Saturday, March 28, 2009

March 28 2009: Atlantic Denizens

Lewis Wickes Hine High Noon November 1910.
Closing hour, Saturday noon, at Dallas Mill, Huntsville, Alabama. Every child in photo, so far as I was able to ascertain, works in that mill. When I questioned some of the youngest boys as to their ages, they said they were 12, and then other boys said they were lying (Which sentiment I agreed with)

Ilargi: In all sorts of ways, I'm feeling queasy and wobbly and uncomfortable. I see a world full of people who will use all their money and power trying to hold on to the seats they sit their asses down on, and they happen to be the same people who have grabbed hold of the wheel that is supposed to guide the planet out of its financial crisis. And these are contradictory goals. There is nothing that says that those who steered us into the quicksand are the best choices for getting us out. In fact, that's a ludicrous idea. But there's nothing we can do short of rioting, and even then no success is guaranteed. AFL-CIO Associate General Counsel Damon Silvers hit the nail on the head this week when he said:
My point is that while we may all be in the same boat, we are not all in this room. And we are not all in this room because some of us can afford to be in this room and some of us cannot be….I’m the only person in this room who could remotely, plausibly, claim to, in any respect, represent anyone who makes less than $100,000 a year. And yet, 85% of the United States is in that category and not in this room. To your point,if you want to avoid that type of tension, right, then other people need to be in the dialogue.
Problem is, all seats are taken, and no-one volunteers to give up their thrones so those who are the most afflicted may get a say in their own lives. Obama has a meeting with the top bankers and all that was said is kept secret; all we get to hear are statements that look like they come straight out of high-end ad agencies. The president needs to get away from that sort of attitude, but he won't. For all we know, the bankers told him what to do, not the other way around.

The G20 meeting is a bit more interesting, because not everyone present has the same interests. Following US policies may cost many attending "leaders" their positions. It’s therefore impossible that anything will come out of the gathering but more ad agency talk. And that means all sides will from now on protect their own neck of the woods.

The best spin example this weekend is the seemingly neverending series of Tim Geithner cheerleading articles published today in the American press. I have included three of them, from the Wall Street Journal, Newsweek and the International Herald Tribune here, but I have no doubt there's more. Coincidence? Yeah.

As long as the people don't get a place at the table, and the economy continues to worsen, the moment gets closer when references to the 1649 beheading of Charles I will no longer be used jokingly. People today are on average much better educated than probably at any time in history. There are also far more people everywhere than at any time. And to top it off, people are far less obedient and far more likely to challenge authority. I'll be the last to propagate fighting in the streets, but I also think that the likelihood of deadly serious civil unrest is being grossly underestimated by just about all sectors of our societies. You can't fool all of the people all of the time, not unless you keep the customer satisfied.

No Time For T-Bonds
Dealers buy U.S. government paper and quickly sell it back.

Count on Wall Street to figure out a way to make a quick buck in a down market. The big banks and brokerage houses that deal directly with the Federal Reserve were avid buyers of Treasury securities in auctions last week, but they were even more avid sellers of those bonds to the central bank. "What appears to be happening is the 16 primary dealers that were responsible for helping underwrite the auctions are now long with the hope of quickly selling the bonds at a higher price to the Fed before the next supply infusion comes in a few weeks," said Josh Stiles, senior bond strategist at IDEAglobal.

The operation was the second of its new program that commenced on Wednesday, and is part of the Fed's plan to purchase $300.0 billion in Treasuries over the next six months. With short-term rates having been effectively pushed to zero, the central bank has decided to purchase government bonds as a way of pushing down interest rates and spurring economic activity. There is a risk that this policy will eventually stoke inflation, since the Fed is effectively printing up money to lend to the Treasury via the bond market.

Primary dealers aren't the only ones involved in the quick trade, Stiles said. Hedge funds can also buy at auction and then sell on to other buyers, though not directly to the central bank. "They can come into the auction if it looks cheap enough, and then quickly flip it--it doesn't have to be to the Fed, but when the Fed buys, there can, in theory, be some profit." This won't last forever. The Fed's objective is to lower mortgage rates in order to stabilize the housing market. If it succeeds, interest rates should then rise, and there will be little the central bank will be able to do to overcome that.

"I hope it does work for a while because I hope I can refinance my mortgage at a lower rate," Stiles said, "and that's what the Fed is going to do, but it can't last forever, and they will relax their grip once they see the impact." On Friday, the New York Federal Reserve on bought $7.5 billion in Treasury securities with maturities of two-and-one-half years to three years. Dealers submitted $23.4 billion in Treasuries for the Fed to consider purchasing, according to data released by the New York Fed. That meant more than three times as many bonds were offered than the central bank offered to buy. By contrast, the bid-to-cover ratios at auctions last week were a maximum of 2.71 and as low as 2.02.

World leaders' last chance
The summit next week of Group of 20 leaders may go down as the turning point that helped the world pull out of the great recession of 2009 and engineered a historic shift in global economic governance. For now, however, Gordon Brown's London summit representing developed and leading developing nations looks set to fall short of the ambitions pushed by the British Prime Minister, his Australian counterpart Kevin Rudd and their new best friend, Barack Obama. That would leave open the risk that the global crisis will deepen and demand a bigger and more urgent policy corrective from the world's biggest nations. "The G20 summit is a really big deal," says Fred Bergsten, director of the Peterson Institute for Economics, who yesterday hosted a lunch for Rudd in Washington.

"The world is going to be looking to it and if they can come up with a reasonably successful package and maybe surprise people a bit on the upside it would do a lot for confidence. If conflict breaks out it will hurt things a lot." Yet Bergsten agrees the G20 summit enthusiastically embraced by Rudd is unlikely to commit to a new co-ordinated global budget stimulus to support economic recovery in 2010. It will seek to hold the line against trade protectionism, but will dash Australian hopes of a breakthrough on the stalled Doha Round of free-trade talks. It will endorse more global supervision of financial markets, though this will largely remain the domain of national regulators. It probably will double or triple the International Monetary Fund's $US250 billion ($358 billion) kitty for helping emerging economies in crisis - such as eastern Europe - as the global credit crunch dries up private finance flows.

And it will endorse a process that eventually will weaken Europe's weight in the "architecture" of global economic governance in favour of large emerging economies, particularly China. But, with Beijing still sniping from the sidelines, the G20 process is a long way from delivering the sort of "grand bargain" between China and the US that would fix the fundamental global imbalance that fuelled the crisis in the first place. Nor will it resolve the differing national imperatives among the bounty of leadership on show at Thursday's summit: 20-plus heads of government from Obama in his first international presidential outing, to China's Hu Jintao, Germany's Angela Merkel, Susilo Bambang Yudhoyono of Indonesia, Japan's Taro Aso, Russia's Dmitry Medvedev, Luiz Inacio Lula da Silva of Brazil, Nicolas Sarkozy of France, India's Manmohan Singh and, of course, Rudd.

The leaders will gather less than five months after the first G20 summit, in Washington in mid-November, when the global financial system appeared on the brink of systemic meltdown. The financial crisis itself has since subsided, if not ended, but the economic fallout has been deeper and more widespread than feared. The IMF says the global economy could shrink by 1per cent this year, the worst downturn since the 1930s Depression. In a $US60 trillion world economy, that's like wiping out all of Australia's annual economic output. Trade volumes will slump by 9 per cent, according to the World Trade Organisation. Global unemployment will rise by 50 million or more people, according to the International Labour Organisation. And rising infant mortality could claim up to 400,000 babies, according to World Bank president Bob Zoellick after his Washington meeting with Rudd this week.

Yet, amid and perhaps because of this, none of the G20 leaders is strong enough to decisively drive the counter-crisis agenda. The US is economically wounded, Europe is divided, Japan is gripped by stagnation and China is not ready. Obama's personal political stocks remain bullish. But the US comes to the G20 summit as the guilty party. Its five biggest banks lost $US46 billion in 2008 in the wake of the sub-prime crisis and it is in a severe recession. As part of the frustrating delay in getting the Obama administration up and running, it took until early this week for embattled US Treasury Secretary Timothy Geithner to flesh out his plan to clean up the hundreds of billions of dollars of "toxic" sub-prime assets on US bank balance sheets. The biggest question for the world economy is whether Geithner's plan gets bank lending flowing again.

Hoping it does, Obama, Brown and Rudd have urged a further globally co-ordinated budget boost at least matching the IMF's target of 2 per cent of gross domestic product in both 2009 and 2010. The IMF calculates that G20 "discretionary" fiscal packages so far amount to 1.8 per cent of GDP (or $US780 billion) this year and 1.3 per cent (or $US590 billion) in 2010. The supercool US President and the nerdish Australian Prime Minister enjoyed what Obama called a "great meeting of minds" on the issue during their White House meeting this week. But the limits to fiscal stimulus are being felt. The US Congressional Budget Office this week projected that the US budget deficit will balloon to $US1.8 trillion or 13.1 per cent of GDP this year. And US public debt will not have stabilised by 2019 when it will hit 82 per cent of GDP and rising.

With a British budget deficit headed towards 12 per cent of GDP, Brown was pulled into line this week by Bank of England governor Mervyn King. "I think the fiscal position in the UK is not one where we could say, well, why don't we just engage in another significant round of fiscal expansion," said King, who already is effectively printing money to buy British government debt. On cue, a pound stg. 1.75 billion ($3.6 billion) British government bond auction failed to attract enough investors for the first time in seven years.

Steeled by historic German experiences with hyperinflation, continental Europe doesn't want to be part of any further global budget expansion. The Europeans argue their bigger welfare states naturally produce a bigger "automatic" budget stimulus during recessions, such as through higher unemployment benefits. And Europe is obsessed about maintaining the budget deficit ceilings prescribed under its single currency agreement. "We should not be competing for the most unrealistic fiscal stimulus," says German Chancellor Merkel. New European Union president (and outgoing Czech Prime Minister) Mirek Topolanek this week called Obama's stimulus plan "the road to hell".

The Peterson Institute's Bergsten has pushed for a 3per cent of GDP stimulus target but concedes the London summit will be unlikely to commit to even the IMF's 2 per cent goal. "The Europeans need more aggressive programs more than anybody, yet paradoxically they are the ones that are fighting it," Bergsten tells Inquirer. "But the Europeans may be compelled by events to go to more expansionary stance pretty quickly." That's a reference to what Rudd fears will be a new wave of European banking weakness sparked by a collapse in emerging Europe. Speaking at the Peterson Institute's high-powered gathering of Washington policy wonks, Rudd continued to press for further fiscal stimulus. But he also emphasised what had been achieved so far. "This is the largest and most synchronised macroeconomic policy action the world has seen in our lifetimes," Rudd said. "We should not be distracted by what I have described as disagreements at the margins."

Yet such disagreements will prevent a conclusion to the stalled Doha trade round, which began eight years ago after the 9/11 terrorist attacks. The first G20 summit in November demanded that G20 trade ministers hammer out a deal by the end of 2008 and committed to a 12-month ban on new protectionist measures. The trade ministers failed to strike a deal and the World Bank has calculated that 17 of the G20 countries have since lifted import tariffs or increased trade-distorting subsidies. The WTO this week warned of a "significant slippage" in the global commitment to free trade that could "slowly strangle" global trade.

The London summit starting on April 2 will likely give WTO director general Pascal Lamy official blessing to "name and shame" countries that breach a renewed commitment not to implement protectionist measures. But Australian Trade Minister Simon Crean appears resigned to not clinching a Doha deal, the main aim of Labor's trade policy. Crean and Rudd yesterday met Obama's new Trade Representative Ron Kirk, who has not given a high priority to Doha or any new trade deals for that matter. Rudd later said the aim now was "to keep Doha alive" until the political climate improved.

"Obama is not ready to move ahead yet," Bergsten says. "They (the new administration) have been very good in resisting any protectionist backsliding and I think they will continue to oppose that. But they are not ready to move forward. It is a very divisive issue within the Democratic Party. And he has a lot on his plate. Doha, I am afraid it is not going to happen. Ithink it is an area where the G20 undermine theircredibility." Short of some surprise, that will leave the G20 focused more on regulating global finance and helping countries hit by financial crises. Both will be slow going. "I think they will take longer on IMF reform and financial regulation processes," says Bergsten.

While the Europeans are pushing for tighter global financial regulation, no one is calling for a genuine global financial regulator. Instead, the new arrangments will be built around the Financial Stability Forum, an intimate talkfest of central bankers, including the Reserve Bank of Australia's governor Glenn Stevens, formed out of the 1997 East Asian crisis and expanded to take in the G20 members plus Spain. But financial regulation will remain largely national, with Geithner this week outlining the Obama administration's plan to bring the fragmented US system of financial regulation under a single supervisor.

The proposed IMF reforms may prove most important because they would bring China into the institutional "architecture" for managing the global economy. Rudd complained yesterday that, as a result of arrangments cemented after World War II, Europe had eight times the voting weight of China in the IMFbut had an economy only 70 per cent bigger thanChina's. The likely reforms will require the US, Europe, Saudi Arabia and China to top up the $100 billion already committed by Japan to double or treble the IMF's existing $250 billion emergency fund for countries in crisis, most immediately in emerging eastern Europe, hit by the collapse in global trade and the drying up of finance from Europe's ailing big banks.

In return, the G20 is likely to bring forward a planned review of IMF voting quotas to the start of 2011 and unlock the US and European monopoly on the top jobs at the World Bank and the IMF respectively. This would amount to slow institutional progress on encouraging China to save less, consume more, allow its exchange rate to strengthen, export less and buy fewer US Treasury bonds - and to encourage the US to save more, cut its budget deficit and, by letting its exchange rate weaken, export more. This so-called grand bargain of domestic-led Chinese growth and export-led US growth is seen as the key to sustaining a durable global economic recovery out of the crisis. Yet the G20 is a long way from addressing this and the Chinese have been making some strange noises of late.

Two weeks ago Chinese Premier Wen Jiabao said he was worried about the safety of China's vast holdings of US Treasury bonds. And this week, China's central bank governor Zhou Xiaochuan proposed replacing the US dollar as the world's reserve currency with a new system based on global money created by the IMF, a call that publicly wrongfooted Geithner. From initial ambivalence, Chinese thinking is "evolving rapidly" in favour of the G20 process, says Peter Drysdale, one of Australia's foremost East Asian experts. But Drysdale cautions that East Asia has been slow to develop a regional response to G20-based global co-operation. And he warns that China in particular is not ready to take on global leadership given its stage of economic development and policy formulation. "They cannot be expected to assume a role beyond their stature, yet people overestimate their stature," Drysdale tells Inquirer.

For instance, if China seeks to promote domestic-led growth, it will need a much more sophisticated banking sector to efficiently employ its excess saving at home, rather than in offshore capital markets. And it will need to wind down its $US2 trillion war chest of foreign exchange reserves that have served as protection against the sort of the capital flight that sparked the 1997 East Asian crisis. And China would have to gradually take on more responsibility within G20 economic governance. It will help that East Asia will likely host the next G20 summit. Bergsten notes that South Korea is scheduled to host next year's G20 finance ministers' meetings and that Japan wants to host the next G20 leaders' summit, probably in the northern autumn.

In the meantime, the London summit will likely provide what Mark Thirlwell calls "another firebreak against things going bad". "At times when economic nationalism is on the rise it is good you are getting everybody together to talk," says Thirlwell, international economics program director at the Sydney-based Lowy Institute. "By definition, however, it is a lowest common denominator agreement because you have got to get everybody on board."

G20 nations unlikely to reach a deal
What do you get when the leaders of the 20 richest nations gather around a table in East London for four and a half hours with the avowed mission of saving the global economy? Politics, of course, lots of it. At the G20 meeting on Thursday, the most powerful men and women on Earth will be transported by helicopter and cavalcade to the somewhat unlikely setting of the ExCeL centre in Docklands. There will be Gordon Brown, the host, whose diminished hopes of a political revival largely rest on being seen to organise a recovery for the economy.

President Obama will be seeking to parade his international superstardom for the first time before critical eyes on the world stage – where Angela Merkel, a cautious German Chancellor, and Nicolas Sarkozy, a flamboyant French President, have perhaps already laid traps for him. The presidents of Russia and China, Dmitri Medvedev and Hu Jintao, may see this more as an opportunity to take the measure of Mr Obama than to resolve the future of capitalism. Among the extras will be an Australian Prime Minister who was once caught eating his earwax on television, an Argentine President known as the Queen of Botox and a Spanish Prime Minister who looks like Mr Bean. But each and every member of the cast will arrive with a set of national interests that are unlikely to create a new world consensus.

And the ExCeL centre, lacking the majesty more usually associated with such a great international gathering of leaders, is a fitting venue for such a summit about global economic blight. This soulless grey bulk was built in the graveyard of what was once the world’s largest port. Its name, with irritant capital letters in the wrong place, is redolent of the foetid marketing strategies of the recently evaporated development boom. Expectations for what can be achieved when the leaders of the 20 richest nations meet are already being scaled back. For a start, this one-day summit leaves little room for real negotiation. If Mr Brown had harboured hopes of overseeing the establishment of a new global financial order like the one agreed at Bretton Woods in 1944, he should perhaps have remembered that it took fully 22 days to thrash out that historic settlement for the postwar world.

Most of the work on draft communiqués for this meeting has already been done by officials and, although there is probably more agreement on broad principles than some reports have suggested, there is scant evidence of a meaningful deal. Instead, the build-up has been dominated by public divisions over the scale of economic stimulus packages and the scope of new regulations for financial institutions, Chinese aspirations to replace the dollar with a world currency, bickering over who is to blame for the crisis and finger-pointing over protectionist policies that might make it worse.

The one leader who might have been able to transcend such difficulties was Mr Obama. Scarcely two months have passed since the world was transfixed by a young President whose charisma and racial identity symbolised his promise of “a new era of American leadership”. As he prepares for his big summit debut, however, Mr Obama does so with the bewildered air of someone who is discovering that the weight of the world does not get easily lifted by the soaring oratory on which the likes of Iowa got so carried away last year. For instance, the White House was taken aback this week when Mirek Topolanek, the Prime Minister of the Czech Republic, which holds the European Union presidency, condemned Mr Obama’s big-spending economic policies as “a way to hell”.

When his Administration urges Europe to borrow more and shoulder some of the economic stimulus burden being borne by the United States, critics suggest that it fails to take account of national sensibilities such as those of Germany, a country still traumatised by the hyperinflation in the Weimar Republic that spawned the rise of Hitler. Ms Merkel called yesterday for the world not to repeat the mistakes of the past by pumping too much money into efforts to fight the global recession. “This crisis did not come about because we issued too little money, but because we created economic growth with too much money and it was not sustainable growth,” she told the Financial Times. President Obama’s preparations have been hampered by a severe shortage of confirmed appointments in his Adminstration and the political imperatives that have forced him to keep his eyes firmly fixed on America’s domestic economic concerns.

But sometimes the details of diplomacy have appeared almost a distraction. When Mr Obama arrives in London on Tuesday for his three-day visit he will need to repair perceived damage done to Mr Brown, one of a diminishing group of dependable allies. Although the President did not mean any offence when Mr Brown went to Washington, his offhand attitude to the protocol of holding a formal press conference was enough to give the British media the “Gordon snubbed” they craved. Nor will Downing Street be pleased if Mr Obama goes ahead with a meeting, pencilled in for Wednesday, with David Cameron.

