Thursday, April 30, 2009

April 30 2009 2: Great Show To Day

National Photo Co. Akropolis 1922
Crowd outside Leader Theater, 507 Ninth Street, N.W., Washington, D.C.
Playing: The Kid, with Jackie Coogan and Charlie Chaplin.
Sign out front reads: "First National Week. This Theatre Joins In Grand National Exhibition of Great Stars. First National Pictures. Great Show To Day"

Ilargi: Can someone anyone please explain to me why Chrysler was "saved"? So the company can serve Americans with their great cars once the crisis is over? Nah, that can't be it. Americans are so deep in debt that even if the economy would recover, which it won’t because Americans are so deep in debt, but even if, hypothetically, they would need all the money they make just to pay off their debt, so there'd be no way car sales would rise again to over 10 million units a year. And once you understand that, Chrysler's survival is nothing but a threat to the survival of its main US competitor, General Motors.

And that magically seamlessly takes me to the second possible option why Chrysler was so important for the administration to save: the workers. It may have tried to save the jobs at the factories and their suppliers. But since Chrysler will run at greatly diminished production capacity anyway for the time being, the suppliers are toast. And the workers that can hang on to their jobs are a danger to their colleagues at GM, which, interestingly enough, will soon be majority owned by its very workers. Perhaps someone should explain to all car industry workers that there are a few monumental potential conflicts of interest brewing at the union offices.

The US auto industry will never return to its glory days, and those are exaggerated, distorted and grossly romanticized to begin with. Every American grows up watching on average at least ten car commercials every single day of her/his life, which turns cars into some primordial emblem of an unattainable dream worth spending a full year's salary on every four years. If that doesn't sound warped to you, you might want to think about the topic a little.

Detroit has been losing money for a very long time. As a matter of fact, it was even already profusely bleeding greenbacks from mortal self-inflicted wounds in the past decade when the credit mills were churning away in full speed overdrive. Obama may be trying to blame hedge funds:
"By lashing out at the dissident investors, Obama is tapping into the public’s anger to make clear who’s to blame for Chrysler’s bankruptcy and to ratchet up pressure on hedge funds and financial firms likely to object to the plan in court..."
But come on, that's just emptiness. Detroit died from highly contagious megalomania and lack of a realistic image of its own products induced by its own advertising campaigns, and as for hedge funds, they owe it to their investors to get the best bang for their bu(i)ck. If that bang happens to reside in shorts and swaps, that's just the free market at work.

I spent a lot of time and space here throughout last year warning that if Obama would not insist Detroit be taken care of before he was 1) chosen as the Democratic contender and 2) later inaugurated as president, he would be blamed for the demise of the entire industry. And now A) he will be, B) there's nothing he can do about it and C) he apparently intends to throw billions more of his voters' scarce remaining resources into a black hole that keeps getting bigger with every penny dumped into it, and that everybody would be better off without, including the workers who’ll get laid off no matter what in a few months or a couple years.

I can't see the reasoning here, unless it's centered around ultra short term political gain or indecently large profits for a bunch of banks and funds who've been betting heavily against Chrysler. Nothing there for the American people.

Still, if anyone has a better explanation for today's Chrysler deal, I'm listening.

Fresh Flesh Runs Screaming as Zombie Banks Drool
Here they come, with their staring eyes and outstretched arms, moaning incoherently and clutching at the air, teeth gnashing uncontrollably as their insatiable appetite for fresh flesh drives them forward. The zombie banks are demanding to be let back into the financial mall so they can pillage the global markets anew. The notion that any U.S. bank that took financial support from the government should be allowed to discharge part of its obligation to the nation and shake off the few, flimsy shackles accompanying that aid is distasteful at best, outrageous at worst. The financial system is still in intensive care, reliant on transfusions of taxpayer cash to keep its heart beating; the price of that support must be a loss of liberty.

Governments are still wrestling with the consequences of their belated acknowledgment that when financial institutions fail, they become wards of the state rather than orphans. Preventing banks from ramping up their risk profiles and imposing caps on how much they can pay their executives are welcome strictures until there’s a way to prevent private benefits in the good times from becoming public losses when the environment deteriorates. U.S. Treasury Secretary Timothy Geithner has insisted that the “vast majority” of U.S. banks have sufficient capital. This week, we learned that at least six of the 19 banks being stress-tested by the government will require additional capital. Asking shareholders for fresh equity is out of the question. Instead, with trust still absent, the banks will have to reshuffle existing capital structures to spare their blushes. In the perverse Alice-in-Wonderland world of accounting, banks will have to absorb additional writedowns as their creditworthiness improves. Morgan Stanley, for example, wrote off $1.5 billion on structured notes tied to its own debt last week when it announced a $177 million loss in the first quarter.

“Morgan Stanley would have been profitable this quarter if not for the dramatic improvement in our credit spreads -- which is a significant positive development, but had a near-term negative impact on our revenues,” Morgan Stanley Chief Executive Officer John Mack said. The truth is that financial institutions can’t stand alone without the bulwark of government generosity propping them up. Normal service hasn’t been resumed. We are still in the twilight zone. Banks can’t fund themselves independently. Morgan Stanley might be able to repay the $10 billion it has sucked down from the Troubled Asset Relief Program; that leaves about $25 billion it has borrowed using the Temporary Liquidity Guarantee Program from the Federal Deposit Insurance Corp. -- money that bond investors wouldn’t lend without that taxpayer-funded guarantee to make the bonds palatable.

The same goes for every other bank currently hooked up to the government’s life-support systems, including JPMorgan Chase & Co., which owes about $25 billion to TARP and $37 billion to the bond-guarantee plan, and Bank of America Corp., with $45 billion of TARP funds and almost $42 billion of government- sponsored debt. While investors are becoming a tad more receptive to non-guaranteed bank bonds, there’s still nowhere near enough appetite to retire the state warranties. Even if the banks could repay every cent of aid, taxpayers are still on the hook for the billions upon billions of dollars, euros, pounds and every other currency that the world’s central banks are pumping into the capital markets. The finance industry can’t be allowed to freeload on that largess; somehow, society has to find a way to exact a fair price for its safety net.

On May 4, the U.S. authorities are scheduled to reveal the results of their analysis of how resilient the biggest 19 banks are in terms of their capital. It is a meaningless exercise to gauge the inadequacies of U.S. banks while they don’t even have to mark-to-market and the entire financial system is still addicted to taxpayer cash. The stress test is reminiscent of a thought experiment suggested by philosopher Ludwig Wittgenstein to highlight how rules determine outcomes. Picture two children throwing stones at a target. In version one, both kids can see the bull’s-eye. In the second example, only the first child knows where to aim. In the third, the target is wherever the first child’s rock lands. The U.S. effort is too close to the third version of Wittgenstein’s contest to deliver any meaningful results.

Do the stress-test playbooks include, for example, the global economic repercussions of a swine-flu pandemic? Or are they carefully crafted to prevent too many banks from failing, avoiding worst-case scenarios for fear of undermining investor and customer confidence? Copies of Nassim Nicholas Taleb’s 2007 book “The Black Swan: The Impact of the Highly Improbable” lie on the bedside tables of finance professionals the world over, yet it is still assumed that an Excel spreadsheet can capture, quantify and correlate all possible outcomes -- exactly the myopia that helped get us into this mess in the first place.

Chrysler won't get much help from Fiat
"I have every confidence that Chrysler will emerge from this process stronger and more competitive," President Obama said today as the automaker filed for bankruptcy and entered into an alliance with Fiat. Bankruptcy was necessary because the vultures circling over Chrysler, hedge funds and other investors, couldn't come to an agreement, each trying to get as much of the carrion as possible. However, a point must be made. They are still circling over carrion--Chrysler is dead. There was a reason why Cerberus Capital Management agreed to forfeit its entire equity stake, to waive its share of Chrysler's $2 billion of second lien debt, and to transfer its ownership of Chrysler headquarters to the new Chrysler alliance. And why Daimler agreed to give up its 19% equity interest, to waive its share of Chrysler's $2 billion of second lien debt, and to pay $600 million to Chrysler's pension funds.

The future of any car manufacturer is new product. According to some Chrysler managers who have "retired" in recent months, chairman Robert Nardelli focused on cash flow at the expense of product development. Most of Chrysler's recent offerings have been badge engineered: essentially old products given new nameplates. Chrysler trashed the Jeep name with the Patriot and the Compass; the Dodge name with the Caliber and Nitro; and the Chrysler name with the Sebring and Aspen. Reportedly there is hardly anything in the pipeline, future-product teams have only half the numbers of engineers necessary, and these people are constantly being second-guessed by the finance types. This is one reason why Chrysler has the noisiest cars on the market and the cheapest-looking interiors.

While the agreement with Fiat is helpful, Chrysler doesn't get much in return. Fiat will contribute a license to use all of its intellectual property and "know how" in exchange for 20% of the equity of the reorganized Chrysler. In exchange for up to 15% in additional equity, Fiat will have to introduce a vehicle produced at a Chrysler factory in the U.S. that achieves 40 mpg, provide Chrysler with a distribution network overseas, and manufacture state-of-the-art, next generation engines at a U.S. Chrysler facility. In Europe, Fiat is a marginal player outside of Italy. The only cars it manufactures that can get 40 mpg will have to be extensively and expensively modified to meet U.S. safety and emission standards. That just can't be done before the 2012 model year.

The Fiat 500, for example, is shorter, narrower, and taller than the Mini Cooper, dimensions that make it well suited for the narrow lanes and traffic-clogged streets common across Europe. But there is a very limited market in the U.S. for "cute," especially when many Americans still think Fiat stands for "Fix it again, Tony." And even then, it is unlikely that these cars can be sold at a profit, especially when Honda and Toyota already sell hybrids with even better mileage for as little as $19,800. Meanwhile, Chrysler dealers can only look forward to the modestly freshened 2010 Jeep Grand Cherokee and Chrysler 300.

As far as distribution overseas, that is ridiculous. Fiat adds distribution only in markets which wouldn't consider buying full-size pickups, minivans and American cars. Yes, Fiat is a leader in diesel-engine development, but that technology is primarily of use overseas, where emissions requirements are diesel-friendly. When all is said and done, the "new" Chrysler will be owned by the United Auto Workers, which understandably will try to maximize jobs, wages, and benefits in the short term. We saw how well that worked when the unions owned 55% of United Airlines.

