Thursday, March 12, 2009

March 12 2009: They tell me of a pie up in the sky

John Vachon You can look but you better not touch November 1937
Children browse a street market in Washington DC

Ilargi: I'm going to let the quotes do the talking one more time. In the face of another 3% and change rise in the Dow, I can't say it any better. I have had this idea all day in my head that Wall Street gets increasingly disconnected from the real economy, or from real people if you will.

One thing I do wish to point out is that the EU expects 4.5 million job losses in 2009, as per a study that looks quite solid, since it gathers data from 20 million companies. If that number is correct, the EU would do much better than the US, which according to current trendlines is set to shed 10 million jobs or more. But by all means, make up your own mind with these quotes and the articles below.

And then I have a song for you, one that provided the title of this post.

• First-time claims for U.S. unemployment benefits [..] increased by 9,000 to 654,000 in the week that ended March 7, more than anticipated...

• There is perhaps no more telling snapshot of the current pronounced U.S. recession than continuing jobless claims, which measures how long it takes to find new employment. This week continuing claims rose another 193,000 to yet another record -- 5.3 million adults -- the U.S. Labor Department announced Thursday....

• U.S. unemployment will approach 10 percent as the country endures its worst recession since World War Two, leaving more than 13 million Americans jobless, according to a Reuters poll of economists.

• European Union businesses said Thursday that some 4.5 million workers may lose their jobs this year as company profits plunge.

• Hit by a double whammy of declining home prices and a falling stock market, U.S. households saw their net worth fall by $11.2 trillion, or 18%, to $51.5 trillion at the end of 2008, wiping out four years of gains, the Federal Reserve reported Thursday. In the fourth quarter alone, household net worth fell by $5.1 trillion, a record 31% annualized decline....

• Foreclosure filings in the U.S. climbed 30 percent in February from a year earlier as the worsening economy thwarted efforts by the government and lenders to prevent homeowners from losing property, RealtyTrac Inc. said. A total of 290,631 homes received a default or auction notice or were seized by the lender....

• House prices may fall by a further 55 percent and there is a "very real probability" that Britain will be bankrupted, a leading investment bank has warned in a private note to clients....

• "I think this is actually the first phase of a major, major problem that will play out to the rest of 2009 and beyond. What we're seeing is money to emerging market get cut off but a primary reason for that is the major developed nations, like the United States, Great Britain and so forth have to raise somewhere between US$3-trillion and US$4-trillion. The US alone has to raise US$2-trillion, and they have never raised more than about 500, a billion dollars, so that's four times their normal borrowing need. They're squeezing everybody else out of the market."

• ... if a conservative assumption were made that only some 2% of derivatives fail, it would still amount to some $14 trillion. The US share would be about $8 trillion, or almost one year of GDP once that figure declines to a sustainable level. The estimated total capitalization of all US banks is some $1.6 trillion. But, this amounts to only 20% of the potential American liability. So far, US citizens have been forced to provide financial institutions with nearly $2 trillion in additional bailouts. This brings the total of current US banking capital to some $3.6 trillion, still less than half of the potential problem, leaving a massive $4.4 trillion shortfall.

• 'Our estimates are that because of the drop in growth, another 200,000 to 400,000 children will die each year. So that is certainly the wrong direction. 'Trade will probably fall the greatest amount in 80 years.'

• Britain's serious fraud office and U.S. regulators are combing through the records of AIG's Financial Products Group, formerly located on the fifth floor of an office building in London's Mayfair section. The unit's small group of traders risked nearly half a trillion dollars to insure U.S. mortgages and other debt using complex financial products called credit default swaps, according to recent congressional testimony...

• Bill Gates regain[ed] the top spot, despite his wealth declining $18 billion to $40 billion. He ousted investor Warren Buffet, whose fortune declined by $25 billion to $37 billion.

• The global financial crisis has finally and dramatically caught up with China, sending exports from the workshop of the world tumbling last month and slashing its trade surplus. Exports in February slid by 25.7 per cent from a year earlier, dwarfing forecasts of a 5 per cent fall, while imports dropped 24.1 per cent....

• China’s new loans more than quadrupled in February from a year earlier after the government pressed banks to support a 4 trillion yuan ($585 billion) stimulus package for the world’s third-biggest economy. "The pace of lending in January and February is certainly unsustainable and dangerous to the health of the financial system," said Sherman Chan, a Sydney-based economist at Moody’s "Lax credit assessment right now may lead to a surge in delinquencies in the years to come."

• "The price of the US spoils system has been high, if the quality of economic policy making in Washington DC by the Obama administration is anything to go by. The Obama administration’s handling of the financial crisis and the recession-verging-on-depression has been surprisingly fumbling and kak-handed. The economic team should have hit the ground running following a lengthy transition period and the appointment to the top positions of experienced economic policy makers like Tim Geithner, Larry Summers, Peter Orszag and Paul Volcker. But there is little evidence of coherent teamwork. Instead we are treated to repeated examples of the Unfinished Symphony (Geithner) or of A Night at the Improv (Summers). In the US Treasury, Timothy Geithner has come up with a number of half-baked plans, under the grand umbrella of the Financial Stability Plan of February 10. These plans are not worked out to the point that they can even be evaluated properly, they are not costed properly and, except for the money left from the TARP and the funds approved by the Congress for the US$ 787 bn fiscal stimulus plan, they are not funded."

• The number of African Americans reporting trouble paying for health care or medications rose six percentage points from the first quarter to the last, to 34%...

• Using "climate change" to describe events like this, with their devastating implications for global food security, water supplies and human settlements, is like describing a foreign invasion as an unexpected visit, or bombs as unwanted deliveries. It's a ridiculously neutral term for the biggest potential catastrophe humankind has ever encountered. I think we should call it "climate breakdown".

Ilargi: Hard to believe this is 40 years old. A brilliant song from a great musician. The film with the same name is just as brilliant. Rent it, buy it. The rhythm the boys lay down is stunning and mean and dirty, and you need to realize these are late 60's-early 70's recording techniques in shoebox Jamaican studios.

The Harder They Come - Jimmy Cliff

Well they tell me of a pie up in the sky
Waiting for me when I die
But between the day you're born and when you die
They never seem to hear even your cry

So as sure as the sun will shine
I'm gonna get my share now of what's mine
And then the harder they come the harder they'll fall, one and all
Ooh the harder they come the harder they'll fall, one and all

Well the officers are trying to keep me down
Trying to drive me underground
And they think that they have got the battle won
I say forgive them Lord, they know not what they've done

And I keep on fighting for the things I want
Though I know that when you're dead you can't
But I'd rather be a free man in my grave
Than living as a puppet or a slave

Yeah, the harder they come, the harder they'll fall one and all
What I say now, what I say now, awww
What I say now, what I say one time
The harder they come the harder they'll fall one and all
Ooh the harder they come the harder they'll fall one and all

U.S. Initial Jobless Claims Rose to 654,000 Last Week
First-time claims for U.S. unemployment benefits rose last week, holding above 600,000 for a sixth straight time, as companies kept cutting payrolls to reduce costs amid a worsening recession. Initial jobless applications increased by 9,000 to 654,000 in the week that ended March 7, more than anticipated, from a revised 645,000 the prior week, the Labor Department said today in Washington. The number of people staying on benefit rolls rose in the previous week by 193,000 to a record 5.317 million. Employers ranging from United Technologies Corp. to AMR Corp., which owns American Airlines, have announced more than 823,000 job cuts since the November election of Barack Obama, bringing total losses since 2007 to about 4.4 million. U.S. House Speaker Nancy Pelosi said this week she hasn’t ruled out a second economic stimulus if the current package, meant to create or save up to 4 million jobs, doesn’t work quickly enough.

"The numbers continue to worsen," said Michael Gregory, a senior economist at BMO Capital Markets in Toronto, who had forecast claims would rise to 650,000. While sales at U.S. retailers were better than expected last month, according to a Commerce Department report today, "it’s hard to believe spending will hold up" with jobless claims so high, he said. The Commerce report showed U.S. retail sales in February fell less than forecast and January’s gain was almost double the previous estimate. The 0.1 percent decrease reflected a slump in demand for cars and followed a revised 1.8 percent jump in January, the Commerce Department said today in Washington. Purchases excluding automobiles unexpectedly climbed 0.7 percent.

Stocks were lower, with the Standard & Poor’s 500 index down 0.5 percent as of 9:40 a.m. in New York. Treasuries gained, with yields on benchmark 10-year notes falling to 2.89 percent from 2.91 percent yesterday. Economists projected jobless claims would rise to 644,000 from an originally reported 639,000 a week earlier, according to the median of 45 estimates in a Bloomberg News survey. Estimates ranged from 610,000 to 660,000. Continuing claims were forecast to increase to 5.14 million. The four-week moving average of initial claims, a less volatile measure, increased to 650,000, the highest in more than 26 years, from 643,250.

The unemployment rate among people eligible for benefits, which tends to track the jobless rate, rose to 4 percent, the highest since June 1983, in the week ended Feb. 28. Thirty-five states and territories reported an increase in new claims for that same period, while 18 had a decrease. Initial claims reflect weekly firings and tend to rise as job growth slows. The U.S. unemployment rate reached 8.1 percent in February, the highest level in more than a quarter century, Labor said on March 6. Employers eliminated 651,000 positions, the third straight month that losses surpassed 600,000 and the first time that has happened since records began in 1939. Economists surveyed by Bloomberg News earlier this month predicted the U.S. jobless rate will reach 9.4 percent this year and stay elevated through at least 2011. At the same time, the country’s economy will shrink 2.5 percent in 2009, the biggest contraction since 1946.

United Technologies said March 10 it plans to cut 11,600 jobs. The Hartford, Connecticut-based maker of Otis elevators and Carrier air conditioners said it cut its sales projection for the year because of "contracting markets worldwide." Chief Executive Officer Louis Chenevert said in a statement that an economic recovery the company anticipated in the second half of 2009 now "appears unlikely." American Airlines, the world’s second-biggest carrier, said March 10 it is considering the futures of its three main maintenance bases as it tries to trim operating costs by an additional $130 million this year. Chief Financial Officer Thomas Horton also reiterated the unit’s plan to reduce capacity in its main jet operations by more than 6.5 percent this year.

The soft labor market crippled the spending that makes up about 70 percent of the economy before a rebound in the past two months. Purchases dropped at a 4.3 percent rate in the fourth quarter, the most since 1980, according to Commerce Department figures. The Obama administration will do "what is necessary" to fix the faltering economy, Treasury Secretary Timothy Geithner said two days ago in an interview with Charlie Rose. He also said the U.S. is in a "deepening recession" and the president will be aggressive in trying to find a solution to the crisis. Federal Reserve Chairman Ben S. Bernanke said March 7 that the central bank will "forcefully" use every resource to restore financial-market stability and revive economic growth.

A new record we don't want: Continuing jobless claims hit 5.3 million
There is perhaps no more telling snapshot of the current pronounced U.S. recession than continuing jobless claims, which measures how long it takes to find new employment. This week continuing claims rose another 193,000 to yet another record -- 5.3 million adults -- the U.S. Labor Department announced Thursday, as slack hiring remained pervasive. Meanwhile, initial jobless claims increased 9,000 to 654,000 for the week ending March 7. Economists surveyed by Bloomberg News had expected this week's initial jobless claims to total 646,000. The 4-week moving average rose 6,750 to 650,000.

Still, while the initial jobless claims total is not low, the real concern is continuing claims. High continuing claims reflect labor market stress, and the long time it takes for those who lost their jobs to find comparable employment. Few companies are filling vacancies, many major corporations have announced large lay offs, and even temporary work assignments are declining, another negative sign for the labor market and the economy. Why is that especially relevant for the U.S. economy and the stock market? Unlike many western European nations, the United States offers only a partial unemployment insurance program. In most states, the unemployment benefit barely places one above the poverty level, and it's certainly not going to cover a typical mortgage payment and related home expenses.

That means that as adults fail to find comparable work after unemployment benefits expire, home mortgage foreclosure rates are almost guaranteed to rise. And investors have seen what rising foreclosure rates have done to mortgage backed securities defaults: they helped set the financial crisis in motion. True, Congress has passed aid to help states increase the length of state unemployment benefits, which in many cases last about 26-30 weeks, but the key to limiting economic damage caused by continuing jobless claims is job growth. The above underscores the importance of job growth to the health of the nation. The 'great American job creation machine' balances the economic ship of state, if you will, which is why it must remain policy makers' top priority, moving forward. It also underscores why, as columnist Martin Wolf has said, given the large employment dislocation caused by globalization, the United States will have to systematically review and improve its social safety net, after the financial crisis and recession have ended.

Unemployment to near 10 percent as U.S. slump worsens
U.S. unemployment will approach 10 percent as the country endures its worst recession since World War Two, leaving more than 13 million Americans jobless, according to a Reuters poll of economists. The economy will level out in the third quarter, the results showed, but the poll painted a bleaker picture than a survey conducted just a month ago. Median forecasts now assume gross domestic product will shrink an annualized 5.3 percent this quarter, following a brutal 6.2 percent decline at the end of 2008.

The recession will continue into the second quarter, moderating to a 2 percent drop, stabilizing sometime this summer. GDP should turn the corner, albeit hesitantly, by autumn. Analysts say the turbulence plaguing large sectors such as banking and autos means predictions are less reliable than usual. "The economic outlook remains very uncertain," said Scott Brown, chief economist at Raymond James & Associates. "A bottom is likely by the end of the year, but downside risks continue." The Reuters poll indicates the jobless rate, already at a 25-year high of 8.1 percent, will climb to 9.6 percent, probably sometime early next year, before receding. An eventual rebound in hiring will probably be mild and erratic.

In this environment, inflation will remain non-existent. Indeed, the consumer price index is expected to fall for the first nine months of this year, with a 2.2 percent decline in the third quarter marking the steepest pullback. Prices will then climb again into next year, but modestly enough to allow the Federal Reserve to keep interest rates on hold until at least the latter part of 2010. The federal government has attacked the problem by committing trillions of dollars to help the banks and passing a $787 billion stimulus package aimed at reigniting growth.

Such measures should help with some of the worst effects of the crisis, analysts said, although there has been much debate about what types of stimulus offer the best path to recovery. "We anticipate a rebound driven by fiscal and monetary stimulus," said Abiel Reinhart, economist at JP Morgan. "Unfortunately, it will take at least three other quarters before improvement in conditions will translate in a rebound for the job market." This is bad news for both unemployed workers and businesses which rely on Americans' spending. Data on Thursday are expected to show a 0.5 percent decline in retail sales, adding to what was already the most dramatic pullback in spending in decades.

EU businesses see 4.5 million job losses this year
European Union businesses said Thursday that some 4.5 million workers may lose their jobs this year as company profits plunge. BusinessEurope, which represents more than 20 million European companies, said it expected the European Central Bank to lower interest rates again beyond the current 1.5 percent as the economy slows more sharply than expected. The business group said access to finance was the key issue for companies. It said many face bankruptcy as banks cut back credit, the number of late payments increase and credit insurance becomes harder to get. BusinessEurope's president, Ernest-Antoine Seilliere, called on the ECB to help ease company's tight finances by buying debt from companies. The ECB can't buy corporate bonds directly from businesses but could purchase them from other buyers.

The group also called on governments to keep public debt increases limited, saying the billions of bonds nations plan to sell this year will limit business access to finance. BusinessEurope forecasts the economy 27-nation EU to shrink 2.2 percent this year, with growth in the 16 nations that use the euro falling back 2.1 percent. This is far worse than January's European Commission forecast for the EU to contract 1.8 percent and the euro area by 1.9 percent -- an outlook based on EU government figures. Business activity is set to drop by a fifth this year and profits are likely to fall by more than 70 percent in the second quarter, the group said. It bases its forecasts on information from business federations in the EU's 27 nations, Norway and Iceland.

US household net worth plunges $11.2 trillion, 18%, in 2008
Hit by a double whammy of declining home prices and a falling stock market, U.S. households saw their net worth fall by $11.2 trillion, or 18%, to $51.5 trillion at the end of 2008, wiping out four years of gains, the Federal Reserve reported Thursday. In the fourth quarter alone, household net worth fell by $5.1 trillion, a record 31% annualized decline. Consumers lost $937 billion on the value of their real estate. Their direct holdings of corporate equity dropped by $1.68 trillion, while holdings in pension and life insurance reserve dropped by $1.46 trillion. Mutual-fund holdings fell by $730 billion. Net worth has fallen for six straight quarters since peaking at $64.4 trillion in the second quarter of 2007. Net worth -- defined as assets minus liabilities -- is down 20% from the peak.

The decline in wealth was accompanied by a sharp pullback in consumer spending at the end of the year. According to Commerce Department data, real consumer spending fell at a 4% annual rate in the final six months of 2008, the sharpest decline since 1980. Economists figure consumers will spend about 5 cents out of each additional dollar of wealth, or cut spending by about 5 cents for every dollar lost. "Consumers have turned a lot more cautious and are saving more," said Richard Berner, chief economist for Morgan Stanley. In the longer term, Berner sees a "sea change in consumer behavior" that will bring the personal savings rate to 7% or 8% within the next few years as consumers begin to understand that quick and easy increases in wealth aren't likely.

At the end of the year, households owned $9.9 trillion in equity shares outside of pension plans, less than the $11.3 trillion they owned in 1998. At the end of 2008, assets fell by $11.3 trillion to $65.7 trillion. Liabilities fell $87 billion to $14.2 trillion. Home owners' equity in their houses fell to a record low. "It's an old lesson: Asset values can fall quickly, but debt lingers!" wrote Bill McBride on his blog, Calculated Risk. At the same time their assets were falling, households were taking on less debt, deleveraging their balance sheets after five years of double-digit growth in debt. In the fourth quarter, households paid off more debt than they took on for the first time since at least 1952, when the Fed began reporting the information in its quarterly Flow of Funds report. Household debts fell at a 2% annual rate in the quarter, including a 1.6% decline in mortgage debt and a 3.2% decline in consumer credit, including credit cards and auto loans.

For all of 2008, household debt rose just 0.4%. Since the early 1950s, debt had never risen less than 5% in a year. Businesses also took on less debt. Total debt grew 4.8% in the corporate sector after a 13.4% gain in 2007. In the fourth quarter, corporate debt increased at a 2.2% annualized rate, the slowest since early 2004. The federal government made up for the deleveraging by families and businesses, however. Federal debt increased 24% in 2008 and rose at 37% annual rate in the fourth quarter. Total nonfinancial debt -- individuals, businesses and government -- rose 5.8% in 2008 and increased at a 6.3% pace in the fourth quarter. It was the slowest annual increase in debt since 2000.

Foreclosure Filings in U.S. Jump 30% in February
Foreclosure filings in the U.S. climbed 30 percent in February from a year earlier as the worsening economy thwarted efforts by the government and lenders to prevent homeowners from losing property, RealtyTrac Inc. said. A total of 290,631 homes received a default or auction notice or were seized by the lender, the Irvine, California-based seller of default data said in a statement today. It was the third-highest monthly total in RealtyTrac records dating to 2005. February filings increased 6 percent from January. "More people have lost their incomes or are underwater on their mortgages, so a new housing plan won’t change those facts by itself," Barry Eichengreen, professor of economics at the University of California, Berkeley, said in an interview.

The U.S. housing crisis is deepening as President Barack Obama attempts a $275 billion rescue to help borrowers with sinking home values or unaffordable loans. Declining prices sapped $2.4 trillion in value from the nation’s residential market last year, according to First American CoreLogic. Prices in 20 U.S. cities have fallen every month since January 2007, the S&P/Case Shiller index shows. Rising unemployment also is making it harder for homeowners to keep up with payments. The U.S. jobless rate rose to 8.1 percent in February, the highest in more than 25 years, according to the Labor Department. Some of the top U.S. lenders own as many as 700,000 foreclosed homes they have yet to offer for sale, said Rick Sharga, executive vice president for marketing for RealtyTrac.

The banks may be waiting to see how U.S. government plans develop before selling the properties, Sharga said. The lenders and government-owned Fannie Mae and Freddie Mac, the two biggest U.S. mortgage financing companies, have already extended temporary foreclosure moratoriums. The combined percentage of loans in foreclosure or at least one payment past due in the fourth quarter was 11.18 percent, the highest on record, according to the Mortgage Bankers Association in Washington. The percentage of loans 60 days past due and 90 days or more late also were at record levels. "Many elements are lined up to suggest we’ll have more foreclosure activity in the future, maybe an all-time high," Sharga said.

Obama introduced a plan Feb. 18 to use $75 billion of public funds to entice lenders to modify or refinance home loans, stem foreclosures and rescue delinquent homeowners. The president also said the Treasury Department would provide as much as $200 billion in additional backing for Fannie Mae and Freddie Mac to free up funding for new mortgages. To qualify for a refinanced loan, applicants will have to fully document income with pay stubs and tax returns, and sign an affidavit attesting to "financial hardship," according to Treasury. One in 440 U.S. housing units received a foreclosure filing last month, and Nevada, Arizona and California had the highest foreclosure rates, RealtyTrac said.

