Saturday, March 7, 2009

March 7 2009: Political Social Ethical Capital

John Vachon Rainy day in Pittsburgh, PA June 1941

Ilargi: There are two separate issues today in the US that occupy my mind. One is the Wall Street Journal revelation that at least $50 billion in taxpayer money ostensibly doled out to save AIG has gone straight to a consortium of the world's largest banks. That is worrisome because it should never have gone there. It also is because just a few days ago, Fed officials refused to tell Congress about these behemoth transfers of public funds. Yes, perhaps it’s also worrisome that the Journal found out regardless, and it certainly is that the banks' dealings with AIG consisted, purely and simply, of gambling wagers for which the once mighty insurer volunteered to be counterparty. The American taxpayer did not, and should never have been forced to pay a dime for the bets. The reason why (s)he was anyway leads to the by far most troubling part of the story. It shows that in the White House and on Capitol Hill, it's the bankers who have final control, not the people.

The second issue, which increasingly occupies my thoughts, is the Federal Deposit Insurance Corporation. Last night, the FDIC seized its 17th bank this year. Only one. The agency operates under a veil of secrecy, so it's hard to prove much of anything, but I find it very hard to believe that out of the 8500 banks the FDIC insures, there was only one in deep enough trouble this week to warrant a seizure, even if many have been handed TARP cash. What I think is happening is that the FDIC has lost control of the situation, that it can't effectively handle more then one bank at a time at this point, and a small one at that.

I'd like to know what stage of the game the previous 16 2009 takeovers are in. The recently and hastily introduced Depositor Protection Act of 2009 would give the FDIC emergency access to $500 billion in government funds. The introduction of the act is somewhat bewildering, since the agency is part of the government to start with, and already has a window at the Treasury. I can understand the fears that the funds are designated for a major bank failure in the near future, but we simply won't be allowed to know until it happens.

FDIC chief Sheila Bair may be a competent financial servant, though I would doubt it by now. What I don't doubt is that she is way below par when it comes to communication and PR (unless she's deliberately trying to create a panic). She has recently warned that the FDIC could go broke, and she has fumbled an initiative to force banks to pay more to the agency to be covered under its programs. While it's obvious that the FDIC's guarantee of $250.000 per bank account largely has a symbolic function, since it lacks both funding and manpower to execute the seizure of one or more major banks. Still, I’m sure it’s not part of Ms. Bair's job description to cast doubt on her agency's role, even on the symbolic part of it. Once people start doubting the FDIC, events could unfold very fast.

Both issues above give me the impression that it's not just the FDIC that’s losing it's grip, it's the government itself, and with it the entire political system. I started warning way before Obama was even elected that we were looking at something much bigger than a financial or an economic crisis, that the way Bear Stearns and Lehman Brothers and Paulson's TARP were handled pointed to a full-blown political crisis. I've seen very few comments since that reflect that realization, but that doesn't make it any less relevant. I’m hopeful that today more people will wake up to the flip side of the confidence issue, and the dark side of the change we can believe in.

You can't treat these things as mere words, and most certainly not while millions of people lose their homes and jobs. Words spoken about confidence and trust and pulling together as a nation to enable an economic turnaround will ring eerily hollow in the face of tens or hundreds of billions of the people's money transferred to the private accounts of global financiers and market makers who've bet on the wrong horses.

People are still willing to give the new president the benefit of the doubt, and they still have faith left that he can pull them out of the deepest of holes. But that will soon be gone if the AIG bail-out details become publicly known. Obama has a lot of credit, but he's also losing it fast. He must hope that this topic remains somehow hidden on a backburner for the time being, or he could fall fast. There are a lot of people who are already very fed up and angry, and more of this sort of thing could ignite some mighty sparks. If the president cannot shake the image of himself as condoning the bankers' robbing the public purse under the guise of rescuing the nation, he will paint himself into a very gloomy corner.

Not a penny of the $50 billion for AIG's bookies serves to alleviate the plight of the people, and they will grow less and less willing to believe otherwise. Washington politics has changed precious little since January 20, which means that for better or for worse, Obama is losing what Congress and the Senate have long since seen evaporate” political capital. The Hill today is nothing but a battlefield for hegemony over money and power. It has no connection with the interests of the people anymore. And that given situation will implode and explode all at the same moment once enough people get poor and miserable and desperate enough.

The government can't sit on its hands much longer if Citigroup shares keep on falling. It has to act, to do something, too many Americans have too much money deposited with the bank. In fact, there is at least $600 billion in Citi accounts, while the company's market cap is hardly above $6 billion. There are increasing demands to remove Treasury Secretary Tim Geithner, and I agree whole-heartedly. He's always been a wrong choice. Thing is, who's going to take his seat? The entire Obama finance team, as I've said since they were appointed, should be kicked out. You can't cleanse an economy with the same people who've soiled it. But an entire new team? I can't see that either.

After all, as I said, it's the bankers that control the government, as the AIG "rescue" abundantly and unequivocally shows. This government may well fall along with Citigroup, if only because it lacks the instruments to deal with a collapse of that order. Read my hips: all they can think of is to throw more billions and trillions at the issue, and hope some of it will stick. It's all still entirely one-dimensional. I see no answers, no ethics, no ideas that would help dig ordinary people out of the quicksand that rapidly drags them down. Well written and well-delivered speeches provide time and space to move, but real political capital comes from the proven ability to tackle issues. All I see is the image of "leaders" that draw people deeper into misery, pulling on their feet, not lifting them out by their shoulders. Political bankruptcy may be a novel term for many, but trust me, it does exist. In democracies.

Top U.S., European Banks Got $50 Billion in AIG Aid
The beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant. Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter. Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA.

More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document. The names of all of AIG's derivative counterparties and the money they have received from taxpayers still isn't known, but The Wall Street Journal has identified some of them and is publishing others here for the first time. The AIG bailout has become a political hot potato as the risk of losses to U.S. taxpayers rises. This past week, legislators demanded that the Federal Reserve disclose names of financial firms that have received money from AIG, which Fed officials have described as too systemically important in the financial system to be allowed to fail.

In a Senate Banking Committee hearing in Washington on Thursday, Fed Vice Chairman Donald Kohn declined to identify AIG's trading partners. He said doing so would make people wary of doing business with AIG. But Mr. Kohn told lawmakers he would take their requests to his colleagues. The Fed, through a new committee led by Mr. Kohn to discuss transparency concerns, is now weighing whether to disclose more details about the AIG transactions. The Fed rescued AIG in September with an $85 billion credit line when investment losses and collateral demands from banks threatened to send the firm into bankruptcy court. A bankruptcy filing would have caused losses and problems for financial institutions and policyholders globally that were relying on AIG to insure them against losses.

Since September, the government has had to extend more aid to AIG as its woes have deepened; the rescue package now has swelled to more than $173 billion. The government's rescue of AIG helped prevent its counterparties from incurring immediate losses on mortgage-backed securities and other assets they had insured through AIG. The bailout provided AIG with cash to pay the banks collateral on the money-losing trades; it also bought out underlying mortgage-linked securities, many of which are currently worth less than half their original value. Banks and other financial companies were trading partners of AIG's financial-products unit, which operated more like a Wall Street trading firm than a conservative insurer. This AIG unit sold credit-default swaps, which acted like insurance on complex securities backed by mortgages.

When the securities plunged in value last year, AIG was forced to post billions of dollars in collateral to counterparties to back up its promises to insure them against losses. Now, other problems are popping up for AIG. The insurer generated a sizable business helping European banks lower the amount of regulatory capital required to cushion against losses on pools of assets such as mortgages and corporate debt. It did this by writing swaps that effectively insured those assets. Values of some of those assets are declining, too, forcing AIG to also post collateral against those positions. And if the portfolios incur losses, AIG will have to compensate the banks.

AIG had seen this business as a relatively safe bet for the company and its investors. The structures were designed to allow European banks to shuck aside high capital costs. A change in capital rules has meant that the AIG protection no longer meets regulatory requirements. The concern has been that if AIG defaulted, banks that made use of the insurer's business to reduce their regulatory capital, most of which were headquartered in Europe, would have been forced to bring $300 billion of assets back onto their balance sheets, according to a Merrill report.

Covered Counterparties

Some banks that were paid by AIG after it was bailed out by the government
* Goldman Sachs
* Deutsche Bank
* Merrill Lynch
* Société Générale
* Calyon
* Barclays
* Rabobank
* Danske
* Royal Bank of Scotland
* Banco Santander
* Morgan Stanley
* Wachovia
* Bank of America
* Lloyds Banking Group
Source: WSJ research

The Fed’s moral hazard maximising strategy
by WIllem Buiter

The reports on the evidence given by the Vice Chairman of the Federal Reserve Board, Don Kohn, to the Senate Banking Committee about the Fed’s role in the government’s rescue of AIG, have left me speechless and weak with rage.  AIG wrote CDS, that is, it sold credit default swaps that provided the buyer of the CDS (including some of the world’s largest banks) with insurance against default on bonds and other credit instruments they held. Of course the insurance was only as good as the creditworthiness of the party writing the CDS. When it was uncovered during the late summer of 2008, that AIG had nurtured a little rogue, unregulated investment banking unit in its bosom, and that the level of the credit risk it had insured was well beyond its means, the AIG counterparties, that is, the buyers of the CDS, were caught with their pants down.

Instead of saying, "how sad, too bad" to these counterparties, the Fed decided (in the words of the Wall Street Journal), to unwind ".. some AIG contracts that were weighing down the insurance giant by paying off the trading partners at the full value they expected to realize in the long term, even though short-term values had tumbled." An LSE colleague has shown me an earlier report in the Wall Street Journal (in December 2008), citing a confidential document and people familiar with the matter, which estimated that about $19 billion of the payouts went to two dozen counterparties between the government bailout of AIG in mid-September and early November 2008.

According to this Wall Street Journal report, nearly three-quarters was reported to have gone to a group of banks, including Société Générale SA ($4.8 billion), Goldman Sachs Group ($2.9 billion), Deutsche Bank AG ($2.9 billion), Credit Agricole SA’s Calyon investment-banking unit ($1.8 billion), and Merrill Lynch & Co. ($1.3 billion).  With the US government (Fed, FDIC and Treasury) now at risk for about $160 bn in AIG, a mere $19 bn may seem like small beer.  But it is outrageous.  It is unfair, deeply distortionary and unnecessary for the maintenance of financial stability.

Don Kohn ackowledged that the aid contributed to "moral hazard" - incentives for future reckless lending by AIG’s counterparties - it "will reduce their incentive to be careful in the future." But, here as in all instances were the weak-kneed guardians of the common wealth (or what’s left of it) cave in to the special pleadings of the captains of finance, this bail-out of the undeserving was painted as the unavoidable price of maintaining, defending or restoring financial stability. What would have happened if the Fed had decided to leave the AIG counterparties with their near-worthless CDS protection? "I’m worried about the knock- on effects in the financial markets.Would other people be willing to do business with other U.S. financial institutions…if they thought, in a crisis like this, they might have to take some losses?"

Let’s step back a minute and ponder this. US banks and shadow-banks (like AIG’s Financial Products Division) took on excessive leverage and excessive risk.   There was not only too much careless lending by US banks, there was too much careless lending to US banks. When this crisis is over and when, in the fullness of time, the real economy has recovered, we want to see less lending by and to US banks than we saw in the years 2004 - 2006. How do we get those who provided US banks and other financial institutions with too much funding at too low a cost to behave with greater prodence and caution in the future? Presumably by making sure that they pay the price for there reckless financial decisions. The counterparties of AIG who had been unwise enough to buy insurance against default on debt instruments they held, by acquiring CDS written by AIG should have been told to eat it.

So, like Mr. Kohh,  I too am worried about the knock- on effects in the financial markets of the Fed’s actions. I, however, am exceedingly worried about the Fed’s bail out (at full face value) of the counterparties of AIG. I am deeply worried that other people may, as a result of this, be willing to do business with other U.S. financial institutions on the same ludicrous terms that brought us the current crisis. Why wouldn’t they be happy and relaxed about once again taking wild and crazy bets? They now know that, should their bets fail, in a crisis like this, there is some sucker-institution in Washington DC that will make sure that they don’t have to take some losses. Unless the counterparties pay the full price for their hubris and recklessness, they will be back for more. 

It is therefore tragic that central banks and governments everywhere are going out of their way to protect and shelter the unsecured creditors of the banks (holders of junior and senior debt among them), by raiding the tax payer or the credit and reputation of the central bank.  Significant mandatory debt-to-equity conversions and large write-downs of (haircuts on) the claims of other unsecured creditors should be an integral part of any financial assistance package. Whenever I suggest that the tax payer should not bail out unsecured creditors when a financial institution is about to go belly-up, someone yells ‘Lehman Brothers’ as if that is enough to turn the unsecured creditors into sacred cows. 

It is not. A simple but (to me) quite persuasive ‘event study’ by John Taylor of Stanford University, "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong" suggests that it is not the inability of the US authorities over the weekend of September 13-14 2008 to come up with a rescue packege for Lehman that started the cardiac arrest in US and global money markets and financial markets. Quoting from Taylor (the spread referred to is the 3-month Libor-OIS spread)
"…the spread moved a bit on September 15th, which is the Monday after the weekend decisions not to intervene in Lehman Brothers. It then bounced back down a little bit on September 16 around the time of the AIG intervention. While the spread did rise during the week following the Lehman Brothers decision, it was not far out of line with the events of the previous year.
On Friday of that week the Treasury announced that it was going to propose a large rescue package, though the size and details weren’t there yet. Over the weekend the package was put together and on Tuesday September 23, Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified at the Senate Banking Committee about the TARP, … . They provided a 2-1/2 page draft of legislation with no mention of oversight and few restrictions on the use. They were questioned intensely in this testimony and the reaction was quite negative, "… it was following this testimony that one really begins to see the  rises deepening, as measured by the relentless upward movement in Libor-OIS spread for the next three weeks. Things steadily deteriorated and the spread went through the roof to 3.5 per cent.

…  identifying the decisions over the weekend of Sept 13 and 14 as the cause of the increased severity of the crisis is questionable. It was not until more than a week later that conditions deteriorated. Moreover, it is plausible that events around September 23 actually drove the market, including the realization by the public that the intervention plan had not been fully thought through and that conditions were much worse than many had been led to believe.

I believe the Lehman collapse was mishandled by the authorities. They committed two egregious errors, one of commission and one of omission. The error of commission was saving the unsecured creditors of Bear Stearns, an investment bank that was even less systemically significant than Lehman. This implanted the belief, among market participants and observers, that only shareholders were exposed to serious risk in America’s internationally visible banks. The error of omission was that, despite the fact that Bear Stearns had been in terminal dire straits in March 2008, there still was no Special Resolution Regime (SRR) with Prompt Corrective Action (PCA) for Investment banks in September 2008.

Why was Lehman not forced to become a bank holding company (the fate of Morgan Stanley and Goldman Sachs later that year), so it could be SRR’d and PCA’d by the FDIC? With an SRR, the systemically important bits of Lehman could have been kept alive on government life support, with the shareholders and the unsecured creditors suffering the fate intended for those with exposure to insolvent institutions. While the demise of Lehman and the destruction of most of its unsecured creditors was an unnecessary surprise, it was still the best option available to the authorities, given the absence of an SRR.  Markets and market participants are educated only by painful example.

The cardiac arrest followed the realisation, well after Lehman went kaput, that (1) most of the internationally recognisable US banks were insolvent or would be but for past, present and anticipated future government financial support; that (2) many other non-bank financial institutions (AIG) and shadow-financial institutions (GE) were either insolvent or at death’s doorstep; and that (3) the government was not on top of the issues and the Congress was deeply divided and irresponsible.

The logic of collective action teaches us that a small group of interested parties, each with much at stake, will run rings around large numbers of interested parties each one of which has much less at stake individually, even though their aggregate stake may well be larger. The organised lobbying bulldozer of Wall Street sweeps the floor with the US tax payer anytime. The modalities of the bailout by the Fed of the AIG counterparties is a textbook example of the logic of collective action at work. It is scandalous: unfair, inefficient, expensive and unnecessary.

FDIC Instant $500 Billion Loan Proposed - Fear Of Big Bank Failure
The government is bracing for a big bank failure. A bill introduced in Congress would give the FDIC, the agency that stands behind Americans’ bank deposits, temporary authority to borrow as much as $500 billion from the government to shore up the deposit insurance fund. The bill — the Depositor Protection Act of 2009, backed by Senate Banking Committee Chairman Chris Dodd, D-Conn. and Sen. Mike Crapo, R-Idaho — wouldn’t change the status of individual bank accounts, which through the end of this year are insured up to $250,000. But the Dodd-Crapo bill acknowledges what the financial markets have been signaling for the past month — that the government must take the lead in a costly cleanup of the mess in the financial sector.

"I think it’s a commendable start," said Simon Johnson, a former International Monetary Fund chief economist who tracks the crisis on his blog. Dodd said he introduced the legislation at the behest of other regulators, notably Federal Deposit Insurance Corp. chief Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner. All three recently wrote Dodd to support an emergency expansion of the FDIC’s capacity to borrow from the Treasury. "This mechanism would allow the FDIC to respond expeditiously to emergency situations that may involve substantial risk to the financial system," Bernanke wrote in a Feb. 2 letter to Dodd.

The Senate bill is being introduced at a time of rising market stress about the health of the banking industry. Seventeen relatively small banks have already failed this year and 25 went under in 2008. Last year’s failures included the July demise of mortgage lender IndyMac and the September collapse of Washington Mutual, which was the sixth-biggest depository institution in the nation at the time it failed. Shares of Citigroup, the giant financial company that last week received a third round of government aid, have fallen 58% since the government outlined a plan to convert the bank’s preferred shares to common stock. The stock even dropped below $1 Thursday.

The Citi plan aimed to ease market concerns about the bank’s health. But fears have only increased, judging by the swoon in financial stocks this week and the sharp rise in the cost of protecting financial-sector debt against default. The Credit Derivatives Research counterparty risk index — a measure of the annual cost of insuring the bonds of 14 global financial companies against default — surged nearly 30% this week as investors rushed to protect themselves against possible defaults at giant institutions. It now costs an average of $289,000 per year to buy insurance on $10 million’s worth of bank debt, according to the CDR index. That’s just shy of the $300,000 average premium in force the day the index hit its all time high — Sept. 17, 2008.

That was the day after the government’s $85 billion first bailout of AIG, two days after the failure of broker-dealer Lehman Brothers and a week before WaMu was seized by regulators. The current degree of stress in the financial sector is "totally shocking," said Johnson, given the massive resources governments around the globe have devoted to reducing fears of a major collapse. The financial fears point to the need for the Obama administration to produce a detailed plan of how it will deal with troubled too-big-to-fail institutions and bad assets in the banking sector, said Johnson, who teaches in the business school at MIT. "If you don’t do a systemic plan fast, you set up a target for speculators," said Johnson.

The market’s reaction to Geithner’s failure to produce an adequately articulated proposal as promised on Feb. 10 stands as a cautionary tale. The Dow Jones Industrial Average has dropped 20% since then. The insurance that the FDIC provides to bank depositors is funded by annual assessments on banks. But the fund has been depleted by a sharp rise in bank failures over the past year, and efforts to raise the fees that support the deposit fund have been complicated by the poor health of the banking industry. The deposit fund’s balance fell 64% in 2008 to $19 billion, putting deposit fund assets at just 0.4% of banking industry assets. That’s barely a third of the 1.15% statutory minimum.

Despite the welcome signs that policymakers are coming to grips with the extent of the U.S. banking crisis, observers say officials have yet to make clear that they fully grasp the scope of the financial industry’s problems. A $500 billion loan to the FDIC "begins to approximate the maximum loss from resolving the top four banks," said Chris Whalen, a managing director at Institutional Risk Analytics, a financial research and hedge fund advice firm. The five biggest U.S. bank holding companies - Bank of America, Citi, JPMorgan Chase, Wells Fargo and Wachovia, which is now owned by Wells - had domestic deposits of between $271 billion and $701 billion at the end of the second quarter of 2008, according to the most recent data available from the FDIC.

With credit costs, which reflect expenses tied to bad mortgage and credit card loans, on the way to doubling the levels reached in the 1991 recession, Whalen expects the cost of fixing troubled banks to hit $1 trillion. Whalen adds that he believes regulators may have to swing into action in coming weeks. With bad loans rising sharply even at the better managed banks, the next round of financial reports from the most troubled banks, due out in April, could be truly horrific. "Does anybody really want to see Citi’s first-quarter numbers?" Whalen said.

FDIC Bill Dodges a New TARP Fight

A three-page bill designed to bolster the Federal Deposit Insurance Corp. could let the Obama administration sidestep a huge political problem: securing more financial firepower without opening a debate over the Troubled Asset Relief Program. The legislation, introduced late Thursday by Senate Banking Committee Chairman Christopher Dodd, would temporarily allow the FDIC to borrow $500 billion to replenish the fund it uses to guarantee bank deposits, if the Federal Reserve and Treasury Department concur. Those funds would be distinct from the contentious $700 billion financial-sector bailout, which lawmakers are loathe to expand.

The FDIC can presently only borrow $30 billion from Treasury. The bill would permanently raise that level to $100 billion, which the FDIC could tap without prior approval from the Fed and Treasury. Mr. Dodd, a Connecticut Democrat, already has four Republican co-sponsors for the bill and it could quickly gain momentum, in part because of strong backing by community bankers. "I do not want [the FDIC] being timid," said Sen. Bob Corker, a Tennessee Republican who is one of the co-sponsors. "I want them to be aggressive, if they feel like a bank needs to be seized, to have the ability to do it."

The bill was championed by FDIC Chairman Sheila Bair, Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner. In a Feb. 2 letter to Mr. Dodd, Mr. Geithner said he supported a move as it would allow the government to respond to "exigent circumstances." Mr. Bernanke sent Mr. Dodd a similar letter the same day, suggesting a coordinated effort was at work. One difference between the FDIC's insurance fund and the TARP is that any money the FDIC borrows from the Treasury would likely have to be repaid through assessments levied on banks rather than on taxpayers. The FDIC finances its fund through bank fees. Many struggling banks argue that the government should ease up on fees until the credit crisis abates.

The FDIC hasn't borrowed from the Treasury in more than a decade, and Capitol Hill aides said the size of the request suggests the government is looking for flexibility to either stabilize or wind down a large bank. The Obama administration has suggested it wouldn't allow any of the 19 U.S. banks with more than $100 billion of assets to fail. "The amount of deposits is growing fast and the FDIC's risk is growing," said former FDIC Chairman Bill Seidman. "They've got to have the money, and have it right away, if the depositors need to be protected."

A string of bank failures depleted the FDIC's deposit-insurance fund to $19 billion at the end of the fourth quarter to backstop roughly $4.5 trillion of insured deposits at more than 8,000 banks. The bill is likely to run into opposition among lawmakers who feel the government is already overextended. "Clearly, it is a backdoor way to avoid the restrictions that could potentially come by means of TARP," said Rep. Scott Garrett, a New Jersey Republican who sits on the House Financial Services Committee. Democrats might try attaching the measure to a separate bill already moving through Congress that would allow bankruptcy judges to alter the terms of mortgages that are in foreclosure. The FDIC insures up to $250,000 for most depositors. FDIC officials have stressed in recent months that no bank customer has ever lost a penny of FDIC-backed money.

Freedom Bank of Georgia Seized, 17th U.S. Failure This Year
Freedom Bank of Georgia was seized by regulators, the 17th bank closed this year, as the recession persists and a jump in unemployment pushed more borrowers behind on home loan payments. Freedom Bank, in Commerce, Georgia, with $173 million in assets and $161 million in deposits, was shut by the state’s Department of Banking and Finance and the Federal Deposit Insurance Corp. was named receiver. Northeast Georgia Bank of Lavonia, Georgia, will assume deposits, the FDIC said. "Customers of both banks should continue to use their existing branches until Northeast Georgia Bank can fully integrate the deposit records of Freedom Bank of Georgia," the FDIC said.

The U.S. economy is in the second year of a recession caused partly by a collapse of the housing market and losses in the financial system linked to mortgage securities. The U.S. unemployment rate reached 8.1 percent, the highest level in more than a quarter century, and employers shed 650,000 jobs last month, the Labor Department said. Closely held Northeast Georgia Bank will buy about $167 million in assets at a discount of $13.7 million and the bank agreed to share with the FDIC in any losses on about $96.5 million in assets. The FDIC estimates the transaction will cost the deposit insurance fund, supported by fees on insured banks, about $36.2 million.

FDIC-insured banks lost $26.2 billion in the fourth quarter, the first loss for a three-month period since 1990. U.S. banks and other financial companies have reported about $800 billion in writedowns and credit losses since 2007 in the worst financial crisis since the Great Depression. "There is no question that this is one of the most difficult periods we have encountered during the FDIC’s 75 years of operation," FDIC Chairman Sheila Bair said at a news conference on Feb. 26 after the industry report was released. The FDIC predicted that bank failures will cost the fund $65 billion through 2013, up from the $40 billion estimated in October. The fund, drained by 25 bank shutdowns last year, dropped 45 percent to $18.9 billion in the fourth quarter from $34.6 billion in the preceding three-month period.

The Washington-based agency classified 252 banks as "problem" in the fourth quarter, a 47 percent jump from the third quarter. It doesn’t name the "problem" banks. The FDIC approved a one-time emergency fee of 20 cents per $100 of insured deposits on banks to bolster the insurance fund at a board meeting on Feb 27. Bair wrote a letter to Senate Banking Committee Chairman Christopher Dodd, saying she may cut the new levy if lawmakers expand the amount of credit the agency can draw from the Treasury Department.

Dodd, a Connecticut Democrat, introduced a bill to permanently raise the FDIC’s borrowing authority from Treasury to $100 billion and temporarily increase it to $500 billion through Dec. 31, 2010. The House of Representatives this week passed a measure that would triple the FDIC’s credit line to $100 billion and permanently raise the deposit-insurance limit to $250,000. The FDIC prompted a banking industry outcry over the new assessment. Camden Fine, president of the Independent Community Bankers of America, said on March 3 he’s received more than 1,000 messages from executives complaining that the one-time fee could significantly reduce 2009 earnings.

FDIC chief: Limits needed on too big to fail banks?
Congress should consider if it is time to step in and stop American banks from becoming too large to fail, the head of the Federal Deposit Insurance Corp. told "60 Minutes" in an interview to be broadcast on Sunday. "I think taxpayers rightfully should ask, that if an institution has become so large that there is no alternative except for the taxpayers to provide support, should we allow so many institutions to exceed that kind of threshold?" FDIC Chairman Sheila Bair said, according to excerpts of the program released on Friday. Bair declined to comment on specific big banks like Citigroup that have received tens of billions of dollars in taxpayer bailouts, saying only that such large institutions are "more than a bank" with vast broker-dealer and offshore operations.

The U.S. Treasury Department is running a $700 billion bailout program to help financial institutions, with the ultimate goal of unfreezing the credit markets. Bair, whose agency has overseen 17 bank failures so far in 2009, was interviewed for a program profiling the FDIC's recent seizure of Heritage Community Bank in Glenwood, Illinois. Before it failed, Heritage was a relatively small bank with assets of $232.9 million. Within the last hour U.S. regulators announced another bank closure, Freedom Bank of Georgia. Freedom Bank of Georgia had $173 million assets. In 2008, the FDIC oversaw 25 bank failures. More than 100, mostly small banks could close their doors this year, according to industry experts.

Obama Seeks to Reassure Nation as Economy Darkens
As the economy continues to deteriorate, President Obama on Saturday sought to reassure Americans that his efforts to stanch the bleeding will eventually work.  The work week ended on another dour note, with 651,000 more American jobs slashed in February and an unemployment rate climbing to 8.1 percent. That is the highest rate of people out of work in more than 25 years, as the recession continued to put enormous pressures on families and industries. Obama recapped the work of another hectic week in his young presidency. His goal was to reassure the country that he and his team are taking specific steps to create jobs in the short term and begin to address huge issues, like health care, that affect virtually everyone.

Obama in the past week launched a more detailed plan to help struggling homeowners avoid foreclosure; unveiled a new credit plan to spur lending for people and businesses; began an overhaul of the way the government hands out private contracts to reduce waste; and held a summit on how to fix the nation's health care crisis. On the last point, Obama has set a goal of signing a bill this year that would fix the U.S. health care system, which is the costliest in the world and leaves an estimated 48 million people uninsured, plus many others lacking adequate coverage. "Our ideas and opinions about how to achieve this reform will vary, but our goal must be the same: quality, affordable health care for every American that no longer overwhelms the budgets of families, businesses and our government," Obama said in his weekly radio and video address, taped a day earlier at the White House.

Obama says he is not wedded to a plan on how to fix the problem. But one proposal he has endorsed, giving Americans the option of buying medical coverage through a government plan, is drawing opposition from Republicans. Republican Rep. Roy Blunt emphasized that point in the Republican weekly radio address."I'm concerned that if the government steps in it will eventually push out the private health care plans millions of Americans enjoy today," Blunt said. "This could cause your employer to simply stop offering coverage, hoping the government will pick up the slack." Obama challenged the nation in his weekly address to not just hang in there but rather to see the hard times as a chance to "discover great opportunity in the midst of great crisis." "That is what we can do and must do today. And I am absolutely confident that is what we will do," Obama said.

As the White House takes on so many huge issues at once, Obama is encouraging people to take a longer view, and not get caught up in the fits and starts. The president said in his address that the nation will continue to face difficult days in the months ahead. Still, he ended with hope. "Yes, this is a moment of challenge for our country," Obama said. "But we've experienced great trials before. And with every test, each generation has found the capacity to not only endure, but to prosper -- to discover great opportunity in the midst of great crisis."