A Primer on a Chrysler Bankruptcy
Chrysler is the first major automaker since Studebaker in 1933 to file for bankruptcy and try to reorganize. The process can be complicated. Here is a quick look at how it is likely to play out.

Q. Is Chrysler going out of business?
A. No. Chrysler is reorganizing under Chapter 11 of the United States Bankruptcy Code. The law allows companies to shed assets, restructure debt, cancel contracts and close operations that normally would have to continue running. Once they secure financing to emerge from bankruptcy, these companies are reconstituted as new legal entities. Should Chrysler fail to successfully reorganize, it might turn to a Chapter 7 bankruptcy, which would mean a liquidation.

Q. How long will this take?
A. The Obama administration spoke of a “surgical bankruptcy” that it said could be completed in 30 to 60 days. It plans to use Section 363 of the bankruptcy code to sell assets, rid the company of liabilities and restructure its debt, creating a new Chrysler. In reality, most bankruptcies take much longer. United Airlines spent more than three years under bankruptcy protection. Delphi, the auto parts supplier, has been in Chapter 11 since 2005. The bankruptcy by LTV, a steel maker, took seven years to resolve. Bankruptcy law changed in 2005 to give management of a company the exclusive right to draft a plan of reorganization for a period of 18 months. A judge can extend this period, which is called exclusivity, but creditors or potential buyers for a company can present a competing plan once that period expires.

Q. What happens to Chrysler dealers?
A. Chrysler is able under bankruptcy to cancel franchise agreements with its dealers, and the government said that would happen. Dealers can sue to block the action, but a final decision would be up to the judge. In the meantime, Chrysler will continue to provide dealers with vehicles to sell. Chrysler Financial will cease making consumer loans for Chrysler vehicles; GMAC, with support from the government, will provide such financing through Chrysler dealers.

Q. What happens to Chrysler employees?
A. The White House said it did not expect any reductions in white- or blue-collar jobs as a result of the bankruptcy. However, Chrysler employees who are not union members do not have any job security. The company can ask a judge for an immediate pay cut for its salaried employees, and can announce job eliminations and close offices, just as it can outside bankruptcy, Contracts covering members of the United Automobile Workers union and other unions will remain in force, until the company asks a judge to void them. U.A.W. members approved changes to their contract on Wednesday that presumably would mean the contract would stay in place. But if the company asked for contracts to be terminated and replaced with terms it can more readily afford, the union would have a chance to respond in court. Negotiations would take place before any cuts were imposed. This process could take months.

Q. Are pensions and retiree health care benefits protected?
A. Companies have the right under bankruptcy law to ask to terminate their pension plans. If such a request was made, a judge would convene a brief trial on the subject and hear both sides. If pensions were terminated, employees would still receive about one-third of their benefits through financing from the federal pension agency. A company also can eliminate retiree health care benefits for nonunion employees; they would subsequently be covered by Medicare. The U.A.W. and Chrysler agreed in 2007 to transfer responsibility for union retiree health care to a special fund, and the fund would administer those retiree benefits.

Q. What happens to Chrysler suppliers?
A. In its bankruptcy filing, Chrysler listed its 50 biggest creditors holding unsecured claims, meaning those that would have to get in line behind creditors whose debt is secured by collateral, like the company’s plants, brands and other assets. The unsecured creditors include its advertising agency, BBDO, and parts suppliers, like Johnson Controls, Magna International and Cummins Engine. The White House said supplier contracts would remain in force, and it has created a program to provide federal help to parts makers. But in bankruptcy, supplier contracts can be canceled. Chrysler is likely to tell the court which suppliers it wants to keep doing business with, and which contracts it wants to reject. Suppliers could challenge the rejection of their contract, but most likely they would have to reach a settlement with Chrysler.

Q. What happens next in the bankruptcy case?
A. Chrysler filed its initial paperwork with the federal bankruptcy court in New York on Thursday. On Friday, it will ask a judge to issue a series of rulings called the first day orders, which allow the company to keep operating. They may include authorizing the payment of routine expenses, like salaries and payments to vendors, including its lawyers, and whatever else Chrysler needs to run its business. Chrysler said it would halt production while it completes a deal with Fiat. Once the case begins, Chrysler can ask a judge to issue an emergency order to temporarily reduce salaries, which is meant to conserve its cash. A committee will also be formed that represents Chrysler’s creditors.

Q. Should owners of Chrysler cars and trucks be concerned?
A. The federal government said it would back the warranties on vehicles bought from Chrysler while it is operating in bankruptcy. So, effective Thursday, warranties are underwritten by the government. Owners of Chrysler vehicles bought before Thursday should expect their warranties to be honored until they expire. But the work may not be performed by a Chrysler dealer. Companies operating in bankruptcy sometimes ask a judge to let them assign warranty repairs to outside vendors, who charge the company less for their work than a dealer would expect to be reimbursed. Owners whose vehicle warranties have run out are liable for any problems with their cars and trucks, as they are now.

Obama Says Chrysler Holdout Lenders Speculated on U.S. Bailout
President Barack Obama said Chrysler LLC lenders who turned down his buyout offers are a “small group of speculators” who forced the automaker into bankruptcy. “A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout,” Obama said today in Washington before Chrysler filed for bankruptcy protection. In bankruptcy, the company can now compel the dissidents, all secured creditors, to go along with a plan to create a more viable carmaker in partnership with Italy’s Fiat SpA. Today, an anonymous group of 20 Chrysler lenders calling itself the “Committee of Chrysler Non-Tarp Lenders” said in a statement they’d been treated worse than junior creditors during negotiations in violation of “long-recognized legal and business principles.” They said they were owed $1 billion. The dissidents included OppenheimerFunds Inc., Perella Weinberg Capital Management LP and Stairway Capital Advisors, a person representing the group said, asking not to be identified. Also in their camp is Group G Capital Partners LLC, said another person who declined to be named. After the president’s attack, Perella said it had agreed to the buyout offer.

Banks including JPMorgan Chase & Co., Citigroup Inc., Morgan Stanley and Goldman Sachs Group Inc. lent Chrysler $6.9 billion, reselling some of their secured loans at discounts to investors. Chrysler took a $4 billion bailout loan from the U.S. Treasury and was racing to reduce debt in order to meet a government deadline today for more aid, after workers agreed to give up $10 billion in future pension benefits. While lenders representing 70 percent of the Chrysler loans agreed to Obama’s offer of $2.25 billion in cash, the dissidents ignored a deadline of 6 p.m. yesterday, according to one of the investors who declined to be named. Obama’s team first offered secured lenders $2 billion for $6.9 billion in loans, then raised the offer to $2.25 billion. In a game of chicken, the holdouts asked for $2.5 billion yesterday, and Obama’s patience ran out. Many dissidents paid from 50 cents to 70 cents on the dollar for their Chrysler loans, so they’re sitting on losses, according to people familiar with the matter.

“They were hoping that everybody else would make sacrifices and they would have to make none,” Obama said. “Some demanded twice the return that other lenders were getting.” Dan Arbess, a partner at New York-based Perella, didn’t return calls for comment. Uniondale, New York-based Stairway principal John Rijo and Group G Capital Chairman Geoffrey Gwin declined to comment. New York-based OppenheimerFunds said it rejected the offers because the government “unfairly” asked the fund’s shareholders to make greater sacrifices than were being asked of unsecured creditors. “Our holdings in secured Chrysler debt are entitled to priority in long-established U.S. bankruptcy law, and we are obligated to our fund shareholders to support agreements that respect these laws,” the company said in an e-mail.

Chrysler’s dissident lenders have on their side the “absolute priority” bankruptcy rule, which holds that value must be distributed according to the legal priorities of the stakeholders. What riled the group that put out the statement today was the fact that junior creditors, consisting of a workers healthcare trust, would get equity in a new Chrysler entity while they would not.
In the deal Chrysler was trying to conclude out of court, Fiat would have become a 20 percent owner of Chrysler, and a union retiree health-care trust fund would hold 55 percent, with the rest of the company staying in the government’s hands initially, according to people familiar with the matter. The government intends to replicate this, using bankruptcy to set up a new company, people familiar with the plan said.

“Junior creditors are ordinarily not entitled to anything until senior secured creditors like our investors are repaid in full,” the dissidents said in the statement. In bankruptcy court, the absolute priority rule is regularly modified, lawyers said. Two-thirds of the lenders can force the holdouts to go along with them in a procedure called a cramdown. “The U.S. bankruptcy code foresees the possibility that it may be necessary to vary from ‘absolute priority,’ in particular when a two-thirds majority is convinced it makes legal or business sense,” said Richard Hahn, co-chairman of the bankruptcy practice at Debevoise & Plimpton LLP, a New York law firm that isn’t involved in the Chrysler negotiations. “If the government has consents from 70 percent, that’s more than enough” to give equity to junior creditors. The dissidents “may be calculating that they can get more money by waiting a bit longer,” Hahn said. “Presumably they will file objections in court. The issue is less whether they’ll win than whether they can cause a meaningful delay that may cause Chrysler or the government to come to an accommodation.”

By lashing out at the dissident investors, Obama is tapping into the public’s anger to make clear who’s to blame for Chrysler’s bankruptcy and to ratchet up pressure on hedge funds and financial firms likely to object to the plan in court, said Stuart Rothenberg, a Washington-based political analyst. “In the real world, you have good guys and bad guys, and at the moment, auto executives, hedge-fund managers and bankers are all in the bad-guy category,” said Rothenberg. “He wants to be the guy who’s solving the problems and wants to make it clear who’s causing the problems.” The objections from the group of lenders also drew criticism from Michigan lawmakers, including Democratic Representatives John Dingell and Sander Levin. “The rogue hedge funds that refused to agree to a fair offer to exchange debt for cash from the U.S. Treasury -- firms I label as the ‘vultures’ -- will now be dealt with accordingly in court,” Dingell said.

Chrysler Shutdown Pushes Suppliers Closer To Brink
Troubled U.S. auto-parts suppliers were dealt a new blow Thursday when Chrysler LLC said it will temporarily idle most of its manufacturing during the bankruptcy process starting Monday. The move, which appeared to take the supply industry by surprise, intensifies pressure on parts makers already reeling from General Motors Corp.'s (GM) announcement last week that it also would idle most assembly plans this summer. Along with lost production, suppliers are at risk of having their payments from Chrysler disrupted as the auto maker's finances are managed in bankruptcy court. To keep its supplier base from collapsing, Chrysler is seeking approval from the U.S. Bankruptcy Court in Manhattan to extend up to a total of $550 million in financing to its troubled suppliers. The auto maker is also asking the court for permission to continue participating in the U.S. government's Troubled Supplier Program, through which Chrysler identifies suppliers that need federal assistance.