Mr Brown has spent seven months, £19 million and made more than a dozen foreign visits trying to make this summit work. But he can expect little thanks. The police are preparing for a snarled-up traffic system as delegations numbering into the thousands, as well as possibly violent protests, effectively shut down London on Wednesday and Thursday. Most of the attention will focus not on Mr Brown but, inevitably perhaps, on Mr Obama, who has swiftly been granted a chat over tea with the Queen at Buckingham Palace on Wednesday afternoon.

The Prime Minister, who will do his best to spread a little stardust of his own by inviting the G20 leaders to a dinner at No 10 cooked by Jamie Oliver, increasingly looks like a party host trying to stop the guests throwing the crockery at each other. On a presummit visit to Brazil this week, he watched aghast as President Lula da Silva declared that the economic crisis was the fault of “the irrational behaviour of white people with blue eyes”. Back at the ExCeL centre, one official was promising to “stick pins in the effigy” of whoever chose this out-of-the-way East London site for the meeting. This is not the Palace of Versailles. After the G20 summit, the ExCeL’s next big event is the British Pest Control Association conference.

The chances of...
  • 90% Agreement that money pumped into world economy already has helped
  • 85% Broad agreement that free trade is a good idea but no firm commitments
  • 65% World signs up to bonus limits for bankers enforced by national governments
  • 60% US and China agree huge cash injection for IMF to help countries in trouble
  • 30% Commitment to 12-month freeze on the introduction of new protectionist measures
  • 25% France and Germany bow to pressure from US and UK to put more money into their economies
  • 20% Specific agreement to conclude world trade agreement by end of 2009, overcoming US and European objections
  • 10% Britain agrees to give up seat on International Monetary Fund, encourages others to follow suit
  • 2% Agreement to introduce a new global financial watchdog which would police every bank in the world

The chances of...
  • 100% Gordon Brown hailing summit as a triumph
  • 99% Summit agreeing to do “what it takes” to help world economy
  • 95% Everyone signing up to the communiqué at the end of the day
  • 75% Barack Obama lavishing praise on Gordon Brown
  • 45% Nicolas Sarkozy praising Brown for world leadership
  • 35% Agreement starting to unravel at meeting of European leaders and Obama the following weekend
  • 30% Anarchists disrupting the conference
  • 15% Leaders airing disagreements during Thursday's press conferences
  • 5% Leader storming out early

London Protesters Threaten Bankers, Evoke 1649 Execution of King Charles I
Mark Barrett, a professional tour guide, spent last Saturday painting Barack Obama’s election catchphrase “yes we can” on a banner that protesters will carry as they try to occupy London’s financial district April 1. Barrett is helping organize a protest outside the Bank of England, one of several called to express anger against banks and bankers and mark the arrival in London of leaders of the Group of 20 nations -- including Obama, now president. “We want a very English revolution,” he says from a café near his home in north London. “The first English revolution in 1649 was about winning sovereignty for parliament over the king.” Now, protesters are campaigning for sovereignty for everyone.

All police leave has been canceled to increase security and financial workers have been told to wear casual clothes amid warnings that protests could turn violent. “There are a lot of hacked-off people,” said Mike Bowron, commander of the City of London Police. “There’s potential for disruption and certain individual groups see violence as their raison d’etre.” The global economic slump has raised unemployment to more than 2 million in the U.K., with more people joining jobless rolls last month than at any time since 1971. The economy shrank 1.6 percent in the fourth quarter, the most since 1980, and there is growing anger at the more than 40 billion pounds ($58 billion) the government has injected into ailing banks while insuring 585 billion pounds more in risky assets.

Class War, an anarchist newspaper, has produced a special edition to promote the protest with an image of former Royal Bank of Scotland Group Plc CEO Fred Goodwin, whose house was vandalized this week, on a guillotine under the headline “Ready to Riot.” Another shows people dancing around a fire with the slogan “How to keep warm in the credit crunch -- Burn a Banker!” Public anger erupted at Goodwin’s 703,000 pounds annual pension after RBS was bailed out by the government. The English Revolution culminated with the beheading of Charles I in 1649, ending the so-called divine right of kings in England. Today’s protesters say they draw inspiration from 17th century radicalism.

Four marches will converge on the Bank of England at midday on April 1 for a protest the organizers call “Financial Fools Day.” At the same time, there are plans for a blockade of the European Climate Exchange, in Bishopsgate, to protest against the market in carbon emissions. “There’s an avowed intention on their behalf on the 1st of April to stop the City either by just clogging up the roads and preventing people getting into work or, if they’re allowed to, getting into some of those institutions,” said Commander Bob Broadhurst of the Metropolitan Police, who is in charge of the policing operation. “What we’re seeing is unprecedented planning amongst protest groups,” he told reporters on March 21. “There are some clever, innovative people with lots of ideas.”

Police, who are detailed to provide security for the world leaders attending the April 2 G20 summit at the Excel Conference Centre in east London, will also have to deal with a labor union-organized protest march to Hyde Park tomorrow, demonstrations at the conference center itself and an anti-war march on the U.S. Embassy. Around 10,500 officers will be available during the week and policing costs will be around 7.2 million pounds, Broadhurst said. City of London authorities are advising businesses to beef up security and protect building entrances and loading bays to thwart protesters who may attempt to break into buildings. The City district has around 300,000 workers, mostly in financial services, and contains JP Morgan Chase & Co.’s and Merrill Lynch & Co.’s European headquarters as well as large buildings of RBS and Deutsche Bank AG.

The organizers of the demonstrations in the financial district, who are expecting “several thousand” people to turn up, say they want them to be non-violent protests. “We are organizing a peaceful creative demonstration with music, a carnival, parades and theater,” Barrett said. “I’ll be amazed if some individuals don’t act in ways considered to be violent, but it’s not something organizers are encouraging.” Stewards will tell protesters to sit down if violence breaks out to show that it is only a minority involved, Barrett said. “We see the state and the finance system as being the violent part of this in the way that economic policy affects people around the world, dislocates them from the land and damages the environment,” he said.

The group planning to protest at the Climate Exchange say they will arrive outside its building at 62 Bishopsgate on April 1, pitch tents, string up bunting and set up a “climate camp,” which they expect to block the road. They hope to stay for 24 hours and there will be workshops, games and a farmers market, spokeswoman Mel Evans said. “We want a space to discuss these issues and to take action to see some changes being made for the benefit of people across the world, not just a couple of bankers,” Evans said. Sara Stahl, the exchange’s marketing manager, said it was company policy not to comment on the protests. A group of protesters have produced a spoof edition of the Financial Times newspaper, which was handed out at railway stations today. It imagines the headlines in 2020 and how the events of the G20 summit will be viewed in the future.

Chris Knight, a professor of anthropology at the University of East London, was suspended from his job yesterday after he told the British Broadcasting Corp. that “we’re going to be hanging a lot of people from lampposts” on April 1 “and I can only say let’s hope they are just effigies.” Knight was suspended “pending investigation,” the university said. Knight didn’t immediately respond to an e-mail message. The Bank of England, founded in 1694, has been the target of demonstrators before, according to the Bank’s Web site. In 1780 the bank, known as the Old Lady of Threadneedle Street, was provided with a military guard after it was threatened by a mob during anti-government riots. This was only discontinued in 1973.

There is also a history of protest at the Excel Centre, where the G20 leaders will meet, and campaigners believe it was chosen in place of the palaces and historic buildings of central London because it is easier to protect. “It’s privately owned land and it’s very, very easy to close off so it’s easy to impose the sort of security which you can’t in central London,” said Kaye Stearman, of the Campaign Against the Arms Trade, which opposes the arms fairs held at the center. “It’s very difficult to protest.” Some campaigners are traveling from mainland Europe for the demonstrations and, after London, plan to head for Strasbourg, France, and the North Atlantic Treaty Organization conference. “It’s the beginning of the season,” Barrett said.

G-20 Group Urges 'System-Wide' Approach to Regulation
Group of 20 officials will recommend that leaders meeting in London next week agree to regulate hedge funds and other non-banking pools of capital that pose “systemic” risks to financial systems. The officials were mandated by G-20 leaders in November to propose changes to global financial regulations. In addition to regulating some hedge funds, they will also recommend rules that would encourage financial institutions to build up capital buffers during good economic times, according to the working group’s final report, which was distributed in Ottawa today.

The report may signal a compromise has been reached within the G-20 on how much more regulation is needed to avoid future financial crises. European governments have called for more active regulation of financial markets and institutions, while countries such as the U.S. and Canada have been concerned about overregulation. The report of G-20 finance ministry and central bank officials recommends the private pools of capital “register with financial authorities and disclose appropriate information.” “There was common ground that authorities required information to assess the risks they pose and the need to regulate them if they are systemic,” according to the document.

Leaders of the world’s 20 largest economies will meet April 2 to devise a common approach to combating the global financial crisis. Finance chiefs from the G-20 member states said March 14 they would strengthen ties between their individual banking supervisors, and that credit rating companies, hedge funds, off- balance sheet vehicles and credit derivatives markets will be subjected to greater oversight. “There is more to be done across the G-20,” Kory Teneycke, a spokesman for Canadian Prime Minister Stephen Harper, told reporters in Ottawa today. Other officials weren’t allowed to be identified by name. “While actions taken since the Washington summit have stabilized the global financial system, the patient is still not well,” Teneycke said.

The recommendations by the G-20 group are in line with proposals yesterday by U.S. Treasury Secretary Timothy Geithner, who wants hedge funds and private-equity firms to register with the U.S. Securities and Exchange Commission and to disclose information about their holdings. Hedge funds are private pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested. They managed $1.2 trillion as of Dec. 31, according to Chicago-based Hedge Fund Research Inc. While there were “differing views” within the G-20 over the need for deepening oversight of private pools of capitals, the officials agreed that such companies should be “required” to provide information to regulators, according to the document.

The G-20 officials also recommended that domestic regulators shore up their regulatory systems in ways that allow them to assess systemic risks and increase oversight of credit rating companies and lets the International Monetary Fund undertake a review of each country’s financial systems. They also recommended the IMF and Financial Stability Forum create a “mechanism” that would allow domestic authorities to meet in order to assess risks to the global financial system, and that regulators “enhance” their oversight of compensation systems. The working group, which Canada co-chaired with India, was one of four set up by world leaders at their meeting Nov. 15 in Washington to offer recommendations when leaders meet again next week. The other three working groups will make proposals on regulatory cooperation in global financial institutions and markets, reforming the IMF, and the role of multilateral development banks.

Merkel warns on further stimulus
Angela Merkel, the German chancellor, will warn leaders of the world’s largest economies next week against pumping too much money into reviving global growth, saying that such action would create an unsustainable recovery. In a forthright interview with the Financial Times before attending the Group of 20 nations summit in London, she rejected renewed calls to spend more public money in Germany as part of a co-ordinated stimulus across the world economy. Ms Merkel said China, in particular, had much more room for expanding domestic demand.

She said it was essential not only to revive the world economy but also ensure that no such crisis occurred again. “This crisis did not come about because we issued too little money but because we created economic growth with too much money, and it was not sustainable growth,” said Ms Merkel. “If we want to learn from that, the answer is not to repeat the mistakes of the past.” Germany had already taken action to boost demand in the economy, amounting to 4.7 per cent of gross domestic product over two years, she said. “That means we are in the leading group of all those making an international effort.”

Ms Merkel rejected any comparison between Germany and China, which also enjoys a large current account surplus and has adopted an $800bn (€601bn, £559bn) stimulus to support demand at home. “I think China can do much more [than Germany] to encourage domestic demand because of its massive reserves. We are in a completely different situation, we have negative reserves,” she said, pointing to Germany’s €1,547bn public debt. Although it had a balanced public sector budget last year and is set to show a deficit of only 2.5 per cent this year, Germany has a bigger public debt in relation to GDP than both the US and the UK.

The chancellor warned against excessive expectations from next week’s summit. “We are talking about building a new global financial market architecture and we will not be able to finish this in London,” she said. “We will naturally not solve the economic crisis either, and we won’t solve the issue of trade. We will definitely need to meet again.” Nor would there be any final agreement on extending the role of the International Monetary Fund, she said, although it was essential to take steps to strengthen the institution and boost its financial resources.

“Many still have misgivings about a supra-national supervisor or one that acts in parallel to the national institutions,” she said. “We will take the first steps towards reinforcing the IMF but certainly not agree on a final reform.” Ms Merkel said that one outcome of the economic crisis would be that emerging economies such as China and India would “naturally play an increasingly important role”. She was keen to play down the notion of a confrontation between Europe and the US, praising the administration of President Barack Obama for its readiness to embrace tougher regulation of financial markets.

Spain’s finance minister shuns new stimulus
Pedro Solbes, Spain’s finance minister, said on Friday that there was no room for new fiscal stimulus plans in Spain or the rest of the eurozone, a cautious assessment that puts him in direct contradiction with José Luis Rodríguez Zapatero, his prime minister. Mr Zapatero, who has headed Spain’s Socialist government since 2004, said on Thursday that Spain would launch a new round of stimulus spending – albeit a smaller programme focused on renewable energy and biotechnology – if previous public spending efforts failed to boost the economy by the summer.

The prime minister pointed to Spain’s “ample margin” on its total public debt, which at less than 40 per cent of gross domestic product is well below the European Union average. But Mr Solbes – who moved the Spanish budget into surplus from 2005 only to see the global economic crisis and Mr Zapatero’s spending plans plunge it back into deficit last year – has persistently called for fiscal prudence. Both he and Mr Zapatero say Spain’s 2009 deficit will be “clearly” above the EU’s limit of 3 per cent of GDP, and independent economists expect it to reach 7 per cent of GDP.

“In these conditions, I and the rest of my colleagues from the eurozone believe there is no room for new fiscal stimulus plans,” Mr Solbes said yesterday after a cabinet meeting in Madrid. Ministers in other countries are also getting cold feet about further deficit spending to deal with the crisis, amid signs that investors are nervous about buying the vast quantities of new government debt required. Gordon Brown, the UK prime minister, signalled this week that Britain would not announce a big fiscal stimulus in next month’s budget.

Mr Zapatero, however, is convinced that additional government spending can be helpful in promoting confidence and creating jobs and has come into conflict with Mr Solbes before on this. Although his government has benefited from Mr Solbes’s presence as an orthodox “safe pair of hands”, Mr Zapatero is said by the pro-Socialist media to be preparing to sacrifice him in a cabinet reshuffle some time after next week’s Group of 20 summit in London. Mr Solbes, meanwhile, appears exhausted by his efforts to enforce budgetary restraint and has made no secret of his desire to retire. He joked that he was jealous of Mariano Fernández Bermejo, the justice minister who resigned over a recent scandal, for being an “ex-minister”.

The Spanish cabinet on Friday approved draft legislation to adopt the EU’s services directive, which will involve modifying 47 separate laws and eliminating various regulations in an effort to make the country’s economy more flexible and competitive and less bureaucratic. “These structural reforms are probably the most important of this parliamentary term,” Mr Solbes said. Rightwing opponents of the government have criticised Mr Zapatero for focusing on social liberalisation instead of reforming restrictive labour laws.

George Soros: Britain may have to seek IMF rescue
Britain may have to go to the IMF for a huge financial bailout, the influential investor George Soros warns today. The man who made $1 billion on Black Wednesday in 1992 told The Times that Britain was particularly vulnerable to the economic crisis. Mr Soros – speaking days after an auction of government bonds failed for the first time in 14 years, ringing alarm bells about Britain’s ability to fund its growing debts – said that Gordon Brown might have to go begging for billions of pounds in international aid. He also warned that next week’s G20 summit in London was the last chance to avert a full-scale depression that could prove worse than that in the 1930s.

“You have a problem that the banking system is bigger than the economy . . . so for Britain to absorb it alone would really pile up the debt,” he said. Asked about the chances of Britain having to seek help from the International Monetary Fund, he said that if the banking system continued to collapse, it was “a possibility”. At this stage, he added, it was “not a likelihood”. He was not optimistic about the G20 meeting, saying the odds were that it would fail because there were so many differences of opinion. The price could be years of economic devastation worse than the Great Depression. “It is really a make-or-break occasion.”

It would be a disaster if the meeting were allowed to turn into a talking shop, he said. “It’s not enough to state general principles. You’ve got to come up with practical measures that are going to provide protection to the developing world, periphery countries, against a storm that originated from the centre, against a calamity that is not of their own making.” He spoke amid more gloom over the British economy after official figures showed that output shrank by a worse-than-expected 1.6 per cent in the final three months of 2008. It was the biggest fall since April-June 1980.

Mr Soros refused to blame Mr Brown for failing to prevent the crisis. “He underestimated the severity of the problem but so did most people. Part of the perceived role of a leader is to cheerlead so you can’t really blame him for that.” Britain has not sought IMF help since 1976 when, with inflation approaching 27 per cent, Denis Healey, then the Chancellor, applied for a loan, shredding confidence in the Labour Government.

Soros Fund Fined $2.2 Million by Hungarian Regulator
Billionaire investor George Soros’s Soros Fund Management LLC was fined 489 million forint ($2.2 million) for attempting to manipulate the share price of OTP Bank Nyrt., Hungary’s largest bank, the country’s financial regulator said. The Soros fund attempted on Oct. 9 to “send out false or misleading signals about a security’s supply and demand or its share price” and short sold OTP shares, the regulator, known as PSZAF, said in a statement late yesterday. The short selling caused the shares to drop 14 percent in the final 30 minutes of trade, the regulator said. Short-sellers sell borrowed securities, hoping to profit by repurchasing them later at a lower price and then returning them to the owner. Budapest-based OTP is Hungary’s largest lender.

The plunge in OTP shares was part of a “significant and strong attack” against Hungarian money and capital markets, Prime Minister Ferenc Gyurcsany said on Oct. 10. The same month, the central bank raised the benchmark interest rate to the European Union’s highest to defend the forint and the country secured an International Monetary Fund-led loan to avert a default as investors sold local assets during the credit crunch. Soros, chairman and founder of New York-based Soros Fund Management, said in a statement to the MTI news service he was “sincerely sorry” his company made the trade. The Soros fund has launched an internal investigation, is cooperating with Hungarian regulators, and will take the “necessary measures” based on the conclusion of the probe, he added.

“Even if the company’s employee didn’t breach the relevant Hungarian regulation, I am especially pained by what happened because of my close personal relations with Hungary,” Hungarian-born Soros said. OTP shares have lost 52 percent of their value since Oct. 8, compared with a 28 percent drop in the benchmark BUX index. The shares traded at 2,173 forint at 9:50 a.m., from 2,165 forint late yesterday.

UK GDP suffers worst quarterly fall for 30 years
Britain has suffered the worst quarterly fall in GDP for almost 30 years, raising fears that the country's fiscal situation is far worse than expected. Economists were expecting GDP to have contracted by 1.5pc in the final quarter of last year – in line with the preliminary estimate – but the Office of National Statistics had to revise the figure downwards to 1.6pc. It is the biggest quarterly fall in GDP since 1980 and the biggest annual fall since the last recession in 1991. The contraction was aggravated by a sharp revision of the fall in construction output from 1.1pc to 4.9pc in the last quarter, falling consumer spend and businesses cutting back their inventories.