Obama recovery plans sowing some unease
President Barack Obama offered his domestic-policy proposals as a "break from a troubled past." But the economic outlook now is more troubled than it was even in January, despite Obama's bold rhetoric and commitment of more trillions of dollars. And while his personal popularity remains high, some economists and lawmakers are beginning to question whether Obama's agenda of increased government activism is helping, or hurting, by sowing uncertainty among businesses, investors and consumers that could prolong the recession. Although the administration likes to say it "inherited" the recession and trillion-dollar deficits, the economic wreckage has worsened on Obama's still-young watch.

Every day, the economy is becoming more and more an Obama economy. More than 4 million jobs have been lost since the recession began in December 2007 — roughly half in the past three months. Stocks have tumbled to levels not seen since 1997. They are down more than 50 percent from their 2007 highs and 20 percent since Obama's inauguration. The president's suggestion that it was a good time for investors with "a long-term perspective" to buy stocks may have been intended to help lift battered markets. But a big sell-off followed. Presidents usually don't talk about the stock market. But the dynamics are different now. A higher percentage of people have more direct exposure to stocks — including through 401(k) and other retirement plans — than ever.

So a tumbling stock market is adding to the national angst as households see the value of their investments and homes plunge as job losses keep rising. Some once mighty companies such as General Motors and Citigroup are little more than penny stocks. Many health care stocks are down because of fears of new government restrictions and mandates as part a health care overhaul. Private student loan providers were pounded because of the increased government lending role proposed by Obama. Industries that use oil and other carbon-based fuels are being shunned, apparently in part because of Obama's proposal for fees on greenhouse-gas polluters. Makers of heavy road-building and other construction equipment have taken a hit, partly because of expectations of fewer public works jobs here and globally than first anticipated.

"We've got a lot of scared investors and business people. I think the uncertainty is a real killer here," said Chris Edwards, director of fiscal policy for the libertarian Cato Institute. Some Democrats, worried over where Obama is headed, are suggesting he has yet to match his call for "bold action and big ideas" with deeds. In particular, they point to bumpy efforts to fix the financial system under Treasury Secretary Timothy Geithner. Obama may have contributed to the national anxiety by first warning of "catastrophe" if his stimulus plan was not passed and in setting high expectations for Geithner. Instead, Geithner's public performance has been halting and he's been challenged by lawmakers of both parties.

Republicans and even some top Democrats, including Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee, have questioned the wisdom of Obama's proposal to limit tax deductions for higher-income people on mortgage interest and charitable contributions. Charities have strongly protested, saying times already are tough enough for them. The administration suggests it might back off that one. Even White House claims that its policies will "create" or "save" 3.5 million jobs have been questioned by Democratic supporters. "You created a situation where you cannot be wrong," the chairman of the Senate Finance Committee, Montana Democrat Max Baucus, told Geithner last week.

"If the economy loses 2 million jobs over the next few years, you can say yes, but it would've lost 5.5 million jobs. If we create a million jobs, you can say, well, it would have lost 2.5 million jobs," Baucus said. "You've given yourself complete leverage where you cannot be wrong, because you can take any scenario and make yourself look correct."

Republicans assert that Obama's proposals, including the "cap and trade" fees on polluters to combat global warming, would raise taxes during a recession that could touch everyone. "Herbert Hoover tried it, and we all know where that led," says House Republican leader John Boehner of Ohio. The administration argues its tax increases for the households earning over $250,000 a year and fees on carbon polluters contained in its budget won't kick in until 2011-2012, when it forecasts the economy will have fully recovered. But even those assumptions are challenged as too rosy by many private forecasters and some Democratic lawmakers. Many deficit hawks also worry that the trillions of federal dollars being doled out by the administration, Congress and the Federal Reserve could sow the seeds of inflation down the road, whether the measures succeed in taming the recession or not. The money includes Obama's $3.6 trillion budget and the $837 billion stimulus package he signed last month.

To the notion that he favors a government-operated approach toward fixing problems, Obama says none of it started on his watch — the collapsing economy or the taxpayer-funded bailouts designed to keep matters from getting even worse. "By the time we got here, there already had been an enormous infusion of taxpayer money into the financial system," he said in an interview posted Saturday on The New York Times' Web site. "And the thing I constantly try to emphasize to people if that coming in, the market was doing fine, nobody would be happier than me to stay out of it. I have more than enough to do without having to worry the financial system." Polls show that Obama's personal approval ratings, generally holding in the high 60s, remain greater than support for his specific policies.

"He still has a fair amount of political capital, so the public is willing to cut him some slack and go along with him for a while," said pollster Andrew Kohut, director of the Pew Research Center. "But the public will have to get some sense that the kinds of things he's proposing are going to work, or are showing some signs that they are working." Allan Sinai, chief global economist for Decision Economics, a Boston-area consulting firm, said the complexity and enormity of the crisis make it hard to solve.
"There's no way to get it all right, regardless of which president is making policy," Sinai said. "The problem is the sickness got too far. The actions taken, medicine applied, were mainly the wrong actions. So it's just worse, and it gets harder to deal with. At this stage, there is no easy answer, no easy way out. It's a question of how we fumble through."

Surging U.S. Unemployment Rate Pressures Obama for More Action
The jump in the U.S. unemployment rate to the highest level in a quarter century last month suggests the recession is deeper than the Obama administration forecasts and additional measures may be needed to restart growth. The jobless rate rose to 8.1 percent in February as employers reduced payrolls by 651,000, the Labor Department said yesterday in Washington. Losses have now exceeded 600,000 for three straight months, the first time that’s happened since the data began in 1939. Unemployment has already reached the average rate the White House projected for the whole year. The administration needs to keep its focus on repairing the banking system and implementing the stimulus, rather than get diverted by other goals such as healthcare changes, said John Ryding, chief economist at RDQ Economics LLC in New York.

"They should be focused on stabilization" of financial firms "and stimulus -- and that should not only be ‘Job 1,’ that should be the only job right now," Ryding said in an interview with Bloomberg Television. "The question is, is it recession or is it something worse than recession" the economy is facing, he said. The Standard & Poor’s 500 Stock Index slumped 7 percent this week, bringing the drop since President Barack Obama took office on Jan. 20 to 20 percent. Benchmark 10-year Treasury yields rose to 2.88 percent yesterday from 2.81 percent the previous day amid concern the government will need to sell more debt. While the president’s $787 billion stimulus plan aims at creating or saving 3.5 million jobs, the U.S. has already lost 4.4 million since the recession began in December 2007, with more declines coming. Tumbling global demand is prompting companies from General Motors Corp. to Sears Holdings Corp. to step up firings.

"You may need more fiscal stimulus in 2010," Jan Hatzius, chief U.S. economist for Goldman Sachs Group Inc., said in a Bloomberg Television interview. The impact of the package already passed will start fading by early next year, he said. Obama said yesterday that the "astounding" job losses show "bold action and big ideas" are needed to revive the economy. "We have a responsibility to act, and that’s what I intend to do," he told a group of Ohio police recruits aided by his stimulus package. Revisions to January and December statistics lopped an additional 161,000 jobs from previous estimates, the Labor Department’s figures showed. Payrolls were forecast to drop by 650,000, according to the median of 80 economists surveyed by Bloomberg News. The jobless rate was projected to jump to 7.9 percent.

"We’re going to have to have a lot more jobs than 3.5 million" generated to get a "serious recovery" in the economy, Harvard University professor Robert Barro said in a Bloomberg Television interview. Barro calculated a 30 percent chance the U.S. will slide into a depression, which he characterized as at least a 10 percent drop in gross domestic product. Factory payrolls fell by 168,000 after declining 257,000 in the prior month. Economists forecast a drop of 200,000. The decrease included 25,300 jobs in producers of machinery and 27,500 in makers of fabricated metal products. Automakers, at the heart of the manufacturing slump, continued to slash jobs and trim costs to stay in business. General Motors last month said it would cut 47,000 more positions globally while Chrysler LLC announced 3,000 more layoffs.

Auto-parts makers are also suffering. Canton, Ohio-based Timken Co., the supplier of bearings to the world’s top five carmakers, said March 2 it would eliminate as many as 400 salaried jobs this year. Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 375,000 workers after cutting 276,000. Financial firms cut 44,000 positions after a 52,000 decline the prior month. Retail payrolls decreased by 39,500 after a 38,500 drop. Sears last week said it would shutter 24 stores, on top of eight closings announced earlier. Government payrolls increased by 9,000 after a gain of 31,000 the prior month, one of the few areas still hiring. Another 26,000 jobs were added by education and health-care providers. Employers are holding the line on hours. The average work week held at 33.3 hours in February. Average weekly hours worked by factory workers dropped to 39.6 hours from 39.8 hours, while overtime also decreased to 2.6 hours from 2.8 hours. That brought average weekly earnings up by $1 to $615.05.

Slumping sales have caused recent Chapter 11 filings by retailers such as Everything But Water LLC, the largest U.S. retailer of women’s swimwear, and Ritz Camera Centers Inc., the largest chain of camera stores. Economists polled by Bloomberg last month forecast consumer spending will contract through the first six months of this year after sliding in the last half of 2008. Purchases have not contracted for four consecutive quarters since records began in 1947. If the recession persists through the first half of this year, it would the longest since the Great Depression. The economy shrank at a 6.2 percent pace in the fourth quarter of 2008, the weakest performance since 1982.

Time To Fire Tim Geithner
We don't mean to sound impatient, but we've seen enough. The country is in the middle of the worst financial crisis in 75 years, and the second-most-important person in charge clearly isn't the right man for the job. When both engines on US Air Flight 1549 quit after takeoff, Capt. Sullenberger did not cling stubbornly to his preconceived view of the situation. He did not float endless versions of the same bad plan to air traffic controllers to see what they thought of them. He did not spend months preparing for a moment just like this only to be seized by indecision when it arrived. Instead, he just took the controls and landed the plane in the Hudson.

Note that this was not a risk-free, popular, or easy decision. When air traffic controllers learned where Sullenberger was headed, they thought everyone in the plane was dead. But if Sullenberger had taken the easier route, and tried for Teterboro, they all would have been dead--along with a bunch of folks on the ground. Before taking office at the end of January, Tim Geithner had many months to develop a solid plan for what to do.  He had the opportunity to see what was working and what wasn't and to consult with dozens of experts, many of whom had no stake in the matter (unlike the Wall Street kingpins who seem to have shaped Geithner's inaccurate view of the situation). He had the opportunity to see and understand that what America needs most right now is clarity and decisiveness.  Then he took office. In the five weeks since, Tim Geithner has:
  • Given a speech billed as the solution to the financial crisis in which he promised something vague, someday, that sounded an awful lot like the bad plan that didn't work in the past administration (which really isn't that surprising, given that Geithner was the one who came up with the earlier bad plan).
  • Floated multiple versions of the same plan into the press hoping that one would be enthusiastically received by someone other than Wall Street (no dice.)
  • Refused to seriously discuss the consensus opinion of most neutral economists and experts: That the banking system is insolvent and that the solution is pre-privatization.
  • Given Congressional testimony in which his brusque, defensive manner and weak responses have inspired no confidence and served only to make people wonder again why Obama picked him for the job.

and, most importantly, Tim Geithner has:
  • Refused to revisit or defend his almost certainly inaccurate view that this crisis is merely a temporary price decline caused by a lack of liquidity, rather than a collapse of a debt-driven economy. You can't cure the patient if you're treating the wrong problem.

With a few years of seasoning in a normal environment, Tim Geithner might turn out to be a fine Treasury Secretary. But this isn't a normal environment, and we don't have a few years. The engines of the US economy just quit. We're losing altitude rapidly. And the co-pilot flying the plane clearly doesn't know what to do. So it's time for the captain to take over again, before Geithner takes him and the rest of us down with him.

Obama's economic saviour savaged as Keating lets rip
When Barack Obama announced his champion to rescue the world from economic ruin, it was the first time most Americans had ever heard the name Tim Geithner. The initial impression was good. The stockmarket surged and the pundits swooned. "Exactly a decade ago, he was Uncle Sam's golden-boy emissary sent into the stormy centre of what was then the world's worst financial crisis [the Asian crisis]," reported The New York Post. The paper gushed: "Just 36 at the time, he'd been raised in Asia and knew the culture so intimately he scored successes and won confidences that other diplomats couldn't match. Geithner earned widespread plaudits for pulling together quarrelling Asian finance ministers into a $US200 billion rescue of their economies." "A fantastic choice," said a Bank of Tokyo-Mitsubishi analyst, Chris Rupkey, as the Dow rose by nearly 6 per cent. Even one of Obama's political rivals, the hard-bitten Republican senator Richard Shelby, agreed Geithner was "up to the challenge".

If anyone in the US media had thought to ask a former Australian prime minister for his assessment, they would have heard a different view. And they would not have been so surprised at Geithner's performance since. In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis." In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription. Geithner thought Asia's problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts.

The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment. But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans - Thailand, South Korea and Indonesia - all had sound public finances. The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind. But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.

Keating continued: "Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power." Exactly who was the "gigantic fool"? It was, obviously, the man who wrote the program, Geithner, although Keating is prepared to put the then managing director of the IMF, the Frenchman Michel Camdessus, in the same category. Worse, Keating argued, Geithner's misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: "The IMF is the gun that can't shoot straight. They've been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose."

China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen. Keating continued: "This has all been noted inside the State Council of China and by the Politburo. And it's one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive reserves. "These reserves are so large at $US2 trillion as to equal $US2000 for every Chinese person, and when your consider that the average income of Chinese people is $US4000 to $US5000, it's 50 per cent of their annual income. It's a huge thing for a developing country to not spend its wealth on its own development."

Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn't think so: "After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money." And Asian capitals know that they have no real influence over the IMF - while European governments enjoy 40 per cent of the voting power on the IMF, Japan, China and the rest of east Asia put together have only about 16 per cent. This is an artefact of the immediate postwar power structure, when the IMF was set up. Keating urges that the fund should be decapitated, with control passing to the governments of the Group of 20 countries whose leaders are to meet in London on April 2. The summit, which is to include China, India and Indonesia as well as Australia, is meeting to consider solutions to the global crisis.

As for The New York Post's claim that Geithner was the hero who cajoled those quarrelsome Asians into agreeing to a $US200 billion rescue, the key fact burned into the minds of Asian elites is that the US was deaf to requests for funds. Washington did not contribute a cent of its own money to any of the emergency packages. Japan and Australia were the only nations that made loans to all three of the stricken Asian countries. Keating went on to argue that, by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy. China invested most of its reserves in US debt markets.

Keating again: "So we have this massive recycling of funds into the system by [the former US Federal Reserve chairman Alan] Greenspan's monetary policy so even if you are greedy Dick Fuld [the former head of the collapsed investment bank Lehman Brothers] or you are hopeless Charles Prince at Citibank, you're being told there's an endless supply of money at a low interest rate and no inflation. So of course the system geared up to spend it. "That is the fundamental cause of the problem - the imbalance is the fundamental cause." If Keating's opinion of Geithner had circulated in the US, the Americans would not have been so surprised and disappointed with their new Treasury Secretary. They quickly learned that he had failed to pay $43,000 in taxes owing.

Then, when he announced his much-anticipated plan to rescue the US banking system, share prices slumped by 4 per cent immediately and a new round of weakness in the financial sector began. The pundits turned savagely against him: "So much for the saviour-based economy," wrote Maureen Dowd of The New York Times. Senator Shelby changed his mind: "Aggravating economic problems by contributing to marketplace uncertainty about what steps the Government will take - is that what this is?" he fumed. US bank stocks weakened so much that nationalisation seems to be the only remaining option to put them quickly out of their misery. Australia's banks, by contrast, are strong, said Keating, because of his decision as Treasurer to create the "Four Pillars" policy.

This requires that the four big banks remain separate, barred from taking each other over. This prevented them "cannibalising each other", in Keating's words. As protected species, they had no need to mount risky takeovers to bulk themselves up defensively. Their strength certainly wasn't due to the brilliance of their managers, whom Keating described as "counterhopping clerks" who had managed to work their way up the bank hierarchies. A further source of the soundness of the Australian banks, he said, was that they had learned well the lessons of risky speculative lending as a result of "the recession we truly did have to have". In sum, Tim Geithner is a gigantic fool, the IMF the gun that can't shoot straight, Alan Greenspan a bungler. The big US banks were run by the greedy and the hopeless, the Australian banks by counterhopping clerks. It's a world of many villains. And only one hero.

Deleveraging still far from over: Fed's Dudley
The U.S. Federal Reserve is prepared to do whatever it takes to keep markets working, but there is more pain ahead as deleveraging is still "far from complete", a top Fed official said on Friday. "I don't want to give you the impression that all will be well soon, that seems unlikely," New York Federal Reserve Bank President William Dudley said in a speech to the Council on Foreign Relations. "It will take time for the deleveraging process to come to an end and, as the recent employment data have underscored, the economy has considerable momentum to the downside."

"The Federal Reserve is prepared to do whatever it takes, within the bounds of its legal authority, to keep markets working and credit available and affordable," said Dudley, who is a voting member on the Fed's policy-setting committee. Answering questions from the audience after his speech, Dudley said there was no "magical number" at which the Fed's balance sheet would become too large. But, he said, buying long-term Treasury securities might not be the best step for the central bank to take at this time. "Judging from the Fed's action, the Fed has judged buying long-term Treasuries is not the most efficient means of easing financial market conditions," he said.

Asked about the looming supply of U.S. debt to fund the government's economic rescue programs, he said there was still "plenty of appetite" for U.S. debt both at home and abroad, noting the global nature of the crisis. "If not the U.S., where else?" he said. Dudley also addressed the lessons to be drawn from the financial crisis, in a week in which the government bailout for insurer American International Group was revised. "If large systematically important institutions are indeed too big to fail then there needs to be an explicit quid pro quo for this," he said. "Important institutions cannot be allowed to stay outside in the sun during good times but be allowed to come inside the regulatory net when it is raining."

He said ad hoc responses to tackling the crisis "increases uncertainty and reduces policy-maker credibility." He also called for a systemic regulator "that has both the responsibility and the powers to look across the entire financial system, both depository institutions and the capital markets." In response to a question from the audience, he said it was up to Congress to decide who this systemic regulator would be. Dudley, who before being promoted to the top job at the New York Fed was head of the bank's markets group, said a number of the Federal Reserve's emergency initiatives including the Commercial Paper Funding Facility (CPFF) and the Term Securities Lending Facility (TSLF) have made a difference.

"The areas where the Federal Reserve and Federal governments have responded in force are doing somewhat better," he said. "Banks and dealers have plenty of access to liquidity." The Fed on Tuesday laid out plans for a program, known as the Term Asset-Backed Securities Loan Facility (TALF), to spur consumer lending, in a program that could grow to $1 trillion. Dudley said the next version of the program would broaden the TALF into new asset classes such as commercial mortgage backed Securites (CMBS). "In principle," he said, the TALF "could be applied to other distressed asset classes, it could move down the credit spectrum to lower-rated tranches and it could be used to fund older vintage assets."

He said the stress testing of banks should also help. Banks should end up with sufficient capital to weather an adverse environment and investors should regain confidence that the banking system will remain resilient, Dudley said. He said the government is committed to supplying whatever capital is needed to "ensure that all the major banks remain viable." The Public Private Investment Fund, which would buy illiquid assets, should help put a floor under the prices of these assets, Dudley said.

'Run on UK' sees foreign investors pull $1 trillion out of the City
A silent $1 trillion "Run on Britain" by foreign investors was revealed yesterday in the latest statistical releases from the Bank of England. The external liabilities of banks operating in the UK – that is monies held in the UK on behalf of foreign investors – fell by $1 trillion (£700bn) between the spring and the end of 2008, representing a huge loss of funds and of confidence in the City of London. Some $597.5bn was lost to the banks in the last quarter of last year alone, after a modest positive inflow in the summer, but a massive $682.5bn haemorrhaged in the second quarter of 2008 – a record. About 15 per cent of the monies held by foreigners in the UK were withdrawn over the period, leaving about $6 trillion. This is by far the largest withdrawal of foreign funds from the UK in recent decades – about 10 times what might flow out during a "normal" quarter.

The revelation will fuel fears that the UK's reputation as a safe place to hold funds is being fatally comp-romised by the acute crisis in the banking system and a general trend to financial protectionism internat- ionally. This week, Lloyds became the latest bank to approach the Government for more assistance. A deal was agreed last night for the Government to insure about £260bn of assets in return for a stake of up to 75 per cent in the bank. The slide in sterling – it has shed a quarter of its value since mid-2007 – has been both cause and effect of the run on London, seemingly becoming a self-fulfilling phenomenon. The danger is that the heavy depreciation of the pound could become a rout if confidence completely evaporates.

Colin Ellis, an economist at Daiwa Securities, commented: "The outflow of overseas banks' UK holdings is not surprising – indeed foreign investors in general will still be smarting from the sharp fall in the exchange rate last year, as many UK liabilities are priced in sterling terms. That raises the question of what could possibly tempt overseas investors to return to the UK. Further heavy outflows of funds are probably a given." The Bank of England said that there had been a large fall in deposits from the United States, Switzerland, offshore centres such as Jersey and the Cayman Islands, and from Russia. Paranoia that the UK could follow Iceland into effective national insolvency and jibes about "Reykjavik on Thames" will find an unwelcome substantiation in these statistics – which also show that stricken British banks are having to repatriate similar sums back to Britain.

This is scant consolation for the authorities, however, as it means the UK and sterling are, like some emerging markets and currencies, suffering from a flight of capital. By contrast some financial centres and currencies – notably the US dollar and the Swiss franc – are enjoying a boost as "safe havens" in a troubled world. The sudden international trend towards financial deglobalisation and the flight of money to "home" bases has nonetheless been dramatic. The Prime Minister has already warned about this drift to "financial protectionism" – even though UK banks brought back almost $600bn in the last months of 2008, as they attempted to repair fragile balance sheets.

Mr Ellis added: "These data are consistent with UK banks reducing their overseas holdings, at the same time as overseas banks scale back their presence in the UK. That is not surprising, given that governments around the world are having to prop up their banking sectors, and in turn demanding that national institutions focus on domestic markets. But it does run the risk of being financial protectionism by the back door." Investment from the West into developing countries has fallen from the level of about $1 trillion a year seen earlier this decade to about $150bn last year. Economies in eastern Europe such as Hungary and the Baltic republics, some in Asia such as Pakistan and developed nations such as Iceland have been severely hit by the collapse in foreign investment. Like Iceland, the UK has an unusually large banking sector in relation to her national income, with liabilities four times GDP. Should the UK taxpayer have to assume these debts it will represent, in relation to GDP, about double the national debt the nation bore at the end of the Second World War, a near unsustainable burden.

The Market Is Already Solving The Housing And Banking Crises
While Obama's team desperately cooks up one flawed plan after another to save the banking and housing systems, it's worth noting that the private market is already doing it.
  • The private market's solution does all the things the government wants its bailouts to do:
    • It keeps homeowners in their homes
    • It gets crap assets off bank balance sheets
    • It gets money flowing through the economy again.

  • The private market's solution also has several advantages that the government's bailouts do not:
    • It is morally fair
    • It doesn't blow hundreds of billions of taxpayer dollars
    • It recognizes and accepts the banks' massive losses
    • It removes the need for the government to micromanage zombie banks
    • It places the responsibility and pain of those losses on the ones who should bear them: The people who made the dumb-ass loans in the first place.
    • It doesn't so infuriate the Great Unbailed-Out Majority that everyone hates everybody.

What is this miraculous solution that has so far eluded the best and the brightest in two presidential administrations? 
  1. The government does what it is supposed to do: Seize, restructure, and sell off insolvent banks.
  2. The private sector does what it is supposed to do: Direct capital toward promising opportunities.

Today's example: PennyMac.  PennyMac was started by Stanford Kurland, the No. 2 at Countrywide. (Leave that irony aside for a moment). PennyMac buys up mortgages that were previously held by failed banks like IndyMac. It buys them at, say, 30 cents on the dollar. PennyMac then calls up the homeowner paying the mortgage who is about to be evicted, "How would you like a 50% cut in your mortgage payment?" The overjoyed homeowner gets to keep his house.  PennyMac and its shareholders feast on the spread between 30 cents and 50 cents.

And who gets hosed? The shareholders and bondholders of IndyMac. As they should. Because they were the ones who made the dumb decisions to invest in and lend money to IndyMac in the first place. And where did PennyMac get the money to buy those IndyMac assets? In this case, from Blackstone. A private-market investor. But it doesn't really matter where PennyMac's particular money came from--because there are dozens of Blackstones waiting on the sidelines to invest in dozens of other PennyMacs. Why? Because, unlike Shitigroup and our other legacy albatrosses, PennyMacs are good investments.  (And if, by some miracle, Tim Geithner proves to be right about this also being a liquidity crisis and NO private market investors have money to invest in PennyMacs, then maybe the taxpayers can actually be put into a good investment for once).

Yes, it's that simple. There is most definitely a role for government in the banking and housing crises: The FDIC needs to keep forcing banks to mark their assets to market, seize the ones that are insolvent, and sell off their assets to companies like PennyMac. That has been the government's job all along. It just needs to keep doing it, and the system will work.

A 'Bankrupt' Financial System
Last week the House of Representatives postponed a vote on HR 200, "Helping Families Save Their Homes in Bankruptcy Act of 2009." If enacted, this legislation would allow as many as 1,200,000 homeowners to avoid foreclosure and save their homes. But the financial crisis continues. The genesis of the crisis is that the greed and stupidity of the banking and credit card industry ran wild without proper regulations. Nationalizing the banks has been suggested as a solution, but the negative aspects of a national banking bureaucracy weigh against this solution and render it a last resort. Savings and loan associations, established in 1932, provided the means for more Americans to own their own homes than at any previous time in our history. Deposits were insured under federal law. Then congressional enactments and deregulation beginning in 1980 dismembered the associations and swept their business into the hands of greedy banks.

Re-establishment of these institutions would provide a means for home ownership through conventional 20-year fixed-rate mortgages. The savings and loan industry did have a problem, though, with depositors' right to withdraw their savings at any time. But using the associations as a vehicle for depositing 401(k) and IRA accounts--which are long-term deposits--would cure the short-term deposit problem. And it would provide individual retirement funds a safe depository and a satisfactory rate of return, while at the same time helping the housing industry and home buyers. In days of yore, the 3-6-3 banker was one of the wealthiest individuals in town. He lived in a fine home, drove an expensive car, paid you 3% interest on your savings, charged you 6% interest on your loans and was on the golf course at his country club each afternoon at 3 p.m.

Old time 3-6-3 bankers underwrote loans. They evaluated the ability of the borrower to repay and essentially made loans that were repaid, assuring their profits, their good lifestyle and the success of their borrowers. Sadly, the banking and credit card industry was permitted to create a new class of indentured servants out of our working class. With the government looking the other way, loan sharking became institutionalized in the U.S. On the fraudulent representation that they are democratizing credit, banks are charging interest rates vastly beyond the recognized 2% time value of money. And credit card companies, owned by the banks, are charging 29% and 33% interest. While the banks claim they must do this because of increased risk, the higher rates become a self-fulfilling prophecy of failure. Borrowers cannot bear the weight, and loans that might have been repaid at a lower rate go into default.

Imagine: An 18-year-old purchases an iPod and accessories on a credit card for $360. The buyer, who then pays the minimum payment of $10 on time every month at 33% interest until he or she is 65 years old, will at that point have paid $5,640 in interest--and will still owe the original $360.

Federal Deposit Insurance Corp. Chair Sheila Bair has put forth some excellent ideas, but they aren't yet being implemented by banks and loan servicers. They would be implemented, however, if Congress will enact them as law rather than hope these institutions will adopt them voluntarily. For it is Congress that should legislate limits on home mortgage loans and business loans. Congress should codify usury and limit interest rates to about 6% for individuals and 15% for business and commercial loans. Further, there should be a law prohibiting the unsolicited offers of pre-approved credit via mass mailings to persons of unknown financial ability, including my deceased father-in-law, my two-year-old granddaughter and my friend's dog. It would only benefit an industry that has become more concerned with market share and stock prices on Wall Street than with the business in which they are engaged and the services they render.

The U.S. has led the world when it comes to reorganizing ailing businesses under Chapter 11 bankruptcy law. Until a few months ago, General Electric Capital provided more than half the lending nationwide for post-petition and exit financing in Chapter 11 cases. Abruptly, though, GE stopped lending. The result? Many businesses capable of reorganization are being sold or liquidated rather that reorganized, with attendant loss of jobs and goods and services for the economy. But the government is now making student loans directly to students, bypassing the banks. The same should be done for the businesses in Chapter 11 bankruptcy cases. This type of lending obtains primary or super-priority status over assets and need not be made without reasonable expectation of repayment in full. If made from stimulus funds, taxpayers could get back all their money plus a modest profit, and thousands of businesses and hundreds of thousands of jobs could be saved. This is the time for Congress to put aside partisanship and act together to ameliorate the financial crisis.

Continuing Job Losses May Signal Broad Economic Shift
Another 651,000 jobs disappeared from the American economy in February, the government reported Friday, as the unemployment rate soared to 8.1 percent — its highest level since 1983. The latest grim scorecard of contraction in the American workplace largely destroyed what hopes remained for an economic recovery in the first half of this year, and added to a growing sense that 2009 is probably a lost cause. Most economists now assume that the American fortunes will not improve before near the end of the year, as the Obama administration’s $787 billion emergency spending program begins to wash through the economy.
"The current pace of decline is breathtaking," said Robert Barbera, chief economist at the research and trading firm ITG. "We are now falling at a near record rate in the postwar period and there’s been no change in the violent downward trajectory."

Indeed, the monthly snapshot of the national employment picture worsened an already abysmal picture as the government revised upward the number of jobs lost in December and January. The economy has now lost at least 650,000 jobs for three consecutive months, the worst decline in percentage terms over that length of time since 1975. Since the recession began, the economy has eliminated roughly 4.4 million jobs, and more than half of those positions — some 2.6 million — disappeared in the last four months. The acceleration has convinced some economists that, far from an ordinary downturn after which jobs will return, the contraction under way reflects a fundamental restructuring of the American economy. In crucial industries — particularly manufacturing, financial services and retail — many companies have opted to abandon whole areas of business.