Idaho, Illinois and Oregon joined the list of top 10 states with the highest rates, a sign that rising unemployment is now pushing defaults, Sharga said. Florida, Michigan, Georgia and Ohio were also in the top 10.California had the highest total with 80,775 foreclosure filings in February, a 51 increase from a year earlier. Auction sale notices almost tripled to 18,831. Florida had the second-most filings at 46,391, a 43 percent increase from a year earlier. Auction sale notices climbed 158 percent and bank seizures rose 128 percent. Arizona ranked third in filings with 18,119, up 88 percent from February 2008. New York had the 35th highest rate and 4,301 filings. New Jersey ranked 29th and had 3,279 filings. Connecticut was 14th with 2,220 filings, RealtyTrac said.

Las Vegas had the highest foreclosure rate among metropolitan areas with populations of 200,000 or more. One in 60 housing units there received a filing, more than seven times the national average. Cape Coral-Fort Myers, Florida had the second-highest rate: one in every 65 housing units, according to RealtyTrac. Five California cities ranked third through seventh: Stockton, Modesto, Merced, Riverside-San Bernardino and Bakersfield. Reno-Sparks, Nevada was eighth; Phoenix was ninth; and Vallejo-Fairfield, California ranked tenth, RealtyTrac said. The company collects data from more than 2,200 counties that are home to more than 90 percent of the U.S. population.

"Very real probability" Britain will be bankrupted, house prices could fall by further 55%"
House prices may fall by a further 55 percent and there is a "very real probability" that Britain will be bankrupted, a leading investment bank has warned in a private note to clients. People who bought buy-to-let flats are expected to "begin panic selling" and the average home value could drop below £100,000. The predictions in a 298-page report from Numis Securities, a City investment bank, are the bleakest yet on the deteriorating state of the British property market. House prices have already fallen by about 20 per cent over the past year. However, in the note written last month, Numis said: "Despite UK house prices already having fallen 21% from the peak, we do not believe that the correction is anywhere near over. "Our core headline forecast is that UK property prices remain between 17% and 39% overvalued based on fair valuation. Moreover, history has shown us that when property…which has experienced a price bubble corrects, the price tends to fall below fair value for a period of time, as confidence in that market remains low. Prices could fall a further 40-55% if the over-correction was as bad as the early 1990s in our view."

The report warns that "city centre flats" and "new executive homes" are likely to record the biggest reductions and describes investing in buy-to-let property as a "poor man’s hedge fund". "It is the action of these amateur investors over the next few months which we are most concerned about," the report says. "We expect some to begin panic selling their portfolios, with the peak volume as is almost always the case with private investors, being at the market trough." Yesterday, Alistair Darling, the Chancellor, warned that the world is facing the most difficult economic conditions for "generations". However, the Numis report is scathing of Government attempts to help the economy. "The Prime Minister and Chancellor have publicly stated that they want banks this year to lend at 2007 levels," it said. "We think this is a crazy policy, given that too much debt was one of the prime reasons why the economy has its current problems." It also criticises the huge debts being run up by the Government to pump money into the economy. Yesterday, John Lewis, the retailer, said that the £12.5 billion cut in Vat has not made "any long term difference at all".

The Numis report says: "The bankruptcy of the UK is a very real probability as the UK Government is trying to stimulate a greater debt burden in a grossly indebted economy. We believe the scale of the macro imbalances in the UK means there is no prospect of a recovery in 2009 and we expect the UK to be mired in a deep recession through all of 2010." Last night, the Conservatives said that the Numis analysis increased the pressure on the Prime Minister to apologise. Grant Shapps, the shadow Housing minister, said: "This is a devastating critique of the Government’s record and how Gordon Brown’s credit bubble will lead to a mountain of debt, a wave of repossessions and negative equity misery. Labour Ministers must take direct responsibility for fuelling buy-to-let speculation. "Gordon Brown’s fingerprints are all over this economic wreckage and he should now have the decency to at least apologies for his mistakes." Yesterday, it emerged that the number of borrowers falling behind with their mortgage repayments has already doubled in the past year. According to Moody’s Investors Services, borrowers more than 90 days in arrears have increased to 1.5 percent of all home loans compared to 0.6 percent a year ago.

Act now or we're doomed: Satyajit Das
The risk analyst and author Satyajit Das predicted the current economic crisis in 2006. He wrote a paper titled 'The Coming Global Credit Crash', highlighting the toxic debts that would poison the global financial system. Mr Das now says that unless urgent action is taken, the world is headed for a sovereign debt crisis that will doom us to something akin to the Great Depression. Echoing the World Bank, he says businesses and governments in the emerging economies are already being choked by a lack of funds. And he fears that even advanced nations like America and Britain will not be able to finance their massive banking bailouts and stimulus packages.

SATYAJIT DAS: Well I think the real situation is now getting to the point of diabolical, particularly in, people in the export industry, trade protectionism has kicked in, they cannot get any money financing, they're actually getting squeezed both on the sale side and the financing side. In places like Dubai, where obviously property speculation has been a big part of the economy, property prices, particularly at the high end have fallen by between 30 and 50 per cent. The best way to describe Dubai, which at one stage had 14 per cent of the world's cranes employed, is there are a lot of cranes, but they ain't going anywhere.

STEPHEN LONG: What was it like Asia; there have been some horrific figures on growth and exports, particularly from Japan, with exports down 46 per cent.
SATYAJIT DAS: The export industries have essentially just hit a wall and fallen right of the edge of it. It was fascinating talking to somebody in the computer industry in Japan, who said they had not received one order since the month of November, and they were essentially looking at a blank order book once their existing orders are fulfilled.

STEPHEN LONG: So, IT ordering has just collapsed.
SATYAJIT DAS: Absolutely, and you're seeing that in figures of much larger companies like Intel, where effectively their profitability, cash flow, sales have fallen by an alarming rate.

STEPHEN LONG: So where does this lead?
SATYAJIT DAS: Well I think what we're now seeing is a global coordinated slowdown. For the first time in a very long time we're seeing global trade come down, for the first time in a very long period of time we're seeing global capital flows. To put that into perspective, in 2007 global capital flows, that's money flowing from country to country, particularly to emerging countries, was just under a trillion dollars. This year it will be under 200, nobody can get any money. So essentially global growth cannot continue and we are going to see a coordinated recession. It's only the depth and the length of that recession seems to be in doubt.

STEPHEN LONG: Well that collapse in global capital flows is one of the very, very serious concerns in this crisis, but most people wouldn’t perhaps understand what that implies.
SATYAJIT DAS: It occurs at different levels, for instance India requires itself about 10 per cent of its gross domestic product. For the size of the economy, 10 per cent has to be borrowed overseas to finance its businesses. So they cannot get any financing and if they can't get financing, particularly where they have borrowing which as falling due, they're in serious difficulty. At individual levels companies cannot get money to just prepare orders for sale. So this actually squeezes these companies to the point where they can't actually make things and sell them. This is also starting to affect agriculture, where farmers cannot get actual funding for crops in terms of buying seeds and buying equipment. What this is, is absolutely totally choking the life out of the economy. It's like oxygen, debt's always been like oxygen. It's now not there in the room and everybody is suffering from a bad case of asphyxiation.

STEPHEN LONG: Yesterday I interviewed Ashok Sharma from the Asian Development Bank and he said that there is virtually no credit in emerging Asia, companies can't get loans, governments can't issue bonds, they can't raise money.
SATYAJIT DAS: Well I think this is actually the first phase of a major, major problem that will play out to the rest of 2009 and beyond. What we're seeing is money to emerging market get cut off but a primary reason for that is the major developed nations, like the United States, Great Britain and so forth have to raise somewhere between US$3-trillion and US$4-trillion. The US alone has to raise US$2-trillion, and they have never raised more than about 500, a billion dollars, so that's four times their normal borrowing need. They're squeezing everybody else out of the market.

STEPHEN LONG: It's crowding out the rest of the world but the issue then is, not only huge hunger, poverty because countries in the developing world can't get finance, but is there a real question about whether America, Britain, the major advanced western economies will be able to raise that kind of money, will be able to fund their debts?
SATYAJIT DAS: Well I think this is the question that everybody's asking and the signs are not good. For instance this year alone, we have had two German bond auctions, this is where the German state auctions its Bunds, which are its government securities. Two of these auctions have failed. What that means is when they offered a certain amount of securities for sale, there wasn't sufficient buyers to cover the entire amount.

STEPHEN LONG: And Germany is seen as one of the lower-risk nations of Europe.
SATYAJIT DAS: That's absolutely correct, and Great Britain recently issues 30-year bonds and one dealer to me described this auction as a debacle, as this process unfolds over 2009 we are effectively seeing the US issue between $40-billion and $60-billion of paper every week. And at some point in time there is going to be a problem of demand. Will people buy it? It depends now on the Chinese and Japanese and these developing countries - their appetite for this paper. The problem is they themselves are in a position where their surpluses are turning to trade deficits, we've just seen that with Japan. And so under those circumstances, there just isn't the money. So this is the million-dollar question, or the trillion-dollar question – will they be able to get this paper away, or will they have to resort to literally the Zimbabwean option of printing money.

STEPHEN LONG: OK, I'll give you the priceless question – is there anything that can be done to avoid this economic and social catastrophe?
SATYAJIT DAS: The critical thing now is a global agreement between the debtor nations and the creditor nations, to actually work out how to keep the funds flow going. Simply because if this breaks down in the way it's now breaking down, it dooms us to something akin to the 1929 period. And the last thing that we need to do which is again being addressed, but in a very piecemeal and unsatisfactory way, is trying to get the financial system, particularly of countries like the United States, and Great Britain, to some semblance of working order.

STEPHEN LONG: What are the hopes of that actually being achieved?
SATYAJIT DAS: Human beings never do anything until they get to the edge of the abyss and look down. We are now within touching distance of the abyss.

A swallow before summer
Citigroup shocked Wall Street this week by announcing that the bank would be profitable in the current quarter. At the same time, the Barack Obama administration indicated that it would be unlikely to nationalize American banks, preferring to provide low-cost funding to encourage the private sector to buy distressed assets from the lenders. The two developments sparked a vigorous rally in financial stocks, which had been drifting downward for weeks, caught in what appeared to be an unending death spiral. But have the good times really returned? On the surface at least, there are some promising points. Based on current income, and an upward trending yield curve (which will allow banks to borrow at nearly no cost from the Fed and lend to borrowers at a good profit) the banks should generate strong cash flow. But that is hardly the full story.

Write-downs in the value of toxic assets already held on banks' balance sheets will continue to explode like ticking time-bombs. These debts may be too large to be overcome by a positive cash flow fueled by cheap access to short-term funding. If banks were simultaneously forced to write down assets, they could be rendered insolvent from a capital balance sheet point of view. This is the underlying problem that America and the much of the world face with their banks: banks can be trading with positive cash flow but from a technically insolvent capital position - which is illegal. Some argue that toxic assets make up only a very small part of the total assets of the banking system. That may be so, but the real issue is the enormous size of the toxic assets in relation to both the capital of the banks and the funding ability of the government.

According to the Bank of International Settlements, the world's total of derivatives investments, including the poorly understood credit default swap (CDS) market reached some US$700 trillion at its height, or more than 20 times the world's total annual production. The American portion was about $419 trillion, or some 40 times America's annual production. The essential problem is that these inherently risky securities were used as collateral for loans. The fall in their value resulted in massive deleveraging. Of course, not all derivatives are yet flawed, or toxic. So, it can be assumed that, in the absence of a total financial collapse, only a limited number will default.

However, if a conservative assumption were made that only some 2% of derivatives fail, it would still amount to some $14 trillion. The US share would be about $8 trillion, or almost one year of GDP once that figure declines to a sustainable level. The estimated total capitalization of all US banks is some $1.6 trillion. But, this amounts to only 20% of the potential American liability. So far, US citizens have been forced to provide financial institutions with nearly $2 trillion in additional bailouts. This brings the total of current US banking capital to some $3.6 trillion, still less than half of the potential problem, leaving a massive $4.4 trillion shortfall. In light of this, even noted bearish economist Nouriel Roubini's estimate of a $3.6 trillion shortfall appears to be too optimistic.

Of course, not all US banks are in trouble. There are a number of local and regional lenders whose managements did not participate in gambling away the country's financial future. Nevertheless, investors should ask themselves some hard questions. What if the government is forced to face the fact that the US banking system, as a whole, is already fundamentally insolvent? What if the administration is therefore forced, despite its expressed disinclination, to nationalize the problem banks? Most importantly, while the good banks are being separated from the bad in the FDIC's "coral", will all American banks be forced to close? Worse still, after the forthcoming meetings of Group of 20 countries, will all international banks be closed on a temporary basis, on a long bank holiday, as happened in the Great Crash? If so, what would happen to consumer confidence and the price of gold? Citigroup says that it is profitable. At the same time, most banks are in dire straits. Until Citigroup is able to put its capital where its mouth is, investors in US financials should remain cautious.

Worst is yet to come, says World Bank president Zoellick
Robert Zoellick is the odd person out in Barack Obama's Washington. He has worked for every Republican president since Ronald Reagan, yet in this time of high financial drama he finds himself occupying one of the key global economic positions as president of the World Bank. Tall, lean and angular, with a moustache and upturned eyebrows, Zoellick has a reputation as a policymaker who can be trusted with the most delicate tasks. This is almost certainly why George W Bush yanked him out of Goldman Sachs in 2007 to take charge of the World Bank after its reputation had been dragged through the mud and its unity torn asunder by the short stewardship of Paul Wolfowitz. Wolfowitz was ousted from office after the disclosure of an improper relationship with Shaha Riza, a senior member of staff.

Turning around the mood of the Bank has 'been a lot of work', Zoellick acknowledges in an exclusive interview in his spacious office on the 12th floor of the World Bank complex in the heart of Washington. 'There were all sorts of scars, anxieties that affected different units in different ways, and they included our internal corruption effort,' he explains. 'So my basic strategy from the start was that we talk about these problems endlessly so we could try and put people back to work by focusing on the mission.' Part of the current problem, he believes, is that because the Bank is a development institution 'the people who come here are not as prone to the sort of rapid response' needed in a financial crisis.

Nevertheless, he believes that he is turning the culture around and that the staff now see themselves 'not just as analysts but problem solvers'. They need to be. When Zoellick looks across the horizon he sees mounting problems for both the industrialised and developing world. The global economic meltdown is costing lives. He says: 'Our estimates are that because of the drop in growth, another 200,000 to 400,000 children will die each year. So that is certainly the wrong direction. 'Trade will probably fall the greatest amount in 80 years.' Zoellick thinks that the outlook for the global economy is worse than the International Monetary Fund's forecast of a negligible 0.5 per cent expansion. 'My guess is that is that growth will probably fall about 1per cent to 2 per cent. 'We haven't seen numbers like that since World War II, which really means since the Thirties. So these are serious and dangerous times,' he says.

Despite the challenges and his businesslike reputation, Zoellick seems remarkably relaxed and informal, patrolling his office in a cream shirt and open suede waistcoat. He recognises that he has an uphill task persuading the richer nations to pour more money into developing countries in these austere times. But he has a plan. 'Developed countries under-standably focus on their stimulus packages and bailing out their own banks. 'But if they could just devote 0.7pc of their stimulus (the UN target for foreign aid) to those most in need, it could help the developing world.' As matters stand, Zoellick is doing all in his power to try and fill the financing gap for the developing world left by the withdrawal of frightened bankers from the global capital markets.

'We have about an extra $100bn of lending to countries that are qualified to borrow, but these are not the very poorest countries. Last year we did about $13.5bn, this year we will probably do about $35-$36bn.' Zoellick also wants to gear up lending through the Bank's concessional arm, the International Development Association, in which Britain, due to the stellar efforts of Gordon Brown when he was Chancellor, is the biggest contributor. 'We have $42bn for the 80 poorest countries, so we are trying to front load that as much as possible.' Zoellick is also seeking to mobilise money through the World Bank's private-sector arm, the International Finance Corporation. We could probably do $30bn of IFC lending for the next three years,' he says.

He has launched a number of initiatives, including trade finance - in which he is an expert as America's top trade negotiator from 2001 to 2005. As the current crisis spreads from the rich countries to the emerging markets, Zoellick's biggest concern at present is the state of the former satellites of the old Soviet Union. Central and Eastern Europe is particularly exposed because over the last two decades it moved quickly to integrate with trade, investment and remittances. 'It didn't have the same cushions as you have in North America, Japan and Western Europe. 'You also have the problem of domestic assets in foreign currencies, whether it be euro or Swiss francs.'

It has recently been revealed that homeowners in Hungary have been hard hit after taking out mortgages in Swiss francs. Subsequently, the forint - the local currency - has fallen sharply, leaving homeowners with huge repayments. At a time when many people have been concerned about the growing influence of China in Africa, Zoellick - who is an expert on US-Sino relations - is not unhappy. 'Africa is not just the preserve of Europe and the US. Anyone can bring in capital, knowledge and jobs. 'That is a good thing,' he says. But he does have worries 'about transparency and governance' on some of the investments. One country where the Bank is biding its time is Zimbabwe. It has been working with the African Development Bank and others to make sure it is ready to act if the political transition from the Mugabe era works.

But he thinks you have to be cautious because of 'governance and corruption' issues. The cholera epidemic he says 'is a terrible tragedy', adding: 'Zimbabwe could be wealthy and successful. That is what happens when a country breaks down.' Looking forward to the upcoming G20 meeting in London, at which he will be key participant, Zoellick believes the key to recovery working is sorting out the banks. He says: 'Stimulus plans will be like a sugar high, unless you fix the banking system.' Zoellick praises a suggestion by Australian prime minister Kevin Rudd, who thinks the G20 must act together to 'take care of bad assets', arguing that this would avoid countries taking individual action at the expense of others. Given his background in free trade, Zoellick abhors the drift towards protectionism, which is 'dangerous in that steps in one country beget steps in another'.

He cites Buy America provisions in the US stimulus package and restrictions on Mexican trucks crossing into the United States - despite the North America Free Trade Agreement - as being of concern. He thinks that the World Bank can help to prevent a retreat behind barriers by supporting trade finance. 'Just as bad as protectionism is if a country could import or export but can't get the finance to do it,' he says. Zoellick seems comfortable in his role even though it is often the IMF rather than the World Bank which captures the headlines in crisis. But as the crunch spreads to the developing world we can expect to see much more of the marathonrunning Republican who - unlike Obama - really hails from the Chicago hinterlands.

Economy Worst Since World War II Says Merkel
Angela Merkel said on Wednesday that the economy is worse than at any time since the end of World War II. Nobel Prize winning economist Paul Krugman says the chancellor herself is partially to blame. In economic times like these, a little historical perspective can go a long way. That, at least, was the message delivered by German Chancellor Angela Merkel in an interview with the mass-circulation tabloid Bild published on Wednesday. "In Germany, we have overcome other major challenges," she said. "This year we are celebrating the 60th anniversary of the Federal Republic of Germany and 20 years since the fall of the Berlin Wall. We succeeded ... in rebuilding after World War II and we tackled reunification following 1989." But Merkel's other historical message in the interview was more to the point. "Such a recession, one which is taking place in all countries around the world, hasn't been seen since World War II."

The chancellor's warning comes after yet another flood of bad news for the economy. On Tuesday, the Federal Statistical Office announced that German exports, the motor behind the country's traditionally strong economy, have shrunk rapidly. Numbers for January show that, compared with the same month a year ago, exports are down by 20.7 percent. The drop is the steepest seen in 16 years. Automakers and engineering firms were hit particularly hard. But the country's chemical industry has likewise been dragged down. Turnover in the sector plummeted by 11 percent in the fourth quarter of 2008 relative to the three months preceding it, said the VCI, which represent German chemical manufacturers, in a statement on its Web site. In addition, the struggling mortgage bank Hypo Real Estate may once again be facing collapse. Berlin has already come to the assistance of HRE to the tune of over €102 billion ($130 billion) in the form of bailouts and guarantees.

Now, according to the anonymous bank sources cited by the Süddeutsche Zeitung, the bank needs another €10 billion. Time is short. According to the paper, HRE will be finalizing its 2008 balance sheet on April 24. A loss of several billion euros will be the likely outcome, meaning that the bank at present doesn't have enough capital equity to counterbalance the loss. The bank's board would, in such a case, be required to declare the bank over-indebted, thus paving the way to bankruptcy. And that would be difficult for the German financial system to absorb. Indeed, Berlin has spent months trying to avoid just such an eventuality. HRE was the first of Germany's financial institutions to run into serious trouble as a result of the global financial crisis. Last October, the Merkel government put together a €50 billion bailout package for the bank, but that proved to be insufficient. Just weeks later, HRE became the first bank to take advantage of the €500 billion bank bailout bill passed by Berlin, likewise last October.
The government has even agreed on a rule change that could allow it to expropriate the bank against the wish of HRE's largest shareholder, the American private equity group JC Flowers & Co., which owns a 24 percent stake. In the meantime, HRE has become just one of a number of economic fires Berlin is trying to put out. The carmaker Opel is struggling for survival and the economy faces significant negative growth this year. Indeed, despite two economic stimulus packages pushed through parliament in recent months -- worth over €80 billion -- some think that Germany isn't doing enough. In an interview with the newsmagazine Stern to be published on Thursday, Nobel Prize winning economist Paul Krugman takes Germany, and Europe, to task for not doing enough. Europe, he said, is stumbling. "I don't see any signs of unified activity, especially when it comes to financial policy," he said in the interview, which was only available in German. He was even more critical when it came to Germany's role in crisis management thus far: "Germany has so far been a huge stumbling block, a major hindrance." He pinned the blame on Finance Minister Peer Steinbrück, who he said is much too orthodox in his approach to economic stimulus. When it comes to Merkel, Krugman said her response has not spoken well for her intellect.

