Tuesday, May 26, 2009

May 26 2009: The ugly emperor and the naked duckling

Jack Delano Family is everything August 1940
Polish family living on High Street in Mauch Chunk, Pennsylvania

Ilargi: So yes, the confidence game works for now, and it no longer matters anymore how bad the news is. When the spin machine churns along at full speed, there's no news so bad that it can't be turned on its head, dressed up to the nice and sold as a hot virgin all the boys would commit a crime to lay their hands on. The question of course remains how long it will work, but for the moment we're stuck in a make-believe world suspended somewhere between the naked emperor and the ugly duckling. GM's bankruptcy came a big step closer again today as bondholders sounded a NO as decisive as it will be painful, not least for themselves.

US consumer confidence may have risen, but not on account of the workers, pensioners and dealers in the automotive industry. Neither will legislators and civil servants in California and soon 45 other states be donning smilies and party hats. And though there will always be voices that claim this morning's Case/Shiller housing numbers shoot greens, shooting blanks is a lot closer.

In April, about 475 American homeowners per hour were served with paperwork drawing them into one step or another of the foreclosure process, every hour, 24 hours a day. The CS Monitor envelops official data for inventory numbers and home values in a cloud of uncertainty: the paper estimates that 70% of done-deal foreclosed homes, for fear the prices they’d fetch in auction would be too low, are simply not put up for sale. 500.000 homes just sit there waiting for the tide to change. The report also suggests that the Obama administration exerts pressure on banks to keep them from trying to sell the properties.

All this serves to prolong an unrealistically high price level, as well as a hugely underestimated number of available homes. And that's still without all the owners who’ve simply removed the For Sale signs from their lawns. One consequence is that the poor people who buy homes today pay prices that are actively, artificially and substantially elevated by government policies. First through Fannie and Freddie's mortgage purchases, second through these don’t ask don't tell foreclosure policies. A government that tricks its own citizens into greatly overpaying for what is likely the most costly purchase in their lives, it truly is quite something from an ethics and morality point of view. But everybody's silent on the topic, nobody dares touch that scary real world out there.

It would be enormously useful if an economist such as Robert Shiller would crunch his present numbers against a background in which banks were to try to sell all their REO (Real Estate Owned ) confiscated properties as fast as they could, and in which Fannie and Freddie would not be there to catch their fall. That would provide a far more accurate picture of a more or less free market, and it would save today's home buyers tens, if not hundreds of thousands of dollars on their purchases and monthly mortgage payments. Provided they'd be able to get a loan, that is.

The reason the Obama administration engages in these ethically highly questionable, if not outright illegal slash criminal, politics is identical to why it does just about everything: saving Wall Street. Indices such as the S&P/Case-Shiller one published today would show hugely lower price levels if all repossessed homes were put on the market (the banks that own them need money badly and live on only thanks to your bailout money), and if the taxpayer would no longer be forced to finance his neighbors' home purchase through Freddie and Fannie.

These lower price levels in turn would force more, much more, writedowns on losses for Wall Street banks, at a time when they want them least of all. Losses on mortgages, on mortgage backed securities and likely also on swaps and other derivatives -though that is murky OTC territory-. Keeping home prices artificially high keeps Wall Street alive. Literally.

As long as Obama and Geithner continue to play these games, sure, consumer confidence may rise a bit, especially since they also hold a 3.5% GDP growth-in-the-fall carrot in front of their voters' faces. But this has to stop somewhere: there are almost 2 million homes in foreclosure, 500.000 that have been foreclosed but not not for sale, and millions more that either take ages to sell, if at all, or are taken off the market by discouraged owners. Yes, it saves individuals, corporations and society at large from facing the truth for a short period of time, but at the same moment, scores of homes are added to the unsold inventory all the time, day after day.

It leads to a society with an increasingly grossly distorted view of where it's at, at any given point in time, just so present divisions of power and money can be sustained or increased an X number of weeks or months longer. If only because of the homes that will inevitably be added, through job losses, Option-ARM and Alt-A resets and other factors, there will soon come a time when the lies must necessarily be exposed. That is when the real price will be paid, and by then a huge additional part of that price will have been transferred to those who can least afford to pay. That is the process that's going on right now, and it's just plain wrong in my book. Better to shatter your hopes and beliefs now than to see your entire lives shattered later.

Rally on renewed global optimism
Evidence of improving confidence among US consumers helped rekindle optimism about the global economic outlook on Tuesday, providing a much-needed boost to equities and other risky assets and offsetting geopolitical worries sparked by North Korea’s nuclear tests. The US Conference Board said its index of consumer confidence jumped to an eight-month high of 54.9 in May from an upwardly revised 40.8 in April, the biggest monthly increase since April 2003. However, the rise was largely due to a big increase in the expectations component of the report, with consumers’ assessment of the present situation improving much more modestly. “Whether the improvement in the consumer confidence index translates into an actual improvement in consumer spending will greatly depend on whether the green shoots turn out to be real or merely another bubble,” said Mark Vitner, senior economist at Wachovia.

“Spending plans did inch up in May but remain exceptionally low. A lasting recovery in confidence and spending will require a true improvement in labour market conditions, which we have not seen yet.” US and European equity markets, however, shrugged off such concerns and staged a powerful rally. By midday in New York, the S&P 500 was up 2.1 per cent, while the technology-heavy Nasdaq Composite index did even better, rising 3.1 per cent following a broker upgrade of Apple. The pan-European FTSE Eurofirst recovered from an early fall to close 0.9 per cent higher. Asian markets eased back but showed only a limited reaction to North Korea’s actions over the past few days. Seoul fell 2 per cent, while the Nikkei 225 in Tokyo ended just 0.4 per cent lower and Taipei and Hong Kong both shed 0.8 per cent. Credit default swaps also responded positively to the consumer confidence data, with the Markit iTraxx Crossover index of mostly junk-rated credits tightening 3 basis points to 752bp.

Commodity prices rallied too as the confidence figures triggered hopes that demand was set to increase. The benchmark US oil price, back below $60 a barrel in early trading, rallied to stand 49 cents higher at $62.16 by lunchtime in New York. Investors were expecting current Opec production levels to be maintained at this week’s meeting of the cartel in Saudi Arabia. It was a similar tale for base metals, with copper recouping a near-3 per cent slide. But gold eased below $950 an ounce as the dollar adopted a steadier tone following last week’s sell-off. On the currency market, the greenback bounced off last week’s five-month low against the euro, with the single currency hurt by fresh worries about the health of the German banking system.

However, John Normand at JPMorgan said dollar weakness was now in full flow in response to macroeconomic policy risks. “Investor concerns about Fed policy and the US fiscal deficit point to continued dollar depreciation,” he said. US government bonds gave up early gains following the release of the US figures, sending yields back towards last week’s six-month highs. Peter Berezin, economist at Goldman Sachs, noted that the recent sell-off in the bond market had come at a time when equities had trended lower, suggesting that the market has grown increasingly uncomfortable with the amount of Treasury issuance in the pipeline. More than $100bn of new supply will hit the US bond market this week.

But Mr Berezin added: “Importantly, long-term inflation expectations have remained well-anchored, which indicates to us that the sell-off in fixed income is likely to present a buying opportunity going forward, especially as disinflationary trends gain greater traction.” The yield on the 10-year Treasury edged up 4 basis point to 3.49 per cent, having earlier been as low as 3.4 per cent. The 10-year German Bund yield rose 3bp to a six-month high of 3.63 per cent , having earlier fallen as much as 4bp. Eurozone industrial orders fell for an eighth successive month in March, but at a slower pace than forecast by economists. The quarter-on-quarter contraction in German gross domestic product in the first three months of the year was confirmed at 3.8 per cent.

S&P: Home prices fall by record 19.1% in 1Q
Home prices fell at the fastest annual rate ever in the first quarter, but the pace of month-to-month declines continues to slow, a closely watched housing index showed Tuesday. The Standard & Poor's/Case-Shiller National Home Price index reported home prices tumbled by 19.1 percent in the first quarter, the most in its 21-year history. Home prices have fallen 32.2 percent since peaking in the second quarter of 2006 and are at levels not seen since the end of 2002. The 20-city index fell by 18.7 percent in March from the year before and the 10-city index lost 18.6 percent. Those declines were a bit better than February's and marked the second straight month the indexes didn't post record drops.

Still, there are no signs home prices have hit bottom. "We see no evidence that a recovery in home prices has begun," said, David M. Blitzer, chairman of the S&P index committee. All 20 cities showed monthly and annual price declines, with nine setting annual records. Fifteen cities posted double-digit drops and three cities - Phoenix, Las Vegas and San Francisco - all recorded declines of more than 30 percent. Minneapolis posted a 6.1 percent decline from February to March, and the biggest monthly drop on record for all of the metro area. Charlotte, N.C., and Denver home prices had the best performance in March over February, both edging up less than 1 percent. Home prices in Dallas were flat in March.

'Shadow market' may undercut real estate rebound
Only 30 percent of foreclosed homes are currently on the market nationwide. Could the backlog of hundreds of thousands of empty or rented homes swamp recovery?

Brian Mehigan, the self-described "Mayor of Tara Lane," knows all too well the rise and fall in real estate prices that he calls, simply, "the madness." One of a handful of original owners left in this decade-old Phoenix-area subdivision, the freelance plumber can tell you the fate of homes up and down his street. He points them out one by one: That one’s for sale, that’s now a rental, rental, foreclosure, short sale, foreclosure, original owner. "Who knows what’s going to happen," says Mr. Mehigan, as he keeps a watch on the street. "All I know is I’m not going anywhere." In the cookie-cutter burbs ringed by saguaro groves here in the shadows of the White Tank Mountains, there’s new hope for neighborhoods in disarray after the housing quake. Plumbers like Mehigan are busier, and Phoenix real estate is suddenly red-hot as buyers snap up bargains.

But, despite the short sales, foreclosure sales, and the burgeoning rental inventory, there’s also a massive "shadow market" of empty or rented homes yet to come on the block, as banks try to optimize returns on failed investments and homeowners hold off, waiting for a rebound. In this foreclosure capital – over 75 percent of homes on the market in Phoenix are owned by banks – such a big backup of inventory could affect streets like Tara Lane for years to come. And it could dramatically impact the trajectory of the much-awaited recovery. "Taking a house in foreclosure but not putting it out on the market, that’s common right now," says Rajeev Dhawan, a real-estate economist at Georgia State University in Atlanta. "Short term, it’s good, but long term you’ve got a problem. When the market starts to recover, they’re going to dump the inventory," pushing prices down again.

As many experts glimpse a possible bottom to the housing market, theories diverge about the potential impact of the shadow market. For now, investors are wading into the Phoenix real estate market in droves. Foreclosures are leveling off, sales are being bid on by five to 10 buyers, and more homes are being bought than any time since 2006. Home prices in the Phoenix area have slid nearly 34 percent since the mid-2006 peak and are still falling at about 3 percent a month. More than half of all home sales in the first quarter of this year were made by first-time homebuyers, reflecting affordability that’s at a 20-year high in many parts of the country. The positive sales numbers and the slowing price slide – mirroring trends in California and Florida, two other housing-crash epicenters – is a sign that the real estate market may finally be shoring up, said Arizona State University real estate professor Karl Guntermann in a recent report. "It appears that we’re turning," said Professor Guntermann.

Housing investor David Isom has seen the buying craze firsthand. Despite being able to offer cash, he bid unsuccessfully on 15 homes in the past few months before scoring one with a pool in nearby Glendale, Ariz. "I don’t follow the herd, man, you’re talking to a different guy," says Mr. Isom, explaining his foray into the market. "Most people are reactive. I go against what most people do. It’s the only way to be successful." Despite such exuberance, many real estate experts are predicting more of an L-shaped recovery than a V-shaped one, as properties glut the marketplace in response to home-buying activity. Only 30 percent of foreclosed homes are currently on the market, meaning that some 500,000 sit vacant across the country, part of a vast "phantom inventory" that the market has yet to grapple with.

"There’s a frenzy for bank properties right now, and as a consumer, I’m likely to say, ‘Wow, that’s got to be an indicator of the bottom,’ " says Brett Barry, a real estate agent at HomeSmart in Phoenix. "But a lot of us expect a tsunami of foreclosures to come on top in June, July, or August, because at some point the banks are going to release this stuff." Reasons for the backlog vary. For one, the sheer number of complex foreclosure proceedings – six times the average in the past year – has overwhelmed many mortgage-servicing companies. And some banks may find accounting advantages to delaying the loss they’ll have to book when they ultimately sell the property at prices below the value of the principal. But Alexis McGee, a real-estate blogger at ForeclosureS.com, wrote earlier this month that banks may also be gaming the market so as not to depress prices – especially as bidding wars are heating up in places such as Surprise.

There are some indications, too, that the Obama administration may have leaned on banks not to release the entire foreclosure inventory at once in order to preserve neighborhood values. That’s not necessarily a bad thing, argues Rick Sharga, a vice president at RealtyTrac.com, a real estate tracking firm in Irvine, Calif. "The L-shaped prognosis does not offer much hope, but hopefully it will turn into a U or something," says Mr. Sharga. "The counter argument [is that] … if they manage the inventory back into the marketplace, they can actually contribute to a quicker stabilization. The question is, will the rest of the dynamics in the marketplace allow the buyers to absorb this inventory in a manageable way, or will something else come along to throw the equilibrium off again?"

