. The trading losses stem largely from legacy positions Merrill Lynch took in previous years. Mr. Lewis told Bank of America directors in a conference call that the bank might abandon the acquisition, which was supposed to close in two weeks. In mid-December, Edward Herlihy, a partner at law firm Wachtell, Lipton, Rosen & Katz who had helped set the merger talks in motion, reached out to Ken Wilson, a former Goldman Sachs Group banker and a top deputy of Mr. Paulson. By then, Merrill's losses had reached almost $21 billion on a pretax basis, roughly equivalent to about $15 billion in net losses, and some of Bank of America's lawyers felt there was sufficient grounds to invoke the legal clause to torpedo the deal.

Mr. Herlihy, a longtime adviser to Bank of America, expressed concern to Mr. Wilson about the size of the losses, according to people familiar with the matter. Mr. Wilson was stunned by the news. Get Mr. Lewis to call Mr. Paulson, Mr. Wilson said, according to people familiar with the conversation. At the meeting the next day, Dec. 17, Messrs. Paulson and Bernanke asked Mr. Lewis to give government officials time to think through their options, according to people with knowledge of the discussions. Mr. Lewis agreed and returned to Charlotte. People close to Mr. Thain say he was unaware of Bank of America's concerns. On Dec. 19, he hopped a plane to Vail, Colo., with his family, people familiar with the matter said. That same day, about 20 people in Charlotte and Washington dialed into a conference call that included Mr. Lewis, other Bank of America executives, Messrs. Paulson and Bernanke, and other Treasury and Fed officials. Mr. Bernanke told Mr. Lewis that Fed staff members had concluded there was no way for the bank to invoke the material-adverse-change clause in the takeover agreement that would allow it to abandon the deal.

Government officials also warned Mr. Lewis that withdrawing from the deal would frazzle the markets, spark a flurry of lawsuits against Bank of America and tarnish the bank for years. A senior Fed official ratcheted up the pressure, telling Mr. Lewis that any future requests for government assistance would cause officials to consider taking a heavier hand in Bank of America's operations. The government's tone wasn't hostile. But the implication was obvious, people close to Bank of America say. As the bank's primary regulator, the Fed can force out executives if the agency concludes they are behaving irresponsibly. Mr. Lewis responded matter-of-factly that that government should do what it had to do, and Bank of America would do the same. Asked what he needed to move ahead with the deal, Mr. Lewis responded that Bank of America wanted additional capital and protection against future losses on Merrill's assets -- something akin to the protection J.P. Morgan Chase & Co. received from the government when it agreed to take over Bear Stearns Cos. last March. Messrs. Paulson and Bernanke agreed to keep talking.

Over the next several days, government officials sifted through the books at Bank of America and Merrill, wrangling over which toxic assets to guarantee and how to value them, people close to the bank say. It became increasingly clear that Bank of America's balance sheet also was packed with assets that faced bruising write-downs, these people say. Later, talks slowed because bank executives were concerned about the 8% interest rate the government wanted on new preferred shares it would take in Bank of America, these people say. Executives also complained that executive-compensation restrictions were being forced on it, despite government assurances that officials didn't want to punish the bank. The bank wound up agreeing to limit total compensation, including bonuses, to a fraction of the amounts awarded in recent years. On Jan. 16, Bank of America announced the new bailout. At the same time, it disclosed Merrill's fourth-quarter net loss of $15.31 billion. Shareholders were floored. Bank of America reported a net quarterly loss of $1.79 billion. Asked by an analyst about his decision to go ahead with the Merrill deal, Mr. Lewis responded: "We did think we were doing the right thing for the country."


scandia said...

What breaks my heart is that everybody I know is still in the mania( shoot the bringer of bad news) phase so I'd only stir hostility if I sent it to any them.Sigh...

Anonymous said...

Ilargi, someone should state the obvious: it doesn't really matter whether or not various monetary actions, fiscal spending programs, banking bailouts, etc do or do not take place.

The simple fact of the matter is that they are dwarfed, by orders of magnitude, by both the size & scale of the economy and private debt. (Steve Keen at has a great article on this subject.)