European Central Bank Approaches Zero Rates by Stealth With New Weapon
European Central Bank President Jean-Claude Trichet’s new weapon to battle the recession is taking him closer than it seems to zero interest rates. Trichet is allowing the ECB’s deposit rate, which lenders earn on overnight deposits with the central bank, to usurp the benchmark refinancing rate and become the main driver of short- term borrowing costs. At just 0.5 percent, the deposit rate matches the Bank of England’s key setting and is only a step away from the zero-to-0.25-percent range the Federal Reserve uses. That is pushing interest rates for banks down, helping Trichet answer critics who accuse him of not doing enough as the euro-region economy sinks into its deepest recession since World War II. The deposit rate is "very, very low," Trichet said three times in an hour at a press conference on March 5.

He "is implicitly admitting that the deposit rate has now become the key barometer of the ECB’s policy," said Nick Kounis, chief European economist at Fortis in Amsterdam. "The ECB has become more and more comfortable in pointing that out, not least because it’s been accused of keeping interest rates too high." The euro overnight index average, or Eonia, fell to 0.85 percent yesterday after the ECB’s latest rate cuts took effect -- about 0.7 percentage point below the 1.5 percent benchmark rate. Overnight deposits dropped to 56.3 billion euros, the lowest amount since Oct. 8. The ECB’s decision to offer banks unlimited amounts of cash, announced on Oct. 8, has culminated in the deposit rate setting the new de facto cost of short-term money. The move removed the need for banks to borrow in the money market to meet their reserve requirements.

Banks have been reluctant to lend to each other since Lehman Brothers Holdings Inc. went bust on Sept. 15, preferring to stash excess money with the ECB instead of taking the risk. As demand dried up, interbank-lending rates dropped toward the deposit rate. The Eonia rate averaged 106 basis points above the deposit rate in the seven years before the ECB started providing unlimited liquidity in October. Since then, the gap has shriveled and yesterday stood at just 35 basis points. Unlimited cash "results in refinancing costs for banks well below the current benchmark interest rate," ECB council member Axel Weber said on March 5. "We expect banks to pass this on to consumers and companies to stimulate the economy."

The overnight Eonia rate "is a very important starting point for all market expectations," said Julian Callow, chief European economist at Barclays Capital in London. "Any further reduction in Eonia expectations would lower Euribor rates and so be a considerable benefit for the real economy." The euro interbank offered rate, or Euribor, that banks say they charge each other for six-month loans dropped to a record low of 1.8 percent yesterday. Market rates of the same maturity traded at 2.08 percent in the U.K. and 1.93 percent in the U.S. While Trichet hasn’t ruled out further rate cuts, officials are hesitant to go much lower. There is "no reason to see the refinancing rate below 1 percent," Weber said on March 10. "I also see a problem with lowering the deposit rate to zero. I would prefer to leave it at 0.5 percent."

That reticence may be linked to Japan’s experiment in the 1990s, when it lowered its key rate to zero to revive its economy in what became known as the "lost decade." Japan shows that keeping rates too low for too long "will cause interbank trading to run dry, despite the ECB’s efforts to revive it," said Michael Schubert, an economist at Commerzbank AG in Frankfurt. Some ECB officials are concerned that too-low market rates will become counterproductive because they will sap banks’ returns and give them less incentive to trade with each other. That would undermine the ECB’s aim to revive interbank lending through its unlimited liquidity operations. "If we had excessively low interest rates, why would banks start lending to each other?" ECB council member Yves Mersch asked March 10. "It would be much safer to put their excessive funds into the central bank rather than engage in the interbanking market."

The ECB has cut its main refinancing rate, which is used as a benchmark in money-market operations, by a total of 2.75 percentage points since early October. That is still well above the key rates of the Fed and the Bank of England, which have started buying assets such as commercial paper and government bonds to ease credit tensions and boost their countries’ economies. So far, the ECB is focusing its efforts on providing unlimited liquidity to banks and said on March 5 it will provide these funds until at least the end of the year. "With the extension of providing unlimited liquidity, the ECB committed to keep the overnight rate very low for the foreseeable future," said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc in London. That is allowing Trichet to argue "that the ECB does not have such a different monetary-policy stance from the Fed and Bank of England," said Gilles Moec, an economist at Bank of America Merrill Lynch in London. He is "driving home the point that the ECB is doing much more than people think."

Japan's 4Q GDP revision confirms deep recession
Japan's economy shrank a bit less than first estimated in the fourth quarter, but the revised government data Thursday is hardly good news, serving only to underscore the increasingly grim picture for the world's second-largest economy. Export demand has collapsed, corporate profits are swerving into losses, and job losses are accelerating nationwide amid Japan's steepest slump since the end of World War II. Analysts say the current downturn — and the response of Japanese companies to it — have combined into a new kind of recession, that's swifter and deeper than ever before. "The Japanese economy was simply collapsing and nose-diving toward the end of last year," said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

Gross domestic product, or the total value of the nation's goods and services, fell at a 12.1 percent annual rate in the October-December quarter, slightly better than the Cabinet Office's preliminary reading of a 12.7 percent contraction. The contraction is the severest for Japan since the oil shock of 1974 and is double the pace of the decline in the U.S. On a quarterly basis, GDP dropped 3.2 percent, improved from an initial reading of a 3.3 percent decline due in part to an upward revision in inventories, the government said. Japan's economy has shrunk for three straight quarters and is almost certainly headed for a fourth quarter of contraction. Like its Asian neighbors, the export-reliant country has been pummeled by the U.S. financial crisis, which morphed into plunging global demand for its cars and gadgets.

The country's exports plummeted a record 13.8 percent in the fourth quarter from the third quarter, the government said. Capital expenditure — business investment in factories and equipment — fell 5.4 percent from the previous quarter, while government investment grew 0.1 percent. Iconic exporters including Toyota Motor Corp. and Sony Corp. — both of which are forecasting annual losses — have reduced shifts, suspended factory lines and announced thousands of job cuts over the past few months. Industrial production in Japan tumbled a record 10 percent in January. Economists say they've never seen Japanese companies move so quickly to cut staff, facilitated by their greater reliance on temporary contract workers who can be eliminated more easily than full-time employees.

"In past recessions, we typically ended up with excess employment, which resulted in excess production, which resulted in inventory," said Morita of Barclays Capital. "Households have a big hardship under the current recession, but with them as the sacrifice of the economy, the adjustment has been much quicker than before." The unemployment rate eased a tad to 4.1 percent in January, but the figure doesn't account for workers who have simply dropped out of the labor market altogether. So-called discouraged workers, who have stopped actively looking for a job, are counted in Japanese labor data as part of the "non-working population" instead of the unemployed.

A recent report by the Ministry of Health, Labor and Welfare estimated that nearly 158,000 "non-regular" employees in Japan's manufacturing sector will have lost their jobs between October and March. For all of 2008, the economy shrank a revised 0.6 percent — the first decline in nine years, according to the Cabinet Office. Many forecasters also expect another year of contraction in 2009. Estimates of the severity of the slump this year range widely with the International Monetary Fund forecasting a 2.6 percent contraction and JPMorgan tipping GDP to shrink 7.7 percent. To revive the economy, Japan's parliament passed a contentious 4.8 trillion yen ($52.2 billion) stimulus plan in January that includes a cash payout that amounts to 12,000 yen ($133) per Japanese taxpayer. Prime Minister Taro Aso — who faces dismal approval ratings — has championed the idea, saying it will stimulate sagging consumer spending. Officials may be considering additional measures to shore up the economy in the months ahead.

Already, Japan's central bank, which lowered its key interest rate to 0.1 percent in December, has introduced various steps to try to thaw a corporate credit crunch, including buying commercial paper, corporate bonds, and stocks from financial institutions. But Masamichi Adachi, senior economist at JP Morgan Securities in Tokyo, predicts this quarter will be even worse. He forecasts GDP to plunge an annualized 15 percent in the January-March period, though he expects Japan's economy to begin climbing again by the end of the year. "We believe that efforts of governments and central banks all over the world — which are still in pipeline — will work eventually, at least in some extent, and Japan's economy can benefit from them," he said in a report. "Nonetheless, expected severe business retrenchment in inventories, capital, and labor costs likely will weigh on growth significantly for a considerable time at large scale." In stock trading, the benchmark Nikkei 225 index was down 2 percent at 7,230.36. The dollar was trading at 96.21 yen, down from 97.31 late Wednesday.

EU to plead for stronger financial regulation at G20
The European Union will make a "now or never" plea for stronger global financial regulation at next month’s G20 summit, but will rule out more fiscal expansion to conquer the recession, EU policymakers said on Thursday. "I would like our ambition matched by others, regarding new rules for supervision and regulation of the financial system," said José Manuel Barroso, European Commission president. "The EU should go to the G20 summit saying, ‘It’s now or never’." Mr Barroso was referring to the April 2 meeting in London of the world’s 20 main advanced and emerging economies, an event where the US, the EU, China and others will compare notes on their fiscal stimulus plans and discuss the regulatory reforms needed to reduce the possibility of another global financial crisis. The Europeans are worried that the US, home to some of the world’s largest and most lightly regulated financial centres, lacks enthusiasm for a detailed set of international rules on regulation. For its part, the EU is calling for a "comprehensive, ambitious and globally co-ordinated approach towards regulatory reform, ensuring that all financial markets, products and participants are regulated or subject to oversight", according to a policy paper agreed by EU finance ministers this week.

In particular, the Europeans are emphasising the need to prevent systemic risk, by regulating hedge funds and private equity investment vehicles more tightly and by clamping down on excessive leverage and risk-taking. The transatlantic differences are not unbridgeable. US and European officials point out that both sides agree in principle on measures such as more effective oversight of derivatives markets and a stronger capital requirements regime for banks.Meanwhile, the EU’s 27 governments have closed ranks behind the view that Europe does not need to adopt a bigger discretionary fiscal stimulus, as Lawrence Summers, the White House economic adviser, has suggested, because it has already introduced anti-recession spending programmes that are similar in scope to that of the US. "We should resist the temptation to call for new initiatives before we have evaluated the initiatives that we’ve already launched," Mr Barroso told a meeting of the Lisbon Council, a Brussels-based think-tank. "Europe has not proved itself incapable of acting. Quite the opposite."

The headline US stimulus figure of $787bn is much larger than the €200bn in the EU’s official economic recovery plan, approved in December. But a comparison fails to take account of the vast expenditure on unemployment benefits and other welfare programmes that is triggered in Europe by a recession, EU officials say. "It has never happened before in economic history that 27 countries have decided at the same time to launch an economic programme of this magnitude," Mr Barroso said. It was possible to exaggerate the risk of protectionism spreading as a result of the recession, he added. "My own feeling is that there’s been more talk about protectionism than actual protectionism going on," he said. Michael Heise, chief economist at Allianz, the giant German insurer, said the EU’s fiscal stimulus, interest rate cuts and massive injections of liquidity by central banks, coupled with low energy and commodity prices, would produce an upturn in the European economy sooner than many analysts were predicting. But he told the Financial Times: "One problem is that the stimulus programmes will only last for 18 months to two years. Then you risk having another slowdown, because from the point of view of fiscal consolidation we’re really going to have to put the brakes on somehow."

Ilargi: The AIG London office story surfaced in England about ten days ago. Now it comes to the US.

AIG's Small London Office May Have Lost $500 billion
Ground zero for AIG's spectacular implosion, which has soaked up more federal bailout money than any other entity, appears to have been a small London branch office that may have lost nearly half a trillion dollars in bad deals. The disastrous deals were built up in a decade and, when the crisis hit, the man who ran the unit for the last eight years retired after making $280 million for himself and leaving with a $1 million-a-month consulting contract. The struggling New York-based insurance giant has avoided collapse with the massive infusion of $160 billion in taxpayer money. The U.S. government has agreed to prop up AIG because it fears that AIG has such extensive financial involvement around the world that its failure would be far more costly.

Britain's serious fraud office and U.S. regulators are combing through the records of AIG's Financial Products Group, formerly located on the fifth floor of an office building in London's Mayfair section. The unit's small group of traders risked nearly half a trillion dollars to insure U.S. mortgages and other debt using complex financial products called credit default swaps, according to recent congressional testimony. "AIG financial products was the core, the hottest point of the global financial crisis," freelance investigative reporter Peter Koenig told "Good Morning America" today. "It was the epicenter." The group's traders "found a crack in the system that was unregulated," Koenig told "GMA." Joseph Cassano, an American who ran the group for eight years, declined through his lawyer to talk with ABC News. But ABC News obtained a tape of Cassano from August 2007 telling investors just how confident he was.

"It is hard for us with, and without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions," Cassano bragged. Koenig said Cassano "had total confidence in his judgment. And he put no money against the fact that he might be wrong." For years, the system worked fine for Cassano and, during his eight-year reign as head of the Financial Products Group, Cassano pocketed $280 million in salary and bonus. But about one year after Cassano boasted that he wasn't worried about losing a single dollar, AIG began bleeding billions. "For about a decade it went OK," Koenig said. "And then, when the U.S. housing market fell out instead, they suddenly realized they had to come up with a half a trillion dollars and all they had was a couple of million in the bank."

The collapse became so severe that AIG warned the U.S. Treasury Department last month that if it wasn't given more federal aid, its failure "could potentially bankrupt or bring down the entire system." AIG admits that Cassano's unit nearly destroyed the insurance giant. "It was clear that this small unit engaged in trades that nearly brought down the company and it's still sound insurance business," AIG told ABC News in a statement. AIG said it is in the process of winding down the group. Cassano, who has homes in London and Connecticut, was forced to retire from AIG on March 31. Critics say despite the fact that the company is hemorrhaging money and being kept alive with taxpayer cash, Cassano has been allowed to keep his windfall.

In addition, according to Cassano's signed retirement agreement obtained by ABC News, he was to be paid $1 million a month by AIG for "consulting services" through the end of last year. The insurance arm of AIG is believed to be in good shape, but the fallout from AIG's financial products arm is still rippling through the U.S. economy and around the world. In a 21-page memo marked "strictly confidential" and obtained by ABC News, AIG pleaded for an additional $30 billion in federal aid last month by warning the Treasury Department that the "failure of AIG would cause turmoil in the U.S. economy and global markets and have multiple and potentially catastrophic unforeseen consequences."

Sir Alan Sugar, often referred to as Britain's Donald Trump, told "GMA" that you can't blame London for the AIG problems. "It may have started here, but it's an American company," Sugar said. "It just happened to be their place where plots were threaded." Sugar said that British Prime Minister Gordon Brown -- a "good friend of mine," he said -- "secretly blames the American businesses, banks that Europe looks up to." Sugar described the American fiscal atmosphere before the crisis as "over enthusiasms in business, greed. You maxed out over there, as you say." "You went mad, financial Disney World, slot machine in Vegas and every time you pulled a lever someone won, and it usually was a bank executive."

Geithner Expects 'Many' Banks Will Repay Government TARP Funds
U.S. Treasury Secretary Timothy Geithner said he wouldn’t prevent banks from returning government capital and predicted that "many" would.
Still, Geithner urged firms that get money from the Troubled Asset Relief Program to keep it until they can replace it with private capital to "provide lending to the economy." Restoring the flow of credit will help consumers and businesses struggling in a recession, he said. Banks "are living with a cloud of uncertainty, which is causing them to be defensive and withhold lending, and we need to arrest that basic dynamic," Geithner told the Senate Budget Committee today in Washington. "But I hope and expect and I believe it will be possible that many banks will be able to repay the government."

While Geithner testified in support of President Barack Obama’s $3.55 trillion budget for 2010, he faced a number of skeptical questions about the $700 billion financial rescue plan. The Treasury’s most recent tally shows the government has invested most of the first half of TARP in 489 banks nationwide. The Treasury chief defended the effort to fix the financial system as a way to help average Americans rather than reward Wall Street executives. "My obligation to the American people is to protect the financial security of this country and to protect our financial system, not because we’re here to do anything for banks," Geithner said, adding that he "wouldn’t give a penny to help a bank."

Budget Committee Chairman Kent Conrad, a North Dakota Democrat, told Geithner that among U.S. citizens, "the anger level is extraordinary" about the bailout. n"People in positions of responsibility took advantage of them," Conrad said. "And they, no fault of their own, are getting stuck paying part of the bill." Geithner told the panel he shared their "outrage," especially over Wall Street compensation practices that awarded executives big bonuses while their firms cratered. "You’re absolutely right that the judgments made by the leaders of our financial institutions have caused a catastrophic loss of basic confidence," he said. Geithner also told lawmakers to be cautious in considering a suspension of mark-to-market accounting rules, which many banks complain are causing them to take excessive writedowns on the value of illiquid securities they hold. "My personal point of view is that we have to be very careful not to do things that would erode confidence" among investors, Geithner said.

The Treasury secretary refused to rule out a request from the Obama administration for more bailout money, saying, "our hope is that Congress would come together and do what is necessary to make sure the financial system is strong enough." Obama left a $250 billion "placeholder" in the budget for additional aid to the financial industry. In his prepared remarks, Geithner said that "doesn’t represent a specific request." Geithner repeated much of the testimony he gave to the House Budget Committee last week, stressing that the Obama administration is "determined" to cut the federal budget deficit by half in four years. The administration projected a $1.75 trillion deficit for the current fiscal year, representing 12.3 percent of gross domestic product. The Obama budget plan would bring the deficit down to $533 billion, or 3 percent of GDP, by 2013, Geithner said. Short-term deficits are necessary to combat a recession that has seen 4.4 million job losses since it began in 2007, as well as strains in financial markets, Geithner said.

Geithner: Rules revamp needed to shield economy
Treasury Secretary Timothy Geithner said on Thursday U.S. regulations need to be revamped so the collapse of any single institution can no longer threaten the entire financial system. "We do not want to put this country in the position in the future where we are vulnerable again, where the weakness in one institution causes the risk of great damage to the fabric of the American financial system," Geithner told the Senate Budget Committee. "That basic objective has to underpin everything we do on the reform agenda and we have to get it right." U.S. officials have pledged to push forward with a revamping of the rules governing the financial system as a necessary complement to emergency efforts to prop up the financial sector and pull the economy out of a deep recession.

Geithner said he planned to roll out "a set of relatively detailed concrete proposals" on regulatory reform prior to testifying on the issue before a House of Representatives panel on March 26. He will stress the twin goals of battling recession while erecting a bulwark against future crises at a meeting of finance ministers from the Group of 20 rich and developing nations near London this weekend. The officials are laying the groundwork for a leaders summit set for April 2. The U.S. Treasury and Federal Reserve repeatedly have intervened to rescue ailing financial titans whose collapse they believed would damage the entire financial system and heavily damage the already suffering economy.

Earlier this month, officials expanded their bailout for ailing insurer American International Group to $173 billion and late last month they reworked their emergency aid for Citigroup Inc (C.N) in which the government raised its equity stake to as much as 36 percent. While he vowed to move to a system where such emergency measures would not be needed, Geithner defended the actions authorities have taken in recent months. "The bottom line is we have to make sure, given the severity of this crisis and the fragility of the system, that we do everything necessary to protect against the risk that we have a disorderly failure of a major financial institution," he said.

Geithner cautioned that efforts to modify so-called mark-to-market rules, which require banks to mark down the value of hard-to-trade assets beyond what some see as a reasonable level, could have the unintended effect of undermining market confidence. "We are in a period where investors do not have a lot of confidence in their capacity to judge the risks," he said. "We have to be very careful not to do things that would erode confidence in people's ability to assess the risks." Geithner said some proposals might do just that, but that Securities and Exchange Commission Chairman Mary Schapiro was moving forward carefully as she considered ways the rule could be modified.

Geithner vowed to move forward aggressively with measures to restore the flow of credit, which has dried up as banks have shouldered big losses on bad mortgages and other loans. Last month, he sketched out plans for a public-private partnership to buy up toxic assets that are strangling bank balance sheets. He made clear on Thursday his plan would seek to lever $1 trillion in financing in a program that would include the Federal Reserve and Federal Deposit Insurance Corp. Geithner said the program could be started with existing government resources under a $700 billion financial rescue program approved by Congress in October.

He said he would seek to limit risks to taxpayers, and that taxpayers would share in the upside should the assets gain in value. "Recovery depends on getting credit flowing again. Without very forceful action to make sure banks have the ability to lend even in a deeper recession and without continued action to get these credit markets working again, then recovery will be undermined," Geithner warned.