"These jobs aren’t coming back," said John E. Silvia, chief economist at Wachovia in Charlotte. "A lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don’t want to be in their businesses." For American policy makers, such a reality poses fundamental challenges to the traditional response to hard times. For decades, the government has reacted to economic downturns by handing out temporary unemployment insurance checks, relying upon the resumption of economic growth to deliver needed jobs. This time, argues Mr. Silvia, the government needs to put a much greater emphasis on retraining workers for careers in other industries.

In the auto industry, for example annual American car sales have dropped from some 17 million a year a few years ago to 9 million now. Even if sales increase to 10 or 12 million, that still leaves a lot of unneeded factories. "That’s a lot of workers that are not coming back," Mr. Silvia said. "That’s a lot of steel, a lot of rubber, a lot of suppliers that are not coming back. It’s really challenging to us as a society." President Obama responded to the figures by declaring that "this country has never responded to a crisis by sitting on the sidelines and hoping for the best" and asserting that government has a huge role to play in bringing out the best in the American people. "I know that throughout our history we have met every great challenge with bold action and big ideas," he told police academy graduates in Columbus, Ohio, on Friday. "That’s what’s fueled a shared and lasting prosperity."

Mr. Obama cited the unemployment figures as further evidence that those who opposed "the very notion that government has a role in ending the cycle of job loss at the heart of this recession" are on the wrong side of history. (The president’s stimulus package was approved by the House with no support from minority Republicans, whose leader, Representative John A. Boehner, is from Ohio.) In February, another 168,000 manufacturing jobs were eliminated, bringing losses over the last year to 1.2 million. In Michigan, where the troubles of the auto industry have been particularly traumatic, the unemployment rate is at 10.6 percent, the highest of any state.

"The people who do what I do in the Detroit area are a dime a dozen," said Kim Allgeyer, 46, a machine toolmaker in Westland, Mich., who was laid off in January from a company that makes manufacturing assembly lines for the Detroit automakers. Since then, he has failed to find another full-time job, subsisting on day labor and one weeklong stint for contractors. He is thinking of moving to Louisiana or Mississippi to seek work as a shipbuilder. "Who’s going to put me to work?" he asked. "Where’s the work at? It’s just a great big black hole." Much the same can be said for financial services, which gave up another 44,000 jobs in February. During the housing boom, banks hired tens of thousands of well-compensated traders, analysts and marketers to sell mortgage-backed securities and other exotic flavors of investments. That industry is unlikely to return to anything close to its former shape.

Retailers are shuttering stores as the era of easy money fueled by rising house prices and abundant credit gives way to a new period in which millions of households are being forced to confine their spending to their paychecks, limiting their trips to the mall. The economy lost 39,500 retail jobs in February, and has eliminated more than 500,000 in the last year. The United States has been neglecting job training programs for decades, argues Andrew Stettner, deputy director of the National Employment Law Project in New York. In current dollars, the nation devoted the equivalent of $20 billion a year on job training in 1979, while spending only $6 billion last year. The stimulus spending bill includes $4.5 billion in additional monies for job training. But under current programs, many of those eligible for training are given vouchers that cover only a semester or two at community colleges, while careers in growth industries like biotechnology and health care typically require two-year degree programs.

"We have to seriously look at fundamentally rebuilding the economy," Mr. Stettner said. "You’ve got to use this moment to retrain for jobs." Friday’s report reinforced the degree to which the economy is being assailed at once by panic in the financial system, falling household spending power and plunging real estate prices, with growing numbers of companies resorting to wholesale layoffs after months of merely declining to hire. "There’s been no place to hide," said Stuart Hoffman, chief economist at PNC Financial in Pittsburgh. "Everybody in every industry has lost jobs or is feeling insecure about whether they’re going to keep their jobs or how their company’s going to do."

Some economists suggested the substantial increase in layoffs reflected the anxiety that has gripped the financial system since last fall when major Wall Street institutions failed, notably the giant investment bank Lehman Brothers. Borrowing costs have spiked for American companies, making even healthy businesses reluctant to expand and hire. Perhaps even more decisive, the collapse last fall has left many companies spooked. "There was a huge increase in uncertainty and a huge hit to confidence which caused a large rethinking among businesses," said Ethan Harris, co-head of United States economics research. "That caused a big downshift in employment."

In similar crises, like the stock market crash of 1987 and the near collapse of the enormous hedge fund Long Term Capital Management in 1998, dysfunction continued to grip markets for about six months, Mr. Harris said, suggesting that this episode may be nearing its end. But history also shows that when fear lifts, the economy returns not to normalcy but to wherever it was when the crisis began, Mr. Harris said. That means that even if order is restored to the financial system, the economy will still be staring at a recession. And order cannot be restored, many economists say, until the Obama administration creates and executes a credible plan to remove the bad loans choking the balance sheets of financial institutions. "The 800-pound gorilla is whether we face up to the bad loans in the financial system," said Alan Levenson, chief economist at the trading firm T. Rowe Price in Baltimore.

Scholes Advises 'Blow Up' Over-the-Counter Contracts
Myron Scholes, the Nobel prize- winning economist who helped invent a model for pricing options, said regulators need to "blow up or burn" over-the-counter derivative trading markets to help solve the financial crisis. The markets have stopped functioning and are failing to provide pricing signals, Scholes, 67, said today at a panel discussion at New York University’s Stern School of Business. Participants need a way to exit transactions and get a "fresh start," he said. The "solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and let us start over," he said, referring to credit-default swaps and other complex securities that are traded off exchanges. "One way to do that, through the auspices of regulators or the banking commissioners, is to try to close all contracts at mid-market prices."

Scholes also recommended moving the trading of credit- default swaps, asset-backed securities and mortgage-backed securities to exchanges to allow for "a correct repricing" of the assets. The securities are currently traded between banks and investors, without any price disclosure on exchanges. Scholes served almost eight years on the board of CME Group Inc., the world’s largest futures market, until his term expired in May, said Allan Schoenberg, a CME spokesman. CME operates the Chicago Mercantile Exchange, Chicago Board of Trade and New York Mercantile Exchange. He was a partner in Long-Term Capital Management LP, the hedge fund whose $4 billion loss in 1998 set off a near-panic in financial markets and prompted the Federal Reserve to orchestrate a bailout by 14 lenders.

A total of $531 trillion in outstanding derivatives contracts traded over-the-counter as of June, according to the International Swaps and Derivatives Association. They were mostly interest-rate swaps, but also included CDS and equity derivatives. "Take the pricing mechanism from the desks in banks, which have made a huge amount of profits over the last number of years, and facilitate price discovery," Scholes said. Scholes’ comments generated opposition from the International Swaps and Derivatives Association, the industry group that sets trading standards for the over-the-counter derivatives market. ISDA has more than 800 members, including dealers and funds that trade in the market. "Whatever your views on derivatives or credit-default swaps and the financial crisis, the notion that you would, as he said, blow up, the business in that way is just misguided," said Robert Pickel, chief executive officer of ISDA. "I don’t know what people are thinking when they say those kinds of things."

Scholes won the Nobel Prize for economics in 1997 along with Fischer Black and Robert Merton for their Black-Scholes model of pricing options, contracts that give the buyer the right, but not the obligation, to purchase a security or commodity at a later date for a specified price. He is now chairman of Platinum Grove Asset Management LP in Rye Brook, New York. The hedge fund was forced in November to freeze investor withdrawals after a surge in redemptions. Among other recommendations, Scholes urged changes to the accounting rules to give better disclosure on risks, said that banks should focus on their return on assets instead of return on equity, and said central bankers shouldn’t try to quell market volatility, which provides a natural brake on risk- taking.

General Motors Drives Back In Time
Automakers' shares fell to 1933 level despite firm's aversion to bankruptcy. Investors aren't buying General Motors' assurances of a revival any more than they're buying its cars. General Motors shares extended their downslide Friday hitting a new multi-year low, this time to levels not seen in 75 years, despite insisting it has not changed its position on bankruptcy. The automaker prefers to restructure out of court, and it said bankruptcy would result in a dramatic deterioration of revenue amid the worst auto sales environment in decades. GM shares lost 41 cents, or 22.0%, to close the week at $1.45, but had fallen as low as $1.27 in morning trading. The low point matched a level set May 4, 1933, according to the Center for Research in Security Prices at the University of Chicago. That Depression-era price is adjusted for splits and other changes.

"As a prudent business measure, the company has analyzed various bankruptcy scenarios," GM said Friday. "However, the company firmly believes an in-court restructuring would carry with it tremendous costs and risks, the most significant being a dramatic deterioration of revenue due to lost sales." An article in the Wall Street Journal on Friday quoted an unidentified source as saying GM executives were becoming "more open" to the idea of a speedy bankruptcy reorganization financed by the government. GM did not say Friday that it was responding to that article, but it also didn't say it wasn't. A White House spokeswoman said President Barack Obama's administration was working "around the clock" to form an approach to the challenges facing General Motors.

Even without a bankruptcy filing, a government bailout, may prove so dilutive to the company’s shares to leave them practically worthless, though it would be a more likely way for current management to remain in place. GM's rival Ford Motor managed to avoid federal aid, and is planning to restructure its debt to steady its finances. GM and rival Chrysler have been kept afloat with emergency government aid since the start of the year and have requested a new round of funding from the autos panel chaired by U.S. Treasury Secretary Timothy Geithner and White House economic adviser Larry Summers. The automakers, suffering from years of overcapacity and competition from non-American companies unburdened by costly labor contracts, have been reeling from the declining economy that has its roots in the subprime mortgage crisis.

On Thursday, a regulatory filing revealed that GM’s auditor has "substantial doubt" the disturbed automaker can stay in business. While the report did not come as a surprise, auditors attributed the warning to GM’s recurring losses from operations, stockholders' deficit and an inability to generate enough cash to meet its obligations. The federal government has been feeding the company cash to keep it from failing and adding to America's unemployment problem. GM recently received $13.4 billion in federal loans, and it's hoping for a total of $30.0 billion. During the past three years, it has piled up $82.0 billion in losses, including $30.9 billion in 2008.

US admits rising automaker uncertainty
Barack Obama’s administration acknowledged deepening uncertainty on Friday over the future of the ailing US car industry. Meanwhile, General Motors tried to damp fears that it was heading for bankruptcy. The White House said it was still considering a request from GM and Chrysler for billions of dollars of more federal aid but refused to rule out bankruptcy for the companies. "Whether the auto industry as we have it now is exactly what we have in a year is something I think is going to be determined by a lot of different factors," said Robert Gibbs, White House press secretary.

GM on Friday sought to push back against reports that it had become more open to filing for bankruptcy, insisting that "restructuring the business out of court remains the best solution". Doubts about GM’s future were heightened on Thursday when the company acknowledged in a regulatory filing that it might not be able to avoid bankruptcy even with more government support. But, in a statement on Friday, GM said it remained committed to the recovery plan it announced last month and warned that restructuring while in bankruptcy "would carry with it tremendous costs and risks".

The White House reiterated the president’s desire to help the industry survive but conceded that declining car sales were making that task more difficult. "The best way to get the auto industry back up on its feet and selling cars again is to get the overall economy going," said Mr Gibbs. The administration re-cently set up a car industry taskforce to oversee government aid, led by Tim Geithner, Treasury secretary, and Lawrence Summers, chief White House economic adviser. Mr Gibbs said the taskforce was still reviewing restructuring plans submitted by GM and Chrysler and "figuring out how to be the best partner in what’s next for the auto industry".

The administration is desperate to avoid the collapse of the car industry – still one of the country’s biggest employers – as it battles to control the economic crisis. But the White Hose has made clear it will not provide endless support without a realistic path to long-term viability. Nancy Pelosi, speaker of the House of Representatives, told reporters this week the administration should offer federal money "as a lifeline, not life support". The administration’s taskforce has canvassed facts and opinions from a range of interested parties including dealers, the United Auto Workers’ union, parts suppliers and bondholders.

The head of Toyota’s North American operations, Jim Lentz, will meet the group next Wednesday. Sergio Marchionne, Fiat chief, met the taskforce to answer questions about Fiat’s proposed part-ownership of Chrysler on Thursday morning. Treasury advisers Ron Bloom and Steven Rattner jointly ran the meeting, which was attended by a handful of other administration officials, according to one insider. The Treasury asked about the credibility, strategy and financial merits of Fiat and Chrysler’s plan, its impact on labour and the environment, and about how control of the venture would be distributed. Government officials were in pure "fact-finding mode", the person said, and they provided little feedback.

Auto Dealers Plead for U.S. Help as Hundreds May Fail in 2009
The National Automobile Dealers Association appealed to President Barack Obama’s car industry task force for help in cutting financing costs for retailers. The 90-minute discussion with U.S. Treasury auto advisers Steven Rattner and Ronald Bloom didn’t elicit any commitment for aid, NADA Chairman John McEleney said yesterday in an interview. The 19,700-member association expects 1,200 U.S. dealers to close this year, he said. "We certainly did not receive a commitment and nor did we expect to," McEleney said. "We had a very helpful discussion. We spent about one-third of our time discussing that topic."

Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers held talks yesterday at the White House to discuss the restructuring of U.S. automakers. U.S. auto sales in February slid to the lowest rate since December 1981, led by a 53 percent plunge for GM as the recession deterred buyers and demand fell for the 16th straight month. The group convened "cabinet-level members of the Presidential Task Force on the Auto Industry to discuss the status of restructuring plans from Chrysler LLC and General Motors Corp.," the Treasury said in an e-mailed statement. Owners of dealerships this week criticized the $1 trillion Term Asset-Backed Securities Loan Facility for failing to meet their most pressing need: financing to buy cars from automakers. Car sellers are complaining they don’t qualify under the program that covers only AAA-rated debt.

Auto dealers use loans from finance companies to buy cars and trucks from manufacturers. Ratings companies have ranked loans to dealers below AAA, meaning the debt can’t be bought by investors with funds from the program. Car dealers of small-to-medium size need financing to support their inventory, which is typically $5 million in vehicles, the NADA chairman said "Our floor traffic is off 40 percent, but our business is off 60 percent to 70 percent because people can’t get financing," said Gordon Stewart, a Detroit-based Chevrolet dealer for 29 years. "I’ve never seen anything like this. I’ve been calling it a depression since last January and it’s only gotten worse." GM, seeking to keep $13.4 billion in U.S. Treasury loans and gain as much as $16.6 million more, said it needs to reduce its dealer ranks to 4,100 in 2014 from 6,246 last year. Chrysler, seeking $5 billion in addition to $4 billion already granted, said only 48 percent of buyers were approved for car loans in January.

U.S. auto sales fell to 13.2 million last year, a 16-year low, and slowed further in the first two months of this year. U.S. auto dealerships closed in record numbers in 2008, with the pace accelerating in the last quarter of the year as the economy collapsed. Chrysler, which hasn’t said how many of its dealers will have to close, said in a Feb. 17 report to the U.S. Treasury that 27 percent of its retailers were "weak" as of December and 74 closed from September to December. Shutdowns totaled 881 last year, with most coming in the fourth quarter, according to a study released Feb. 19 by Detroit- based consultant Urban Science. That was the biggest decline since recordkeeping began in 1991, the firm said. Domestic automakers accounted for 80 percent of the car- dealer closings, Urban Science said. It counted 20,084 U.S. dealers at year end. "A lot of our dealers, if they aren’t losing money, are right on the edge," McEleney said. "It’s really bad." Ford Motor Co., which is not seeking a U.S. bailout, said in a Dec. 2 report to Congress that it estimated it had 3,790 dealers at the end of last year, a drop from 4,396 at the end of 2005.

The Obama administration is "figuring out how to be the best partner in what’s next for the auto industry," White House press secretary Robert Gibbs told reporters traveling today with the president to a Columbus, Ohio, police academy. "Whether the auto industry as what we have is exactly what we have in a year is something I think that is going to be determined by a lot of factors," he said, pointing to recent requests by Toyota Motor Corp. and Honda Motor Co. for aid in Japan. Highlighting concerns, the U.S. unemployment rate surged in February to 8.1 percent, the highest level in more than 25 years, and the economy lost more than 600,000 jobs for a third consecutive month, pointing to further reductions in spending. The U.S. economy has now lost almost 4.4 million jobs since the recession began in December 2007, the biggest employment slump of any economic downturn in the postwar period. "The best way to get the auto industry back up on its feet and selling cars again is to get the overall economy going again," Gibbs said.

Merrill Probe Stymied by Bank of America, New York AG Cuomo Says
Bank of America Corp. is still interfering in his investigation into bonuses given to Merrill Lynch & Co. employees, New York Attorney General Andrew Cuomo told a New York Supreme Court judge. "We respectfully request that the court reject Bank of America’s continued efforts to stymie the attorney general’s investigation," Cuomo said in his letter yesterday. Cuomo is probing a decision by Merrill, which lost $15.8 billion in the fourth quarter, to award $3.6 billion in bonuses in late December, days before Bank of America bought the firm on Jan. 1. Former Merrill Chief Executive Officer John Thain and Bank of America CEO Kenneth Lewis have already testified to Cuomo, and Cuomo has subpoenaed seven of the bonus recipients, a person familiar with the matter said.

Bank of America, the largest U.S. bank by assets, said it offered information on individual Merrill bonuses that Cuomo is seeking. Bank of America won’t comply with Cuomo’s request, even under an agreement to keep it confidential at least temporarily, according to Cuomo. "Bank of America does not believe the attorney general needs the freedom to place private, personal information in the news media in order to conduct his investigation," Scott Silvestri, a spokesman for the Charlotte, North Carolina-based bank, said in an e-mail. The dispute with Cuomo widened as Merrill said it uncovered an "irregularity" during a review of its trading operations in London. The New York Times said risk officers discovered three weeks ago that a London currency trader who had recorded a trading profit of $120 million for the fourth quarter may instead have lost a large amount.

The newspaper identified the trader as Alexis Stenfors, 38, and said he described the matter as a "misunderstanding." Calls from Bloomberg News to his office in London and a mobile phone weren’t answered. Stenfors previously worked at Calyon, the investment-banking unit of France’s Credit Agricole SA, according to the U.K. Financial Services Authority’s register. He joined Merrill Lynch in 2005, and is listed as being "inactive" since Feb. 25. A spokeswoman for Calyon couldn’t immediately comment. In the Cuomo probe, Bank of America is seeking to expand a temporary confidentiality order on Thain’s testimony to include all witnesses in the investigation, including Greg Fleming, Merrill’s former head of investment banking, Cuomo said. Fleming, who left the bank in early January to take a post at Yale University, testified this week, the attorney general said in the letter.

"Bank of America is treating this matter as a commercial litigation between private parties. It is not," Cuomo said. "Bank of America is seeking to prevent witnesses from testifying and is seeking to require advance notice of the attorney general’s investigative steps, which it is not entitled to do." The Wall Street Journal on Wednesday published the names of a number of the top executives and their 2008 earnings, citing documents and people familiar with Merrill’s compensation. Eleven top executives were paid more than $10 million in cash and stock last year, the Journal said. The newspaper identified the seven bonus recipients as Andrea Orcel, David Sobotka, Peter Kraus, Thomas Montag, David Gu, David Goodman and Fares Noujaim.

A person familiar with Cuomo’s investigation said that seven bonus recipients were subpoenaed in connection with the probe. The person identified the people as Orcel, Sobotka, Kraus, Montag, Gu, Goodman and Noujaim. The information Cuomo seeks would provide a "road map" showing which business lines Bank of America considers most valuable and to assist rivals seeking to poach talented staff, the bank said in its court filings. Cuomo’s letter said House Financial Services Committee Chairman Barney Frank will soon demand Bank of America make individual bonus information public. The bank has received $45 billion from the Treasury’s bank recapitalization program. Cuomo said in a Feb. 10 letter that Merrill "secretly and prematurely" awarded the bonuses with Bank of America’s "apparent complicity." After the top four recipients received a total of $121 million, the next four received a combined $62 million and the next six a combined $66 million, Cuomo said. Bank of America had no legal standing to block the bonuses, Lewis has said.

Frank Seeking Prosecutions for Financial Wrongdoing
U.S. House Financial Services Committee Chairman Barney Frank said he wants to see people prosecuted for wrongdoing related to the financial crisis as lawmakers overhaul regulation of Wall Street. Frank will call on attorneys general, bank regulators and officials from the U.S. Securities and Exchange Commission to outline plans for prosecuting and recovering funds from those responsible for the crisis, he said today at a news conference in Washington. "What are your plans to prosecute those people whose irresponsible and, in some cases, criminal actions helped bring about this crisis?" said Frank, a Massachusetts Democrat.

Congress is planning the biggest overhaul of U.S. financial- industry regulation since the 1930s after companies reported almost $1.2 trillion in writedowns and credit losses since the subprime mortgage market collapsed in 2007. Frank said his committee will examine whether law enforcement agencies have sufficient tools to fight fraud, and will advance legislation aimed at curbing abuses in credit-card and mortgage lending. "I do want all these people with enforcement powers, state and federal, in that room outlining what their plans are to do these recoveries," Frank said about the March 20 hearing. "We want to know what proposals there are to recover funds from people who caused this loss of taxpayer dollars and investor dollars," Frank said.

Frank, 68, said he wants to know whether agencies have enough staff to investigate wrongdoing. Frank "has the bully pulpit and it sounds like what he’s trying to do is to make sure that each of these enforcement agencies are doing everything they can do in their power to bring people to the bar of justice," Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University, said today in a telephone interview. Frank said he’ll pursue reforms of U.S. rules overseeing Wall Street. "We have got to empower some entities that don’t now have it to restrain risk-taking that is irresponsible," Frank said, adding that the Federal Reserve is in the "best capacity" to serve this role.

The systemic-risk regulator should have authority to limit securitization, unwind failed institutions that aren’t insured banks, curtail excessive leverage and reform executive pay rules to curb "perverse" incentives that promote risk-taking. "Too much executive compensation took the form of people making extra money if a bet paid off and losing nothing if the bet disastrously failed," Frank said. Frank said he plans to advance to the House floor a "tougher version" of legislation that stalled in Congress last year, to curb "irresponsible" subprime-mortgage lending. Securitization, or packaging loans and selling them to investors, "was a large part of the problem," he said. He plans to "make it illegal for anybody to securitize 100 percent of anything."

Ambrose Evans-Pritchard on Gold

ECB cuts rates to record 1.5pc, mulls radical action
The European Central Bank has cut interest rates a half point to an historic low of 1.5pc and opened the door for extreme measures akin to the quantitative easing (QE) underway in America, Britain, and Japan."I don't exclude anything," said Jean-Claude Trichet, the ECB's president. "We did not decide that this is the lowest level. We are studying additional non-standard measures." Bond yields plummeted across the eurozone as the markets instantly priced in further monetary loosening. None of the eurozone's sixteen central banks have ever seen interest rates this low. The cut follows a collapse in industrial production over the last five months. The pace of deterioration has been faster than the early 1930s, when falls were mostly stretched over a longer period.

The ECB has torn up its growth forecast for this year and expects an unprecedented contraction 2.7pc for the eurozone. Even this may prove optimistic. Output fell 1.5pc in the fourth quarter and the picture seems to be going from bad to worse. Export orders for German engineering companies fell 47pc in January. Julian Callow from Barclays Capital said the ECB had responded too slowly over recent months as credit tightened. Rates should be "minus 1pc" under a "Taylor Rule" analysis of economic conditions, suggesting the bank is still far behind the curve. "They need to move urgently. The euro area is besieged by sharply rising unemployment. This is going to a scourge over coming years, with the jobless rating rising to a post-War high of 11pc," he said.

The Handelsblatt's "shadow ECB" of economists from across Europe voted for more drastic action. "I can see no reason for delaying rate cuts to the minimum and moving quickly to quantitative easing (QE)" said Erik Nielsen from Goldman Sachs. He slammed ECB hardliners for clinging to "Voodoo" theories. Mr Trichet said the ECB had cut its deposit rate to 0.5pc – bringing down the market Eonia rate in lockstep – and was providing unlimited liquidity to banks. "This is of great importance," he said. The ECB has boosted its balance sheet to €600bn by lending freely but appears deeply reluctant to escalate to QE by purchasing bonds and other assets - although the German and French governors have both hinted at ECB purchases of commercial paper.

Mr Trichet said there is no hurry because "the risks of deflation are very meagre" - though CPI inflation may turn briefly negative by mid-year. Deflation expectations are not becoming embedded, he said. Critics retort that is that once they are embedded, it is already too late to arrest the downward spiral. This is why other central banks are taking pre-emptive steps. The suspicion is that a German led bloc of ECB hawks are dragging their feet in part because QE measures would blur the lines between the bank and the fiscal authorities. This risks opening a can of worms in euroland where there is no single treasury. ECB bond purchases would be tantamount to the creation of an EU debt union. This is a huge political step, and anathema to Berlin.

Retirement plans of millions of Britons at risk after Bank of England 'prints money'
In a mere 24 hours the size of the pension deficits facing some of Britain’s biggest companies has jumped by around £100 billion to a record £390 billion - the equivalent of over £150,000 for every member of a final salary scheme. The increase is a direct result of the Bank’s announcement this week to create £150 billion and pour it directly into the financial system, experts said. The ballooning deficits sharply increase the chance that a swathe of companies shut down their pension schemes - not only for future employees but for those already paying into them.

It sparked further criticism of the authorities for endangering the financial future of Britons’ savers in their efforts to bring the financial crisis to an end. The Government and Bank have already been accused of obliterating the incentive to save by slashing interest rates on savings accounts and visibly attempting to stoke up high inflation in the years to come. The Bank was accused of hammering the final nail into the coffin for Britain’s final salary pension schemes, which have seen their deficits climb in recent years, partly as a result of Gordon Brown’s decision as Chancellor to levy a £6 billion tax raid on pension funds’ dividends. Some 2.5 million workers are currently signed up for these schemes which provide retirees with a guaranteed annual income when they reach the appropriate age.

Having enjoyed a small surplus only a year ago, these funds have also been hit by the fall in the stock market over the past year. However, the effect of the Bank’s scheme has been to increase the deficit between what is in the funds and what is needed to pay out future pensioners by an almost instant £100 billion. Although some expect the deficits to fall in the years ahead as the economy improves, insiders warned that this could be the final straw that persuades companies to shut down these schemes altogether and turn instead to far less generous defined contribution plans. However, experts warned that even these more parsimonious schemes, which 8 million workers are subscribed to, will suffer as a direct result of the Bank’s actions.

The amount these people receive from their pension depends not only on the size of pot they amass over their working life but on the rate of the so-called annuity which provides them an annual income from the moment of retirement. Over 600,000 people are due to retire onto these schemes over the next year. Should annuity rates fall a further percentage point, it will mean the annual pension of someone with a £100,000 pension pot may drop from around £7,000 to £6,000. Experts said anyone retiring in the coming years may face an instant decrease in what they could hope to expect from their pension. Tom McPhail of Hargreaves Lansdowne said: "The sad truth is that pensions savings are going to be what pays the price for these efforts to bail out the economy in the short term. The apparent plan is to try to fix today’s problems at the expense of our children - by paying a shedload of money which will have to be paid back tomorrow.

"It will hammer the final nail in the coffin of final salary schemes, as well as cutting the annuity rates for anyone with a defined contribution set to retire imminently." However, public sector workers, many of whom are on generous final salary schemes, will be unaffected by the increase in deficits, since their pensions are paid by taxpayers rather than cash-pressed companies. The problems stem from the dramatic impact the Bank’s plan has had on Britain’s debt markets. So large is the amount of cash the Bank is creating for its economic rescue package that the prices of all the assets it intends to buy jumped at an unprecedented rate in the hours following Thursday’s announcement.

Unfortunately for pension funds, the amount they are compelled to spend on their pensions over the coming years depends on the interest rates on government debt. These have fallen since Thursday by the biggest amount in history. Meanwhile share prices have continued to fall, further reducing the amount pension funds have already saved in their pots for tomorrow. "This is really bad news for pension funds however you look at it," a senior City analyst said. "This was an unfortunate consequence of what the Bank has done. Pension funds are now facing some extremely unpleasant deficits. Likewise if you are planning to get an annuity in the coming years it will also be lower." Furthermore, the deficits are likely to balloon even higher for as long as the crisis continues, experts added.

UK Treasury, Lloyds agree £260 billion deal for risky assets
Lloyds Banking Group and the Treasury sealed more than a week of fraught negotiations last night with a deal that will see the Government insure about £260bn of risky assets and take an economic stake of up to 75 per cent in the embattled bank. Under the terms of the deal, Lloyds will swap the Government's £4bn of high-cost preference shares for ordinary equity, giving existing shareholders first refusal on the new shares at a slight discount. If investors do not take up the offer, the Government will do so, taking the state's interest in Lloyds from 43 per cent to about 65 per cent.

To pay for the Government's guarantees on Lloyds' assets, the bank will issue non-voting stock, called B shares, taking the state's potential interest in the bank to about 75 per cent. Lloyds, already under pressure from shareholders over its takeover of HBOS, has been battling to stop the Government gaining a majority stake. But the Treasury team has driven a hard bargain over the capital Lloyds should hold against HBOS's stricken assets. The agreement to let shareholders have first refusal on the new stock could help assuage investors and allow Lloyds to argue that their pre-emption rights were not flouted. Lloyds declined to comment last night.

Shareholders reluctantly approved Lloyds' emergency takeover of HBOS, announced in September, but have grown increasingly angry after huge charges on HBOS's corporate loans and investments sent the group to a loss for 2008 with a further loss predicted this year. Lloyds needs the Government's guarantees but has been battling on terms because it would not have needed state capital if it had not bought HBOS in a deal orchestrated by the Prime Minister. Full details of the agreement are due to be announced today.