The entire FIRE based system is going down and there's nothing anyone can do about it. It was a flawed model from the start, and needed ever increasing amounts of external support to keep the game going.

So, now onto the next topic of discussion: where do we go from here? I differ with your assessment regarding sustainability, in that I have great faith in humanity's ability to innovate itself out of tight corners. (After all we've been doing it for some 5m years or so.)

Thoughts and/or ideas?

Anonymous said...

The FT on Protectionism: "Eight decades ago the US, followed by governments in Europe and elsewhere, launched a wave of protectionist measures that heightened tensions". Your readers must be aware that at the time The Empire of Evil had this thing called Imperial Privilege and that the USA and indeed the other European countries and Japan could not freely trade with the Empire.
In fact the argument that Britain caused the 30's Depression by its economic policy is very convincing, as the USA, much as you like to believe otherwise, was a relatively minor player.
I find -as a Spaniard- very funny how the English when they write about that time conveniently forget what they were and conveniently shift the blame to the other side of the Atlantic. Not by lying, of course. An Englishman NEVER tells a lie: he's too clever for that, he just never says the whole truth.
Things had gotten so at the time that a war between the USA and the Empire of Evil was more and more likely. Or have you never stopped to think why the USA was increasing its naval power, obviously against the first Navy in the world?
Luckily Hitler came to power and history took a different road, for the better I believe.

In any case, in the here and now, I'm in favor of American Protectionism for the good and sufficient reason that if you people sink, we Europeans are sure to follow.

Phil said...

Anonymous said:

"I have great faith in humanity's ability to innovate itself out of tight corners. (After all we've been doing it for some 5m years or so.)"

That's the fallacy of logical induction. Taleb completely demolishes it in "The Black Swan".

Anonymous said...


Great thinking ... I, too, have recently wondered about Obama's contradictions, or is it his talking from both sides of his mouth? I skeptically voted for him, thought better to have him piloting the fast crash than McInsane/Palin. I suspect he might be a good actor, another dishonest, bought-off politician. Just because at times he knows how to articulate our dreams does not mean that he's well meaning or genuine. So many people are giving Obama the benefit of the doubt. Sadly, many amongst us will be deeply disappointed.

"What you do stands above you and shouts so loudly, I can't hear what you are saying." ~ RALPH WALDO EMERSON

Anonymous said...


The proposal would allow a tax credit of 10 percent of the value of new or existing residences, up to a $15,000 limit. Current law provides for a $7,500 tax break but only for first-time homebuyers. Isakson's office said the proposal would cost the government an estimated $19 billion.

19 billion? Really, well there are aroung 50 million home owners in the US and lets say that the median value is 150k, which it is actually higher than that but it gets us to the 15k allowance, well then the cost of that "tax credit" is $750 billion, not 19 billion, where in the hell did they come up with that absurd number.

Looks like another episode of Republicans pulling shit out of thin air...

Anonymous said...

Some items:
Corruption And The Global Financial Crisis
Democracy Incorporated: Managed Democracy and the Specter of Inverted Totalitarianism (Hardcover)
by Sheldon Wolin See also:
Book Review
Chalmers Johnson on Our 'Managed Democracy'
How offshore capitalism ate our economies - and itself
Convoluted networks of tax havens became a model for the abstract financial wizadry that led to the current crisis
He mentioned the D-word
Gordon Brown didn't want to use the word "depression" today. It's his great unconscious fear

Anonymous said...

Something else to read:
A Feast of Vultures
February 4, 2009

On Corruption

Anonymous said...

In Canada we are facing a $64B government deficit over the next two years, yet the bank of Canada persists in holding over $80B in USD currency reserves.

Now, in the face of increasing US protectionism, the bank of Canada should dump is USD reserve. Deficit AND protectionism solved.

Anonymous said...

Anonymous @ 10:16: Thanks for the link to Steve Keen's blog - was this article what you were referring to - The Roving Cavaliers of Credit? One of the best descriptions of how money is created that I've read.

I would be curious to hear what I&S think of it?