"Many suppliers may simply lack the financial wherewithal to continue in operation after a precipitous and unplanned period of nonpayment, particularly in light of the extraordinary economic pressures facing the automotive sector," Chrysler said in court papers. Two suppliers on Thursday refused to ship parts to Chrysler, forcing the auto maker to close a Warren, Mich., factory ahead of the planned shutdown, President Tom LaSorda said in a conference call with reporters. Chrysler and GM factories could be down for up to nine weeks, an unprecedented slowdown for the U.S. auto industry. Standard & Poor's Ratings Services on Thursday threatened to downgrade its ratings on six parts suppliers, noting the impact of production cuts in the wake of the Chrysler bankruptcy. Chrysler's move threatens to push many suppliers closer to bankruptcy, and could ultimately lead to disruption in the flow of parts to healthier auto makers, such as Ford Motor Co. (F), which plans to continue operating through the summer, said Dave Andrea, vice president of industry analysis and economics for the Original Equipment Suppliers Association.

"With a tremendous amount of effort and cost, the system has been able to hold together," Andrea said. "But with every piece of news like this, that becomes more difficult. This is where we could see disruptions at Ford and other auto makers that are still running." Ford spokesman Todd Nissen said the auto maker doesn't anticipate a production disruption, but is monitoring the situation. The Chrysler shutdown will likely lower U.S. auto production to 8 million cars and trucks for 2009, Andrea said, which would be less than half what it was in 2000. He said about half of U.S. suppliers will likely be in "significant distress" as a result of the cuts, up from 35% to 40% at the end of the first quarter. GM's summer shutdowns will cut output by 190,000 vehicles, or 25%. Around 400, or about one-fifth, of top-tier parts makers have enrolled in a U.S. Treasury program launched this month to guarantee receivables in case of an auto maker bankruptcy, said Craig Fitzgerald, an auto analyst with Plante & Moran in Southfield, Mich. "That assistance took a little bit of the sting out of a bankruptcy," he said. "But it doesn't solve the problem" of production cuts.

Fitzgerald said more government aid will likely be required to avoid a "cascading and devastating " effect on the U.S. auto industry. Suppliers' ability to survive the shutdown will largely depend on the willingness of banks to continue financing the companies through the impending revenue shortage, OESA's Andrea said. "The most significant indicator as to whether a supplier will see the other side of this is if they have a banking relationship that is willing to stick with them," he said. S&P said Thursday it put Harman International Industries Inc. (HAR), Johnson Controls Inc. (JCI), Magna International Inc. (MGA), Shiloh Industries Inc. (SHLO), Stoneridge Inc. (SRI), and TRW Automotive Inc. (TRW) on CreditWatch with negative implications. The rating firm said "potential systemic risks could arise because of the interconnectedness of the North American supply base." Many smaller suppliers could fail because of the Chrysler bankruptcy and the extended shutdown at GM, which would pose a problem for suppliers that purchase parts from their smaller counterparts, which could force auto makers to idle production.

Markets infected by confidence pandemic
Imagine if swine flu had broken out on March 9. A health emergency would probably have thrown stock markets - then touching 10-year lows - into an absolute rout. But less than two months later, investors don't seem to care. The Dow Jones Stoxx 600 European index hit a 2009 high on Thursday. That followed Wednesday's rise in the yield on 10-year US Treasury bonds above 3pc. Investors won't cough up for risk-free assets, but will take commodities and emerging markets exposure in big doses. It's a kind of flight from safety. Clouds become mere appendages to big silver linings. Investors overlooked worse-than-expected US GDP figures, focusing instead on the need to rebuild inventories. They rejoiced in a slowdown in the contraction of eurozone bank lending, without recoiling at the contraction itself. Even the likely bankruptcy of Chrysler has found a positive spin: uncertainty is lifted. As for unequivocally bad news - a huge increase in eurozone unemployment, confirmation that UK house prices are still falling - it is simply ignored. Investors seem to be on a mood-enhancing drug. And in a sense they are.

Governments and central banks have been issuing vast quantities of a stimulant that gets investors and markets high - cheap money. Some of the liquidity created by near-zero official interest rates, effectively unlimited financing for banks and gargantuan fiscal deficits is almost certainly leaking into financial markets. Investors, like policymakers, are betting that the optimism will prove self-fulfilling. Confidence makes consumers and companies more likely to spend and invest. Also, the liquidity should ease the financial squeeze, increasing the supply of credit for trade and inventories. The cure is working so well that it's tempting to believe the monetary floodgates should remain open forever. But there's a reason why these policies are exceptional. They are likely to have adverse side effects - too high inflation if money stays too cheap for too long, or another squeeze if interest and tax rates rise too quickly. The money drug is still in trials. What's more, it may do little to combat the underlying disease of globally unbalanced production and consumption. A long and painful recession would do that. And markets may yet follow the economy rather than the money.

Obama Entourage Member Has Swine Flu
An advance security staffer who attended a dinner with President Barack Obama in Mexico on April 16 has been diagnosed with a flu that is probably swine flu. He has passed The Oink to his wife, his son and his nephew. The White House says the president has not had any symptoms, however. The while house issued a health advisory to anyone who traveled on the the president's trip to Mexico. The staffer was part of Energy Secretary Steven Chu's staff. White House spokesman Robert Gibbs said he did not work closely with Obama and didn’t fly on the terror plane Air Force One. He is healthy enough to be back at work at the Energy Department.  The staffer was at a dinner Obama attended with Mexican officials April 16. The aide “was asked specifically if he ever came within six feet of the president, and the answer to that was 'No,' " Gibbs said. Of course, that doesn't mean that whoever gave the staffer swine flu didn't come within six feet of the Prez. Politico explains that this is very surprising news:
The disclosure of the likely flu case in the president’s entourage was startling because Gibbs said earlier this week that White House physicians believed the flu had posed no risk at all to Obama when he visited Mexico. “The doctors have informed me… that the President's health was never in any danger,” Gibbs said Monday. Also on Monday, Gibbs had said no one traveling with the president “in either governmental or press capacity has shown any symptoms that would denote cause for any concern." Gibbs said Thursday that Chu’s aide developed a fever while in Mexico and that several of the aide’s relatives subsequently fell ill with flu-like symptoms. The aide has not tested positive for swine flu, probably because so much time has elapsed, but tests on his three relatives came back as “probable” cases on Tuesday, Gibbs said.

Hedge-Fund Bubble Bursts in Time for Swine Flu
Swine flu marks the bursting of yet another bubble. The latest airy hope to be deflated is over the world’s ability to withstand the occasional pandemic risk. We did it with SARS in 2003 and avian influenza in 2005. That was before swine flu and the World Health Organization’s declaration that it isn’t containable. Forget surgical marks. Gas masks, anyone? The question now is whether this disease will morph into an international disaster that will devastate markets. Asia’s future is also affected by the bursting of a second bubble: hedge funds. Almost 20 percent of Asia-Pacific hedge funds closed in the 15 months to March, with that rate set to accelerate in today’s dire economic conditions, according to London-based magazine AsiaHedge. If swine flu really is the Big One, the effects of these two bubbles will converge, dragging down asset prices and deepening the recession.

Markets didn’t need this challenge. There’s something almost biblical about what’s happening around the world. Really, what’s next? A plague of locusts? Raining frogs? The fragility of the global economy raises expectations for how public officials will handle swine flu. Any hint of incompetence will hurt markets early and often. All this spells trouble for the world’s most-populous region. This is also the most economically promising area, one on which corporate executives in New York, London and Johannesburg are depending for future growth and profits. Asia, with its teeming populations, crowded cities, high poverty and spotty access to health care, must be considered a future hot zone. That’s why even though Mexico is the epicenter, Asian governments are moving fast to prepare for outbreaks. The region’s vulnerability will grow exponentially over time.

Even without swine flu, economies aren’t close to bottoming. The best-case scenario is for growth to level off at very low levels. Stimulus packages of about $2 trillion globally aren’t enough to offset the wealth destruction of the past 18 months. Mark Matthews, a strategist at Fox-Pitt Kelton in Hong Kong, puts the loss in equities alone at $30 trillion. The credit crisis caused the shuttering of 129 Asia-region hedge funds in 2008. That’s the most in at least eight years and more than double the number in 2007. An additional 17 closed funds in the first quarter. Hedge funds around the world are reeling after losing 19 percent on average last year and investors withdrew $155 billion, the worst performance since Chicago-based Hedge Fund Research Inc. began keeping records. Investor redemptions have soared since Lehman Brothers Holdings Inc. folded in September.

The health of Asia’s hedge funds is less interesting than the forces that drove the industry’s growth. At the end of 2008, there were about 930 Asia-region hedge funds, according to AsiaHedge editor Paul Storey. In 2000, there were about 160 Asia hedge funds. It was always a bubble waiting to explode. At the time, investors said the sudden rush to start hedge funds in Hong Kong, Japan and Singapore reflected Asia’s maturity. That was true to an extent. It was more about Asia’s rapid growth and its underdeveloped markets. The region was rife with the inefficiencies that speculators exploit. For anyone aiming to profit from disparities in the prices of similar bonds or other assets, Asia was an obvious place.

Then there was the bandwagon effect. There were suddenly too many aggressive investors pursuing similar strategies, thus cannibalizing the benefits. And when markets were booming in the mid-2000s, lots of people who went to work at hedge funds had little hands-on experience. “If he can get rich, so can I” was the dynamic that pervaded the industry. Some good may come of the current shakeout. Kirby Daley, a senior strategist at Newedge Group in Hong Kong, says the managers who survive will represent an industry that is stronger and more diverse in strategy. Still, it’s impossible to say at this moment how many will be left.

Swine flu deepens the plot. It’s a big concern that health officials are giving up on containment already. They are focused on treating patients and strengthening preparations for outbreaks. The WHO raised its global pandemic alert to the highest since the warning system was adopted in 2005. Asian markets plunged during the 2002-2003 outbreak of severe acute respiratory syndrome. SARS killed 770 people, a number that belies the hysteria that swept the region. In reality, SARS was the health equivalent of the Y2K computer bug in 1999. And yet it took a toll on Asia’s economies and markets. Swine-flu concerns may also turn out to be overdone. If not, expect markets in Asia to be in for an even rougher 2009 than seemed possible just a couple of weeks ago. And expect more hedge funds to go bust.