Lloyds will take a "first loss" on the loans and investments, expected to be similar to the 6 per cent agreed by Royal Bank of Scotland last week, with the Government covering about 10 per cent of any subsequent losses. The Government is insuring the two state-dominated banks' loans to free capital for lending into the sharply slowing economy. Lloyds shares have lost about two-thirds of their value this year on concerns about the HBOS deal. The stock rose 4 per cent to 42p yesterday on hopes that talks with the Treasury would lead to a deal.

IMF: Fifth of Britain's GDP spent so far on bailouts
Alistair Darling has already spent almost a fifth of Britain's GDP on bailing out its shattered banking system – more than any other major economy, according to a grave assessment of the world financial crisis published today by the International Monetary Fund. With G20 finance ministers due to gather in Sussex next Friday for a two-day meeting before the London summit in April, the IMF has totted up the costs of financial bailouts so far. It calculates that the UK has spent as much as 19.8% of its GDP, topping the table of G20 countries. The US, where the investment bank Bear Stearns and the insurer AIG have both been rescued with public finds, has spent just 6.8% of its GDP. Only Norway has come close to the UK, spending 13.8%.

Opposition politicians leapt on the figures as evidence of the economic damage inflicted by the credit crunch. Philip Hammond, the shadow chief secretary to the Treasury, said: "This is a stark illustration of the true cost of Labour's Age of Irresponsibility. Thanks to the failings of the banking regulatory framework that Gordon Brown put in place, we have spent more than twice as much on bailing out the banking system as the United States – and taxpayers are on the hook for billions of pounds as a result." Vince Cable, the Liberal Democrat Treasury spokesman, said: "This is a direct consequence of playing host to international banks. Britain is in an extremely exposed position. These are global banks, but they're not being rescued by the globe."

He argued that instead of focusing on international action on bonuses at the G20 summit, Gordon Brown should be pushing for a forced separation between risky investment banking, and the staid deposit-taking institutions that are essential to the economy. "We have to separate deposits from the very risky global casino." A Treasury spokesman said: "The UK is leading the world in taking action to clean up banks' balance sheets and provide them with greater confidence to increase lending in the economy. As the chancellor has said, the alternative is a failure of the banking system, here and elsewhere, which will make the recession longer and more painful, putting more jobs at risk."

He added that the final cost might be lower if the value of assets owned by the part-nationalised banks bounced back. In a series of discussion papers, the IMF draws an alarming picture of the trail of policy mistakes and complacency that led to the credit crunch, saying: "At the root of market failure was optimism bred by a long period of high growth, low real interest rates and volatility." The crucial lesson world leaders must now learn, it says, is that, "flawed incentives and interconnections in modern financial systems can have huge macro-economic consequences".

It calls for more coherent regulation of financial products, including non-bank institutions such as hedge funds; and better co-ordination between international organisations at the heart of the financial system, including the IMF itself. Its calculations date from 18 February, before the United States' latest bailout for Citigroup and the Treasury's asset-protection scheme for the Royal Bank of Scotland.

Bank of England's King 'Groping in the Dark' as U.K. Prints Money
Bank of England Governor Mervyn King, criticized for his initial response to the credit crisis, is now embarking on one of the biggest risks in British economic history. The central bank on Thursday won authority to print as much as 150 billion pounds ($212 billion) and pump it into an economy facing its worst recession since World War II, after cutting interest rates close to zero. With markets clogged and economic activity shriveling, King can’t be sure the gamble will work. "We’re groping in the dark," said Willem Buiter, a former Bank of England policy maker and now a professor at the London School of Economics. "Ultimately, we’ll know it works if the economy turns around, and that we won’t know for a couple of years."

The risk for King is that the strategy fails, forcing him to create yet more money, or it backfires and fuels inflation. While U.K. officials are at pains to deny similarities with the economic policies of Robert Mugabe’s Zimbabwe, where printing money has fueled hyperinflation, some economists argue that the Bank of England hasn’t much of a choice left. "You have to ask what it would be like if they weren’t doing anything and I suspect a lot worse," said Amit Kara, an economist at UBS AG in London. "But the whole banking system has yet to be fixed, the economy has yet to deliver and credit is not available. It’s all a shot in the dark."

Bond yields fell for a second day on the bank’s announcement. The yield on the U.K. 10-year gilt fell 26 basis points to 3.09 percent as of 10 a.m. in London. Bond yields move inversely to prices. King drew criticism from bankers and economists for waiting a month to extend an emergency funding program following the collapse of Lehman Brothers Holdings Inc. last year. Before Northern Rock Plc faced the first run on a British bank in more than a century in 2007, he told cash-strapped banks that lending them extra funds risked sowing the seeds of the next crisis. Yesterday’s move now puts King ahead of European Central Bank President Jean-Claude Trichet in devising new tools to tackle the economic crisis. Trichet said in Frankfurt yesterday that the ECB still hasn’t decided whether to step up its response and buy securities in the market.

"We don’t know whether quantitative easing works or not, but it’s a good thing to try," said Christopher Allsopp, a former U.K. policy maker. "The amount looks serious, and it needs to be to make sure it has a chance of working. They’re doing what they can." The bank’s purchases may lower long-term gilt yields, reducing benchmark corporate borrowing costs in the process. U.K. 10-year government bond yields fell the most in at least 17 years yesterday on the bank’s announcement. Still, Buiter said that the bank’s focus on buying government bonds with outstanding maturities of five to 25 years won’t help and may raise costs for pension funds, which depend on buying long-term securities.

"This is really quite pointless and in some ways counterproductive," Buiter said. "They could indeed end up hurting pension funds more than helping anything." Policy makers may also have to come up with further measures, said Lena Komileva, an economist at Tullett Prebon in London. "I don’t think it will work," she said. Printing money has become linked with economic mismanagement. In the 1920s, the German government fueled inflation to fund World War I loan repayments and reparations, eroding the authority of the Weimar Republic. Mugabe’s monetary policy has left Zimbabwe with the world’s fastest inflation, last estimated at 231 million percent in July 2008.

Quantitative easing was also tried in Japan in the 1990s, where authorities struggled to stimulate the economy in what became known as the country’s "Lost Decade." King himself has noted how it’s all too easy for central bankers to let prices slip out of control once they start printing money. "Zimbabwe has determined very clearly that if you want a higher inflation rate you could have it," he told reporters in August 2007. With the U.K. slipping deeper into recession, some economists nevertheless say the Bank of England’s policies are bold enough to help turns things around. "Ultimately it has to have an effect," said Matthew Sharratt, an economist at Bank of America Corp. in London. "It’s going to bring an extraordinary amount of stimulus into the pipeline along with all the other measures that have already been taken."

BNP Paribas to Buy 75% of Fortis Bank With Belgian State Guarantee Against Losses
BNP Paribas SA, France’s biggest bank, agreed to acquire Fortis’s former banking units in Belgium and Luxembourg and take a stake in the insurance business after obtaining state guarantees on potential losses. BNP Paribas will buy 75 percent of state-owned Fortis Bank NV and gain control of the Luxembourg banking unit for 2.88 billion euros ($3.64 billion) in stock, the Belgian government said today in a statement. Fortis Bank will then pay 1.38 billion euros in cash for 25 percent of Fortis Insurance Belgium SA. The French bank will become the biggest by deposits in Belgium and Luxembourg, two of Europe’s wealthiest nations, if it wins over Fortis investors. Belgium is seeking to sell the Fortis banking operations after the September collapse of Lehman Brothers Holdings Inc. and the freezing of credit markets triggered state bailouts of Fortis and Dexia SA.

"Given the situation, this is probably as good as it gets," Albert Ploegh, an analyst at ING Wholesale Banking in Amsterdam, said today by telephone. "I don’t think there’s a much better deal to be expected." Under the new agreement, the Belgian government will provide 740 million euros of equity funding to a company created to split off 11.4 billion euros of risky assets into a separate entity. BNP Paribas will contribute 200 million euros to the risky-asset entity and Fortis will provide 760 million euros. Fortis Bank will contribute the remaining 9.7 billion euros in debt funding, backed by a 4.36 billion-euro guarantee from Belgium. The structured-credit investments have been marked down to about 58 percent of par value, Belgian central bank Deputy Governor Luc Coene told reporters in Brussels.

BNP Paribas also obtained a 1.5 billion-euro state guarantee on losses exceeding 3.5 billion euros on the structured-credit holdings that remain within Fortis Bank. Once Belgium’s largest financial-services company, Fortis will emerge from the state- organized breakup as an insurer with the right to potential gains on Belgium’s stake in BNP Paribas. "This solution guarantees the bank’s safety and future," BNP Paribas Chief Executive Officer Baudouin Prot told reporters in Brussels. "And I think this is very important for the Belgian economy at a time when its banking industry is going through a difficult period." Fortis shareholders blocked an earlier agreement to sell units to BNP Paribas on Feb. 11. Mischael Modrikamen, a lawyer representing about 2,000 Fortis investors who won a Dec. 12 court injunction on the previous deal pending the shareholder vote, said there isn’t "any objective reason to call on shareholders to vote ‘yes’ on this" new agreement.

"Compared to the previous deal, there is absolutely nothing favorable for shareholders" of Fortis, Modrikamen told Belgian broadcaster RTBF today. The new arrangement includes "some elements" of the earlier plan, "but they have been adapted for the benefit of BNP Paribas and not in favor of Fortis Bank." Fortis’s largest shareholder, Chinese insurer Ping An Insurance (Group) Co., is "studying the situation," L’Echo newspaper reported, citing a Ping An lawyer it didn’t identify. Fortis Chairman Jozef De Mey said executives "feel relatively comfortable that we will get a positive vote" from shareholders on the new agreement. "We can definitely show that compared to the deal presented to shareholders in February, this one is better," De Mey said on a conference call today. Meetings may be scheduled on April 8 in Brussels and the following day in the Dutch city of Utrecht, he told reporters.

Under the agreement announced today, the net asset value has been improved by 510 million euros compared to the February deal and the cash position has increased by about one billion euros, De Mey said. "Cash is king these days and this will put the holding in a better position to look at possibilities for future development," he said. All Fortis investors will be able to vote on the transaction, Chief Executive Officer Karel De Boeck said. At the Feb. 11 meeting, only those investors who held Fortis shares as of Oct. 14 were eligible to cast ballots following a December court injunction blocking the asset sales. Fortis became a casualty of the global financial turmoil after spending 24.2 billion euros buying ABN Amro Holding NV assets in the biggest bank takeover just as the U.S. subprime- mortgage market collapsed and credit markets froze. The bank and insurer was forced to sell most of its businesses over three days last October after running out of short-term funding and seeing its share price plummet.

Belgium nationalized Fortis Bank for 9.4 billion euros in two transactions on Sept. 29 and Oct. 10, and Luxembourg agreed to take 49.9 percent of the banking unit in that country. The Netherlands bought Fortis’s Dutch banking and insurance businesses for 16.8 billion euros on Oct. 3. BNP Paribas’s Prot said changes to the workforce will be necessary after the transaction, "but we will work responsibly and in compliance with the commitments made," according to Belga newswire. "We have no branch network in Belgium; there will be no significant overstaffing in that area. However, if staff reductions are necessary, we will emphasize natural departures," the newswire cited Prot as saying.

The purchase of Fortis Bank won’t improve BNP Paribas’s capital-adequacy ratios as originally planned. The Belgian bank said yesterday it had a fourth-quarter net loss of 6 billion euros, based on preliminary figures. "It was an absolute minimum for us that the transaction would be neutral for our capital ratios," BNP Paribas Chief Financial Officer Philippe Bordenave said in an interview today in Brussels. BNP’s Tier 1 capital ratio, a measure of a bank’s ability to absorb losses, stood at 7.8 percent on Dec. 31. That compares with 9.1 percent at Credit Agricole SA and 8.8 percent at Societe Generale SA, France’s second- and third-largest banks. Fortis Bank’s Tier 1 ratio was "about 10 percent," the state-owned Belgian bank said yesterday. Belgium also agreed to shore up Fortis Bank’s capital to a maximum of 2 billion euros should the lender’s Tier 1 ratio fall to less than 9.2 percent. The capital infusion could raise the government’s stake in Fortis Bank to as much as 49.9 percent.

China central bank Governor Pledges Fast, Forceful Policies for China Growth
Chinese central bank Governor Zhou Xiaochuan pledged fast and forceful policies to restore confidence and prevent the global financial crisis from deepening the nation’s economic slump. "If we act slowly and less decisively, we’re likely to see what happened in other countries: a slide in confidence," Zhou said at briefing in Beijing. The central bank has "ample room" to fine-tune monetary policy after a record surge in lending in January, he said. The central banker said he saw "signs of stabilization and recovery" in the world’s third-biggest economy, echoing Premier Wen Jiabao’s confidence that the nation’s 8 percent growth target for 2009 remains within reach. Collapsing exports because of the global recession have dragged growth to the weakest pace in seven years and cost the jobs of 20 million migrant workers.

"This isn’t the time to be cautious with the measures you roll out, it’s time to overdo it," said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong. "The outlook for the global economy has deteriorated dramatically." The Shanghai Composite Index closed 1.3 percent lower on concern that the global recession is deepening. The yuan was little changed against the dollar as of 4:48 p.m. in Shanghai. Premier Wen restated the 8 percent target in an annual speech to China’s parliament yesterday, the equivalent of a U.S. State of the Union address. Fast and forceful policies are preferable to "prevent confidence slumping during the financial crisis," Zhou said.

China’s confidence contrasts with U.S. Treasury Secretary Timothy Geithner’s warning yesterday that his nation’s recession is deepening as it starts a $787 billion stimulus program of public works. China’s official manufacturing index rose for a third month in February, from a record low in November. Initial public offerings of shares may resume, the nation’s securities regulator said today. Wen has cited growth in power output and consumption, loans and retail sales as positive signs. Chinese banks doled out a record 1.62 trillion yuan ($237 billion) of loans in January and more than 800 billion yuan last month, Liu Mingkang, chairman of the China Banking Regulatory Commission, said in Beijing yesterday. The regulator plans to conduct spot checks of bank loan books to "ensure quality of growth," Liu said.

Loans and money supply may have grown too quickly, Zhou said, after China cut interest rates, scrapped quotas limiting lending and pressed banks to support a 4 trillion yuan stimulus package. The jump in lending exceeded the central bank’s expectations, he said. The government will study the results of its existing stimulus package before deciding whether to take any new measures, Zhang Ping, head of the National Development and Reform Commission, said in Beijing today. The People’s Bank of China cut interest rates five times in the final four months of last year, including the biggest single reduction since the 1997-98 Asian financial crisis, leaving the benchmark one-year lending rate at 5.31 percent. There have been no cuts in 2009.

China needs "stable and relatively fast growth" to create jobs, boost incomes and ensure social stability, Premier Wen said yesterday. Not everyone is convinced that China will meet its 8 percent goal. The 6.8 percent gain in the fourth quarter was down from 9 percent for all of 2008 and 13 percent for 2007. The International Monetary Fund forecasts the economy will grow 6.7 percent in 2009, the least in almost two decades. Economist Kowalczyk sees a 6 percent expansion this year and warns that surging unemployment may undermine social stability if the government fails to do more to boost growth.

China’s exports may have fallen 20 percent in February from a year earlier, the 21st Century Business Herald newspaper reported today, citing an unidentified trade official. Imports may have also fallen 20 percent last month, it said. The nation’s trade surplus for February may be $7 billion, the newspaper reported. That would be less than a fifth of the size of January’s surplus. "China’s economic conditions may appear less dismal than its Asian peers, but the government’s growth target of eight percent seems too optimistic," said Sherman Chan, a Sydney- based economist at Moody’s Economy.Com.

China's Soaring Bank Lending Stands Out in Global Downturn
Optimistic official comments from China's annual legislative meeting are highlighting the country's differences with major Western economies caught in the worsening financial crisis. China's economy hasn't turned the corner into recovery -- housing sales, construction and manufacturing continue to contract, and the worst is almost certainly still to come for exporters hammered by downturns in U.S. and European demand, with February trade figures next week expected to show a sharp decline. But while financial systems sag in many countries, Chinese banks -- state-run, stodgy and opaque though they may be -- continue to pump money through the economy. Along with flush household savings and solid corporate balance sheets, that is sparing China from the liquidity crunch and credit collapse savaging other nations.

"The effect of this financial crisis on China is different than its effect on Western developed countries," Zhang Ping, the head of China's economic planning agency, said at a news conference on Friday. "For us the biggest impact has been on the real economy, while in the West there has been a major impact on the financial system." "It's just one crisis, not two" for China, said Ben Simpfendorfer, an economist for Royal Bank of Scotland. Because they don't have to restructure their financial system, he said, Chinese authorities can focus on re-accelerating economic growth with measures like the 4 trillion yuan ($585 billion) investment plan the government announced in November.

Beijing wants to stimulate growth to avoid social unrest, while the international community sees the world's third largest economy as a potential growth engine. The most important complement to the government's spending has been the jump in bank lending since November. In January alone, banks made 1.6 trillion yuan in new loans -- more than they did in the entire first quarter of 2008. February data to be disclosed in the next few days are expected to show another strong rise in loans. "The size of total lending in January was beyond our expectations," central bank governor Zhou Xiaochuan said Friday at a news conference. Mr. Zhou said the increase is welcome if it keeps confidence from declining, and that any problems from the surge could be dealt with later.

While some experts question whether China's wave of lending is sustainable, it's the kind of problem other countries would like to have right now. "It's probably the only country in the world with a big expansion in private credit," Ronald McKinnon, professor of international economics at Stanford University, said in a recent talk in Beijing. With the European Central Bank and Bank of England slashing interest rates to record lows this week, the contrast is even more stark. The availability of credit has helped ease China's slowdown, officials say. Indicators of manufacturing are falling less sharply than they were in November and December. "There are already some signs of stabilization and recovery. This shows that our policies are starting to take effect," said Mr. Zhou, the central bank governor.

Such optimism is, to some degree, intended for public consumption. The administration of Premier Wen Jiabao has made reassuring consumers and businesses a central part of its response to the crisis. This week Mr. Wen declared that China can achieve its traditional target of 8% economic growth for 2009. Though many private forecasters say that is unlikely, it was a public display of the confidence that Mr. Wen frequently says is "more important than gold or money." However, domestic and global investors were disappointed that Mr. Wen didn't announce additional stimulus measures this week, and the reaction drove markets down. Why didn't China ramp up its stimulus? In practical terms, it would be almost impossible for the government to announce new investment projects now, as it hasn't finished allocating the original funds announced in November.

Revising the stimulus could also have undermined the government's careful optimism about current prospects -- and left officials with fewer resources to deal with what many expect to be a protracted global slump. "We believe the government is unwilling to use up all its ammunition at the current stage of the downturn," said Lan Xue, China strategist for Citigroup. Chinese officials say their response to the crisis so far has been effective, but they are leaving their options open. "Of course, we cannot lower our guard now, and we cannot say that we can completely avoid the impact of the financial crisis," said Mr. Zhang, the economic planner. Officials are monitoring changes in the economy and will shift policies as needed, he said.

World's poor suffering most in the credit crunch
The credit crunch is hitting the income of the world's poorest people the most and will make the UN's Millennium Development Goals more difficult to achieve than ever, according to research released today. The Global Monitoring Report from Unesco estimates the 390 million poorest Africans will see their income drop by around 20% - far more than in the developed world. The global financial crisis has seen a fall in commodity prices as well as a drop in investment flows to poorer countries. The report's authors - Kevin Watkins and Patrick Montjourides - estimate this will cost sub-Saharan Africa's poorest people $18bn (£12.8bn), or $46 per person. "These numbers will bring the region's limited progress in poverty reduction to a shuddering halt," says Watkins.

Douglas Alexander, the international development secretary, is hosting a conference in London next week to discuss the future of the goals, such as reducing child mortality and poverty amid growing concern progress towards these, agreed with great fanfare in 2000, is grinding to a halt. The study also highlights wider human development impacts, including the prospect of an increase of between 200,000 and 400,000 in infant mortality. Child malnutrition, already a rising trend, will be one of the main drivers of higher child death rates. "Millions of children face the prospect of long-term irreversible cognitive damage as a result of the financial crisis," says Montjourides.

The Unesco warning follows hot on the heels of one from the International Monetary Fund. It said the world's 22 poorest countries might need an additional $25bn aid this year to cope with the financial crisis. If the crisis is worse than the IMF expects, though, that could hit $140bn. Unesco reckons poor countries will need around $7bn to meet key education targets which form part of the goals. That compares with the $380bn of public money pumped into banks by rich countries in the fourth quarter of 2008. "Aid donors could clearly do far more to protect the world's poorest people from a crisis manufactured by the world's richest financiers and regulatory failure in rich countries," says Watkins.

The report analyses the scope of many of the poor countries affected by the credit crunch to use tax and spending measures to help themselves combat it. The conclusion is their capacity to do so is very limited. Using a new indicator for fiscal capacity, the analysis estimates 43 out of 48 low-income countries lack the wherewithal to provide a pro-poor fiscal stimulus. Fiscal constraints are especially marked in many of the countries furthest from the international goals, it adds. There is a real danger these countries, many of which have been making progress towards universal primary education, will suffer setbacks, it says. The at-risk group includes Mozambique, Ethiopia, Mali, Senegal, Rwanda and Bangladesh.

The report says aid budgets in rich nations are being squeezed because they are expressed as a share of GDP, which is contracting. It estimates the EU's commitment to provide 0.56% of GDP in aid by 2010 will actually mean a drop of $4.6bn. Unesco wants a concerted international effort to limit the impact of the financial crisis on the poor. Suggested measures include an increase of more than $500bn in IMF special drawing rights, along with governance reforms to give developing countries an increased voice. The authors also call for the EU to provide a $4.6bn aid adjustment premium. They argue increased aid should be directed towards social protection and safety nets for the most vulnerable.

The travails of Detroit
You expect snow in Detroit in winter, and this time there was plenty. I waded through drifts, sweeping mounds of it off my car, and gunning the engine in slush to get the wheels going again. Detroit and Wayne County, which encompasses the city and many of its biggest suburbs, is out of money, so the ploughing and salting of roads here is as patchy as it is in England – although blizzards in south-eastern Michigan are hardly once-in-18-years events. Weekends are particularly bad. Side streets are not cleared at all, giving downtown driving a Mad Max quality. One sleety evening on the border of Detroit proper and Dearborn, my rented Ford Focus skidded on black ice and hit a concrete roadside barrier. A 911 call to get help driving home (my car was fine, but I had lost my glasses) provided a sobering lesson in Detroit’s fragmented polity: after being shunted between emergency services in the two municipalities, both of which were inundated with similar requests, I gave up and drove myself back down Ford Road – very slowly, squinting.

I had come to Detroit for the auto show. I stayed on for seven weeks, at first living in a condo near the Ford Motor Company’s suburban "Glass House" headquarters, where the telephone rang repeatedly with robo-calls from a bill-collection agency chasing a previous tenant. Then came a downtown loft – set in an almost cinematically American landscape of half-deserted art deco towers, steam rising from manholes and a daytime population split between office workers and vagrants. In January, Detroit saw its municipal bonds downgraded to junk status by Standard & Poor’s and Moody’s, both of which expressed doubts about the city’s ability to close a $300m budget deficit. In early February, Kwame Kilpatrick, the former "hip-hop mayor" (so dubbed by comedian Chris Rock after Kilpatrick entered office aged 31, with a diamond earring and endorsements from a number of rappers) was released from jail after serving a 120-day sentence for perjury and assault.

He flew to Texas for a job interview, and soon afterwards, the city held a primary poll for an election to replace Ken Cockrel, his caretaker successor. Meanwhile, federal investigators were probing a "pay-to-play" sleaze scandal involving the alleged bribery of other city officials by a company called Synagro, relating to a $1.2bn sewage sludge disposal contract, and a corpse was found in an abandoned Detroit warehouse, encased face down in ice, legs protruding like popsicle sticks. It turned out several men had been playing hockey around the body. In a city where the headlines pretty much write themselves, the story ran under the words "Frozen in indifference."

The story seemed an apt metaphor for a city enduring the collapse of its century-old car industry, only to be met with a public reaction in other parts of the US best described as a collective shrug. In late January, Chrysler, whose year-on-year sales plunged by 55 per cent in January, began re-opening its north American car plants after a near-two-month shutdown, then promptly said it was closing at least three of them again. This came shortly after the company, alongside General Motors, formally became a ward of the state, collecting its $4bn share of the $17.4bn emergency federal bridging loans approved for the two ailing companies in December.

When GM’s dismal 2008 sales figures came in, the company finally fell behind Japanese rival Toyota in the long-watched race to become the world’s top-selling carmaker – although there were no victory parties in Tokyo as GM’s nemesis said it was heading for its first full-year loss since 1950. For decades, scribes from America’s coasts and beyond have been parachuting into Detroit to marvel at its horrors. The city never fails to deliver colourful copy: the urban decay, the $1 houses that still go unsold, the tragicomic city politics. Jerry Herron, a writer and scholar at Detroit’s Wayne State University, likens journalists’ morbid delight at Detroit to that of Victorian travellers reaching Pompeii. "City of the dead, city of the dead," Thackeray wrote. The words might as well apply here.

. . .

Detroit may be the archetypal down-and-out rust-belt city, but to call it "dying" masks a more complex reality. Greater Detroit still has three to four million residents, a world-class university next door in Ann Arbor and the bone structure of a great city, as a car-industry consultant with the ear of a poet put it over lunch one day. Why, then, the relentless focus on its failings? Nearly everyone you meet is either weary or angry at seeing their home town made the butt of jokes on late-night television and the subject of anguished political commentary. But no one denies that the region’s property market is abysmal, its finances a mess and its industrial base shrinking at an alarming rate. Instead, Michiganders, despite being self-deprecating to a fault, make a point their countrymen won’t want to hear: Detroit is no longer the nation’s worst-case scenario, but on its leading edge, the proverbial canary in the coal mine.

"It’s like the rest of the country is getting to where Detroit has been," said Peter De Lorenzo, who writes the acerbic and very funny blog. That means that smug mock-horror is no longer the appropriate reaction to the frozen corpse. Instead, get ready for a shock of recognition. Over drinks at a nearly empty upscale restaurant in the northern suburb of Birmingham, De Lorenzo was, like other Detroiters, still smarting from the treatment meted out to the bosses of GM, Chrysler and Ford in Washington in December. With their sales collapsing and their cash reserves running low, they had gone to beg Congress for emergency bridging loans in the waning days of George W. Bush’s administration. Wall Street had been handed a $700bn blank cheque to bankroll troubled assets just a few weeks previously – after a minor, ineffectual strop by libertarian legislators and with few questions asked.

But when Detroit’s corporate bosses arrived in the capital, politicians, perhaps now realising their error, peppered them with pointed questions that verged, many felt, on abuse. In the end, Washington approved a much smaller bail-out – barely half the $34bn Detroit wanted – and hedged with conditions, such as bringing labour costs down to those of Japanese competitors. No one thought this was Detroit’s finest hour, including De Lorenzo. His blog is scathing about the erstwhile Big Three’s many failings. (He describes Chrysler, owned by the New York buyout group Cerberus, as a "dead company walking".) And, like other Detroiters, he was scornful when our talk turned to the auto bosses’ first December jaunt to Capitol Hill. They flew in on three separate corporate jets, setting a new standard in the annals of tin-eared corporate diplomacy. While the chief executives fumbled their big moment, more than three million jobs across America are at risk at car plants and automotive suppliers. Indeed, suppliers, now veering towards collapse after the winter shutdown of most US car plants, are lobbying Washington for their own $25.5bn bail-out.

For their second foray to DC, Detroit’s chief executives duly drove, in hybrid cars, to answer legislators’ often poorly informed questions meekly. They promised to take $1 salaries as the price of federal aid. "If Lee Iacocca had been there in his prime, he would have been pounding on his desk," De Lorenzo said, referring to the legendary head of Chrysler in the 1980s. Detroiters have some justification in saying their city’s industry is dimly understood in Washington. In December, GM, Ford and Chrysler were attacked from both sides. California eco-Democrats ("Dianne and Barbara" in the arch shorthand of one Michigan industry consultant) castigated them for forcing gas-guzzling pick-ups and SUVs on supposedly unwilling Americans – patent nonsense in a country where low petrol taxes meant, at least until oil prices spiked, they couldn’t roll F-150 trucks or Jeep Grand Cherokee SUVs off their assembly lines fast enough. On the other hand, Republicans from southern states home to non-union Japanese plants slammed Detroit carmakers for their bloated wage bills. Their depiction of an industry that had done nothing to help itself was accurate, but at least 10 years out of date.

Moreover, many Michiganders – whose parents had been able to send them to college thanks to the middle-class salaries of assembly-line work – felt the Republicans had made United Auto Workers members into hate figures on a par with the "welfare queens" conjured up by Reagan-era Republicans. National newspaper and television reports mostly followed rightwing Washington’s cartoonishly simple version of what ails the American auto industry. "Labour is totally under attack," said Mike Smith, director of the Walter P. Reuther Library at Wayne State University. "And who is it under attack from? The supposedly leftwing media." Smith, a former mechanic and self-described "working stiff" turned librarian, is clearly an interested party, but he may have a point. In January, Ford followed GM and Chrysler in eliminating one of the UAW’s most jealously guarded perks, the "jobs bank", which allows workers whose services are not needed to receive pay by doing course work, community service or – in some cases – just showing up and watching TV. I duly recorded this in a story for this newspaper, and found myself silently cheering the move, one of the conditions of the bail-out. Then I tuned into the news on Detroit’s local Channel 4 station, and listened to an auto-worker pointing out that many people at his shuttered plant were paying their grocery bills and mortgages from their jobs bank money, and did not know how they would replace the income.