The shadow may stretch beyond foreclosures. Zillow.com, a real estate tracking firm, revealed in a survey this week that a third of the nation’s 55 million homeowners would be somewhat likely to try to sell their homes in the next 12 months if the market improves. A large chunk of those are likely to be the 15 million or so US homeowners currently "underwater" on their mortgages – owing more than their home is worth. "[A] lot of these home sellers will also be buyers so they will help some of the inventory," writes Stan Humphries, a vice president in Zillow’s data-analytics division. But it’s also likely that some sellers will become renters or will downsize, so "this ‘shadow inventory’ represents more supply … than demand."

So far, political appetite for a nationwide "principal reduction" bailout – forcing banks to reset principals to current, depreciated values – has waned. In its place, the Obama administration on May 14 outlined new rules for so-called "short sales" to help homeowners who don’t qualify under last year’s Help for Homeowners program, which Congress bolstered this week. A short sale is a complex, acrimonious, and often unsuccessful process that allows homeowners to sell homes for less than they owe, while reducing the amount of credit damage to two years instead of five to seven years in a foreclosure.

The short-sale gambit "will push prices up, because people know that it’s a viable sale that will take place," says Ron Farber, whose website, shortsaleplan.com, aims to help put the new Washington rules into play. "This’ll be helpful to the borrower, the real estate agent, the bank, and it’ll really help the economy." Whether it will help Tara Lane is another question, says Mehigan, the Surprise plumber. The one short sale in his quiet neighborhood led to a group of rough characters moving in. Mehigan called the police, and they retaliated after moving out by busting his windows and scrawling graffiti on his house. Looking out on the empty street of low-slung adobe-style homes, Mehigan says, "This used to be a nice neighborhood where people got together, but now it’s a ghost town."

GM bondholders nix tender offer; bankruptcy nears
General Motors Corp has failed to persuade enough bondholders to accept a debt-for-equity swap, setting the stage for the largest-ever U.S. industrial bankruptcy by the end of this month. The largest U.S. automaker had so far failed to gain anywhere near the 90 percent of bondholder support desired to stave off bankruptcy, two sources familiar with the discussions told Reuters on Tuesday. Bondholders have until midnight to make their final decision on the tender. As of midday Tuesday, the source said the company had only "low-single-digit" interest from bondholders. R

Reuters' sources said GM will likely file for bankruptcy some time after midnight Tuesday, but before June 1. The failure to gain bondholder support is a critical disappointment for GM, the largest U.S. automaker and once considered the standard-bearer of all U.S. manufacturing. In the 1950s, a popular ad for the automaker proclaimed that "What's good for General Motors, is good for the USA." "I would say this is a sound rejection of an unsuitable offer," said Pete Hastings, a credit analyst at Morgan Keegan who has followed GM. "I have been saying for some time that this thing was dead on arrival and we were just waiting for the doctor to pronounce it dead. Now that's happened."

As various deadlines near for the automaker, officials at the United Auto Workers' union will gather to hear how many U.S factory jobs GM will cut as part of its restructuring. Union officials representing 54,000 GM workers are scheduled to meet to prepare for a quick ratification vote on a cost-cutting labor deal negotiated last week. The union aims to complete those votes by Thursday. Approval of the contract, which would change payment terms on $20 billion owed to a UAW trust fund, represents one of the hurdles for GM to clear before a June 1 deadline set by the Obama administration. But bondholders have balked at proposals that they forgive debt in exchange for a 10 percent stake in a restructured company.

Under GM's current plan, a UAW trust fund for healthcare would receive a GM stake of about 39 percent. The U.S. Treasury would hold a 50 percent stake. Current shareholders would be left with just 1 percent of a restructured company. A person familiar with Obama administration thinking on the matter said the administration was continuing to engage with bondholders to reach agreement. Shares of GM, which the automaker has warned could be worthless in a bankruptcy, were down 20 cents or 14 percent at $1.23 on the New York Stock Exchange on Tuesday. The U.S. government has provided a combined $36.6 billion to GM, Chrysler and their financing units since December. In an interview broadcast over the weekend, Obama said he hoped GM and Chrysler would emerge from restructuring "leaner, meaner, more competitive." "Ultimately, I think that GM is going to be a strong company," he said.

While much attention is on Washington and Detroit, talks continue in Europe over the possible sale of GM's Opel unit. On Tuesday, Germany pressed the three bidders for Opel to improve their offers for the carmaker, saying they needed to assume greater risks and make credible commitments to preserve jobs and sites. [ID:nLQ677656] Economy Minister Karl-Theodor zu Guttenberg told reporters after meeting Fiat Chief Executive Sergio Marchionne in Berlin that the Italian carmaker's offer looked serious but that rival bidders Magna and RHJ International (remained in contention. "There's no favorite," he said. "Everyone knows that improvements are still necessary."

Fiat made an aggressive last-ditch push to convince the German government to back its bid for Opel ahead of a top-level meeting in Berlin on Wednesday where a preliminary decision on preferred bidders is expected. Marchionne met with Chancellor Angela Merkel and Guttenberg on Tuesday morning to try to address German concerns about his ambitious plan to fold Opel into a transatlantic car empire that would also include U.S. carmaker Chrysler. The German government hoped to be able to settle on one or more preferred bidders late Tuesday or Wednesday, a step which could lead to further negotiations. Pressure to choose a preferred bidder is building ahead of the June 1 restructuring deadline for GM.

A GM Bankruptcy Would Be History's Most Complex
The decline of General Motors may be putting thousands of auto workers and managers out of work, but it will be putting a lot of lawyers to work. How many lawyers will end up working on G.M.’s expected bankruptcy case still is not clear, but in legal circles, the joke is that there may not be enough experienced bankruptcy lawyers available to handle the filing. In part, that is because so many top lawyers are already running up lots of billable hours working on the Chrysler bankruptcy case, while others have been hired by the government, which is financing the way through bankruptcy for Chrysler and, presumably, G.M.

It is not just lawyers who will be busy handling a G.M. bankruptcy filing, which would be perhaps the biggest and most-watched in legal history. Because of its size and scope, the bankruptcy would be the most complicated that any American company has gone through — more complex than those of Chrysler and Lehman Brothers, two other notable bankruptcy cases now making their way through the system. The G.M. filing, which is expected to occur by June 1 as part of a restructuring orchestrated by the federal government, will generate so much economic activity — like hotel bookings, restaurant dining and expanded office rentals — that Detroit is hoping that the case will be filed in the local bankruptcy court.

That is unlikely, however, as bankruptcy cases are typically handled in New York or Delaware, where many business are incorporated and the bankruptcy courts have more experience handling complex filings. For law firms, big bankruptcies can be very lucrative. Weil, Gotshal & Manges, the New York firm handling the Lehman case, recently sought approval for billings for $55 million for just three months’ work from the bankruptcy court in that case. Weil Gotshal is one of the firms that will represent G.M., almost certainly ensuring tens of millions more in fees to represent the automaker. But it is not the only firm that will be working on the case. Already, hundreds of lawyers from almost every major firm that handles restructuring work have spent months preparing the reams of documents that would be required for a bankruptcy filing by G.M., which had nearly $150 billion in global revenue last year, making its case bigger than Enron.

G.M., the Treasury Department, the United Automobile Workers, suppliers, dealers and other vendors all will have legal representatives on hand, meaning a full house in the New York bankruptcy court where the case is likely to be heard. Although no judge will be assigned until the case is filed, court officials are creating plans for a separate computer server devoted to G.M.’s filing, which will be an even bigger megacase than Chrysler, which received that designation in April. G.M. will require $40 billion to $70 billion in debtor-in-possession financing to create a new version of G.M. and dispose of its assets, according to people familiar with the case.

The near inevitability of the G.M. case is a sharp contrast to the resistance put up by company executives, including Rick Wagoner, the former chief. His steadfast refusal to file for Chapter 11 bankruptcy protection while the company reorganized was a factor in his ouster in March at the behest of the Obama administration, which has been keeping G.M. alive with billions of dollars in loans. Many people thought a G.M. bankruptcy restructuring was simply too complicated to do. "The case would last my lifetime, my son’s lifetime, my grandson’s lifetime and maybe my great-grandson’s lifetime," Stephen P. Yokich, the late president of the U.A.W., said in a 1995 interview. But G.M. did consider the idea seriously at least twice in the last two decades: once in 1992, when the company was close to insolvency, and again in late 2005, when rumors of a Chapter 11 filing swirled in Detroit.

Both times, G.M. officials rejected a bankruptcy filing, citing the disruption it would have meant to G.M.’s suppliers, workers and the communities where the company did business. Another reason was the expense: "It would make 10 million lawyers $10 million apiece," Mr. Yokich said in 1995. That is an overstatement, of course. But while there might not be that many lawyers involved, legal fees totaling hundreds of millions of dollars are likely during the course of the case given the high-powered and high-fee lawyers involved. A reason that so many lawyers are needed is that the reorganization, as envisioned by the automaker with support from the federal government, is complex.

The plan is to split G.M.’s good assets from the bad assets, with the idea that the part owning the good assets would be a viable company because it would not be burdened with the other businesses. G.M. would sell desirable brands like Chevrolet and Cadillac to a new company, which would emerge from bankruptcy protection in a few months’ time. Less-attractive assets and liabilities would remain with the old G.M., and eventually be liquidated. For the last several months, G.M. had retained the services of two of the biggest bankruptcy players to help guide it into Chapter 11: Harvey R. Miller of Weil, Gotshal & Manges and Martin Bienenstock of Dewey & LeBoeuf.

Mr. Miller and his team are the company’s principal legal counsel for its bankruptcy filing; but it will not represent the new version of G.M. once that is created, as there is a potential conflict between parties with an interest in the existing company and those with interests in the new company. Mr. Bienenstock, a former partner of Mr. Miller’s at Weil, was brought in last fall to help create the company’s restructuring plan. He may end up representing the new G.M., although the decision has not been made. The law firm Cravath, Swaine & Moore, meanwhile, is representing G.M.’s board.

The restructuring also will provide work for many professional groups other than lawyers. G.M., for example, has retained the services of Jay Alix, the co-founder of AlixPartners, the consulting firm. Mr. Alix, who came out of retirement to help G.M., worked with Mr. Bienenstock on the plan for a new G.M., according to people briefed on the matter. For financial and restructuring advice, the carmaker has turned to investment bankers at Evercore Partners, led by a cofounder, Roger Altman, and the restructuring co-head, William Repko, and to Morgan Stanley. The government’s auto task force has its own advisers, led by the former investment bankers Steven Rattner and Ron Bloom.

The team also has brought in several restructuring veterans, notably Matthew Feldman, formerly a partner at the law firm Willkie, Farr & Gallagher, and Harry Wilson, formerly an executive at the distressed-debt-focused hedge fund Silver Point Capital. In addition, the auto task force has retained the services of the investment bank Rothschild, led by Todd Snyder, and the law firm Cadwalader, Wickersham & Taft, led by John J. Rapisardi, and the Boston Consulting Group, to provide forecasts for auto sales. The U.A.W., meanwhile, is receiving counsel from longtime advisers at Lazard, the investment bank, and the law firm Cleary, Gottlieb, Steen & Hamilton.

As the lawyers prepare to take their seats, many other steps have already been taken to ease the company into court. Last week, the U.A.W. reached a deal with G.M. that includes concessions by workers and modifications to a health care fund that will assume responsibility for retirees’ benefits. G.M. workers will be briefed on the contract changes in meetings on Tuesday and Wednesday, and are expected to vote on them this week. Communities where G.M. does business are eligible to share in $50 million in federal assistance, announced by the administration last week. Suppliers also have been offered assistance, and the Treasury is infusing more money into GMAC, the company’s lending arm that also will provide loans for Chrysler.

Consumers who buy G.M. cars while the company is under bankruptcy protection will have their warranties backed by the federal government, as it is doing for Chrysler buyers. "I’ve never seen a bankruptcy that has such a happy face on it as this one," Gary N. Chaison, professor of industrial affairs at Clark University in Worcester, Mass., said of the work that has been done in advance. As a result, the tone has completely changed since the dire warnings late last year that a Chapter 11 case would spell the end to the country’s biggest carmaker. Now, Professor Chaison said, the government’s attitude was, "You’re going to the hospital and that’s really good because you’ll be out soon and you’ll be much better."

It’s the End of GM as We Knew It
In about a week, we will witness the darkest day in American business history. That’s because on or about June 1, General Motors (GM) will likely file for Chapter 11 bankruptcy protection. OK, it’s not like GM hasn’t been in a sort of quasi-bankruptcy for the past few months, with the government providing the billions in financing the company has required to forge deals with the UAW, the Canadian Auto Workers union, the taxpayer (who will end up owning a majority stake in the new GM), and …

Oh yeah, it’s déjà-vu all over again. We’ve got bondholders. We’ve got lots and lots of GM bondholders. Thousands, in fact, who are refusing to accept a debt-for-equity swap that would ask them to relinquish $27 billion in debt in return for a 10 percent stake in the new General. We were here last month with Chrysler’s creditors, but there were far fewer of them and, after Obama brought out the big stick of his massive approval ratings, the "rogue hedge funds" who were holding out caved and cleared the way for Chrysler to execute an alliance with Fiat.