Geithner Said to Push G-7 to Ease Criticism of China Policy
Treasury Secretary Timothy Geithner pushed Group of Seven officials to soften criticism of China last month after his accusation that the nation was "manipulating" the yuan strained ties with the U.S.’s second- biggest trading partner, said a person briefed on the matter. G-7 finance ministers and central bankers on Feb. 14 welcomed "China’s fiscal measures and continued commitment to move to a more flexible exchange rate." By contrast, the group in April 2008 pressed for "accelerated appreciation" of the yuan. Geithner’s behind-the-scenes effort came just weeks after he publicly accused China of "manipulating" its currency during his Senate confirmation hearings, drawing criticism from the Chinese. Donald Straszheim, a former Merrill Lynch & Co. chief economist, said the G-7 shift may signal the U.S. Treasury won’t label China a manipulator in a report due April.

"I would be very surprised if we would bring up the currency manipulator terminology again any time soon," said Straszhiem, who heads Straszheim Global Advisors Inc. in Los Angeles. "I think it would be a mistake and I don’t think they’ll do that." The G-7 made its statement even after the appreciation of the renminbi stalled last year as China’s economy began to suffer the impact of the global economic slowdown. Treasury spokeswoman Heather Wong was not immediately available for comment. Geithner’s move to tone down the G-7 statement came amid a flurry of phone calls and meetings he had with Chinese officials, including Vice Premier Wang Qishan and Finance Minister Xie Xuren, according to details of Geithner’s schedule provided by the administration.

"Geithner’s change of attitude showed that he’s paying more attention to China’s effort in reforming its currency over the past few years," said Peng Xingyun, a senior international finance researcher at the Chinese Academy of Social Sciences, a government-backed institute in Beijing. China is the biggest foreign owner of U.S. Treasuries, holding $696.2 billion at the end of December, according to Treasury Department figures. The yuan was little changed at 6.8393 a dollar as of 12:08 p.m. in Shanghai. China’s currency has traded between 6.81 and 6.89 a dollar since mid-2008. Geithner will meet with Xie tomorrow in the U.K. as part of sessions with finance ministers from 20 of the world’s industrial and developing nations. The G-20 meeting will lay the groundwork for a leaders’ summit on April 2 in London.

Yesterday, Geithner prepared for the upcoming summit in a Washington meeting with Yang Jiechi, China’s foreign minister. A U.S. administration official said Geithner and Yang discussed their governments’ efforts to jump-start their economies, as well as strategies to cooperate at the meetings this weekend and press for broader coordination of fiscal stimulus measures. Geithner, 47, also called on China to support a new U.S. proposal to expand the International Monetary Fund’s supplementary borrowing program by about $500 billion. China already has pledged "substantial support" to the fund, he said. "We very much hope they’d be willing and interested to be part of this," Geithner told reporters yesterday. President Barack Obama and Chinese President Hu Jintao are preparing to announce in April the new shape of regular high- level talks between the U.S. and China. The previous administration held twice-yearly meetings led by former Treasury Secretary Henry Paulson.

Mortgage Investors Call for Changes in Rescue Plan
Investors who hold billions of dollars of residential mortgage-backed securities are pressing the Obama administration to make changes in its housing rescue plan. Participation by these investors will help determine the success of President Barack Obama's $75 billion plan to reduce foreclosures and help stabilize the housing market. But many investors are critical of features of the program and have been meeting with Treasury officials in an effort to influence parts of the plan, such as how it treats second mortgages.

Some investors say they are contemplating legal action because they think the administration's plan and legislation before Congress would violate their rights. They are particularly concerned about measures that would prevent lawsuits against mortgage servicers, which collect loan payments for the investors and are responsible for modifying loans with homeowners. "Investors are given rights through the contracts in the securities, and we expect those rights to be honored," said Jeffrey Gundlach, chief investment officer of TCW Group Inc., which manages roughly $52 billion in residential mortgage-backed securities.

Many of the four million borrowers the administration hopes to help through its loan-modification program have mortgages that were packaged into securities and sold to investors world-wide. Roughly $1.9 trillion of mortgage loans outstanding as of Dec. 31 had been packaged into securities that don't carry government backing, according to Inside Mortgage Finance. Thus far, servicers have been more reluctant to modify those loans than mortgages they own. Administration officials say they are trying to address the concerns of investors and others as they work out details of the program. The range of investors in mortgage-backed securities includes hedge funds, insurance companies and pension funds.

Some investors say they are willing to work with the administration. Mr. Grundlach says the program would be more palatable to investors if, for instance, modifications weren't given to borrowers who lied when they took out their initial mortgage. Treasury Department officials say they believe that servicers will be able to modify the vast majority of investor-owned loans based on their current contracts. They also point out that the plan includes financial incentives to encourage investor participation in loan modifications, but doesn't mandate that investor loans are reworked.

Home-equity loans and other second mortgages are an issue because such debt is junior to first mortgages. Some investors and analysts say that mortgage servicers may find it in their own financial interest to modify the first mortgage and not touch the related home-equity loan or line of credit. Roughly half of delinquent subprime borrowers also have a second mortgage, according to Credit Suisse Group. Mortgage investors say that rewriting the first mortgage without touching the second violates their rights, because second mortgages are supposed to be repaid second. Modifying the first loan can help the holder of the second mortgage, because it increases the chances the loan will be repaid, they say. But fixing both loans is a better strategy, they add, because it will produce a more affordable payment and reduce the chances that borrowers owe more than their homes are worth.

Investors say the Obama plan results in a conflict of interest, because many loans are serviced by big banks that also hold second mortgages -- and as a result have a financial interest in how these loans are handled. Government officials say they are working on a plan that would provide incentives for servicers to extinguish these second mortgages. Investors are also calling on the administration to strengthen the federal government's Hope for Homeowners program. Under it, some delinquent borrowers can refinance and get a more affordable, government-backed loan, provided the investor who currently holds the mortgage agrees to a principal write-down. So far, the program has fallen far short of initial expectations that it would help as many as 400,000 homeowners.

Foreign parts muddle push for additional auto loans
As the Obama administration crafts a rescue plan for Detroit's auto industry, it must weigh demands from several players pushing to limit how much taxpayer aid gets spent on vehicles and parts made outside the United States. "Buy American" rules played a key role in the debate over the federal stimulus plan and the financial industry rescue, with many members of Congress calling for barriers to keep aid in the United States. Yet Detroit automakers increasingly rely on a web of foreign suppliers and overseas units to keep their costs down. They say restrictions on federal aid would complicate rescue plans for General Motors Corp. and Chrysler LLC, pose major challenges for suppliers and violate global trade laws.

But some experts say such limits would ensure that the money benefits the U.S. economy as much as possible. Lansing Mayor Virg Bernero, who met last week with the administration's task force considering more financial aid for GM and Chrysler, said domestic rules were "a key issue -- that the money we send be spent on American production, that they're talking about production in America by Americans." Bernero said he told the panel he was pressing for aid even after GM decided to shift production of the Cadillac SRX SUV from a Lansing factory to Mexico. "Here I am out stumping for GM proudly and constantly, and when they do things like send the SRX to Mexico, it's very hurtful," he said.

Members of the tool-and-die industry, who are scheduled to meet with the task force today, say foreign sourcing is a major concern. D. Craig Wiggins, president of Tooling & Equipment Capital Solutions Inc., said one of his companies lost a Chrysler contract for tooling to a Chinese firm after the U.S. firm couldn't get a needed credit line, and Chrysler refused to change its terms. "U.S. taxpayer money is being used by Chrysler and GM, through their tier one suppliers, and sent to China," Wiggins said. Robert Scott, senior international economist and director of international programs at the Economic Policy Institute, said even as U.S. sales plunged last year, GM, Chrysler and Ford Motor Co. all expanded Mexican production.

"Why we should give them public funds to invest in Mexico makes no sense," Scott said. Scott said the administration could limit the market share of Mexican-made vehicles for automakers receiving aid. But such a restriction might run afoul of international trade deals. Last month, the United States and Europe won a World Trade Organization complaint against China over its barriers to imported auto parts. White House spokesman Robert Gibbs said Wednesday that the auto task force has yet to present President Barack Obama with its plans for helping automakers and suppliers. GM and Chrysler are seeking another $21.6 billion, while suppliers have asked for up to $25.5 billion. The auto industry likely will be "restructured and reimagined from where it is today so that Americans are buying cars that are built by and for Americans," he said.

Michigan Gov. Jennifer Granholm, who also has met with task force members, said the panel is "certainly aware of the importance of creating jobs in this country, and that's part of their calculus." Under the rules of their $17.4-billion rescue loans last year, GM and Chrysler must spend the loan on domestic operations. But the loan did not address how far down the supply chain those restrictions went. An industry official said after the loans were made, the U.S. Treasury clarified to automakers that the limit did not apply to their parts suppliers. In their aid requests, GM, Chrysler, suppliers and the UAW have emphasized the industry's domestic sourcing and the jobs they support. In its presentation to the treasury last month, GM touted that 77% of the parts value in its vehicles last year came from the United States or Canada; the automaker has told officials that 60% of its parts are made in the United States.

Under federal law, parts made in Canada are also considered domestic vehicle content.GM spokesman Greg Martin said "any potential U.S. federal aid money will be used exclusively for GM's U.S. operations." Still, GM relies heavily on foreign branches. Body engineering of the upcoming Chevrolet Volt hybrid, and its batteries, will come from South Korea, while GM's midsize cars are engineered in Germany. And the foreign parts content of Detroit's vehicles has been rising for the past few years, according to an analysis of federal data by the Free Press. Three years ago, 81% of GM's parts were from the United States or Canada. Chrysler's 67% score was the lowest among Detroit automakers last year, and the company has raised the foreign content in most of its models for 2009, likely placing it below Toyota Motor Co.'s average on North American-built models.

Chrysler spokesman Stuart Schorrr responded in an e-mail to the Free Press: "The single best way to support America is to support Chrysler's viability plan, as 78% of what we buy is purchased from U.S.-based suppliers." Laurie Harbour-Felax, an industry analyst and president of the Harbour-Felax Group, said her recent review of the tooling industry found that Detroit automakers had saved little if any money by shifting tooling and other complex parts overseas. She said the administration could certify some domestic suppliers as suitable replacements for foreign sources. "I do think there is a mass quantity of suppliers as good or better at cost in the states that need to be considered."

What's GE stock worth after the S&P cut?
Ask 10 people what General Electric Co shares are worth and you are liable to hear 10 different answers. Now that Standard & Poor's has stripped GE of its AAA credit rating and switched its outlook to "stable," some of the uncertainty surrounding the huge U.S. conglomerate has been lifted and the stock rallied amid relief S&P's cut was not deeper. But while some investors think GE stock could double from here, others warn that the company is not out of the woods yet. Among the many questions still on the table are the scope of writeoffs at its finance arm, the need for any additional funding, and the health of its industrial backlog.

GE -- the largest U.S. conglomerate -- will attempt to answer some of those questions at a crucial analyst meeting next Thursday, in which it is expected to spell out details about its balance sheet, including fresh data on likely credit losses. "Once they can provide a little more transparency into GE Capital, I think that stock will head back up toward $20," said Ted Parrish, principal at Henssler Financial Group in Kennesaw, Georgia, which owns GE shares. "It's been beaten up a little too much." GE last traded above $20 in early November. The stock has lost three-quarters of its value from its 52-week high of $38.52 in April, as investors focused on the potential landmines in its capital unit, overlooking the relatively upbeat prospects for its huge industrial units.

"With all the eyes on GE Capital, there is a decent story being lost," said analyst Daniel Holland of Morningstar, who has a five-star rating on the stock, estimating GE's fair value at $22. Holland said GE could help restore confidence in its long-term prospects with targeted industrial acquisitions, to shift the emphasis back to its core business. "It would give a lot of investors confidence GE can fight many battles and is positioning itself for growth," Holland said. A key question ahead of next week's analyst meeting is the extent to which GE Capital can be profitable this year.

Deutsche Bank analyst Nigel Coe said on Thursday GE could revise down its earlier target, which calls for $5 billion operating profit at the finance arm. Coe, who has a "hold" rating on GE shares and a $12 price target, estimates earnings of $2.9 billion at the finance unit. Citi analyst Jeffrey Sprague estimates GE shares are worth $9, reflecting the value of its industrial portfolio; the capital arm is worth zero, according to Citi. "The S&P ratings downgrade removes another overhang, but we still have concerns about escalating credit losses and more downside risk to industrial earnings," Sprague wrote in a note to clients. "It's likely Moody's will also weigh in shortly and may provide a more pessimistic view."

Profit fell 29 percent at GE Capital last year and was the main drag on the company's overall results, which were down 22 percent. Still, even with that decline, GE Capital earned $8.63 billion -- more than even GE's Technology Infrastructure division, which makes jet engines and CT-scan machines. The high potential profitability of the finance unit goes a long way toward explaining why it became such a large part of GE, growing dramatically during the tenure of prior Chief Executive Jack Welch. Current CEO Jeff Immelt wants to reduce GE's reliance on that business, cutting it to account for 30 percent of GE's profit, down from half in 2007, before the downturn started in earnest. S&P said it expects no earnings and no cash flow for GE Capital this year or next year, but its stable outlook reflected an "excellent" risk profile. "That would be one of the reasons we would look at their outlook, if GE Capital was going to report significant losses for a significant time," S&P analyst Robert Schulz told Reuters in an interview. "That is not our current expectation."

FASB Pledges Mark-to-Market Guidance in 3 Weeks
The chairman of the Financial Accounting Standards Board pledged to speed up on providing guidance for mark-to-market accounting rules Thursday, telling Rep. Gary Ackerman, after some pressing that it would be ready in three weeks. Rep. Ackerman (D., N.Y.) put the pressure on FASB Chairman Robert Herz at a hearing before the Financial Services Subcommittee on Capital Markets, in which Democrats and Republicans lambasted FASB and the Securities and Exchange Commission for reacting too slowly to provide guidance on mark-to-market rules. "If the press wants to report accurately, we can have this in three weeks?" Rep. Ackerman asked.

"We can have guidance in three weeks," Mr. Herz responded, although he noted he cannot guarantee it will fix things. Rep. Ackerman pressed again, asking if FASB "can and will" provide the guidance in that timeframe. "Yes," Mr. Herz said, noting he would talk it over with his board members later Thursday evening. Mark-to-market accounting rules require companies to record their assets at current market value. Since the market crisis, though, many have complained it has forced them to write down billions of dollars worth of assets, thereby hurting banks' ability to maintain regulatory capital requirements. Mr. Herz later added a caveat in his testimony, saying he is only one person on his board, with whom he still needs to talk over the request from Congress.

Local Economies Seek Own Revival
Cities, counties and states across the nation are launching home-grown economic-stimulus plans aimed at spurring local spending and keeping small businesses afloat during the recession. Some are taking the traditional route of cutting corporate taxes. Others are trying all sorts of ideas: Paying residents to shop in local stores; giving real-estate brokers bonuses for bringing tenants to empty strip malls; reducing fees on new development; even critiquing local restaurants and giving owners feedback on how best to bring in customers.

Here in Carrollton, just north of Dallas, council members have dipped into a budget surplus to create as many as 250 temporary jobs paying $8 to $10 an hour. Hiring will swing into gear this week for shifts planting trees, painting fire hydrants and sprucing up Little League fields. "I have no grand designs that we're going to solve the world's economic problems," says City Manager Leonard Martin. "But there's got to be something we can do to help some of our people." Local governments of all sizes have been searching for ways to do the same. More than 16 states are preparing their own stimulus packages, which are expected to total about $10 billion in spending, according to the National Conference of State Legislatures. At least 30 cities and counties are undertaking more localized efforts, according to people involved with those initiatives.

State and local governments are still hoping to get pieces of the $787 billion federal stimulus package, which is designed to pump money into health care, transportation and education, among other things. In Carrollton, Texas, community leaders are using Depression-era tactics to help jump-start the local economy. WSJ's Stephanie Simon reports. But leaders of many struggling cities and states say they can't afford to wait for their slice of that pie. They face substantial financial hurdles to acting on their own: Their tax revenues are declining, forcing some to slash budgets. They're constrained by balanced-budget requirements -- unlike the federal government, they can't run up deficits or print money. Still, they're floating bonds, raiding reserves and shuffling money among various accounts to free up capital for local stimulus efforts.

In Lancaster, Calif., for instance, where the unemployment rate has hit 15.2%, the City Council voted to take $500,000 from a reserve fund to try to spark consumer spending. Anyone who spends $300 at local businesses will get a $30 gift card from the city. Lancaster is also covering vehicle-registration fees for anyone who buys a new car or motorcycle in town. Already, the local auto mall has sold 60 cars under that program, including one to a customer who drove out from Beverly Hills just to shop in Lancaster. "It's pretty depressed around here," says Steve Gocke, the project coordinator. "This is a psychological boost." Newark, N.J., is taking $1 million out of a trust fund fed by the sale of city-owned land to guarantee bonding for small-scale contractors hoping to get a piece of the expected surge in federally funded road construction.

In western Pennsylvania, Allegheny County has promised all laid-off workers free tuition at the community college. More than 100 start classes this month in subjects such as nursing and computer technology. Big cities are also stepping up. New York City has a $15 million plan -- a fraction of its $43 billion budget -- to help laid-off investment bankers start new careers as entrepreneurs. This month, the city began offering office space, complete with computers and kitchens, at the low rate of $200 a month per person. The city is seeding a $3 million "angel investment fund" for start-ups. It also hopes to use $30 million in federal recovery funds originally set aside to deal with the aftermath of the Sept. 11 attacks to give grants to companies that create jobs in lower Manhattan.

San Francisco is tapping a pot of federal funds to offer small businesses $23 million in no-interest loans. The mayor also is pushing to waive local payroll taxes on new hires and to give tax rebates to companies that buy new equipment, such as commercial dishwashers, from local vendors. "It's a million flowers blooming," says Neil Kleiman, policy director for Living Cities, a community-development nonprofit. In the past, he says, economic development has often been focused on "trying to hold on to your large employers as beachheads, keeping the GM plant from moving to Ottawa. It wasn't focused on workers or stimulus. Now, we're seeing new economic development strategies for the 21st century." Even boosters recognize the limits of such initiatives. For one thing, local efforts can't address the structural problems that plague the global economy. "How can a community organize the unfreezing of the credit markets?" asks Maryland Gov. Martin O'Malley.

Economists dispute the effectiveness of small-business loans and subsidies for start-ups. Such incentives may help a particular town poach businesses from its neighbors, but that doesn't lift the regional economy. Another weakness: Many start-ups will fail long before the public can recoup its investment. Research shows that most job creation comes from midsize, "teenage" companies, which tend to be left out of most local stimulus plans, according to Brent Lane, director of the Center for Competitive Economies at the University of North Carolina. As for "buy local" campaigns and sales-tax rebates, some economists say their chief value is psychological -- they make residents feel a little better about opening their wallets. "There's a certain amount of morale building," says Jeff Finkle, president of the International Economic Development Council.

But economists do see clear benefits from local efforts to finance more public-works projects, which can create jobs, improve traffic flow, make shopping centers more attractive, and, in general, keep money flowing through the community. "If a local government has surplus funds, now's the time to spend," says Bernard Weinstein, director of the Center for Economic Development and Research at the University of North Texas. A number of states have adopted that approach. Ohio recently sold $240 million in bonds to finance a stimulus package that Gov. Ted Strickland estimates will create 57,000 jobs through projects such as building bridges and sewers and cleaning up abandoned industrial sites. Florida Gov. Charlie Crist expects to create 39,000 jobs by speeding up the timetable on public-works projects.

And as early as next week, Iowa Gov. Chet Culver is expected to ask the state legislature to approve a $750 million bond issue -- something the state has seldom done and never on this scale, says Phil Roeder, his communications director. The money would fund infrastructure improvements. "It is really intended as a job-stimulus effort," Mr. Roeder says. "That's priority one." Several cities, including San Francisco and New York, are also accelerating spending on public works. Here in north Texas, Carrollton is doing that, too, but with a twist: It's focusing on small projects that jobless men and women can accomplish without much special training. The city of nearly 125,000 ended its latest fiscal year on Sept. 30 with a $900,000 surplus in the general fund, thanks to conservative budgeting and last year's spike in oil prices, which temporarily lifted the Texas economy.

The council typically spends such windfalls on big-ticket projects such as resurfacing sidewalks, which it contracts to outside vendors. This year, Mr. Martin, the city manager, decided it would be better to think small -- and local. By January, Carrollton's jobless rate stood at 6.5%. That's below the national average of 8.5%, but significantly higher than Carrollton's rate of 4.1% a year earlier. The line at a day-labor center forms before dawn. Requests for employment help at the government-funded social-service agency, Metrocrest, are up 40% over eight months. Each week, more families come to the Metrocrest food pantry, piling ramen noodles, turkey sausage and canned beans into plastic bags. Nearly half the new clients say they have never before sought help with groceries.

Most Carrollton leaders are fiscal conservatives, not given to expanding government programs. But one by one, members of the City Council came to believe they had to act, council members say. The realization hit Councilman Tim Hayden when he went out to a favorite burger joint on a Friday night and found the usually hopping restaurant nearly deserted. Councilwoman Pat Malone got scared when business at her downtown gift shop dropped 20% over the course of a year. Mayor Ronald Branson says he began noticing neighbors bunching in anxious circles after church, discussing layoffs. When Mr. Martin proposed a jobs-creation program, which he saw as a small-scale version of the New Deal, the council backed him up. "We like to think of Carrollton as a family," says Mayor Branson. "We like to take care of our own."