Stress-Test Results Are Delayed by Fed as Examiners, Banks Debate Findings
The Federal Reserve will postpone the release of stress tests on the biggest U.S. banks while executives debate preliminary findings with examiners, according to government and industry officials. The results, originally scheduled for publication on May 4, now may not be revealed until toward the end of next week, said the people, who declined to be identified. A new release date may be announced as soon as tomorrow, they said. Regulators and bank executives are concerned about how the disclosure is handled because weaker institutions could suffer a collapse in their stock prices.

“Everybody understands they’ve got a tiger by the tail here,” said Mark Tenhundfeld, a senior vice president at the American Bankers Association in Washington. “If they don’t let him go gently there will be a lot of mauling going on.” The 19 firms include Citigroup Inc., Bank of America Corp., Goldman Sachs Group Inc., GMAC LLC, MetLife Inc. and regional lenders including Fifth Third Bancorp and Regions Financial Corp. The banks in the test hold two-thirds of the assets and more than half of the loans in the U.S. banking system, according to a Fed study released April 24.

The Fed led the stress tests, using as many as 140 staff members working in consultation with 60 people from other bank oversight agencies. While the banks were ordered not to release the results of the stress assessments prematurely, Goldman yesterday may have provided a hint with its decision to sell bonds and shares, issuing $2 billion in five-year notes without a government guarantee and making a $750 million stock offering. A spokesman for Goldman declined to comment. “You can read between the lines on it that nothing adverse will be coming out next week” about Goldman, said Ralph Cole, a money manager at Portland, Oregon-based Ferguson Wellman Capital Management Inc., which oversees $2.2 billion.

Fed’s Balance-Sheet Assets Drop Most in Seven Years
The size of the Federal Reserve’s balance sheet fell the most in seven years as companies renewed less of the 90-day debt that was taken on by the central bank and other borrowing declined.
Commercial paper held by the Fed fell to $179.4 billion as of yesterday from $240.4 billion, the biggest drop since the original batch of 90-day debt matured in January. Total assets declined $130.1 billion, or 5.9 percent, to $2.07 trillion, the first drop in seven weeks, the Fed said today in Washington. The shrinking balance sheet may indicate an improvement in private credit markets. Fed Chairman Ben S. Bernanke has cited the commercial-paper program, begun in October, as one of the central bank’s most successful emergency efforts. Borrowers “have seen significant improvements in the cost and availability of funding,” he said in an April 14 speech.

“It’s certainly more good news than bad,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “It’s a sign that markets do have alternative sources of funds that they would rather use.” The central bank has increased total assets on the balance sheet by $1.2 trillion in the past year to unfreeze credit markets and support banks’ demand for cash. The Fed added Treasuries under previous plans to revive credit and the economy. The Fed’s balance sheet recorded a bigger one-week decline, 13 percent, after the terrorist attacks on Sept. 11, 2001, when borrowing temporarily surged. The Fed’s currency swaps, in which other central banks lend dollars in their countries, dropped by $33.4 billion to $249.5 billion. Commercial banks’ borrowing through the Fed’s U.S. Term Auction Facility fell $52.2 billion to $403.6 billion.

Last month, Bernanke led a $1.15 trillion commitment by the Federal Open Market Committee to channel more money into the economy and keep borrowing rates low. Policy makers yesterday left the door open to boosting their credit programs even as the worst recession in five decades shows signs of waning. Fed officials lowered the benchmark interest rate to a target range of zero to 0.25 percent in December and have switched to using credit programs and outright purchases of Treasuries, mortgage-backed securities and housing agency debt as the main tools of monetary policy. The first batch of commercial paper absorbed by the Fed in October and rolled over in January matures this week, according to Barclays Capital in New York. The amount totals about $110 billion, or 46 percent of the central bank’s holdings. The Fed’s interest rates are becoming “less attractive” compared with private markets, said Tony Crescenzi, chief bond- market strategist at Miller Tabak & Co. in New York.

Investors demand 0.3 percent to own 30-day commercial paper sold by financial companies, about the lowest on record and 12 basis points more than the Fed Funds rate. Six months ago, the debt yielded an average of 2.7 percent, or a spread of 259 basis points. A basis point is 0.01 percentage point. Mortgage-backed securities held by the Fed fell to $366.2 billion as of yesterday, down $1.44 billion from the previous week, the Fed said. The Fed reiterated its commitment this week to buy up to $1.25 trillion of MBS this year. Total U.S. Treasury securities owned by the Fed rose to $549 billion versus $535 billion a week earlier. The balance sheet’s size peaked at $2.31 billion in December. Discount-window lending to commercial banks rose to $45.3 billion versus $43.8 billion the previous Wednesday, the central bank said. Wall Street bond dealer borrowings plunged to $700 million compared with $8 billion last week.

Credit to American International Group Inc., the insurer rescued by the government in September, rose to $87.3 billion from $85.8 billion. The Fed’s loans to a program providing liquidity to the asset-backed commercial paper market and money- market funds increased to $3.7 billion from $800 million. The Fed did not provide today its quarterly revaluation of assets in the portfolios of securities and loans acquired in the rescues of Bear Stearns Cos. and AIG. The calculations are still based on values as of Dec. 31. The net value of the Bear Stearns assets was $26.5 billion as of yesterday. The Fed said the M2 money supply fell by $4.4 billion in the week ended April 20. That left M2 growing at an annual rate of 9.2 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target. The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds. For the latest reporting week, M1 fell by $16.9 billion, and over the past 52 weeks, M1 rose 14.4 percent. The Fed no longer publishes figures for M3.

New York AG Cuomo: Pension kickbacks national, ongoing problem
New York state's criminal probe of kickbacks paid to invest its $122 billion state pension fund money has exposed a national network of actors whose schemes are ongoing, state Attorney General Andrew Cuomo said on Thursday. The U.S. Securities and Exchange Commission charged Dallas-based Aldus Equity Partners and one founding principal, Saul Meyer, for their participation. Cuomo, jointly probing New York's pay-to-play scandal with the SEC, charged only Meyer. This is the third round of charges in the probe, which began with the use of paid middlemen, called placement agents, that investment firms hired to help them win the lucrative business of investing New York state's pension fund.

Meyer paid $300,000 of kickbacks to the former state comptroller's top fund-raiser, Henry Morris, who was indicted in March along with David Loglisci, the former top investment officer, Cuomo said. Loglisci had the pension fund invest $375 million with Aldus from 2004 to 2006, according to the SEC complaint. Lawyers for Morris and Loglisci say they are innocent. Cuomo accuses Morris of turning the state retirement fund into a "piggybank" to raise campaign money, enrich individuals and reward favors. To demonstrate Morris' control of pension investments, Cuomo quoted him as telling an intermediary of Meyer's: "Tell that little peanut of a man that I can take business away as easily as I provided (it)."

Aldus knew that Morris was "working both sides of the deal," Cuomo said, by marketing funds for investments in the Aldus/NY Emerging Fund in which Morris had a 35 percent stake. New York City pensions should end investments with Aldus, the city comptroller said. The state pension has already done so and is weighing legal remedies against Aldus and Meyer. Meyer, whose firm also did business in Louisiana, Oklahoma, Texas, New Mexico, California, New York state and New York City, was charged with a felony violation of the state securities law and released on $200,000 bail. His lawyer Paul Shechtman, of Stillman, Friedman & Shechtman, said: "I learned years ago that it's far easier for a prosecutor to file a complaint than to prevail at a trial. Time and evidence will show that Saul Meyer did nothing wrong." A lawyer for Aldus Equity had no comment.

Cuomo said more charges will be filed but declined comment on who might be next. He said he could rule no one in or out including Steven Rattner, who left the Quadrangle Group -- one of the private equity firms under a microscope -- to lead the U.S. government's auto industry bail-out team. "This is all across the nation, and it's continuing today," the Democratic attorney general said on a conference call, adding he and other states were "formalizing" their probes. Cuomo said that so far, he had heard of no reason to probe private pension funds. The roles played by other professionals, including lawyers and lobbyists, are also being scrutinized, Cuomo said. The probe has led to other big private equity funds, including The Carlyle Group. Cuomo said he would announce probe developments involving Illinois and Connecticut as soon as Friday.

UK and Europe heading for rift over regulation
The European Commission has been accused of launching a "blatant attack" on London's financial services industry with proposals to regulate hedge funds and private equity firms. The European Commission has been accused of launching a "blatant attack" on London's financial services industry with proposals to regulate hedge funds and private equity firms. The directive looks set to open a deep divide between the UK – where over 80pc of the alternative investment industry is based – and the rest of Europe. The proposals include radical new rules ranging from fund raising to capital requirements. The directive is particularly tough on non-European fund operators. It stipulates that only funds domiciled in Europe can be marketed in the EU.

An estimated 90pc of hedge funds are domiciled off-shore while the industry is also dominated by Amercian players. Antonio Borges, chairman of the Hedge Fund Standards Board, said: "This is a blatant attack on the UK and US financial systems by continental countries that neither have a tradition of alternative investments nor a proper understanding of them. With the European elections coming up this is clearly politicial." Steven Whittaker, partner at Simmons & Simmons said: "This is a deeply protectionist directive and damaging for the UK which attracts the international players."

But in Europe the directive was criticised for not going far enough. Poul Nyrup Rasmussen, a Danish MEP and president of the Party of European Socialists who led the parliamentary pressure for the new rules, said the commission had come forward with regulation that was "so light, it's flyweight". He said: "Private equity can pop the champagne today but they may not be celebrating for long as we will not accept such an ineffective regulation." Charlie McCreevy, EU commissioner, said the directive was necessary to address the concerns following the financial crisis. He said: "There is now a global consensus – as expressed by the G20 leaders – over the need for closer regulatory engagement with this sector. In particular, it is essential that regulators have the information and tools necessary to conduct effective macro-prudential oversight." The directive proposes imposing "demanding regulatory standards" on all managers with funds over the value of €100m (£89m).

The regulations will also extend to "all major sources of risks in the alternative investment value chain" including "key service providers ... depositaries and administrators". The directive says they will be "subject to robust regulatory standards". The funds will also have to demonstrate standards of governance. Florence Lombard, executive director of the Alternative Investment Management Association, said: "This directive is not a proportionate regulatory response to any of the identified causes of the current crisis." She said that all of the major reports concluded that neither hedge funds nor private equity caused the crisis. John Cridland, deputy director general of the CBI, said: "It is of deep concern to us, just a week after Alistair Darling said that we must have a business-led recovery, to push away the richest and most exciting investment professionals from this country towards others that want them more."