It’s not going to be so easy with GM. Everyone saw this coming and, as a result, has been calling Chapter 11 a forgone conclusion for weeks. This is a disgusting sort of phony brinksmanship that serves only one purpose: to put a gaggle of investors who assumed too much risk at the front of the line to get paid once GM goes to bankruptcy court (thereby initiating the largest bankruptcy in the history of industrial manufacturing). That’s dumb money for you. After a slow start, the government has genuinely focused its attention on coming up with a good solution for both the Chrysler and GM dilemmas. The UAW has surrendered generations of hard-won gains and effectively sealed its eventual demise. But the bondholders … well, they just want to get paid. Anything.

GM is 100 years old. It has done some bad things and some good things. But it defines American business culture in the 20th century. In fact, you could argue that its great midcentury president Alfred Sloan invented what we now think of as the American corporation. It wouldn’t be a stretch to say that there would be no "business"—in the Tom Wolfe, Michael Lewis, pop-heroic modern day sense—without GM. Sloan created the idea that business was as much a state of mind as a profitable deployment of combined interests. Ford figured out how to make manufacturing an efficient, industrial process, but Sloan—an MIT grad—imagined business as an intellectual activity. Through GM and the advent of vertical integration, business and business management became an affair of the mind.

From a cultural standpoint, watching GM slide into probable bankruptcy with its dealer network shattered and one of its oldest brands, Pontiac, banished from the field is like being on the French border in 1812 and watching the remnants of Napoleon's Grand Armée return starved, frozen, and wrecked from their disastrous foray into Russia. We’ve kind of been taught to hate GM, at least since Roger and Me, but anyone in America who really values his freedom and citizenship owes a debt to GM. The same assembly lines that built Buicks built bombers. And then employed the men that flew them when the time for bombing and bombers was done.

For decades, GM was a blue-chip investment and a low-risk, boring place to park money and gather dividends until something snazzier came along. GM was the anti-derivative. GM's business involved putting something of value in one end and getting something of greater value out the other end. Steel and rubber became a Cadillac. From a financial perspective, GM served its purpose. But from a cultural perspective, GM’s impact was far grander, pervasive, international. It introduced a sort of tenure for the middle class. There were always high-wage jobs, and you didn’t need college to get them. At its peak, in the 1950s, Detroit, in its way, rivaled New York as a cosmopolitan citadel. Eventually, they wrote songs about its products.

I can’t be the only who has noticed that GM’s last week as capital-G capital-M, as The General, began yesterday, Memorial Day. You would have to have a cold and mercenary character to seek what’s coming for GM. You would have to enjoy the smiting of the good or the fall of the strong. You would have to be the type who would chuckle as the arrow pierced Achilles' heel.
You would have to be a GM bondholder.

"I aim to make a fool out of Chrysler"
Rocco Massarelli is down but not out. "I'm too stubborn to quit and I'm too stupid to go away," said the owner of Richard Chrysler-Jeep-Dodge in the western Chicago suburb of St Charles. "I'm going to keep selling cars and fight this to the end." Massarelli's dealership is one of 789, out of a total of 3,181 Chrysler dealerships, with which the bankrupt automaker has said it plans to eliminate franchise agreements as of June 9. The franchise eliminations are part of plans by Chrysler LLC [CBS.UL], the No. 3 U.S. automaker, which has been operating in bankruptcy since April 30, to sell its most valuable assets to a new company owned by the U.S. and Canadian governments, Chrysler's union and Italian car maker Fiat SpA.

Bankruptcy Judge Arthur Gonzalez could rule as early as Wednesday on whether Chrysler can go ahead with those plans, with fierce opposition coming from dealers on the elimination list. Massarelli said he was shocked Chrysler was ditching his franchise, a business his father founded 30 years ago. "We don't fit the guidelines for closure," Massarelli said. "We're profitable, we've never missed a payment and we've done everything Chrysler has ever asked us to help them out." The plan to shut off Richard Chrysler-Jeep-Dodge came May 14 despite a recent pickup in sales following a dismal 2008 fourth quarter when the credit crunch cut off potential buyers. The dealership sold 60 cars in April, down from pre-recession monthly highs of 150 cars, but inching back up.

Chrysler's sales fell 48 percent in April from a year earlier as the worst decline in U.S. auto sales in decades continued. "The irony is we could do with more inventory right now because we're actually selling cars," said Marni McClennan on the sales floor between seeing customers. "We've had so many people coming in over the past few days it's hard to keep up." Massarelli is stuck waiting to find out what will happen to his inventory -- Chrysler has said it will not repurchase cars from dealers -- and facing bankruptcy after June 9. A steady stream of customers filed through Massarelli's showroom on Monday, which was Memorial Day in the United States -- the start of the busy summer driving months and the car-buying season. The aroma of car wax and new leather mixed with the odor of engine oil and grease from the car service department -- a peculiar combination of smells common to U.S. dealerships.

Massarelli's showroom stands near a number of others -- including those of General Motors Corp and Ford Motor Co -- on the town's main four-lane thoroughfare. "It's not fair Chrysler wants to shut these guys down if they're making money," said John Scott, a customer of 10 years who came to look at a new minivan. His family has bought seven new cars from Richard Chrysler-Jeep-Dodge over the years. "That is not in the spirit of American enterprise." Scott's words echoed those of an e-mail on Monday from a committee of dealers opposed to Chrysler's plans. "Instead of allowing the free market to determine which dealers survive, Chrysler and the government are effectively playing the roles of judge, jury and executioner," the e-mail said.

Massarelli said he has around 50 new cars left, an inventory of around $2 million, plus $350,000 in car parts. Since 2006, he said he has taken more cars whenever Chrysler asked and at one point had 400 new cars on his lot worth $12 million. He bought the local Dodge franchise three years ago for $1.7 million on Chrysler's request. "Every time Chrysler said they needed us, we were there for them," Massarelli said. "Now they won't even return my calls." He said Chrysler Financial -- Chrysler's financing arm -- told him he may be able to sell his inventory to other dealers at a loss of around $3,000 per vehicle. If he loses the franchise, under Illinois state law he will have to sell his inventory as used cars, at a loss of around $10,000 per car.

But Massarelli said that is the least of his worries. His 20 remaining staff will be jobless and he has a $4 million mortgage on the dealership. "That mortgage will be foreclosed on and I could lose my home," he said. "I'll be lucky to walk away with the clothes on my back. "I'm not asking for a handout, I just want to keep running a business we've managed successfully for decades," he added. Sales manager Art Greenslade, 63, said the plan to shut down the dealership was "horrible." "I'll have to find another job because my 401(k) has been dismembered by the crisis and I can't retire," he said. "But I'll stay here to the end and keep pushing cars out the door. "I aim to make a fool out of Chrysler."

Budget crises swamp state after state
When the University of Southern California’s juggernaut football team opens its season in September, could the Trojans be playing at the Taco Bell Coliseum? It’s not yet likely, but with California voters having rejected five of his six budget propositions last week, Gov. Arnold Schwarzenegger has proposed selling several famous state properties, including the iconic Los Angeles Memorial Coliseum. The votes plunged California into a crisis that is different only in degree from the deep budget problems afflicting states across the country. Schwarzenegger and state lawmakers were left desperately seeking ways to close a deficit now projected to hit $21.3 billion in the budget year that begins July 1 and potentially as much as $42 billion by the end of the year.

Not that things would have been dramatically better had all six propositions passed — that would have reduced the projected shortfall to "only" $15.4 billion. But it would have allowed lawmakers to sidestep the state Constitution’s requirement that they pass the budget with a two-thirds’ majority, something they’ve failed to do for months. "The voters are sending a message that they believe the budget is the job of the governor and Legislature," said Assemblywoman Noreen Evans, D-Santa Rosa, chairwoman of the Budget Committee. "We probably need to go back and do our job." Schwarzenegger acknowledged that voters were "frustrated with dysfunction in our budget system," and he said he and the Assembly got the message. They will not be able to pass the toughest decisions on to the voters.

Instead, they will have to identify "drastic" cuts to avoid "fiscal disaster," Schwarzenegger said. Education, health care, social services and prison programs will have to be deeply cut, he said, while thousands of state workers face being laid off. And in addition to Memorial Coliseum — the only stadium in the world to have been primary host of the Summer Olympic Games twice — Schwarzenegger is examining whether to sell off several high-profile state properties, including San Quentin State Prison; Del Mar Fairgrounds north of San Diego, home to one of the premier horseracing tracks in the country; and the Cow Palace near San Francisco, the site of national political conventions and major sports events since 1941.

In good times, California rakes in tax revenue swollen with payments from newly minted millionaires. In bad times, it suffers a proportional impact. After the recession started in December 2007, the state lost about $20 billion in revenue in 2008 — nearly a fifth of its overall general fund — State Treasurer Bill Lockyer said. Things have only gotten worse this year. From January through March, California collected 16 percent less in state income, corporate and sales taxes than it had in the same period last year. Then, in April alone, personal income tax receipts were $1 billion below projections, while corporate taxes came up $831 million short, the state comptroller’s office reported.
"With this cataclysmic economic decline, we just have a combination that’s unimaginably bad," said Bruce E. Cain, director of the University of California’s political research center in Washington, D.C.

California would run the seventh-largest economy in the world if it were its own country, the International Monetary Fund calculated late last year, so its financial problems can produce eye-popping numbers. But it is only a funhouse mirror distortion of what is happening in nearly all of the other states, which face critical budget gaps of their own:
  • The Ohio Senate is considering a $54 billion two-year budget passed by the House that was balanced by cutting education spending by $244 million, depleting the state’s reserves of $1 billion and incorporating $2.2 billion of federal stimulus money. Even then, the plan includes projected deficits of at least $2.5 billion in each of the next two years.
  • The Indiana State Budget Committee last week requested a new, more accurate revenue forecast for lawmakers to use in a pending special session after April tax revenue fell $255 million short of what had been forecast just one month earlier. "This wasn’t just an April phenomenon," state Budget Director Chris Ruhl said. "We’ve been missing for months and months and months."
  • In Illinois, Gov. Pat Quinn is seeking a 4.5 percent state income tax increase to close a deficit of nearly $12 billion. Otherwise, he said, the state faces a "doomsday" budget that would lay off 7,000 teachers and half of the state’s troopers and eliminate health care for 650,000 people.
  • Washington Gov. Christine Gregoire last week signed a two-year budget that closed a $9 billion shortfall by cutting 40 percent in state payments for low-income health coverage, raising state employees’ health care benefits by less than half the rate of inflation and reducing per-student education allocations. "This was the toughest legislative session in nearly 30 years, and maybe the toughest since the Great Depression," Gregoire said.
  • In Oregon, where the projected shortfall of $3.8 billion is equal to nearly a third of the overall budget, Democratic lawmakers proposed a 2009-11 budget that would eliminate 1,700 state pensions, cut spending on community colleges and higher education and seek $800 million in new taxes. "The state must make agonizing budget decisions," said Sen. Margaret Carter, D-Portland. "The reality is that every agency and every program will feel the pain."

Overall, 48 states faced real-time or projected funding shortages during this budget cycle, according to msnbc.com’s review of all 50 state budgets. The exceptions were Texas and North Dakota. In an unrelentingly bleak report, the National Council of State Legislatures said potentially crippling shortages were likely to continue well into fiscal year 2011 as the nation slowly works its way out of a recession that began 17 months ago. "The fiscal situation facing states is like a bad horror movie," said Corina Eckl, the report’s author. "The details get more gruesome, and the story never seems to end." The council said the only bright spot in many of those states was the federal stimulus program, without which "state finances would be even more dismal." Which is what makes the budget battle in South Carolina especially striking.

Republican Gov. Mark Sanford last week vetoed most of the Legislature’s $5.7 billion budget measure because of his disagreement with lawmakers and the White House over how to spend $700 million in money from the stimulus package. Sanford, who has contended that the stimulus will increase the national deficit and devalue the dollar, said he would be willing to accept that money only if he could use it to pay down state debt, but the federal government insisted that most of it be spent on education. By overwhelming margins — 98-19 in the House on the main funding section of the budget — the Republican-led Legislature, in a campaign led by the Republican chairman of the House Ways and Means Committee, overrode nearly all of Sanford’s vetoes.

In response, Sanford sued the Legislature in federal court, calling the overrides "an end-around maneuver" designed to force him to accept the first installment of $350 million in federal money. All this has been going on while South Carolina suffers from the same problems as the rest of the states. According to the Rockefeller Institute of the state University of New York at Albany, which requested the figures from each of the states, South Carolina’s tax revenue fell 15 percent from January through March over the same period last year. "This has been a crazy year," said Sen. Darrell Jackson, D-Richland. Meanwhile, a new budget must be in place by July 1. Sen. Phil Leventis, D-Sumter, a member of both the Finance and Commerce committees, summarized South Carolina’s predicament very simply: "We’re in a crisis," he said.

California’s day of reckoning is a warning for Europe
California is the salad bowl in which the world serves up its more exotic lifestyle experiments. Mix sunshine with self-indulgence and dress it with surf-wear and you get a glimpse of how we might live in the future – if we could only afford the plastic surgery. Unfortunately, it appears that even Californians can no longer afford the lifestyle of the Valley Girl. The Golden State is almost bust, but its inhabitants, even if they believe it, do not want to know and they certainly do not want to pay for it.

The state has been running huge budget deficits for years; the till in Sacramento, the state capital, is now empty and the last-ditch attempt by Arnold Schwarzenegger, the Governor, to balance the books with a series of tax increases and budgetary shuffles was roundly rejected by voters in referendums a week ago. With a $21 billion (£13 billion) deficit and the lowest credit rating of any American state, the choices are few and grim. California cannot hope to borrow such large sums, except at extortionate rates, which leaves the option of massive cuts in public spending – the sacking of thousands of teachers. California could run out of cash in a few months. Mr Schwarzenegger has already warned that 5,000 state employees face being fired. The state education budget is in line for a $5 billion cut, alongside the end of funding for parks and the closure of at least one state agency.