Mr. Martin posted the first four openings even before the council's unanimous vote last week to appropriate $200,000 from the surplus. Within days, he had 54 applications on his desk. Some positions are clerical. Others involve manual labor: Unclogging culverts, filling sandbags, whacking weeds and planting thousands of crape myrtle and Mexican plum trees in parks and along streets. Applicants need not live in Carrollton, but must pass drug and criminal-history screens. The plan has angered some residents, who see it as a misuse of taxpayers' money. Kenneth Buxton, a retired steel worker, says he's endured stretches of unemployment and always got by on his own. He recalled his father's disdain for the Works Progress Administration, which put millions to work during the Great Depression. "He said WPA meant We Putter Around," Mr. Buxton says. "That's what they're doing here -- providing make-work jobs."

Council members respond that they're simply outsourcing work that has been on the city's to-do list for years. They also hope the project will nudge private citizens to do a little job creation of their own, by hiring out-of-work neighbors to weed gardens, paint porches or do other odd jobs. Mr. Martin, 62 years old, says his goal is modest: "Give people hope." The city manager says he grew up in such poverty that he patched holes in his shoes with cardboard and treated wounds by disinfecting them with kerosene. He recalls a day a few years after his father died when there was no food in the house and no money to go shopping. He was 18, just starting his senior year in high school, and he figured there was nothing to do but drop out and find full-time work. But a series of mentors came up with flexible class schedules, part-time jobs, scholarships and solutions.

"Nobody comes through life self-sufficient," he says. "Sometimes we forget that." Rhea Shay Myers, a medical assistant who has been out of work since April, says she would welcome a short-term job, even just a few hours of manual labor. She could use the cash, but even more, she longs to feel productive again. "I'd cut someone's lawn. I'd paint their gate," she says. "We need that, from a psychological standpoint." Louis Holbert agrees -- to a point. He spent 12 years at a paper plant, working his way to a managerial salary of $70,000. He was laid off in 2004, landed a road-maintenance job, then was laid off again about a year ago. Now, he counts himself lucky to have part-time work in a paint shop at $12 an hour. He was evicted from his apartment. His car was repossessed. He gets groceries at the food pantry.

Mr. Holbert, who is 48, is all for the local stimulus package, but he fears the city is overestimating the value of jobs that may, in some cases, last just a few days. Planting trees for a couple afternoons, he says, won't be enough for the jobless people he knows. "If you can find jobs that would last a few months, that might get their self-esteem back," he says. "That might get them to where they feel normal again." His lunch break was almost over, and Mr. Holbert, who had stopped by the social-service agency for a free bus pass, hurried into the food pantry. He picked out fried chicken and Hamburger Helper and day-old banana-nut muffins. Then he straightened his hard hat, white with an American flag, and set off to catch the bus back to work.

Rich list hit by economic crisis
The financial crisis is taking its toll on the world's richest people, wiping 332 names off Forbes magazine's "rich list" of world billionaires. Just 793 people can now lay claim to a place on the list, but on average they have lost 23% of their wealth. The stock market collapse helped Microsoft founder Bill Gates regain the top spot, despite his wealth declining $18bn (£13.06bn) to $40bn. He ousted investor Warren Buffet, whose fortune declined by $25bn to $37bn. In 2008, Mr Buffet had managed to end Bill Gates' 13-year reign at the top as shares in his firm Berkshire Hathaway surged to a record of $150,000 per share just before Forbes formulated its 2008 ultra-rich list. However, the financial crisis has since taken its toll on Berkshire Hathaway, with its share value sinking 50% over the past 12 months.

Indian businessman Anil Ambani experienced the biggest reversal of fortunes, slipping to number 34 on the list from number six last year, as his net worth sank by $31.9bn to $10.1bn. The declining health of the world economy meant that to make the top 20 on the Forbes list this year a net worth of just $14bn was needed - compared with $21bn in 2008. And in the past year, only 44 people on the list managed to increase their fortunes, compared with 656 who lost money. Mayor of New York Michael Bloomberg was the only member of the top 20 who managed to increase his net worth. His wealth rose by $4.5bn after a re-evaluation of his financial data firm Bloomberg LP.

But the credit crunch did prove to be a boon for some names on the rich list, with nine out of the top 20 boosting their fortunes from discount retailing. Japan's Tadashi Yanai, founder of budget retailer Uniqlo, was one of the few newcomers to the 2009 list entering it at number 76 with a net worth of $6bn. Meanwhile German Karl Albrecht moved up from number 10 to number six as his supermarket chain Aldi cashed in on its cut price credentials. His rise in position came despite the fact that Mr Albrecht's net worth in absolute terms declined to $21.5bn from $27bn last year. In the regional stakes, countries like India and Russia lost ground this year to the US, which reasserted its dominance over the world's wealthy elite.

The three richest men in India all saw their fortunes plummet by more than half, while Russian billionaires lost a total of $369bn between them. US citizens now lay claim to 10 of the top 20 spots - up from four last year - while the US is also the country with the most billionaires. As a result New York has also toppled Moscow as home to the most names on the rich list with 55 billionaires. The Russian capital itself has slipped to third place, with 27 members on the list, while London has edged into second place with 28 billionaires.

Swiss Bank Secrecy Pressured as Liechtenstein Eases
Switzerland, where banks manage 27 percent of the world’s offshore wealth, may come under increased pressure to water down banking secrecy after Liechtenstein and Andorra agreed to help in the fight against tax dodgers. Liechtenstein said today it will comply with standards for transparency and information exchange set by the Organization for Economic Cooperation and Development, and seek agreements with other nations to shed its status as a rogue tax haven. Andorra agreed to amend its laws by November. "This clearly puts more pressure on Switzerland," said Cedric Tille, a professor at the Graduate Institute in Geneva and a former economist at the Federal Reserve Bank of New York. "Business as usual a couple months from now is not an option."

Switzerland, Liechtenstein and Andorra are being pushed to loosen bank secrecy as the U.S. and European governments seek to protect their tax revenue amid the worst financial crisis since the Great Depression. UBS AG, Switzerland’s largest bank, last month handed over the names of about 300 customers to the U.S., the first time Swiss authorities have bypassed secrecy laws introduced to protect clients from requests by Nazi Germany. Liechtenstein’s announcement may chip away at the distinction between tax fraud and tax evasion on which Switzerland and its Alpine neighbor have relied to shield foreign bank clients from tax authorities at home. While tax fraud, or misleading authorities, is a crime in both countries, tax evasion, or failing to declare assets, is a civil offense.

In December, Liechtenstein agreed to share tax information with the U.S. Under that accord, authorities can request the records of taxpayers where there is evidence of tax evasion, in addition to existing rules that allow secrecy to be lifted in cases of money laundering or tax fraud. The agreement doesn’t permit the release of information if there is no allegation of wrongdoing, ruling out so-called fishing expeditions criticized by Swiss authorities. "The distinction between evasion and fraud will fall and Switzerland may cooperate on tax evasion with the same provisions as Liechtenstein," said Christian Stark, an analyst at Credit Agricole Cheuvreux in Zurich. A deal "limiting information to a case-by-case basis where there is evidence" would be "a big relief."

On Feb. 19, a day after UBS agreed to release the names of 300 clients, the U.S. government sued to force disclosure on as many as 52,000 Americans who allegedly hid Swiss accounts from tax authorities. The following weekend, European leaders said they will crack down on tax havens and threatened sanctions against "uncooperative jurisdictions." The Swiss government this month said privacy protection for bank clients should be preserved, though international cooperation on tax offences will be improved. It set up a group of experts to look at issues such as how to define tax fraud and will advise on talks with other countries. Swiss Finance Minister Hans-Rudolf Merz has said he’s willing to collect taxes on offshore accounts for the U.S. Justice Minister Eveline Widmer-Schlumpf offered cooperation on some cases of tax evasion.

"There was already significant pressure on Switzerland, but this adds to that," said Andreas Venditti, a banking analyst at Zuercher Kantonalbank in Zurich. The government should fight demands to ease the distinction between tax fraud and evasion, said Hans Fehr, a member of parliament from the Swiss People’s Party, which has more seats than any other party in the legislature. "Liechtenstein should not be an example for us," said Fehr, who represents the canton of Zurich. "We are putting pressure on the Swiss government to stay steadfast on the issue of banking secrecy" and "anchor" secrecy in the constitution. Switzerland enacted secrecy legislation in 1934. The law was amended in 1998 to stop banks from shielding the identities of those suspected of money laundering or tax fraud.

Most Swiss support banking secrecy, the Swiss Bankers Association said yesterday, citing a poll of 1,004 people. About 78 percent of those surveyed want to preserve the current client confidentiality regime, and 91 percent favor protecting their privacy in financial matters. Offshore accounts in countries such as Switzerland cost the U.S. about $100 billion in taxes annually, according to estimates from Michigan Senator Carl Levin. The U.K. probably loses at least 4 billion pounds ($5.6 billion) a year in revenue, the London-based Trades Union Congress said March 1. "We’re in the midst of a massive commercial war, accentuated by the collapse of investment banking and the credit crisis, which has turned financial centers back toward the more traditional activity of private banking," said Edouard Cuendet, deputy secretary general of the Geneva-based Swiss Private Bankers Association.

The OECD lists Liechtenstein as an uncooperative tax haven, along with Andorra and Monaco. European leaders have said they plan to crack down on tax havens as they prepare for a meeting of the Group of 20 nations. Finance ministers from G-20 nations will meet March 14 in London, followed by heads on April 2. The OECD said yesterday it had prepared a list of countries that don’t fully meet its standards of information disclosure on tax matters, including Austria, Luxembourg and Switzerland. The review was drawn up for the G-20 and presented to the U.K. government, which hosts the next meetings. "The threat is the very great pressure being put on Switzerland in the context of the G-20 meeting," Cuendet said. "Switzerland isn’t technically a tax haven, and even if France and Germany want it to be on the official list of the OECD, that will be difficult given that Switzerland is a member."

UK trade gap widens as exports slow despite pound
Exporters are finding it tougher to take advantage of the weakness of the pound as world trade slows. Official figures yesterday underlined the growing struggle facing exporters with the trade gap in goods in January widening by a bigger than expected 7pc to £7.745bn. Overall exports dropped 4pc to £18.8bn while imports fell 1pc to £26.5bn. The rapid deterioration in key overseas markets was graphically reflected in the 16pc slump in exports to non-EU markets where the trade deficit reached a record £5.7bn, Exports to the rest of Europe, helped by the strength of the euro, rose 6pc, reducing the trade deficit to £2bn but an 8.5pc fall in shipments to the US and a slowdown in deliveries to weaker Asian markets more than offset the improvement.

Manufacturers feel the closer Eurozone markets are offering better prospects as they attempt to replace business lost in the US and Asia and although the improvement in exports has reduced Britain's trade gap with the EU to its lowest level for six years there are uncertainties about how long it can be maintained. The extent of the disruption to world trade produced by the global financial crisis was underlined by figures from China showing that exports last month slumped by more than a quarter. The rapid downturn in manufacturing in Britain has added to concerns about the outlook for the economy as hopes that sterling's weakness would provide some trade comfort continue to evaporate. Figures released this week show manufacturing output falling at its fastest rate for more than 40 years.

The surplus on services rose 5pc to £4.2bn in January but the weakness of exports meant the combined deficit on goods and services rose 12.5pc to £3.6bn. Economists see little prospect of a turn around because of the bleak export outlook. Vicky Redwood, UK economist at Capital Economics, said the "weakness of global demand appears to be delaying the much-hoped for rebalancing of the economy. Alan Clarke at BNP Paribas said: "Overseas demand is collapsing and even though the pound is weaker, it's overseas demand that dominates and that is likely to be the case for several months to come." The ONS feels that over the last three months the trade deficit has been fairly flat, pointing to a narrowing of the deficit in goods and service from £11.1bn to £10.3bn. Exports of goods were down 9.5pc and imports by 7pc over the period. Over the quarter exports to the US dropped by almost £1bn, by nearly £450m to India, £233m to China and £378m to Russia. Car exports were down 11pc while imports rose 9pc.

Britain 'biggest in EU by 2050'
Britain could have the biggest population in Europe by 2050 and be the third biggest recipient of migrants in the world, UN projections suggest. They predict net immigration will average 174,000 a year up to 2050, swelling the population to 72 million. The US would take the largest number of migrants - 1.1m a year between 2010 and 2050. Canada would take 214,000 a year. A minister said earlier that numbers of workers from new EU states applying to work in the UK were falling. The UN predictions, based on the latest census and research from around the world, suggested Britain would be the third biggest recipient of immigrants between 2010 and 2050.

After the US, Canada and Britain - Spain is projected to take 170,000 migrants a year, Italy 159,000, Germany 110,000, France and Australia 100,000. It would mean by 2050, Britain would have a population of nearly 72.4 million - overtaking Germany, whose population is projected to fall sharply over the period, as Europe's largest country. Although Germany's population is currently above 82 million, the UN suggests a combination of falling birth and rising mortality rates could see this drop to about 70 million by 2050. The researchers said the global economic crisis would only slow down migration rates temporarily.

Labour MP Frank Field and Conservative Nicholas Soames - who campaign on the issue of immigration - said it was "more evidence of the pressure that uncontrolled immigration will place on our population, and therefore our quality of life". The Conservatives said it was evidence of the need for "proper controls" on immigration - including a cap on work permits and language test for those who want to move to Britain to get married. Earlier, Immigration Minister Phil Woolas told MPs on the European Scrutiny Committee the "best estimate" of numbers of workers from the 10 newest countries to join the European Union was a prediction of 665,000 for next month - 550,000 more than when they joined the EU in May 2004.

The estimates were based on registration figures, data from the Labour Force survey and analysis by the Institute for Public Policy Research. But he told the committee that the numbers of people applying for the Worker Registration Scheme - which residents of the accession countries have to join if they want to work in the UK for more than a month - were falling. In the final quarter of last year, 29,000 had applied, compared with 53,000 in the same period on 2007 and 65,000 in the last three months of 2006. Mr Woolas said this was mainly explained by a fall in the numbers of applications from Polish nationals.

On Monday, Business Secretary Lord Mandelson told the committee that eastern Europeans were filling jobs that British people did not want to do and had made a "positive contribution to the UK economy as a whole". Mr Woolas said the Home Office agreed that there had been a "general value added" from the migration of eastern European workers. But that did not mean it could be "extrapolated into the future". The government has until the end of April to decide whether it wants to extend the Worker Registration Scheme for eight of the accession countries - excluding Romania and Bulgaria - until 2011. It began phasing in a new immigration points system, which is based on education, previous salary and age, last year, for migrants from outside the EU.

Swiss central bank sells own currency
The Swiss franc plunged to its lowest level so far this year on Thursday after the Swiss National Bank said it was set to make purchases in the foreign exchange market to halt the currency’s rise against the euro. The Swiss franc’s haven status has been heightened by the recent market turmoil and seen it rise 9 per cent on a trade-weighted basis since July and come close to its record high around SFr1.43 against the euro in recent weeks. The SNB said the Swiss franc’s strength represented an "inappropriate tightening of monetary conditions" as it battled against a sharp deterioration in the Swiss economy. "In view of this development, the SNB has decided to purchase foreign currency on the foreign exchange market to prevent any further appreciation of the Swiss franc against the euro," the central bank said. The central bank said it had implemented its decision, with traders confirming that the SNB had been active in the market. This represented the first time a major central bank has intervened in the foreign exchange markets since 2004 when the Bank of Japan sought to weaken the yen.

The Swiss franc dropped 3.2 per cent to SFr1.5290 against the euro and dropped 3.7 per cent to $1.1952 against the dollar. Marc Chandler at Brown Brothers Harriman said even though the SNB’s intervention to weaken the franc was enjoying immediate success, the policy’s longer term prospects were more questionable. "It is troubling that a country with a current surplus larger than 10 per cent of GDP feels compelled to depreciate its currency," he said. "Moreover, at the G20 preparation meeting this week, officials will once again call to avoid protectionism." Mr Chandler said the real problem the SNB was trying to address was the threat of deflation. "Currency depreciation is a blunt instrument for such a goal," he said. "This is not to suggested that investors fade the Swiss franc’s drop. However, it suggest that after the immediate surprise factor wears off, the market will reassess the merits of intervention." The SNB also cut its interest rates by 25 basis points, taking its three-month libor target range down to 0 to 0.75 per cent.

It also announced plans to follow the Bank of England and the Federal Reserve and adopt a quantitative easing approach to monetary policy, saying it would buy bonds. Analysts said the move towards quantitative easing was sparked by drastic changes in the central bank’s forecast for growth, which is now expected to fall between 2.5 per cent and 3 per cent in 2009, much worse than its previous forecast of a drop of between 0.5 and 1 per cent. Elsewhere, the yen staged a broad rally on Thursday as investors repatriated funds ahead of the end of the Japanese business year. In March Japanese investors typically switch foreign assets back into yen to bolster their books ahead of the end of the Japanese fiscal year, boosting the Japanese currency against its competitors. "The yen was the major outperformer this morning with repatriation related flows being the main drivers", said Hans Redeker at BNP Paribas. "The move will make investors cautious on long dollar/yen positions, in the near term, as fiscal year-end flows have the potential to reverse some of the recent trend."

Data for the previous week showed net currency inflows into Japan, while Japanese investors were also net sellers of foreign assets. The yen rose 0.1 per cent against the dollar to Y97.30, and 0.3 per cent against the euro to Y124.56. Against the pound, the yen climbed 0.8 per cent to Y133.71. An interest rate cut by Reserve Bank of New Zealand overnight sent the Kiwi to a two week high against the US dollar. While some expected more than the 50 basis point cut by the central bank, the currency was buoyed by comments from Governor Alan Bollard hinting that a near-zero interest rate was not a necessity. The prospect of the Kiwi maintaining an interest rate differential against the US and Japanese currencies, where rates have already been slammed close to zero, pushed the New Zealand dollar up 0.2 per cent against the US dollar to $0.5113.

China's exports fall 25.7% as global crisis extends its reach
The global financial crisis has finally and dramatically caught up with China, sending exports from the workshop of the world tumbling last month and slashing its trade surplus. Exports in February slid by 25.7 per cent from a year earlier, dwarfing forecasts of a 5 per cent fall, while imports dropped 24.1 per cent, close to predictions of a 25 per cent decline. The resulting trade surplus was only $4.84 billion (£3.5 billion), a three-year low, compared with $39.1 billion in January and a record $40.1 billion in November, China's customs administration said. That was far short of market expectations of $27.3 billion. The fallout may be felt across the Chinese economy, with the possibility of acceleration in the increase in unemployment and yet more slowing of consumption, despite a $600 billion stimulus package that the Government hopes will cushion the blow.

Paul Cavey, an economist with Macquarie Securities in Hong Kong, said: "China has finally and spectacularly succumbed to the world financial crisis on the export side, and it's difficult to see why that would improve in the short term." China's exporters had fared better than competitors in places such as South Korea and Taiwan, encouraging conjecture that cost-conscious shoppers in the West were trading down to cheaper made-in-China goods. "This is clearly worse than expected," said Robert Subbaraman, an analyst with Nomura International in Hong Kong, who indicated that the markets had been expecting a 1 per cent rise in exports despite the worldwide slowdown. "China is feeling the pinch like other Asian countries from the global downturn now," he said.

The collapse in global demand for China's toys, shoes and other goods has already put 20 million migrants out of work. Communist leaders worry that more job losses could spark unrest and are promising to spend heavily to create employment. Isaac Meng, an economist with BNP Paribas in Beijing, said that it was unrealistic to expect China to remain immune to the sharpest drop in global trade in 80 years. Of the decline in exports, he said: "That's a terrible number. It will have a pretty big impact on Chinese domestic demand. Probably 60 million to 70 million workers directly work in these export sectors, so there will be secondary impacts on capital expenditure, employment and consumption."

The fall in exports was the steepest since bankers started to keep records in 1993. The figure piles pressure on Beijing to move quickly to carry out its stimulus package aimed at boosting the world's third-largest economy. Ben Simpfendorfer, a Royal Bank of Scotland economist, said: "Exports will get worse before they get better. We could see contractions of up to 30 per cent. I do think the economy will struggle to bounce back." Mr Simpfendorfer said that he saw no way for the stimulus to prop up growth until the second half of the year.

Mei Xinyu, a researcher with the Ministry of Commerce, said: "Any recovery in the export sector will not take place until the third or even the fourth quarter of this year." That is bad news for those hoping that China, with its huge bank of domestic savings, could be in a position to help to revive other economies. Some figures suggested a ray of hope. Investment in urban areas in fixed assets such as roads, power plants and apartment buildings rose by 26.5 per cent in January and February, against a year earlier. But inventories of raw materials have begun to mount again and a rise in steel prices has proved short-lived.