The pound fell 1.73 cents against the dollar to $1.4323 on the GDP revision, which reinforced the concern of the International Monetary Fund that Britain could be the worst affected by global recession. GDP sank by 2pc in the fourth quarter of last year when compared with the same period in 2007, again worse than the preliminary estimate of a 1.9pc contraction. The Office of National Statistics (ONS) said the economy expanded by 0.7pc overall last year, which is the slowest annual rate for 17 years, underlining a dramatic slowdown since the UK's 3pc expansion in 2007. Spencer Dale, the Bank of England's chief economist, admitted that "near-term prospects are bleak" but added that the contraction will slow down throughout the year, leading to "signs of recovery" by the fourth quarter.

He also said that it was a positive sign that the consumer price index showed inflation steadier than expected, but suggested policymakers need to prioritise stabilising the economy. "The economy is still contracting very sharply," he added. "Those inflation numbers need to be put alongside what is happening in the economy." David Miles, Morgan Stanley's chief economist, warned that public debt could now rise to 70pc if the banks needed more financial support. "The fiscal situation is far worse than anyone imagined 12 months ago, yet gilt yields are lower: is this sustainable?" said Mr Miles, who is due to take over from David Blanchflower on the Monetary Policy Committee in June.

But he said that rate cuts, the weakness of the pound, increased government spending and the natural ways that an economy stabilises during a recession could add 5pc to GDP. The ONS also revealed that Britain's current account deficit – the difference between goods exported and goods imported – narrowed to £7.64bn in the fourth quarter of last year from £8.16bn in the previous quarter. The improvement was helped by the weak pound but Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club, questioned whether this positive trend would continue. "The slight improvement in the current account is encouraging but further improvement will be hampered by weak external demand," she said.

WTO: protectionism on rise, endangering recovery
The world is slipping dangerously into protectionism, threatening to strangle global economic recovery, the World Trade Organization said. In an alarm bell to WTO's 153 members, Director-General Pascal Lamy said free trade has suffered "significant slippage" this year as countries have erected new barriers to imports in the form of tariffs, subsidies and other measures designed to protect domestic industries. Lamy said Thursday there was still no indication of a global descent into the trade wars that helped bring on the Great Depression. But he said "the danger today is of an incremental buildup of restrictions that could slowly strangle international trade and undercut the effectiveness of policies to boost aggregate demand and restore sustained growth globally."

Lamy's 47-page report obtained by The Associated Press lists dozens of government policies that are or would appear protectionist, if not illegal. Trade has been a key driver of global economic expansion over the past three decades, growing faster than economic output and spurring gains in both rich and poor countries. But it is being hit hard by the economic crisis, with the WTO announcing earlier this week that commercial activity was expected to shrink by 9 percent this year, the worst collapse since World War II. Protectionism will be one of the key issues when 20 of the world's leading economic powers meet in London next week. Those countries, which pledged in November in Washington to avoid spurring their economies at the expense of others, did not escape criticism in the WTO report.

Lamy said fiscal stimulus and government bailouts should be welcomed in the current environment because they aim to reverse a fall in global demand and revive international trade in goods and services. But he said the trade effects of such packages needed to be considered as they can provoke tit-for-tat retaliation that hurts all economies. Fears are rampant that amid the most dangerous economic downturn in 80 years countries will resort to the same shortsighted trade policies after the 1929 stock market crash. The United States then led that charge by raising tariffs on hundreds of foreign goods, sparking worldwide retaliation and the devastation of international commerce.

Part of the danger is that global trade rules provide so much space for maneuvering that countries can inflict serious damage on foreign exporters without violating any agreements. Most nations can legally raise their tariffs somewhat above the level they currently charge on imports. They can attach extra duties on foreign goods they suspect are being "dumped" at below-market value. Complicated import licenses can be required. Safety standards for imports can be set so high that trade stops. Rich countries have the option of subsidies. "The main risk is that governments will continue to cede ground to protectionist pressures, even if only gradually, as long as the global economic situation continues to deteriorate," Lamy warned.

"In that case, the negative impact on trade will mount as the number of new measures accumulates. This will worsen the contraction of world trade and undermine confidence in an early and sustained recovery in global economic activity." The report praises efforts by some leaders, such as Brazilian President Luiz Inacio Lula da Silva, to reject or reverse decisions aimed at making it harder for companies in foreign countries. President Barack Obama was also commended for ensuring that "Buy American" provisions in the United States' $789 billion stimulus package comply with international agreements. But its shame list was longer.

In the footwear sector alone, Argentina, Brazil, Canada, Ecuador, the European Union, Turkey and Ukraine have enacted or are considering measures designed to slow imports from China or Vietnam, the report showed. Australia, Brazil, Britain, Canada, France, India, Russia, and the United States were cited for automotive tariffs, subsidies, credits, licenses or other changes deemed dangerous to trade. Argentina, the 27-nation EU, Egypt, India, Indonesia, Malaysia, Philippines, Russia, Turkey, the U.S. and Vietnam were listed for protective steel regulations. It was Lamy's second report on protectionism this year. Future reports are expected every two months as the WTO steps up its monitoring of the crisis.

China wants influence and has money to buy it
This is the year when once-rich countries realised they needed China’s money. But it will extract a high price. It will change the character of the International Monetary Fund, and other old institutions — if it agrees to help them out at all. Gordon Brown has made much of wanting to rebuild the IMF at next week’s G20 meeting. It won’t be a quick conversation. China, India, Russia and Brazil want more voting rights over how the IMF spends its money, to reflect their rising share of the world’s economy. How much will they put in? There is a danger in expecting much. From China’s point of view, it may win more influence by investing directly in troubled countries, rather than in one of the creaking institutions built after the Second World War.

Two years ago critics of the IMF argued that it had had its day. The World Bank, too, and the satellite organisations, such as the European Bank for Reconstruction and Development, came under sceptical attack from those who thought they no longer had a role. The opening up of capital markets had made their provision of finance redundant, the argument went. The conditions they used to attach when they offered funds now seemed patronising — an imposition of Western-style capitalism. Meanwhile, the leap that countries in Eastern Europe, Latin America and parts of Asia had taken towards open markets and democracy was some kind of answer to those who thought they needed more lessons.

But the financial crisis has revived these institutions. It’s now clear that the fund’s resources may not be enough to prop up all the countries wanting help. Yesterday the fund’s managing director, Dominique Strauss-Kahn, said that the fund would be much more flexible in lending to well-run emerging economies. For months Brown has been suggesting that China should plug the gap. It has cash; the fund does not. He has not explained why China should do this. It might win more influence from the deals it has been exploring on its own with troubled countries (for instance, probing opportunities in energy in Iraq and Pakistan). Before the economic turmoil crash, it had bought itself big footholds in the resources of African and Latin American countries. It could do that even more cheaply now.

It will have to be given a reason to work within the IMF, and that price will be more influence. Under the current IMF rules, the EU has 32 per cent of the voting rights and the US, 17 per cent, compared with China’s 3.7 per cent and India’s 1.9 per cent. Those are bound to change — and there will be other demands. A call yesterday by China’s central banker for a new reserve currency for the world — an alternative to the dollar — is symbolic rather than sensible. But it represents China’s determination to make itself heard. It won’t be the last time.

Omni National Bank in Georgia Shut, 21st U.S. Failure
Omni National Bank of Atlanta was seized by federal regulators, the 21st U.S. bank to fail this year, as foreclosures rise amid the recession and the highest unemployment in a quarter century. Omni National, with $956 million in assets and $796.8 million in deposits, was shut today by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. was named receiver, the OCC said in a statement. SunTrust Banks Inc. of Atlanta will operate the lender’s six branches in four states and wind down the bank by April 27, the FDIC said. “The bank had experienced substantial dissipation of assets and earnings due to unsafe and unsound practices,” the OCC said. The losses “depleted most of its capital” and there was no “reasonable prospect” the levels would rise without government action.

The U.S. has lost 4.4 million jobs since the recession began in December 2007 and unemployment jumped to 8.1 percent in February, the highest in more than 25 years, crippling homeowners trying to pay off their mortgages. The Obama administration’s $787 billion stimulus package is aiming to create or save 3.5 million jobs and boost the economy. The failed bank had branches in Georgia, Illinois, Florida and Texas, and two loan offices in Alabama and Pennsylvania, the OCC said. The lender, owned by Omni Financial Services Inc., opened in 2000. The Federal Reserve on March 17 ordered the bank, which is controlled by of Atlanta, to bolster its capital and make improvements in accounting controls within 30 days.

Omni National customers must transfer accounts by April 27, or get a check from SunTrust after the branches are closed, the FDIC said. SunTrust said it received about $400 million in insured deposits as part of the transaction. The cost to the agency’s deposit insurance fund is estimated to be $290 million, the agency said. U.S. banks lost $32.1 billion from October through December, the first aggregate quarterly loss since 1990. The agency’s deposit insurance fund, used to reimburse customers of closed banks, tumbled 45 percent to $18.9 billion in the quarter from $34.6 billion in the preceding period following the closing of 25 lenders last year. “I’m starting to get more optimism,” FDIC Chairman Sheila Bair said this week in an interview on Bloomberg Television. “I think we are seeing some signs of thawing, some signs of improvement. Many banks are making money.”

The FDIC is preparing to sell devalued mortgages and commercial real-estate loans that are clogging banks’ balance sheets and preventing lending, Bair said. The initiative is part of the Obama administration’s effort to restart lending by reviving the credit markets. All banks are being encouraged to participate in the program, the FDIC said yesterday in a conference call with bankers. The agency, which is proposing a one-time fee on banks to replenish the deposit insurance fund, will divert profits from sales in the program to its reserves. Congress is considering expanding the agency’s borrowing authority from the Treasury Department. An FDIC official told U.S. lawmakers this week the levy of 20 cents per $100 of insured deposits may be cut in half if the credit line is expanded. The FDIC is considering calculating the fee based on a bank’s assets, rather than domestic deposits, so larger lenders will bear more of the cost.

Community lenders have said the one-time fee may significantly reduce 2009 earnings. The Independent Community Bankers of America said more than 1,000 bank executives complained, by letter, about the extra fees in the week after the charges were announced. The FDIC insures deposits at 8,305 institutions with $13.9 trillion in assets. The 252 lenders on the FDIC’s “problem list” had assets of $159 billion at the end of the fourth quarter, about 1.1 percent of total asserts, an increase from the $116 billion at the end of the third quarter, the agency said on Feb. 26.

Geithner facing own stress test
In any other year, Timothy Geithner already would have spent a week at tennis camp in Florida, sharpening his skills and kicking back with a group of friends that includes the mentor who helped put him on the fast track to the top of the Treasury Department. Instead, Barack Obama's 47-year-old treasury secretary is in his office before dawn most days, grabbing lunch at his desk and juggling three Blackberries as he tries to untangle the wreckage of a financial system gone sour. He's been pilloried for lousing up his tax returns, battered by bad reviews of his earliest policy pronouncements and pelted with resignation calls from congressional critics. Through it all, Geithner has displayed the same intense focus and unflappable demeanor that made him an obvious choice when no-drama Obama went hunting for a compatible personality to manage the biggest problem confronting the nation.

"Nothing has seemed to blow him off course," says Lee Sachs, a friend who worked with Geithner at Treasury during the Clinton years and is back in the department. Geithner was a twentysomething whiz kid when he first came knocking on the department's doors in 1988. He had outgrown his first job as a grunt at Kissinger Associates but he wasn't ready to be one of its big-money rainmakers. So Geithner signed on as a civil servant in the Treasury's trade office during the Reagan administration. Within a decade, he was on track to become the boss of the man who had hired him. Within two, he was fending off Obama's entreaties to become treasury secretary. Geithner's fans say one key to his quick rise to the top is his uncanny ability to see around corners. It also could help explain why he was so reluctant to take on a job that so far has been nothing but one long stress test, a phrase he would much rather see applied to troubled banks than his own career.

Geithner had been immersed in the unfolding economic crisis last fall as head of the Federal Reserve Bank of New York, and he knew better than almost anyone how bad things really were. But even he couldn't have predicted what a brutal slog it would be for him personally. Treasury secretaries normally aren't part of the zeitgeist. Just weeks into the job, Geithner already is "Saturday Night Live" sketch material. (To the amusement of his wife and kids.) With most of the department's top jobs still unfilled since the presidential transition, those who are at work there joke about being hooked up to food intravenously and walking the halls tethered to an IV bag hanging on a pole. Geithner hasn't had a full day off since he took the job two months ago. His family still is 200 miles away in New York. The overlord who will have his signature imprinted on U.S. currency is bunking with friends.

And he and his one-time mentor, Lawrence Summers, have managed to get in just one game of tennis. The man who loves any kind of sportsnowboarding, basketball, running and morelargely settles for a predawn workout in the basement gym at Treasury. On a rare overnight trip home recently, Geithner spent much of the time prepping for last week's rollout of his bank rescue plan. That, at least, got a thumbs-up from Wall Street and helped to ease the sense of a Treasury Department under siege after the blowup over big bonuses going to executives at American International Group Inc., the insurer that has soaked up billions in federal bailout money. Geithner caught much of the blame for letting the payments go through, although he insisted he was powerless to block them. The AIG furor wasn't the first major bump in Geithner's tempestuous tenure at Treasury. A month earlier, his awkward introduction of the bank rescue plan's sketchy framework sent global financial markets tumbling, and the letdown spawned talk about a lack of confidence in a Cabinet member who looks so much younger than his years.

"Shock and uh," one critic called it. With his youthful looks and curly locks, Geithner brings to mind Doogie Howser, the boy-genius doctor of a '90s TV show, more than the outsized personalities who typically have presided at Treasury. His mind seems to race ahead of his mouth, which plays catch-up by blurting out phrases such as "majoremergingmarketcountries" and "toolstomitigatesystemicrisk." His loafers shift forward, then back as he fields incoming fire from cantankerous legislators at hearings, his head slowly nodding three or four times to show he gets it, then bobbing up and down more quickly. He's on "thin ice," one GOP critic says. "Shaky ground," warns another. "He should go," says a third. Obama, for a time, felt compelled to dole out a daily dose of confidence in his treasury secretary to tamp down calls for his head.

Although the criticism eased after Geithner released details of the bank plan, his every move will be under a high-resolution microscope at this coming week's economic summit in London. He already is weakened politically and it's not clear how much margin for error he has left. But former Federal Reserve Chairman Alan Greenspan, one of the wise men to whom the treasury secretary turns for outside advice, said missteps are inevitable given the demands of the job. "He is making decisions in areas where if you get it right 60-70 percent of the time, you are extraordinary," says Greenspan. "That means you are wrong 30-40 percent of the time." At Treasury, Greenspan said, it's not enough to make broad policy decisions and leave it to others to work out the details.

"If you're not down in the weeds in this type of operation, you're going to make some terrible mistakes," he said. To Geithner's harshest critics, there already have been too many mistakes. "You know, I'd like to send a little message to Mr. Geithner to not sell his home,his $1.6 million home in New Yorkbecause I'd like for him to stay there and not come to be the secretary of the treasury," Sen. Jim Bunning, R-Ky., sniped last week.

Timothy Franz Geithner's birth certificate reads New York City but he's truly a global production. With a father who worked abroad for the U.S. Agency for International Development and then the Ford Foundation, Geithner lived in Zambia and Rhodesia (now Zimbabwe) as a child. By junior high, he was in India. By high school, he was in Thailand. As it happens, Geithner's father, Peter, at one point oversaw a program developed by Obama's mother, Ann Dunham Soetoro, when she worked for the Ford Foundation in Indonesia. The two met at least once in Jakarta, according to the foundation. At his Treasury swearing-in ceremony in January, Geithner paid tribute to his father for showing him the world as a child and allowing him see America "through the eyes of others."

"It was that experienceseeing firsthand the extraordinary influence of American policy on the worldthat led me to work in government," he said. An interest in public service also is part of his pedigree. A grandfather served as an adviser to President Dwight Eisenhower. An uncle advised the presidential campaigns of George Romney and Nelson Rockefeller, and held positions in the departments of Justice, State and Defense and as a U.N. ambassador. At Dartmouth College, Geithner avoided the fraternity culture, immersing himself in Asian studies. Friends were more likely to peg him for a future diplomat than financial wizard. Geithner studied both Japanese and Chinese, going abroad for a time to hone his language skills in Beijing.

"He really nailed Chinese in a way that was quite out of the ordinary," recalls John Fanestil, his sophomore roommate. It was at Dartmouth that Geithner met Carole Sonneberg, now a social worker. The two were married at his parents' summer home on Cape Cod, with Geithner's father serving as best man. They have two children in high school, freshman Ben and senior Elise, who are more likely to see their dad on TV than in person. "I talk to them many, many times a day and try to keep in touch," Geithner said in a recent TV interview that spoke tellingly of the distance between them.

After his early stint at Henry Kissinger's consulting firm, Geithner got hired at the Treasury by William Barreda, who says that if he hadn't retired when he did in 1997, Geithner soon would have been his boss. He likes Geithner anyway, and says "you'll have trouble finding anyone who dislikes him." When Robert Rubin took over as treasury secretary in 1995, Barreda remembers Rubin going around the room during a meeting to ask each person's background, and getting back puffed-up credentials from virtually everyone. Then came Geithner, who confessed that prior to joining Treasury, "mainly, I was in high school." Geithner's big break came when he caught the approving eye of Summers, then a treasury undersecretary, who became his mentor and mental sparring partner. Summers, who followed Rubin as treasury secretary, now says he and Geithner work together so closely on Obama's economic team that "if one of us explains something and it's unclear, the other will try to fill in because we tend to be able to follow each other's thoughts."

Stylistically, though, the two are at opposite ends of the spectrum: Summers, the say-anything bulldog; Geithner, the quiet, calm guy in the roomful of egos. Stephanie Flanders, who worked at the Treasury during the Clinton years and now is the BBC's economics editor, remembers Geithner as a skilled manager. "Tim gave the impression of being conciliatory and low key, but he actually was still able to get people to do what he wanted them to do," she said. "Everyone sort of finds themselves doing his bidding without realizing it. The 1990s had its own set of financial crises to be containedMexico, Brazil, Korea, Thailand and moreand it was the threesome of Rubin, Summers and Greenspan who repeatedly rode to the rescue. Their brain trust of bright young minds at the department included Geithner, by then in his mid-30s. "He was the senior technician of the group and we relied very heavily on his input and his judgmentdespite the fact that he looked like he was 25 years old," Greenspan recalls now.

After a stint at the International Monetary Fund, Geithner made it to the short list when the New York Fed was looking for a new president in 2003. Search chairman Peter Peterson, then head of the New York Fed's board, says there were worries about how tough Geithner would be, particularly given his age and quiet manner in job interviews. "That's the last thing you have to worry about," Peterson says Summers assured him. "Grab him before he has a change of mind," Greenspan advised. Geithner got the job, and had time to enjoy the boom times before the bust. He says he spent his years at the New York Fed trying to strengthen regulatory protections, "but many of those things didn't have enough traction" to prevent what lay ahead. By 2008, Geithner was part of a new troika trying to avert calamity, teaming with Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke.