Meanwhile, there is talk of a trip to Washington to seek financial assistance. One idea is a federal guarantee of short-dated bonds issued by Calfornia, but that solution would be resolutely opposed in Congress by states resentful of West Coast profligacy. One of President Obama’s early constitutional headaches may be getting the financial bailout of California approved by Congress. Inevitably, the Golden State’s excesses will have to be curtailed. What will jealous legislators from other states demand in return for more cash for the beach bums? The fight will be ugly and California may find that it is not only its extravagant lifestyle that is in the straitjacket, but its political freedom as well.

Politicians in Europe will be watching the Californian car crash with fascination and horror. The sight of the world’s favourite American state lurching towards financial Armageddon is not unlike watching an episode of the American television drama Desperate Housewives. You laugh at the outrageous behaviour of the characters, believing that your neighbours could never behave in such an appalling way, until, on reflection, you wonder . . . On Europe’s eastern fringe, there is Hungary, a financial basket-case, its banking system crippled by a private borrowing binge in Swiss francs. Hungary is already supported by the IMF and the European Union has resisted calls for a regional financial rescue package for the former communist states, but even within the eurozone, the financial stress is mounting in Greece, the Irish Republic, Italy and Spain.

Were a eurozone government to find itself at risk of being unable to pay interest on its sovereign debt, there is no question that fellow member states would have to provide financial support to prevent default. The alternative would be for that state to abandon the euro, float its own currency and allow its economy to implode in what could be rapid devaluation and, ultimately, bankruptcy. It is the Argentine scenario, scary stuff, but if America is looking at a financial rescue package for California, the EU must begin to contemplate similar tailspin scenarios for its more precarious member states. Sterling and the gilt market suffered a rude shock last week when Standard & Poor’s, the credit rating agency, gave warning that Britain could lose its AAA rating if government debt rose to a level equal to the country’s gross domestic product.

Standard & Poor’s was doing nothing more than casting doubt on the conservatism of forecasts of economic growth and tax revenue published by Alistair Darling, the Chancellor. If S&P’s more gloomy outlook is correct (and the April public borrowing figures were worryingly high), the Government will be forced to borrow much more or to make drastic cuts in public services. Britain already needs to borrow a staggering £220 billion this year to pay the bills. Without the triple-A rating, the cost of borrowing will soar and the attractiveness of UK government paper will diminish. Britain is not yet heading down the highway to California’s world of sun, sand and insolvency, but even if the Chancellor still clings to the validity of his own Budget projections, he needs to begin thinking about the other side of the California equation if he plans to be residing in No 11 Downing Street next year.

If S&P is right and Mr Darling wants to avoid dumping second-rate British wallpaper into the bond market, he must raise taxes or implement Mr Schwarzenegger’s threat: a bonfire of public service jobs, cutting GPs’ salaries and closing a government department. There is an alternative to putting the bloated public sector on a crash diet, because Mr Darling, unlike Mr Schwarzenegger, can impose tax increases without a referendum. However, he should look carefully at the message that emerged from California’s exercise in fiscal democracy. Roughly two thirds of voters rejected every tax-raising measure put before them. The only proposal to gain approval was one to bar pay rises for state officals who run up deficits – a measure that secured 74 per cent of votes in favour, evidence of the growing tide of public resentment against taxes and government.

California’s absurd rule by referendum, in which the electorate can vote to spend public money without funding the expenditure with new taxes, is found wanting. However, our own system of sending politicians off with a cheque book so that they can engage in a spending spree for five, or even ten, years before they are kicked out, seems to be equally flawed. There is an almost universal assumption that the next government, of whatever stripe, will be imposing new taxes to avoid a junk-bond future. This easy option should not be allowed to run its course without challenge, because it ignores the risk of turning Britain into a junk economy of high taxes and low growth. It is no coincidence that the pressure to bring tax havens to heel has become intense over the past six months.

So panicked were the finance ministers of the G20 nations about the risk of capital flight from the grabbing State that a campaign of bullying was launched against a small group of nations that refuse to accept that the State has the power to achieve absolute dominion over private wealth. Germany excelled itself, with Peer Steinbrück, the Finance Minister, suggesting that a whip should be used on the Swiss to fight tax evasion and bank secrecy. Franz Müntefering, the leader of Germany’s Social Democrats, said that "in the old times one would have sent in troops, to combat tax havens". Not surprisingly, Germany’s neighbours, notably Luxembourg, which has in the past played host to German troops, were not amused by Mr Müntefering’s remarks. It remains to be seen whether Europe’s taxpayers will be amused when the focus of this fiscal aggression begins to reach deep into their pockets.

Europe Feels the Strain of Protecting Workers and Plants
For Klaus Franz, the top union official at General Motors’ Opel unit here, the difference between how the United States and Europe confront the auto industry’s global overcapacity problem is simple. "In the U.S., you get money to close down factories," said Mr. Franz, referring to the tens of thousands of Chrysler and G.M. workers who will lose their jobs as part of the White House’s plan to restructure the American auto industry. "In Europe, you get money to keep them open and safeguard jobs." It is an appealing sound bite worthy of one of the Continent’s most powerful and articulate labor leaders — but the reality may be more complicated.

For even as Europe refuses to emulate the United States and reduce the ranks of its auto workers, its carmakers risk falling behind in the current wave of global consolidation that is transforming the industry. Eventually Europe may be forced to grapple with the fact that it does not need all the auto plants it has to meet demand. In the last five years, the number of auto workers in Europe has held steady at roughly 2.3 million, even as the American automotive work force dipped from 1.1 million in 2003 to 781,000 by the end of 2008. Sales have dropped sharply in both markets, however, and experts say Europe has at least 25 percent too much production capacity. In recent years, car production at new plants in central and Eastern Europe has surged, but few of the older, more expensive factories in France, Belgium or Germany have closed. "If they don’t take the pain now the way the U.S. is accepting it, you’re just storing up a crisis in 10 years time," Stuart Pearson, an analyst with Credit Suisse in London, said.

For now, however, European workers and politicians prefer to put off any hard decisions. As G.M. lurches toward a likely bankruptcy filing by June 1 and several bidders race to make a deal for Opel and the rest of G.M. Europe, the goal of preserving jobs, not profits, could determine the winner. Along with G.M.’s endorsement, financial aid from the German government will be needed by any of the potential acquirers, which include the Italian automaker Fiat as well as Magna International, a Canadian auto parts maker with major operations in Europe, and RHJ International, a Brussels-based private equity firm. "Too many players and too much capacity is a recipe for value destruction," Mr. Pearson said. The stakes are especially high for Fiat, whose chief executive, Sergio Marchionne, has embraced the American approach and called for consolidation with a few global players dominating the industry.

Last month, Mr. Marchionne successfully persuaded Washington to give Fiat a 20 percent stake in Chrysler when it emerges from bankruptcy this summer, as well as billions in financing for Chrysler in exchange for new technology from Fiat that he claims will make Chrysler more efficient and broaden its product line. But a similar strategy to acquire Opel and vault Fiat into the top tier of global car companies is faltering because Berlin fears Mr. Marchionne will use as much as 7 billion euros in government aid for Opel to shut factories and lay off German workers. Mr. Marchionne is set to meet Tuesday in Berlin with Germany’s chancellor, Angela Merkel, in a last-ditch attempt to win her support, with the German government expected to announce a decision later this week. German officials prefer a rival bid by Magna because they believe it will preserve more jobs.

Few observers dispute that Europe has the capacity to produce too many cars for too few consumers. The 27-member European Union makes 30 percent of the world’s automobiles even though it is home to less than 10 percent of its population, and exports only a small, luxury slice of that output. "It will have to be solved but it’s unlikely to be fixed in the short-term," said Ivan Hodac, secretary-general of the European Automobile Manufacturers Association. Because of generous severance requirements under European law, he said his members "can’t close factories in a time of crisis, you don’t have the money for it." "In times of economic growth, it’s also difficult," he added. "The trade unions will say why?"

A decision on the fate of G.M. in Europe could come within days, but Mr. Franz does not betray much anxiety at a time when American union bosses are tallying their losses. Noting that Mrs. Merkel faces a re-election campaign in September, he said, "Do you think the German government will give once cent to close down factories in an election year?" In a bid to reassure political and labor leaders, Fiat on Friday took the unusual step of publicly disputing German media reports that a Fiat acquisition of Opel would claim 18,000 jobs, insisting instead that total job losses throughout Europe would amount to less than 10,000 and that only a small portion of those would be in Germany. G.M. employs roughly 50,000 workers across Europe, about half of whom are in Germany. In contrast, G.M. plans to shut 13 plants North American plants and lay off 21,000 workers as part of its turnaround plan. By 2014, G.M.’s goal is to cut its hourly work force to 38,000, compared with 61,000 in the first quarter of 2009.

If Magna were to win control of G.M. Europe, according to a top official familiar with the negotiations, G.M. would retain a 35 percent stake in the new company, with Russia’s Sberbank getting 35 percent, Magna taking 20 percent, and Opel’s employees owning 10 percent. Fiat, on the other hand, would have a clear majority stake in a new Fiat-led auto group, with G.M. getting a smaller fraction of the new company. RHJ International’s bid foresees it taking a 51 percent interest, while G.M. would retain 49 percent. If it is successful, the Russian support for the Magna bid might help Opel gain market share in Russia, and Mrs. Merkel discussed the offer with Russian Prime Minister Vladimir Putin over the weekend.

Regardless of who acquires Opel, experts say Europe needs to come to grips with the overcapacity problem if it is going to be able to compete with Japanese automakers now, as well as potentially more efficient American car companies when the economy recovers. "Europe does have to make a choice," said Garel Rhys, head of the Center for Automotive Industry Research at Cardiff University in Wales. "In North America, the unions have realized there will be no jobs left if the capacity issue isn’t dealt with. If Europe doesn’t do the same, the industry won’t be able to make the profits they need to invest for the future." Eventually, he warns, taxpayers will tire of making up the difference. "Patience is wearing pretty thin," he said. Despite European Union rules aimed at guaranteeing a single market without state intervention, Mr. Rhys said the concern over the job cuts in Germany, as well as the need for the loans from Berlin, makes it likely that workers in Britain and Belgium will shoulder a disproportionate share of any American-style plant closures.

If that were to happen, Rudi Kennes, the union head at the G.M. plant in Antwerp, warned, "They’d have a big problem and everybody knows it." The Antwerp plant is running significantly below its production capacity of 125,000 cars annually; while its work force has declined, G.M. has wanted to close it for years. But Mr. Kennes said he believed the 500 million euros in financial support recently offered by the local Flemish government would prevent that, much as the German government aid would protect jobs there. Fiat and Magna have both identified Antwerp for potential cuts, but like Mr. Franz, Mr. Kennes does not seem especially worried. "We’re immune to these kinds of messages," he said during an interview at the eerily quiet factory. "I hope to write a book, ‘The Plant They Couldn’t Close.’ "

German debts set to blow 'like a grenade'
Germany's financial regulator BaFin has warned that the toxic debts of the country's banks will blow up "like a grenade" unless they take advantage of the government's bad bank plans to prepare for the next phase of the crisis. Jochen Sanio, BaFin's president, said the danger is a series of "brutal" downgrades of mortgage securities by the rating agencies, which would eat into the depleted capital reserves of the banks and cause broader stress across the credit system. "We must make the banks immune against the changes in ratings," he said.

The markets will "kill" banks that try to go it alone without state protection, warning that banks have €200bn (£176bn) of bad debts on their books. "We are pretty sure that within a month or two our banks will feel the full force of the sharpest recession ever on their credit portfolios," he said, speaking after the release of BaFin's annual report last week. An internal memo by the regulator's office suggested that likely write-offs may reach €816bn, twice the entire reserves of the country's financial institutions. This figure included a broader array of "problematic" assets. Hypo Real topped the secret list with €268bn in credit risk, followed by HSH Nordbank at €105bn, and Commerzbank at €101bn.

The International Monetary Fund (IMF) has called for a stress test for Europe's banks along the lines to the US Treasury's health screen, saying the region "urgently needs to weatherproof its institutions". The IMF said European institutions have written down less than 20pc of projected losses of $900bn (£566bn) by 2010. Euro area banks will have to raise a further $375bn in fresh capital, compared with $275bn for US banks. The Tier one capital ratio is 7.3pc in Europe, and 10.4pc in the US. The German bad bank plan has been heavily criticised as an attempt to brush the problems under the carpet until after the elections in September. It allows banks to spread losses over 20 years in an off-balance sheet vehicle – much like the "SIVs" that masked their extreme leverage in the first place – and risks repeating the Japanese error of letting "zombie" banks limp on rather than purging the system.

The recession has hit Europe much harder than expected. German GDP has contracted by 6.9pc over the last year, and the eurozone as a whole has shrunk 4.6pc, although there are signs that the economy may be through the worst. Germany's IFO business confidence index rose to 84.2 in May, the highest since December, and German exports have started to rise again after a catastrophic fall of 16pc. But Carsten Brzeski from ING said it is too early to celebrate.