Anonymous said...

@Phil - "That's the fallacy of logical induction. Taleb completely demolishes it in "The Black Swan"."

Actually, 'Black Swan' events are a two-way street. Many, such as yourself, wish to only see catastrophe. But Taleb himself regards many scientific discoveries as both 'undirected & unpredicted'.

Perhaps I should have refrained from referring to 5m years of history as a guide, and simply stated that probability suggests a solution will be forthcoming.

Doomsters seem to hate the idea of humanity. If there were a series of medical, health, energy and food production breakthroughs (say, driven by genetic engineering) that enabled the world's population to reach 10b, and everyone to live to 100 y.o., how would you feel?

Careful about your answer, because odds on that's what's gonna happen within the next 50 years.

Anonymous said...

@ Daka - yes, Cavaliers of Credit.

Karl Denninger covers many of the same concepts in a less technical manner, but his conclusions are identical.

Simply put, Fed monetary actions are merely the proverbial tail wagging the 'total credit economy' dog.

They cannot, and will not, influence the debt-deflation cycle that Ilargi and other financial blogs are writing about.

So, while it is interesting to follow current events, the foregone conclusion leads one to begin focusing on what happens next.

This is the new area for analysis & speculation. Personally, I think the respective governments are going to throw cash at solutions that promise to engage 10s of millions of unemployed in some sort of productive capacity.

And I don't mean digging/filling holes.

Anonymous said...

Anonymous @ 5:02
SARCASM ALERT: Your 10bn population/100 year lifespan remark just begs for a pithy answer so be prepared to get a few. I will just point out that with 100 year life spans the population will go way past 10bn, especially if reproductive age keeps pace with longevity. And yes, I hate humanity.

Anonymous said...

Regarding the need to keep Wall Street salaries high to keep "talent:" It is well known, or should be, that for every Derek Jeeter or Tom Cruise there are hundreds of others who could do the same job as well or better and for much less. The idea that in a nation of 300 million people these financial incompetents are the only "talent" available would be hilarious if it weren't so pathetic. I offer Harry Markopolos as just one example. In view of his testimony, I am having a hard time imagining that any of these sociopaths even claims to be "talented" let alone worth any salary at all.

I believe this situation is why the saying "Don't let the door hit you on the way out" was invented.

Anonymous said...

The pace of bad news has quickened noticeably. Ordinary people now ask me upon first meeting where I think the economy is going. This is strange since, other than wearing glasses, I have no credentials in this area. I tell them we all have to get used to making less money.

Anecdotally, the situation worsens and the circle tightens. In our town, a fancy restaurant that was packed as recently as last summer was empty last night except for an auctioneer and his staff. Layoffs are no longer items in the news but personal accounts. Everyone wonders, "Am I next?"

We have been renting for the past year in a metropolitan area. We are leaving the current place however to take advantage of lowering rents and to get back into the countryside. We will save more than $1000 a month by moving. St. Stoneleigh has said that if one is able to remain mobile through the downturn, one can take advantage of cost savings where they exist. I agree.

For a long time I read sites like TOD and TAE and never thought I would really see the worst of the predictions come true. I am starting to believe that I will, and sooner than expected.

KLR said...

I&S - obligatory kudos, I listen (with Text to Speech Software) to your excellent commentary and links most every day, along with Drumbeat. Following up with listening to, say, Larry Kudlow's brainless jib jab makes for interesting contrast, like going from a professional presentation of Shakespeare to watching WWF.

Concerning comments of late, I'm sitting on the fence in re: whether financial upheaval or energy shortages - or climate change - or environmental degradation - or - will grind things to a painful halt first. Regards the first two anyway, it's firing squad vs. guillotine. Mix in the rest and you've got a prisoner with terminal cancer...