This man was hardly the militant unionist of Washington’s imagination, or mine. The numbers tell an even more compelling story: the UAW and the Detroit carmakers are in rare unity in pointing out that wages account for only about 10 per cent of the companies’ total costs. Their inability to compete rests on a number of factors other than wages, including consumers’ unwillingness to credit GM or Ford with making cars these days as good as, or even better than, Toyota’s or Honda’s, according to rankings from Consumer Reports magazine and JD Power’s Initial Quality Studies. If Detroit’s designers and engineers are doing an objectively better job, the fault may lie with their marketing and public relations chiefs. Or perhaps too many Americans have bad memories of clunky old cars. In one of the most vivid illustrations of the so-called quality gap bedevilling Detroit, the Pontiac Vibe and Toyota Matrix small cars are made on the same assembly line, at a GM-Toyota joint venture plant in California, but the latter model sells for at least $1,200 more than the former.

But this problem pales next to what is arguably the industry’s biggest burden: America’s lack of universal healthcare. GM has more than twice as many retirees on its books than it does active workers. Healthcare costs alone account for a gap of $1,500 between the price of a Detroit vehicle and a Japanese one, and are the main reason Detroit cannot compete with the Japanese on lower-margin small cars. In 2007, the UAW signed away many of its remaining perks in a contract negotiation with the Big Three, agreeing to pay new hires lower wages of as little as $14 an hour and to assume management of retirees’ healthcare in exchange for lump-sum payouts from the carmakers. Analysts said that the concessions would have made GM, Ford and Chrysler competitive by 2010. But then petrol prices spiked, Wall Street staggered, world car markets collapsed, and now all bets are off. Detroit’s crisis, in other words, is the result of both bad choices and worse luck. With or without bail-out aid, the carmakers are shedding tens of thousands of jobs, and heading toward failure. Detroit is bracing itself.

. . .

This winter, in addition to trekking to Washington and back, the bosses at Chrysler, Ford and GM were slashing their sponsorship of cultural institutions built up in the city’s golden age, including its symphony orchestra and the Detroit Institute of the Arts, home to Diego Rivera’s extraordinary murals of auto-workers, commissioned by Edsel Ford and painted in the 1930s. In fact, the car companies, accustomed to boom and bust, haven’t funded large endowments since the days of Henry Ford; the DIA’s, with America’s fifth-largest art collection, is less than $100m – one-sixth to one-eighth the size of the sums bestowed upon similar museums such as the Art Institute of Chicago or the Museum of Fine Arts in Houston. In February, the DIA laid off about 20 per cent of its staff. High culture aside, charities and institutions such as the Mosaic Youth Theatre, a beacon for poor, inner-city teens, are also worried about their budgets. The city’s two newspapers, The Detroit News and the Detroit Free Press, are clinging together for survival under a joint operating agreement that allows them to skirt antitrust law and pool costs on areas such as printing and back-office functions. From this month, they are cutting home delivery – standard for newspapers in the US – to just three days a week.

Detroiters also speak of a fraying of the city’s social fabric. For much of the 20th century, the car industry was a ticket to the middle class for poor whites from Appalachia and blacks from the deep south, lured north by Henry Ford’s famous $5-a-day jobs. Public sector unions, in turn, negotiated benefits modelled on the UAW’s – which are now straining city and state budgets. For some, social mobility is now in reverse. In Detroit’s predominantly black North End, there are blocks of ramshackle houses, many up for auction after being abandoned by owners no longer able to meet higher payments on their adjustable-rate mortgages. Again, this is the stuff of Detroit dispatches of past; the difference is that this neighbourhood always had middle-class residents alongside its poor majority. All are now bearing the brunt of the sub-prime crisis and its ripple effect on jobs, the economy and confidence.

Much has been written about "white flight" from inner Detroit, a city whose population peaked at two million in the 1950s but now stands at about 900,000. But now middle-class blacks are leaving, too. "Over the last year, the number of people who have left the state seeking better opportunities has risen significantly," said Edgar Vann, bishop of the neighbourhood’s Second Ebenezer Church. "The city of Detroit carries a stigma." In an inner city bereft of major businesses or cultural organisations, institutions like Vann’s megachurch are the backbones of the community; the church has its own development arm. "Once people start making $30,000 a year, they tend to leave the city because of their kids’ safety and the schools – which are synonymous," said Vann. Detroit’s fecklessly managed public schools lack textbooks and, in some cases, light bulbs and toilet paper.

One evening, I drove to Hamtramck, a traditionally Polish-American, working-class municipality to meet Karen Majewski, its mayor. The city is surrounded by Detroit proper and shares with it a GM car plant and the headquarters of American Axle, the parts supplier now reeling from a collapse of orders from GM. Majewski, an archivist of Polish books, makes about $7,000 a year as mayor, hearing disputes about stolen tyres or noisy neighbours in her spare time. Forbes magazine had the previous week named Hamtramck one of "America’s 10 fastest-dying cities", alongside Cleveland, Ohio; Buffalo, New York; and Detroit itself. Majewski called the piece "mean-spirited and hurtful", adding: "If you want to harm a city, this is the way to do it." She described a different place to me – a community of close-set houses with a kind of "funkiness and a grounding", as she put it. "We’re not too full of ourselves here." The town has become less Polish over the years, attracting immigrants from as far afield as Bangladesh and Yemen (Detroit has the largest urban concentration of Arabs outside the Middle East). It even had its own mini-property bubble in the 1990s, triggered in part by artsy urbanites seeking lower rents.

Now Hamtramck is seeing repossessions balloon, and its anchor stores replaced by dollar shops. As GM and Chrysler neared bankruptcy last year, Majewski joined about 30 other officials from towns with car plants on a trip to Washington. She was not prepared for her encounters with Congress. "It was galling in some cases to get really dissed," she said. "We all took it personally – as though we don’t count and somehow we’re all at fault. A lot of people in Hamtramck think it’s really a class thing: ‘we haven’t changed with the times, we want entitlements, we drink beer’." Hamtramck is now "holding its breath", she says, waiting for GM to make a decision on producing the Volt, the plug-in electric car it may make at the plant there from 2010 – assuming it survives. "Without sounding too Pollyanna-ish, unless GM collapses, we’re OK," Majewski said.

. . .

"Collapse" is a relative notion for an industry that has been losing jobs for years – and not really even a new idea. Deindustrialisation and the loss of decent-paying employment are longstanding, atavistic fears in Detroit. "Will the last person to leave Detroit please turn out the lights?" went the joke from the 1980s, when Iacocca was turning around a spluttering Chrysler and US-based Japanese plants were capturing market share from the Americans in earnest. Urban renewal is also an old trope in a city where the 1950s "Renaissance Center", meant to be a symbol of a revived downtown, is full of empty offices. GM would like to sell the building as the company downsizes. Before the current recession and collapse began, Detroit was already diversifying into industries such as gambling, which brought some new jobs, while arguably incurring new social costs. The opulent MGM Grand casino hotel, opened in 2007, has a good Wolfgang Puck restaurant – but the dining room sits alongside a vast, depressing, carpeted expanse of slot machines and poker tables full of mostly working-class Michiganders. And even gaming is now in downturn: the Greektown Casino filed for bankruptcy protection last year.

In her state of the state address in early February, Michigan’s Democratic governor Jennifer Granholm said the future lay in "green" industries such as lithium-ion battery plants for cars such as the Volt, or turbines to harness the wind off the Great Lakes. She also announced the opening of two new film studios. Thanks to big tax incentives, Michigan’s burgeoning industry has drawn recent productions such as Clint Eastwood’s Gran Torino, filmed in gritty Highland Park, north of Detroit. Detroiters are fiercely protective of their city’s reputation, but sober about its near-term prospects. Many were dismissive of the notion that Michigan could dream its way into a greener future, or replace the tens of thousands of jobs lost in carmaking with jobs in film. "It’s very hard to make the case that this is a great place to invest – based on what?" said Daniel Howes, a Detroit News columnist. "You have a governor who has looked under the hood, realised what a disaster this is, and started polishing the wheels and the trunk. Sure, it’s fantastic that productions like Gran Torino film locally, but you know what? They leave."

As Ford has cut tens of thousands of jobs, Dearborn – where Howes and I met – has racked up one of America’s highest foreclosure rates. Wary of becoming a slum, the city has bought up some of these homes and demolished them, and now plans to develop houses on larger lots. The foresight of the mayor, John B. O’Reilly, is commendable, even if the net effect is that Dearborn is due to become less urban. The same thing is happening in the inner city, where houses are vanishing after being abandoned, then stripped of appliances and other fittings, then squatted, then burned to the ground by people making fires to keep warm. In February, desperate for good-news stories, I called Patrick Crouch, who heads the Earthworks Urban Farm garden programme, an inner-city project attached to the Capuchin order’s soup kitchen. Crouch sighed loudly into the phone. "Are you going to write another of those stories?" he asked. The project he heads is a popular stop on the route of journalists keen to note the irony of a city with so much unused land that it can afford to grow vegetables downtown. After a long and pointed discussion about the urban geography of the Midwest – there is a lot of space in its cities, even those less troubled than Detroit – he grudgingly agreed to meet me.

The garden, in addition to supplying the soup kitchen, serves as a gathering point and source of information on good nutrition in a community where many subsist on high-calorie, unwholesome foods. Some local families are supplementing their small incomes by growing vegetables and selling them on. Crouch says that talking to clients of the soup kitchen also keeps him abreast of another form of barter now flourishing: trade in scrap metal. The men lining up for food can tell you, for example, how the price of copper is doing. An environmentalist and avowed sceptic about world trade, Crouch had the same surprisingly sunny view of the world as some others in Detroit. "Assuming there is a post-petroleum economy, I see Michigan as poised to be in a good place," he said. With the Great Lakes nearby, the area "doesn’t have to worry about depleted aquifers".

In an earlier time, I might have lost patience with these eco-centric, anti-globalisation arguments. This winter, in Detroit, they sounded right. At a time when jobs and whole industries are collapsing, growing your own food seems reasonable. I promised to come back to see the garden’s programme for local children, now getting back in swing as the snow begins to clear. I haven’t yet made it back. Maybe in the spring.

All Boarded Up: How Cleveland deals with mass foreclosures
TONY BRANCATELLI, A CLEVELAND CITY COUNCILMAN, yearns for signs that something like normal life still exists in his ward. Early one morning last fall, he called me from his cellphone. He sounded unusually excited. He had just visited two forlorn-looking vacant houses that had been foreclosed more than a year ago. They sat on the same lot, one in front of the other. Both had been frequented by squatters, and Brancatelli had passed by to see if they had been finally boarded up. They hadn’t. But while there he noticed with alarm what looked like a prone body in the yard next door. As he moved closer, he realized he was looking at an elderly woman who had just one leg, lying on the ground. She was leaning on one arm and, with the other, was whacking at weeds with a hatchet and stuffing the clippings into a cardboard box for garbage pickup. "Talk about fortitude," he told me. In a place like Cleveland, hope comes in small morsels.

The next day, I went with Brancatelli to visit Ada Flores, the woman who was whacking at the weeds. She is 81, and mostly gets around in a wheelchair. Flores is a native Spanish speaker, and her English was difficult to understand, especially above the incessant barking of her caged dog, Tuffy. But the story she told Brancatelli was familiar to him. Teenagers had been in and out of the two vacant houses next door, she said, and her son, who visits her regularly, at one point boarded up the windows himself. "Are they going to tear them down?" she asked. Brancatelli crossed himself. "I hope so," he mumbled. Prayer and sheer persistence are pretty much all Brancatelli has to go on these days. Cleveland is reeling from the foreclosure crisis. There have been roughly 10,000 foreclosures in two years. For all of 2007, before it was overtaken by sky-high foreclosure rates in parts of California, Nevada and Florida, Cleveland’s rate was among the highest in the country. (It’s now 24th among metropolitan areas.)

Vacant houses are not a new phenomenon to the city. Ravaged by the closing of American steel mills, Cleveland has long been in decline. With fewer manufacturing jobs to attract workers, it has lost half its population since 1960. Its poverty rate is one of the highest in the nation. But in all those years, nothing has approached the current scale of ruin. And in December, just when local officials thought things couldn’t get worse, Cuyahoga County, which includes Cleveland, posted a record number of foreclosure filings. The number of empty houses is so staggeringly high that no one has an accurate count. The city estimates that 10,000 houses, or 1 in 13, are vacant. The county treasurer says it’s more likely 15,000. Most of the vacant houses are owned by lenders who foreclosed on the properties and by the wholesalers who are now sweeping in to pick up houses in bulk, as if they were trading in baseball cards.

Brancatelli and others — judges, the police, city officials, residents — are grappling with the wreckage left behind, although to call this the aftermath would be premature. Even with President Barack Obama’s plan to help prevent foreclosures, the city is bracing for more, especially as more people lose their jobs. The city’s unemployment rate is now 8.8 percent. Moreover, on some streets so many houses are already vacant that those residents left behind are not necessarily inclined to stay. "It just happens so fast, the sad part is you really have little control," Brancatelli told me. "It snowballs on the street, and you try to prevent that avalanche." Walking away from a house even makes a kind of economic sense when the mortgage far exceeds the home’s value; Obama’s foreclosure-prevention plan does little to address that situation. Now outside investors have descended on Cleveland; they pick up properties for the price of a large flat-screen TV and then try to sell them for a profit.

So much here defies reasonableness. It’s what Brancatelli keeps telling me. A few months ago, he met with Luis Jimenez, a train conductor from Long Beach, Calif. Jimenez had purchased a house in Brancatelli’s ward on eBay and had come to Cleveland to resolve some issues with the property. The two-story house has a long rap sheet of bad deals. Since 2001, it has been foreclosed twice and sold four times, for prices ranging from $87,000 to $1,500. Jimenez bought it for $4,000. When Jimenez arrived in Cleveland, he learned that the house had been vacant for two years; scavengers had torn apart the walls to get the copper piping, ripped the sinks from the walls and removed the boiler from the basement. He also learned that the city had condemned the house and would now charge him to demolish it. Brancatelli asked Jimenez, What were you thinking, buying a house unseen, from 2,000 miles away? "It was cheap," Jimenez shrugged. He didn’t want to walk away from the house, but he didn’t have the money to renovate. The property remains an eyesore. "Generally, I’m an optimist, but none of this makes sense," Brancatelli told me. "Trying to give order to all this chaos is the big challenge."

Like others who have stayed in Cleveland, Brancatelli, who has lived in his two-story American Foursquare for 15 years, is trying to hold the wall against the flood. Of his ward, known as Slavic Village, he says: "It’s one of the most resilient communities in the country. People are rolling up their sleeves and working. We can’t wait for others to step in." This was a tone — the swagger of the underdog — that I heard from other Cleveland stalwarts during the weeks I spent in the city this winter. "Cleveland’s a blue-collar community," Mayor Frank Jackson told me. "They’re surviving-cultures. And we will fight back." The task is achingly slow; each house its own battle. On one street I visited, in a ward near Brancatelli’s, a third of the houses were abandoned. One resident, Anita Gardner, told me about the young family who moved in down the street a few years before. They spruced up the house with new windows, a fireplace, wood kitchen cabinets, track lighting and a Jacuzzi. When they lost the house to foreclosure, they left nothing for the scavengers. They stripped their own dwelling, piling toilets, metal screen doors, kitchen cabinets, the furnace and copper pipes into a moving van. "They said, ‘Why should someone else get it?’ " Gardner told me. "So they took it themselves." In December, Gardner’s neighbor watched a man strain to push a cart filled with thin slabs of concrete down the street. It explained why so many of the abandoned homes in the city are without front steps, as if their legs had been knocked out from under them.

Perhaps such pillage is part of the natural momentum of a city being torn apart. If you can’t hold onto something of real value, at least get your hands on something. Foreclosures are a problem all over the country now, but Cleveland got to this place a while ago. Cities, old and new, are looking at what’s occurring in Cleveland with some trepidation — and also looking for guidance. Already places as diverse as Atlanta, Chicago, Denver, Las Vegas and Minneapolis have neighborhoods where at least one of every five homes stands vacant. In states like California, Florida and Nevada, where many of the foreclosures have been newer housing, there is fear that with mounting unemployment and more people walking away from their property, houses will remain empty longer, with a greater likelihood that they will deteriorate or be vandalized. "There are neighborhoods around the country as bad as anything in Cleveland," says Dan Immergluck, a visiting scholar at the Federal Reserve Bank of Atlanta and an associate professor in the city and regional planning program at Georgia Tech. Local officials from other industrial cities have visited Cleveland to learn how it’s dealing with the devastation. "Cleveland is a bellwether," Immergluck says. "It’s where other cities are heading because of the economic downturn."

TONY BRANCATELLI, WHO IS 51, is a man of a birdlike build and intensity, but he also possesses a Midwestern folksiness, closing most conversations with a cheerful "alrighty." Over the past couple of years, he has become a minor media star. Journalists from Sweden, Japan, China, Germany, Britain and France have visited him, drawn to his ward because of the high rate of foreclosures, at present two a day. Brancatelli’s world is defined by the borders of Slavic Village. It’s where he grew up and where he has lived for all but three years of his life. His license plate reads Slavic 1. (He tried to convince his wife to get plates that read Slavic 2, but she declined.) The neighborhood took root roughly a hundred years ago: diminutive, narrow homes — some no more than 900 square feet — built within walking distance of the steel mills now shuttered. The demographics have been changing over the past decade: African-Americans moving in, whites moving out. A common story. Unintentionally, it’s one of the few racially mixed communities in Cleveland.

Brancatelli’s mother worked as a waitress at a local diner, then as a clerk at a neighborhood Army-Navy store. His father was an auto mechanic. They divorced when Brancatelli was 12, yet Brancatelli describes his childhood in Slavic Village in nostalgic hues. "You always knew somebody," he says. "You didn’t need formal day care. There was always somewhere to stay." He began working for the Slavic Village Development Corporation, a local nonprofit group, in 1988 and a year later became its director. The organization built and renovated storefronts and homes, bringing new people to the area. In fact, he met his wife when she bought a rehabbed house in the neighborhood. He stayed at the development group for 17 years until moving on to the City Council.

Cleveland has long been known for its unusually large number of nonprofit housing groups, and in the 1990s their impact on the city was noticeable. Under Brancatelli’s watch, Slavic Village Development constructed more than 500 new homes and rehabbed more than 1,000. Brancatelli measured success by the number of homes the group sold for more than $50,000. "We started to see this incredible transformation," he recalls. A local thrift, Third Federal Savings and Loan, built its new corporate headquarters in Slavic Village. Marc A. Stefanski, chairman and chief executive of Third Federal, told me, "There was a good feeling that, hey, this neighborhood’s coming back." Throughout the city, there was a renaissance of sorts: new housing construction in the neighborhoods and, downtown, three sports stadiums and the Rock and Roll Hall of Fame. Cleveland adopted the moniker "The Comeback City."

But then Cleveland was hit hard — and early — by the foreclosure crisis. In 1999, Brancatelli noticed something peculiar: homes, many of which were in squalid condition, were selling for inflated prices. One entrepreneur in particular caught Brancatelli’s attention: 27-year-old Raymond Delacruz. He would buy a distressed property and, at best, make nominal repairs before quickly selling it for three or four times what he paid for it. The flips needed the cooperation of appraisers and the gullibility of home buyers. But the proliferation of mortgage companies — mostly based out of state and willing to provide loans with little documentation — also facilitated flippers. And the flippers justified the high prices to both home buyers and mortgage companies by pointing to the high prices nonprofit housing groups, like Brancatelli’s, were getting for their new construction.

There was something else going on in the city that was even more destructive. Unlike fast-growing communities in Florida and California, Cleveland didn’t see housing prices rise through the stratosphere. But even moderately rising property values created the conditions for subprime lenders to exploit strapped homeowners. Cold-calling mortgage brokers offered refinancing deals that would let homeowners use the equity in their houses to pay off other debts. A neighbor of Brancatelli’s had medical problems and fell behind in her bills. She refinanced, then did it two more times, draining the equity in her house. "She used her house as an A.T.M.," Brancatelli says. "In the end, they just walked away. The debt exceeded the value of the house." In other instances, mortgage brokers would cruise neighborhoods, looking for houses with old windows or a leaning porch, something that needed fixing. They would then offer to arrange financing to pay for repairs. Many of those deals were too good to be true, and interest rates ballooned after a short period of low payments. Suddenly burdened with debt, people began to lose homes they had owned free and clear.

As early as 2000, a handful of public officials led by the county treasurer, Jim Rokakis, went to the Federal Reserve Bank of Cleveland and pleaded with it to take some action. In 2002, the city passed an ordinance meant to discourage predatory lending by, among other things, requiring prospective borrowers to get premortgage counseling. In response, the banking industry threatened to stop making loans in the city and then lobbied state legislators to prohibit cities in Ohio from imposing local antipredatory lending laws. In the ensuing years, the city’s real estate was transformed into an Alice-in-Wonderland-like landscape. Local officials began keeping track of foreclosed homes by placing red dots on large wall maps. Some corners of the map, like Slavic Village, are now so packed with red dots they look like puddles of blood. The first question outsiders now ask is, Where has everyone gone? The homeless numbers have not increased much over the past couple of years, and it appears that most of the people who lost their homes have moved in with relatives, found a rental or moved out of the city altogether. The county has lost nearly 100,000 people over the past seven years, the largest exodus in recent memory outside of New Orleans. Banks are now selling properties at such low prices — many below what they sold for in the 1920s — you have to wonder why they bother to foreclose at all. (The F.D.I.C. estimates that each foreclosure costs a bank on average $50,000, more than if they were to do a loan modification.) All of this leaves Brancatelli in a constant state of exasperation. When asked how he’s doing, he often takes a breath and replies, "Another day in paradise."

O.V.V. IS A TERM OF ART that stands for Open, Vacant and Vandalized. Houses fitting this description have popped up like prairie dogs. They are boarded, unboarded, then boarded again, and the city can’t keep up with the savvy squatters. They will prop the plywood over the front entrance to make it look as if it’s nailed shut. One woman told me that she called the police last summer when she saw smoke coming out of a vacant home across the street; it turned out that some young men were cooking on a grill inside. On a dreary wintry day, Brancatelli took me to Hosmer Street, on which a fourth of the homes were foreclosed. As we strolled down the block, Brancatelli noticed something odd. Through a side window of one slender house, we could make out a waist-high pile of tree limbs and branches. The front door was off the hinges and propped against the entrance. We entered through the rear, where the door was gone altogether. "Hello," Brancatelli hollered, "City!" — an effort to both warn squatters and frighten animals. Earlier that day we entered another O.V.V. and heard footsteps upstairs.

"They don’t have a gun," he had assured me. He explained that scavengers know enough not to carry weapons because it would mean more prison time should they be caught. Even in O.V.V.’s, there are rules. Inside, we found firewood and brush piled in the kitchen and front room. "The crap we deal with," Brancatelli muttered to himself. He snapped a photo with his cellphone and sent an e-mail message to the city’s Building and Housing Department, urging the department to send someone to secure the house. He often does this two or three times a day. But finding a collection of timber like this is of particular concern; over the past year there have been more than 60 fires in his ward, all in vacant houses. The fire department tried stakeouts but has not caught anyone. The general belief is that the fires are set either by squatters trying to stay warm or by mischievous kids. Brancatelli, though, wonders aloud if it might be vigilantes who don’t like the blight on their block. "Maybe I’m overthinking it," he says. More likely, he’s projecting. He would like to see many of these houses just disappear.

This is Brancatelli’s conundrum: many of the abandoned homes should be razed. They’re either so old or so impractically tiny that they have little resale value, or they have been stripped of their innards and are in utter disrepair. There are an estimated one million lender-owned properties nationwide, and on average each house sits empty for eight months, a length of time that is only growing. Demolition, though, is costly: roughly $8,000 a house. Two years ago, Litton Loan Servicing, a mortgage servicer, discussed giving the city a number of foreclosed homes. Free. The city told them that would be fine, but only if the company came up with money to pay for the necessary demolitions. The transaction never occurred.

Last summer, Congress appropriated $3.9 billion in emergency funds for cities to acquire and rehab foreclosed properties. (An additional $2 billion will be available under the recently enacted economic-stimulus package.) The legislation was labeled the Neighborhood Stabilization Program, but Cleveland and a handful of other cities had to lobby hard to convince Congress that "stabilization" in their cities meant tearing down houses — not renovating them. Last month, Cleveland said it planned to use more than half of its $25.5 million allotment to raze 1,700 houses. This presents an opportunity to reimagine the city, to erase the obsolete and provide a space for the new. (There’s little money now to build, so imagine is the operative word.) Cuyahoga County is also establishing a land bank, a public entity that can acquire distressed properties and hold on to the land until improved economic times allow for redevelopment. The county hopes to persuade banks to unload their distressed properties, which the land bank would then raze, as well as give up some foreclosed properties in the suburbs, which the county could eventually renovate and sell.

Other cities — including Minneapolis, Youngstown, Detroit and Cincinnati — have put aside at least a third of their neighborhood-stabilization funds for demolition. "As properties stay vacant for longer periods of time," says Joe Schilling, a founder of the National Vacant Properties Campaign, "it’s inevitable that even in some of the fast-growing communities, they’ll have to look at demolition." Phoenix, for instance, has set aside a quarter of its grant money to tear down abandoned homes. Cleveland may use some of those demolition dollars on houses now owned by the federal government. Between the Department of Housing and Urban Development and entities like Fannie Mae and Freddie Mac, the federal government has control of roughly a thousand abandoned properties in Cleveland.

Across the street from the house with the timber inside sits a one-and-a-half story vacant property owned by HUD, which had guaranteed the last mortgage. On the front porch, a large picture window was wide open, but Brancatelli chose to enter through the front door. Going on a hunch, he punched the numbers in the address into the lockbox. The toilet was gone, as was the copper piping. HUD recently sold this house — for $1,500 — but didn’t inform the new owner that the house had been condemned. "They dumped the house," Brancatelli grumbled. "It’s this kind of stuff that drives me nuts." A few weeks ago Brancatelli persuaded HUD to let the owner out of his purchase. Then HUD offered to sell the city its distressed properties, including this one, for $100 each. You might think this was something to celebrate. Brancatelli, though, is irked. As he sees it, the city will now have to use some of its emergency HUD financing to demolish houses that HUD was responsible for.

THE LIFE OF A CLEVELAND CITY COUNCILMAN has become one of answering complaints derived in one way or another from the foreclosure crisis. In November, Zachary Reed, who represents the ward near Slavic Village, received a pleading phone call from Cecilia Cooper-Hardy, a constituent and school-bus driver who lives next to a vacant house. Cooper-Hardy told Reed that as she was leaving for work at 5 one morning, she peered out her living-room window and noticed a pair of eyes staring back at her from behind a slit cut in a window shade next door. Reed had the house secured, but within days the boards were pulled off. Cooper-Hardy then purchased a pistol that she now keeps under her pillow. The local police commander calls her regularly, just to make sure everything’s O.K., a routine he has adopted with others as well. Last summer, while Cooper-Hardy was doing yardwork, someone slipped in her back door. She hollered to a neighbor across the street who was drinking in the yard with friends. They rushed to her aid as the burglar fled. That neighbor is gone now. Another foreclosure. So every morning she offers up a prayer, and then she peeks out her living room blinds to see if there’s anyone peeking back at her from the house next door. Reed, the councilman, told me, "If we don’t get some help we’re going to turn into a third-world nation."

Brancatelli doesn’t necessarily disagree with the sentiment, but he continues to search for reasons to be sanguine. He insisted on driving me past a small store called Johnny’s Beverage because, he told me, it was a key to his community’s future. Johnny’s Beverage sits in the middle of a residential block. Its facade is worn. Dark plastic sheeting covers the front windows so you can’t see in. A hodgepodge of posters and handwritten signs advertise cold beer and wine, cigarettes and lottery tickets. A tattered American flag flaps in the breeze. When Jerome Jackson purchased the store three years ago, Brancatelli told him in no uncertain terms that he wasn’t too happy about it and that he was going to oppose the transfer of the liquor license. It did not, after all, have the aspect of a family-friendly enterprise you would want in a residential neighborhood.

Jackson, who is 52 and barrel-chested, has a retiring demeanor. His perch is a narrow space separated from the rest of the store by counter-to-ceiling plexiglass. He had managed a store in another neighborhood and saved up to buy his own business. He renovated the upstairs and moved in (and hung the American flag from a second-floor deck he built). He then purchased a foreclosed house down the street, where his brother could live. The house next door to the store went into foreclosure, and Brancatelli heard that Jackson kept watch over it, chasing scavengers away and erecting a fence in the rear. He also heard that Jackson had alerted the city that there was a foot of water in the basement of the vacant, the result of pipes having been ripped out. (This is common; Brancatelli has seen back water bills for vacant houses as high as $6,000.) Brancatelli began to reconsider his opinion of Jackson. He was keeping an eye on the neighborhood — and he was committed to staying. Brancatelli decided to support the liquor-license transfer and then told Jackson that he would help get him the property next door, if he agreed to tear it down.

U.S. Bank, which owned the house, appealed a city condemnation order. "It’s the running joke," Brancatelli told me. "The banks appeal the condemnations because they say they want more time to make repairs to put it on the market to sell. And I go to the hearings on a regular basis to say you shouldn’t get more time. Here, they owned it for more than six months and hadn’t made any repairs. They just want time to try to unload the property." Jackson offered U.S. Bank $2,000. He heard nothing. He upped his offer to $3,000. Again, no response. When Brancatelli intervened and made it clear that U.S. Bank would be stuck with the $8,000 demolition bill, the bank agreed to sell it for a dollar to the Slavic Development Corporation. The nonprofit group then turned it over to Jackson, who agreed to pay for the razing. "Imbeciles," Brancatelli said more than once, referring to the banks. "They’re imbeciles."