Buiter Says U.K. Finance Will Shrink to as Little as 7% of GDP
Britain’s financial industry will shrink to as little as 7 percent of gross domestic product as the global crisis forces foreign banks to retreat from London, former Bank of England policy maker Willem Buiter said. “Financial services in the City grew in the U.K. from 5.5 percent of GDP in 1996 to about 10.8 percent in 2007,” Buiter said today at a conference in London on the future of its financial district, known as the City. “It will probably go back in a steady state to something halfway there, to around 7 or 7.5 percent. That’s a big adjustment.” The British economy contracted the most since 1979 in the first quarter as business services and finance shrank at a record pace. The depth of the global crisis has cast a shadow on the U.K.’s prospects for recovery because of its dependence on banking and financial services as motors of growth.

“We are seeing the repatriation of cross-border banking,” Buiter said. “This is inevitable” and “bad news for London because this is the home of cross-border banking.” Business services and finance as a whole make up about 30 percent of the British economy, compared with about 14 percent for manufacturing. The Treasury forecasts that GDP will shrink 3.5 percent in 2009, the most since World War II. Banks and insurers in London may eliminate 29,000 jobs this year, 9 percent of the total, before employment growth resumes in 2010, the Center for Economics & Business Research said in a report on April 20. Buiter, a professor at the London School of Economics, said that the City’s position as a global center will also suffer because of global measures to strengthen regulation and clamp down on tax competition. He spoke at a conference at Bloomberg LP’s offices organized by the Global Policy Institute.

“London as a financial sector is going to have, I think, a very hard to time of it,” he said. “London has been a regulatory haven for decades. It competed not just on its genius and its great infrastructure but also on tax dodges and regulatory dodges.” Buiter said that the Labour government, in power since 1997 and now led by Prime Minister Gordon Brown, shirked from greater regulation because of the City’s success for much of the past decade. “London is the home of self regulation and soft-touch regulation” which “became a destabilizing factor not just here but in the world as a whole,” he said. “New Labour became blinded by the light of the City.”

Current Crisis Shows Uncanny Parallels to Great Depression
Is history repeating itself? The current global downturn has many parallels to the Great Depression. And if the current massive bailout packages fail, the effect on the world's economies could be similarly drastic. The Germans have always had a penchant for looking to America to gain a glimpse into the future. They marveled at the Apollo 11 mission to the moon. They admired the gray but affordable Commodore personal computer. And they succumbed to the spell of an Internet company with the odd name of Google. Now the Germans are looking across the Atlantic once again, but this time they see images that remind them of their own past, images of sad-looking people standing in long lines, hoping for work. One of them is Michael Sheehan, who worked as an engineer with a large company until February. Not too long ago, Sheehan was the one doing the hiring.

Today he is only one of 900 other job-seekers attending a job fair in a depressing hotel ballroom in Philadelphia. One of the flyers arranged on the tables exhorts the attendees to "Stay Positive." But Sheehan feels more outraged than positive. Someone at the fair asks him for his resume. "I don't have a resume," he says. "I worked at one company for more than 30 years." Natalie Ingelido, 21, is standing nearby, trying to calm down her bawling two-year-old son, who clearly doesn't like it here. "I'm looking for a job, any job, in a restaurant, a bar, cleaning, whatever," she says. In the past, says Ingelido, "Help Wanted" signs were plastered on the doors of shops and bars. The past she refers to is last summer, when Natalie and her husband still lived in their own apartment. Now they live with his parents. Across America, people like Sheehan and Ingelido are standing in lines, waiting and hoping.

At one job fair in New York, the line stretched for several city blocks. Many would turn away, embarrassed to be seen there, whenever TV reporters attempted to document their fates. More than 5 million people in the United States have lost their jobs since the crisis began. As if the country were undergoing fever convulsions, more than 650,000 were catapulted into the streets in the last month alone. Most experts are now convinced that Germany will follow the United States along this downward trajectory. And those who, like many a politician, had refused to believe it until now were disabused of that notion last week. Wednesday was a dark day for the leaders of Berlin's grand coalition government, which comprises the center-left Social Democratic Party (SPD) and the conservative Christian Democratic Union (CDU).

All their hopes that the skies over Germany could quickly brighten -- just in time for September's national election -- were suddenly dashed when leading economic institutes released their annual forecasts, which turned out to be even gloomier than expected: a 6 percent shrinkage in the German economy this year, followed by another year with no economic growth. Unemployment will rise sharply. It is expected to exceed 4 million by this fall and hit 5 million by next year. By then, at the latest, the crisis will have become reality for millions of people, as it reaches private households, forces more companies into bankruptcy and pushes countless loans into default, only making things worse for the country's already ailing banks. Politicians around the world are forced to look on as the economic crisis jumps from one industrial sector to the next and spreads to more and more social groups. They are the witnesses of a reality that repeatedly debunks their worst prognoses as being all too optimistic.

They are approving billions in government spending for economic stimulus programs and bank bailout packages, and pumping more and more money into the economy to rejuvenate the economic cycle. But no one knows whether this medicine actually works -- and if it does, when it will take effect. Politicians, in their desperation, are clinging to even the tiniest glimmer of hope. At the opening ceremony of the Hanover Trade Fair early last week, where the number of exhibitors had just about remained stable, Chancellor Angela Merkel announced that the worst appeared to be over. At an economic summit at the Chancellery a few days later, none of the 31 invited representatives of industry was willing to share this optimism. Instead, the meeting was marked by pessimism and a deep sense of helplessness. The mood reminded one of the attendees of a "funeral wake."

It appears that the German federal government, labor unions and employers have exhausted their options. As a result, the course of the meeting was predictable. The assembled representatives of industry groups used the opportunity to present the government with their familiar demands. The invited economists argued over terminology and forecasts, and the members of the government snubbed those officials who had expressed their opinions somewhat too loudly of late. The mood at the Chancellery only worsened in response to the grim forecast for growth presented by Hans-Werner Sinn, the president of the Munich-based Ifo Institute for Economic Research, who predicted that the worst is yet to come. According to Sinn, German banks will have to make write-downs equivalent to up to 90 percent of their capital, while most businesses hold a pessimistic view of the future.

Sinn even believes that deflation is possible, a situation in which demand would continue to decline despite falling prices. But not all of the economics professors in attendance agreed with the Munich economist's theories. Wolfgang Franz, an economist from the southwestern German city of Mannheim, said that he believed that the economy could fall back into step more quickly than others predicted. Axel Weber, the head of Germany's central bank, the Bundesbank, made it clear that he sees possible inflation as a much greater threat. By the end of the economists' presentations, the attendees were no longer sure which danger they were supposed to combat. Deflation, inflation, mass unemployment --  these are words reminiscent of the darkest chapter in economic history. Thus, it comes as no surprise that experts are mentioning with growing frequency a term that was believed to have been relegated to the history books: Great Depression.

'The Consequences Are Real'
In the United States, the term "depression" has already crept into daily usage. Christina Romer, the chair of the Council of Economic Advisers appointed by US President Barack Obama, doesn't like to hear the comparison with the past. The Great Depression was Romer's field of expertise as an economic historian at the University of California, Berkeley, before she came to the White House under the new administration. Now Romer has the feeling that history moved to Washington with her, that the past is alive once again and, on some days, is already beginning to look like the present. "In the last few months, I have found myself uttering the words 'worst since the Great Depression" far too often,'" she said in a recent speech at the Brookings Institution in Washington. She went on to repeat all of the depressing references to the past: "The worst 12 month job loss since the Great Depression; the worst financial crisis since the Great Depression; the worst rise in home foreclosures since the Great Depression."

Even Ben Bernanke, the chairman of the US Federal Reserve, whose job requires him to be a professional optimist, finds it difficult to dispel the current melancholy. As a professor at Princeton, Bernanke wrote a substantial book on the world economic crisis. "I've always been more skeptical than others when it comes to predicting the potential effects of this crisis," he says. "Some people thought that we would get over this easily." He chuckles, but it sounds more like a groan. "I hope that no one subscribes to that view any more. The consequences of this crisis are very real, and they are extremely serious." But how serious? That's what everyone wants to know, and yet no one is able to predict how the crisis will continue -- not Romer, not Bernanke and not German Finance Minister Peer Steinbrück. Last week, Steinbrück admitted, openly and helplessly: "I don't know." That's what makes this crisis so uncanny. It's clear where it comes from, but no one knows where it is going. Will it continue to rage on at the same pace? Or will it subside, even just for a few months?

Or is the worst already behind us, as some market players seem to believe? They pushed Germany's DAX stock index up by 24 percent and the US's Dow Jones Industrial Average up by 22 percent in the last seven weeks. Is the market smarter than all of the experts, who were denying the possibility of a deep recession as recently as last year? Or is the market blind to the major fault lines in the world economy? The mood on Wall Street remained positive for a long time after real estate prices began tumbling in the fall of 2007. Every small sign of hope is eagerly interpreted as a turn for the better. When the Ifo Business Climate Index, an early indicator for economic development in Germany, rose last Friday, the DAX promptly added 3 percent -- even though a majority of the firms polled by Ifo Institute expect the situation to worsen even further.

The crisis is currently putting an excessive burden on everyone. It behaves like an aggressive, previously unknown virus, changing its appearance and speed from week to week. At first, it looked like an American real estate crisis, then a banking crisis, a market crisis and a financial crisis. But the virus was consistently worse than the words that were being used to describe it. At the beginning of the crisis, everyone felt that it was someone else's problem. Carmakers thought that it was a crisis for banks. The Europeans thought that it was an American problem. The rich believed that it would only affect the poor. The opposition felt that it was the government's crisis. Today, everyone knows that these notions were too short-sighted. The virus is raging in all parts of the world, and striking at all levels of society. The pathogen has spread more quickly than all other pathogens in the past. It is invisible, but the trail it leaves behind is not pretty. At the container terminal in the northern German port city of Hamburg, only 12 of 100 parking spots for trucks that transport containers to and from the docks are occupied. "Only a year ago, they had to wait in line for a spot," says dockworker Gerhard Hamann.