Month after month, the trio scrambled to put out fires with names like Bear Stearns, Lehman Brothers, Citigroup, Wachovia, AIG. Geithner was the man on the spot, making the phone calls to sometimes paralyzed chief executives, negotiating the deals, plying with persuasion at some points, with four-letter words at others. At times he would function on as little as six hours of sleep over three days. During one crunch period, Bernanke sent flowers to Geithner's wife, already not seeing much of her husband. Paulson credits Geithner for bringing to the effort an astute understanding of the intersection of policy, politics and marketsa difficult threesome to get right. "He thinks through the consequences of everything he does, works around corners," says Paulson.

Geithner's knowledge of both Wall Street and Washington was a big plus as the president-elect looked to build a strong financial team to tackle the worsening economy. Even the revelation that Geithner mistakenly failed to pay $34,000 in payroll taxes over four years didn't derail his nomination. But his association with Wall Street and his big role in addressing the credit crisis last year also left him open to criticism from those who felt the Bush team hadn't been tough enough on the banks receiving billions of dollars in government bailout money. Others argued that if he'd only been a tougher watchdog, the crisis might have been averted. News that Geithner hadn't blocked bonuses for employees of AIG, whose bailouts he'd helped to orchestrate, sent the criticism into the stratosphere.

Obama said Geithner had done his best with a bad handbut also gave him marching orders to see what more could be done. Geithner rarely lets on publicly about all the stresses he's under, saying that criticism comes with the job.But associates say that in private, he will acknowledge how tough it's been. "I've seen him a bit down, as we all are in these matters, but it's not something that is pervasive," says Rodgin Cohen, a New York attorney who was in line to take the No. 2 job at Treasury before bowing out. "He bounces back. There's a lot of resilience." During one recent congressional hearing where his performance came up for yet another roasting, Geithner let plenty of criticism go unanswered. The Code Pink ladies waving "fire Geithner" signs didn't seem to faze him. But there was one dig he couldn't let pass.

When a senator made passing reference to Geithner and "the Wall Street crowd where you're from," Geithner wanted the last word. "I've been in public service my entire professional life," he protested. "Never worked on Wall Street. Never worked for a financial institution. ... Wouldn't give a penny to help a bank."

Ilargi: I don't think I'll ever stop wondering why a newspaper would throw its reputation to the wolves woith propaganda material like this.

Paulson Applauds as Geithner Grows Into His Role
Timothy Geithner's stock, once trading like the shares of beleaguered Citigroup, is rising. Fox Business Network calls the Treasury secretary "a rock star," and a columnist jokes that he is a foot taller than he was last week. Truth is, he wasn't as incompetent as he was made out to be a few weeks ago, and he isn't as sure-footed as he appeared to be on Capitol Hill the other day. It's a sign of the dismal times that the Treasury secretary is now part of pop culture. A song posted on YouTube unfavorably compares Mr. Geithner to Paul Krugman, the Princeton University economist and Geithner critic. ("For God's sake, man, you won the Nobel Prize. Tim Geithner uses TurboTax.")

But few people really know what it's like to be Treasury secretary in a crisis. One person who does know is Hank Paulson, now working from a spacious but modest office at John Hopkins University's Washington branch and preparing to write a book giving his account of the past few years. "It's difficult," he says, "to get the politics, the policy and the market reaction all right at any one point in time. It's virtually impossible to get all three of them right, but if you get any one of them very wrong, then you're not going to succeed." An example: Last fall, Mr. Paulson and Federal Reserve Chairman Ben Bernanke begged Congress for $700 billion to rescue the crumbling banks.

"For understandable political reasons, Congress kept putting a microphone under our noses and said, 'Tell the American people how dire this situation is.' That was a political necessity, but it sure didn't help people's confidence," he says. "You know it intellectually, but it is unpleasant to be forced to say things that you know are going to be very unsettling to the American people and to markets." Although both are Dartmouth graduates (Mr. Paulson '68, Mr. Geithner '83), the two men are strikingly different. Mr. Paulson spent his career as an investment banker; Mr. Geithner as a government technocrat. Mr. Paulson is macho. He played football in college, and treats every issue as if he were pushing down the field with only the end zone in mind.

Mr. Geithner is lithe. He plays tennis well, and excels at the verbal volley and the art of weighing the pros and cons of unappealing options. Mr. Paulson is blunt, sometimes talking before listening. Mr. Geithner has a way of cocking his head to show he is listening, and he chooses his words so carefully he sometimes sounds as if he is giving a deposition. Mr. Paulson is an unabashed Geithner fan, and regularly sought his advice. Although you wouldn't know it from the marketing, much of the Obama-Geithner-Bernanke financial rescue is built on Paulson-Geithner-Bernanke foundations, albeit with significant changes and substantially more emphasis on avoiding foreclosures.

The two Treasury secretaries confront very different political circumstances. President George W. Bush, on his way out, delegated to Mr. Paulson and Mr. Bernanke. He seemed somewhere between oblivious and disinterested in the politics of it all. President Barack Obama has built a powerful White House that sometimes constrains Mr. Geithner. And the president himself, as demonstrated with his running commentary, cares very much about the politics. Mr. Geithner's rough start was a surprise to those who watched him rise from civil servant to aide-de-camp to Treasury secretaries to president of the Federal Reserve Bank of New York. The flap over the taxes he should have paid -- but didn't -- demolished his public credibility and made him beholden to the senators who voted to confirm him.

Once in office, he proved that it's easier to whisper in the ear of the Treasury secretary so he says the right thing than to face the cameras and do it yourself. (Given that he spent more than a decade on the international side of the Treasury, his gaffe last week that suggested he might acquiesce to a diminished role for the dollar was a surprise.) One challenge for any Treasury secretary, Mr. Paulson says, is: "How do you define success? What are a realistic set of expectations?" After he (and Mr. Geithner) pushed taxpayer capital onto the banks -- but before a single dollar had actually been dispersed -- people were asking why the banks weren't lending more, he protests. And no Treasury secretary gets credit for avoiding catastrophe. "We succeeded in keeping the financial system from collapse," he says, "but people were unhappy because we didn't prevent a recession. It's hard to get kudos for what didn't happen."

It's no surprise that Mr. Geithner is looking better. A 20% climb in the stock market has a way of doing that. A lot of what was said about him a few weeks ago didn't ring true. He may be overwhelmed, but he's neither politically tone-deaf nor oblivious to the consequences of his actions. He now realizes that he is better at fielding questions than delivering telepromptered speeches, so that's what he is doing. And the conversation has moved to his strength: talking about the rationale for a multipronged plan that he has helped to develop, as opposed to sweeping, rally-behind-the-leader rhetoric. Or, as Mr. Paulson puts it in a characteristic locker-room compliment: "I've been in the trenches with him. He can take a punch."

America’s liberals lay into Obama
The liberal backlash against President Barack Obama has begun with many prominent left-leaning economists in the US attacking the administration’s plans to bail out the banks. Paul Krugman describes the toxic asset purchase plan as “cash for trash”. Jeffrey Sachs calls it “a thinly veiled attempt to transfer hundreds of billions of US taxpayer funds to the commercial banks”. Robert Reich depicts Tim Geithner, Treasury secretary, as a prisoner of Wall Street while Joe Stiglitz says the plan “amounts to robbery of the American people”.

On the blogosphere and beyond, Democratic economists accuse Mr Obama – along with Mr Geithner, and Lawrence Summers, the president’s senior economic adviser – of taking dictation from the same financiers who have brought the economy to the brink of depression. Mr Reich, who was Bill Clinton’s Labour secretary in the 1990s before resigning over the former president’s reluctance to pursue a strong public investment agenda, says that he and his colleagues fear a replay of the Clinton years under Mr Obama. Mr Reich now talks of the “Paulson-Geithner approach” to demonstrate what he sees as the continuity between Hank Paulson, George W. Bush’s last Treasury secretary, and the current administration. Mr Reich says bank nationalisation is the only answer to today’s crisis.

“Bill Clinton chose to pursue a set of policies that Wall Street agreed with but at the expense of his long-term agenda of boosting public investment,” says Mr Reich. “Bill Clinton’s Wall Street agenda in the end brought America and the world crashing down with it. I hope we are not seeing history repeat itself with Mr Obama.” Not every Democrat agrees. Brad DeLong, a former Clinton official, says that every banking crisis – barring the Great Depression – has been resolved by government recapitalisation of the banking sector, as Mr Obama is likely to attempt in the near future. Nor, says Mr DeLong, is it fair to paint Mr Geithner as a creature of Wall Street.

“Hank Paulson is a man who grew up in American finance and cannot imagine a world in which America does well and its financial sector does badly,” he says. “Tim Geithner, by contrast, is a bureaucrat and a policymaker. He has never pulled down a multibillion-dollar bonus. They are not the same type of people.” But in reality the division is as much political as economic. Most of Mr Obama’s liberal critics argue he should have gone to Congress already and asked for a lot of money for bank recapitalisation. His defenders say that would be political suicide until the populist mood on Capitol Hill has died down. “We have to ask ourselves: Do we want to revive our economy, or do we want to punish the bankers?” says Mr DeLong. “I don’t agree that we can do both.”

Goldman allowed executives to exit funds
Two of Goldman Sachs’ top executives, including Jon Winkelried, the co-chief operating officer, were allowed to sell part of their positions in the firm’s proprietary, illiquid investment funds last year, according to Goldman’s preliminary proxy statement, filed on Friday afternoon. Mr Winkelried and Gregory Palm, the firm’s general counsel, both entered into “related party” transactions with Goldman in 2008, allowing them partially to sell, or “cash out” of, their holdings. According to the filing, Mr Winkelried received $19.7m and Mr Palm $38.3m from the sales.

The disclosure comes almost two months after Mr Winkelried announced he was stepping down from the firm, effective March 31. Mr Winkelried never publicly stated the reasons for his departure, but the disclosure concerning the special sale of illiquid assets, and the fact that he put his Nantucket mansion up for sale in October – during one of the worst real estate markets ever – suggests that he needed some liquidity last year.

Employees at Goldman, who receive most of their bonus money in restricted stock, are also allowed to invest in Goldman’s proprietary funds, which are tied up in illiquid investments such as real estate or private equity deals. But the credit crisis of 2008, combined with the failure of Bear Stearns and Lehman Brothers, helped drive Goldman stock downwards late last year. On top of the stock’s drop, the value of the proprietary funds nosedived. Goldman Sachs is forbidden to extend loans to executives such as Mr Winkelried or Mr Palm because of the Sarbanes-Oxley Act. Either man could have raised cash by selling stock, but such sales by executives would have had to be disclosed to the market.

“In the fall of 2008, the firm purchased interests in certain hedge funds and private equity funds from Jon Winkelried and Greg Palm,” said a spokesman for the firm.
“Stock sales would easily have covered their requirements but, given the turbulent market conditions, we and they were concerned that such sales would be misconstrued by the market as indicating a lack of confidence in Goldman Sachs.” The special asset sales occurred in September, around the time of Lehman’s bankruptcy and Merrill Lynch’s sale to Bank of America. Shortly after the sale, Warren Buffett invested $5bn in the firm. One of the conditions of Mr Buffett’s investment was that none of Goldman’s top three executives – including Mr Winkelried – would be allowed to sell more than 10 per cent of their holdings in the firm for several years.

Bank chiefs hold peace talks with Obama
Top bank chief executives held peace talks with President Barack Obama at the White House on Friday as the administration sought to soothe tensions over lavish Wall Street bonus payments. The meeting came at the end of a week in which in which Mr Obama pushed back against efforts by Congress to slap hefty tax penalties on bonuses and warned people not to “demonise” investors and entrepreneurs. Ken Lewis of Bank of America, Jamie Dimon of JP Morgan, and Vikram Pandit of Citigroup were among 15 bank heads invited to the talks in the White House state dining room.

Robert Gibbs, White House press secretary, said the president would deliver a tough message on the need for shared sacrifice between Wall Street and Main Street. But another administration official made clear it would not be a one-way lecture. “The purpose of the meeting is to listen and to have a conversation about how we’re going to repair the damage to our financial system,” said the official. “Our recovery depends on reviving our financial system and capital markets.” Mr Obama initially echoed and even encouraged public anger towards Wall Street after revelations earlier this month that AIG, the bailed-out insurer, had used taxpayer money to pay $165m of bonuses to top employees. But he dialled back his rhetoric this week amid mounting concern that anti-Wall Street sentiment could undermine the administration’s efforts to shore up the financial sector.

In particular, Tim Geithner, Treasury secretary, needs support from investors for his plan, announced on Monday, for a public-private partnership to buy up the toxic assets weighing down bank balance sheets. The administration has also been rattled by signs that healthier banks could withdraw early from the Troubled Asset Relief Programme because of heavy-handed government intervention, a move that would make it harder for the administration to kick-start lending. Tensions between Wall Street and Washington reached a peak last week when the House of Representatives rushed through legislation to impose a 90 per cent tax on bonuses at many financial institutions receiving taxpayer support.

However, momentum behind the proposals has slowed this week after Mr Obama signalled his opposition and the initial wave of anger over the AIG bonuses fades. Harry Reid, the Democratic leader in the Senate, insisted on Friday that “the issue has not gone away” but conceded that the Senate version of the bill was on hold until later in April at the earliest. “When we come back after Easter recess I’m committed to taking the lay of land to find out where we all go on this,” he said. The Senate is working on a watered-down version of the House bill that would impose a 70 per cent tax on a wider range of bonuses, with half paid by the employee and half by the employer.

Bankers went into Friday’s meeting with a mixture of apprehension and hope. Financial executives said that White House officials wanted to reassure them that President Obama would use the gathering to cool tensions rather than pressing them on specific issues. However, few bankers believed the administration would not take the opportunity to remind the country’s largest financial institutions that the billions of dollars in taxpayers’ funds they have received came with strings attached. “Hot button topics such as executive compensation, the resumption of lending and banks’ participation in the latest plan to rid the system of toxic assets are bound to come up,” said a Wall Street insider. “The question is how hard the White House wants to press the banks on these”.

For their part, bankers said they would be in a listening mode and keep their lobbying and complaints about the political furore surrounding the industry to a minimum. Others attending the meeting included Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, Ken Chenault of American Express, and Rick Waddell of Northern Trust.

Bank of America May Boost Investment Banker Pay 70% After Merrill Takeover
Bank of America Corp. plans to increase some investment bankers’ salaries by as much as 70 percent following the takeover earlier this year of Merrill Lynch & Co., people familiar with the proposal said. “The concepts we are considering would not increase total compensation,” Brian Moynihan, Bank of America’s president of investment banking and wealth management, wrote yesterday in a memo to employees obtained by Bloomberg News. “Rather, we believe it is responsible, and consistent with the emerging public consensus, that a greater percentage of overall compensation come from fixed base salary.”

Bank of America, which has received $45 billion of taxpayers’ money, may raise the annual base pay for some managing directors to about $300,000 from $180,000, said the people, who declined to be identified because the final numbers are still under discussion. Salaries for less-senior directors would climb to about $250,000 from $150,000, and vice presidents would get $200,000, up from about $125,000, the people said. Bonuses will become a “smaller” portion of total compensation, Moynihan wrote in the memo. The adjustments, which may be rolled out as soon as next month, are designed in part to align the salaries of employees at Charlotte, North Carolina- based Bank of America with workers at New York-based Merrill, one person familiar with the plans said. Salaries for traders and other employees outside the investment bank may also be adjusted, the person said.

Governments across the world are gearing up to curb bankers’ year-end cash bonuses after the credit crisis forced regulators and lawmakers to use taxpayer funds to rescue the industry. The U.S. House passed a bill last week that would impose a 90 percent tax rate on bonuses paid by American International Group Inc. and firms that received more than $5 billion from the government. The Senate is weighing a tax. “In view of the public concerns about executive compensation, changes in the market, and the need to create a more sustainable compensation culture, all the major financial institutions are evaluating compensation practices,” Moynihan wrote in the memo. “We are considering proposals that reflect principles that have been outlined by regulators and elected officials, as well as the need to be competitive in the industry.”

The worst financial crisis since the 1930s has spread across the economy, lifting the U.S. unemployment rate to 8.1 percent, the highest in more than 25 years, and causing the biggest quarterly economic contraction since 1982. “We’re in an economic downturn, the government is pouring billions into banks, and these guys are boosting their salaries,” said Jason Kennedy, chief executive officer of London-based recruitment firm Kennedy Associates. “There’s an issue of public perception.” The U.S. is projecting that spending to stimulate the economy and rescue the financial system will lead to a $1.75 trillion budget deficit in the current fiscal year. Bank of America, led by CEO Kenneth Lewis, has struggled to retain Merrill Lynch executives since it bought the investment bank in January. Merrill investment banking chief Greg Fleming and wealth management head Robert McCann have quit, and Andrea Orcel, Merrill’s top investment banker, has told people he’s considering leaving, according to two people with direct knowledge of his situation.

“Orcel has indicated to his leadership team and to Brian Moynihan that he intends to roll his sleeves up, go to work on building our combined businesses, and try to ignore the distractions caused by anonymous sources of questionable reliability or motivation,” bank spokesman Scott Silvestri said in an e-mailed statement. Before it was acquired by Bank of America, Merrill doled out $14.8 billion in pay and benefits last year, an average of $253,000 per employee, company filings show. New York Attorney General Andrew Cuomo is investigating $3.6 billion of bonuses paid to Merrill executives in December. The American Recovery and Reinvestment Act of 2009 will require the top five executives at banks that receive at least $500 million of bailout funds, and the 20 top-paid employees at those companies, to forgo cash bonuses.

Bankers can still get stock bonuses under the law, as long as the shares are restricted until their employers repay bailout funds. Other banks will likely ratchet up salaries as year-end bonuses shrink, according to compensation consultant Alan Johnson. UBS AG, Switzerland’s biggest bank, promoted about 1,500 investment-banking employees and raised their fixed salaries as much as 50 percent, SonntagsZeitung reported this month. “It’s literally long overdue,” said Johnson, the founder of New York-based compensation-consulting firm Johnson Associates Inc. “Salaries haven’t really changed in 15 years. The whole industry had silly low base salaries. It was kind of a macho thing left over from the 1980s.”

Bonuses make up about two-thirds of a banker’s total compensation. Salaries have ranged from about $80,000 to $300,000, with bonuses often climbing into the millions of dollars, Johnson said. The five biggest Wall Street firms awarded their employees a record $39 billion of bonuses in 2007. Financial firms worldwide have taken more than $1 trillion of writedowns and credit losses since the subprime mortgage market collapsed in 2007, triggering a global credit contraction. The U.S. government has pledged more than $11.6 trillion on behalf of American taxpayers over the period to prop up financial firms.

Goldman Sachs Pays Executives $49.6 Million on Investments as Stock Falls
Goldman Sachs Group Inc.’s top 10 executives received $49.6 million from their investments in hedge funds and private equity funds during 2008, more than most of them earned in compensation after agreeing to forgo bonuses. Chief Executive Officer Lloyd Blankfein’s $1.1 million in total compensation was dwarfed by the $11.3 million he received in profits and other income from his fund investments, the New York-based company’s proxy filing showed. Co-President Gary Cohn’s $3.7 million in pay contrasts with $7.4 million in fund income, the filing showed.