China New Yuan Loans More Than Quadruple on Stimulus
China’s new loans more than quadrupled in February from a year earlier after the government pressed banks to support a 4 trillion yuan ($585 billion) stimulus package for the world’s third-biggest economy. Banks extended 1.07 trillion yuan of local-currency loans, the central bank said on its Web site today. M2, the broadest measure of money supply, climbed 20.5 percent from a year earlier, the fastest pace in more than five years, after growing 18.8 percent in January. The lending, which adds to a record 1.62 trillion yuan of new loans in January and a surge in investment, may help to revive growth as an export collapse closes factories and eliminates millions of jobs. Chinese banks, which have side- stepped the toxic assets that crippled lenders in the U.S. and Europe, risk an increase in bad loans this year in a weakened economy, according to Fitch Ratings.

"The pace of lending in January and February is certainly unsustainable and dangerous to the health of the financial system," said Sherman Chan, a Sydney-based economist at Moody’s "Lax credit assessment right now may lead to a surge in delinquencies in the years to come." New yuan loans in February 2008 were 243.8 billion yuan, according to earlier central bank data. Outstanding yuan- denominated loans at the end of last month were 33 trillion yuan, 24.2 percent higher than a year earlier. The gain in M2, to 50.7 trillion yuan, was the fastest since October 2003. "Chinese banks are actually gearing up and pumping liquidity into the economy," said Sun Mingchun, an economist at Nomura Holdings in Hong Kong.

Urban fixed-asset investment climbed a more-than-estimated 26.5 percent in January and February combined, the statistics bureau said yesterday. Exports tumbled 25.7 percent in February, the customs bureau said, the biggest decline since Bloomberg data began in 1995. China’s loan surge contrasts with the U.S., where Treasury Secretary Timothy Geithner is trying to spur bank lending. Chinese banks have less than 1 percent of the $1.2 trillion of losses and writedowns reported by financial institutions as a result of the crisis triggered by defaults on U.S. mortgage payments. They stepped up lending after the central bank removed quotas in November last year and the government urged support from lenders for the 4 trillion stimulus.

Central bank Governor Zhou Xiaochuan said March 6 that loans and money supply may have grown too quickly. Still, he said, it was best to act quickly and forcefully to revive growth and fine- tune policies later. Premier Wen Jiabao announced on March 5 a target for lending this year of 5 trillion yuan, meaning that the banks are halfway there with 10 months to go. The surge in credit has triggered concern that some of the money is being pumped into the stock market. "Our general assessment is that the fundamentals of these loans are normal," China Banking Regulatory Commission Chairman Liu Mingkang said Feb. 26. Given such a rapid decline in economic growth, "it’s necessary to boost the intensity and pace of credit support to help companies in difficulties."

Bank of China Chairman Xiao Gang said last week that the sharp rise in lending in January and February was "normal" because of pent-up demand caused by previous restrictions and the "frontloading" of credit so that lenders start earning interest income immediately. China spent about $650 billion recapitalizing its largest banks in the past decade as government-directed lending led to a surge in bad loans. Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., and Bank of China are now the world’s three largest lenders by market value after selling shares to the public and complying with international accounting and capital adequacy rules. Growth in M1, the narrow definition of money supply, rose 10.9 percent to 16.65 trillion yuan at the end of February from a year earlier, recovering from a slump to 6.7 percent in January, today’s statement said.

To the victor go the spoils: who answers the phone in the US Treasury?
by WIllem Buiter

Nobody home in Washington DC
Since the Obama administration took over on January 20, the US Treasury has effectively been out to lunch. As widely reported (see e.g. this account in the Financial Times), Sir Gus O’Donnell (as cabinet secretary the top UK civil servant) has attacked the "absolute madness’ of the US spoils system, where a new Federal administration replaces the entire top stratum of the civil service with new officials possessing the right political connections and leanings. Quite a few of these top officials need to be confirmed before they can start working. This can take months. Many of the new officials have no political, government or administrative experience and spend most of their first months in office trying to figure out where the washroom is instead of designing and implementing policy. It is a system designed to produce protracted policy paralysis. Often this does not matter much. It may even be helpful to the greater good at times - "That government is best which governs least." - but in times of war and deep economic crisis, when the world we thought we knew may be falling apart, it is not a bad idea to have a government that can both think and act. The current US administration neither thinks nor acts much, judging from the results.

The reason Gus O’Donnell made his remarks is that the UK government are busy organising next month’s G20 summit in London, and found that when they ring the US Treasury, either nobody answers the phone or they get put on hold and have to listen to Vivaldi’s Four Seasons for hours on end. In the UK system, there is a permanent civil service which smoothes the transition from one government to the next. This is also the norm in most other advanced industrial countries today. The permanent professional civil service system also has its flaws - it can become a state within the state, running rings around their supposed political masters (watch Yes Minister or Yes, Prime Minister to get a wonderful and accurate depiction of an out-of-control professional civil service) - but there are ways of minimizing and mitigating the risk of rule by a professional civil service other than the US ’solution’: paralyzing and demoralising the professional civil service.

The price of the US spoils system: the emasculation of US macroecononomic policy making
The price of the US spoils system has been high, if the quality of economic policy making in Washington DC by the Obama administration is anything to go by. The Obama administration’s handling of the financial crisis and the recession-verging-on-depression has been surprisingly fumbling and kak-handed. The economic team should have hit the ground running following a lengthy transition period and the appointment to the top positions of experienced economic policy makers like Tim Geithner, Larry Summers, Peter Orszag and Paul Volcker. But there is little evidence of coherent teamwork. Instead we are treated to repeated examples of the Unfinished Symphony (Geithner) or of A Night at the Improv (Summers). In the US Treasury, Timothy Geithner has come up with a number of half-baked plans, under the grand umbrella of the Financial Stability Plan of February 10. These plans are not worked out to the point that they can even be evaluated properly, they are not costed properly and, except for the money left from the TARP and the funds approved by the Congress for the US$ 787 bn fiscal stimulus plan, they are not funded.

That the half-worked-out fiscal-financial rescue plans of the US government are not funded is due to a deeper flaw in the US political economy than the spoils system. It reflects the extreme polarisation of American society and of the polity. This may have started as early as the Vietnam War years, accelerated during the Reagan administrations and exploded during the George W. Bush administrations. Almost any departure from the status-quo is subject to de-facto veto from some well-organised and well-funded special interest coalition. During times of war and economic crisis, policy paralysis is costly. But the fact that the economic plans of the administration are only half worked out is due to the fact that, except for the Treasury Secretary himself, the entire top of the Treasury is vacant. it is even possible that Geithner has to make his own coffee, a task normally delegated to a Deputy Secretary. This is an insane situation that no self-respecting country should allow to continue.

With Geithner under-supported and over-worked, Larry Summers, Director of the National Economic Council, has jumped into the macroeconomic policy fray with gusto, but not, unfortunately, with the benefit and backing of careful analysis. Larry’s understanding of policy-oriented macroeconomics is fully encompassed by the ‘Keynesian cross’ of introductory macroeconomics textbook fame. We have a recession. The world has a recession. During recessions, firms don’t spend. So households and governments must spend. Part of any national spending boost leaks abroad through imports. The global public good of demand expansion will therefore be under-supplied unless there is international coordination and cooperation. Therefore governments everythwere must cut taxes and/or boost public spending. I will explain in a future post why the Keynesian cross is a dangerous half-truth, even under depression-economics conditions. Here I will say only that even if two of the necessary conditions for Summers’ Keynesian cross-based policy prescriptions are met - (1) there are widespread idle resources of labour and capital to meet demand and (2) there are sufficient numbers of liquidity-constrained and current-disposable-income constrained households that act as ‘myopic’ current income-constrained, Keynesian consumers - there is still an important and potentially binding financial crowding out constraint on the ability of governments to use expansionary fiscal policy to boost aggregate demand.

In addition to (1) and (2) being met, there must be sufficient ‘fiscal spare capacity’ - confidence and trust in the financial markets and among permanent-income consumers, that the government will raise future taxes or cut future public spending by the same amount, in present discounted value terms, that they want to boost spending or cut taxes today. Without this confidence and trust, financial markets and forward-looking consumers will be spooked by the spectre of unsustainable fiscal deficits. Fear of future monetisation of public debt and deficits, or of future sovereign default will cause nominal and real long-term interest rates to rise. Ultimately, the sovereign will be rationed out of its own debt market. The US government (and the US economy as a whole) will encounter a ’sudden stop’. These are not tales to frighten the children. I am deeply concerned that, when the US Federal government starts to run Federal budget deficits of 14 percent of GDP or over, the markets will get spooked and will simply refuse to fund the US authorities at any interest rate. Summers’ naive proposal for expansion now, virtue later, is simply not credible given the political economy of the US budget, now and in the foreseeable future.

Of course there are always the printing presses. But these are most effective if their use is unanticipated. Seigniorage or the expected inflation tax are a much more limited source of government revenue that the capital levy on the holders (domestic and foreign) of fixed-interest US-dollar denominated non-index-linked debt that can be inflicted through an unanticipated increase in the rate of inflation - the unexpected inflation tax. So the US Treasury and the other members of the US macropolicy chorus plus the Fed have to simultaneously convince the holders of US Treasury debt that the real value of their investment is safe, and prepare to inflate that real value away if and when the need arises. Summers’ macroeconomic policy prescriptions have dire ‘tail risks’ associated with them. Effective fiscal expansions are not part of the US policy menu. The spoils system has created the policy vacuum that permits Summers to make such ill-thought-out and dangerous proposals. That alone should be sufficient reason to get rid of the system.

Abolish the spoils system
The spoils system - the manisfestation of government patronage (grants and favours) in the domain of civil service and government agency jobs - is, historically, the ubiquitous system. It was the prevailing system in the UK and all other now-advanced industrial countries before the spread of electoral democracy and accountable government -except the US. For some reason the US has been the only advanced industrial country to get stuck in a time-warp, with a 19th century spoils system at the level of the central government. Not surprisingly, the level of performance the US gets out of its government bureaucracy tends to be more like that found in developing countries and emerging-but-not-yet-emerged market economies, than the level one would expect from one of the world’s oldest and richest democracies.

The solution to the spoils system is simple: abolish it. Cabinet-level positions are for political appointees. All other civil service and government agency positions are filled by members of a non-partisan professional civil service, appointed on the basis of merit, that is, competence and independence. You may also have to start rewarding public service competitively, and not just through a comprehensive health insurance package, if you want to attract high quality men and women into the civil service and to retain them. Gus O’Donnell may get an F for tact and may even have committed a major diplomatic gaffe. But what is really unforgivable is that he spoke the truth. If your friends are people who point out your weaknesses when these weaknesses threaten to harm you and those around you, Gus O’Donnell is a good friend of America indeed. Truth before tact. To the victor go the spoils. But the losers in this silly spoils game are the American people and those in the rest of the world who are waiting in vain for thoughtful and decisive American leadership. They are getting neither. And the spoils system is part of the problem.

21% of Americans scramble to pay medical, drug bills
Denise Prosser, 39, has battled cancer since she was a toddler. Yet Prosser can't afford her next cancer treatment — a radioactive therapy that she's supposed to receive once a year — because she and her husband lost their jobs in December. Without insurance, she has postponed the radiation indefinitely and is taking only half of her asthma medications — sacrifices that often leave her gasping for air and could allow her cancer to come surging back. "I can't walk more than 100 feet without sounding like I just ran a marathon," says Prosser, of Galloway, N.J. Prosser is among millions of Americans who struggled last year to pay for health care or medications, the largest poll ever conducted by Gallup shows. As the economy fell, the percentage who reported having trouble paying for needed health care or medicines during the previous 12 months rose from 18% in January 2008 to 21% in December, according to the poll of 355,334 Americans.

Each percentage point change in the full survey represents about 2.2 million people, says Jim Harter, Gallup's chief scientist for well-being and workplace management. Gallup, along with disease management company Healthways, surveyed a random sample of about 1,000 people nearly every day during 2008 about their physical, emotional and economic well-being. The poll, the Gallup-Healthways Well-Being Index, shows that struggles to pay crossed all socioeconomic lines but hit some Americans harder than others: More than half of the uninsured had trouble paying for health care or medications during the year. So did more than 30% of blacks and Hispanics, compared with 17% of whites and 13% of Asians. Overall, women had more trouble than men. Those who were divorced, widowed or in domestic partner arrangements fared less well than those who were married.

Among other key findings:
• As the year progressed, fewer Americans reported getting health coverage through their jobs, dropping from 59% in the first quarter to 58% by the last.
• The number of African Americans reporting trouble paying for health care or medications rose six percentage points from the first quarter to the last, to 34%. People ages 25-34 also saw a big increase, up five points to 28%.
• Among the states, Hawaii had the smallest percentage of residents who had trouble paying for health care in the previous 12 months at 12%, and Mississippi the most at 29%. "The biggest problem that the country has is actually the cost of health care," says Jim Clifton, Gallup's CEO. "It's a lot bigger problem than war and a bigger problem than the current meltdown because there are no fixes to it on the horizon right now. … You can't just throw money at it. That's still not a fix."

The increasing trouble people have paying for medical care comes as Congress begins its most serious health care overhaul debate in 15 years — and as the economy continues to shed jobs. Because most people still get health insurance through their jobs — rather than buying it themselves or being covered by a government program such as Medicare — the loss of a job can mean the loss of insurance. Nearly 4.4 million people have lost jobs since the recession began in December 2007, the U.S. Department of Labor reports. Nearly one in 10 children and one in five adults under age 65 are uninsured, says a February report on the uninsured from the Institute of Medicine, part of the National Academy of Sciences, which advises the government on health care.

People without insurance are at much higher risk for a host of medical problems, the institute's report shows. They're less likely to get preventive care, more likely to be diagnosed with later-stage cancers and more likely to die if they suffer a heart attack, stroke, lung problem, hip fracture, seizure or trauma. "The evidence clearly shows that lack of health insurance is hazardous to one's health," says report co-author Lawrence Lewin. "And the situation is getting worse." Lower-income residents are more likely to have trouble paying medical bills and to lack insurance. Income also plays a role in how people feel about their own physical well-being. The Gallup-Healthways poll found that 40% of those making $500 to $1,000 a month said they were dissatisfied with their health. By comparison, only 10% of wealthy people — those making at least $10,000 a month — are dissatisfied with their health.

People often resort to desperate solutions to pay for health care for themselves and their families, says Christy Schmidt, senior policy director at the American Cancer Society's Cancer Action Network. Some are tapping into their 401(k) plans and other retirement savings, she says. But even these funds may fall short, since many investments have lost half their value in the past year. When money gets really tight, Schmidt says, many uninsured people cut corners on their health, such as by cutting pills in half or skipping doctor's appointments.

While Gallup's poll asked if the specific person being interviewed had cut back on "needed" health care, a February poll by Kaiser Family Foundation took a broader look at health care spending. In that poll, more than half of Americans said at least one person in their family had cut back on medical care within the previous 12 months because of cost. Many people can't pay for coverage on their own, Schmidt says. Among them are Denise Prosser, who worked part time in a day care before being laid off, and her husband, Warren, who was a television news director in Linwood, N.J. The 600 stitches on her back testify to her long struggle with cancer. She was first diagnosed at 18 months old. A new tumor, in her thyroid, developed when she was 27. Her lung capacity has declined by 50% since then as her health has deteriorated, leaving her unable to work full time.

The Prossers say they can't afford coverage through COBRA, a program that allows workers to keep their health insurance for 18 months after they leave their jobs, just as long as they pay 100% of the health premiums themselves. A COBRA plan would cost the Prossers $900 a month, Denise says. With help from the recently passed economic stimulus package, which provides a federal subsidy worth 65% of COBRA premiums, the Prossers still would have to pay $300 a month — an especially high price tag for people who no longer have regular salaries. After she lost her job, Prosser applied for official status as disabled through the Social Security Administration but was turned down: "They said I wasn't disabled enough."

Even patients who qualify as disabled may struggle with medical bills, Schmidt says. Most people have to wait two years after being declared disabled before they qualify for Medicare coverage. If patients opt for 18 months of COBRA, that still leaves a six-month gap. That puts Prosser — whose doctor recently found a lump on her thyroid — in a sort of no man's land. Prosser fears the lump could be a relapse of the thyroid cancer she developed in 1997. Although her thyroid specialist gave her some free medication samples, the doctor would not treat Prosser without insurance. Prosser hopes to see a doctor through a charity clinic in Atlantic City but worries her husband's income from his unemployment check — $622 a week before taxes — may disqualify them.

Even charity care and emergency rooms can't guarantee that uninsured people — especially those such as Prosser, who have a long history of complex problems — get the treatment they need, says John Ayanian, a Harvard Medical School professor and co-author of the Institute of Medicine report. Free clinics often struggle just to find generalists, he says, let alone specialists. The problem extends beyond individual struggles. Eroding insurance coverage can undermine the health of entire communities, Ayanian says. Hospitals and doctors may have trouble paying their own bills in communities with large numbers of uninsured. That can drive away specialists and make it harder for even well-insured people to find care, the report says.

Often, people without insurance must struggle on their own. Calls to the cancer society's insurance hotline have increased by 6% since last year, Schmidt says. Although the society sometimes can help patients find coverage, three out of five callers find those options — such as individual health policies or state-sponsored high-risk pools — too expensive, Schmidt says. Nor is there any guarantee those options will be available. Individual policies sometimes won't cover pre-existing medical conditions, such as cancer, depression or pregnancy, or will not pay for care needed for those conditions during an initial period of six months or more.

Jim Hann, 51, who's losing his job as a chemical operator at the Americas Styrenics plant in Marietta, Ohio, next month, won't be able to afford COBRA, even with the federal subsidy. The plant is laying off 65 of 100 employees. That didn't deter him, however, from donating a kidney to his wife, Hannah. In the past decade, Hannah has weathered more surgeries than they can count: seven or eight operations to cut away dying sections of bowel, a small intestine transplant and, in February, the kidney transplant at Washington's Georgetown University Hospital. "He tells me he'd give me both of his if that's what it took," says Hannah, 49, a few days after the February transplant.

Their surgeon moved up her transplant surgery by a month, before Jim's coverage lapsed. Although Hannah's disability makes her eligible for Medicare, she has used Jim's generous company-funded insurance until now. Medicare will cover her health care after Jim loses his coverage in November. Jim plans to get by without any insurance. That's a gamble, given that kidney donors have an increased risk of high blood pressure and kidney problems. After taking care of Hannah for so many years, Jim says he's well-prepared for his next career. He has decided to enroll in a nursing program that will make him a registered nurse within two years. Until then, he says, the couple will "tough it out" by living off their savings,

Hannah's disability check and the proceeds they make selling their home to move into a smaller, cheaper house. If needed, Jim says he's prepared to return to driving a truck or waiting tables while going to school. But he doubts he'll ever find another job like the one he lost. Factories are laying off at least 1,000 workers in the region around Marietta and Ravenswood, W.Va., about 50 miles away, where Century Aluminum is shutting down a plant and letting go about 600 employees. The Gallup-Healthways survey found nearly 25% of people in the congressional district that includes Marietta didn't have enough money to pay for health care in the past year. "There aren't even any bad jobs," Jim says. "It's the same all over."

Global warming 'will be worse than expected' warns Stern
Politicians have failed to take on board the severe consequences of failing to cut world carbon emissions, Nicholas Stern, the economist who warned the government of the high cost of climate change, said today. Stern told a meeting of climate change scientists in Copenhagen that the effects of global warming would be worse than he predicted in his seminal 2006 report on the economics of the problem. He said policy-makers needed to think more about the likely impact of severe temperature rises of 6C or more. Speaking after a keynote speech at the conference, Stern said: "Do the politicians understand just how difficult it could be? Just how devastating 4, 5, 6 degrees centigrade would be? I think not yet. Looking back, the Stern review underestimated the risks and underestimated the damage from inaction."

His remarks echo concerns by other scientists at the meeting. Privately, many climate experts and officials say that the European target of limiting world temperature rise to 2C above pre-industrial levels is no longer realistic. Steven Sherwood, a climate researcher at Yale university, will tell the conference later today that warming of 4C or more this century looks "increasingly likely". Bob Watson, a former head of the Intergovernmental Panel on Climate Change (IPCC) and chief scientist at the environment department, has already warned that governments need to prepare for a 4C rise. The 2007 report of the IPCC said that average temperatures could rise by up to 6C this century if no action were taken to curb greenhouse gas emissions. Many scientists say this could be an underestimate, because world emissions have grown faster than expected.

According to the 2006 Stern report, a rise of 4C would put between seven million and 300 million more people at risk of coastal flooding each year, there would be a 30-50% reduction in water availability in southern Africa and the Mediterranean, agricultural yields would decline by 15%-35% in Africa, and 20%-50% of animal and plant species would face extinction. Yesterday, scientists announced at the conference that a 4C rise would lead to the loss of 85% of the Amazon rainforest. A 5C rise would mean that major cities such as New York, London and Tokyo would be threatened by a rise in sea levels and increases in ocean acidity would severely disrupt marine ecosystems and fisheries. An increase of more than 5C — equivalent to the amount of warming that occurred between the last ice age and today — is, according to the Stern report, "likely to lead to major disruption and large-scale movement of population". It said the effects would be "catastrophic" and "far outside human experience".

Time to change 'climate change' to 'climate breakdown'
by George Monbiot

The more we know, the grimmer it gets. Presentations by climate scientists at this week's conference in Copenhagen show that we might have underplayed the impacts of global warming in three important respects:

• Partly because the estimates by the Intergovernmental Panel on Climate Change (IPCC) took no account of meltwater from Greenland's glaciers, the rise in sea levels this century could be twice or three times as great as it forecast, with grave implications for coastal cities, farmland and freshwater reserves.