Oil demand can rebound quite smartly, US VMT made its usual rebound in November, although YOY it's been declining since '06. I think we at least have a price shock still in store, before the supermarkets all go under - and I'm curious about what kind of concerted emergency action would be implemented in that case. People have been known to tenaciously maintain systems in the face of the utmost adversaries, after all; consider the German engineers who persistently rebuilt bridges the RAF was blowing up every night. Or the starving Japanese citizenry at the same point in time who collected huge amounts of pine needles to be rendered into biodiesel. One imagines segments of JIT being propped up regardless of the economic consequences, at the point of a gun if necessary.

Regarding the Insecurity Exchangeable Committed,
Jim Puplava did a couple of outstanding interviews with Bud Burrell last year. Bud is nothing short of brilliant and an incredible speaker as well, with, as he puts it, about as varied a Wall St. career as could be imagined, and really castigates the SEC from all angles. Highly recommended if you haven't had a hear yet.

Here's a photo you might use in a post, too: Original is in a Time Life book from the 70s, Photographing Children. Always loved the maniacal glee in this pic.

Anonymous said...

"Obama Creates Faith-Based Office",
that will run the soup kitchens and provide beds for the homeless created by the upcoming depressions.

Ilargi said...

Anon 4:38

"19 billion? Really, well there are aroung 50 million home owners in the US and lets say that the median value is 150k, which it is actually higher than that but it gets us to the 15k allowance, well then the cost of that "tax credit" is $750 billion, not 19 billion, where in the hell did they come up with that absurd number."

This concerns homes bought, not possessed. So it would cover 1.9 million home purchases at $10.000 each. The trouble with the plan is that price declines of 7.5%-10% (or less with higher priced properties) would wipe away all that "money". And those declines are sure to happen. So you'll have 1 or 2 million more people underwater on their loans. Which will then have to be foreclosed on, and written down by Fannie and Freddie, the taxpayer-owned bureaus that are the only parties who buy them. So the buyers are not the only ones deeper in debt, everyone is. How insane do you want it?

Ilargi said...


"The Roving Cavaliers of Credit? One of the best descriptions of how money is created that I've read.

I would be curious to hear what I&S think of it?"

Stoneleigh has commented quite a bit on it the past 2-3 days.

I couldn't figure out a way to post it here, but it's now in the primer list. It confirms much of what S and I have been saying here all along.

I added Paul Grignon's Money as Debt as well. Paul, where's the sequel you promised?

Anonymous said...

RE: The King of Clowns.

Markopoulos's futile attempt to get the SEC to investigate Madoff's dealings is yet more proof that this world is run by the most vile of demons.

He's smart not to accept a position at the SEC. Why would he? An honest man among thieves? The SEC is in on the Madoff fraud, and I suspect the gubbermint is too. Even in the top position, he knows he'd be mariginalized (or worse) just like Obama's hands are already tied.

I doubt those surrounding Obama are by his choice. His strings are being pulled by the ones in control.

Surprising how so many people still beat the devil out of the details, while still failing to get the big picture, and that is:
This is an evil world run by evil people. History has shown what happens to highly influential beings who speak out against TPTB...those who tell the truth (Jesus, Lincoln, JFK and etc)

A common misconception is that this is a good world marred by an evil few who have managed to grab control of it. Rather, the opposite is true--that it is an evil world whose vileness has been mitigated somewhat by heaven sent ones like those afore mentioned. Add to them Thomas Jefferson, Thomas Paine, Ben Franklin, Plato, Beethoven, Pythagorus, and many others...those that brought love, truth, beauty and helped bring about liberty, knowledge and enlightenment into a world full of hate, greed, and ignorance.

It might do some of us good to step back from the numbers and make some bigger realizations about the kind of world we live in.

Anonymous said...

"Doomsters seem to hate the idea of humanity. If there were a series of medical, health, energy and food production breakthroughs (say, driven by genetic engineering) that enabled the world's population to reach 10b, and everyone to live to 100 y.o., how would you feel?

Careful about your answer, because odds on that's what's gonna happen within the next 50 years."

I believe Robert Heinlein gave a wonderful little what if buried in the reflections of Lazarus Long in his Opus "Time enough for Love"

Anonymous said...