German export plunge underlines economy's woes
The dire state of the German economy was underlined on Tuesday after figures showed that exports fell almost 10pc in the first quarter of the year. Exports from Europe's largest economy fell 9.7pc from the final three months of the year. Investment by companies was also on a sharply downward trend and fell 7.9pc in the same period. The German economy's reliance on exports has left it exposed to the global downturn that is hitting all the world's major economies. Angela Merkel, the chancellor of Germany, has already pledged to spend more than 80 billion euros (£70bn) to help drag the economy from its deepest recession on record. The year’s first three months were certainly the worst," Ralph Solveen, an economist at Commerzbank, told Bloomberg News."The economy probably continued to shrink in the current quarter but that should be followed by a stabilisation in the second half." German exporters will be concerned that the recent rise in the euro - which has saw it hit $1.40 for the first time this year - will add further pressure on the struggling sector.

Rise in German confidence index stymies optimism
German business confidence recovered further this month but fell short of signalling a dramatic rebound in Europe’s biggest economy. The Munich-based Ifo institute on Monday reported its "business climate" index – closely watched as an indicator of future growth trends – had risen for the second consecutive month to the highest since November. That pointed to a significant improvement in prospects since the first quarter of the year, when German gross domestic product contracted by 3.8 per cent – significantly faster than in the US. The Ifo index showed "that the German economy is no longer in freefall and is now on its landing approach," said Jörg Krämer, chief economist at Commerzbank in Frankfurt.

However the index’s rise, from 83.7 in April to 84.2, was smaller than expected, suggesting that some recent optimism about eurozone economic prospects had been overdone. Pushing the index higher was a further improvement in businesses’ expectations about the next six months – which were the most optimistic since September. In contrast, German businesses’ assessment of current conditions deteriorated further in May, to the bleakest since the survey began in 1991. Economists said the Ifo results were consistent with a significantly slower pace of economic contraction in the second quarter, without necessarily foreshadowing a return to growth this year. "So far the improvement in expectations has been only in small steps," said Thomas Köbel, economist at SEB in Frankfurt.

"There is no justification for massive optimism." Hans-Werner Sinn, Ifo’s president, argued the latest reading pointed to a "gradual stabilisation of the economy at a low level". Among the world’s large industrialised countries, Germany was among the worst affected by the collapse in global demand after the failure of Lehman Brothers in September because of its reliance on overseas sales, particularly of investment goods. Details of the Ifo survey showed manufacturers had become less pessimistic this month about export prospects. Retailers, meanwhile, had become more upbeat about both current conditions and expectations for the next six months – highlighting how German consumers have been relatively unaffected by the crisis.

However German policymakers fear the labour market has yet to feel the full effects of the sharp contraction in output since late last year. Axel Weber, Bundesbank president, argued on Monday that unemployment rises had been modest so far – especially compared with the steep rise in Spain – because companies had hoarded labour in the hope of a fast return to growth. The risk was of a "massive deterioration the labour market" if such hopes evaporated, he warned in a speech in Helsinki. Acting as a further brake on German economic activity will be continuing upheaval in the country’s financial system, which is constraining lending. Export sales, meanwhile, will remain linked to global economic prospects – adding to worries that Germany’s recovery will remain weak until well into 2010 and possibly longer.

French and Germans maintain spending
French and German consumers are keeping up their spending even in the face of the severest recession to hit the Continent in half a century, data and surveys showed on Tuesday. France reported consumer spending on manufactured goods rose by a bigger-than-expected 0.7 per month on month in April, while Germany’s GfK research organisation reported its "consumer climate" indicator was expected to hold steady in June for the fourth consecutive month. Although the GfK indicator is at a low level, the latest evidence suggested that the sharp contraction in European industrial production had yet to feed through into the broader economy. The 16-country eurozone – of which Germany and France are the largest members – contracted faster than the US in the first quarter , with exporters faring particularly badly. But its consumers have been helped by government measures allowing companies to hoard, rather than shed labour, and encouraged consumers to spend – particularly on cars.

"Where the Anglo-Saxon economies are likely to see a sizable retrenchment in consumer spending this year, continental consumers will probably keep spending broadly stable," wrote Elga Bartsch, European economist at Morgan Stanley, in a note. However Ms Bartsch argued that eurozone consumers would cut back spending next year as a result of steep rises in unemployment. The GfK added that German consumers had "yet to face a real test". A breakdown of first-quarter German gross domestic product on Tuesday confirmed unevenness of the downturn. German exports and investment were in free fall, dropping by 9.7 per cent and 7.9 per cent compared with the previous three months. But consumer spending rose by 0.5 per cent. In France, continued consumer resilience helps explain why the country has so far suffered less in the recession than some its neighbours. April’s rise in spending was largely driven by a surge in car sales, up 3.7 per cent, as consumers took advantage of government incentives to trade in old models for new, less polluting ones.

Fréderique Cerisier, economist at BNP Paribas, said newly introduced tax breaks "should help to sustain consumption and rebalance spending on other types of goods". But she warned that further rises in unemployment would ensure that overall household consumption would remain weak this year. Although Insee, the French statistical office, revised down sharply March’s consumer spending figures, the fact that consumption has remained positive will add to the view in government circles that the economy may be bottoming out. In another sign of stabilisation, eurozone industrial orders fell by 0.8 per cent in March – much smaller than the near double-digit month-on-month declines reported late last year, according to Eurostat, the European Union’s statistics office on Tuesday. But the scale of the overall contraction in eurozone economic activity means governments will not be able to prevent a surge in jobless figures this year, economists fear. Eurozone industrial orders in March were almost 27 per cent lower than a year before.

When austerity does not come easily
There was a moment, a few months ago, when sensible people in rich countries were considering pulling all their money out of the bank, buying gold ingots and hiding them under the bed. But now that the panic has passed, something less frightening and rather bleaker is beckoning. Welcome to the politics of austerity. Across the developed world, unemployment, public debt and taxes are rising. When the global economic crisis first hit, it was natural to assume that the poorer and more recent democracies would be most vulnerable to a political backlash. Without the accumulated wealth or the welfare systems to cushion the blow, their populations looked vulnerable. Most countries in central Europe or Latin America only made the transition to democracy in the 1980s, so authoritarian nasties might still be lurking in the shadows.

But perhaps we are looking for trouble in the wrong places. It could be that it will be the richer democracies, such as Britain and the US, that find it most difficult to adapt to the politics of austerity. Faced with hard times, some central European countries have had to take drastic measures. They do not have the British and American options of borrowing hugely to avoid making painful cuts. In Estonia, public-sector salaries have been sliced by 10 per cent. In Hungary, pensions have been cut by 8 per cent and the retirement age has been raised. So far, their publics have reacted with remarkable equanimity. Perhaps countries that have recent memories of real turbulence and hard times are better able to shrug off the consequences of a sudden economic setback.

The experience of Latin America after the economic crisis of 1998 shows that new democracies can be reassuringly resilient. As Michael Reid writes in a recent book on Latin America, Forgotten Continent : "The region’s democracies were subjected to a severe stress test during the lost half-decade of 1998-2002, which saw unemployment rise, real incomes fall and progress in reducing poverty halted. Democracy held up – but not unscathed." That experience may now be replicated in central Europe. Deep recessions will, of course, cause a political reaction, and extremist parties may gain. But, for the moment, politics remain stable. Now consider what would happen if the UK or US were to attempt Hungarian or Estonian style cuts. There would be a huge outcry. Long periods of economic expansion mean that citizens in the US and the UK have developed a sense of entitlement. Many people have come to believe that, in the words of the campaign song of Britain’s Labour party in 1997, things can only get better.

So rather than taking the axe to public spending, the British and American governments are borrowing madly, with no sign of any credible long-term plan to balance the books. The US, according to the Congressional Budget Office, now has an annual structural budget deficit of 5 per cent of gross domestic product. In Britain, public debt as a proportion of GDP is set to double. Both countries are in the fortunate position that the markets will still lend to them. In spite of last week’s warning from Standard & Poor’s, the rating agency, about rising public debt, Britain has (so far) retained its triple A credit rating. Despite President Barack Obama’s stern words earlier this year that a "day of reckoning has arrived" in which America would finally have to address "critical debates and difficult decisions", the US is planning to run huge budget deficits for the next decade and beyond.

The obvious risk is that when a real day of reckoning does arrive it will be that much tougher. In Britain, Dieter Helm, a professor of economics at Oxford university, is one voice sounding warnings. "The fundamental cause of the current crisis is that consumption has been unsustainably high, based on borrowing too much, investing too little and saving too little," he says. "If we continue to try to spend even more, and borrow ever greater sums, the eventual effect on the standard of living will be commensurately greater." Prof Helm reckons that sustainable consumption in Britain "may be as much as 20 per cent lower than at the peak in 2006-07". But try telling the British or American publics that they might have to accept a 20 per cent drop in living standards. That might be OK for Argentines or Estonians – but not in London or New York, and certainly not now.

Optimists point out that countries such as Italy and Japan have sustained public sector debts of more than 100 per cent of GDP for years, without ever facing that long-dreaded "day of reckoning" when the currency collapses or the markets refuse to lend any more. The US, with the world’s largest economy and reserve currency, may be in a position to ramp up its debt in a similar fashion and push that nasty day of reckoning ever further into the future. Britain may not be so fortunate. It does not have the industrial or savings base of Japan or the currency security of Italy’s euro membership. The Conservative party, which is likely to win power next year, has talked of "austerity". But, with an election looming, it has been careful to avoid spelling out the implications. Over the past 30 years, Britain and America have often followed the same political and ideological cycle: Margaret Thatcher and Ronald Reagan were a pair, so were Tony Blair and Bill Clinton. But if a rightwing British government takes power in 2010 and launches into a new politics of austerity, then the US and the UK may suddenly look very different places.

Lowest Libor Hides 'Exceptionally Wide' Bank Spreads
The drop in the London interbank offered rate, the benchmark for $360 trillion of financial products, to a record low masks a growing gap between the rates that the biggest banks charge each other for credit. The difference between the highest and lowest interest rates banks say they pay for three-month dollar-denominated loans is near the widest this year, according to data compiled by the British Bankers’ Association. The spread signals that lenders still lack confidence in each other, even though measures ranging from the so-called Libor-OIS spread to corporate bond sales show credit markets have recovered from the freeze caused by the Sept. 15 collapse of Lehman Brothers Holdings Inc.

"It’s premature to judge that the credit meltdown is fully over," said Kazuto Uchida, chief economist in Tokyo at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s largest bank. "Banks remain wary of extending credit to each other due to strenuous concerns about counterparty risk." Libor, a benchmark rate for everything from mortgages to company borrowing costs, fell to 0.66 percent, from 4.82 percent on Oct. 10. At the same time, the gap between the highest and lowest accepted quotes reported by the 16 banks that contribute to the London-based BBA for its calculation of Libor has averaged 7.5 basis points in May, according to Citigroup Inc. That’s up from 4.9 basis points in April and 1.5 basis points in the six months before Lehman’s bankruptcy. It widened to 9 basis points on May 14, the most since Dec. 3.

While the spread, calculated by discarding the highest and lowest four quotes before determining the mean of the remaining eight, equates to about $76,000 of interest on a $100 million loan, it represents a growing proportion of Libor as the rate declines. On every day but 11 in the past three months, London- based Royal Bank of Scotland Group Plc, which is under government control, submitted the highest rate in the daily survey, according to data compiled by Bloomberg. "The dispersion of Libor submissions seems to be exceptionally wide," said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York. "There is potential for bifurcation of the financial system between banks perceived to be healthier than others." Royal Bank of Canada, Norinchukin Bank, Royal Bank of Scotland and Bank of Tokyo-Mitsubishi UFJ Ltd. quoted rates higher than today’s Libor. JPMorgan Chase & Co, Citigroup, Deutsche Bank AG and HSBC Holdings Plc posted rates below.

Lending between banks started to freeze in August 2007, when losses linked to the collapse of U.S. subprime mortgages left financial institutions with billions of dollars in securities and financial contracts they couldn’t value. Losses and writedowns at the world’s biggest financial companies since the start of 2007 have grown to $1.47 trillion. Concern about the deteriorating health of financial markets peaked in September when Lehman collapsed, Merrill Lynch & Co. was sold to Bank of America Corp. and American International Group Inc. was bailed out by the government. Yields on Treasuries fell to record lows in 2008 as investors fled corporate bonds and stocks for the safety of government debt. Libor rose even as central banks around the world slashed interest rates, jumping from 2.82 percent in the days before Lehman’s bankruptcy.

Federal Reserve Chairman Ben S. Bernanke warned in congressional testimony on May 5 that another shock to the financial system would undercut the central bank’s forecast that the recession will give way this year to a recovery. There are signs that the more than $12.8 trillion the U.S. government and Fed agreed to lend, spend or commit has loosened credit. U.S. companies have sold a record $600 billion of bonds so far this year, up from about $500 billion in the same period of 2007, according to data compiled by Bloomberg. Rates on 30-year fixed mortgages are about 1.8 percentage points more than 10- year Treasuries, down from 3.27 percentage points in December. Morgan Stanley’s MSCI World Index of stocks is up almost 38 percent from its low this year in March.

While financial markets are improving, more than 60 U.S. financial institutions have collapsed over the past two years, according to Bloomberg data. In its latest quarterly survey of senior loan officers, the Fed found that more than 70 percent of respondents said bad loans will rise should the economy progress "in line with consensus forecasts." The world economy is projected to shrink 1.3 percent this year, the International Monetary Fund said in April, reversing a previous forecast of 0.5 percent growth. Libor-OIS, which indicates banks’ reluctance to lend, fell to 0.45 percentage point today, the lowest level since February 2008. Still, futures indicate the measure is about two years away from shrinking to 0.25 percentage point. That’s the level former Fed Chairman Alan Greenspan has said would be considered "normal."