Things are even worse in Bremerhaven, another northern German port city, where German cars are shipped to destinations around the world. The automobile shipping industry has lost almost half of its business, and the company that provides harbor services has plans to lay off more than 1,000 of its 2,700 employees. In the boom days of globalization, German cars were hot items, status symbols for the nouveau riche in China, Russia and India. German machinery was in high demand when large sums of money were being invested in emerging economies. As a result, Germany, the world's leading exporter, benefited the most from globalization. Conversely, the effects of a shrinking global economy are felt all the more acutely in Germany.

As the virus rages, it is already claiming its first victims. German industrialist Adolf Merckle threw himself in front of a moving train because his life's work, which includes the companies Ratiopharm, a pharmaceutical company, and HeidelbergCement, was threatened. David B. Kellermann, the chief financial official of the US's second-largest mortgage lender, Freddie Mac, hung himself at his home in a Washington suburb last week. "It is plain that at Freddie Mac, as at many of the companies in the center of this economic storm, there are forces so strong they can overwhelm almost anyone," wrote the New York Times. No part of the world is currently unaffected by the crisis. From the United States to China to Germany, the pictures of devastation are the same. Poor countries, especially in Africa, are even worse off. According to a report by the World Bank and the IMF, the global recession will plunge up to 90 million into extreme poverty and drive up the number of chronically hungry people to more than 1 billion. Emerging economies are also getting nowhere fast.

In fact, they have been brought to their knees. As Western consumers cut back on spending, much of their export industry is at a standstill. In March alone, Taiwanese exports dropped by 30 percent over the previous month. Hundreds of empty freighters are at anchor off Singapore's port, while Japanese Prime Minister Taro Aso sees "no land in sight" for his country. In Latin America, Western companies are pulling out their investments en masse. In Brazil, half of the 35 modern ethanol plants planned for 2009 and 2010 will not be put into service. Western capital is flowing back into the country that triggered the crisis in the first place. US treasury bonds are now considered a safer investment than the biofuel business. At the same time, prices for many crops have dropped sharply --  the price of soybeans, for example, has declined by 40 percent -- meaning the Brazilian economy is caught in a dangerous pincer movement. The country's traditional sectors are no longer viable while new businesses are not yet fully developed. Even export giant China is losing steam. Chinese exports fell by 25 percent in February, a number Bank of America calls "ugly."

Donating Sperm to Beat the Crisis
All eyes are on the US, the country where the disaster began. American consumers have lost their erstwhile reputation as the engine of worldwide growth. Instead, they are now seen as reserved and uncertain, potential consumers who need strong persuasion before they buy anything. Chains like Pizza Hut are offering customers who buy a pizza a second one for a penny, while car dealers are trying to entice customers by offering a second vehicle for $1 -- if only the consumers would buy the first one. New business ideas are cropping up, providing ways for budget-conscious Americans to earn a quick buck. Phil Maher, who runs the Web sites and, which feature information on how people can earn extra income by donating blood and sperm, says that traffic to his sites has grown by 50 percent and 80 percent respectively in recent months. Men, he says, are mainly donating sperm.

"You can donate every two to three days, twice to three times a week if you're lucky," Maher told the news agency AFP. "Three times a week, $100 per donation -- with a year's commitment it can get really interesting." Germany hasn't reached this stage yet. Many Germans are nervously awaiting whatever comes next. They still have their jobs and are still collecting their salaries, and yet the uneasy feeling that things could take a turn for the worse is difficult to dispel. In fact, many are now wary of the reality they see around them, a reality imbued with ominous words like "still" and "until now," words that rob one's feeling of security. Many can take comfort in the fact that their favorite stores are still open, and that their own employers have not resorted to layoffs -- yet. Most Germans are doing well, but how much longer can it last?

A classic German company like Porsche is still a strong carmaker -- or is it? Humanity has yet to find cures for diseases like AIDS, Alzheimer's and Parkinson's, even though all the relevant data for these illnesses can be found inside a single body. But the economic crisis is taking place in 6.5 billion minds at the same time, making it the biggest psychodrama in world history. Experiences and television images become condensed into expectations, expectations turn into fears, and fears shape what is happening in every market today. These fears exert a stronger impact on markets than politicians and central bankers, with their speeches and their programs. The virus has eluded the powerful. The entire world is now on edge, causing large numbers of people and businesses -- from housewives to CEOs to bankers -- to hesitate and take a wait-and-see approach to things. This partly explains why the World Bank and the IMF predict a decline in global economic activity in 2009 -- for the first time since World War II.

In its most recent report, the Organization for Economic Cooperation and Development (OECD) writes: "The world economy is in the midst of its deepest and most synchronized recession in our lifetimes, caused by a global financial crisis and deepened by a collapse in world trade." According to the OECD, by 2010, the gap between our current economic potential and the current output of goods and services will be twice as large as in the early 1980s, when many countries faced their most severe recession since World War II. One has to go back even further in time to find anything comparable --  to a time when photographs were still in black and white and life was grim. The Great Depression was the primal event of the last century, the root of all evil in the 20th century, including poverty, mass unemployment, Hitler and total war.

It is a painful comparison to make, because it presupposes an inevitability that, of course, doesn't exist. Drawing this historical analogy is dangerous, Frank Schirrmacher, a co-publisher of the heavyweight German newspaper Frankfurter Allgemeine Zeitung, warned last fall. According to Schirrmacher, it creates precisely the reality that it warns against, conjuring up "a social type -- that of our grandparents or great-grandparents -- with which an insecure and outclassed society can, at the very least, identify." Comparing is not the same as equating, but it improves our understanding. The past illuminates the present, the German philosopher Karl Jaspers once said. But perhaps the comparison will also show that the differences are greater than the similarities.

Is 2009 a new 1929? "I believe and hope it is not, but I wouldn't be surprised if I were wrong," says Robert Samuelson, a leading US commentator on economic issues. When Nobel laureate Paul Krugman was asked the same question recently, he reflected for a moment before responding. Finally, he said, with his trademark thoughtfulness: "It's impossible to rule out anything at this point." Today's data are still a long way from the dramatic -- and, for many, traumatic -- economic statistics of the Great Depression. In the United States, the epicenter of the current crisis, a quarter of all citizens available to work were unemployed at the height of the Great Depression. Today, only 8.5 percent of Americans who are available to work are unemployed.

Between September 1929 and June 1932, stock markets lost up to 85 percent of their value, representing a massive destruction of wealth. By comparison, today's Dow Jones index has lost only about 40 percent of its value. But the total value wiped out by the crisis exceeds the destruction of wealth in the Great Depression several times over, even when adjusted for inflation. This is because there is simply more money invested in stocks today than there was 80 years ago. At the time, the entire US economy shrank by almost a third, as tens of thousands of factories, stores and banks went out of business. Between 1929 and 1932, 5,000 banks filed for bankruptcy, and another 4,000 financial institutions went under in 1933, at the height of the financial crisis. These bankruptcies meant that roughly one-fifth of American banks disappeared. In the current crisis, only a few dozen financial institutions have declared bankruptcy. Nevertheless, today's banks are not in a significantly better position than banks were during the Great Depression.

Their balance sheets remain burdened by toxic assets. The government continues to inject new, clean money into the economic system. Although this doesn't make banks healthy, it at least prevents their demise. Nevertheless, many institutions are now known in the industry as "zombie banks" -- banks that continue to exist like the undead. During the Great Depression, governments, especially in the United States, stood by and watched as the crisis deepened. The economy stumbled -- and the government allowed it to fall, leaving citizens, banks and companies to their own devices. Governments today, however, are coming to the rescue with billions in bailout funds. This is an important difference, as Obama's adviser Christina Romer is quick to point out.

Unfettered Capitalism
In 1930, the first year of the crisis, the German economy was caught in a downward spiral, as the population became more and more impoverished each day. Unlike today, very few citizens could claim significant benefits under unemployment insurance, and many were dependent on meager local assistance programs. The victims of the crisis included people who, as the then-mayor of Cologne, Konrad Adenauer -- who would later become the first chancellor of West Germany -- once said, "would never have had to rely on public assistance in normal economic times: pensioners, independent craftsmen and tradesmen." Germans did their best to limit their consumption.

One Berlin newspaper, the Berliner Lokalanzeiger, reported that people would drive to restaurants on the outskirts of the city catering to day-trippers, and would often "order only a bottle of mineral water and eat cake they brought along from home." Foreclosure auctions were announced in the newspapers on a daily basis. Bakers decorated cakes with sayings like: "This cake is small, because I too am out of work!" Cafés saved costs by eliminating live bands, playing music from the radio instead, and by serving glasses of milk for 10 pfennigs instead of sparkling wine. In our day, there is more fear than suffering. Germany now boasts a relatively sizeable and stable social welfare state, and even the United States of today cannot be compared with the America of the 1930s.

Capitalism was primitive and unfettered at the time. In the United States, government spending as a percentage of gross domestic product was barely 10 percent at the end of the 1920s. Today, the same ratio amounts to around 40 percent in the United States and 44 percent in Germany. As a result, governments have economic forces at their disposable that they can now put into action. During the Great Depression, workers who lost their jobs usually ended up directly on the street. Unemployment meant poverty, while prolonged unemployment led to a slide into economic misery. Both the German and the American welfare states are much stronger today.

The United States has unemployment insurance benefits (albeit relatively small), a mandatory social security system and health insurance for retirees and children. In addition, 32 million Americans, or more than 10 percent of the population, receive government food stamps. The greatest similarities between 2009 and 1929 have to do with the causes of the crisis. The history leading up to the Great Depression reads like a review of the last decade. In both eras, people were enamored of the present. They celebrated themselves, and they consumed and invested -- doing both with money they didn't have. They failed to notice growing economic imbalances, and they ignored the trouble brewing in the global economy.

People in the 1920s were fascinated by progress and the fashionable new products it spawned, including cars, airplanes, radios and telephones. They were finally able to take part in the latest technical achievements. For only two months' worth of wages, a worker at Ford could buy himself the first affordable automobile, the Model T, popularly known as the "Tin Lizzy." The stock markets also came under the spell of modernity, as more and more citizens became fascinated by stocks and invested their savings in the market. People at all levels of society were suddenly overtaken by a new stock market fever.

Unbelievable stories made the rounds, like the tale of a New York valet who made a quarter of a million dollars in the stock market, or the nurse who became $30,000 richer on the basis of a stock tip she had received, or the shoeshine boy who bought stocks worth $50,000 for $500 in cash. Many investors speculated with borrowed money, convinced that they would be able to pay off their debts when their shares appreciated. The American fondness for buying things on credit was already very pronounced at the time. More than half of all cars and three-quarters of all furniture bought in the 1920s were financed on credit. John Kenneth Galbraith, the great student of the world economic crisis, wrote that a "mass escape from reality" had brought movement into the markets -- not in slow, sedate steps, but by leaps and bounds. According to Galbraith, a mass exodus into an economic world of make-believe had begun.