This concerns homes bought, not possessed. So it would cover 1.9 million home purchases at $10.000 each. The trouble with the plan is that price declines of 7.5%-10% (or less with higher priced properties) would wipe away all that "money". And those declines are sure to happen. So you'll have 1 or 2 million more people underwater on their loans. Which will then have to be foreclosed on, and written down by Fannie and Freddie, the taxpayer-owned bureaus that are the only parties who buy them. So the buyers are not the only ones deeper in debt, everyone is. How insane do you want it?

Sorry, I misread, I thought when it mentioned existing homes it meant existing homeowners like myself.

It really is insane, they simply cannot get their little heads around the fact that there is no one else left to lend to. I live in Gwinnett County Georgia and all the news the other day was 1600+ homes were auctioned off this month, this on top of nearly 1600 last month.

I wish someone would just ask them why we had to lend to sub-prime borrowers in the first place, sheesh, its a simple business marketshare problem, when you have all the qualified marketshare then you either have to sell them two hamburgers or figure out a way to sell hamburgers to dogs and cats in order to continue to expand your business model.

Barack, Bernake, Summers and all you other folks that think you can get out of this situation by trying to figure out a way to lend us what you refuse to pay us in income. It won't work, we cannot borrow any more money from you, you must find a way to get serious amounts of money into out hands so we can service debt and continue to consume.

All of your economic theories are completely wrong, period and now all there is left is to print our way out of this mess, go through a deflationary depression followed by a hyper-inflationary depression and come out the other end with a new monetary system in 20 or so years, hopefully we will have put a lot of people behind bars by then...

Anonymous said...

Jay Hanson did a brilliant job at his site years ago. His experiences in politics led him to conclude many years ago that it was futile to try and change the status quo.

Humans are irrational and are prone to "magical thinking". Obama is no different, to be in politics one must play the game. The notion of "growth" is so deeply ingrained into society that it will take a generation to clear out falsehoods.

Even if people know there will be a depression of unprecedented magnitude, they will still assume recovery and "growth" at some stage simply because this is how it has been throughout history. The panics, bubbles, manias and depressions of yore have always led to more growth.

But now we are entering a different paradigm, one of limits in terms of arable land, soil, fertilizer, energy, ability to extract minerals etc.

Anonymous said...

Perhaps I should have refrained from referring to 5m years of history as a guide, and simply stated that probability suggests a solution will be forthcoming.


Careful about your answer, because odds on that's what's gonna happen within the next 50 years.

Yea, pick your field where odds and probabilities given by experts in those fields have held up. Even long term (50 yrs). Please, hit us with some examples. Weird random stuff happens and wonderful trajectories go awry, beautiful predictions end up as funny and quaint.

Just because you don't believe the hype doesn't mean you hate the hypers. Sometimes it means you care.

Ilargi said...

Anon 5:02

""Doomsters seem to hate the idea of humanity. If there were a series of medical, health, energy and food production breakthroughs (say, driven by genetic engineering) that enabled the world's population to reach 10b, and everyone to live to 100 y.o., how would you feel?

Careful about your answer, because odds on that's what's gonna happen within the next 50 years."

That statement has no value without data and proof. You may have noticed the faith based state I commented on in the intro today. And no, the odds are not on that outcome. Your faith may be.

Ilargi said...

Dude, your pic link appears broken

Ilargi said...


You were asking the other day about derivatives. As are many others through the weeks and months. A think it's important to acknowledge that you're looking at a 3-D picture here, not a 2-D one . What I mean is that bets have been covered with bets that were covered with bets that were and so on. That sort of scheme, obviously, can easily fall down upon itself. If I can''t pay you, you can''t pay 10 others, who can''t pay 100 more, who can't pay...... That is the main threat.

Ilargi said...

Anon 5:29

I'll stick with Jon Stewart's comment:

"You don’t have ‘best people’!" "You lost $27 billion! Do you live in Bizarro World?"

After all. what else is there?

Ilargi said...


Years ago I took a month off and read everything Jay Hanson has posted on There is nothing in the world that compares to it when it comes to understanding who you are, and why you are you.

I still follow Jay, and he is still very interesting, but economics is not his strong suit. He expresses his thoughts in a much more concise manner at these days, and on various web groups.