While the payouts pale in comparison with Blankfein’s record-setting $67.9 million bonus for 2007, they illustrate that top executives had other sources of income at the sixth- biggest U.S. bank by assets. Two of the executives, Co-President Jon Winkelried and Co-General Counsel Gregory Palm, sold fund stakes back to the firm to raise money in the last four months of the year rather than sell stock in a rocky market. “Stock sales would easily have covered their liquidity requirements but given the turbulent market conditions, we, and they, were concerned that such sales would be misconstrued by the market as indicating a lack of confidence in Goldman Sachs,” said Lucas van Praag, a spokesman.

“It was clearly in the long-term interests of the organization and our shareholders that we purchase these interests.” Goldman Sachs bought the holdings after consulting with the board, he said. Palm, 51, raised $38.3 million in cash, while Winkelried, 49, garnered $19.7 million, the proxy showed. Palm’s sale represented 25 percent of his total investments in the funds and Winkelried’s was 30 percent, said van Praag. As of March 9, Winkelried owned 2.79 million Goldman Sachs shares, yesterday’s filing showed. At their most recent closing price of $108.08 apiece, the stock would be worth $301.1 million. Palm’s total shareholdings weren’t disclosed in the filing because he’s not a board member.

Winkelried, paid $67.5 million in salary and bonuses in 2007 and $53 million in 2006, is leaving the firm this month. Last year, Winkelried listed his Nantucket, Massachusetts, estate for sale at $55 million. He cut the price to $38.5 million, the Wall Street Journal reported on its Web site in February. Palm, 60, received $9.1 million in restricted shares and options in 2007 and about $1.1 million in restricted stock and options in 2008. The company doesn’t disclose any information on cash bonuses he may have collected. Palm also received $10.9 million in profit and other returns from Goldman Sachs’s funds in 2008, the filing showed. Winkelried received $3.6 million in such distributions.

The 10 executives whose fund income was disclosed in the filing were Blankfein, Cohn, Winkelried, Palm, Co-General Counsel Esta Stecher, Chief Financial Officer David Viniar, Vice Chairman Michael Evans, Vice Chairman Michael Sherwood, Vice Chairman John S. Weinberg, and Kevin Kennedy, who runs Goldman’s business in Latin America. Of the 10, only Palm, Stecher, and Kennedy didn’t forgo their bonuses in 2008.

Is the Bail Out Breeding a Bigger Crisis?
y Paul Craig Roberts

At his March 24 press conference President Obama demonstrated that he is capable of understanding issues as presented to him by his advisers and able to pass on the explanations to the press. The question is whether Obama’s advisers understand the issues. Obama’s advisers are focused on rescuing banks and the insurance company, AIG. They perceive the problems as solvency and paralyzing uncertainly or fear. Financial institutions, unsure of their own and other institutions solvency, hoard cash and refuse to lend. Credit is needed to get the economy moving, and the Federal Reserve and Treasury are doing their best to inject liquidity and to remove troubled assets from the banks’ books.

This perception of the problem and the “remedies” being applied, might be causing a greater problem for which there is no solution. Obama’s approach, and that of the previous administration, requires massive monetization of debt by the Federal Reserve and massive new debt issues by the Treasury. The unaddressed question remains: Is the US dollar’s status as world reserve currency threatened by the debt monetization and multi-year, multi-trillion dollar issuance of new Treasuries? The United States has become an import-dependent country. The US is dependent on imports for energy, manufactured goods including clothes and shoes, and advanced technology products. If the US dollar loses its reserve currency status, the US will not be able to pay for its imports. The ensuing crisis would dwarf the current one.

Obama’s advisers believe that the US can monetize debt and issue new debt endlessly, because America’s capital markets are the deepest and most liquid. The dollar is strong, Obama said at his press conference. But already cracks and strains are appearing. The day after Obama’s press conference, an auction of UK bonds, known as gilts, failed when bids fell short of the supply offered and interest rates rose. This is a bad sign for Prime Minister Gordon Brown’s plan to market an unprecedented amount of new debt during the current fiscal year. It is also a bad sign for Obama’s similar plan. In the US, interest rates on US Treasuries have risen in anticipation of unprecedented new Treasury issues despite the Federal Reserve’s recent announcement that it intends to purchase $300 billion of existing Treasuries held by the banking system.

Normally, Fed purchases raise bond prices, thereby lowering interest rates.  However, the inflation and interest rate implications of the unprecedented supply of new Treasuries necessary to finance the multi-year, multi-trillion dollar budget deficits are beginning to be recognized in bond and currency markets. Everyone knows that the Federal Reserve will monetize the new debt issues rather than allow a Treasury auction to fail. Recently, America’s largest creditor, China, expressed concern that the value of its massive holdings of US dollar investments is in danger of being inflated away. The Fed cannot monetize new Treasury issues without the word getting out.  If and when this happens, the US dollar’s exchange value is likely to drop while interest rates and inflation rise.

To avoid a crisis of this magnitude, the US needs to focus on saving the dollar as reserve currency. As I previously emphasized, this requires reducing US budget and trade deficits. Despite the near-term budget costs of ending the occupation of Iraq and the war in Afghanistan, terminating these pointless military adventures would produce immediate large out-year budget savings. Closing many foreign military bases and cutting a gratuitously large military budget would produce more out-year savings. The Obama administration’s belief that it can continue with Bush’s wars of aggression while it engages in a massive economic bailout indicates a lack of seriousness about America’s predicament. Rome eventually understood that its imperial frontiers exceeded its resources and pulled back. This realization has yet to dawn on Washington.

More budget savings could come from a different approach to the financial crisis. The entire question of bailing out private financial institutions needs rethinking. The probability is that the bailouts are not over. The commercial real estate defaults are yet to present themselves. Would it be cheaper for government to buy the shares of the banks and AIG at the current low prices than to pour trillions of taxpayers’ dollars into them in an effort to drive up private share prices with public money? The Bush/Paulson bailout plan of approximately $800 billion has been followed a few months later by the Obama/Geithner stimulus-bailout plan of another approximately $800 billion. Together it adds to $1.6 trillion in new Treasury debt, much of which might have to be monetized.

Could this huge debt issue be avoided if the government took over the banks and netted out the losses between the constituent parts? A staid socialized financial sector run by civil servants is preferable to the gambling casino of greed-driven, innovative, unregulated capitalism operated by banksters who have caused crisis throughout the world. Perhaps the Federal Reserve should be socialized as well. The notion of an independent, privately-owned Federal Reserve system was never more than a ruse to get a national bank into place. Once the central bank is part of the state-owned banking system, the government can create money without having to accumulate a public debt that saddles taxpayers and future budgets with hundreds of billions of dollars in annual interest payments.

Free market ideologues will say the government would inflate. However, the government has been inflating for generations and is now set on a course for hyperinflation.  Monetization of troubled financial instruments by the Federal Reserve is just beginning. In addition, there are the multi-trillion dollar budget deficits which probably cannot be financed other than by monetization of new debt issues. The US money supply as measured by cash in circulation and demand deposits (checking accounts) is currently about $1.4 trillion. If this year’s budget deficit is monetized, the money supply doubles. If next year’s budget deficit is monetized, the money supply would have tripled in two years.  Inflation would explode. The combination of high unemployment and high inflation would be devastating. In contrast, protecting depositors is not inflationary. It merely prevents monetary contraction.

If the Obama administration can think about socializing health care as a single-payer system, it should be able to think about socializing the banking system. Currently, Medicare is paid for by taxpayers, Medicare beneficiaries, healthy retirees, and doctors.  Beneficiaries have to pay substantial premiums for supplemental coverage whether ill or healthy, and doctors are paid a pittance from the schedule of fixed prices.  The insurers are the ones who make money, not the medical service providers. The single-payer system would shrink costs by the amount of the health insurance industry’s profits and the enormous paperwork and enforcement compliance costs.

The trade deficit is even more difficult to address. The American economy lost much of its manufacturing leg to offshoring. It has now lost its real estate and financial sector legs. Real incomes for the average family have not increased. The consumer-demand-driven economy became dependent on the accumulation of consumer debt, which has reached its limit. When the production of goods and services for the domestic market is moved offshore, Americans lose income and the economy loses GDP.  When the goods and services produced offshore return to be sold to Americans, they constitute imports that widen the trade deficit. The US finances its trade deficit by turning over to foreigners ownership of existing US assets and their future income streams, which, of course, increases the flow of income away from Americans.

The claim that low prices in Wal-Mart compensate for all these costs is ridiculous.  Nevertheless, the Obama administration, corporation executives, and the economics profession remain committed to offshoring. The claim, expressed by Obama at his press conference, that retraining programs are the solution to manufacturing and IT unemployment caused by offshoring is also ridiculous.  For a decade the only source of American job growth has been domestic services that cannot be offshored, such as hospital orderlies, barbers, waitresses and bartenders. Retraining is simply a government subsidy to educational institutions, a subsidy that insures their continued support for offshoring.

The enormous trade deficit that has been created by the pursuit of short-term corporate profits can only be closed in two ways. One is to stop the offshoring and to bring home the offshored production. Possibly, this could be done by replacing the corporate income tax with a tax based on whether value added to a company’s output occurs domestically or abroad. The other way the trade deficit can be closed is by the inability of Americans to pay for imports. If debt monetization wrecks the dollar and drives up import prices, Americans will have to learn to live with less imported energy and manufactured goods. American annual consumption would shrink by the amount of the trade deficit.

The Bush/Obama approach to the crisis in the financial sector is to monetize existing debt and to accumulate enormous new debt that will likely also require monetization. The monetization threatens inflation, high interest rates, and depreciation of the US dollar and loss of its reserve currency role. The accumulation of new public debt implies larger annual interest payments that could make future deficit reduction problematic. Clearly, the Obama administration needs to broaden its perception of the predicament to which financial deregulation and offshoring have brought the US economy.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration.

DBRS Accuses Fed Of Discriminating Against Small Rating Firms
The president of Canada-based DBRS Inc., a rival to the big three credit rating firms, accused the Federal Reserve on Thursday of effectively shutting smaller rating firms out of the U.S. securitization market. In prepared testimony before the Senate Banking Committee, Daniel Curry complained that asset-backed securities are only eligible to participate in the Fed's new Term Asset-Backed Securities Loan Facility if they receive a AAA-ratings from Standard & Poor's, Moody's or Fitch.

"No explanation has been given for the creation of this new sub-category of registered credit rating agency," Curry said. "The result of this is that DBRS ... has been deemed unqualified to rate TALF-eligible securities, even though several issuers have asked it to do so." "The harmful effects of limiting rating agency competition under the TALF are profound, because for the foreseeable future, the TALF is likely to be the entire securitization market in the United States," he added. In 2006, Congress passed a bill aimed at promoting more competition in the rating industry, improving transparency and curbing conflicts of interest. Following the passage of that bill, the Securities and Exchange Commission approved some rules to implement the legislation.

But since the financial crisis, some critics have called for expanding the SEC's authority beyond the scope of the bill because they say the firms gave overly generous ratings to certain types of debt. DBRS, a Canada-based firm, has been officially designated by the Securities and Exchange Commission as a nationally recognized statistical rating organization. That designation, Curry noted, should make his company eligible to rate securities for TALF. Curry said he is trying to persuade the Fed to end its "discriminatory policy."

Is there any gold inside Fort Knox, the world's most secure vault?
It is said to be the most impregnable vault on Earth: built out of granite, sealed behind a 22-tonne door, located on a US military base and watched over day and night by army units with tanks, heavy artillery and Apache helicopter gunships at their disposal. Since its construction in 1937 the treasures locked inside Fort Knox have included the US Declaration of Independence, the Gettysburg Address, three volumes of the Gutenberg Bible and Magna Carta. For several prominent investors and at least one senior US congressman it is not the security of the facility in Kentucky that is a cause of concern: it is the matter of how much gold remains stored there - and who owns it.

They are worried that no independent auditors appear to have had access to the reported $137 billion (£96 billion) stockpile of brick-shaped gold bars in Fort Knox since the era of President Eisenhower. After the risky trading activities at supposedly safe institutions such as AIG they want to be reassured that the gold reserves are still the exclusive property of the US and have not been used to fund risky transactions. In other words, they want to be certain that the bullion has not been rendered as valueless as if a real-life Goldfinger had stolen it. “It has been several decades since the gold in Fort Knox was independently audited or properly accounted for,” said Ron Paul, the Texas Congressman and former Republican presidential candidate, in an e-mail interview with The Times. “The American people deserve to know the truth.”

Mr Paul has so far attracted 21 co-sponsors for a Bill to conduct an independent audit of the Federal Reserve System - including its claims to Fort Knox gold - but an organisation named the Gold Anti-Trust Action Committee (GATA) is taking a different approach. It has hired the Virginia law firm William J.Olson, PC, to test President Obama's promise to bring “an unprecedented level of openness” to the Government and next month it will file several Freedom of Information requests for a full disclosure of US gold ownership and trading activities. “We're taking the President at his word,” said Chris Powell, of GATA. “If you go online you can find out how to build a nuclear weapon but you won't find any detailed records on central gold reserves.”

A month after President Nixon resigned over the Watergate affair Congress demanded to inspect the contents of Fort Knox but the trip to Kentucky was dismissed by critics as a photo opportunity. Three years earlier Mr Nixon brought an end to the gold standard when France and Switzerland demanded to redeem their dollar holdings for gold amid the soaring cost of the Vietnam War. Many gold investors suspect that the US has periodically attempted to flood the market with Fort Knox gold to keep prices low and the dollar high - perhaps through international swap agreements with other central banks - but facts remain scarce and the US Treasury denies that any such meddling has gone on for at least the past decade.

Pressure for more openness is mounting after the collapse of the global banking system and renewed interest in a return to the simpler era of the gold standard - a subject that is likely to be raised at the G20 summit next week. China and Russia are calling for the creation of a new world reserve currency amid fears that the Federal Reserve's quantitative easing policy - essentially printing money - might cause hyperinflation, then collapse. A spokesman for the US Treasury told The Times that US gold holdings are audited every year by the Department of Treasury's Office of Inspector General. He confirmed that although independent auditors oversee the process they are not given access to the Fort Knox vault. The website of the US Mint says that the 147.3 million troy ounces of gold in Fort Knox “is held as an asset of the US”. It does not elaborate.

Conspiracy theories
• Area 51, which is part of the Nellis air force base in south Nevada, is at the centre of US conspiracy theories. According to these the base is used to store alien spacecraft, study the corpses of aliens, or develop time travel
• Conspiracy theories suggest that tunnels were built below Denver airport to protect five million people during the coming Armageddon. Some say aliens are housed there
• The Federal Emergency Management Agency (Fema) was established by the US Government in 1979 to co-ordinate a response in the event of a disaster. Since then conspiracy theories have flourished on the theme that Fema concentration camps were being built around the country to incarcerate people and that the Government was soon to declare martial law
• In 1979 an intricate structure made of blue granite appeared on a farm in Elbert County, Georgia. The Georgia Guidestones are inscribed with ten guides written in English, Spanish, Russian, Chinese, Arabic, Hebrew, Hindi and Swahili. An inscription states that its sponsors were “a group of Americans who seek the age of reason”
• Roswell in New Mexico is believed by many to be the site of a UFO crash in 1947, from which an “alien body”, below, was recovered. The US military insists that the debris belonged to an experimental surveillance balloon

Russian Defaults Would Be Signal to 'Attack' Ruble, Bank of America Unit Says
Russia’s ruble may breach the level the central bank has vowed to defend if the country’s banks reveal they have more loans in or close to default than current forecasts show, Bank of America Securities-Merrill Lynch said. As much as 10 percent of the loan portfolio at OAO Sberbank, which has more than half of bank deposits in Russia, could be in or close to default, said Yulia Tsepliaeva, chief economist in Moscow at Bank of America-Merrill Lynch. That’s almost five times the level at the beginning of March. “Should the situation for non-performing loans be worse than it is now, it could be a catalyst for a return to bad sentiment on Russia,” Tsepliaeva said in an interview in the Russian capital today. “If the central bank had to use its reserves to support a big bank, investors would look at this as a signal to attack the ruble.”

Bank Rossii has been using higher interest rates, reductions in state lending to banks and the threat of selling more foreign reserves to deter investors from pushing the ruble beyond 41 to the dollar-euro basket used to manage fluctuations. Sberbank’s overdue loans were 2.1 percent of commercial and retail lending as of March 1, the state-run savings bank said on its Web site March 24, up from about 1.8 percent as of Feb. 1. It didn’t specify whether that excluded credits to other banks. Sberbank spokeswoman Irina Kibina wasn’t immediately available to comment on Tsepliaeva’s forecast today. The ruble was little changed at 38.6894 by 2:01 p.m. in Moscow versus the basket, which is made up of about 55 percent dollars and the rest euros.

The currency tumbled 37 percent against the basket between August and the end of January as the central bank engineered a “gradual devaluation” amid sliding oil prices and the threat of recession. Policy makers managed the decline by draining more than a third of Russia’s foreign-exchange reserves, still the third-largest in the world. That stockpile now stands at $385.3 billion, from a record $598.1 billion in August. The decline in the ruble “would be bad” if the central bank were forced to dole out as much as $100 billion of reserves to assist banks, said Tsepliaeva, whose forecast at the moment is for the ruble to remain around current levels against the basket for the rest of 2009. “That would be the extreme case; it all depends on the size of the hole,” she said.

Russia has pledged 300 billion rubles ($8.96 billion) to support the banking system this year, as part of a plan to jumpstart an economy forecast to contract by 2.2 percent as global demand shrinks and credit markets remain frozen. Finance Minister Alexei Kudrin said this week banks may face a second wave of problems as companies fail to repay loans. Moscow’s UralSib Financial Corp. estimates corporate non- performing loans in Russia could reach 9 percent in 2009. The ruble dropped 0.4 percent to 33.5437 per dollar today, leaving it little changed on the week, and paring its increase in March to 6.6 percent, the most in a month since the currency was redenominated by the government in January 1998. It gained 0.5 percent to 45.9559 per euro, for an advance of 1.2 percent on the week and 1.1 percent in March.

The ruble will probably trade at an average rate of 32 to 33 per dollar this year, Bank Rossii’s First Deputy Chairman Alexei Ulyukayev said today on the Ekho Moskvy radio station. It is more likely to strengthen against the dollar-euro basket in 2009 than weaken, he told reporters in Moscow today, according to Interfax. The 41 level will be defended unless Urals crude, Russia’s chief oil export blend, slumps to $30 a barrel and stays there “for a long time,” Bank Rossii Chairman Sergey Ignatiev said Jan. 22. Urals, which the government expects to trade at an average $41 a barrel this year, has jumped 8 percent so far this week to $51.68 a barrel, rising above $50 for the first time in four months on March 23.

The Quiet Coup
One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out. No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely.

So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the fund can wait. And when he is ready, the fund is happy to make helpful suggestions—particularly with regard to wresting control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.”