Everyone was convinced that the stock market boom in God's own country could only continue, perhaps not indefinitely, but certainly for several more years. Homebuyers in the United States felt the same way until recently. They too were living in an illusory world, except that this time it consisted of their own homes. Politicians played a less than admirable role in both eras, encouraging people to do the wrong things. President George W. Bush told Americans to "go shopping" after the terrorist attacks of Sept. 11, 2001 had shaken the country to its core. The Federal Reserve, America's central bank, provided low interest rates. As a result, economic growth in the United States was driven, not by rising exports or groundbreaking inventions, but by consumption paid for with credit. The US had "the best recovery that money can buy," says Kenneth Rogoff, a former chief economist at the IMF. A similarly unshakable belief in the future prevailed in the 1920s. In the 1928 election campaign, President Herbert Hoover crowed: "We in America today are nearer to the final triumph over poverty than ever before in the history of any land." As late as November 1929, the Harvard Economic Society was still declaring that "a serious depression seems improbable."

In both eras, the drama began with a crash. "Despite many differences in terms of detail, the market crash of 1929 and the banking crisis of 1931 closely resemble the problems of today," says economic historian Werner Abelshauser. The bankruptcy of US investment firm Lehman Brothers, for example, bears a fatal resemblance to the events that led to the demise of Germany's Danat Bank. The Danat Bank drama ran its course on the evening of May 11, 1931, when the bank's chairman, Jakob Goldschmidt, was informed during a dinner that his most important client, the Bremen-based textile giant Nordwolle, had falsified its accounts and was hopelessly insolvent. "Nordwolle is finished, Danat Bank is finished, Dresdner Bank is finished, and I am finished," he said frantically. Goldschmidt was not wrong in his assessment. Danat Bank was indeed finished, and every major Berlin bank was in trouble. The debacle was followed by a crisis meeting of politicians and bankers on the weekend of July 11 and 12.

Underestimating the Crash
The large conference room at the Reich Chancellery at Wilhelmstrasse 77 in Berlin was filled with dignitaries from the world of politics and money. Contemporary observers reported that the mood in the room was extremely tense. As Hjalmar Schacht, the then president of the central bank, the Reichsbank, recalled, the bank directors were hurling "accusations at each other concerning their financial condition and business practices." But the bankers downplayed the gravity of the situation in their discussions with politicians. Then-Deutsche Bank Chairman Oskar Wassermann even insisted that the situation among Germany's major banks was "no worse than anywhere else in the world." The bankers sought to portray the Danat failure as an isolated case and treated Goldschmidt "like someone with the plague," as then-Chancellor Heinrich Brüning wrote in his memoirs. When Brüning asked the bankers about the condition of Dresdner Bank, "the question alone was perceived as an insult," as he wrote. Three days later, Dresdner was ready to be bailed out. The events in Germany were mirrored in the United States. First the banks came down, followed by their customers -- manufacturers, department store barons and small businesses. After that, all economic activity went into a tailspin, something the modern world had never quite experienced before.

Global trade volume fell by 30 percent in three years, while industrial production shrank by 37 percent. It was a shocking experience for everyone involved, from beggars to businessmen. The official unemployment figure in Germany rose to 6.1 million by February 1932, but real unemployment was in fact much higher. Today's contractions in the overall economy and the labor market are relatively modest by comparison. The US economy is expected to shrink by 3 percent in 2009, while Germany will experience a significantly greater decline. The comparisons between the current crisis and the Great Depression are indeed problematic. What exactly is being compared? One set of statistics represents the ultimate outcome of the Great Depression, but what do today's statistics signify? Perhaps merely the beginning of the current crisis? In the late 1920s, the crisis began when it was underestimated. No one recognized the events of the day as the turning point they would eventually become. So much was whitewashed and so many people were placated. If speculation was the mother of the crisis, its father was naïveté. The players, says the economic historian Werner Abelshauser, lacked an "awareness of disaster."

At one point, on October 24, 1929, the Dow Jones index fell from 305 to 272 points. The next day, the headline in the New York Daily Investment News declared: "Stock Market Crisis Over." The chairman of the New York Stock Exchange continued his honeymoon in Honolulu. The stock market would not hit bottom until three years later when, in July 1932, the index fell to 41 points. It would take the market another 22 years to reach its pre-crisis level. Politicians at the time, not unlike politicians today, were notoriously optimistic at first. President Hoover heralded a recovery, but the real downturn was yet to come. When his successor, Franklin D. Roosevelt, came into office in 1933, he too believed that the worst was over -- and he too would be proven wrong. President Obama, also unable to resist temptation, used the first halfway positive economic data to instill confidence in the public. In mid-April, he said the economy was showing "glimmers of hope," while his chief economic advisor, Lawrence Summers, said that the sense of "unremitting freefall" in the US economy had disappeared. But that was before the IMF revised its forecasts drastically downward. By that point, there could be no question of an end to the crisis or even a reversal of the current trend.

When Obama gave a speech to workers in Iowa last Wednesday, the talk of glimmers of hope had already evaporated. This time, the president told his audience to be patient and bold, not to give up hope, and to believe in America's future. He looked tired. His staff said that he was still exhausted from his European trip. In the decade following 1929, there were repeated signs of a recovery, and politicians were not the only ones to eagerly grasp at every hopeful opportunity. People believed that they had put the worst behind them, and yet their hopes were deceptive. An even bleaker future lay ahead. Even John D. Rockefeller, the richest man of his day, was mistaken in his assessment of the markets.

At the end of the week of the 1929 crash, he returned to the market and bought stocks, "believing that fundamental conditions of the country are sound." Last September, Warren Buffett, one of the world's richest men today, made a similarly hasty decision when he invested $5 billion (€3.8 billion) in the firm Goldman Sachs a little more than a week after the Lehman bankruptcy. He would have turned a decent profit if he had waited a while longer. More than anyone else, President Herbert Hoover would go down in history for downplaying the Great Depression. In December 1929, he said that it was "the strong position of the banks" that had "carried the whole credit system through the crisis without impairment." But the real banking crisis was yet to come.

In May 1930, the president boldly announced that he was "convinced we have now passed the worst and with continued unity of effort we shall rapidly recover." German Chancellor Angela Merkel seems to be doing her best to imitate Hoover. In the spring of 2008, she believed that the crisis would "perhaps not affect Germany." She was quickly proven wrong. A short time later, Merkel said that German banks were in good shape, and yet the first of those banks had to be rescued soon afterwards. Perhaps the most astute contemporaries are those who withhold judgment. When asked the question: "Can you explain what has happened?" Robert Solow, a winner of the Nobel Prize in Economics, simply shakes his head and says: "No, I don't think that normal economic thinking can help explain this crisis."

In light of the difficulties in comparing a past depression with a depression in its embryonic stages, it is worth taking a look at the speed of the respective processes of disintegration. It is an exercise that exposes the raw forces that prevail. The current downward spiral exceeds all previous downturns when it comes to its intensity and speed. The United States has experienced seven recessions since 1947, which lasted 10 months on average. It was only in 1982 and 1983 that the unemployment rate climbed to around the 10 percent mark. But this time jobs are being destroyed at a rate that suggests the outbreak of an epidemic in factories and office buildings. Last August saw 640,000 people being added to the unemployment rolls, followed by 629,000 in October, 255,000 in November and 632,000 in December, and the rate of new unemployment has continued unabated ever since. The US economy is currently losing about 700,000 jobs a month. At this rate, the 10 percent threshold will likely be exceeded at a gallop.

The Rise of Hitler
A similar decline in economic activity is also unprecedented in Germany. Most German economic research institutes now predict a 6 percent decline in growth for this year, and although the decline is not expected to be as severe in 2010, forecasts do not foresee growth. These assumptions are not based on the opinions of business owners and consumers. Instead, they reflect the decline in orders for goods and services. Both the machine-building and steel industries report a 50 percent drop in orders. Indeed, it is hard to find an industry that is not shrinking dramatically. Germany's postwar society has never experienced turmoil of similar proportions.

The major economic tremors have always been felt in neighboring countries, brought on by France's nationalization policies in the 1980s, the withdrawal of the British pound sterling from the European Monetary System, and the conditions in Italy that led to the rise of current Prime Minister Silvio Berlusconi. "This is the first postwar crisis that we are not experiencing as someone else's crisis," says Wolfgang Nowak, the director of Deutsche Bank's Alfred Herrhausen Society. One can only guess at the long-term political impact of today's crisis. The reason the comparison with the Great Depression is so horrifying is that the world economic crisis led not only to the impoverishment of large segments of the population in Germany and elsewhere, but also to a political catastrophe.

In the wake of the economic crisis, Germany fell into the hands of the Nazis. The slogan, "Hitler - Our Last Hope," was plastered on campaign posters in the 1930s. Many agreed with the sentiment at the time. A bizarre political group that had formed around Adolf Hitler, a former vagrant and veteran of World War I, was suddenly catapulted to the center of the public eye. On May 2, 1930, Hitler, a man who had been ridiculed until then, was suddenly speaking to a packed house at Berlin's Sportpalast hall. Now the people, or at least a significant portion of the people, were eager to hear Hitler speak. After the Reichstag election in the late summer of 1930, a splinter group had suddenly become a force to be reckoned with.

The Nazi Party won 18.3 percent of the vote and 107 seats in the Reichstag, making it the country's second-most powerful party. The economic crisis had catapulted the party to power within just a short space of time. Berlin is not Weimar. And the current economic crisis has not produced any noticeable political changes -- at least not yet. Demonstrations and protests by those affected by the crisis have attracted moderate crowds at best, as was the case at last week's demonstration outside the annual meeting of the Continental automotive parts company's annual meeting in Hanover. This could change if the crisis worsens and unemployment rises significantly.

But will that lead to "social unrest," as Michael Sommer, the head of the DGB federation of German trade unions warns? Could the situation in Germany become explosive, posing a threat to democracy, as Gesine Schwan, the SPD's presidential candidate, cautions? Nothing so far suggests that this is the case. Both Sommer and Schwan have already been reproached for engaging in scare tactics, even by fellow party members like Frank-Walter Steinmeier, the SPD's chancellor candidate. But what is realistic? How will the crisis change the country and the rest of the world?