• Two degrees of warming in the Arctic (which is heating up much more quickly than the rest of the planet) could trigger a massive bacterial response in the soils there. As the permafrost melts, bacteria are able to start breaking down organic material that was previously locked up in ice, producing billions of tonnes of carbon dioxide and methane. This could catalyse one of the world's most powerful positive feedback loops: warming causing more warming.

• Four degrees of warming could almost eliminate the Amazon rainforests, with appalling implications for biodiversity and regional weather patterns, and with the result that a massive new pulse of carbon dioxide is released into the atmosphere. Trees are basically sticks of wet carbon. As they rot or burn, the carbon oxidises. This is another way in which climate feedbacks appear to have been underestimated in the last IPCC report.

Apart from the sheer animal panic I felt on reading these reports, two things jumped out at me. The first is that governments are relying on IPCC assessments that are years out of date even before they are published, as a result of the IPCC's extremely careful and laborious review and consensus process. This lends its reports great scientific weight, but it also means that the politicians using them as a guide to the cuts in greenhouse gases required are always well behind the curve. There is surely a strong case for the IPCC to publish interim reports every year, consisting of a summary of the latest science and its implications for global policy.

The second is that we have to stop calling it climate change. Using "climate change" to describe events like this, with their devastating implications for global food security, water supplies and human settlements, is like describing a foreign invasion as an unexpected visit, or bombs as unwanted deliveries. It's a ridiculously neutral term for the biggest potential catastrophe humankind has ever encountered. I think we should call it "climate breakdown". Does anyone out there have a better idea?

Sea levels are rising twice as fast as had been thought
Science and politics are inextricably linked. At a scientific conference on climate change held this week in Copenhagen, four environmental experts announced that sea levels appear to be rising almost twice as rapidly as had been forecast by the United Nations just two years ago. The warning is aimed at politicians who will meet in the same city in December to discuss the same subject and, perhaps, to thrash out an international agreement to counter it.

The reason for the rapid change in the predicted rise in sea levels is a rapid increase in the information available. In 2007, when the Intergovernmental Panel on Climate Change convened by the UN made its prediction that sea levels would rise by between 18cm and 59cm by 2100, a lack of knowledge about how the polar ice caps were behaving was behind much of the uncertainty. Since then they have been closely monitored, and the results are disturbing. Both the Greenland and the Antarctic caps have been melting at an accelerating rate. It is this melting ice that is raising sea levels much faster than had been expected. Indeed, scientists now reckon that sea levels will rise by between 50cm and 100cm by 2100, unless action is taken to curb climate change.

Konrad Steffen of the University of Colorado, Boulder, leads one study of the Greenland ice sheet. He told the conference that this sheet is melting not only because it is warmer but also because water seeping through its crevices is breaking it up. This effect had been neglected in the earlier report. The impact of the melting ice has been measured by John Church of the Centre for Australian Weather and Climate Research. He told the conference that satellite and ground-based systems showed that sea levels have been rising more rapidly since 1993 than they were earlier in the 20th century. He is concerned that more climate change could cause a further acceleration in this rate.

Stefan Rahmstorf of the Potsdam Institute for Climate Impact Research has examined data stretching over 125 years that link increases in sea temperatures to rises in sea levels. He told the conference that, based on past experience, "I expect that sea-level rise will accelerate as the planet gets hotter." He was supported in this view by the fourth expert, Eric Rignot of the University of California, Irvine, who called for the world’s leaders to slash the emission of carbon dioxide and other greenhouse gases. Advance negotiations on the UN Climate Change Conference are due to begin in Bonn in just over a fortnight’s time. The scientists hope that their startling warnings will change the outcome of that pre-meeting meeting. With much still to argue over, they hope that a clear scientific lead will both help to narrow the room for disagreement and also galvanise the desire to get a treaty agreed.

Amazon could shrink by 85% due to climate change
Global warming will wreck attempts to save the Amazon rainforest, according to a devastating new study which predicts that one-third of its trees will be killed by even modest temperature rises. The research, by some of Britain's leading experts on climate change, shows that even severe cuts in deforestation and carbon emissions will fail to save the emblematic South American jungle, the destruction of which has become a powerful symbol of human impact on the planet. Up to 85% of the forest could be lost if spiralling greenhouse gas emissions are not brought under control, the experts said. But even under the most optimistic climate change scenarios, the destruction of large parts of the forest is "irreversible".

Vicky Pope, of the Met Office's Hadley Centre, which carried out the study, said: "The impacts of climate change on the Amazon are much worse than we thought. As temperatures rise quickly over the coming century the damage to the forest won't be obvious straight away, but we could be storing up trouble for the future." Tim Lenton, a climate expert at the University of East Anglia, called the study, presented at a global warming conference in Copenhagen today , a "bombshell". He said: "When I was young I thought chopping down the trees would destroy the forest but now it seems that climate change will deliver the killer blow."

The study, which has been submitted to the journal Nature Geoscience, used computer models to investigate how the Amazon would respond to future temperature rises. It found that a 2C rise above pre-industrial levels, widely considered the best case global warming scenario and the target for ambitious international plans to curb emissions, would still see 20-40% of the Amazon die off within 100 years. A 3C rise would see 75% of the forest destroyed by drought over the following century, while a 4C rise would kill 85%. "The forest as we know it would effectively be gone," Pope said. Experts had previously predicted that global warming could cause significant "die-back" of the Amazon. The new research is the first to quantify the long-term effect.

Chris Jones, who led the research, told the conference: "A temperature rise of anything over 1C commits you to some future loss of Amazon forest. Even the commonly quoted 2C target already commits us to 20-40% loss. On any kind of pragmatic timescale, I think we should see loss of the Amazon forest as irreversible." Peter Cox, professor of climate system dynamics at the University of Exeter, said the effects would be felt around the world. "Ecologically it would be a catastrophe and it would be taking a huge chance with our own climate. The tropics are drivers of the world's weather systems and killing the Amazon is likely to change them forever. We don't know exactly what would happen but we could expect more extreme weather." Massive Amazon loss would also amplify global warming "significantly" he said. "Destroying the Amazon would also turn what is a significant carbon sink into a significant source."

Jones said the study showed that tree growth in high latitudes, such as Siberia, would increase, but would be unlikely to compensate for the carbon stocks lost from the Amazon. Even with drastic cuts in emissions in the next decade, scientists say that there will only be around a 50% chance of keeping global temperatures rises below 2C. This best-case emissions scenario is based on emissions peaking in 2015 and quickly changing from an increase of 2-3% per year to a decrease of 3% per year. For every 10 years this action is delayed, the most likely temperature rise increases by 0.5C. Environmental campaigners said they were alarmed by the predictions. "With a rise of over 2C you begin to see a large-scale change to savannah," said Beatrix Richards, head of forest policy and trade at WWF UK. "You also lose major ecosystem services, such as keeping carbon levels stable, providing indigenous people with goods and services, and balancing rainfall patterns globally from the US grain belt to as far away as Kazakhstan. A 4C [rise] is a nightmare scenario that would move us into uncharted territory."

"People have known about the links between climate and forests for some time, but the alarming thing now is the level of certainty because real world observations are feeding into the computer models," said Tony Juniper, an environmental campaigner and Green party candidate. "There really is no time for delay. Governments must cooperate to cut industrial emissions while at the same time halting deforestation, otherwise we'll have a mass extinction and a global warming catastrophe." A separate study from the Met Office shows that, if temperatures do reach 2C, then there is a one-in-three chance they would stay that high for at least 100 years, whatever action was taken on carbon pollution. The results were announced on the second day of a key climate science meeting in Copenhagen, which is intended to spur politicians into taking action to cut carbon pollution. It comes ahead of a UN summit in December, also in Copenhagen, where officials will try to agree a new global deal on climate to replace the Kyoto protocol. The results from the meeting will be published in the summer as a supplement to the 2007 report of the Intergovernmental Panel on Climate Change.

Amazon dieback is one of the key positive feedbacks brought about by global warming. These are typically runaway processes in which global temperature rises lead to further releases of CO?, which in turn brings about more global warming. In the Amazon this happens on a more localised scale but the result, increased forest death, also releases carbon into the atmosphere. Experts predict that higher worldwide temperatures will reduce rainfall in the Amazon region, which will cause widespread local drought. With less water and tree growth, "homegrown" rainfall produced by the forest will reduce as well, as it depends on water passed into the atmosphere above the forests by the trees. The cycle continues, with even less rain causing more drought, and so on. With no water, the root systems collapse and the trees fall over. The parched forest becomes tinderbox dry and more susceptible to fire, which can spread to destroy the still-healthy patches of forest. Other positive feedback effects expected by scientists, are releases of carbon stored in frozen arctic ecosystems and an increase in the sun's energy absorbed by the planet as ice melts.

Could Rising Seas Swallow California's Coast?
Imagine San Francisco Airport under water, or Long Beach Harbor in Los Angeles, home to the second busiest port in America, washed away. Picture Orange County's Newport Beach completely submerged under the encroaching ocean. That's the soggy future that could be in place for California at the end of this century, if climate change continues unabated. According to the Pacific Institute, an environmental NGO that specializes in water, unchecked global warming may cause the world's seas to rise more than 4.6 feet (1.4 m). The California government commissioned the institute's study released on March 11, one of a number of forthcoming reports on how climate change will affect the coastal state and one of the most detailed analyses yet on the local impact of rising seas.

The Pacific Institute found that by 2100, an estimated 480,000 Californians will be at risk of increased flooding — almost double the number currently living in disaster-prone areas of state — along with roads, schools, hospitals and other low-lying coastal infrastructure. Altogether nearly $100 billion worth of coastal property could be at risk — and the cost to protect that land from flooding will likely be in the billions, even if we do control greenhouse gas emissions. "This change is inevitable, and it's going to alter the character of California's coast," says Heather Cooley, a senior research associate at the Pacific Institute and a co-author of the report.

The report's warnings are so striking in part because the study assumes a much higher sea level rise than past analyses. The 1.4 m figure used in the Pacific Institute study — which comes from research by the Scripps Institute of Oceanography — is considerably higher than the estimates put forth in the U.N. Intergovernmental Panel on Climate Change's (IPCC) most recent assessment in 2007, which projected a sea level rise of between 18 to 59 cm by 2100. But the IPCC numbers were based on older data, and took into account only the thermal expansion of the seas. (Water expands as it heats, so warmer seas will rise.) The IPCC did not factor in the potentially far greater impact of melting ice caps in Greenland and Antarctica — Greenland alone has enough frozen ice to raise sea levels more than 20 feet. At the time of the IPCC report, the polar ice sheets were clearly melting, but it wasn't clear how fast they were going or how they would respond to rising temperatures in the future.

New research is clarifying the ice cap question — and the results are sobering. Scientists at the Climate Change Congress in Copenhagen this week presented a study estimating that sea levels could rise globally by 1 m or more by the end of the century, with large regional differences around the world. At the lower end of the estimate, scientists say it's unlikely that seas will rise less than 50 cm even if we can get a grip on carbon emissions. The revised predictions are due to better data on melting in Greenland, Antarctica and other glaciers around the world, which is currently pouring water into the oceans and causing them to rise. Altogether up to 600 million people in coastal areas around the world could be at increased risk for flooding. "Unless we take urgent and significant mitigation actions, the climate could cross a threshold during the 21st century committing the world to a sea level rise of meters," said John Church, an oceanographer a the Centre for Australian Weather and Climate Research and one of the study's co-authors.

The Pacific Institute report takes that abstract number and shows what it will mean for the cities, streets, bridges, beaches and power plants in America's most populous — and vulnerable — state. Nearly half a million people will be at risk for what's called a 100-year flood event. That doesn't mean a flood that happens once a century, but rather a disaster that has a 1% of happening every year — which means it has a 26% chance of happening over the life of an average 30-year mortgage. The vulnerability is concentrated along the coastline of the San Francisco Bay area, where large parts of both San Francisco and Oakland could be threatened with extreme flooding by the end of the century. Even parts of the Pacific coastline that may be shielded from flooding could be at risk for increased erosion. Worse, as with Hurricane Katrina, it will be the poor and those without insurance who will likely bear the brunt of the flooding damage. "There's this notion that those living on the coast are all rich with insurance," says Cooley. "But in fact these populations are often poor, and they will be particularly vulnerable."

The best way to protect California's coasts would be to sharply reduce carbon emissions now and hope to avert the worst of the warming. But even if we do cut carbon soon, we've locked in sea level rise, and we need to begin protecting sensitive coastlines better than we did in New Orleans. The Pacific Institute study suggests that some 1,100 miles of improved coastal defenses — including dunes and seawalls — would be needed to protect against a 1.4 m sea rise. It won't be cheap — the cost will be at least $14 billion up front according to the Pacific Institute, with an additional $1.4 billion a year in maintenance costs. But even that might not be enough. "Eventually you could see phased abandonment of certain areas that would experience flooding a lot," says Cooley. We're used to controlling the effects of nature, but if we fail to control climate change, we may have to surrender.


Anonymous said...

F'n loved that song.

Thanks for a couple minutes of peace.

Anonymous said...

• 'Our estimates are that because of the drop in growth, another 200,000 to 400,000 children will die each year. So that is certainly the wrong direction.

So that
is certainly
the wrong

The bitter understatement of that line could make a stone weep.

Anonymous said...

Another depression era pie in the sky song.
-------------------------------------------Big Rock Candy Mountain

One evening as the sun went down and the jungle fire was burning
Down the track came a hobo hiking and he said boys I'm not turning
I'm headin for a land that's far away beside the crystal fountains
So come with me we'll go and see the Big Rock Candy Mountains

In the Big Rock Candy Mountains there's a land that's fair and bright
Where the handouts grow on bushes and you sleep out every night
Where the boxcars are all empty and the sun shines every day
On the birds and the bees and the cigarette trees
Where the lemonade springs where the bluebird sings
In the Big Rock Candy Mountains

In the Big Rock Candy Mountains all the cops have wooden legs
And the bulldogs all have rubber teeth and the hens lay soft boiled eggs
The farmer's trees are full of fruit and the barns are full of hay
Oh, I'm bound to go where there ain't no snow
Where the rain don't fall and the wind don't blow
In the Big Rock Candy Mountains

In the Big Rock Candy Mountains you never change your socks
And the little streams of alcohol come a-trickling down the rocks
The brakemen have to tip their hats and the railroad bulls are blind
There's a lake of stew and of whiskey too
You can paddle all around 'em in a big canoe
In the Big Rock Candy Mountains

In the Big Rock Candy Mountains the jails are made of tin
And you can walk right out again as soon as you are in
There ain't no short handled shovels, no axes saws or picks
I'm a goin to stay where you sleep all day
Where they hung the jerk that invented work
In the Big Rock Candy Mountains

I'll see you all this coming fall in the Big Rock Candy Mountains

Anonymous said...

For those interested in a map of sea level rise and affected areas there is this nifty tool:

My in-laws (in their mid-50s) live in a beach city with their house at less than 2m above sea level. We have tried to convince them that for many reasons, potential sea level rise among them, that their home is not a stable or sustainable place to retire.

Anonymous said...

Ilargi, I'm gonna help you & your readers out with 3 data points of unpublished information that provide more insight than the headlines you posted up today:

1. Someone successfully bid on a room at the Waikiki Hilton Hawaiian Village for $55/night. We were at the Sheraton for $90/night. We flew to HI from LAX non-stop on United for $200 r/t. I don't think I need to explain to people how expensive & exotic a trip to Hawaii used to be.

2. Top-of-the-line hotels in Palm Springs are going for as little as $70/night during the upcoming Easter prime time season. Perhaps more interesting is that reservation systems are showing minimal vacancies since entire sections/wings are being closed. When you get there, it's a ghost town.

I know, 'cause we've been going out there every other weekend this spring. Again, if you're familiar with historic pricing, 75%+ discounts off $300+/night are eye-popping.

3. The last data point is a little bit more amorphous; sort of negative info bit, but one I'm sure the average reader can easily verify.

Just wander over to your local gun/outdoor shop and take a look around. Don't even go during peak busy periods; say, go at 10:30 on a Tues morning.

What you'll see is a lot of staff, a lot of customers, and no available product and/or inventory. The display cases are absolutely bare, as are the empty shelf spaces where ammo is normally kept.

Some say that certain animals can tell when bad weather is brewing or an earthquake is imminent. I think humans can get so wrapped up in externalities like MSM news that they sometimes fail to see what's staring them right in the face.

Look around your own local environment if you want to see long-term sentiment. Forget the noise of day-day market fluctuations. Oh, and get on a waiting list for a gun.

Anonymous said...

"idiot savant"-wow, didn't know the brilliance you've displayed here has all been accidental!

And, in case anyone hasn't heard, (supposedly) Cramer will be the guest on Jon Stewart tonight.

Nice to have a little levity in these morbid days....

Anonymous said...

"Geithner Expects 'Many' Banks Will Repay Government TARP Funds..."

It might as well have said,"
Geither Expects Flying Monkeys to Shoot Out of His Butt"

Persephone said...

To Anon 807
"Geithner Expects 'Many' Banks Will Repay Government TARP Funds..."

It might as well have said,"
Geither Expects Flying Monkeys to Shoot Out of His Butt"

It seems there may be a very lucid reason for the banks sudden 180
Financial Fraud Is Focus of Attack by Prosecutors

How ironic would it be that our rally is because the WS PTB don't want to go to prison?

My cynical side thinks it has more to to with Geithner upcoming weekend trip with the G20.

Ilargi said...

Peter said... "Ilargi,, "idiot savant"
That's precisely where I lost interest and quit reading. I have no clue what was said, and that's cool. I've seen plenty ADHD in my life.

I don't regret asking a simple question, but It was a little bit silly on my part to presume everyone's actually taking their prescribed drugs. Anyway, enough kindergarten.

For Jon Stewart tonight, make sure you read this beforehand.

I just hope I can stay awake long enough.

Anonymous said...

You get paid 280 million dollars for blowing up the world's biggest insurance company using a half a trillion dollar bet. What was that man thinking? Where was management? Will he ever even get prosecuted and sent to prison? The world is a madhouse and a hothouse as well. Nice to see the climate change articles, not nice to read about the effects...

Anonymous said...

Ritual human sacrifice has a very long and ancient history.

The Council of Banksters is probably drawing up the first of a number of 'short lists' as candidate to save the herd from the pitchforks and torches.

Madoff was the proto-type.

He drew a short straw.

He pleads guilty, no fight, no muss no fuss, end of public story. How lucky.


The number of 'Ritual Human Sacrifices' (RHS) the professional criminal class of Banksters will throw to the wolfs depends on the anger and staying power of the mobs and their respective attention spans.

Anonymous said...

Peter said... "Ilargi,, "idiot savant"
That's precisely where I lost interest and quit reading.

Ah, yes. I'm glad.

We all knew you were more dignified than to mudwrestle with a goon!

SMiles aLl arouNd.

Toddman said...

Thanks for the song. Took me back to a warm Summer outdoor show in '88.

Here's another good one for ya:

Pressure Drop

"...I say when it drops, oh you gonna feel it
Know that you were doing wrong"

Chaos said...

Re: Idiot Savant

I viewed this as a sort of backhanded compliment, if you actually know the definition of the term (and maybe Karl does, or maybe not). It refers to someone, who, while lacking some social or other skills, nonetheless has extraordinary abilities in one or more (like prognostications about the economy, perhaps?). At any rate, here:

Oh, and to the gentleman who had the question about not paying taxes a few days ago, here's my take: as someone who's practiced criminal law in Federal court, I can tell you that, in addition to income tax fraud, federal crimes such as wire fraud, mail fraud, conspiracy and particularly money laundering are so broadly defined that, even if the "authorities" can't make a case of income tax fraud, they can surely make something stick. As long as the government has the apparatus to collect these taxes, it will use it. Be cautious.

Anonymous said...

"As long as the government has the apparatus to collect these taxes, it will use it."

Does this mean they will hold us upside down by the ankles and shake us like cartoon characters until something falls out?

Anonymous said...

The correct link to the Monbiot article is

-- DIYer

Persephone said...

From the Front Page:
"The pace of lending in January and February is certainly unsustainable and dangerous to the health of the financial system," ...

Why does that make me think of Einstein's quote on insanity?

From yesteday-
@el gallinazo
Here is a suggestion which you could use if you make the move before the collapse and unrest has proceeded very far. Rent a u-Haul trailer and tow it to your parents' place.

Thanks for the suggestion - and definitely an option if I make the move in advance of a TSHTF.

Fortunately - or unfortunately, I have moved many times with job relos. As long as my job lasts - barring escalating crime - I will stay. I have to take the opportunity to pump up savings while I can as jobs will be scarce once I move. I am not an ultra material person. So, if I am forced to leave things behind - or sell them- for the sake of more road agility, I'm OK with that.

Morris Berman:'Dark Ages America: The Final Phase of Empire'"

Looks VERY interesting! Thanks. I will definitely read it..

Great link. I knew that the unemployment numbers are sanitized.