"The historic level for the years immediately preceding the crisis for the Libor-OIS spread was about 10 basis points," Greenspan said in a May 22 interview. "It seems quite unlikely that we will get the general tightness of spreads that existed back then as it implied a degree of under-pricing of risk that was not sustainable. If we get to 25 basis points or below and keep it there, these markets will start to ease up." The BBA asks member banks each morning how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. It then calculates averages, throwing out the four highest and lowest quotes, and publishes them after 11:30 a.m. in London.

Libor would have been 0.67437 percent today when including the four highest and lowest quotes, above the 0.66 percent reported rate. London-based HSBC reported the lowest rate, at 0.60 percent, and Royal Bank of Canada in Toronto the highest, at 0.86 percent. The difference of 26 basis points was down from a gap of 35 basis points on May 22, the most since Jan. 9. The disparity averaged almost 58 basis points in the fourth quarter, according to John Ewan, a director of the BBA. Royal Bank of Scotland, or RBS, quoted the highest rate about 85 percent of the time since Feb. 19, according to the BBA. JPMorgan, which has applied to repay the funds it borrowed from the U.S. Treasury Department under the $700 billion financial rescue package, typically quoted the lowest, BBA data show. Spokespeople at RBC, RBS and JPMorgan either declined to comment or didn’t immediately return calls for comment.

"The disparity and the difference is really a signal to the market of who really wants to make some loans and who’s got the ability to make those loans," said Mark MacQueen, partner and money manager at Austin, Texas-based Sage Advisory Services Ltd., which oversees $7.5 billion. "A lot of banks are just trying to hold on to what they have and not really make loans." Rather than signaling that the world’s banks are more willing to lend to each other, some investors and strategists say the decline in Libor has more to do with deposits reducing demand for funds in the interbank market. Deposits at U.S. banks jumped by almost $400 billion in the past six months, according to Jim Vogel, head of bond research at Memphis, Tennessee-based FTN Financial.

"Libor’s decline is not necessarily a sign of improving bank credit or the willingness of banks to lend to each other," said Vogel, whose firm is one of the 10 biggest underwriters of Fannie Mae, Freddie Mac and other U.S. government agency debt. "It’s a sign of improving bank liquidity as customer deposit growth replaces borrowing in the short-term money markets." Libor came under fire last year amid concern that some banks were underestimating borrowing costs to avoid the perception they were in financial straits. Former Bank of England policy Willem Buiter described Libor last year as the "rate at which banks don’t lend to one another." Libor "is just cheap talk," said Buiter, who is now a professor at the London School of Economics.

The BBA has rejected those concerns, saying the rates are an accurate representation of interbank lending rates. "Dollar Libors are coming down, which implies all banks are able to fund more cheaply," Brian Mairs, a spokesman at the British Bankers’ Association, said in an e-mail. While borrowing costs have tumbled, banks must still raise "large" amounts of money, Greenspan said in a separate interview last week. The comments came a day after Treasury Secretary Timothy Geithner told lawmakers that banks had issued more than $56 billion in new stock or debt since stress tests by regulators on the 19 biggest U.S. lenders found that 10 firms needed to raise about $75 billion. "There is still a very large unfunded capital requirement in the commercial banking system in the United States and that’s got to be funded," Greenspan said.

Bets against dollar highest since start of economic crisis
Speculative bets against the dollar have risen to their highest level since the onset of the financial crisis. Positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, showed that in the week ending May 19, bets against the dollar – short positions – versus the euro exceeded bets on dollar strength by 12,250 contracts. This net short position was the highest level since the week of July 15, when the dollar hit a record low of $1.6038 against the euro. Meanwhile, the net short position on the dollar versus the yen rose to 6,000 contracts, the highest since March.

Analysts said the fact that net long positions in the Australian dollar also hit their highest level since July reflected the extent of deepening anti-US dollar sentiment among the speculative community. Ashraf Laidi at CMC Markets said considering that long positions in the euro and yen against the dollar were still about 11 times lower than their record highs, speculators had plenty of upside against the dollar in terms of quantity as well as price. "Any signs of weakness in Wednesday’s auction of $35bn in five-year Treasury-notes and Thursday’s auction of $25bn in seven-year Treasury-notes may give more fundamental leeway for speculators to pile on shorting the US currency and build up a gradual path towards $1.47 versus the euro and Y91 against the yen."

Dollar Is Near 5-Month Low Against Euro Before U.S. Debt Sales
The dollar traded near the weakest level in more than five months against the euro on speculation bond sales this week may renew concerns that a record supply of Treasuries will jeopardize the U.S.’s AAA credit rating. The euro may strengthen against the yen after European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo said yesterday the bank will seek a quick exit from its non- standard policy measures, backing speculation that the ECB will stop cutting interest rates. The New Zealand dollar declined before the government brings down the budget on May 28. Australia’s currency also weakened. "We are beginning to see unfavorable increases in yields of Treasuries because of massive supply," said Daisuke Uno, chief strategist in Tokyo at Sumitomo Mitsui Banking Corp., a unit of Japan’s third-largest banking group. "This may put stronger downward pressure on the dollar."

The dollar traded at 94.77 yen as of 8:33 a.m. in Tokyo, from 94.83 yen yesterday in New York. The U.S. currency bought $1.4000 per euro from $1.4017. Japan’s currency was at 132.68 yen per euro, from 132.92 yen.
New Zealand’s dollar weakened to 61.90 U.S. cents from 62.07 cents yesterday. Standard & Poor’s in January put a negative outlook on New Zealand’s AA+ foreign currency credit- rating and said it wanted to see evidence of an improving fiscal position. Ten-year Treasuries completed the biggest weekly loss since June 2008 as the U.S. prepared to resume debt sales after a two- week pause. The Treasury plans to sell $40 billion in two-year notes today, $35 billion in five-year notes May 27 and $26 billion in seven-year notes May 28. It will sell $61 billion in three-month and six-month bills in a weekly auction today.

The U.S. is boosting debt sales to $3.25 trillion in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., one of 16 primary dealers required to bid at Treasury auctions, as President Barack Obama borrows record amounts to try to snap the steepest recession in at least 50 years. S&P lowered its outlook on the U.K.’s AAA credit rating May 21 to "negative" from "stable," raising concern that the same may happen to the U.S. "Given growing concerns about U.S. creditworthiness, capital outflow from the dollar-denominated assets may gain further momentum," said Kengo Suzuki, manager of the foreign bond trading department at Mizuho Securities Co., a unit of Japan’s second-largest banking group.

The euro fell after Gonzalez-Paramo told reporters in Madrid yesterday that purchases of covered bonds will start "as soon as it’s technically possible" which "could be weeks." Still, "what we want is to return as soon as it’s possible to a normal framework, to leave non-conventionality," he added. The ECB has cut its key interest rate to a record low of 1 percent to counter the worst recession since World War II. The Frankfurt-based bank this month stepped up its fight against the crisis by pledging to buy 60 billion euros ($84 billion) of covered bonds, low-risk securities backed by mortgages and public-sector loans. It also said it will lengthen the maximum term of its loans to banks to 12 months to help free up credit. The measures still lag the U.S. Federal Reserve and Bank of England, which have reduced their main lending rates to close to zero and started buying government and corporate debt to pump money into their economies.

Dollar Gains as North Korean Tests Spur Demand for Safety
The dollar and yen rose against the euro on increased safety demand as Yonhap News reported North Korea carried out a missile experiment a day after conducting a nuclear test that drew international condemnation. The U.S. currency advanced versus all of its major counterparts after the news agency said Kim Jong Il’s government test-fired two missiles. The euro fell for the first time in seven days against the dollar after Britain’s Daily Telegraph cited a German banking regulator as saying bad debt at the nation’s biggest lenders may increase. "The market is still digesting the news from North Korea," said Jeremy Stretch, a senior currency strategist at Rabobank International in London. "The dollar is holding up, and the yen is also having reasonable gains. The defining factor is broad risk metrics." The euro fell 0.7 percent to $1.3918 at 9:04 a.m. in New York, from $1.4017 yesterday.

The 16-nation currency depreciated 0.9 percent to 131.70 yen from 132.92. The dollar slid 0.2 percent to 94.60 yen from 94.83. The dollar remained lower against the yen after a report showed home prices in 20 major metropolitan areas fell in March more than economists forecast. The S&P/Case-Shiller home-price index dropped 18.7 percent from a year earlier following a similar drop in February. The median forecast of 26 economists surveyed by Bloomberg was for an 18.3 percent decrease. Norway’s krone fell against all of the 16 most actively traded currencies tracked by Bloomberg as oil prices fell and the central bank said the country’s financial institutions need to keep building up capital to weather the financial crisis. The krone declined as much as 1.2 percent to 8.9780 per euro, its weakest level since March 31, from 8.8694 yesterday. It dropped as much as 2.2 percent against the dollar before declining 1.8 percent to 6.4430.
South Korea’s Won

South Korea’s won lost 1.1 percent to 1,262.88 against the dollar as the nation’s benchmark stock index slumped for a fourth day after Yonhap reported North Korea was preparing further nuclear tests. "This kind of news may trigger a knee-jerk reaction among those short-term players who wanted to buy Asian currencies," said Taisuke Tanaka, managing director and foreign-exchange strategist in Tokyo at Nomura Securities Co., a unit of Japan’s largest securities broker. "But given the fact that most Asian countries enjoy huge current-account surpluses, this type of event won’t change the overall international capital flow." The euro slid versus the dollar as the Telegraph quoted Jochen Sanio, president of the German regulator BaFin, as saying debt levels of banks will blow up "like a grenade" unless they participate in the government’s bad-bank plan. "The report over the German debt situation isn’t helping sentiment toward the euro," said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest interbank broker. The comments sound "fairly dire."

German banks have 200 billion euros ($280 billion) of bad debt, Sanio said last week, according to the Telegraph. Write- offs may reach 816 billion euros, the newspaper reported, citing an internal memo from the regulator’s office. In an interview with Bloomberg News last week, Sanio said Germany is "more than able" to cope with the 200 billion euros of toxic assets that its banks still hold. Government bond sales this week may renew concern that a record supply of Treasuries will jeopardize the U.S.’s AAA credit rating, analysts said. Ten-year Treasuries fell the most since June 2008 last week as the U.S. prepared to resume debt auctions after a two-week pause. The U.S. will increase debt sales to $3.25 trillion in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., as President Barack Obama borrows record amounts to try to snap the recession in at least 50 years.

Standard & Poor’s lowered its outlook on the U.K.’s AAA credit rating on May 21 to "negative" from "stable," raising concern that the same may happen to the world’s biggest economy. "Given growing concerns about U.S. creditworthiness, capital outflows from the dollar-denominated assets may gain further momentum," said Kengo Suzuki, manager of the foreign bond trading department in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest banking group. Rising debt levels may jeopardize the AAA credit rating of the U.S. in the next three years, New York University economist Nouriel Roubini told Il Sole 24 Ore in an interview. "The situation may become risky in two, three years’ time," Roubini told Sole. "The evolution of the crisis requires paying attention to this matter too."

The Australian dollar fell for a second day, losing 0.9 percent to 77.54 U.S. cents and paring a gain from a five-year low of 60.09 cents reached in October to 29 percent. Analysts are raising forecasts for the Australian dollar faster than any other major currency on optimism for a global economic recovery. The median year-end Aussie forecast in monthly Bloomberg surveys rose 14 percent this year, the biggest increase among major currencies against the dollar, and is now 3 cents shy of the current price, half the gap in January. Strategists at BNP Paribas SA, Wells Fargo & Co. and 21 other companies raised estimates in May on speculation China’s demand for Australian exports, from iron ore to wool, will rebound. "The bears are throwing in the towel, and the Aussie is undervalued," said Paresh Upadhyaya, who helps manage $21 billion in currency as a Putnam Investments senior vice president in Boston.

China's Yuan: The Next Reserve Currency?
Are the Chinese finally getting serious about loosening their ties to the dollar—and even replacing the greenback with the yuan as the global economy's reserve currency? The evidence is mounting that they are.
For the last two months, China's leadership has been complaining about the country's dangerous dependence on the dollar. Beijing holds $2 trillion in dollar assets, accumulated through years of exports to America and massive purchases of Treasuries by the Chinese government. If Washington can't rein in its mounting budget deficit, both Treasuries and the greenback could weaken considerably—and the Chinese could be big losers as a result.
The Chinese began generating attention on the issue in March, when Chinese Premier Wen Jiabao said he was worried that the country's dollar assets could slide. Ten days later Chinese central bank chief Zhou Xiaochuan suggested replacing the dollar as the international reserve currency. One idea, Zhou said, was to replace the dollar with a basket of currencies supervised by the International Monetary Fund.

Skeptics said the Chinese were merely talking. The dollar is too entrenched as the international currency of choice, with the U.S. by far the world's largest economy, went the thinking. And in any case, the Chinese act so deliberately that, even if they did wish to elevate the yuan globally, they wouldn't do it in the short or medium term. Finally, if the Chinese were to bring the yuan into competition with the dollar as a medium of international trade, they would have to turn the yuan into a convertible currency whose value would be dictated by the market, with traders, investors, governments, and companies around the world freely buying and selling it. Such a loss of control, said many Western investors, would never be allowed by the authoritarian Chinese. It would mean lowering all kinds of financial trade barriers, allowing foreign access to Chinese securities markets and more. No way.