I spent an evening with Jackson in his store and watched as a young disheveled man came in and purchased a pack of cigarettes. He hovered around the plexiglass. "Do you want to buy some tools?" the man asked. "No," Jackson curtly replied. Customers frequently offer Jackson sinks, cabinets and other scavenged items. He says that in the few years he has owned the store, the community has become more transient. "I don’t know nobody no more," he said. "I don’t know who to trust." Everyone calls him Johnny. They assume the store was named after him, even though it has been there for decades. The week before Christmas, two men rammed a van into the front of the store, intending to rob it. The van got stuck, and the robbers fled. But Jackson isn’t deterred. He says he hopes one day to knock down his store and build a row of small enterprises, including a restaurant and a barbershop. He is trying to buy another vacant house on the block. Brancatelli now fears he’ll lose Jackson. "I want to convince him we have a strategy for the neighborhood," he told me. "The worst thing you can have happen is to have this store close up."

BY MID-2007, IT BECAME CLEAR to Brancatelli that his was a city at the mercy of lenders and real estate wholesalers, who now owned thousands of abandoned properties in the city. Somehow, the city needed to hold these new land barons accountable for their vacant houses, so many of which were in utter disrepair. Brancatelli and others looked to Raymond Pianka, the judge in the city’s lone housing court. In 1996, Pianka gave up his seat on the City Council to accept this judgeship. His judicial colleagues derisively refer to it as "rat court," because its main function is to make sure that owners mow their lawns, trim their hedges, clean up their garbage, repair leaning porches or hanging gutters — in short, that they make their homes inhospitable for rats. No one foresaw that this lowliest of courts would become one of the most powerful instruments in the city’s fight for survival. "The court’s the only tool we have," Brancatelli said. "When we get them into court, we can’t let them go."

In 2001, when it became clear how Raymond Delacruz was wreaking havoc on city neighborhoods by flipping houses, it was Pianka who ran him out of town. The city’s building and housing department cited Delacruz for code violations on a house he hadn’t flipped fast enough. When he didn’t show up in court, Pianka had his chief bailiff stake out Delacruz at a doughnut shop. Pianka placed him on house arrest, ordering him to spend 30 days in the dilapidated structure he owned but had not maintained. Shortly after his sentence was up, Delacruz moved to Columbus, where he continued his flipping, and was eventually convicted for fraud that included swindling a bank vice president. Housing codes, which were established in the mid-19th century, set minimum standards for housing quality. They traditionally help maintain both a city’s aesthetics and safety. In Cleveland today, they seem to be all that keeps the city from crumbling. In 2007, Pianka realized that the banks weren’t showing up in court after being cited for code violations. "They were thumbing their noses at the city," he told me. "They were probably thinking, It’s Municipal Court. What can they do? And we thought, How loud can this mouse roar?" Pianka set up what he called his Clean Hands Docket. If a bank didn’t respond to a warrant, Pianka refused to order any evictions it requested.

Pianka’s staff also dug up a little-used 1953 statute that allowed for trials in absentia, and every other Monday afternoon for the last year and a half Pianka has held trials with a judge and a prosecutor but no defendant. The first case involved Destiny Ventures, a firm based in Oklahoma that buys foreclosed properties in bulk and then sells them. It was cited in 2007 for violations on one of its houses, but didn’t show up in court. The idea of a trial without a defendant was so unusual that when the prosecutor said he had no opening statement, Pianka prodded him. "You’re going to waive opening statement?" he asked. "Don’t you want to give the court a little road map about the strategy?" A housing inspector testified that Destiny Ventures had done nothing to correct the code violations on the vacant two-story clapboard house in question. The windows were punched out, the front door was wide open and roof shingles were missing. Pianka fined Destiny Ventures $40,000, and then had a collection agency sweep the company’s bank accounts for the money. Brancatelli celebrated by taping a copy of the check to his office wall. In a recent phone interview, an owner of Destiny Ventures, Steve Nodine, said, "It’s unconstitutional the way they fine people." His firm now refuses to do business in Cleveland.

One morning this fall, I visited Pianka before his Monday court session. His office, on the 13th floor of the Justice Center, overlooks Lake Erie and the new Cleveland Browns Stadium. It might be one of the nicer views in the city, but he would just as soon overlook the city’s residential neighborhoods. When I entered his chambers, he was on his computer scanning Web sites to tap into the real estate chatter. He found a Cleveland house on eBay selling for $500. In the photos, Pianka could make out mold on the walls and noticed a large portable heater, which he said was illegal. He shook his head. He has no power to haul people into court. Building and housing inspectors issue citations for code violations, and then the city’s law department decides whether to prosecute. Pianka hears only misdemeanor offenses, but he can both fine and jail defendants.

Pianka, who has a bushy mustache, often seems amused, so it’s easy to underestimate his resoluteness. The chief magistrate told me she has heard Pianka curse only once. It was in late 2007. He had fined Wells Fargo $20,000 for code violations but told the bank he would rescind the fine if it spent that amount rehabilitating the structure. Wells Fargo fixed up the house, and it was, for Pianka, a success story. When he drove the chief magistrate to the address to show off the house, there was nothing there, just a vacant lot. The city, he discovered, had razed it, unaware of the repairs. Pianka lives on a beautiful block in Cleveland’s Detroit-Shoreway neighborhood, where there is a stunning variety of architecture. But even on his street, there have been three foreclosures. For months, Pianka helped keep watch on a majestic 19th-century Victorian down the street. One neighbor paid for the electricity so the vacant house would be protected against vandals by an alarm system. Pianka shoveled the snow in winter and often parked his car in the driveway so it would appear as if someone were living there.

Pianka is an amateur historian, and his office shelves are filled with books on Poland, his grandfather’s native country. During my visit, he retrieved a book about wartime Warsaw and opened it to a photograph of a lone man with a wheelbarrow collecting bricks from the rubble of a building’s ruins. "He’s putting the city back together," Pianka told me. "We just have to make the best of things. We have to do it because nobody else will." One of his assistants poked her head in the doorway. "It looks like we’re going to have another packed house," she announced, and Pianka headed for the courtroom. A line of people snaked into the hallway. When the bailiff called their names, they approached the lectern, usually without an attorney. Pianka asked one man how he wanted to plead. "I plead whatever it takes," he replied.

Most of the defendants are simply asking for guidance, or at least some understanding, and the word is that you can trust Pianka. "He’s the most loved judge in Cleveland," Brancatelli told me. A good number of the defendants are facing foreclosure themselves and don’t have the means to keep up their property. Until recently, many might have refinanced, but that is no longer an option. One of the first cases I observed involved Sally Hardy, who is 52 and works as a housekeeper at a nursing home. She asked Pianka if she could confer briefly with the prosecutor, which she did, and then began to cry softly. "What’d you say to her?" Pianka asked the prosecutor in an attempt to lighten the mood. Hardy jogged out of the courtroom in tears. When she returned, Pianka apologized. "I’m sorry," he said. "These are emotional times, and sometimes it feels like the weight of the world is on your shoulders." Her house was in foreclosure, she told Pianka, but she had rescued it. Pianka brightened. "That’s a great accomplishment," he told her. He ordered her into a program that assists struggling homeowners; a housing specialist will work with Hardy to find money to repair her roof and porch.

Mayra Caraballo, a 39-year-old mother of two, appeared in court in response to code violations on her home. She explained to Pianka that she no longer owned the house. She had lost her job at a processing plant, and an adjustable rate had kicked in on her mortgage, boosting her monthly payments to $1,100, from $800. She had left after receiving a foreclosure notice. The house was quickly stripped of everything but the furnace. Pianka asked a clerk to check into the house’s ownership; he suspected that the lender had withdrawn the foreclosure at the last minute, as is becoming more common. The clerk tracked down the trustee on the mortgage, Deutsche Bank, and confirmed that the foreclosure had indeed been withdrawn. Pianka calls these situations "toxic titles." "You’re in limbo," Pianka told a shocked Caraballo. "There’s no hope in your getting out of this property as a result of foreclosure. We’re seeing this more and more."

Pianka sees these toxic titles as an effort by lenders to dodge responsibility for vacant houses. Later, I called Deutsche Bank to ask about Caraballo’s house. "We don’t own the property," a spokesman told me. "We’re the owner of record, but the investors who bought the mortgage-backed securities own it." Pianka chuckled when I told him of the bank’s response. "That’s their mantra: we don’t own it," he said. "It’s handy for them to say, ‘Oh, it’s not us.’ It’s part of this big shell game they’re playing." I checked in with Caraballo, too. She’s now renting and working part time at a day care center. She told me that she would like to move back into the house, but she’s not sure she has the money to replace all the hardware that has been stripped by scavengers or to make the necessary repairs.

Over the last year and a half, the housing court has collected $1.6 million in fines from defendants who didn’t show up for their trials. Last April, Pianka fined Washington Mutual $100,000 for a vacant property on the city’s west side. Washington Mutual, now owned by JPMorgan Chase, appealed, and in December, the Eighth District Court of Appeals in Ohio ruled that trials in absentia were not permitted in misdemeanor cases, essentially putting an end to Pianka’s efforts. JPMorgan Chase disputes the code violations, but a spokeswoman said the bank was not planning to send a representative to court to respond to the city’s charges. "We just have to figure out some other ways," Pianka told me. He has suggested that the city could name corporate officers when prosecuting code violations. He told me that a Cleveland police officer was so angered by all the abandoned properties that he volunteered last month to serve warrants to bank officers should they ever be issued. In the meantime, early last year, Cleveland sued 21 lenders, arguing that their vacant houses created a public nuisance, virtually destroying some neighborhoods. Ten of those lenders have since gone under, been acquired or gone into bankruptcy. The case is slowly winding its way through federal court. "This crisis changes weekly," Pianka told me. "It’s a torrent of water coming at us. We can divert it one way or another. But we can’t stop it."

ON FEB. 29 LAST YEAR, Derek Owens, a 36-year-old police officer on patrol, spotted a group of young men drinking beer in the open garage of an abandoned house. Neighbors previously complained of teenagers both selling and using drugs in the row of vacant houses on the street. When Owens and his partner got out of their squad car, the men fled. As Owens chased them, one of the men stopped in the driveway of yet another abandoned house, turned around and opened fire. One shot hit Owens in the abdomen, and he died several hours later. When Brancatelli heard of Owens’s murder, he wondered who owned the abandoned house and garage where the young men were drinking. He made some phone calls and discovered that he knew the owners, Eric and Sheila Tomasi, a couple from Templeton, Calif., who had been buying up foreclosed houses in Cleveland as an investment. Eric Tomasi soon called. He had heard about the shooting. Brancatelli liked the Tomasis, and suggested that it might be a good idea to begin repairs on the house. The neighbors, he told Tomasi, were up in arms over the vacant houses in their community. The Tomasis soon sought permits to do work and began to fix up the house.

Brancatelli had met the Tomasis a few weeks earlier at a suburban hotel where a private company was auctioning off foreclosed homes. Brancatelli was there to scare off speculators. He passed out a flyer, which read in part: "Dealing with the increasing problem of abandoned and vacant homes is at the forefront of our efforts to continue improving our community. . . . You should be aware that some of these homes were the source of incredible community concern and some resulted in criminal prosecution of mortgage brokers." This is what Brancatelli calls "the next tsunami" — companies and individuals who are buying foreclosed houses in bulk and then quickly selling them for a profit, often without making any repairs. The companies have appellations like Whatever Inc., Under Par Properties and Tin Cup Investments. Brancatelli thought all the equity had been wrung out of these properties, but clearly he was mistaken.

At this auction, Brancatelli was introduced to the Tomasis. They are both in their 40s. Before investing in real estate, Sheila Tomasi owned a small chain of clothing stores and Eric Tomasi was a mortgage broker and before that managed a chain of sporting-goods stores. Brancatelli found them surprisingly open, unlike some of the other wholesalers — or "bottom feeders" as some derisively refer to them — who wouldn’t return his phone calls or e-mail queries. He invited the couple to a gathering of local housing activists, and they laid out their business plan. Brancatelli was curious to find out how anyone was making money in a market where houses were selling for a few thousand dollars on eBay. The Tomasis said that they owned about 200 houses in Cleveland. (They purchased 2,000 homes last year, in 22 states.) They explained that they, unlike most other wholesalers, provide each buyer with the mechanicals — pipes, a boiler, a furnace, all the basic materials that had been stripped — that the purchaser would then be responsible for installing.

Brancatelli derived some comfort from this description. From his background with a nonprofit housing group, he knew the theory that people who put sweat equity into a house will be more committed to its upkeep and to making the mortgage payments. The financing the Tomasis laid out, though, made Brancatelli squirm. The purchaser would pay $500 down and then make monthly payments of no more than $450, which was below local rental prices. But the interest rate was 10 or 11 percent. What most concerned Brancatelli was that the Tomasis eventually hope to package the mortgages and sell them to investors. "It’s Groundhog Day all over again," Brancatelli remembers thinking to himself. "Intuitively, it doesn’t make any sense that a person from California would be buying hundreds of distressed properties in a place that’s in a downward spiral. It has nothing but the makings of someone coming to pillage our neighborhood."

But did that mean he shouldn’t work with the Tomasis? If he considered them the enemy, he wondered, where would that get him? Eric Tomasi assured Brancatelli and the others that they had a shared interest. "I want to put people in homes," he said. "And you want to get homes occupied." Pianka says Brancatelli faces a difficult choice: work with the Tomasis to make sure their properties are maintained and then sold to people who make the payments, or contest the Tomasis’ efforts and lose any oversight. In December, while I was driving through Slavic Village with Brancatelli, we passed a Tomasi-owned house that wasn’t secured. He left a message for Tomasi: "Eric, calling about 6921 Gertrude. The door’s open in the back. Give me a call. Hope things are well." Tomasi sent someone out to board it up. "Even if I didn’t like this guy, I don’t have the ammo to fight him," Brancatelli later told me. "Let’s see if this is a model we can work with."

THERE ARE REASONS to be wary. During my time in Cleveland, I came across two properties owned by an investment company that goes by the name Thor Real Estate. The first I stumbled across while driving through the city’s west side with Jay Westbrook, a city councilman. We passed a compact two-story house that had been vacant just a few weeks earlier. Westbrook peeked through the windows and, much to his surprise, saw some activity. A young, stocky man was inside installing new floors. He introduced himself as Oswan Jackson and told us he had just bought the house. He planned to move in with his wife, who was pregnant with their first child. He seemed disoriented, like many new homeowners, overwhelmed by the amount of work he needed to do. "I didn’t know there were code violations," he told Westbrook.

The foundation was failing and the roof needed replacing. He said the purchase price was $24,580 for the house: $500 down and $290 a month. "We’ll make it work for you," Westbrook cheerfully told him. "Welcome to the neighborhood." A few days later, after a colleague researched the property, Westbrook learned that the house had been in such poor condition that it was condemned three weeks after Jackson signed the contract — and that Jackson owed the back taxes on the property, which amounted to $4,000. The last I spoke with Jackson, he planned to walk away from his new home. The second house was on East 113th Street. The front steps were missing; piles of brush and rubbish clogged the driveway. One side was tagged by a local gang, an indication that it had been used as a gathering place. Posted to the front porch was a sign that read: 500 Down, 295 a month. In January on Craigslist, the owner advertised it this way: "I have a beautiful home at 3637 East 113th Street, Cleveland, OH 44105 Move in now! No credit check!" One neighbor I spoke to wondered why anyone would want to buy it. "It looks like there’s nothing left for that house to give," the neighbor said.

The dispiriting part of the story behind these houses, certainly from Brancatelli’s point of view, is that Thor Real Estate had been in partnership with the Tomasis. The Tomasis say they are now separate entities, but in court, the Tomasis have admitted that properties have been transferred between the two companies, and on occasion Eric Tomasi has offered to speak for Thor on code-violation cases. Once again, it’s hard to know who owns what. In January, Sheila Tomasi appeared in housing court. Sheila Tomasi is a personable, cheerful woman with high cheekbones and honey-streaked hair. The Tomasis purchased a house for their own use near Cleveland, and she was back for a couple of weeks to appear in court and to check on their properties. It wasn’t the Tomasis’ first time in Pianka’s court, and on that day, five of the Tomasis’ properties were cited for code violations. During her appearance, she told the court about a new owner, a single mother of seven, who had hired a contractor to install new pipes provided by the Tomasis.

But it was a shoddy job. So, the Tomasis hired a plumber themselves and paid him $1,300 to redo the work. They added that charge to the woman’s monthly mortgage payments. "I can’t go to sleep at night if we can’t give someone a good start," Tomasi told me on an earlier occasion. "You want to groom them and get all the hiccups out of owning a home: that they’re getting all their improvements done, that they’re paying their taxes. We want to make sure that everything’s going O.K." Tomasi also confirmed to the judge that they were considering the purchase of another 1,000 homes in the city. "That’s the nature of what’s happening here," Pianka sighed. "We feel in many ways helpless. "You’ve moved to Cleveland at least temporarily," he said. "That’s important, and taking care of your inventory properties, making sure you come into compliance with the law. There aren’t enough inspectors to follow you around." Tomasi nodded. Pianka continued, "If we find out you have a property and it’s flying below the radar, there are going to be severe consequences." "Yes, your honor," Tomasi replied.

Then, as if thinking aloud, Pianka said, "It is really tough being a city municipality because we’re subject to international banks, national banks, acts of Congress, buyouts of mortgages. . . . We have no control over those entities, so I guess we’re going to have to try to work with you." He fined the Tomasis $50,000 but gave them time to either raze the properties or repair them. "I’d like you to appreciate what we’re dealing with in Cleveland," he told Tomasi. "Now if you don’t have some good reason, I expect a good check made out to the clerk." Pianka left the bench shaking his head and later told me he better understood why Brancatelli was willing to work with the Tomasis. "What are you to do?" he said. When I told Brancatelli about the court proceedings and about the Tomasis’ mention of purchasing another 1,000 homes, Brancatelli said, "It’s just really strange times."


Anonymous said...

Stairway To Retail Heaven


Reversion to the mean is a concept that government bureaucrats refuse to accept. They are willing to spend as much of your money as they can get their hands on to reverse a non-reversible trend. Home prices must fall another 30% to reach the long-term mean value. Taking money from prudent homeowners and giving it to deadbeat homeowners and allowing politically motivated judges to decide who deserves a lower mortgage will not reverse the downward trajectory of home prices. It will just prolong the pain and create unintended consequences.

The number of homes for sale is still at record levels. With foreclosures accelerating, more houses will come onto the market and prices will fall. Unemployment will reach 10% next year. There are 2.1 million vacant homes in the U.S. today. This is 1 million more than the historical trend. No one is going to buy these homes at current asking prices. If you wait until foreclosure, you may get a house 50% cheaper than today’s asking price. This is a rational approach and will lead to lower prices. All the facts point to a significant further decline in home prices. The government’s efforts to mitigate foreclosures and prop up home prices with our tax dollars will fail. With prices falling for another two years and jobs disappearing at a 500,000 per month clip, consumers will stay on the sidelines for years.

Americans bought into the lie that their homes could fund a glorious retirement of cruises, golf, and travelling the world. That illusion has been shattered. It will likely take 10 years to get back to breakeven on the portfolio losses they’ve experienced in the last 18 months. Anyone who has retired in the last five years or has plans to retire in the next five years has had their plans upended. They will have to go back to work or work longer, if they can find a job. Only an insane person, after experiencing the losses of the last few years, would continue to spend on electric gadgets and luxury cars. If they don’t start to save at a rapid clip, they will experience a miserable stress filled old age.

The drop in retail sales in the last few months is the most dramatic in U.S. history. This is not a momentary blip in a long term uptrend. This is a paradigm shift. From 1952 through 1982, consumer spending as a percentage of our economy ranged between 60% and 64%. The United States ran trade surpluses and manufactured things that other countries wanted. Since 1982, we’ve lived above our means, consumed 4% more per year than we produced, and borrowed the money from foreigners to live this way. In 2008, this ratio of consumers spending to GDP topped out at close to 71%, or $10 trillion of our $14 trillion economy. Since this was an unsustainable trend, it will revert to the mean over the next decade. The reversion to 62% of GDP will reduce consumer spending by $1.3 trillion annually going forward.

To paraphrase famous American admiral John Paul Jones, we’ve only just begun to de-lever. When you accumulate debt over three decades, you don’t get rid of it in two years. Multi-decade expansions of debt are followed by a multi-decade deleveraging. The consumer is in the process of collapsing. There will be false starts in a positive direction, but the overhang of consumer debt, relentless decrease in housing and stock values, and looming retirement funding will force Americans to dramatically cut their spending for decades. The retail industry will be devastated by this paradigm shift.


Anonymous said...

Time To Fire Tim Geithner

We don't mean to sound impatient, but we've seen enough

Right. Like that'll change the world.

Deleveraging still far from over: Fed's Dudley

Deleveraging - used to mean something. Now it's the catchall for "we're fracked".

The Market Is Already Solving The Housing And Banking Crises

Comedic relief! Thanks, I needed that.

Continuing Job Losses May Signal Broad Economic Shift

Ya think?

Myron Scholes, the Nobel prize- winning economist who helped invent a model for pricing options, said regulators need to "blow up or burn"

Begs the question, "why not both?"

World's poor suffering most in the credit crunch

Oj, and you expected what..the rich?

The travails of Detroit

"travails"...hmmm, never new it was a past tense synonym for a four letter word beginning with F.

(Apologies to Noon Summary, still love ya!)

Why is everyone describing the bark! We get it already. Give us some reference. I mean at least look at the branches or something', will ya? There are *trees* out there. Maybe a forest even.

Stoneleigh said...

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

Anonymous said...

Great articles on Detroit and Cleveland. I spent time in both cities early this decade selling to K-mart and OfficeMax.

You could see (and even feel) that both cities where almost done with their middle class, blue collar neighborhoods.

Now cities have reverted to a two-class society.

I wonder if the 2nd age of sail will revitalize some of the old Great Lakes cities.

Anonymous said...

Posted to RGE on Nov. 13, 2008
I think we are going to see 5 very soon which will happen along with a market rally.

1.Credit crisis worsens and the money supply starts to shrink for lack of credit. The economy begins it's descent into a deflationary spiral. Unemployment goes into double digits.
2.The federal reserve starts lowering interest rates and there is a fire sale on US debt to the rest of the world.
3.Deflation worsens, unemployment increases and the federal reserve tries to stave off a depression by 'fixing' the money supply by sending the overnight funds rate to zero.
4.The banks take this 'free' money and put it on their balance sheets by paying off debt or giving out dividends or buying back shares or sending it overseas or into hedge funds or any other way they can pocket the money. Loans are at the very bottom of the bank's lists to use the money.
5.The federal reserve tries threatening the banks into lending but the banks ignore them. Stymied the federal reserve is paralyzed and does nothing. Congress and the President step in and attempt to inject liquidity directly into the market by making large emergency tax cuts and rebates.
6.The federal deficit soars. There is a crisis of confidence in the solvency of the US dollar. The market for US debt dries up.
7.Facing imminent bankruptcy the federal government passes laws allowing them to take money directly from the federal reserve in order to finance day to day operations.
8.The markets realizes that the US government is going to risk hyperinflation and inflate their way out of debt. Everyone tries to unload all the debt they bought and as a result trigger the very hyperinflation they feared.
9.Globalization fails spectacularly. The massive sale of US debt and the following hyperinflation turns the US into a monetary black hole that sucks liquidity out of the global market. The US has just stolen trillions of dollars from the entire world by selling dollar based debt and then hyper inflating it.
10.The global economy goes beyond depression into a complete economic collapse.

MikeB said...


The fact that we're even seeing such a headline in the U.S. is just phenomenal.

By way of full disclosure: I have no money to stuff into my mattress.

Greenpa said...

I won't belabor it; my opinion remains the same.

Ilargi- you keep hollering for Obama to "lead" - take critical action quick, etc.

I think Lao Tzu agrees with me, however:

"To lead people walk behind them. "

Most of what Obama has accomplished so far has been by FOLLOWING the public mood.

The mood, you must admit, is getting more agitated; more calls for blood; calls for Geithner's head, even from the pundits who praised him- at first.

Much easier for Obama to shed the blood of the powerful today, than a few months ago; and many of the Masters of the Universe are starting to look afraid.

Time will tell! (Didn't Lao Tzu say that?) :-)

el gallinazo said...


"By way of full disclosure: I have no money to stuff into my mattress."

By way of disclosure: I will soon have no mattress.


Health care is the next big bubble to pop. Like housing it was propped up by ruses involving the government and FIRE (in this case the "I") to the point that its cost vastly exceeds the ability of the average citizen to pay. Many of the large and expensive villa owners on my island are physicians. Of course the front line grunts in the health field will suffer first and the most.

"I have stopped the bleeding and have substantial funds left in my 401k, let's say $30k after penalties.

I am wondering if and when I should think about trying to move those to a slightly safer FDIC insured account at HSBC. As far as I can tell, they appear to have been deemed "too big to fail" by the people in charge."

Why not go into 13 week treasuries through Why put it in a FDIC account? Hasn't Ilargi convinced you yet that the FDIC will fail in the fairly near future, i.e when CitiGroup collapses?

I see CitiGroup as King Kong in his last few moments as he swiveled around the antenna of the Empire State Building and the short traders fire mercilessly at him. Actually Kong inspires infinitely more sympathy than CitiGroup.


The Michael Hudson radio interview was a great listen. Thanks to whomever posted it.

Anonymous said...

VK said: (yesterday)
"Efficient engines will only serve to accelerate peak oil."

True, and any engine will contribute carbon emissions, too. If governments and people would at least use efficient engines in a transitional period that would lead to fewer or no engines, but we're nowhere near that stage. Plus, it is probably too late anyway. People in the US prefer enormous SUVs, McMansions, and luxury excesses. Western culture is very covetous and most people believe that small and less is ugly, that large and more is beautiful.

"Society needs to power down, if it's not peak energy, it's peak water, peak fertilizer, peak everything. We can't run a society built on cars."

True, but the powerful elites will never allow the dismantling of the motor culture. Collectively, people in our culture will not voluntarily embrace simplicity and, of course, our Wall St.-controlled government will never encourage people to live simply or change the transportation infrastructure (develop rail system, for example) to facilitate living with fewer machines or no machines. Again, it is probably too late to change infrastructure. Money that could be going to infrastructure change is going to the financial sector in the bailouts.

"It's best to get a bicycle. The most efficient of them all. Sorry to be such a skeptic but any solution to peak oil must be viewed thorough the lens of population overshoot and resource consumption generated by more efficiency."

Agree. It's better to be brown than green. Greens are addicted to technology, browns are not. Greens will buy a hybrid vehicle (made with lots of fossil fuel) and Browns will buy a bike, not a car -- while most in our culture will still buy an SUV!

Go brown!!! :-)

Anonymous said...

The truth is ugly.

Forbes magazine had the previous week named Hamtramck one of "America’s 10 fastest-dying cities", alongside Cleveland, Ohio; Buffalo, New York; and Detroit itself.
Much has been written about "white flight" from inner Detroit, a city whose population peaked at two million in the 1950s but now stands at about 900,000.
Vacant houses are not a new phenomenon to the city. Ravaged by the closing of American steel mills, Cleveland has long been in decline. It has lost half its population since 1960. The number of empty houses is so staggeringly high that no one has an accurate count. The county treasurer says it’s more likely 15,000.

The Market Is Already Solving The Housing And Banking Crises
It buys them at, say, 30 cents on the dollar. PennyMac then calls up the homeowner paying the mortgage who is about to be evicted, "How would you like a 50% cut in your mortgage payment?" The overjoyed homeowner gets to keep his house. PennyMac and its shareholders feast on the spread between 30 cents and 50 cents.

And who gets hosed? The shareholders and bondholders of IndyMac.
Next crisis.
The home owner goes to his municipality and presents his NEW mortgage/value of his house and asks for a 50% decrease in the evaluation of his house. The municipality will be forced to adjust their taxes. Snow ball effect … therefore, a new crisis … municipal services are cut.
Its all a bad dream!
Ghost towns ... I mean, ghost cities

Anonymous said...

El gallinazo said:


"By way of full disclosure: I have no money to stuff into my mattress."

By way of disclosure: I will soon have no mattress.

LOL ...

el gallinazo said...


Thinking about the Michael Hudson radio interview I listened to today

it seemed that much of his analysis was congruent with ideas you have expressed. However, while he stated in no uncertain terms that the looting of the treasury by the banks was the largest theft in history, he was in favor of Keynesian stimulus countercyclical actions of a government, and stated that Europe will collapse even faster the the USA because it refuses to run stimulus deficits. Did I get that right, and what do you think of it?

Anonymous said...

I think we're participants in the collapse of the US. We're still very much in the denial stage of the process so we have lots of "magical solutions" but in the end the ship sinks. Course there are always the "hopeful" ie hoping someone, somewhere will save the ship. But it's the realists that say "ah hell" and figure out how to survive that are standing in the end.

Anonymous said...

There are a few places that I'd like to stuff some of my money, but I'd probably get arrested for that.

Nelson said...

This apparent mutiny by the WSJ is fascinating, reminiscent of the stunning revelation by military officers eighteen months ago, who went public with the story that nuclear-tipped cruise missiles were caught on their way to Iraq.

IMO we're seeing the start of defections by finance insiders who have either had enough of this criminal activity, or are seriously afraid of the social consequences of their actions.

It's not just the actions of Treasury and the Fed that reek of panic now. The Street seems to know that they're down to the last few ticks of the National Debt Clock.

They're stuffing their mattresses.

Bigelow said...


Hey WSJ catches $50 Billion in FED funds going through AIG elsewhere to big banks! That’s not the first nor last time the government is treated as a cash cow for various criminal syndicates. Federal Reserve Note shipments to Iraq have just disappeared. Over a Trillion dollars was missing from just the Dept. of Defense nine years ago. How much more since then? No audits. That doesn’t even count the big ramp up of recent bailouts. Elites have been plundering public assets with abandon for years, this must be the crescendo. TOTALLY POLITICALLY BANKRUPT! Damn right.