Of course, Putin’s ex-friends will fight back. They’ll mobilize allies, work the system, and put pressure on other parts of the government to get additional subsidies. In extreme cases, they’ll even try subversion—including calling up their contacts in the American foreign-policy establishment, as the Ukrainians did with some success in the late 1990s.

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies, and the consequences are massive inflation or other disasters. A program “goes back on track” once the government prevails or powerful oligarchs sort out among themselves who will govern—and thus win or lose—under the IMF-supported plan. The real fight in Thailand and Indonesia in 1997 was about which powerful families would lose their banks. In Thailand, it was handled relatively smoothly. In Indonesia, it led to the fall of President Suharto and economic chaos.

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.

Becoming a Banana Republic

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

Madoff vs. the lobsters
by Woody Allen

Two weeks ago, Abe Moscowitz dropped dead of a heart attack and was reincarnated as a lobster. Trapped off the coast of Maine, he was shipped to Manhattan and dumped into a tank at a posh Upper East Side seafood restaurant. In the tank there were several other lobsters, one of whom recognized him.'Abe, is that you? the creature asked, his antennae perking up.

'Who's that? Who's talking to me? Moscowitz said, still dazed by the mystical slam-bang postmortem that had transmogrified him into a crustacean. 'It's me, Moe Silverman,the other lobster said.

'O.M.G.! Moscowitz piped, recognizing the voice of an old gin-rummy colleague.'What's going on?

'We're reborn,Moe explained. 'As a couple of two-pounders.

'Lobsters? This is how I wind up after leading a just life? In a tank on Third Avenue?

'The Lord works in strange ways,Moe Silverman explained.'Take Phil Pinchuck. The man keeled over with an aneurysm, he's now a hamster. All day, running at the stupid wheel. For years he was a Yale professor. My point is he's gotten to like the wheel. He pedals and pedals, running nowhere, but he smiles.

Moscowitz did not like his new condition at all. Why should a decent citizen like himself, a dentist, a mensch who deserved to relive life as a soaring eagle or ensconced in the lap of some sexy socialite getting his fur stroked, come back ignominiously as an entree on a menu? It was his cruel fate to be delicious, to turn up as Today's Special, along with a baked potato and dessert. This led to a discussion by the two lobsters of the mysteries of existence, of religion, and how capricious the universe was, when someone like Sol Drazin, a schlemiel they knew from the catering business, came back after a fatal stroke as a stud horse impregnating cute little thoroughbred fillies for high fees. Feeling sorry for himself and angry, Moscowitz swam about, unable to buy into Silverman's Buddha-like resignation over the prospect of being served thermidor.

At that moment, who walked into the restaurant and sits down at a nearby table but Bernie Madoff. If Moscowitz had been bitter and agitated before, now he gasped as his tail started churning the water like an Evinrude.

'I don't believe this,he said, pressing his little black peepers to the glass walls.'That goniff who should be doing time, chopping rocks, making license plates, somehow slipped out of his apartment confinement and he's treating himself to a shore dinner.

'Clock the ice on his immortal beloved,Moe observed, scanning Mrs. M.'s rings and bracelets.

Moscowitz fought back his acid reflux, a condition that had followed him from his former life.'He's the reason I'm here,he said, riled to a fever pitch.

'Tell me about it,Moe Silverman said.'I played golf with the man in Florida, which incidentally he'll move the ball with his foot if you're not watching.

'Each month I got a statement from him,Moscowitz ranted.'I knew such numbers looked too good to be kosher, and when I joked to him how it sounded like a Ponzi scheme he choked on his kugel. I had to do the Heimlich maneuver. Finally, after all that high living, it comes out he was a fraud and my net worth was bupkes. P.S., I had a myocardial infarction that registered at the oceanography lab in Tokyo.

'With me he played it coy,Silverman said, instinctively frisking his carapace for a Xanax.'He told me at first he had no room for another investor. The more he put me off, the more I wanted in. I had him to dinner, and because he liked Rosalee's blintzes he promised me the next opening would be mine. The day I found out he could handle my account I was so thrilled I cut my wife's head out of our wedding photo and put his in. When I learned I was broke, I committed suicide by jumping off the roof of our golf club in Palm Beach. I had to wait half an hour to jump, I was twelfth in line.

At this moment, the captain escorted Madoff to the lobster tank, where the unctuous sharpie analyzed the assorted saltwater candidates for potential succulence and pointed to Moscowitz and Silverman. An obliging smile played on the captain's face as he summoned a waiter to extract the pair from the tank.

'This is the last straw! Moscowitz cried, bracing himself for the consummate outrage.'To swindle me out of my life's savings and then to nosh me in butter sauce! What kind of universe is this?

Moscowitz and Silverman, their ire reaching cosmic dimensions, rocked the tank to and fro until it toppled off its table, smashing its glass walls and flooding the hexagonal-tile floor. Heads turned as the alarmed captain looked on in stunned disbelief. Bent on vengeance, the two lobsters scuttled swiftly after Madoff. They reached his table in an instant, and Silverman went for his ankle. Moscowitz, summoning the strength of a madman, leaped from the floor and with one giant pincer took firm hold of Madoff's nose. Screaming with pain, the gray-haired con artist hopped from the chair as Silverman strangled his instep with both claws. Patrons could not believe their eyes as they recognized Madoff, and began to cheer the lobsters.

'This is for the widows and charities! yelled Moscowitz.'Thanks to you, Hatikvah Hospital is now a skating rink!

Madoff, unable to free himself from the two Atlantic denizens, bolted from the restaurant and fled yelping into traffic. When Moscowitz tightened his viselike grip on his septum and Silverman tore through his shoe, they persuaded the oily scammer to plead guilty and apologize for his monumental hustle.

By the end of the day, Madoff was in Lenox Hill Hospital, awash in welts and abrasions. The two renegade main courses, their rage slaked, had just enough strength left to flop away into the cold, deep waters of Sheepshead Bay, where, if I'm not mistaken, Moscowitz lives to this day with Yetta Belkin, whom he recognized from shopping at Fairway. In life she had always resembled a flounder, and after her fatal plane crash she came back as one.


Anonymous said...

War within a breath
Its land or death

Their existence is a crime
Their seat, their robe, their tie
Their land deeds
Their hired guns
Theyre tha crime

Shots heard underground round the rapture
Worlds eye captured
At last is a Mexican pasture
Tha masked screaming land or deathWithin a breath
A war from the depth of time
Shot four puppet governors in a line
Shook all tha world bankers
Who think they can rhyme
Shot the landlords who knew it was mine
Yes its a war from the depth of time

rapier said...

Choosing what are probably random events and giving them weight like Tom Freidman, I pick 3 weekends ago as a crucial juncture.

That was when the supposition that Paulson rescued AIG 3 days after deep sixing LEH so GS and the other banksters could cash in on their bets was officially documented. The WSJ and Forbes did the reports. There they sat. Seen only by the obsessives. The NY Times and the networks were hard at work on another AIG story, the bonuses.

So the taxpayer funding of the AIG CDO's to the benefit of the crooks, at full value, was a beautiful example of the modified limited hangout. Paulson didn't get his start in the White House with Ehrlichman for nothing you know.

They spit in our face and are feeling pretty cocky. Another trillion or two on the way to them was announced, noted, forgotten. Those kinds of bucks can go a long way. To wit a 20% rally in stocks.

I am not counting the Pigmen out.

I live in the heart of the rustbelt, in recession since 73. The mall was busy today.

Anonymous said...

ilargi says:

"I'll be the last to propagate fighting in the streets

Yes much more good propagating fighting from here:)

I think thanks to yours and other blogs points of view are being expressed on the MSM that a few months ago would have been considered fodder for loons,

What is it, is it 6 degrees of separation we are from anyone on the planet we may be thinking of? If that works, the way I understand it, you should expect President Obama to hear your point of view any second now. In the meantime keep up the shouting from these barricades.

-Bulletin Plank-

Nightly Summary said...

* Full Disclosure: Nightly Summary is male, a boomer (apologizes to all GenXers), grows a garden, harvests rainwater, hoards canned tuna, appreciates TAE, but is unqualified to make useful comments, so instead plays the fool to stormy King Ilargi, benevolent Queen Stoneleigh and the mass of squabbling TAE courtiers.
* Will oil service stocks recover?; Some say yes, we are three to six months from price shock; Others say $20 oil still possible
* Credit crash was caused by GenX hedge fund managers and traders; Boomers were just innocent bysh*tters
* Greenpa suggests US and UK buy each others' bonds
* Don't expect any good to come from IMF actions
* Idle Acts gives insider view of SEC; Change in tone at top is major improvement; SEC employees are not the Borg and most try to do the right thing; Some hearing this are skeptical; Talk is cheap; When will AIG be prosecuted?; Many hope Idle Acts will not driven away by flack
* Taleb recommends barbell investing: 85% gov't notes, 15% risky ventures
* Some churches and other organizations are donating land to community gardens; Large scale ag not sustainable; Family farms under attack; Urban populations are oblivious to food sources; Food is the new Gold; Is there gold left in Fort Knox or is the gummnt giving us the gold finger?
* Where will the wheat come from?; Corn, amaranth, lamb's quarter, popcorn, favas, chickpeas and lentils suggested as substitutes
* FDIC on the move; There are plenty of ways you can hurt a bank and bring it to the ground
* Scandia fears violence at G20 summit in London; Police plants may throw rocks, provoke police attack; Similar thing happened in Miami
* Why can't some country with guts just cancel all foreign debts and go insular?; Because no one would do non-cash business with that country ever again
* Get ready for fascist imperialist wars
* Thirdcoast seeks doomer chick; Must like doomer porn; Some think he can expect doomer chicks to be pounding on his door soon
* Some doomer girls married cornucopians; Some doomer guys are in same position
* Cap and trade great for congress and traders but bad for middle class
* Nationwide Wall Street protest planned for April 11
* Pension collapse will have long term deflationary impact
* Snuffy suggests Encyclopedia AutomaticEarthica on CD; Could serve as foundation for new empire
* RC admits this is not the best of all possible worlds after all; Says that if The Secret had worked for him its authors would have choked to death on Hawaiian Pizza
* Mike asks when will we as a species stop the endless cycle of madness?; We as a species shouldn't hold our breath or maybe we should go ahead and hold our breath for a long, long, long time
* Kunstler predicts end of dollar; Suggests now is time to buy tangibles; Some say he is a great idea guy but has no sense of timing or herdonomics
* El Gallinazo explains TAE registry
* There is a fine line between chemistry and physics; Stoneleigh is more biologist than chemist; Herdonomics is applied biology
* Stablization, depression, collapse: Are chances 60/30/10 or 10/60/30?
* RC and El Gallinazo try to out-insufferable each other; They have forgotten their ineffability
* BloodyParadise thanks I and S for focus, direction and buffoons to pelt

Jim R said...

Snuffy suggests Encyclopedia AutomaticEarthica on CD; Could serve as foundation for new empire

Or as coasters for margarita glass, thanks to bit rot.

Starcade said...

We live at the pleasure of our slavemasters. We have no place at their table.

The only question is whether we will be simply eliminated when the time comes, or used as military pawns (and _then_ eliminated)...

Starcade said...

Stabilization, Depression, Collapse...

My thought: 0/30/70.


Stabilization is no longer possible until one of the other two occurs. We are far beyond the carrying capacity of the planet (or of America) without infinitely printing infinite money and NOT having it hyperinflate or implode.

You can guess what will happen...

The only thing separating us from abject certain collapse is the _appearance_ of outward calm. The apparent certainty that enough people will get fed to keep order.

What happens when that stops? I give that sometime this fall or winter...

Anonymous said...

Thank you for the Woody Allen story. A little sugar helps the medicine go down. Comedians have always done well during hard times. Charlie Chaplin was popular on both continents during the 30's. Although, death & destruction isn't as funny as it used to be.
I like the music videos, too. Musicians & comedians have one thing in common: Anger. They just channel it more productively because they are artists, not arsonists. My favorite shit is Bob Odenkirk & David Cross. Gilbert Gottfried, Dave Chappell, Dave Attel & Lewis Black are f'd up, too.
Channel 6 - We Make the News
A Stranger

scandia said...

I can't recall which article I was reading but the author raised a question I hadn't thought of. QE, or funny money, now entering the system distorts the system. How does one get it back out of the system? Getting it back out is a requirement of recovery,no? Can someone please educate me on this question?

Armando Gascón said...

Do not follow the path of revolt or violence, besides you being fat and scant of breath (as the queen said) it accomplishes nothing. Revolt won't be spontaneous, as José Mujica said "In this life there's nothing spontaneous, except sneezing".

Who him? Uruguayan senator, 72, official candidate to the Presidency, ex-minister of Agriculture, ex-prisoner (14 years in the can, several bullets still inside his thick body), ex-terrorist, murderer (also his wife, Lucia Topolansky), Tupamaros who kidnapped the British ambassador Sir Geoffrey Holt Seymour Jackson, KCMG, in 1971 and tortured him for a year, and a long list of terrorists acts, or 'propaganda through the deed' as it used to be called.

He should know.

If there's unrest or worse in the streets it is because somebody powerful benefits from it. So stay home and tell others to stay home.
It is better to live on your knees than to die on your feet, notwithstanding what La Pasionaria said.

jal said...

Re: CO2 Cap and Trade
A while back someone made the comment to someone, “Just because nobody responded to your comment does not mean that it has not been noticed.”
I wonder, does it also mean that everyone agrees with it and that they do not have any other insight to add to the subject?

How Obama's cap-and-trade scheme could create a trade war between Canada and the U.S.
It works like this: Those that clean up and live below their government-mandated CO2 caps, create carbon credits. These they can bank or sell off, or trade like stocks, to other industries that don't reduce their carbon footprints to meet targets.
The bad part is …. trade like stocks … is a way for the laid off traders to get back into the game of making another bubble and a fortune for themselves.

I will assume that no comments means that the readers don't mind seeing the financial wizards laying out another trap for the middle class.

scandia said...

Stoneleigh,You forgot 2 items on your profile, herdonomics and and co-creator of The Automatic Earth.
I pinch myself every day to have access to your broad knowledge base and your extraordinary communication skills. Access such as this is priceless. I wish I could donate more than I do.TAE will get a share of my tax refund when it comes in.
I&S or S&I.What a team!What a friendship!

Persephone said...

I hope that everyone enjoyed their Earth Hour tonight.

The South Park video was very funny!

I like this video, too.
Daniel Hannan MEP: The devalued Prime Minister of a devalued Government

I wish U.S. representatives had as much courage.

Regarding who's buying who in Washington, OpenSecrets has an extensive database.

Persephone said...

Even better Open Secrets link. There is also a drop down option for each congress critter.

RC said...

Sir Nightly, thou dost play the fool e'er well that knavery result. Anon!

Stoneleigh said...


Stoneleigh,You forgot 2 items on your profile, herdonomics and and co-creator of The Automatic Earth.

I'm sure I left out a lot of things that have taken my fancy over the last several decades. My so-called career path probably looks a lot like a bad case of ADD - so many interesting things to focus on and so little time ;)

Ilargi and I have both been interested in many things over the years, and when we want to learn about something, we go ahead and do it. He was the main impetus behind setting up TAE, as he's the one with the webmaster/multimedia skills. Fortunately our backgrounds and personalities seem to complement each other. It's fun being part of this team :)

By the way, I'll be in your neck of the woods in the second week of April, so I'll look you up if I can manage it.

Anonymous said...

This is why the terrorists hate us.
A stranger

Anonymous said...

Its late,and I am way tired..Went by the garden place and shelled out too much for onions,potatoes,and peas...all things that can stand wet.The cold,cold rain is getting old.My inner Gardener in chomping at the bit.I have to restrain myself to the "cold mud"chores that are all one gets this time of the year.Like splitting garlic.I have a 5x10 bed full of garlic...that needs to be worked over badly.My end will be one hellava lot of garlic.3lb onions sets,4 big bundles of walla walla [sweet]onions that are mild.Only half for harvest...I will go for seed this year for a lot of what I grow

I am starting to run out of disdain for these creeps.There will be a reckoning I believe.I think those whom still believe themselves MOTU might find themselves wishing to be "annoni-mouse"...hiding for awhile from the cats who want to talk about fraud and other items..
The net is wonderful in that it gives EVERYONE high end research capacity.Or you could just tune in to TAE to get a blow by blow of the rape of the taxpayers.
At one time I honestly believed in the duty of a citizen to pay their share...their ticket price to membership in civilized society.
Watching what is being done with my my name..has soured me a bit on that issue.

So much for the right of this .gov to take my bread.They can force me to pay...but they have lost the "right".

My brother and I chatted this day about the state of things.We agree the anger is boiling up..getting worse every day.And its not showing on "the screen".

You know it from the conversations you have with your mechanic,

with the lady at the bus station

when you buy a sweet roll at a 7-11 and grimace at the headlines...and a spontaneous conversation starts between strangers about how f#cked-up things are....

People are just so bone-f#cking mad that it just comes out.

Brother and I agree there will be a trigger event.Do not know what or where...but some-thing will light the fuse.And then sweet jesus look out.

I do not think Armondo understands what we have here.There is a whole lot of people who were raised to expect the whole enchilada..."play the game straight, and life will be good"Who have just found out the enchilada has a "special"center full of catshit...
The "formerly "middle class..
now struggling poor...
very soon to have NOTHING
but debt,taxes,and hunger for their kids..

When these folks really figure it out,oh say about the time the "reform" SSN and tell everyone to work till your 72...

thats when it will start..

and on that happy note G'nite


Persephone said...

Ilargi said :
"For all we know, the bankers told him[Obama] what to do, not the other way around."

More articles are emerging on the Financial Oligarchs shaping policy.
From Simon Johnson
But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.


Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

Johnson's Blog Baseline Scenario has many articles on the topic.

Persephone said...

For the question yesterday on the impact of CRE,

More from Calculated Risk (this was originally a Real Estate Blog):
The CRE Bust: Quick Overview (Dec:2008)
Note: There is another problem with CRE too (not discussed here) - many existing properties were recently purchased at prices that were based on overly optimistic pro forma income projections. These loans typically included reserves to pay interest until rents increased (like a negatively amortizing option ARM), and it is likely that many of these deals will blow up when the interest reserve is depleted - probably in the 2009-2010 period.

Go to the blog for eye-popping charts

More on Seeking Alpha:Commercial Real Estate Implosion Is Imminent

Unlike residential real estate, the collateralized debt obligations (CDOs) pervasive in commercial real estate are isolated to a handful of REITs. Mall operators, retailers, and other commercial properties are developed and run by a select few investment trusts, differing from residential housing, which has millions of mortgage bundles across America, many of them already defaulting. This prevents immediate defaults but also centralizes the pain, because as one REIT faces defaults, the others soon follow.

With the weighted average cost of capital (WACC) set to rise 150-200 basis points in response to the credit crisis, cap rates will also increase, causing property values to fall further. This increases default risk as the collateral backing debt obligations loses value, causing borrowing costs to rise further, and restarting the vicious cycle.