Now some observers are changing their tune. China's financial moves during the last two months have persuaded Western experts that the nation's leadership intends to make the yuan freely convertible into other currencies—the first big step toward open confrontation with the dollar—within a few years. Why have perceptions started to change? Last month, Beijing completed the last of a series of so-called currency swaps—providing yuan to other central banks for use in trade with China—with Argentina, Hong Kong, Indonesia, Malaysia, South Korea, and others. These arrangements theoretically removed any need for these trading partners to use the dollar as an intermediary currency in dealing with China. Last week, Beijing denominated a bilateral trade deal with Brazil in the two countries' currencies, rather than in dollars; the value of the agreement was not specified. The value of the other agreements comes to $95 billion. By way of comparison, U.S.-Chinese trade amounted to $333 billion in 2008.

Big hurdles remain for the Chinese. Making the yuan freely convertible is one: Major central banks would be loath to hold any large sums of any currency—the purest definition of a reserve currency—if they could not sell or trade it without limitation. Another is the absence of a large market for yuan-denominated bonds. One key sign of acceptance as a reserve currency would be if Western countries such as the U.S. purchased bonds denominated in yuan and sold at market rates. Until now, yuan-denominated bonds have been sold only by Chinese banks, along with multilateral banks such as the Asian Development Bank and International Finance Corporation, and the bonds have been sold only in China. Yet there was movement even on that aspect last week: HSBC Holdings and Bank of East Asia said they would become the first foreign banks to be authorized to sell yuan-denominated bonds in China.

Doubts remain that the Chinese can challenge the greenback. Former Brazilian Central Bank chief Gustavo Franco poured cold water on the notion that Brazil and China would fully abandon trading in dollars, calling it "pure idle talk." Others agree. "For now, the safe haven aspect of the dollar has overwhelmed other concerns. When people need liquidity, they go to the United States," says Morris Goldstein, an economist at the Peterson Institute for International Economics in Washington. Still, what is more or less a consensus among Western experts on China seems to have formed that the Chinese are on an unmistakable path toward challenging the dollar. What remains lacking is a political decision to shift from acting on the margins to making a decisive move, many experts say.

That resolve may be forming. A Chinese official said on May 20 that the yuan could be a serious reserve currency by 2020. Zhang Guangping, vice-head of the Shanghai branch of the China Banking Regulatory Commission, told reporters that this date would coincide with the timetable of making Shanghai an international financial center like London and New York. Turning Shanghai into China's money capital would be meaningless if the yuan were not convertible. That rough timeline—a 10- or 15-year transition—coincides with the projections of many Western experts.

But among those predicting that the Chinese may move more rapidly is Nicholas Lardy, a China expert at the Peterson Institute. Lardy says the idea of making the yuan convertible is not new: The Chinese first raised the issue in the 1990s but were derailed by the 1997 Asian economic crisis. "They could do it in two or three years," Lardy said. "We tend to underestimate how far they've come in reforming various aspects of their financial system."
Whatever the timing, such a move would be dramatic in terms of the Chinese economy. Until now, Beijing has maintained a tight grip on the value of the yuan—many experts believe it is undervalued—including limiting who can convert it to hard currency and how many dollars flow into the country. "China has maintained the currency at below the market clearing rate to help its exporters," said Brad Setser, a currency specialist at the Council on Foreign Relations, for whom he writes a blog, Follow the Money.

In addition, there is the matter of China's massive reserve of dollar assets. "If the Chinese stop buying dollars, the value of their assets will fall," said Rachel Ziemba, a China analyst at RGE Monitor, a financial think tank. "So the change is not going to be tomorrow or next year." One way the Chinese can lessen their exposure to dollar assets over time is to shift their reserves from long-term Treasuries into shorter-term U.S. bonds. That shift would give the Chinese more flexibility in easing away from the dollar. The New York Times reported last week that the Chinese seem to be maintaining dollar-asset ownership levels, but shifting their holdings into maturities of a year or less—something they have not previously done.

Time to stop talking of renminbi as reserve currency
One baleful consequence of the global financial crisis has been a swarm of ill-informed commentary about the decline of the US and the dollar, and the rise of China and the renminbi. Such hyperbolic claims about a tectonic shift in global power relations are bunkum. Since last November, the People’s Bank of China has initiated more than $100bn in renminbi swap lines with various other central banks, mainly in the developing world. There also has been lots of noise about increasing the use of renminbi in regional trade transactions. These developments have led many to speculate that China aims to make the renminbi a major global currency, and that it is just a matter of time before the currency of the world’s largest creditor supplants that of the world’s biggest debtor as the major global reserve asset.

On the potential for the renminbi itself as a reserve currency, commentators frequently confuse three distinct concepts: currency internationalisation, reserve currency, and dominant global reserve currency. The renminbi will clearly internationalise significantly over the next five to 10 years. Over a longer period (10-20 years) it may emerge as a secondary reserve currency like the Japanese yen, although this is not certain. But for it to replace the dollar as the main global reserve currency, many decades and a combination of improbable events would be needed.

Plenty of currencies internationalise without becoming substantial vehicles for reserve holdings (Swiss franc, Singapore dollar, etc). The renminbi will certainly become far more widely used in many countries because of China’s large role in global trade and the vast numbers of Chinese business and leisure travelers who will trot the globe. Swaps and trade facilities may help this internationalisation, though it is worth noting that the talk of denominating trade transactions in renminbi remains mostly talk (the practicalities are inconvenient), and the total swap lines initiated by the PBoC since last September are about one-fifth of the international swap lines opened by the US Federal Reserve during the same period.

Internationalisation – ie the increased use of a currency in current-account transactions – is a necessary but insufficient condition for a reserve currency, which emerges only when people want to hold and invest large balances of that currency. For the renminbi to become a vehicle for reserve holdings, foreigners must be able to invest freely in onshore renminbi financial assets (stocks, bonds and bank deposits), and freely repatriate both their earnings and their capital. For foreign investors to want to hold renminbi assets on a large scale, they must be convinced that China’s financial markets are trustworthy and not rigged.

For the renminbi to become even a secondary reserve currency, it must therefore fully liberalise its capital account and set up reliable financial markets that are reasonably free of government interference. Technical difficulties aside, this will require a significant retreat from the current state-dominated model of credit allocation – and this cannot happen quickly. The US dollar’s position as the dominant global reserve currency is secure. It boils down to this: in a fiat currency world (unlike the gold- and quasi-gold standards that prevailed until 1971), the dominant reserve currency nation must be a net debtor, not a net creditor.

This is because the principal reserve asset is the debt securities of the reserve nation. Other countries must have current-account surpluses that they can invest in those debt securities, so the reserve nation itself must run a current-account deficit. (The problem of recent years was not that the US ran a current-account deficit, but simply that the deficit grew too large – nearly 7 per cent of GDP rather than the sustainable 1 per cent of GDP or so.) So if China wants the renminbi to become the world’s main reserve currency, one condition is clear: it must abandon mercantilism and start running a current account deficit. Until it is willing to satisfy that condition, all talk about the future dominance of the renminbi is the purest hot air.

Japan's Net Foreign Assets Fall Most Since 1999 on Yen’s Gain
Japan’s net foreign assets fell the most in nine years in 2008 as the yen’s gain reduced the value of investments made abroad. Net foreign assets, or the difference between assets and liabilities overseas, dropped 9.9 percent from a year earlier to 225.5 trillion yen ($2.4 trillion) at the end of 2008, the Ministry of Finance said today in Tokyo. It was the first decline in three years. Japan’s currency gained against the 16 most-traded currencies in 2008 as the global financial crisis encouraged investors to unwind carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher.

Foreign assets fell 15 percent to 519.2 trillion yen in 2008, mainly because of the yen’s appreciation, the ministry said. The yen strengthened 23 percent against the dollar and 29 percent versus the euro last year. The assets include investment in companies, bonds, stocks, loans and savings Japanese made abroad as well as the nation’s foreign reserves. The liabilities, or the investment foreigners made in Japan, dropped 18.5 percent to 293.7 trillion yen, partly because the value of stocks and other assets declined, according to the ministry. The Nikkei 225 Stock Average fell a record 42 percent in 2008. Japan maintained the largest amount of net foreign assets in the world in 2008 for the 18th consecutive year, followed by China’s 137.8 trillion yen and Germany’s 82.4 trillion yen, the Finance Ministry said.

Zombie banks walk among us
Maybe the so-called "zombie" banks didn't die after all. As recently as two months ago, many on Wall Street speculated that the nation's largest financial institutions -- banks like Citigroup and Bank of America -- were only operating as a result of extensive aid from the U.S. government. Now, many experts wonder how so many small regional and community lenders that are capital starved and overwhelmed by escalating loan losses are able to stay in business. In metropolitan Atlanta and the state of Florida, for example, more than 50 banks reported non-performing asset levels of 10% or more of total assets as of the end of March, according to the Raleigh, N.C.-based investment bank Carson Medlin.

Non-performing assets are loans that are not collecting interest or principal payments. In more normal economic times, non-performing asset levels remain below 1%. Up to this point, small lenders, which serve as the primary source of credit for large parts of the country, were considered a picture of health in the banking industry. Most avoided the toxic mortgage products that ruined so many of their big bank peers. Experts note that the majority of the 8,000 small banks are still thriving. But the outlook for this corner of the nation's banking industry has been tempered in recent weeks as small lenders endure rising losses, partly as a result of exposure to areas like commercial real estate and small business loans.

Next Wednesday, Wall Street will get a clearer sense of what kind of shape the industry is in when the Federal Deposit Insurance Corp. publishes its first-quarter assessment of the industry. One closely-watched part of that report is the agency's so-called "problem bank" list. As of the end of 2008, that number stood at 252 institutions and it is expected to have climbed even higher during the first three months of 2009. So far this year, the government has closed 34 banks, including the FDIC's takeover and subsequent sale of Florida-based lender BankUnited late Thursday to a group of private equity investors. While only a fraction of the institutions on the problem bank list typically reach the point of failure, experts contend that regulators have been unable to shut down some "zombie" lenders, in part, because they are still scrambling to catch up with the variety of ills affecting the sector.

Consider the case of Citizens Community Bank, a New Jersey-based lender located a little more than an hour's driven northwest of New York City. Federal regulators seized control of the bank earlier this month after the firm became overwhelmed by problems in its construction loan portfolio. Nick Ketcha Jr., a former director of supervision at the FDIC who now serves as a managing director at the New Jersey-based financial services consulting firm FinPro, said that the company could have just as easily have been shut down at the end of last year. "They were ready to be taken over," said Ketcha. "The fact that [regulators] didn't get to them may suggest that others are out there." Two reports published earlier this month by the FDIC's Office of Inspector General charged that the agency was "not timely and effective" in addressing the most significant problems affecting Bradenton, Fla.-based lender Freedom Bank and Alpha Bank & Trust of Alpharetta, Georgia. Both banks failed late last year.

Unprepared for the crisis much in the same way the private sector was, the FDIC has been ramping up efforts since late last year to try and stay ahead of troubles. In its annual budget for 2009, for example, the agency increased funding for its receivership division, which oversees bank failures, nearly tenfold from $150 million to $1 billion. But even with that funding increase, it will take time for the FDIC to boost its staff levels enough to be capable of keeping up with all the troubled banks. In the meantime, regulators may have little choice but to focus their attention on those institutions which are in the most dire shape. As a result, other less-troubled lenders are allowed to live on for another day, notes FinPro's Ketcha.

"Right now they are looking at which [banks] are the biggest problem and prioritizing," he said. Still, experts like Joshua Siegel, managing principal at StoneCastle Partners, whose firm focuses on investing in small-cap banks, suspects there could be forces other than staffing levels at work. Regulators, he notes, may postpone a bank's downfall especially if the region in which its resides could enjoy an economic recovery in the coming months. There is also speculation that industry regulators have resisted closing some banks because it may be tough for the FDIC to find buyers for them -- even after they have been seized and scrubbed of their troubled loans. Despite some interest in failed banks from private equity firms, Jeffrey Adams, managing director at Carson Medlin Co., said many banks are unwilling to buy struggling peers. "They are battling their own fires if you will," said Adams. "There is just not a natural supply of parties to take over deposits."  

Curb property addiction to avoid another disaster
It used to be said that a man's price is just a few pounds short of his mortgage. Though in Westminster that should now be his second mortgage, and women MPs, like Hazel Blears, have been just as bad as the men. It's widely accepted now that our political system will require radical change to restore public confidence. But there's something else that is needing reform: the housing market. Our national obsession with property corrupted parliament by turning many of our politicians into property speculators. We have seen how MPs have been fiddling and flipping their second homes to gain, in some cases, hundreds of thousands of pounds from properties wholly or largely funded by the state. Some even bought second homes for their ducks. As a result, up to half of all MPs are expected to be retired, deselected or be voted out by outraged constituents. It's like a Stalinist purge. MPs are desperately waiting the four o'clock call from the Daily Telegraph.