Anonymous said...

Illargi. I am a bit surprised you did not surmise that a lot of the AIG bailout money was going to pay off their credit insurance policies. Named swaps so they were not regulated.

This is a more direct method of propping and helping the banks. More direct than taking their crappy paper as collateral for loans or buying newly minted stocks but the intent is the same. That would be to bail, bail bail.

A distinction should be made on the mortgage CDS's. Many banks held mortgage portfolios and they purchased the CDS's as hedges, insurance. Others like GS or John Paulson the hedge fund guy used them for pure speculation. One can make an argument perhaps in good faith that paying off the contracts of the hedgers serves the main purpose of the bailout. That being healing the banks. I don't believe it but it's a rational argument.

However it is sick and dirty in the extreme that the speculators like GS are getting paid. Especially since it was really AIGs immanent failure due to the CDS's which brought Hank and Ben to Capital Hill that September evening with dynamite strapped to their chests demanding $700 billion tomorrow, no questions asked, or the system would blow up.

Now that the cat is semi out of the bad you will note that all the focus is on those damn foreign banks taking Uncle Sam's money. I maintain the primary focus should be on the payoff of the CDS speculators. GS in particlar.

While Paulson was Treasury Secretary he went out of his way to downplay the meltdown in the mortgage market at the very same time GS was building up it's speculative position against them. The entire thing is sick beyond belief.

Anonymous said...

el gallinazo
".... and stated that Europe will collapse even faster the the USA because it refuses to run stimulus deficits."
I believe that it was more of a question of not being able to run stimulus deficits since they are independent countries.
He does not like the neoliberalism approach to the economy.
Maybe, Githner cannot find any other neoliberalists to help him fix the financial system because they know that it cannot be fixed.

I sure that he does not want to hear from people like Michael Hudson.

Persephone said...

Need a safe bed?

New 'safe' bed allows savers to safely store their cash under the mattress


It was my understanding that the AIG money was pushed through to the banks by paying off swaps. Shoring up the ibank casino.

Anonymous said...

airtrader @ 5:44pm

The modern spelling is "frak", not "frack", but you may be a 70s/80s fan ;-)

Anonymous said...

Things are startting to look very grim; Denninger just pulled out the elephant font again.

el gallinazo said...

@ Pineapple
From an anon poster to RGB Monitor

"8.The markets realizes that the US government is going to risk hyperinflation and inflate their way out of debt. Everyone tries to unload all the debt they bought and as a result trigger the very hyperinflation they feared.
9.Globalization fails spectacularly. The massive sale of US debt and the following hyperinflation turns the US into a monetary black hole that sucks liquidity out of the global market. The US has just stolen trillions of dollars from the entire world by selling dollar based debt and then hyper inflating it.
10.The global economy goes beyond depression into a complete economic collapse."

Re #8:

Why would everyone trying to unload treasuries cause hyperinflation? Wouldn't it just lower the value of the bonds from face value?

After everyone has dumped their treasuries - into dollars- what do they do with their dollars. After all, short term treasury bills are essentially dollar equivalents? Gold? Oil? Florida swamp land? Hudson talks of Da Boyz moving their money off shore. But how do they store their money? If everyone tries to buy gold, it will just form another collapsing bubble. Inquiring minds would like to know.

Persephone said...

One giant step towards bankruptcy

Meanwhile, the cop who had the Wall Street beat when the biggest heist in history was going on... and who engineered the loans to AIG and GM... is now the chief of police. Tim Geithner said he was working night and day on Obama’s rescue plan, “because we know how directly the future of our economy depends on it.”

But as our old friend Marc Faber points out, neither Mr. Geithner, Mr. Bernanke, nor any of the men who rule us, seems to have any idea what they are talking about. As Chairman of the New York Fed, writes Faber, Mr. Geithner “did not seem to ‘know’, in the period preceding the crisis, how the future of the economy depends on a sound financial system!”

Faber goes on to explain that not only did the key players fail to understand what was going on – when it was obvious to him, us and millions of others – they then misdiagnosed the problem and prescribed the wrong treatment. They thought it was a liquidity crisis; so they threw billions in cash at dying institutions.

At every step of the way, the feds have been clueless, hopeless, and defenseless. It was the feds who lent money at negative real interest rates for more than 5 years. It was the feds who pretended to “regulate” and “control” the marketplace... claiming to protect investors from fraud and malfeasance. It was the feds who licensed the banks... set banking standards... blessed derivatives because they “distributed risk more widely” (Greenspan)... urged people to buy adjustable rate mortgages (Greenspan again)... praised sub-prime lending because it encouraged home ownership... and even told consumers to “go out and buy an SUV” in order to give the economy a boost (Fed governor Robert Tier).

The feds piled up the tinder... poured on the gasoline... and lit the match. And now, what do you know... they’ve all joined the fire department!

Anonymous said...

"After everyone has dumped their treasuries - into dollars- what do they do with their dollars....moving their money off shore. But how do they store their money? If everyone tries to buy gold, it will just form another collapsing bubble."

That's the big question, isn't it?

I can think of a few answers:
1) Some will go into gold, and it probably will spike to levels that make it unattractive to all but the firstcomers, then crash, then repeat the process cyclically with extreme volatility as long as the crisis continues.
2) If the eurozone countries don't engage in the same stimulus as the USA, their economies will fall faster, but their currency will be more stable, so their may be some flight to the Euro.
3) If the eurozone falls apart, the re-introduced currencies may have some appeal after they have sunk to fair value.
4) People use their dollars to buy stockpiles of food and fuel, tools, trade goods, guns and ammo.

You could see all of the above at the same time. A flight to hard goods, transfer of some capital to other currencies to diversify currency risk, a boom in precious metals.

But I don't expect any of these things to lead to inflation by themselves. Too much deflationary momentum. You'll need a huge amount of money printing to get any traction - tens of trilions, and even then, it won't kick in until assets are a lot closer to a bottom, which requires another year at least of catastophic losses

z said...

@Greenpa: I think Lao Tzu agrees with me, however:

"To lead people walk behind them. "

tongue in cheek? if not, you'd better find a different translation.

rachel said...

ilargi: Thank you for your work. This is a frightening and brilliant intro..

Both issues above give me the impression that it's not just the FDIC that’s losing it's grip, it's the government itself, and with it the entire political system..... I've seen very few comments since that reflect that realization, but that doesn't make it any less relevant.

Today I was talking to an alderman about using DHS money to install hand pump wells in a few city locations like parks or schools. Charming like at a wayside in rural Wisconsin but very practical from an emergency management plan perspective. I can't even mention the potential collapse of our economic system or the failing water services to come, worse the municipal water supply is privately owned.
Just because we are not saying it doesn't mean it wont or isn't happening!
ilargi your brilliant intro was right on.

The article about Cleveland is a story of a few heroes, powerful villains and victims.

Anonymous said...

@ gallinazo

The link goes to a page for sale...

rachel said...

"Kitchen of India" ads wow! much better than the woman's clothing from a while back!

Anonymous said...

I was taking to a friend about the Banksters and their (dis?)organized criminal financial rackets.

He wanted to know why we (the People) could not just go after these sleaze balls tooth and claw. Track them down, hunt them down, 'render' them when they were found. Make them cough up their ill gotten gains, etc... He said," Believe me, there are ways and means to do it to them if the intelligence agencies can do it to the general public."

As I thought about how the Bush Junta debased and dismembered the Constitution for last 8 years and the Judiciary and Congress stood by in mute complicity, it occurred to me that the power of the warrant-less wiretap and other assorted info gathering techniques, that are now at the disposal of the New President, could easily be applied to these Banksters and the Financial Terrorists who have destroyed the economy.

Everyone indirectly refers to "TPTB" in one form or another, but these people, despite having lots of money, are not omnipotent. And judging by how things are unraveling, I agree with Ilargi that they increasingly look like they are losing control of The Moment.

Peak Finance, Peak Oil, Peak Climate. Do they think they can live in caves or uncharted islands or in space until this 'blows over'? Could they hide in China or Saudi Arabia or a cave in Switzerland and feel safe?

Everybody on the planet including their fellow financial terrorists will be gunning for them. If for no other reason than to steal their stolen loot. There is no honor among thieves.

Do they think that hired goons and mercenaries will keep them safe in a Green Zone somewhere? Where exactly in the world would that be? Inquiring minds would love to know.

Anonymous said...

Part of the solution
The Economic Crisis and its Implications for The Science of Economics

May 1 - 4, 2009
Perimeter Institute
The Perimeter Institute conference on economics is being organized in an effort to better evaluate the state of economics as a predictive and descriptive science in light of the current market crisis. We believe that this requires careful, dispassionate discussion, in an atmosphere governed by the modesty and open mindedness that characterizes the scientific community. To do this we aim to bring leading economists and theorists of finance together with physicists, mathematicians, biologists and computer scientists to evaluate current theories of markets, and identify key issues that can motivate new directions for research.
The conference will begin on May 1, 2009, with a day of invited talks by leading experts to a public audience of around 200 on the status of economic and financial theory in light of the crisis. We will then continue for three days of focused discussion and workshops with an invited group of around 30, aimed at defining research agendas that address that question and beginning work on them.
I'll try to follow it and keep everyone informed.

Anonymous said...

An addition

Under reccomended reading
The Financial And The Policy Responses; An Empirical Analysis Of What Went Wrong
Cambridge 2009
John B. Taylor
I don't give much hope of them arriving at anything if this is the kind of info that they are basing their discussion.

He hasn't a clue.

Anonymous said...

"It shows that in the White House and on Capitol Hill, it's the bankers who have final control, not the people."

Well, duh. Which is why we no longer need to waste breath prescribing financially responsible public policy solutions that the government will never implement.

"Do they think that hired goons and mercenaries will keep them safe in a Green Zone somewhere?"

Yes, it appears they do.

"Where exactly in the world would that be? Inquiring minds would love to know."

Umm...That would be Paraguay.

Anonymous said...

Paraguay? Well, that takes the guessing game away. TPTB will make a much easier target all bunched up together in one clearly defined area of South America.

Ah,'The Land of Martin Borman', alias for them, it's not 1945 anymore and a sad little back water of a country like Paraguay can be turned out inside these days like a very cheap suit with the right combination of threats and incentives.

Anonymous said...

To Ilargi, I can't seem to store the RSS feed in my reader. Can you check it out?

Anonymous said...

@Anon: 8:19

"We're still very much in the denial stage of the process"

There's an old saying. "A good General knows when to retreat".

I have a better version of it:

"A good General knows when to charge in a different direction".

It's pretty simple. If you don't charge in a different direction right now, you're going to get slaughtered.

That should be quite clear by now.

"He wanted to know why we (the People) could not just go after these sleaze balls tooth and claw."

Because, as Ilargi has pointed out, there's a fourth branch of Government which controls things. The Lobbys from the Corporate Elite.

And yes, they do think they can get away with it, and are quite arrogant about it. Don't underestimate them. Even if things change, many of them will still be around and influencing things. That's what they do best. Underestimating them would be a very naive and serious mistake.

Greyzone said...

A note to people - I am discovering rural properties, with houses (that almost always need repairs) in a state of foreclosure that can sometimes be bought free and clear for ridiculous sums. As an example, a co-worker of my daughter just mentioned getting a lake house and acreage for $4000. Yes you read that correctly.

There are those of you looking for your last chance to "get out of Dodge" (G.O.O.D.) and this may be one way to proceed. Start examining rural properties well away from any large city, preferably at least 100 miles, and seeing what's available.

In the case of the co-worker of my daughter, the bank originally wanted $15,000. They said sorry, no way. The bank replied with "Make us an offer." So they did and it was accepted.

The couple in question now has a retreat property that at least is an intact house owned free and clear with some acreage. It needs repairs but could be lived in. Their dual purpose plan is to begin repairing it with the hope that they can vacation there in a few years and retire there even later but also holding it as their G.O.O.D. retreat. Such a solution isn't perfect, but it's better than losing your job, being thrown on the street, and living under a freeway.

Time grows short. Your chance to do something about your situation grows slimmer by the minute.

Anonymous said...

For whatever it's worth, here's a little Kremlin astroturfing about Gold:

Putin's Fascinating Bet

“We’ll solve the problem with gold mining,” Putin said. “Especially since — I’ll say it again — I’m well aware that the price of gold is rising on world markets.”


Keep in mind Ferfal's experience in Argentina, about properties which are too remote. They are prime targets for attackers, since they are easy to sneak up on, when TSHTF.

One's best defense lies with one's neighbors.

I'm not saying the properties you mentioned aren't a valuable alternative, especially under the circumstances you mentioned. Rather, one might want to bring along some like-minded friends.

Anonymous said...

@airtrader 5:44pm

The modern spelling is "frak", not "frack", but you may be a 70s/80s fan ;-)


(count 'em)


Anonymous said...

Now this is an interesting statement:

"We don’t own the property," a spokesman told me. "We’re the owner of record, but the investors who bought the mortgage-backed securities own it."

Gosh, yet they were able to initiate a foreclosure!?

This is more reason for every single person undergoing a foreclosure to challenge it in court, and prove that the Bank is indeed the owner of the mortgage.

It strikes me that the above type of claim by the Bank could easily be made to backfire against them, one way or another.

But I'm not a lawyer, and certainly not an expert in the property law of that State.

Anonymous said...


This is more reason for every single person undergoing a foreclosure to challenge it in court, and prove that the Bank is indeed the owner of the mortgage.

This is indeed what is happening. Companies are springing up that, for a fee, will use this tactic to help homeowners keep their homes.

In another life long ago I wrote software for a large trans-pacific bank. They had a backlog of thousands of loans that could not be resold to FNMA or FDMC (fanny /freddy) because the documentation was incomplete. And these were new loans.

The software tracked the large number of documents that needed to be complete before fanny or freddy would buy the loan.

In building the system I became familiar with many of the docs that were needed. What I came to realize, and what I pointed out to management, was that the docs that were being marked as "cleared" were often in error, incomplete, or missing entirely.

And this was back in the early 1990's before the age of derivatives and tertiary (quaternary, etc) resale of loans.


For anyone that is unfamiliar with how home loans were made in the US it worked something like this:

1) A bank made a home loan.

2) The bank sold the loan to FDMC or FNMA for a .5% to 1.5% profit and locked in this profit up front.

3) FNMA or FDMC repackaged the loan in a bundle of loans resold to tertiary buyers.


In the late 1990's the packaged loans began to be resold a 4th, 5th, 6th or more times. Insurance against loan defaults was taken out on the loan packages at every step of the way.

Anonymous said...

Political Social Ethical Capital

Well, the USA is not alone. I will not bother mentioning Berlusconi who is an outstanding scoundrel. Just take a look at Tony Blair, America's poster boy Another Million in the Kitty

All I can really add is that our respective ruling classes are corrupt to a degree unfathomable not so long ago.

Anonymous said...

Apropos the coming global currency system shakeout that many of us believe is imminent, a new econ 'zine has popped up with some insightful artcles.

Quoted from Barry Ritholtz' blog:

The economy we live in is a rigged game, established around the time of the Renaissance in order to promote the welfare of early chartered corporations and the monarchs who gave them license to monopolize world business. Until that time, there were many kinds of money in use simultaneously. People used centralized currency to conduct long-distance transactions, and local currency to transact on a more day-to-day basis.

Most people, in fact, never used centralized currency at all. They simply brought their season’s harvest to a grain store, then got a receipt for the amount of grain they had deposited. This receipt was currency, redeemable at the grain store for something everyone knew had real value. but since a certain amount of grain went bad or was lost to rats, and since the grain store had some expenses, this money lost value over time. Since the money would be worth less the following year than it was worth that day, the bias of the money was towards spending and reinvestment. That’s why medieval towns built cathedrals: as a way of investing in the future with excess money from the present. They were that wealthy. Women were taller in medieval england — a sign of their good health and diet — than at any other time before the last two decades.

Local currencies allowed towns to create value and reinvest it in their own affairs. This was intolerable to an aristocracy already waning in power and influence. So European monarchs began to outlaw local currencies, and force everyone to use “coin of the realm.” These centralized currencies had the opposite bias. They were borrowed into existence by businesses, and then paid back to the central bank, with interest. Like most innovations of the Colonial era, centralized currency is a way to extract value from the periphery and bring it back to the center. People’s labor no longer contributes to their own wealth, but to the lender’s. eventually, the lending economy — central banks and banks — becomes bigger than the “real” economy of people doing stuff. Today, in fact, over 95% of currency transactions are made between speculators. our money is used less for real transactions than betting.

I believe the trend will be away from the US dollar backed centralized currency schemes in use today. Regional currencies are already starting to appear. This in itself is nothing new. But current events are giving ground to these regional currencies' traction in regional trading blocks.

The humdinger black swan event would be if China pushes a gold backed Yuan as an Asian regional currency. This is currently unlikely due to the death-embrace of the US-China trading moebius. If/when this trading system weakens or breaks down entirely it would be logical for the Chinese to move to stabilize the Asian ecnonomies around their own currency. Of course Japane and probably even Australia and New Zealand would have to be on board. If the Chinese could get Iran and a couple other oil producers (Venezuela?) to hop on board as well we could see a new paradigm emerge.

The idea of super-local currencies is gaining ground, down even to a single town or parish level. Once global trade becomes uneconomic things will move increasingly local. How will central authorities block "receipts of deposit" of foodstuffs, gold, silver, or anything or value from being used as local currency? This is, after all, one of the oldest and most natural forms of money.

Micro-loans have already rejeuvenated local business in many poor third world nations. What would prevent a micro-loan provider from issuing their own script redeemable at the businesses receiving the loans? The business owners would then use the script to repay the loans themselves. As long as the script can be used to purchase a breadth of goods or services with intrinsic value it is a complete monetary system. Albeit a local one with limited influence outside of its sphere of use.

goritsas said...


Please review the meaning of a “Black Swan” before you continue to use it erroneously. Please review the definition of “script.” I think you’ll find you’re looking to use “scrip.” Your observations and assertions are irretrievably weakened, and ultimately dismissed, as you cannot even parrot the terms of your discussion correctly.

Also, I’m confused by your scrip issuing micro-lender idea. If I, as a micro-lender, lend to you, presumably I am lending in the sovereign currency. How do I recover my sovereign currency if I let you repay your micro-loan using scrip I have issued? Don’t I need to have some means to allow my loan to repaid in the currency it was lent in? Or have I simply issued your loan in my scrip? How would that work, exactly? How would you use my scrip to purchase for your business when, presumably, your vendors will be expecting payment in the legal tender? Do I need to sell my scrip at a discount to face value to your buyers in order to recover my loan? I’m sure I’m missing something, but there appear to be some gaps in the process you’re describing that don’t seem to have any clear answers.

Greenpa said...

z - ""To lead people walk behind them. "

tongue in cheek? if not, you'd better find a different translation."

aha. I wondered. There are two versions I'm aware of; one saying "walk beside", the other "behind". The translations I looked at seemed to separate those, as if he might have said both.

and; many many thanks for your detailed response to my question on LaoZi a couple days ago; it helped. LIkewise, Brian M- excellent pointer on the translation front. ( I'm well aware, of course, of how thoroughly LaoZi has been mythologized; I get a kick out of the fact that one of the fairy tales I read my 4 year old has him floating down, on his "auspicious cloud" .)

Ilargi said...

Black swans suffer a lot of abuse these days.

Stoneleigh said...


(Quoting Ritholtz): Local currencies allowed towns to create value and reinvest it in their own affairs. This was intolerable to an aristocracy already waning in power and influence. So European monarchs began to outlaw local currencies, and force everyone to use “coin of the realm.” These centralized currencies had the opposite bias. They were borrowed into existence by businesses, and then paid back to the central bank, with interest. Like most innovations of the Colonial era, centralized currency is a way to extract value from the periphery and bring it back to the center.

This is an important point. central currencies are wealth concentration mechanisms, as are markets. As Ilargi has repeatedly said, the centre cannot hold (in its present form and at its current scale). Wealth conveyors in favour of the centre are breaking down. Eventually we will revert to many regional centres instead, which will employ separate wealth concentration mechanisms in their own favour, but at a much smaller scale.

Local currencies can be an important means to get through an interim period of chaos, as they have the potential to get a local economy moving again, or even prevent it from seizing up in the first place, as so much of the economy is destined to do.

In time they will be seen as a threat though, precisely because they undermine central power and control. For this reason they are likely to be a temporary solution. The elites will want their cut, and they would rather have a percentage of virtually nothing from a crippled local economy than be shut out of a thriving one. The cost to the local people of shutting down a successful local currency would be enormous, and for very little gain by the elites. It's not just about the money, but about power structures and subjugation. The naked abuse of power - just because they can - becomes much more evident in hard times. Seeking control over others is a major feature of times such as these.

My view of where we are headed politically is an initial period of chaos met by disorganized state violence, which people will have to ride out largely on their own, or, if they are lucky, with their community. My best guess as to when such a thing might begin is next year.

I think that will be followed by much larger scale and far more organized repression, taking advantage of the severe shock to the system in order to press an advantage. For those who have not yet read The Shock Doctrine by Naomi Klein, I strongly suggest that you do so. Forewarned is forearmed, if only psychologically.

The resources we have, which have been stretched far too thinly to support a middle class in developed countries at anything like their current standard of living, will still support a repressive elite at a very high standard of living once the masses have been reduced to penury. For a while they will have the resources to be able to maintain a totalitarian state run from defended 'Green Zones'. The relevant parallel from the Roman Empire would be the repressive reign of Diocletian, where the peasants in the periphery were taxed and worked to the limit in an ultimately vain attempt to maintain the power of the centre.

Eventually (probably beyond the lifespans of most of us here), this too will fail, and we will be on our way to a future of much smaller political structures (if we don't irretrievably undermine our carry capacity through fast catabolism or war).

Anonymous said...

@el gallinazo wrote:
"Why would everyone trying to unload treasuries cause hyperinflation? Wouldn't it just lower the value of the bonds from face value?"

Treasuries are debt, money is debt, treasuries are money. It's all the same pile. Like all commodities this pile is subject to the law of supply and demand. A collapse in demand means a collapse in value and a currency losing value is the definition of inflation. Right now the US dollar is increasing in value because treasuries are in demand because people want to keep their money safe. A currency gaining value is the definition of deflation.

@el gallinazo wrote:
"After everyone has dumped their treasuries - into dollars- what do they do with their dollars. After all, short term treasury bills are essentially dollar equivalents? Gold? Oil? Florida swamp land? Hudson talks of Da Boyz moving their money off shore. But how do they store their money? If everyone tries to buy gold, it will just form another collapsing bubble. Inquiring minds would like to know."

Unlike the physical world there is no such thing as conservation of debt. Debt (money) can be created out of nothing and can disappear into nothingness. Once it starts to disappear people are prone to exchange it for "hard" assets that are much less prone to disappearing like land, food, ammunition, etc. Basically anything that has utility. If everyone tries to do this at once everyone is going to get very little.

Jim R said...


It makes the mattress lumpy. I'd rather invest it in land in Maine.

Have to convince the person sitting next to me on the couch first ...

el gallinazo said...


It has been 18 years since I had to go into depth with the Carnot cycle, and unfortunately, I never really got my head around it entirely. But it describes in theoretical terms the maximum efficiency of a heat engine. I also find it very unlikely that your friend could invent a heat engine that improves efficiency to this degree as it would violate the Carnot maximums. I never say never, but it would be a hard proof and would require a rigorously tested prototype.

People are also reading on the Web about engines that burn water. It always turns out that the water is prepped in such a fashion into molecular O2 and H2, and then that is burned, and the free energy for this dissociation is far greater then anything received in combustion.


Anyone who has ever cared for a baby knows that green can also be the color of manure :-)

Anonymous said...


I don't disagree with you about the will and intentions of the ruling class, but it's hard for me to credit a comparison between the peasantry of Roman times and the middle class of today. A Roman peasant simply had an entirely different conception of him- or herself than today's cubicle worker does... I think it's probably misguided to look back beyond 1789 for analogues. And I don't think any state apparatus will be able to nakedly suppress the wider population for very long.


el gallinazo said...

@Todd in California

Sorry, Todd, I am losing whatever marbles I ever possessed. Turning into a senile old buzzard. Meant to write:

goritsas said...

pineapple said...

Debt ... Once it starts to disappear people are prone to exchange it for "hard" assets that are much less prone to disappearing like land, food, ammunition, etc. Basically anything that has utility. If everyone tries to do this at once everyone is going to get very little.

If debt is disappearing, how does one exchange it for hard assets? How would I, for example, exchange my mortgage for land, food, ammunition, etc? This seems oddly contradictory to me. But, since you seem to think this works, I’ve got a great mortgage on really nice paper I’m just looking to exchange for your land, food, ammunition, etc. Let’s do a deal.

el gallinazo said...


You are very, very bright and have a profound understanding of economics. It is unfortunate that you feel compelled to express your thoughts through aggressive, condescending, humorless, disparaging postings. It's like wrapping your bon bons in turds.

Anonymous said...

Here's the solution to Starcade's problem.

If you haven't got a farm, or a job, all you need to do is become a Mormon:

Mormon food bank a private welfare system

"They're damn sophisticated people, for sure," said Rodney Stark, professor of sociology of religion at Baylor University and the author of "The Rise of Mormonism."

This article is just the tip of the iceberg, IMHO. If you want to find the best book on Preparedness, search for the one from the Mormons.

I had mentioned last fall that tough times would be an excellent recruiting opportunity for certain groups like these.

And I'm not a Mormon, just for the record. Organized Religions just aren't my thing. Personally, I find the Mormons slightly scary, though not nearly as bad as the organized crime syndicate called "Scientology".

But if you are out of choices, I suppose it's better than starving to death.

Anonymous said...

Gallinazo - it's either goritsas's medication; or his recreational chemicals; I'm convinced. Today he's Jesus H. Keynes. As you say; it's a shame. On non-chemically distorted days, he's worth talking with.

goritsas said...


Your scrip issuing micro-lender scheme is fatally flawed for one compelling reason I completely failed to see.

Private banks already do this.

The only difference between your scheme and today is banks issue legal tender with the authority of the nation-state. Further, what’s to prevent some enterprising micro-lender from issuing more scrip than actual capital? After all, not every holder of micro-scrip is going to use it at once, are they. In a single stroke not only has debt as money been restored to its rightful place, but factional reserve lending is alive and well! Damn, aitrader, you’re a genius. You’ve managed to replace the current system with an entirely new system that is just the old system, only it’s a micro-system. Way to think on your feet! Maybe you should sit on your arse for a while and come up with something that might not be a reheated idea of a bad recipe that nobody likes anyways.

Anonymous said...


Good points. I agree about power elites. They're part of human nature. I believe we're wired to seek hierarchy. Product of a couple of million years of tribal living.

The choice is to try to join them or...?

Eventually (probably beyond the lifespans of most of us here), this too will fail, and we will be on our way to a future of much smaller political structures (if we don't irretrievably undermine our carry capacity through fast catabolism or war).

I see several staged shakeouts coming.

The beginning of the first collapse we are experiencing now.

The next, I think you and Ilargi also believe as well, is oil and energy shortages.

The third is food shortages due to collapse #1 & #2, effects of climate change, and human population. I.e. put simply, carrying capacity overshoot.

I see these events overlapping. to get the gist of the severity and rapidity I see - long ago in the '90's I told a small group of friends that we would see a 1 meter sea-level rise by 2015. I stand by it. The reason is (am I using the term right Mr Moon/Ilargi?) black swans. In this the black swan is the unknown feedback effects of warming temperatures. I can list a few: albedo, melting tundra and methane release, changed weather patterns, ocean current changes. But unknown feedback loops are there. The proof is in all of the oil, coal, and natural gas. I believe it will be discontinuous. I believe discontinuities will punctuate the changes far more than folks currently entertain.

And I don't mean just climate change. All of the above will interact, mainly in negative ways.

The human race will survive. I think your scenario with elites, armies, and future serfdom may or may not be accurate depending on where you are.

Certainly things will be very difficult. I am keeping my kids in two worlds to prepare them: a modern city and a backwoods farm. The education from the former and skills from the latter will hopefully give them enough breadth to do well whatever the changes.

Interesting times...

@el gallinazo

He doesn't have any bon bons

Anonymous said...

For those who are new here, ad hominem attacks are most unwelcome.

They decrease the value of this blog, and the important information which needs to be discussed.

If you can't make a point without attacking someone personally, please rephrase your argument in a manner which is more helpful to all, or don't make your point at all.

Thank you.

xtropy27 said...

If we really want to fix this thing... I say elect Stanford Kurland, of 'PennyMac' (formerly of 'CountryWide') as the US Treasury Secretary. He obviously has the vision required to get the job done. Geithner doen't.

Not having truly bold and visionary leadership in place during this crisis seems to be a statement... and what this might be saying isn't very good. Speeches are nice... but so far, Obama's track record is not impressive.'s early...but the situation is dire and calls for lightning quick responses.

The depths of what is quietly going on day by day in Cleveland and Detroit is NEWS which makes such a very large statement.

Forget 'HOPE' now... for if there isn't significant CHANGE (as oppsoed to slogans like 'Change we can believe in') soon, many other US cities could resemble Cleveland and Detroit. And when that happens, this time will be known by future generations as 'The GREATEST Depression'.. or the 'Total Collapse'.

If Obama is indeed playing a high stakes poker hand through all this, as I have suggested prviously... the time to REALLY act decisively and effectively better be soon... or else !

Have you seen the CNN feature on tent cities in Sacramento, California. Very sobering.

It certainly seems that the time for serious INNOVATION is NOW !

A few ideas:

1) Immediately negotiate a deal with Russia to ground our B-52 fleet of bombers which carry nuclear bombs. Stop wasting fuel. With Nuclear subs, the B-52's are a useless redundancy.(Dry dock nuclear subs next ?)