When experts don't know what will happen next, they develop scenarios. And because future economic developments are so politically explosive, Germany's foreign intelligence agency, the Bundesnachrichtendienst (BND), has decided to address the issue. In mid-April, BND President Ernst Uhrlau presented German President Horst Köhler with his analysis of the repercussions of the current situation. During the meeting at Berlin's Bellevue Palace, the president's official residence, the two men discussed a "metamorphosis in geopolitics" and the future political make-up of a world that will never be the same again. The core message for the German government is that Europe and the United States will come under growing political pressure, and will face growing competition from China. Beijing will be one of the likely beneficiaries of future shifts on the political map.

Uhrlau believes that there are three possible scenarios. The first scenario, the most optimistic of the three, assumes that the current economic stimulus programs will work, leading to a rapid shift in trends in the stock and credit markets, and that confidence will return and the economy will pick up speed soon. Under this scenario, the United States will remain the dominant superpower, but it will emerge from the crisis economically weakened and with less available capital to fund its military activities. The People's Republic of China would benefit from this development as the strongest exporting nation. The Chinese will benefit even more if scenario two, which the BND calls the "China scenario," becomes reality. It describes what will happen if the billions from the West's economic stimulus programs end up primarily in Asian countries.

The foreign capital would reinvigorate Asian domestic markets, allowing Beijing to invest even more heavily in advanced technology and take over the prime assets of Western industry, thereby accelerating its modernization process. This, in turn, would speed up China's process of catching up with the West. For Beijing, the crisis would serve as the catalyst for a development that has already been underway for several years. "China would develop even more strongly into a superpower in Asia and a reference point for countries like the Arab Gulf states and other raw materials producers," says Uhrlau. "The United States, on the other hand, could forfeit some of its dominant status." India would also grow in the slipstream of the Chinese, though not as dynamically. The BND believes that under this scenario, competitors to central institutions like the IMF would take shape, such as an Asian Monetary Fund.

The third scenario is the most dismal. It describes the consequences if the economic stimulus programs are ineffective, which will become all the more likely the longer it takes for the recovery to emerge. It is a catastrophic scenario for large parts of Africa, as well as for countries like Argentina, Venezuela, Iran, Kazakhstan and parts of the European Union, which would come under massive pressure. Countries like Yemen could turn into "failing" states, with central governments losing much of their authority, while the loss of aid payments from other countries would push countries like Jordan to the brink of insolvency. The flow of refugees to Europe would surge, benefiting Islamists worldwide. In this scenario, the BND predicts mass unemployment for China, internal unrest and a loss of its monopoly on power for the Communist Party.

This would constitute virtually a revolutionary development with grave risks to global stability, because it would prompt the government in Beijing to become more aggressive abroad to compensate for internal tensions. The BND expects to see a blend of the first two scenarios emerge -- not exactly a soft landing, but not an all-out catastrophe, either. What all three scenarios have in common is the theory that, after this crisis, the world will likely not be as dependent on the United States and Asia will play a greater role than in the past. "There will be a development in the direction of regionalization," says Uhrlau, "and we will have to get used to a more self-confident China in the future." But is the third scenario truly out of the question? Isn't it possible that the billions now being pumped into the economy could seep away without producing the desired effect, because the foundation of the economy has become so porous after years of being fueled by debt?

The End of American Hegemony
There are, at the very least, signs that this scenario is not quite as unlikely as some would like to claim. The severe crisis is affecting the United States, which is already in a weakened position, and it could accelerate the country's relative demise as a superpower which already began a long time ago. American industry, or what is left of it, is already in a deplorable condition today. Detroit's Big Three carmakers, General Motors, Ford and Chrysler, have been ailing for a long time and are now on their last legs. In the last three years alone, the three companies have lost a combined $110 billion (€83 billion). The history of the US auto industry --  and this is what makes the current situation so dramatic -- is the history of America as an economic superpower, from its brilliant ascent to its agonizingly slow demise.

The GM model, characterized by massive marketing, little substance and an excessive policy of debt financing, has also become the country's model. Never before has a country lived at the expense of the future with such reckless abandon. The United States today is an economy that sucks in the savings of other nations. America currently needs more than half of worldwide savings merely to avoid falling below the levels of previous years. The government and private households borrow roughly $1 billion (€760 million) on each business day. Three years ago, the country was only borrowing two-thirds of this amount. Even when adjusted for the size of today's economy, the US's current debts significantly exceed debt levels during the Great Depression. The superpower has become an empire of debt.

The most dangerous element of President Obama's crisis management program is that this debt is not being reduced, but expanded. The US's national deficit will reach an estimated $1.8 trillion (€1.36 trillion) in 2009 and will only continue to grow after that, perhaps even doubling. About 40 percent of the national budget is already not being covered by revenues. If only the problem were limited to the United States. But the situation that has been brewing on the periphery of the crisis is far more dramatic than it was in 1929. This is mainly attributable to the fact that modern globalization had only begun at the time. Many of today's industrialized nations were agricultural economies, and were not linked to the global economic system.

Countries like Romania, Hungary, Russia, Latvia and Ukraine did not play a significant role at the time of the Great Depression. Today, they are either on the brink of bankruptcy or, like Russia, they are in serious trouble because the price of oil has declined dramatically and Western investors are pulling out their money. The Institute of International Finance expects the flow of capital into the emerging economies of Eastern Europe, Latin America and Asia to fall to only $165 billion (€125 billion) this year, or one-sixth of the level of foreign investment in these countries only two years ago. Eastern Europe, in particular, is suffering from a massive exodus of capital. The Hungarian forint has lost more than 20 percent of its value since last July, while the Ukrainian hryvna has declined by a third. The tailspin affects banks in Austria, Germany and Italy that had heavily invested in the region. In some countries, more than half of all loans were denominated in foreign currencies.

Experts like economics Nobel Prize winner Krugman believe that, barring a noticeable improvement in Eastern Europe, Austria could face national bankruptcy. Austria's wellbeing depends on the wellbeing of the Eastern Europeans. This, in turn, is closely tied to the influx of foreign investment capital. There would be serious political consequences if any Eastern European countries became failed states. One would be a threat to the goal of European unification. A divided Europe would not be a peaceful Europe, as radical influences would quickly begin flowing from the edges of the continent towards its center, which is precisely where Germany is located. The IMF is currently doing its utmost to prevent the collapse of these countries.

Special task forces are being established, Hungary and Latvia are being supported and rescue programs for other countries have already been approved. At its recent summit in London, the G-20 group of major industrialized nations voted to provide the IMF with an additional $500 billion (€380 billion) in lending capital. Germany is also preparing itself for tougher times, at least in theory. As unemployment rises, tax and social security revenues will naturally decline. As a result, Germany will sink further into the red. The Nuremberg-based Federal Labor Agency has already sounded the alarm, noting that its reserves will be depleted by this fall. Some €2.1 billion ($2.8 billion) have already been set aside for 2009 to pay for the large numbers of workers that are on short-time schemes, where the shortfall in their wages is partly made up by the government.

The government's reserves for social security benefits are likely to be tapped even further, partly to prevent the development of a politically explosive atmosphere. The "Agenda 2010" labor market and social system reforms adopted under former Chancellor Gerhard Schröder have helped to reduce the costs to the government of welfare programs. But in a crisis of the current dimensions, these laws could also lead to the rapid impoverishment of people who are still part of the middle class today. Anyone who is unable to find a new job within a few months automatically becomes a welfare case in Germany. In the past, if a 57-year-old worker became unemployed, he would continue to receive 60 percent of his last net salary for 32 months.

Only then would he qualify for unemployment assistance. Under the old system, he was able to keep his home and his life insurance policies. This helped to slow the descent into poverty. Today, the same worker would lose his unemployment benefits after 18 months. If he fails to find a job after that, he stands to descend quickly into poverty. A person who is classified as long-term unemployed receives €351 ($463) a month in government assistance, as well as the cost of rent for "suitable" housing, which, for a single person, is generally restricted to an apartment no larger than 45 square meters (484 square feet). And he only qualifies for this assistance if his savings are minimal. Germany could soon face a debate over the future of the social welfare state. "We must take an offensive approach to discussing the threat of impoverishment," says one SPD cabinet member.

The cabinet member insists that an amendment to the Hartz IV reforms is at the top of the political agenda, and that the Social Democrats cannot allow their political base to fall into the poverty trap. Nevertheless, no one in Berlin is currently interested in actively discussing the issue. No one wants to be suspected of fueling public anxiety even further. Politicians are still holding onto the hope that things will not turn out to be as bad as expected after all. Everyone, in fact, still hopes that the differences between today's crisis and the Great Depression will be greater than the parallels. Unlike 1929, the governments of the major industrialized nations today are generally in agreement and are combating the crisis together, a commitment they agreed upon at the London G-20 summit in early April.

Unlike 1929, the social welfare network, especially in Germany, provides citizens with a cushion against the most acute hardships. Under the Obama administration, America's social safety net is also being improved. Unlike 1929, the world's major countries are flooding the economy with money to prevent deflation and, with it, a downward spiral of declining prices and income. But no one knows whether this will suffice, or whether all the money being thrown at the aggressive virus fueling this crisis will only make it worse. Debts are being fought with debts, meaning that not only banks but entire countries could end up bankrupt. Perhaps the efforts to combat the current crisis are merely laying the foundations for the next crisis, which will be bigger still. Economic historian Werner Abelshauser is among those who refuse to rule out anything. "History doesn't repeat itself," he says. But then he quickly adds: "Or does it?"

Top DC Lawyer Shoots Himself In Office One Day After Firm Announces Layoffs
Just one day after prominent DC law firm Kilpatrick Stockton announced layoffs of attorneys, Mark Levy, the head of the firm's Supreme Court and Appellate Advocacy practice, apparently shot himself in the firm's D.C. office this morning. It's terrible news but also a reminder of the genuine human suffering the economic slowdown can inflict. We're sorry for the troubles of both Levy's family and his colleagues.

In a weird turn, Levy appears to have set up an "away" email response prior to killing himself. According to the ABA Journal email to Levy are bouncing back with this response: "As of April 30, 2009, I can no longer be reached. If your message relates to a firm matter, please contact my secretary . . . If it concerns a personal matter, please contact my wife . . . Thanks." Most recently, Levy argued on behalf of DuPont in a pension benefits case before the Supreme Court. The Court unanimously decided the decision in favor of the DuPont  administrator, awarding benefits to the divorced widow of a pension holder.