The strongest point about Jay is that he was the first one to look at the world, and tried to combine what he saw with why people did to their habitats what they did. Short version: Why do we kill?

The collection of wisdom at is way more than brilliant, it's Nobel Prize territory.

Unknown said...


That is what I've come to understand. Swaps can't even out when the counterparties can sell their obligation off to a third party, and that third party can sell it off, and so on. There's no guarantee that the eventual obligee actually has the cash to pay when the call is made, and there's no way everyone has the money to pay off all the claims (or even a significant fraction of the claims). Not even close to close.

Anonymous said...

A thought to make you feel better.

When you are laying in bed and having a nightmare about Obama and same ol same ol, turn over and dream about Mcain/Palin with the Bush team/advisors. That was the alternative.

bluebird said...

Ah, today's picture of Middletown, Ohio. Now we're getting close to home. Interesting February theme of pictures from small town America: Ohio, Iowa, North Dakota, Oklahoma. Nice touch to always start the day's intro with a picture.

Anonymous said...

Anon 5:02

""Doomsters seem to hate the idea of humanity. If there were a series of medical, health, energy and food production breakthroughs (say, driven by genetic engineering) that enabled the world's population to reach 10b, and everyone to live to 100 y.o., how would you feel?

Careful about your answer, because odds on that's what's gonna happen within the next 50 years."

That statement has no value without data and proof. You may have noticed the faith based state I commented on in the intro today. And no, the odds are not on that outcome. Your faith may be.

"Love for humanity" exactly in the case of confine spaces fatality's doubles the chance of death. (2008 stats) Should by any chance the human nature work in the same way in financial rescue and swerve to the screaming truth we are screwed.

As far as the future goes I am personally very optimistic. Sometimes I don’t even need a full broom to fly. Should what you say come to pass it will actually have the contribution of I & S. They will not even have Jonas remorse.

"I don't give 'em hell," he reportedly said. "I give 'em the truth and they think it's hell."

el gallinazo said...


"When you are laying in bed and having a nightmare about Obama and same ol same ol, turn over and dream about Mcain/Palin with the Bush team/advisors. That was the alternative."

I see little difference between Obama and McCain on economic issues. They are obviously different on the so-called wedge, social issues, but as the economy collapses, the federal attitude toward wedge issues will be far less important than the economic issues. Ironically, it may have been better for the population as a whole if McCain had eked out a small margin of victory or the Republicans once again had stolen the election as they did in 2000 and 2004. Working people (or more precisely non-working people) would probably have mobilized far more rapidly against a McCain administration and perhaps allowed it to do less damage than Obama with his troika of scumbags, Geithner, Summers, and Rubin will do.

Stoneleigh said...

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

Anonymous said...


Indeed, Jay Hanson's site is truly remarkable. He's got these little presentation videos on a range of topics and each one is so packed with information in a few lines that I had to view it repeatedly to be able to digest it.

Reg Morrison is a remarkable author as well, this was from a pdf file downloadable from his site - Hydrogen Breaker.

"Each litre of petrol that we burn in our cars is the distilled residue of some 23 tonnes of ancient organisms mostly marine algae, and the oil products consumed by modern civilisation in a single day cost the entire planet some 13 months of continuous photosynthesis to produce and store"

A remarkable snippet about how oil is such a wondrous substance.

I shudder to think what the world will be like in 3 years? I'll just be 25 than. Life seemed so simple when I started University. Now I have many sleepless nights wondering and pondering about obscure CDS, MBS, banks, treasuries and about countries I have never been too but are essential for the "system" to keep going. Even made a conscious decision to leave Australia for Kenya after getting advice and learning from you and TOD.

TAE is Nobel winning stuff as well. It is remarkable that you can come up with such prescient articles day in and day out.

Maybe a book is in order? :-)

Anonymous said...

Hanson may be getting more concise but he has a long way to go to beat Charles Dickens :

"This boy is Ignorance. This girl is Want. Beware them both, and all of their degree, but most of all beware this boy, for on his brow I see that written which is Doom, unless the writing be erased."