2) Implement a fast track program to gang together small, quick assembly, nuclear reactors... the kind that are used to power US Navy warships... to provide non-carbon based electrical power to ALL US cities within 5 years. (Switch to Thorium reactors as soon as possible ? Breeder reactors ?)

3) Create massive 'Coastal Water Desalination Projects', which then connect with pipeline networks to deliver fresh water to all sections of the USA. Las Vegas, North Dakota... everywhere would have piped in water. Use oil pipelines as the model for the pipeline networks.

4) Create new 'self-fab', 'kit of parts', type housing designs... that are SAFE, STRONG, and that can be mostly owner built. These 'kit of parts' will be sold by Lowes, Home Depot, WalMart, etc. (See Frank Lloyd Wrights 'Usonian Hosues' of the last 'Great Depression' for examples.) These 'self-fab' homes would be dirt cheap too. A perfect fit for the abandoned lots in Cleveland & Detroit. Use square steel tubing as the frame, and SIP's (Structurally Insulated panels) as the infill. Save trees. Save the forests. (A boost for the US Steel industry ?)

5) Provide funding to the 'NanoSolar' company in California, so that they can build 5 more plants. Currently their 'NanoSolar' solar-panel product produces electricity at LESS THAN THE PRICE OF COAL to produce the same electricity !!!!! Problem: Germany has bought the entire first 2 years supply of NanoSolar panels ! NanoSolar 'Power Plants' could replace ALL the Coal fired power plants in the USA in only a few years time. This is technology that's been developed in the USA. It's here and now ! Lets USE IT ! Fund 'NanoSolar' Power plants.

6) Federal Government funds a program where homeowners install solar panel systems. 0% loan for homeowners who do so. True 'Bottom Up' energy independence. Use a modified version of the< > idea, as a starting point ?

7) The USA creates a new auto industry based upon innovation. TATA Motors of India has produced the 'Nano Car'. It costs $2,500 ! Fine... do a USA version that has 4 cylinders, bigger wheels and is hybrid gas/electric. Price: $6,500. Then...EXPORT the hell out of these 'muthas ! Made in the USA indeed !

8) Connect and modernize the USA electric grid. Use '' model

Lets GO ! It's time to: INNOVATE or PERISH.

Anonymous said...

“The report argues that the lobbying and contributions kept financial derivatives from being regulated, led to the repeal of regulatory barriers between commercial banks and investment banks and kept the government from stepping into halt predatory subprime lending. (The authors list “12 Key Policy Decisions Led to Cataclysm” here.)

"Depression-era programs that would have prevented the financial meltdown that began last year were dismantled, and the warnings of those who foresaw disaster were drowned in an ocean of political money,” Rosenfield said in a release.

The authors don’t blame either political party, noting that roughly 55 percent of the donations went to Republicans and 45 percent to Democrats. In the 2008 election cycle, they note, Democrats received slightly more than half of the financial sector’s contributions.

They also say that 142 of the lobbyists employed by 20 “leading financial firms” during this period “were previously high-ranking officials or employees in the Executive Branch or Congress.””
Report: Wall Street Spent $5 Billion For Political Influence CBSNEWS

Anonymous said...

Hi xtropy27!
Good points that you raised. Too bad that the US is not a dictatorship like Chine ... Its hard to get things done in a democracy.

Greyzone said...

Well xtropy27, those are nice ideas, except for one thing. Please check out this World Population Graph (since I can't link an image directly in comments).

When that graph (or one of its variants) gets posted, the techo-fix crowd has their eyes glaze over and they fall into a catatonic faith based mode of operation. Without one shred of actual proof, they insist that "This time it's different, damnit!" They insist that homo sapiens are not like any other species that has done this before. They insist that unlike every single other population curve that has done this for a billion plus years, that "This time it's different, damnit!"

Given such an obstinate mindset, I've given up trying to convince techno-fix addicts. They are hopelessly lost in La-La land. So what are you? Another techno-fix addict? Or something different? Can you see the forest for the trees? Or at least, what's left of the forest?

Anonymous said...

Apropros oil, here is a picture of current OPEC rig counts. Do we see a plateau here? I do.

From the report:

There is some scant evidence that drilling activity in OPEC member states is starting to decline. There are now 300 rigs active in OPEC counties, which is down 8 from last month and 18 from last year. The number of rigs targeting oil was down 12 to 237 in February while there were 57 rigs directed toward natural gas. Gas rigs were up 4 and the number of rigs not classified by target was flat at 6 rigs.

Most of the fluctuation was withing the normal bounds, but one country is worth special notice. Venezuela's total rig count at 69 is down 5 rigs (6.8%) for the month and 14 (16.9%) for the year. There are now 62 rigs drilling for oil in which is down 8 (11.4%) for the month and 12 (16.2%) for the year.

When compared to the dramatic decline in U.S. drilling, which is down 35% overall from last year with 28.5% fewer rigs targeting oil, the Venezuelan situation doesn't sound that dramatic. The problem is that for Venezuela to maintain its current level of oil production it needs 70-80 rigs running.

Despite the production plateau I see demand destruction pushing prices lower for the near term. This gentleman pegs it IMO.

Where is oil headed? I’m surprised oil is holding the 40s. I would say most likely in the mid-20s, but don’t count out the mid-teens.

The S&P is headed sub-500 by Summer along with a DOW under 5,000 IMO.

His take is similar:

The S&P 500 still has a way to fall before it reaches fair value in my opinion. Based upon my forecasts for earnings, I would say 550 is fair value. Assuming it overshoots, I would expect to see 450-500.

I don't see a sucker's rally in the near term. I see lower lows. A good news kicker is needed before the herd starts to buy. FWIW Stoneleigh, my wife, who is much smarter than I, sees it your way. Me, I'm still short the S&P and am sleepin' just fine thanks.

John Hemingway said...

@El Gallinazo

I agree with Aitrader, "he doesn't have any bons bons".

Um abraço,

Anonymous said...


Thanks for posting that info about mortgage documentation.

goritsas said...

xtropy27 said...

If we really want to fix this thing... I say elect Stanford Kurland…

In what way is Stanford Kurland any less a member of the same cabal that has, if not birthed the crises, at least shepherded them along their current trajectory?

Not having truly bold and visionary leadership in place during this crisis seems to be a statement...

You know, my friend, its not about leadership, its about personal action. As long as you, and your ilk, not only rely upon, but demand, leadership, you’ll face the same problem tomorrow, and the day after, and the day after, and the…

1) Immediately negotiate a deal with Russia to ground our B-52 fleet of bombers which carry nuclear bombs.

Hey, I know, let’s try a “Peace Dividend!” (How 1980’s!) That’s the ticket. Say no more, Say more. Know what I mean. Know what I mean. Let’s not forget SALT I and SALT II! I always thought too much salt was bad, but not if you just refuse it.

2) Implement a fast track program to gang together small, quick assembly, nuclear reactors... the kind that are used to power US Navy warships...

So, let me get this straight, you want to get rid of airborne nuclear weapons first, followed by submarine based nuclear weapons, but you want to get every city in the continental U.S. provided electricity using those wee small reactors that power the same nuclear equipped subs. Am I missing something; are you just trying to be ironic or maybe even satirical, or have you recently been discharged from some institution of some description?

3) …

No comment. Insanity must be its own reward.

4) Create new 'self-fab', 'kit of parts', type housing designs...

See number 3.

5) Provide funding to the 'NanoSolar'…

See number 3.

6) Federal Government funds a program…

I take it you don’t quite realise, at least insofar as funding is concerned, the Federal Government is, well, you? Do you have any connection between your payroll deductions and Federal Government funding? Any at all?

7) The USA creates a new auto industry based upon innovation.

I’m not sure you’ve been reading much lately, but it’s fairly clear that, no mater the motor manufacturer, there’s massive over capacity that may take several years, or more, to wind down. I’m not entirely sure, in this context, a “new” motor industry is actually required. Now, if you’d said plug-in tractors…

Lets GO ! It's time to: INNOVATE or PERISH.

Rah, rah , rah. Pardon my lack of enthusiasm, but if that’s our only two options, can I opt for some nano-euthanasia? Now there’s a market! Better suicide through really small hypodermics.

Anonymous said...

aitrader wrote:

"FWIW Stoneleigh, my wife, who is much smarter than I, sees it your way."

Stoneleigh is your wife? :)

The last part of your most recent posting is a little confusing.

Anonymous said...

"FWIW Stoneleigh, my wife, who is much smarter than I, sees it your way."

No, no, no. Sorry. Syntax error! Here's what I meant:


"FWIW, my wife, who is much smarter than I, sees it your way."

Anonymous said...

Heh. English is a funny language.

I have to point something out though, to all of the husbands who recognize that theif wives are much smarter than them:

If she's so smart, then why the heck did she marry YOU? Hmmm?

Just kidding.

el gallinazo said...

Off Topic (whatever that means)

The topic of super high efficiency internal combustion engines reminded me of a book I just read last week, Alex and Me. For those of you who don’t know, Alex was an African Gray Parrot and a colleague of Professor Irene Pepperberg for 30 years until he had an untimely and premature death last year at the age of 30. African Gray’s normal life span is about 50 years.

Alex could converse intelligibly in English and even add single digit numbers. He even developed a rudimentary concept of the number zero. However, he never learned to write scrip. His mental capacity was equivalent to a three year old child yet his bird brain was the size of a shelled walnut and only weighed a few grams. It leads me to believe that we don’t understand shit about nothing.

I had been following Alex’s exploits since the early ‘90’s and was much saddened by his death. His intellect was matched by his impresario personality. Anyway, this book is an easy read and I highly recommend it.

xtropy27 said...

Hey Goritsas,

Thanks for your ‘jerky’ response. Hey it takes all types to make a World now doesn’t it ?

I guess I’ll have to spell it out a bit point by point.

1) Stanford Kurland, in creating PennyMac, has solved the mortgage crisis. By creating ‘PennyMac’ he’s demonstrated that he has the innovative thinking that can turn ‘Lemon’s’ into ‘Lemonade’. This ability could be very helpful if it was applied to the US economy in general. Again… INNOVATION, ie: innovative thinking that comes up with a solution, could really be helpful right now. Kurland has clearly demonstrated that he has ‘the right stuff’ in this regard. Geithner hasn't. I don’t give a shit if some see him as an egregious opportunist. Shit ! Get me someone who can make it all work… NOW !

2) You said: “You know, my friend, its not about leadership, its about personal action. As long as you, and your ilk, not only rely upon, but demand, leadership, you’ll face the same problem tomorrow, and the day after, and the day after, and the…”

Goristas… you presume too much. I’d easily wager that my Life is far more innovative and based upon personal initiative than yours is. I retired at 48 from a business that I founded and then sold. I own my own home outright in a 365 day growing season in the Caribbean, etc. What about YOU ? I’ve taken the ‘personal action’ Goritsas ? What about YOU ? What about your ‘personal action’ ?

3) And inspite of ‘personal actions’… great, Bold, Visionary LEADERS make a Hell of a difference in hard times ‘my friend’. Or are you blind to the lessons of history. See: FDR, Lincoln, etc.

4) Your stunning lack of knowledge about small breeder reactors, thorium reactors, and small scale ‘standard’ nuclear reactors that are in use on Navy warships… indicates that before you open your mouth and have your brains fall out… that a bit of research on your part is indicated. Breeder reactors, for example, use current nuclear waste as fuel… producing no additional nuclear waste after use. GEE ! I bet you didn’t know that did you ? (Google: 'Breeder reactors, Fuel, waste ?' or see: < >)

5) Since you haven’t directly commented upon the specifics of the other points raised, I will not waste further time with you on them.

Also: Greyzone…

Are you trying to point out that the population explosion will do us all in anyway, regardless ?

If so… what about natural or man made Global Pandemics, caused, say, by ‘weaponized Avain Flu’ or something else ? According to some people, a world with 2/3rds less people and all the technology intact… would be quite an interesting place ?

Certainly, I hope this doesn’t happen… but all those out of work Bio-Weapon’s Russian Scientists that went to work developing ‘Phages’ for Iran give me pause.

Anyway… Thank’s for all the interaction. (That includes even YOU Goritsas.)

Anonymous said...

Thanks el gallinazo,

After 7 or 8 months of trying, I've finally convinced my mother, a retired teacher in California, that her retirement money isn't safe. Well, maybe the ever deteriorating situation has convinced her. Now we've just got to figure the best way out of these somewhat complicated "insured" accounts, and that right soon.

Anonymous said...


If she's so smart, then why the heck did she marry YOU? Hmmm?

If you can't dazzle them with brilliance baffle them with bulls**t. (Worked in my case).

And you've probably heard the old saying:

"Behind every successful man is a strong women. And a shocked Mother-In-Law."

Also true in my case.

Ilargi said...

re: breeders and thorium:

I know I can''t stop the faithful from endlessly hammering out the message, but I also know this:

When I last wrote on the topic at the Oil Drum, 2-3 years ago, there was one experimental thorium reactor in India, and one dysfunctional breeder in Russia. All other breeder and thorium projects had been shut down. Both technologies are awash in unsolved problems. And I bet that there are very few working reactors of either kind fully functioning today.

Nor is either a new technology: they've been part of the spectrum for many decades, and no-one has been able to make them work on a real life scale with positive return on either energy or money invested.

Because of timeframes involved in getting permits, developing and building reactors, even if there were a breakthrough, which there is not, these stillborn dodo's would arrive too late to catch the energy fall.

You can''t have a society rely on yet-to-be-developed technology, no matter how good it looks on paper. I've never applied my Law of Receding Horizons to this, but they look like a good fit.

goritsas said...

xtropy27 said...

Thanks for your ‘jerky’ response. Hey it takes all types to make a World now doesn’t it ?

Is that a rhetorical question or do you actually expect a reply? If so, please be explicit.

1) Stanford Kurland, in creating PennyMac, has solved the mortgage crisis… Shit ! Get me someone who can make it all work… NOW !

I think you’ve amply demonstrated the point. Kurland has not “solved” the mortgage crisis. And, despite your blathering, Kurland is not someone who can make “it” work NOW, or in the future. He’s just another carrion feeder circling around the carcass of the future. If that’s your notion of leadership, well, your at least entitled to it. I hope he and his brethren consume you and all those that matter to you. Maybe you’ll learn the lesson. Probably not.

… you presume too much. I’d easily wager that my Life is far more innovative and based upon personal initiative than yours is. I retired at 48 from a business that I founded and then sold. I own my own home outright in a 365 day growing season in the Caribbean, etc. What about YOU ? I’ve taken the ‘personal action’ Goritsas ? What about YOU ? What about your ‘personal action’ ?

Wow! I prostrate myself upon the alter of your success. I am not worthy. But, then again, neither were Bill and Ted when they embarked upon their “excellent adventure." I’ll wager you never hung out with George Carlin either. So, in my estimation, we’re square. As for the rest of your “I’m a winner and you’re a looser so fuck off, I’m better than you are” rant, who cares? You “own” your home outright? I suggest you look carefully at Zimbabwe for possible outcomes your whitey ass might be subject too. Let alone the philosophical questions surrounding “ownership.” Not to mention the practical questions. What happens if, Lord forbid, the rule of law in your jurisdiction fails and a group of bad assed mother fuckers decides your ownership doesn’t met their “rule of law?” Good luck, me ‘ol muckka.

As for personal action, well, I’m doing what I can. The back garden is, slowly, being turned into a “market garden.” The south facing walls have the dubious luxury of supporting pinned fruit trees. These are trees that are trained to spread against the wall in the same way vines and climbers are often trained. The detached garage roof is being turned into a “roof garden” and the west facing downstairs extension is undergoing the same transformation. So, as for personal action, I think I’m on message.

But, you know what? I don’t “own” my home. I still have a mortgage. But, you know what? I don’t live in the year around growing fiesta of the Caribbean. But, you know what? I couldn’t fucking care less. I’ve got an old oak log that is inoculated with mushroom spores and I’m just awaiting the outcome. I’ve got a compost heap that is just about ready and only waiting for me and my shovel. And I’ve got a back garden filled with robins and thrushes and tits and wrens galore. As fair as I can tell, I’m in heaven.

3) And inspite of ‘personal actions’… great, Bold, Visionary LEADERS make a Hell of a difference in hard times ‘my friend’. Or are you blind to the lessons of history. See: FDR, Lincoln, etc.

Only for those that prefer slavery to personal sovereignty. You’re warped and twisted. Having said that, it’s not your fault. As much as Daniel Quinn’s Mother Culture has embedded you within her, you have embedded her within you. You have no capacity to act beyond the proscriptions of your enculturation. Sad, I know. But not unexpected.

4) Your stunning lack of knowledge about small breeder reactors, thorium reactors, and small scale ‘standard’ nuclear reactors that are in use on Navy warships…

In the end, whatever technological masturbation that gets you off is fine by me. Personally, I’d prefer if nuclear is going to have to be a part of our collective future it doesn’t come in the size of U.S. Navy submarine power plants. Call me old fashioned but that’s a shed load of trouble just looking for a chance to make it so. Give me big plants with loads of engineers and technicians and security personnel. I still won’t be happy but at least I’ve got the size effect on my side.

I’ve heard the promise of breeder reactors. So has everyone else born before the 70’s. I’ve heard the promise of fusion. I’ve heard the promise of thorium. But, and I’ll be honest, I’ve always wondered why the various nuclear fuels have always been found in such low concentrations in the Earth’s crust. What if they were as concentrated as required for the power generation? Would life, at least as we know it, really be as it is today? Would we even be able to have this conversation?

goritsas said...

John Hemingway said...

I agree with Aitrader, "he doesn't have any bons bons".

Coming from you, that’s a compliment. Given you’re incapable of answering direct questions, given you’re preference for your own opinion, given you’re careless disregard for anything remotely resembling Socratic dialectic, I can see why, for you, I have no “bons bons.” But, don’t feel bad, after you pass the chocolate, they taste like shit anyway. Enjoy! :)

Anonymous said...


Dont't know what the law of Receding Horizons is exactly. (Guess I need to read one of your primers, eh?).

You can''t have a society rely on yet-to-be-developed technology, no matter how good it looks on paper. I've never applied my Law of Receding Horizons to this, but they look like a good fit.

How desperate do you think we will get? My bet is pretty desperate. If necessity is the mother of invention then desperation is her larger testosterone enhanced sister-in-law who will kick your teeth in to get what she needs.

If they can run a Strontium 90 reactor in Antarctica for a couple of decades, my bet is they can get some mix of isotopes to heat water to steam for a couple of millenium. I have a physicist friend whose life revolves around the stuff who says it is not only doable but is certain.

So maybe the "law" is more a postulate or perhaps a pustule, a pimple that may or may not pop.


And as you've surely gandered from my posts, I'm not exactly an optimist of the years ahead.

John Hemingway said...

Cara Goritsas, ma quale dio ha fatto un pirla/maleducata come te veramente non lo so.

goritsas said...

aitrader said...

Dont't know what the law of Receding Horizons is exactly. (Guess I need to read one of your primers, eh?).


So maybe the "law" is more a postulate or perhaps a pustule, a pimple that may or may not pop.

Can you clarify a point, if you’d be so kind? You open by saying you don’t know what the law is, in the intervening text you spew forth the “world according to aitrader,” and you close by redefining what was once a law to being a postulate, or even a pustule or pimple, yet you have yet to indicate you’ve actually read a definition, any definition, of the law to which ilargi refers?

Why do you even post? You make me look good. And, by all accounts, that’s not an easy task. Although, left to your own devices, everything you do makes everyone look good. No matter how daft or ignorant or pathetic. aitrader, keep on posting. Our egos are becoming dependent upon it.

goritsas said...

John Hemingway said...

Cara Goritsas…

Sorry, Italian isn’t my strong suit. But, despite my ignorance, I love the Latin Romance languages. Their sounds and their rhythms. They’re lovely, indeed, to hear. As for Italian, would opera be opera otherwise?

And thanks for proving my point. You’re such a stud. How do you feel about Platonic Love? I find myself more and more attracted to your manly disregard for all but your manly self and the opinion your manly self holds of its manly self. Would you ever consider sharing it? Your manly self, I mean. In a purely Platonic way, of course. :)

Greenpa said...

Ilargi- the current economic "meltdown" - (terminology borrowed from the nuclear world) actually has presented us with a splendid illustration of why we should not build fission plants, period.

It's the risk. All those lovely risk models the quants proliferated- ignored the probability of a fatal event. And lo and behold!

The "risk models" used to excuse nuclear power are essentially the same. I'm more than 95% certain at this point that the entire field of "Risk Management", in which you can now get a PhD, was invented by vulture capitalists intending from the outset to mathematically obfuscate and circumvent reasonable discussions, for purposes of profits.

Contrary to one anti-argument; nuclear power plants ARE profitable- very- for the construction company. Usually GE.

The "proofs" that nuclear power plants are a reasonable risk are the same as the "proofs" that collateralized debt instruments were safe.

Should convince everybody, these days. Except, of course, the nuke construction industry.

Jim R said...


Receding Horizons:
The general idea is, it's this technology that looks good on paper, but as you attempt to put it into practice, you find that your product requires increasing amounts of some feedstock that, in turn, depends on availability of the product.

It was discussed on The Oil Drum regarding zymurgical ethanol as a fuel. But Ilargi believes it applies to thorium reactors too:
1. You need fissionable isotoptes to run the reactor;
2. Thorium feedstock can breed and produce fissionable isotopes;
3. But if you didn't carefully husband your fissionables, you end up with less of them than you started with.

If you could just reach that rainbow-festooned horizon of EROI, you could make the reactor work, but for now you need more fissionables... So the horizon keeps running away from you.

Maybe it should be called the "Principle of Receding Horizons" or something. You need pretty accurate numbers to determine whether it applies or not; tar sands, thorium, ethanol, or pelamis machines. These technologies are apt to succumb to receding horizons.

Anonymous said...


My issue, and I do have one, has nothing to do with if or if not Thorium or Strontium or iron filings in after-ski-packs power the future.

My issue is scope.

If you can see a future sans nuclear reactors then you have a vision, yes?

So why are you spending your time whacking guys like Geithner on their metaphorical peepees?

It's beneath you. Where is the vision? Where is the forest? Why are you describing the bark, day after day after day?

I mean it's not like I don't agree that Geithner needs his peepee whacked. I just see it as superfluous and probably a job best left to Mrs. Geithner (metaphorically or not).

If you have a vision of the future then for f*** sake articulate it. It would certainly garner more attention to your blog and engender more meaningful debate than whether Geithner or Bernanke or whomever is a righteous dude or a nincompoop.

Aren't there larger issues here? Or have I missed "Ilargi's law of the righteous and truthful peepee whacking" in regard to trees (and bark) in the greater scheme of things?

If you have a deep point to make, a vision and analysis of the future, and I believe that you do (or could or may), then for f@@@'s sake articulate the M***er F***er. Stop dicking around with pointless banalities about men whose future is at best a footnote in the unread back end of some unknown future student's PhD thesis.

Still a...slightly, ever so increasingly,

Anonymous said...

Wow,looks like everyone is hot this date..

Not much to say except I think some folks are getting a rope ready for Paulson and the rest...AIG is a walking deadman,as is most of the dinosaus....

Foolish me,I hope the little money I spent on boat supplies is used for good.I will spend what "free"time not spent gardening and
standing guard...everyone needs a dream...mine is a stout little sailboat to fish and crab in...providing we can still scare up enough fuel to run down to the river..
dont know how it will shake out,and I am tired of waiting.I know the ball is rolling...but when will it hit..

Bigelow said...

I am completely for Nukes long as all the nuke company boards of directors and executives are required to permanently live next door to the nukes, reprocessing plants and/or radioactive storage sites. Simple accident prevention scheme.

Anonymous said...

Hey Aitrader,

You're such a disgusting fellow. Quit attempting to belittle and discredit Ilargi. Your tactics will not work. The vast majority of TAE readers are quite content and grateful with what Ilargi and Stoneleigh provide. If you want more, pursue it on your own, and stop talking from both sides of your mouth. Your dishonest ways are blatant enough.

Oh, and definitely NO NUKES!!!

Jim R said...
This comment has been removed by the author.
Jim R said...
This comment has been removed by the author.
Anonymous said...


Dude. Ilargi isn't a science fiction writer. The blog has a pretty clearly-defined scope. If you're going to allow yourself to get all bent out of shape because the blog isn't what you want it to be, then maybe you should spare yourself and stop visiting.

One implication of yours, though, that I would certainly dispute, is that there's no point in letting people know that their "leaders" are corrupt. Just because you know it, and those of us who have been on this site for a while all know it, does not mean that there's no point in continuing to proclaim it.

Most people, obviously, do not know that their governments are corrupt to the core. I suspect that more and more people wake up to this fact every day, thanks to Ilargi, Stoneleigh, and others like them. A widespread recognition of this fact seems to me to be a prerequisite for any positive social action in the future.

In short, It is not "beneath" anyone but the thoroughly cynical to engage in this sort of teaching, and to build these very important ethical and political cases against the current ruling elite.


Anonymous said...


If you're going to allow yourself to get all bent out of shape because the blog isn't what you want it to be, then maybe you should spare yourself and stop visiting.

Not bent our of shape at all. Anyone can read the same stuff at a couple of hundred of blogs.

Maybe you are right. Not worth bothering with.

@Stoneleigh - thanks for attempts at substantive debate about near-term futures and challenges ahead.

@Ilargi - I do agree that Geithner, et al are poopoo-heads and AIG, et al are wankers. Maybe you believe that that mantra, day after day after day, is enough to change the future. Guess I'm too shallow to see it.

Best o' luck to you all.

Aitrader over and out.

Jim R said...

** deleting a couple tangential comments about element 38 **

Speaking for Ilargi again, perhaps I can explain. The epiphany most of us have encountered is that civilization is hydrofracked. It's injected, inspected, detected, and rejected (Thanks Arlo). The human population in 2025 will not be 9e+09 or whatever is predicted by actuaries with straight edges on log paper. And the transition back to 1850 is not going to be an orderly linear process.

What we can look forward to -- what our grandchildren if any, can look forward to, is catabolic collapse. I won't attempt to define that, you can google for it.

What this blog is about, and the useful bits of information it provides, are navigational hints for how this thing will play out. I did not foresee it but should have, that the entire fabric of our "civilization" is built around this financial bubble, and I&S correctly realized that the first place we would encounter this event horizon would be in the financial world.

And that's my take on TAE.

Greenpa said...

Ok now, that was just too funny. Really!

Did you guys catch what just happened there?

Aitrader was getting frustrated with Ilargi because... Ilargi wasn't laying out nice clear, big, clean answers for all the world's problems, fast enough. And ai had started to hope he would.

Kind of like- Ilargi and Obama.... :-)

ai - hope you hang around. Remember - he's only 29.

xtropy27 said...

Hey Goritsas,

Vent all you want. Get it out of your system. The bottom line is that I believe that Innovation could have a large impact upon our present day problems, and I refuse to embrace the bitter and twisted outlooks that some choose to hold dear.

You mentioned that some of my recommendations were 'insane'. Fine. Well where are your better alternatives ? Did you manage to include a few and I somehow just... missed them ? I guess they went by fast ?

Sure Stanford Kurland is an asshole and an opportunist. But he's done more with 'PennyMac' to solve the mortgage crisis than all the governmental machinations so far. And yes, I mentioned him as an extreme contrast to Geithner... and to show that even a psuedo-crook like Kurland would probably do a better job that Geithner seems to be doing in the present moment. I believe that we could use the kind of innovative thinking that Kurland has exhibited to solve a bunch of our problems right now. And 'No'... I'm not seriously recommending Him, precisely, to be our next Sec'y of the Treasury.

As for your:

“You know, my friend, its not about leadership, its about personal action. As long as you, and your ilk, not only rely upon, but demand, leadership, you’ll face the same problem tomorrow, and the day after, and the day after, and the…”

and my reply...

"Goritsas… you presume too much. I’d easily wager that my Life is far more innovative and based upon personal initiative than yours is. I retired at 48 from a business that I founded and then sold. I own my own home outright in a 365 day growing season in the Caribbean, etc. What about YOU ? I’ve taken the ‘personal action’ Goritsas ? What about YOU ? What about your ‘personal action’ ?"

I stand by my statement. You presumed too much, were not accurate in that presumption, and where I come from, that's 'jerky' behavior... usually exhibited by Jerks !


Great site ! It's a pleasure to tune into it on a daily basis. Thank you for your work. You too Stoneleigh.

My impetus about the dire necessity to employ Nuclear Energy solutions right now... is born of my reading the works of noted British Scientist Dr. James Lovelock (of the 'Gaia Hypothesis' fame). He is adamant. He believes that we must switch to Nuclear Energy FAST, as in immediately, or the Earth tips into a 100,000 year long feverish state of much higher temperatures... creating a world where only the most northern latitudes are habitable. Maybe he's 'cracked' ? But what if he's right ? His point is that ALL the alternative enegy technologies, besides Nuclear, are not now capable of replacing Oil. He believes that Nuclear power is the only present-state technology that can replace Oil right now.

Because standard Nuclear Power Plants take 10 years to get online... my thought of pumping out small scale reactors and ganging them together in single location groupings, seemed a possibility worthy of consideration. Afterwhich, accelerated research, in the form of a 'Manhattan Project' type undertaking, could fast forward the development of Breeder reactors and Thorium reactors.

On another matter... a recent scientific study has shown that Trees have been shown to 'call' rain. So I believe that creating massive sea-water desalination projects that pipeline fresh, desalinated, water to locations that grow food and reforest, would be a hedge against a warming world. More trees and more forests will help immensely. And as such, Agro-Forestry could be huge. And with all the ice cap melt that's going on these days... there's plenty of 'excess' sea water available. WATER is the biggest problem behind OIL. And maybe it's an even bigger problem than Oil ? It seems to me that pipelining Desalinated Sea Water could really help with our fresh water crisis worldwide.

But wait !

According to 'Goritsas'... pipelining Desalinated water all over the place is INSANE !


Be well everybody...