As this occurs, REIT clients will be forced to default in mass waves, as they are unable to sell their properties for a decent price and can't refinance their loans in secured debt markets. About $30 billion of REIT-related debt matures in 2009-2010, and there is very little equity left in REITs to finance the debt.

Also from CRE: Investment in Hotels, Offices and Malls
Investment in multimerchandise shopping structures (malls) decreased in Q4 2008 to .21% of GDP, after peaking in Q4 2007 at .25% of GDP. This is a pretty steep decline, but now it appears that new mall construction is about to almost stop.

As David Simon, Chief Executive Officer or Simon Property Group, the largest U.S. shopping mall owner said a few weeks ago:

"The new development business is dead for a decade. Maybe it’s eight years. Maybe it’s not completely dead. Maybe I’m over-dramatizing it for effect."

I am closely watching what happens with Simon Properties: SPG because most of our stores are located in these malls.

Stoneleigh said...


I wish I had your gardening skills and knowledge. We're just starting to get things going with our garden for the year - spreading charcoal etc - but there's not much we can do until the ground thaws. Even with the really warm spring we've had so far, it could be another month before we can dig everything over properly. We'll be bringing on seedlings in the greenhouse so they'll be ready to transplant by the end of May, when this area is usually safe from frost.

When these folks really figure it out,oh say about the time the "reform" SSN and tell everyone to work till your 72...

Sadly people will need to work for as long as they live, unless they have relatives who can take care of them instead, but there won't be any work even for many young and strong people, let alone the old and frail.

Pensions will be history and we will have to go back to an extended family model where everyone has a role at all stages of life. Grandparents used to look after their grandchildren while their adult children did whatever work they could find wherever they could find it. Children used to work too, as we see in the photos of child labour from our own not too distant past on TAE. For a long time though there is likely to be so little work, and so few entitlements to bridge the chasm, that we will be unable to sustain our social fabric even as well as we managed in the 1930s.

The nightmare will be brewing steadily while the world relaxes into a sucker rally, but watch out this autumn. Last year bankers and Wall street execs were panicking, but late this year I think it'll be the public. We should see a cascade far larger than anything we've seen so far.

VK said...

Hypothesis: An electronic bank run is not as bad as a physical bank run.

Reasoning: The financial sector has done all it can to move away from physical currency to electronic. Plastic cards in the form of debit and credit, electronic banking - pay all your bills and buy all your needs online. Hence if an electronic bank run were to occur, the bank can cope with the electronic shuffling of digits.

A physical bank run is a whole different ball game, according to Wikipedia, US money supply is 15 trillion but physical dollars that exist in the world are around 700-900 billion. So a physical bank run would cause immediate distrust and collapse of the banking system as there are simply not enough physical dollars in the world. Whereas an electronic bank run can be masked over for a greater period of time.

Question: What does the board think?

scandia said...

Stoneleigh,Hope time allows for us to meet.I'll accomodate your busy schedule. Time I have lots of.

Snuffy, when reading your comment I flashed back to the early days, so much has happened,has happened to you personally. You had hope and belief in Obama way back then. Seems like another more innocent age.It is horrible to even think it but I want a trigger event as I feel absolutely powerless to use the system to " right the ship".

Jal, I've been thinking about the Cap and Trade proposal. I would want the profit from such a mechanism to be used to green effect but don't see how to accomplish that end. Same foxes, same outcome. Gotta deal with the foxes first I think or nothing will change.

Does anyone think the G20 will propose fervent efforts to round up and charge the foxes? News like that would be encouraging.

Stoneleigh said...


In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay.

This is exactly right. Markets are all about the self-fulfilling prophecies that derive from herding behaviour. Mood can turn on a dime, and when it does confidence can evaporate just as quickly, leaving illiquidity in its wake. This is why we say not to invest in long bonds. Even T-bonds could become illiquid eventually, although we are nowhere near that point yet. If you stick to cash and short term T-bills you will be able to get out when you need to as you won't need to find a buyer.

Stoneleigh said...


Unlike residential real estate, the collateralized debt obligations (CDOs) pervasive in commercial real estate are isolated to a handful of REITs.

For anyone reading here who may have any investment in REITs (Real Estate Investment Trusts) I hope you will use the rally to extract yourselves ASAP. They will be worth absolutely nothing when TSHTF.

Commercial real estate is a disaster of epic proportions waiting to happen, and when it does it will take many, if not most, regional banks with it.

SanderO said...

People don't get a seat at the table because we have a top down, trickle down, follow the leader organizing structure.

Democracy is supposed to be about the people participating in how their world is structured and run. Nice concept, poor implementation. democracy now required representative democracy since we can't vote on every policy decision. The closet thing to that is opinion polls and pols always say they don't listen, but when they are clear enough the do.

I wonder what the polls are revealing about the sentiment of the people these days? And if they are being paid attention to and if they will mean anything.

Street demonstrations are a form of ad hoc democratic expression. When the people are not consulted they often get together and bang pots. Most governments dismiss demonstrators as a collection of DFH - dumb f*ckin hippies who can be dismissed - and they are. When a few anarchists mix it up or a few infiltrators mix it up, it only proves the point that these are just crazy mobs.

Unions strikes are almost not permitted in the USA and most unions have been destroyed anyone and painted as obstructionists to the goal of industry.

Lots of stratgeies have been employed to carry on the show. Buy and own the media, control the rules about it's "use" and own the message. The make sure that free speech is defined as how much money you have - more money more free speech. You are poor, you are not entitled to free speech.

The above have led to the influences of money in politics and the complete corruption of the representative concept of democracy. In politics - money talks and money is access to the levers of power. Send in the lobbyists... with their money, which is free speech.

So people believe the deal. Work, pay taxes, play by their rules, borrow money, consume their products, use credit, accept fees for everything and if you work hard you get to rise and make more than you need and get to retire before you drop dead from working. But that ain't happening is it?

The notion of Obi fairy tale is that the financial system that created wealth and had everything humming along so well is essential and must be fixed so we can all get back to the kabuki, close the curtain and let oz do his magic. Yes the emperor has a lovely suit.

Most readers of TAE understand that Humpty Dumpty cannot be put back together again. All the glue and tape and patches that kept him tettering on the wall won't work this time, the fissures are too deep.

The Fall of Humpty Dumpty has revealed lots of BS that 99.9% of the people had no idea about, and most still don't understand much. They can understand the concept of huge bonus being paid foe what amounts to performance failures. Bonuses granted in one shot which is more than most earn in 20 yrs not to mention monthly salaries which are more than they earn in a lifetime of hardwork. They understand this and they don't care for it. Obi thinks if they get their jobs back and maybe cancel some bonuses and with some tape and glue everyone can return to work and live happily ever after.

How to get the credit thing going again? The big boys want their big pay offs and certainly won't take big losses dropping them down to live with the unwashed masses.

Oh, I forgot, it was not their money that these "guys" used to make their fortunes. it was a combination of make believe money and your money deposited in banks and pensions and retirement funds. These guys use money to make money. They certainly don't do anything else. But as the people have learned that when someone makes money there is a "counter party" and they LOSE money. That's how it works. And now the wins are bigger and the losses match them. Huge companies like Bear can disappear in blink taken with them all the "investments" of big and little guys.

The fundamental question going forward is really do we need "money changers"? Do we need a finance sector which makes money from money, extracts wealth from workers, which use OPM other people's money as their "capital", their chips, to place on the craps table. Should finance and banking be a like a utility -a not for profit service that society requires in order to have commerce?

As the insurance industry provides nothing of value in the health care sector, the finance industry as it is today provides nothing of value to commerce. The notion that the finance sector's purpose is to provide capital for industry is more myth than reality. At best, it's a side business. But providing capital to industry and credit to business and people is what the people need to have healthy commerce. And the finance sector ain't playin because they can't make enough dough doing it. They need leverage. When they can't leverage they won't play. They need no rules to how they play or they won't play.

Little guys have been hostage to the finance sector and will continue to be if those guys at the table get their way. And since it is about them and not us, they will get their way or take their marbles home, which is what they have been doing anyway... taking all the marbles.

Fixes take time. But there is time and there is time. What the BS about getting out of Iraq? I'll bet the US could mobilize, did mobilize the troops to invade Iraq into a war which is chaos, in a few months. So why can't they get out in a few months? THEY CAN. And faster! But, as usual, some big guys are making money and enjoying power and so THEY WILL NOT.

So what will the people do? So far they are taking it lying down. But when they have no place to rest their heads they will stand up and their will be a revolution unless some real changes come down the pike pretty soon.

When you have nothing left to lose, why not do what's left? Resist, struggle for change, take control from those who are at the table.

Tripwire said...

I think the only we reason we haven't seen panic in the streets is because people still believe that government bailouts will solve the problem.

The widespread conventional wisdom is that the government will "print money" and then the problem will subside.

The talking heads on CNBC hypnotize viewers with facts and figures that relate only to the historical stock market trendlines; ignoring completely the fundamentals that supported those trendlines. Nowhere is cheap, abundant energy from fossil fuels credited with our wealth and comfort. Jocular banter and an exhalation of relief is expressed over rich Uncle Sam coming to the rescue just in time. After all, that's always been the case before, right?

At this point, Obama et. al. can still talk about a $trillion here and $trillion there, and the citizenry still gets all giddy inside thinking about the "free money" that's coming their way. The tipping point will come when the illusion is cruelly stripped away and it is revealed that the government does not have the money it needs to fulfill its promises; when it is discovered that our rich Uncle has a fancy suit but an empty bank account. At that point, the last hope will be vanquished, and panic will set in. There will be no one left to "believe" in, now that Obama took all of our hope and served it back to us cold.

People today are as nasty as snakes. The car culture and material worship has raised the me-first mentality to a place of honor. Few are going to willingly be the loser as the system flies apart. Pensioners will be among those who feel the most betrayed.

As St. Stoneleigh has said previously, the financial crisis is going to make us all poor, and the energy crisis is going to keep us all poor.

Hope for the best but plan for the worst. That's what I'm doing.

Armando Gascón said...

I enjoyed the story by Woody Allen. I am sure he didn't lose a lot of money with Madoff.

SanderO said...

Tripwire has it right. The people believe that their government has the power to do something, to fix what's broken and the money to do it or can print it. If money is an illusion then why not print it and distribute the monoply money and restart the game?

Of course they want some sort of fairness. The guys who played by the rule of cash and no credit and little debt will come out losers for their prudent behavior if they restart the monopoly game. Guys in their ivory towers will have their world they lose it all and start over at the same place as everyone else. They have the most power now and the most to lose and are still taking and planning to take again in what comes next.

Underlying this financial collapse and the tall of capitalism as we know it is the question can anything sustainable and acceptable rise from the ashes? Can the people in the west expect to have anything like the level of material comfort going forward? Or will we see some sort of haircuts for all until we are barely above the world's lowest common denominator? Will that look like an oligarchy police state - a new feudalism with a tiny elite and the rest of us living a subsistence existence in a post industrial post technology world? The elites at the top probably don't care and certainly don't care about the bottom, as long as they are pliant and under control. Facist authoritarianism?

How does the world deal with 6BB people? Is there some way that there can be a "middle class" and expanding one?: Or are we destined to two tiers going forward?

It doesn't look hopeful from my perspective, but I can't get a good feel for the time frame of the great unraveling. It seems to be happening pretty fast.

Greenpa said...

RC- some charcoal questions for you-
How long have you been putting charcoal on your garden?
Did you keep a control plot for comparison?
If so- what differences do you see?
How fast?
Do you incorporate it specifically?
How deep?
What is your process for making your own?
what wood do you burn by preference?
When did you hear about terra preta?

(incidentally; I do promise you guinea videos, over on my blog. I've got a bunch; waiting. Major problem is time- and multiple software changes, so I have to learn how to export and prep all over again.)

Greenpa said...

From Nightly Summary; via somewhere:
"* Why can't some country with guts just cancel all foreign debts and go insular?; Because no one would do non-cash business with that country ever again."

Sorry, but I don't buy it- historically. You're missing two factors; collusion, and greed.

There's nothing to prevent Columbia, Peru, Guatemala, North Korea, Iran, and Argentina from meeting secretly, and entering into a pact to simultaneously cancel all foreign debt (except with each other, of course).

They then have each other to trade with. Until- smugglers from other countries step in to fill any other needs.

Nothing prevents international trade- not even war. Greedy persons will risk their employees lives cheerfully. If there's a buck to be made- they'll go after it. And once there are two smugglers competing for the business- one will extend credit; to nail it down.

It's a matter of how desperate you get; and which way you lose less.

Most of us in the First World still have no idea what "desperate" means. Most usacos are terrified they may have to give up ordering take-out, before long. Or try to sell their second car. We have a long way to drop to real desperation.

Wyote said...

Bunny Winthrop needed just a month to get his gear set.
Since the death of Blinky, much had happened. Almost everybody he knew had been laid off from their jobs. Peace Warren had become a slum of shacks and haphazard burrows made by the many homeless. The school had closed, as no one could afford to keep going. Life was a nightmare lived out each day. Most of the bunnies just moped about feeling depressed, victimized and even guilty.

Winthrop was putting the finishing touches on his plan. The big bunnies, who had run the bank, “Helping people invest in their futures”, would go first. Since it had been closed, all of its employees had been let go. This, after last fall’s bank picnic where the big boys had talked so many into buying shares “To become owners themselves” they had said. Oh yeah, the big bunnies would be first.

The realtors would be up next. They were a nervous lot these days. Making a hard living off the foreclosure sales. Winthrop had overheard some of them talking at a garden café a week back. One bragging about selling the same place three times, but grousing that the commissions were so pitiful.

Then, of course the Law, which had so faithfully notified and evicted his friends, even now harassing them in the shantytowns. They would be trickier, they carried weapons and were not averse to using them. Some he had known from school long ago as bullies and punks.

And one more. That slime, Mr. Friedman. The “Older Wiser Bunny” himself. He had spoken at Blinky’s funeral. “A gift of example”, he had said. Indeed. But Winthrop would have to wait for him to return from some trip to England he was on this week. Waiting wasn’t that hard though, now that the plan was in motion.

(previous reports from Warren Peace can be found in the TAE comments sections on 2-19,20,21,22,& 25)

D. Benton Smith said...

I must have been dropped off by space ship at birth.

Either that or developed from some random wild mutation, because not only did I never buy into the consensus of our so-called civilization, I could never quite fully believe (until the past decade or so) that anyone else could either.


I thought everyone was faking it. Surely, underneath their publicly expressed agreement, they knew that it was utter bullshit. Alas, I have been gradually convinced that the vast majority actually do believe, against all evidence to the contrary, in a whole slough of ridiculous things.

They believe that God knocked up Mary (sans sex) to create a son who will save the world after we are dead.

They believe that fights can be fair.

They believe that capitalism is rational, that good wins out in the end, and that we are immune from extinction.

But perhaps most silly of all, they believe that humans are not just animals with big brains (and a whopping dose of herd/pack/tribal instincts that cannot and shall not ever be jettisoned so long as we remain humans.)

Oh, dear.

I think we're in for some trouble.

TUTAN said...

May be the world is ruled by a secret society, may be not, but I do not know what's worse.

If there is someone in the cockpit may be they can avoid the frontal crash and have only a hard landing but if nobody is there......

Anyway, aircraft and society share a common need: energy. And energy is becoming scarce and, therefore, expensive.

While increasing oil prices did not translate in a sizable reduction in consumption this crisis may succeed at it, although it may also have the side effect of reducing drastically our numbers.

But don't worry because most likely I'm wrong.

Brimstone said...

Denton Smith

Dont worry, there are apparently several of us that were dropped off by the same alien race.

I have lived in disbelief myself. I know numerous highly intelligent people at the top of their fields, who are probably in the top 1-2% for intelligence. Yet these people are no less blind then j6P.

I have often wondered if the mother ship ever plans on stopping back by. Maybe i could hitch a ride.

Its an interesting perspective to have when you live in a different world then 90% of those around yet are int he same physical space.

What is an even more interesting perspective is being married to a cornucopian.....

You look at this mess and one could only hope that there is some secret fraternity like the mythical freemasons or illuminati that actually base their actions on logic and knowledge.

brimstone said...

El golinazo,

i am interested in joining your list, where do i e-mail you?

Brimstone said...

But perhaps most silly of all, they believe that humans are not just animals with big brains (and a whopping dose of herd/pack/tribal instincts that cannot and shall not ever be jettisoned so long as we remain humans.)

This is where i believe we have an opportunity. We as a species have advanced far enough that if we were to chose to do so we could over come these traits.

In doing so we would become something else. And it is likely that you would see a split in the human species. those that chose to go forward and those that chose to remain truly human.

i dont think it is a scifi thing anymore. Look at what certain sects of Buddhist monks do in terms of developing their mind. I have had the opportunity to meet the Dalai Lama and have a very interesting discussion with him.

While their path may not be the exact way forward it does illuminate the path open to us as a species in overcoming our animal instincts.

Then of course their is the ability to actually start engineering ourselves at the genetic level even if we are only beginning to understand the tech.

It seems to me that one potential solution for our species at this point would be to split into 2 different ones

D. Benton Smith said...

Hi Greenpa,

You are, as I'm sure you know, one of the stalwart few whose posts are ALWAYS worth reading with care.

Yup. What Americans call 'desperation' is pretty funny.

"What's that? Starbucks is switching from half 'n' half to skimmed milk as a cost cutting measure? To arms! To arms! Take to the streets, man the barricades!"

I had the privilege, at the age of 12, to experience near starvation. (Our 7 member family we had been flown in to a base camp on the north coast of Alaska without adequate supplies, and foul weather at the onset of winter prevented re-supply for three months.)

Didn't die, learned what hungry really means, and discovered that my father was a hero. I also learned a other few things, including:

Rotted caribou ribs can really taste great.

Survival is better than death by starvation.

Desperation is very dangerous.

True leaders save lives.

If there is a lesson for others in all of this I would say that the best advice is to find and follow the best advice.

The best I've seen out there on the net has been coming from Sharon Astyk. A strong Second goes to the team of Ilargi and Stoneleigh, Third to Gail over on the Oil Drum, and a very honorable mention to Dimitri Orlov.

Ultimately, your survival will be determined by your self, your assembled circle of friends, your choices, and a good deal of luck.

Oh, and one last thing:

Avoid fights. The game is SURVIVAL, not vengeance.

Wyote said...

I am planning a test production and small plot test of biochar this year. I plan to use the traditional and much more polluting smolder method for this small quantity.

Terra Preta was brought to my attention by my nephew- Hi RR!- this winter. One thing to note is that to be effective in massively propagating microflora, biochar must be charged first and, if you think it through, this makes sense.

From Wikipedia re: Terra Preta: "It is important to note that the fresh charcoal must first be “charged” before it can function as a biotope[31]. Several experiments demonstrate that uncharged charcoal can bring a provisional depletion of available nutrients when first put into the soil - until its pores fill up with nutrients. This is overcome by soaking the charcoal for a few weeks (2 to 4 weeks) in any liquid nutrient (urine, plant tea. ...).

I'm planning a 10% by volume addition to this small plot (20sq ft. dubble dug bed). I may try a heavy feeder crop there or may go with a light feeder the first year. We'll see if these cold northern soils can be pushed to hyper fertility.

el gallinazo said...