I think where Hanson misses is when he talks of genetics and destiny yet fails to see that our genetic make up has another aspect - the ability to make and change culture. A sheep has a sheep culture and it is immutable.

Hanson is likely right that we will go to that doom but only because we were lazy and didn't read our Dickens and have been given very bad Marx. (and make bad puns as well)


Anonymous said...

Sorry, but I'm catching up from the past couple of days.

Yesterday, Dagobaz said, and Stoneleigh concurred:
"The frank and open exchange of ideas here is wonderful, the pointless attacks and ad hominem distractions are not."

I had to say a big "Thank You" to you both. I heartily agree. A pity that your request appears to have lasted less than 3 hours before the usual crowd started off on their ad hominems.

Oh well. Yours was a noble effort though.

If people want to keep this blog at a high level of standards, it's not going to happen without actions by the community to set, and maintain those standards.

Without people complaining about it to the original poster, things aren't going to change. Especially as more people come here.

Anonymous said...

Regarding yesterday's intro, I also had to say thank you for posting that! I found Sheldon Wolin's views quite refreshingly imaginative and informative.

To say "It provides understanding, which is the number one requirement for any sort of preparation" really should be emphasized.

It is especially interesting to keep it in mind while watching today's Kabuki dance over the Stimulus package in Washington

Anonymous said...

Ilargi...the dry knife you use for wit is sharp today..I enjoy it always.

Doomers ,[like me] always preoccupy themselves,with the "when" it is of primary importance to be 5 days to early,than 5 seconds too late.All of us are deeply concerned when our selfs will face the gut-wrenching trial of un-employment.
When we ,ourselves will face hunger,danger,and maybe/probably death.

Its coming.

There is that old/new matter where you go,there you are..

Something the emergency management trainers back in navel nuclear school took great pains to pound into our heads was at the end of the figured out who was successful in their response by how they recovered from their mistakes...because everyone makes mistakes..always..

Its how well you recover from a mistake that is the key...

Many of us are in less than perfect situations to begin this gig.The key,will always be how you act to mitigate the mess that is headed each of our ways...
Here is a tip.For those of you who were glasses ,google zenna eyeglasses.Online optician.I just got 2 pairs of excellent glasses [one pair photosun,one tinted]for 80 bucks.make use of this system while its still working to stock up on med gear like prescription glasses

I do not know what will trigger the street demos/riots that will come...but they will come.

as will the troops..

I think it will be when there is more hunger...hunger is something many are not used to here,or seeing their little kids hungry...



Anonymous said...

And one interesting point for today.

The Baltic Dry Index, a measure of shipping costs for commodities, rose 15 percent

"Chinese steelmakers are returning to the market after inventories were used up. ... Demand for commodities is finally showing signs of life,”

Perhaps the Chinese are finally spending their Dollars? This is the second article about a notable rise in the BDI that I've seen in the past two weeks.

Anonymous said...

The food supply front seems to have taken a back burner in this target rich environment. Here are a few items that caught my eye:

Cheap Crops Won’t Last, Credit Suisse Says

Corn, soybean and wheat prices are trading at discounts to their inflation-adjusted averages, and all three are likely to rally because output won’t keep pace with demand for crops to make food, animal feed and alternative fuels, said Eliane Tanner at Credit Suisse Group.

Fisheries Collapse Imperils Developing Nations’ Food, Jobs

"The risk of fisheries collapsing in Peru, the world’s largest fishmeal producer, and developing nations such as Senegal that depend on fish for both food and jobs means economic hardship as climate change threatens fishing grounds."

China Declares Drought Emergency as Crops Threatened

"About 143 million mu (9.5 million hectares) of winter wheat are in drought, more than 40 percent of the crop, and about a third of that is
in a “severe” condition,

Anonymous said...

The BDI makes moves of the magnitude up and down all the time ... It is currently still very near the decade low.

Anonymous said...

Anon 1:02

I take it you haven't looked at a chart of the BDI recently?

Here's one.