@ jal
The governments are not going to tell the blogsphere what tools they are using to stabilizing the global financial system.
The G-7 and the G-20 are cooperating in their efforts.

I couldn't agree more!

"For Jon Stewart tonight, make sure you read this beforehand.

Though I didn't know about the Stewart-NYSE connection, I find this clash interesting as both Kramer and Stewart are both liberal. Kramer has been a staunch Democratic supporter. However, he made a few strong derogatory comments about Geithner's plan/non-plan setting the left wing ablaze with anti-Kramer sentiment.
I predict they kiss and make up tonight ;).

z said...

the George Monbiot article link needs fix.

Persephone said...

Interesting article
The Dow at 36,000 and the end of history by Bernd Debusmann

Tricky question. Despite routine comparisons between the Great Depression of the 1930s, there’s no precedent for today’s crisis. And identifying turning points in history has defied eminent historians.

Remember “The End of History”, the famous essay Francis Fukuyama wrote after the fall of the Berlin Wall in 1989? Mankind’s ideological evolution had ended, he argued, to be replaced by the “universalization of Western liberal democracy as the final form of human government.”


That has yet to happen, if ever it will, in places as far apart as Congo and Darfur, Egypt and Saudi Arabia, Russia and China.

The most memorably wrong financial predictions have tended to be on the exuberantly optimistic side. Irving Fisher, an economics professor at Yale, earned a place in the history books with a speech, on October 14, 1929, in which he said “stocks have reached a permanently high plateau.” The worst stock market crash in history came two weeks later.

Now, after years during which prophets of financial nirvana commanded most attention, dominating TV ratings and bestseller charts, it is the turn of the doomsayers, a development reflected by the titles displayed at popular bookstores.

Meltdown, says one. The Return of Depression Economics, says another. It sits next to The Great Depression Ahead.

One of the most dire predictions has come from Niall Ferguson, the prolific author and Harvard economic historian who thinks that the contagion that spread from the United States to the rest of the world will have an impact that goes far beyond finance and the economy.

“There will be blood,” he told a Canadian interviewer in February, “in the sense that a crisis of this magnitude is bound to increase political as well as economic (conflict). It is bound to destabilize some countries. It will cause civil wars to break out that have been dormant. It will topple governments that were moderate and bring in governments that are extreme.”

Ilargi said...


My favorite version of Pressure Drop is from the album with the same name, which will be forever in my top 10, by Robert Palmer and Little Feat, produced by Allen Toussaint. Yeah, way back when I was even younger than that now. And I was so much older then. I think it was first released in 1976?!.Here's the only, and lousy, video I could find. Close your eyes and play it loud!

Anonymous said...

Surprise! You Tube buried the Jon Stewart link from the WSJ article. Apparently Jon's message ridiculing CNBC's polliannish pundit is entirely too popular for TPTB's taste...

Anonymous said...


Thank you for the informative articles on "climate breakdown."

Anonymous said...

@Persephone and @Eugen (from yesterday):

You're both welcome. I'm glad you found it helpful.

Eugen's right, that wasn't the original link. I had saved a copy, but oddly enough the original html file didn't give any identifying info as to the original source.

So I looked around, and found the original copy on Ferfal's blog site.

I was always wondering what Eugen's take of that article was. And I think Eugen's words, to start preparing, are quite wise indeed.

Regarding how people react to the actual event, my bet is on what the article mentioned. The similarity to how people viewed things during the Great Depression is striking.

Both are variations of the "Boiling Frog" scenario, that Washington is so deft at implementing.

Anonymous said...

Oooo - this one's going to be interesting:

In a rarity, Bernanke to appear on "60 Minutes"

"Federal Reserve Chairman Ben S. Bernanke will be interviewed at length on CBS’ "60 Minutes" on Sunday, an unusual forum for a central bank chief.

Bernanke "tells correspondent Scott Pelley what he thinks went wrong with America's financial system, how it caused the economic crisis, what the Federal Reserve is doing to help fix it and when he expects the crippling recession to end,"

I think we live in interesting times.

Penn said...

A bunch of guys in a fifth-floor office lost 500 billion dollars?

What age are we living in?

Anonymous said...

First, thanks Illargi and Stonleigh for an amazingly informative blog. Have been reading daily for a month or so. And thanks to whomever posted a link to this site, wherever I found it.

While we are sharing songs...
How about some Johnny Cash?
Today it is dedicated to Madoff, but there are probably thousands of others as runners up...

"God's Gonna Cut You Down"

You can run on for a long time
Run on for a long time
Run on for a long time
Sooner or later God'll cut you down
Sooner or later God'll cut you down

Go tell that long tongue liar
Go and tell that midnight rider
Tell the rambler, the gambler, the back biter
Tell 'em that God's gonna cut 'em down
Tell 'em that God's gonna cut 'em down

Well my goodness gracious let me tell you the news
My head's been wet with the midnight dew
I've been down on bended knee talkin' to the man from Galilee
He spoke to me in the voice so sweet
I thought I heard the shuffle of the angel's feet
He called my name and my heart stood still
When he said, "John go do My will!"

Go tell that long tongue liar
Go and tell that midnight rider
Tell the rambler, the gambler, the back biter
Tell 'em that God's gonna cut 'em down
Tell 'em that God's gonna cut 'em down

You can run on for a long time
Run on for a long time
Run on for a long time
Sooner or later God'll cut you down
Sooner or later God'll cut you down

Well you may throw your rock and hide your hand
Workin' in the dark against your fellow man
But as sure as God made black and white
What's down in the dark will be brought to the light

You can run on for a long time
Run on for a long time
Run on for a long time
Sooner or later God'll cut you down
Sooner or later God'll cut you down

Go tell that long tongue liar
Go and tell that midnight rider
Tell the rambler, the gambler, the back biter
Tell 'em that God's gonna cut you down
Tell 'em that God's gonna cut you down
Tell 'em that God's gonna cut you down

xtropy27 said...

Hi Folks,

Just like the heavy hitters in the US financial giants knew that thy could roll the dice and win... so too can the USA itself press the same kind of brinksmanship on a global level.

Just the threat that the USA will close all its world around military bases, ground its B-52 nuclear bomber fleet... and turn those troops around into a retrained 'Army for a New American Century' to build out the CHANGE within the continental US... is enough to get all the capitulation we require.

BUT... actually doing it might be better still !

Create the new 'New World' ?

Also, we're still the world reserve currency. That means we still have a chokehold on global finance.

Interesting times indeed.

Anonymous said...

Suckers rally indeed...

Citigroup Executives Gain $2.2 Million in Stock Bets (Update1)

By David Scheer

March 12 (Bloomberg) -- Four Citigroup Inc. executives who bought the bank’s stock last week generated a $2.2 million paper profit within nine days, regulatory filings show.

The executives, including director Roberto Hernandez, benefited as the company’s stock climbed 47 percent from March 10 through yesterday’s close of markets, after Chief Executive Officer Vikram Pandit said in a memo that the bank is having the best quarter since 2007. Their buying spree was the first by bank insiders since Jan. 14, filings show.

“You’re supposed to buy when everyone else is selling,” said Bruce Foerster, a former Lehman Brothers Holdings Inc. managing director who now runs South Beach Capital Markets in Miami. Banks have internal systems to monitor executive trades and prevent abuses, he said.

Pandit wrote in the internal memo March 10 that the company was profitable in January and February, leaving him “encouraged with the strength of our business so far in 2009.” The comments triggered Citigroup’s biggest one-day percentage gain since Nov. 24, spurring global markets.

The stock had tumbled 95 percent in the previous year amid five straight quarters of losses and three government rescue attempts since October. The plunge has slashed the value of investments by the bank’s own employees, including some of the executives who purchased shares last week.


Shannon Bell, a spokeswoman for New York-based Citigroup, declined to comment on the trades.

Anonymous said...

Great stuff here

Anonymous said...

* Sacramento's tent city is being evicted; Exepct police violence soon
* Ferfal's diary good starting point for survivalist; How much time between collapse and degredation?
* Before you get out of Dodge establish a half way point; When you get out of Dodge Do Not Stop Till You Get There; U-Haul is useful in getting out of Dodge; Getting out Dodge in a Dodge will soon be difficult
* What accounts for rally? 1) Stupidy 2) Correction 3) Collusion 4) Dead Cat Bounce; Most vote for 3); Some for 4); Some say it isn't a rally yet (has to be longer)
* You can't feed yourself from a back yard garden; We are tied tightly into an unsustainable system; Even if your garden is big enough you will still have problems
* KD sniping continues; Ilargi says meh; Readers are pleased
* 400,000 children dead is wrong direction; Line could make a stone weep; Madeleine Albright turns over in grave (Note: Some claim she's not dead yet)
*Big Rock Candy Mountain and Johnny Cash quoted
* Three data points: 1-Waikiki Hilton at $55/night; 2-Top line hotel rooms in Palm Springs at $70/night; 3-Gun sales are brisk; The writing is on the wall
* Cramer on Jon Stewart provides jocularity (Note: Jim never learned the first rule of being on TV: Never fight with a comedian); Some suggest they will kiss and make up
* Reasonable headline: Geithner expects flying monkeys to shoot out of his butt
* Madoff drew the short straw and was ritually sacrified; Sweet
* Pay your taxes
* Bernanke to appear on 60 Minutes; Will be interviewed by Andy Rooney
* Threat of closing US bases abroad will cause other countries to get in line

Anonymous said...

"* Madoff drew the short straw and was ritually sacrified; Sweet"
Don't forget another out-of-the-box possibility....

Remember ...
If he would not have confessed, he could have blamed the losses on the market and got away until he died of old age.

Maybe he wanted demonstrate that he was the best and could outfox the best of the other capilalists.

Anonymous said...


Interesting data points. What a world we're heading into.


I think it's pretty clear that the only reason why Madoff plead guilty so quickly was to try and protect his family and other associates from being dragged into the trial.

It's simply part of a well thought-out legal strategy. Those are the only one's he's a sacrificial lamb for,

And for everyone:

Oh, ye doubters who questioned Mexico's economy. Take a look at:

Forbes new list of The World's Billionaires

"So is there anywhere one can still make a fortune these days? The 38 newcomers offer a few clues. Among the more notable new billionaires are Joaquín Guzmán Loera, one of the biggest suppliers of cocaine to the U.S."

I'm surprised that Mr. Loera declined being at the announcement ceremony today. Criminals walk freely down Wall Street. And he would have had complete protection, being an Illegal Immigrant.

New York is, after all, a sanctuary city.

I presume he was too tied up with business transactions.

Anonymous said...

this is the suckers rally that has been predicted. 70% of the GDP is consumer spending. until money gets back in the hands of the people, the economy will continue to fall.

the obama administration appears to be more concerned with penalizing those that make more than $250K a year than getting money into the hands of the people to pay down debt, or continue spending.

until then, we can expect stale markets, and possibly cataclysmic crash.

Anonymous said...

Enjoyed the song.

Just to be fair to the a_hole he said:
"idiot savant comment"

Yes Orion that link is on my favorites now. The worse thing is to get in a panic and start buying things without thinking. If you buy a gun you better make sure you know how to use it and dont hurt your self by accident. Collapse is actually okay if you dont panic, an extra pain you have to go through.

Persephone said...

At Anon3:33

Retail sales are stabilizing - from Calculated Risk:Retail Sales: Some Possible Stabilization
Just DON'T look at the chart!

This is most likely the reason for the jump in retail sales.

Only one of 2 things have to occur and the U.S. is thrown into a 3rd world state. An increase in the price of oil is one. The other is lack of sovereign wealth investments in Treasuries.


China’s Wen ‘Worried’ on Safety of Treasuries, Seeks Assurances

Also in the news
G20 split over more crisis spending as meeting looms

This story on CNN last night reports that Mexican cartels make up the largest organized crime organization in the U.S. operating in 230 cities.
Police: U.S. teens were hit men for Mexican cartel

Calculated Risk has reported for the last 2 months that Commercial Real Estate will be the nail in the coffin for Finance. So, I found this Diary on Daily Kos interesting:Why banks aren't lending

" If you buy a gun you better make sure you know how to use it and dont hurt your self by accident."

I would say "you have to be WILLING to use it." I know how to shoot. My hesitation to get a gun has been whether I have the intestinal fortitude to take another life.

Great tunes, Ilargi!
I am more of an REM fan, though.

Persephone said...

Daily Show update
Stewart, Cramer square off over market meltdown

Stewart gave Cramer hell - and Cramer took it. Cramer didn't even correct Stewart that he (Cramer) is not a reporter.
As to my prediction:
"Maybe we can ... start getting back to fundamentals on the reporting, and I can go back to making fart noises and funny faces," Stewart said.

"I think we can make a deal right here," Cramer said, and the two shook hands.

In case you missed it:
Background videos here:

Full video (longer than TV version)

Anonymous said...

Another Jamaican song:

Human Rights Now! tour version

Get up stand up, stand up for your rights
Get up stand up, don't give up the fight
Get up stand up, stand up for your right
Get up stand up, don't give up the fight

Preacher man don't tell me
Heaven is under the earth
I know you don't know
What life is really worth
[Peter Gabriel]
Not all that glitters is gold
Half the story has never been told
[Peter and Bruce Springsteen]
So now you see the light
Stand up for your right

Get up stand up, stand up for your right
Get up stand up, don't give up the fight
Get up stand up, stand up for your right
Get up stand up, don't give up the fight

[Tracy Chapman]
Most people think
A great God will come from the sky
Take away everything
And make everybody feel high
But if you knew what life is worth
You will look to yours on earth
[Tracy and Bruce]
And now you've seen the light
Stand up for your rights

[all] Get up stand up, [Sting] get up stand up
[all] Stand up for your right, [Sting] stand up for your right
[all] Get up stand up [Sting], get up stand up
[all] Don't give up the fight, [Sting] give up, give up, don't give up
Get up stand up, stand up for your right
Get up stand up, don't give up the fight

We're sick and tired of your easing kissing
I'm going to heaven in Jesus name
Cause we know and we understand
That mighty God is a living man
[Yussou N'Dour]
You can fool some people sometimes
But you can't fool all the people all the time
Now you see the light
Stand up for our rights

[all] Get up stand up, [Sting] get up stand up
[all] Stand up for your right, [Sting] stand up for your right
[all] Get up stand up [Sting], get up stand up
[all] Don't give up the fight, [Sting] don't give up the

[Yussou N'Dour]
We yoh
We yoh
[Yussou N'Dour]
We yoh yoh yoh
We yoh yoh yoh
[Yussou N'Dour]
We don't give up the fight
Don't give up the fight
Don't give up the fight
[Yussou N'Dour]
We yoh
We yoh
[Yussou N'Dour]
We yoh yoh yoh
We yoh yoh yoh
[Yussou N'Dour]
We don't give up the fight
[Tracy Chapman]
Don't give up the fight

[somebody in Spanish]

[Bruce and Sting in Spanish]

Don't give up the fight
Don't give up the fight
Don't give up the fight
Don't give up the fight
Don't give up the fight
Don't give up the fight

Written by Bob Marley and Pete Tosh, and originally performed by Bob Marley. Played in choral version twice during each of the 20 Human Rights Now! Tour shows in 1988 (opening and closing the show), with Sting, Yussou N'Dour, Peter Gabriel, and Tracy Chapman.

The above lyrics are for the closing 15 Oct 1988 performance at the River Plate Stadium, Buenos Aires, Argentina.

Anonymous said...

Nice links.

Notice also that the Baltic Dry Index has been steadily rising, after it fell off a cliff last quarter.


Anonymous said...

Jim Sinclair’s Commentary
“The following, as I have told you, was what the Bank for International Settlement stated prior to adopting a new computer model to reduce it by 50%.
Where is the outrage? Nowhere I imagine in a world populated by sheep.

Global Derivatives Market Now Valued at $1.14 Quadrillion!
By: Jutia Group Thursday, July 24, 2008 1:40 PM
The Bank of International Settlements, which seems to be the only institution that tracks the derivatives market, has recently reported that global outstanding derivatives have reached 1.14 quadrillion dollars: $548 Trillion in listed credit derivatives plus $596 trillion in notional/OTC derivatives.

Yes, that is Quadrillion. One and 15 zeroes!”

scandia said...

Hey everybody! Good news! Obama has announced the economic condition is NOT DIRE. Things are really much better than we thought. glad as I was damn close to that abyss.
Orion, Grateful for the BDI link. I've been wanting to track it for myself instead of relying on infrequent mentions in the news.

Greenpa said...

"climate breakdown"? bleah. Confirms my not very high opinion of Monbiot.

If you're looking for terminology with impact- you at least get out the thesaurus. Find words that are memorable, sonorous, etc.

Actually- I've been USING "climate collapse" - for some years now.

At least it can't be confused with banjo picking.

Anonymous said...

Hey Scandia,

We should all sing Bob Marley's "Don't Worry About a Thing." :)

Honest John said...

Do we really need LONG posts with lyrics of songs?

Enough, my finger is sore from scrolling.

Just link to the lyrics instead..

my 2 bits

Carry on

Anonymous said...

"Climate collapse" is instantly intuitively superior.

Unknown said...

Modest gains in the BDI following the jump of a cliff are probably minor corrections from an excess drop on the downside. I don't expect it to go much higher than it is at the moment.

(Could always be wrong, that's just my impression. Just a hard fall generally has to correct from some overshoot on the downside.)

Stoneleigh said...

El Gallinazo,

I don't think this rally is THE rally that we've been talking about. A couple of days ago (I think), I said that my best guess was for a short but sharp rally followed by another leg of the decline before a substantial rally. I think we're seeing that short rally now, and I doubt if it will last more than a few days. I don't think we're that far away from the beginning of the larger rally though, and even though I think we'll see a decline first, I personally think it would be dangerous to try to short that move. I'd leave that to the really aggressive speculators.


Insider trading. Basically people on the inside, with that memo, buying C, and then selling C when it exploded in the rally, feeding into same.

Bet these fraud fuckers are now going to short C soon.

Indeed - it's all part of the insiders feeding off the sentiment of the herd and playing them for suckers. 'Twas ever thus.

Anonymous said...


You're welcome. The bloomberg link also comes up near the top of a Google search for "Baltic Dry Index". It's like the third hit, in case you switch to a different computer.

The first couple of links from Google aren't as good.

Anonymous said...


What do you base such predicative specificity on ? BTW, I have read similar economic predictions elsewhere, is this a growing consensus among bloggers?

Scandia, re Obama " Not Dire" comment:

This morning I see restaurants and coffee shops teeming with end of the week Friday morning activity. Obama is right in one respect: the situation is not so dire as SOME are asserting. Moreover, let's not forget that economic tradition in America is deeply entrenched in the far recesses of the Protestant work ethic psyche. Simply put, Americans are pretty damn adept at getting up, going to work and making money. Year after year, decade after decade, century after century, a particular and idiosyncratic economic approach has been collecting momentum and sinking deep roots into the soils of societal expectation. Lineage, for better or worse, is not so easily evaporated. I do, however, agree with the author of the article posted by Ilargi--health care is the soft underbelly of the USA.

" Nonetheless, Lend Lease was approved. The U.S. had set out on its "awful mission" ( as Production Chief Donald Nelson called it). Three decades earlier Sir Edward Gray had told Winston Churchill: " [The United States] is like a gigantic boiler.Once the fire is lighted under it, there is no limit to the power it can generate." But not even this clairvoyant minister of World War 1 could have foreseen that the mighty boiler would pour forth 51 billion worth of supplies for the many anti-Axis nations--all freely given."

Anonymous said...

From the Asia Times article which you quoted--

The fall in their value resulted in massive deleveraging. Of course, not all derivatives are yet flawed, or toxic. So, it can be assumed that, in the absence of a total financial collapse, only a limited number will default.

It would be interesting to know your opinion of the author's statement However, if a conservative assumption were made that only some 2% of derivatives fail, it would still amount to some $14 trillion.

Because 2% seems extremely conservative? And, do we know how much of the 700 tr. global/419 tr. US has been unwound so far--very little? And what percent of the US bank bailout money and guarantees so far are directly related to derivatives? And new ones are still being created, right?

Any thoughts you might add to this would be appreciated. It was an interesting article but he seemed to contradict himself quite a few times. And his idea, Worse still, after the forthcoming meetings of Group of 20 countries, will all international banks be closed on a temporary basis, on a long bank holiday, as happened in the Great Crash? was interesting but hard to imagine for many reasons.

Stoneleigh said...

Anon @12:35,

What do you base such predicative specificity on ?

Elliottwaves. This is a human nature/'herdonomics' model developed by RN Elliott in the 1930s and based on the fractal behaviour of markets.

I see markets as patterned rather than random, and therefore probabilistically predictable. This view is completely at odds with the prevailing view of markets as efficient and objective resource allocation mechanisms.

For more detail you can check out the primer Markets and the Lemming Factor on the front page, and for much more detail check out Robert Prechter's work on markets and socionomics. His book Conquer the Crash is probably the best one to start with. I don't agree with him on everything by any means (he is a peak oil denier for one thing), but his financial work is very good.

Gravity said...

There is something
behind the Market greater
than the Hand itself.

Anonymous said...

@ Scandia
Gee what a relief. I was feeling pretty doomerish today, but with your good news I can relax a while:)