@Brimstone & Denton Smith

My email is hpaulfuchs which can be found at gmail, a commercial corporation.

I have always felt myself the alien intruder as well. My metaphysical take on it is quite different than yours and would probably place me in your category of sheeple. How I reached this belief system would require a detailed description of a 40 year search. I don't think it is an artifact of cognizance dissonance, though many here might disagree.

I believe that humans on Earth are essentially hybrid creatures that are a temporary composite of a primate animal developed through purely Darwinian evolution (maybe a little tweaking from the other side) and a non-physical soul that resides in another dimension and is innately kind, moral, and immortal. This soul periodically (reincarnation) descends into a physical human animal body and leaves at death. The purpose of these sojourns is to gain the soul moral wisdom over eons in the most difficult of conditions. There are a near infinite number of possible planets for this in the multiverse, but Earth is considered one of the most severe to incarnate in. The severity is due to high levels of suffering in the physical and the innate viciousness of the animal part of the hybrid which must be overcome and controlled by the soul in time. Souls who chose the Earth do so because it is such a highly leveraged environment, and the opportunity for spiritual gains are much greater and more rapid than in other, gentler alternatives. So our cohabitants on this planet are the high rollers of the lower, spiritual realms.

Delusionally yours

Anonymous said...

♥♥♥♥♥Nightly Summary’s digest♥♥♥♥♥

Brimstone said...

carrion feeder

I do not see your view as sheeple at all. The great thing about those who actually utilize their ability to think is the spectrum of ideas that arise.

None of us have the answer or know what it all means but the great adventure is poking and prodding existence, like a 2 year old with a new toy, in an attempt to understand as much as one can about themselves and the world we live in.

sheeple are simply those who refuse to think for themselves and question the world they live in.

however to be fair, nearly all modern societies condition people nearly from birth to follow the herd

el gallinazo said...

Check Mish out today for a chart of resale home prices in CA. Median decline is in the area of 55% from the peak as of Feb closings. And we are still in the outer fringe belt of this cat 5 hurricane. I&S predictions of 10-20% trough appearing more likely all the time. Fasten your seat belts.

I watched Aaron Russo's America: From Fteedom to Fascism last night. On a technical level, I thought it was as good as anything Michael Moore has done and in a similar style, but perhaps Russo has leveled his sights on the heart of the beast. Has anyone else watched it? Any opinions?

Brimstone said...


what happens to the 10's / 100's of thousands of people in universities over the next few years?

many carry 20, 30, 40+ thousand in student debt and will likely have no way to pay it back. What happens as they start dropping out of school, a trickle first but a steadily increasing # until you have an exodus from the universities due to the inability to pay?

Ahimsa said...

Here's the most thorough article I have read discussing why America is already a police state. Excellent links, videos, etc. Although I'm already acquainted with this topic, I find this insightful treatise puts it all together in one place.

"Is America Already a Police State?"

D. Benton Smith said...

Hi Brimstone,

I have no problem at all with the spiritual conclusions you have arrived at from a lifetime of searching.

In fact, it crossed my mind at the time of writing that I might be misconstrued as some sort of atheist, when in truth my spiritual inclination would be better described as 'Pugnacious Agnosticism, with a Dash of Wonder.'

Of all the possibilities that are possibly possible, the most mathematically unlikely of all is the existence of sentient beings in a purely physical Universe... yet here we are. Go figure.

(Hey, maybe that line in the Bible was simply a mistranslation! God did not say "Go forth and multiply"... he said "Go figure.")

True atheists are as arrogant as even the worst Evangelist who claims certain knowledge of the mind of God. Neither of 'em REALLY knows, now do they?

Peace and enlightenment to you and yours.

scandia said...

Wyote, Blinky lives in my heart. so happy to revisit Warren Peace, to discover Winthrop has plans!

Ahimsa said...

I guess I can be added to the list of those feeling alienated from our mainstream culture. I suspect most TAE readers feel alienated from our culture to one degree or another. For many years I've felt alienated to a great degree from our times and our culture.

"People cannot stand too much reality!" ~ CARL JUNG

D. Benton Smith said...

Brimstone and El Gallinazo,

Oops! My last post misidentified the both of you. All spiritual observations were in reply to the large and observant bird rather than the fundamentally hot rock, but I think no harm done.

Homeland Security has probably placed all three of us on the mother ship's passenger manifest for her next scheduled swing through this sector of the galaxy.

Anonymous said...

Stoneleigh,one of the wonderful things about gardening [Horticulture]is the glad sharing of knowledge between folks in your neighborhood.As I was "outed"as a Master Gardener by my next-over neighbor,I rarely have discourse with those who live close w/o garden questions...It serves to humble and sharpen your mind.
....[This place here is for my inner economist...I thank you for your and Ilargi's tireless efforts.]

I looked at the reason for death @ old age in previous times of chaos. Starvation was right up there at the top.That's why the 150 or so fruit trees,and dryhouse.As long as I am able to walk,and carry a small sack of fruit,I can squirrel away enough for winter.
I see a re-tribing of folks the harder things get.Its happening now with kids moving back with their folks ect.[as just happened w/my stepdaughter.She is now part of a large extended in-laws.]Same is true here.Plans have been made w/other family members to show up "if and when".

The Bunny story is about to get intersting


jal said...

@ D. Benton Smith, SanderO, tripwire, Brimstone, others ...

It nice to hear that there are "SEEKERS" out there.

Ahimsa said...

@ El G

I got the film when it first came out, since it was highly recommended by Ruppert. I appreciated the info on the Federal Reserve, income taxes, and surveillance technology. However, I was not pleased with the film's patriotic presentation. It is not accurate to suggest that the USA was a great nation until the creation of the Federal Reserve in 1913. It wasn't.

VK said...

(Hat Tip Naked Capitalism)

It's a comfort in this wildly spinning world to find some things remain the same. We had feared that with the change in administrations, we'd have to revise our long-standing mistrust of government statistics. But, though it is still early days, the initial evidence gives us reason for hope. The numbers flowing out of Washington seem as dubious as ever, and so are the inferences being extracted from them by more than a smattering of investment strategists, money managers and, it pains us to say, even journalists.

The misleading figures cut across a wide swath of the economy, encompassing housing, manufacturing, employment -- you name it. The leading agent of deception, unintentional or otherwise, has been that old sly villain, seasonal adjustment. As it turns out, the seasons don't need adjustment as much as the adjustors need seasoning.

As Merrill Lynch's David Rosenberg (who, incidentally, is planning to do a bit of adjusting himself and moving back to his native Canada; our loss, Canada's gain) points out in a recent commentary, the official keepers of the books have been unusually aggressive in constructing seasonal adjustments for February's economic data.

To illustrate, the seasonal adjustment for new-home sales was the strongest since 1982; for durable-goods orders, the strongest since they were first released in 1992; the retail-sales figures for February were flat (or, as David says, flattering) after such adjustment, but unadjusted fell 3%, the biggest drop on record. He also notes dryly that the 40,000 raw non-seasonally adjusted housing-start total for February "all of a sudden becomes a headline-adjusted annual rate figure of 583,000."

Which makes David think that come the inevitably sharp downward revisions of such distorted data, first-quarter real GDP is likely to suffer a 7.2% drop. Which, together with the 6.3% skid in the fourth quarter of 2008, would be the worst back-to-back contraction in the economy in 50 years.

ca said...

Stoneleigh --

Approximately how many years do you think it will be until SS and all pensions are eliminated?

Ahimsa said...

Wow, Kunstler made a good presentation at the Aspen forum. I think I & S would agree.

"James Kunstler offers a decidedly darker view at Aspen forum."

TUTAN said...

D. Benton Smith said
".. True atheists are as arrogant as even the worst Evangelist who claims certain knowledge of the mind of God. Neither of 'em REALLY knows, now do they? .."

No, they don't. They simply believe in different things thus they are "believers". On the other hand, some people "knows" and do not have to "believe" nor "dis-believe", they simply know.

Whether are there many things, or any, "out-there" you can really know is still, and will be forever, an open discussion. A few simple ones may qualify such as: telling apart day and night, being almost sure that 2+2=4, and the like. Only that these examples are axioms, not real knowledge.

Kind of humbling eh!

Possibly "the shadows in the cave" is the most we can afford to know, but seeking for the truth "out there" is utterly worth the effort.

Good posts here guys!


Stoneleigh said...


Approximately how many years do you think it will be until SS and all pensions are eliminated?

I don't think it would necessarily all go at once, but I expect entitlements to be essentially gutted within 2-3 years. Upheaval in the bond market will force drastic cuts in government spending, and many private companies will have dumped their pension funds on the government by then. A huge amount of hardship is waiting in the wings as a result.

There may still be some kind of very basic food stamp programme in a few years - probably the bare minimum to stave off revolution. I expect there to be tremendous inequality based on connections though, as there was with the blat economy (economy of favours) after the fall of the Soviet Union.

Brimstone said...


Seeing as you have referenced Socrates "The Cave", i will comment further on it.

This view may upset others, but the more i look at recent events in conjunction with human history, the more i come to the conclusion that the average J6P is not capable of ruling themselves.

I am not suggesting a monarchy or benevolent dictator, but until J6p is ruled more by logic then animal instincts and desires, we are doomed to repeat the roller coaster ride of empire after empire.

as long as the average american is more concerned with american idol or the latest hollywood celebrity, they cannot be an integral player in society.

Looked at from this perspective, i can see why some societies have historically limited who can actually participate in the government. The problem being that once you give a disinterested group a stake in government, the situation becomes one of whoever wields the most effective propaganda will maintain power, through manipulation of the masses

Anonymous said...

Highly recommended summary of the most recent GEAP No.33: An illustration of Wall Street’s and the City’s attempt to destabilize the EU banking system and the Euro.

Stoneleigh said...


Stoneleigh,one of the wonderful things about gardening [Horticulture]is the glad sharing of knowledge between folks in your neighborhood.

I wish we were neighbours :)

el gallinazo said...


"It is not accurate to suggest that the USA was a great nation until the creation of the Federal Reserve in 1913. It wasn't."

To be sure. One thing that I find interesting though. The average American 120 years ago knew infinitely more about money creation than our purported knowledge based society does today. Bryan's "Cross of Gold" speech would just draw blank stares today. I think that this could be laid in large part to the secrecy and obscuring fancy footwork of the Creature from Jekyl Island.

Wealth distribution in the USA was far more egalitarian (if one eliminates the slaves) than anything since the advent of the Fed, as detailed by Kevin Philips. To paraphrase Robert Sapolsky, the primate endocrinologist who lived for years with baboon troops:

Baboons are so highly adapted to their environment that they must only work four hours a day for a living and are thus free to spend the other 20 making each other a miserable as possible.

History shows that Americans made each other as miserable as possible prior to 1913, but for white males, it was a more egalitarian misery.

D. Benton Smith said...

Todays postings have been especially exuberant and entertaining, which may have obscured a very interesting question posed by VK earlier in the day.

VK observed: "An electronic bank run is not as bad as a physical bank run."

and " The financial sector has done all it can to move away from physical currency to electronic."

and "... US money supply is 15 trillion but physical dollars that exist in the world are around 700-900 billion."

and "... a physical bank run would cause immediate ... collapse of the banking system as there are simply not enough physical dollars in the world."

and "... an electronic bank run can be masked over for a greater period of time.

VK then asked the "Question: What does the board think?"

Well, I think VK has opened a fascinating can of worms, and one big and complicated enough to warrant using some of the collective brain power of this site to unravel.

To begin:

Many, if not most, of the shenanigans that led to the present crisis would have been flatly impossible without the software and computational power of powerful networked computers that are far far more than mere conduits of transaction.

In a very real sense they ARE the money itself, and as such their digital symbology is transcendent.

For example, it is not just possible but easy to conceive of a "kited" check that circulated forever, by being transferred from one computer to another ad infinitum, and was therefore never discovered.

VK's question warrants serious discussion.

If you owned the hardware, the software, the network, and were responsible for the financial information that circulated on them, and stood to gain from pulling a fast one ... how might you do it?

Anonymous said...

Not strictly germane, interesting anyway...
Porn in the USA: Conservatives are biggest consumers

VK said...

@ D Benton Smith

Many thanks for your assessment of my question. I do hope the collective brain power of TAE can unravel this little question which I thought was indeed forgotten.

jal said...

D. Benton Smith said...
... and stood to gain from pulling a fast one ... how might you do it?
Movies have been made about it. I'm sure your are asking a more in depth question than those answers...

I always say,"I'm not that smart. If I thought of it someone is probably doing it already."

Okay... will the real made-off identify him/herself?

el gallinazo said...

re physical bills or digital bank runs

Don't think it makes much difference. Anyone who has say $50k in her checking account (which is technically a demand deposit), go into your branch and try to withdraw it in $100 bills and see what happens. (Hint: They will insist on giving you a bank check, unless you fight like hell for days.) When a bank goes into receivership, they will not issue cash regardless. They will only issue you a bank check which you would have to deposit in the account of a different bank, and which would be unavailable until it clears through the Fed.

The real issue is what happens when the FDIC is broke. With The Weasel illicitly using the FDIC to leverage Cash for Trash, that's going to happen real soon.

Anonymous said...

D. Benton Smith

I would suggest we ask Bernie but I think he is otherwise occupied at the moment. Hmmmm maybe better ask Greenspan instead, he seems to be at liberty (still).



Thanks for your view on the commercial end of real estate:

"In 2005 - 2007, many Retailers also overleveraged - borrowing up to 20 times their annual earnings."

Well I guess an echo mall will be an eco mall.

el gazebo

What stops youse guys from transfering your dough, in a bank run situation, into treasuries you know rob Peter to pay Paulson (or the other guy)?

-slipping plank-

Starcade said...

Armando: Good luck trying to convince some of us that living on our knees is better -- especially if, as I believe, the end idea is to kill off some of the masses...

Submit your advice said...

Ahimsa, I don't feel even remotely alienated from the world. It is, rather, the culture at large which is alienated, not I. They are the ones who experience most of life by proxy, consume the ersatz, the pre-fabricated, pre-digested, prevaricated, living an oxymoronic second life of reality TV, virtual reality, unreal real estate, Velveeta cheese, bac-o-bits and boo berries and other pseudorexias. They are the ones who do not know their neighbours, their wives, their children, themselves, lonely and surrounded by strangers, producing nothing they can view with pride, going home to a glowing box and some more s'mores while spouse snores, and a snootful of meds to go to sleep, to wake up, to bear the day and get through the night. They thought all the crap they sold their soul for would make them happy and now don't know what to do. Those are the ones you are talking about, and they are the ones who are alienated, and because they are alienated to begin with, you can never be connected to them, so there is no sense in worrying about being alienated from those who cannot be anything but alienated. IMO it's better to just focus on being connected to those who permit connection, love all who will let you love them, give to those who will receive. Believe me, there are plenty of those such people out there, more than enough to last a lifetime, and the more of them you connect to, the more you'll find.

Submit your advice said...

And to Tripwire,

When you know how to be poor, you can never be poor. When you know how to be old, you can never be old, when you know how to be weak, you can never be weak. I've seen people poor on $100k/yr. I've been rich on $2k/yr. It's up to you, and what you understand, what you know, how you feel.

Of one thing I am certain, those who do best in the future will be those who can adapt, those who are the most open minded, the most able to find not just food, but also pleasure, and bonding, and meaning. Those who can be cheerful when there seems to be the least reason for cheer, those who are never so poor nor destitute that they cannot find a way to help someone else, those who never complain, those who do not see themselves as victims of injustice, but as lucky, no matter their circumstances. Those who are just a little bit (but not too much) crazy. If people were truly rational, they'd kill themselves, and where would that lead us? Life really is meaningless and the world is full of suffering? So what? Ishkabibble.

Today in rural MI, despite the fact it is snowing, I enjoyed my first harvest of the year. A salad with a variety of fresh greens mixed with chopped egg. It had dandelion greens, french sorrel (cultivated), yard sorrel (weed), cress, parsley, chives, green garlic, onion greens, and fava greens. None was grown in a coldframe or greenhouse. It was good. Although I'm sure if I told most people in MI that I enjoyed a bountiful fresh nutritious harvest of vegetables on Mar. 29 in MI, they'd say I was crazy, and I'd have to agree. But so what? Epur si muove.

Starcade said...

APC: Damned right. And thanks for reading my blog, too.

I'm done being tolerant to simply be politically correct.

Frank said...

@D. Benton Smith,

A banker once admitted to me that he had inadvertently done the opposite of a perpetual kite, putting money into perpetual float, always out as fed funds.

He said that the good news was that the bank got almost as much interest that way as by actually writing a loan.

el gallinazo said...

Submit your advice

Great post, but obviously all of the previous commenters meant that they felt alienated from main stream culture and society and not from the natural world. I, like you, don't usually have the patience or temperament to deal with or positively interact with the autopilot people. But I do not take pride in this. I view it as a serious shortcoming and a lack of evolution on my part. And I have a lot of admiration for the good souls who do this with a certain patience and gentleness without retreating from their principles. The enlightened adults amongst the world's overgrown children. Stoneleigh, for one, is a good example of this.


Why do you assume that TPTB intentionally wish to kill of much of the population? Why have they, the Church included, consistently promoted policies leading to the misery of over population if this was their intention? Overpopulation is a prime factor leading to the destruction of the middle class, low wages, and serfdom. Not that I am saying that TPTB will bemoan the fate of the culled millions when conditions enforce this outcome. But you insist that this is their plan. Show me the evidence.

Ahimsa said...

Submit your advice,

Thanks for sharing your reflections.

I do love and connect with many sentient beings (including fellow human beings) and nature... Perhaps being alienated from society at large facilitates realizing our interconnectness with all. :)

Ahimsa said...

El G,

Egalitarianism is a wonderful word I seldom hear today. Agree that it's non-existent nowadays for the most part. Financial and corporate elites hijacked the government.

D. Benton Smith said...

El Gallinazo said :
"When a bank goes into receivership, they will not issue cash regardless. They will only issue you a bank check which you would have to deposit in the account of a different bank, and which would be unavailable until it clears through the Fed.

Yes, that sounds like kiting a check, alright. And claiming a "money supply" of $ 15 Trillion while holding only $900 Billion in greenbacks sounds just like a Ponzi.

And late delivery of sold stock sounds more than a little like cross-pollenization of the two of them.

Yet all three are not just 'legal', they are standard operating procedure.

That's no way to run a railroad.

It's more like how to run a gangland racket.

El Gallinazo went on to say that, "The real issue is what happens when the FDIC is broke."

Gotta agree with you on that one, too... although I might modify the term "broke" to read "even more broke than they are now," because based on what I see from here they already are, but with Federally authorized check kiting, who's going to catch 'em at it?

In fact, who even WANTS to catch 'em, since the IOU they issue is good and spendable until someone cries "Foul!"... and that's not a wise thing to do when you're holding a lot of IOU's. If they say the bank check they hand to you is good, then smile and go along with the gag.

Those computers mentioned earlier, and a few tweaks to rules written into the accounting software, should make it all fairly quick and easy.

Print Banners said...

The situations may be different, but we all want to have the same general idea of a world much better than the one we grew up knowing. Thanks for airing out and posting this.