Notice that U curve there. It's rather distinctive.

The fact that it's been at historic lows has been covered here in the past.

The point is that it's turned around this year, so far. As opposed to last November, when it had dropped for about 6 months straight.

Anonymous said...

bear in mind, the 15K housing credit was most likely brought about from the national association of home builders. (lobbyist) the limitations on who gets the credit are too narrow. it should be for any homebuyer.

congress and senate combined aren't smart enough to think of this. but then the credit should be much higher. say 20K or even 40K.

Anonymous said...

@ Orion

So the BDI is up and so are UK January home prices.


Stoneleigh said...

So the BDI is up and so are UK January home prices.


No market ever moves in only one direction. There are always sucker rallies to engender false hope. I believe it was Bob Prechter who described bear markets as sliding down a slope of hope, while bull markets had to climb a wall of worry.

The market has been in a long sideways correction which is about at peak or slightly past it IMO. It is common for other indicators to show a modicum of optimism at such a time, but it won't last long. When the next phase of the decline (which should be starting soon) is over and we see a larger rally, there should be far more optimism by the time that peaks.

I fully expect the media to be patting Obama on the back for doing such a good job saving the world, just in time for the decline to resume again. We are still far closer to a top than a bottom at this point.

Anonymous said...

Stimulus Bill Will Lead to "Unmitigated Disaster"

The fiscal stimulus bill being debated in Congress not only won't help the economy, it will make the recession much worse, says Peter Schiff, president of Euro Pacific Capital.

Schiff scoffs at the notion the economic decline is starting to level off and concedes no government action means a "terrible" recession. But the path of increased government intervention will lead to "unmitigated disaster," says Schiff, who gained notoriety in 2007-08 for his prescient calls on the housing bubble and U.S. stocks.

The problem, he says, is the government is trying to perpetuate a "phony economy" based on borrowing and spending. With the U.S. consumer tapped out, the government is "now taking on the mantle" of consumer of last resort, he continues, predicting the bond bubble will soon burst - if it hasn't already - ultimately leading to a collapse of the dollar and an "inflationary depression worse than anything any of us have ever seen."

If nothing else, Schiff is an nonpartisan critic of American policymakers, comparing President Bush to Herbert Hoover and President Obama to FDR, and neither in a favorable way.

Anonymous said...

"Naomi Klein: Public Revolt Builds Against Rip-off Rescue Plans for the Economy"


Anonymous said...

@Ilargi - "That statement has no value without data and proof. You may have noticed the faith based state I commented on in the intro today. And no, the odds are not on that outcome. Your faith may be."

Doomsters have the apparent advantage of arguing from a fact based model, but in reality, it is simply a projection of past events (data) to support an expectation of future trends (proof?).

Assumptions such as these are commonly referred to in financial/corporate planning as being "example bound". It essence, it is the opposite of anticipating (the "odds" of) potential 'black swan' events in that unknown unknowns are discounted because there isn't any supporting empirical evidence that they may or may not occur ie "faith".

scandia said...

At times the headlines are simply indigestable1 Have you seen the photo of Tony Blair kissing Michelle as he is the guest speaker at the breakfast prayer meeting in Washingon.How reassuring that policy will be formed by the preacher man over breakfast.
My question is who made Blair the poster boy for " The Devout Man"!

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

Anon @ 10:24,

"Doomsters have the apparent advantage of arguing from a fact based model, but in reality, it is simply a projection of past events (data) to support an expectation of future trends (proof?)."

If you think that's what goes on here, you haven't been reading TAE. Try again after you have.


Side note, I would love to be able to edit my own comments. Oh, how this vexes me.

Stoneleigh said...


Peter Schiff is a die-hard inflationist and sinophile. He didn't anticipate the deteriorating situation in China, hence his clients have lost a lot of money, and they'll lose even more if they bet on inflation.

Check out our primer Inflation Deflated for the reasoning behind our position that's it's deflation we're facing. There's also a link there to an article by Steve Keen called The Roving Cavaliers of Credit, which is an excellent piece on the nature of credit bubbles and their aftermath.