They should erect a monument to Kirsty Allsop outside the Commons as a grim reminder of what happens when people become addicted to the drug of property. And a copy should go to the city of London too, because housing madness helped to destroy the banking system. Bankers who believed property prices could only ever go up created an inverted pyramid of debt on the slender basis of dodgy mortgages in American and British inner cities. The losses and write downs from the mortgage-related securities fiasco has so far reached some $4trillion world wide, according to the IMF. In Britain around £1trillion has disappeared from the asset base of the middle classes, who had been maintaining their living standards for years by borrowing against the nominal value of their homes.

The housing boom begat the debt bubble, which begat the construction boom. The mania for property diverted investment from productive activity into real estate on a colossal scale. From Riga to Dublin, European cities are surrounded by thousands of acres of unfinished developments, many of which face being demolished because there's no money to complete them. The housing boom has inflicted the devastation of a small war on the national finances of European countries from Spain to the Baltic. Vast sums of public money are being wasted by central banks buying toxic mortgage bonds from insolvent banks.

Amid this devastation, ruined political careers in Westminster might seem the least of our problems, but the scandal of MPs' second homes is important because it was both a symptom and a cause of the crisis. Politicians became infected with housing madness under New Labour and started plundering the public finances to buy and develop second and sometimes third and fourth homes. So it's hardly surprising that MPs didn't ask searching questions about the housing bubble - they were benefiting from it. And so were their constituents. Between 1997 and 2001, house prices nearly doubled. They nearly doubled again by 2005. It was as if the government had given every homeowner an average of £100,000. No wonder they voted Labour. We were all corrupted by the housing boom, to some extent. People talked endlessly about how their houses were earning more than they did, never asking where all this free money was coming from.

Well the truth is that it was being stolen from the next generation. Houses don't produce wealth, they merely transfer it from the young to the old - from the coming generation of families who have to burden themselves with colossal debts if they want to get a roof over their heads, to the baby boomers who are about to retire and live on the cash they make when they downsize. MPs were the most egregious example of this, but in a sense we were all invested in the housing scam. Well, it's time to call a halt. Our property obsession has been an economic and political disaster. Now, governments and central bankers talk as if the real estate bubble was nothing to do with them. But in reality house price inflation has been actively encouraged by easy money, low interest rates and regulatory negligence. From mortgage interest tax relief to tax breaks to buy-to-let investors, successive governments have fuelled the housing mania. They subsidised the sale of council houses and then prevented local authorities from using the proceeds to build new social housing, thus creating an artificial shortage.

Housing is the only asset class which is free from capital gains tax, and both Labour and Conservatives intend to exempt up to £1m worth of property per family from inheritance tax. For 30 years, governments made property speculation a no brainer - and even now, in the wake of the crash, the thrust of government policy is to try and reflate house prices. I spoke to a friend last week who said that his £1500 a month mortgage has now fallen to £600. He feels a bit embarrassed by this, since there are a lot of people who seem rather more deserving of a £900 a month bung. Our addiction to property must be curbed if we are to avoid yet another disastrous bubble. Property must be taxed like any other investment, like shares or savings - there is no rational justification for its exemption.

The mortgage industry must be properly regulated by the Financial Services Authority, with limits put on loan to value ratios to prevent young people taking on unsustainable loans of five or six times salary. 125% "suicide" loans and self-certification "liar loans" should be outlawed along with sub prime. There should be a minimum deposit of 20% on residential loans as is the case in countries like Canada and Germany which have not experienced property crashes. Buy to let investors should no longer be able to set mortgage interest against tax, a measure which discriminates against ordinary home buyers.

Mortgage loans should be made "non recourse" as in America, so that when a house is repossessed, the mortgagee doesn't bear liability for any losses at auction. That would soon stop predatory lending, above all, governments must ensure that enough houses are built to meet population pressures caused by immigration and family break ups. It is the most basic function of government to ensure proper residential housing is built. Perhaps now that we have a new generation of MPs coming along who will actually have to buy and equip their houses like the rest of us, they will finally see sense.

Oil Above $50 Saves Gulf States During Crisis
While their biggest customers may continue to wallow in recession into 2010, the oil-producing nations of the Persian Gulf are again luring foreign investment and looking for places to park their own wealth. Crude prices that have stabilized above $50 a barrel mean the Middle East’s oil-rich economies are likely to pull out of the global financial crisis sooner than the rest of the world. Saudi Arabia, the largest Arab economy and the world’s biggest oil exporter, is attracting renewed interest from investors including leveraged-buyout firm KKR & Co. Qatar and Abu Dhabi have returned to international capital markets. Stock markets are rallying across the region, led by Saudi Arabia, whose Tadawul All Share Index ended last week up 26 percent for the year to date, after tumbling 56.5 percent in 2008.

"The expected resilience of oil prices puts the Gulf countries in a relatively privileged position compared to Europe and the U.S.," says Eckart Woertz, an economist at the Gulf Research Center in Dubai. "In 2010, that is likely to lead to some resumption of growth, unlike in developed-market economies." Crude oil traded at $61.61 a barrel on the New York Mercantile Exchange at 10:33 a.m. in Singapore -- up 81 percent from around $34 on Feb. 12. Prices will remain above $50 for the rest of this year and top $60 next year, according to the median forecast of analysts surveyed by Bloomberg. While that’s still less than half the record $147.27 a barrel reached last July, savings built up during the boom from 2003 to 2008 are providing a cushion for most of the Gulf’s petroleum producers to get them through the worst recession since World War II.

"Oil prices are going up and confidence levels are coming back, things are going in the right direction," Mohammed al- Shihi, the director-general of the U.A.E. economy ministry, told a conference today in Abu Dhabi. Saudi Arabia’s economy will shrink 0.9 percent this year, according to the International Monetary Fund’s April forecast, while the United Arab Emirates is projected to decline 0.6 percent and Kuwait 1.1 percent. By comparison, the U.S. may contract 2.8 percent, the European Union 4 percent and Japan 6.2 percent, the IMF says. By next year, the IMF expects the Gulf oil states to resume expanding, with Saudi Arabia growing 2.9 percent and Kuwait 2.4 percent, while advanced economies as a whole have no growth.

As a result, the six states in the Gulf Cooperation Council, which hold 40 percent of global oil reserves, are already luring fresh capital from abroad. The Qatari joint venture of Newbury, England-based Vodafone Group Plc, the world’s largest mobile-phone company, raised about $1 billion last month in the country’s first initial public offering in nearly a year. Gulf oil exporters "have accumulated such big financial surpluses, and with ambitious expansionary fiscal budgets, things will be OK," National Bank of Kuwait SAK Chief Executive Officer Ibrahim Dabdoub said in a May 14 interview at the World Economic Forum in Jordan. "We have started to see some green shoots here and there."

International investors have taken notice. A Euromoney investment conference last week in the Saudi capital of Riyadh drew 1,600 participants, including representatives of Bank of New York Mellon, HSBC and Barclays Capital. Saudis in traditional white robes and red-and-white headdresses crowded a five-star hotel along with businessmen in suits from the U.S. and Europe. Abu Dhabi, with more than 90 percent of the emirates’ oil, has the best prospects in the region, along with Saudi Arabia and Qatar, the world’s largest exporter of liquid natural gas, says Simon Williams, chief regional economist at HSBC Holdings Plc in Dubai. By contrast, the picture is a good deal grimmer in Dubai, which lacks the oil reserves of its U.A.E. partner Abu Dhabi and other neighbors. Dubai’s real-estate boom crashed last year, and it will continue to flounder, says Timothy Ash, head of emerging-market economics in London at Royal Bank of Scotland Group Plc.

The second-biggest of seven states making up the U.A.E., Dubai ran up debts of $80 billion and had to cancel projects including a waterfront development twice the size of Hong Kong Island. The traffic jams that clogged roads last year are gone; once-scarce taxis now sit outside residential buildings waiting for fares. Dubai property prices may fall as much as 70 percent from their peak, UBS AG predicts. Even in Dubai, though, Emaar Properties PJSC, the U.A.E.’s biggest real-estate developer, says it is hiring 1,600 people for its retail, hospitality and leisure businesses, including three new attractions at Emaar’s Dubai Mall and three new hotels. And in the other Gulf economies, the presence of oil translates into a quickening of prospects.

"There is inherent stability in these markets," says Emad Mostaque, a London-based Middle East equity-fund manager for Pictet Asset Management Ltd.,which oversees about $100 billion globally. "Next year you will see this region outperform other emerging and global markets." Mostaque says he is particularly interested these days in shares of Saudi consumer companies such as Riyadh-based food producer Almarai Co. KKR is studying Saudi investments as it aims to take advantage of the region’s "most attractive markets," says Makram Azar, head of Middle Eastern operations. This month, KKR named Ford M. Fraker, former U.S. ambassador to Saudi Arabia, as a senior adviser.

Investors perceive diminishing risk on Gulf-region bonds, according to trading in credit default swaps. The cost of protecting against default by the Dubai government fell to 488 basis points on May 8 from a record high of 977 in February, CMA Datavision prices show. Saudi Arabia’s bond-default risk declined to about 162 basis points last week, from 335 basis points in February. The apparent end of plans for a Gulf monetary union -- the U.A.E. pulled out of the project on May 20 -- won’t alter the region’s growth outlook because all the countries in the proposed union except for Kuwait already peg their currencies to the dollar, Woertz says. In another sign that markets are opening up for Gulf borrowers, Qatar and Abu Dhabi raised $6 billion by selling bonds to international investors last month. Aldar Properties PJSC, Abu Dhabi’s biggest real-estate developer, sold $1.25 billion of 5-year notes May 21, becoming the first such firm in the U.A.E. to issue debt since August.

Meanwhile, Gulf sovereign-wealth funds, which turned their attention inward to shoring up domestic banks and domestic stock markets, now have an "appetite and cash available for selected strategic acquisitions" abroad, Woertz says. Saudi Arabia has sovereign assets of around $438 billion, up from $335 billion at the start of 2008, according to estimates by RGE Monitor in New York. Abu Dhabi holds a fund of about $300 billion, and Kuwait has about $210 billion. In March, Abu Dhabi agreed to buy 9.1 percent of German carmaker Daimler AG for 1.95 billion euros ($2.6 billion). Earlier this month it won approval to buy Nova Chemicals Corp., Canada’s largest chemical maker, for $499 million. The region’s continued dependence on oil and gas is a "strength, not a weakness" that generates long-term surpluses, says HSBC’S Williams. "I expect all of the region’s economies to fare well, including Dubai, which has a compelling economic case as the service hub for a rapidly growing and prosperous part of the world," he says.

Chinese hoarders 'are causing oil price boom'
The big rally in the oil price in recent weeks is down to Chinese stockpiling, a leading energy industry analyst has claimed. Oil industry experts Bernstein Research say they have been spying on the world's third-largest economy and have concluded China is actively hoarding supplies. After the spectacular crash in the crude price last year following an all-time high of $147 a barrel, oil has soared again this year, up 70% since mid-January. In the past four weeks, the oil price has jumped 25% to trade around the $60-a-barrel level again. Energy analysts have been scratching their heads for a reason, other than the recent dollar weakness which always pushes up the value of crude.

Analysts have argued that global demand remains weak, the Saudi-led cartel of major oil producers Opec has not cut production as deeply as it might and output from non-Opec countries is robust. But according to Bernstein's Neil McMahon: "If the supply/demand balance is not driving higher oil prices, then what is? "We believe that increased imports into China could be part of the explanation. McMahon says Chinese imports spiked in March and April and the country's storage levels have reached a new peak. "We believe [the rise in the oil price] reflects not strengthening demand, but rather China's efforts to boost its strategic petroleum reserve," he said.

"To verify this we have utilised satellite tracking of tanker movements, as well as time-lapse satellite images to observe the amount of storage expansion. "Our analysis confirms that tanker capacity arrivals into China have spiked up in recent months, in line with imports, but more importantly, tanker arrivals into the ports [holding strategic reserves] have increased materially. "Satellite images confirm a significant increase in storage construction in the last few years. This suggests that China is stockpiling crude oil. "This recent drive by the Chinese to fill their reserves should have offered some support to crude prices and will continue to do so going forward."


el gallinazo said...

anon 2:37 PM

"At one point I thought it was all done and fine and said to the wife that if it holds now it should be good and at that exact point a coupling I had put in, a stupid rubber gasket affair, blew in my face. Good fun but makes me glad I didn't go to be a plumber."

What's a little shower of potable water among friends? The high point of my plumber career on my island is when I had to cut a 3" PVC sewer pipe with about a 15 foot elevation pressure of sewage in it with a sawzall. I thought I could get out of the way in time. I couldn't.

jal said...

A word of thanks to I&S!
This blog does a great job of highlighting what is happening and the possible consequences.

Your links are always worth digging into to find some gems.
Here are a couple of gems: For those who are on a “learning curve”,

“Obama is a defender of private capital. Believe it. He does not know that it is impossible for a private monetary system to serve the general welfare. He thinks it can, just like he thinks private insurance can provide universal and affordable health coverage. It can’t.”

“I do think the reforms are going to have to come from the ground up. I’ve always felt that way. The reforms that come from the top down are probably going to be the ones we don’t want, and the bankers do.”

“These people who live by usury and control society by usury, will not abandon usury in the interest of the general welfare. They will see us starve in gulags first.”

“This issue is no longer capitalism versus communism, if indeed it ever was. The issue is the power of money versus the power of the people! The issue is plutocracy or oligarchy versus democracy or democratic republicanism.”

“Republicans & Democrats are at fault because they have embraced an unsustainable American Dream provided by the geniuses on Easy Street, the financial speculation of the financial class in the new post-industrial “service” economy of the US, in which we all grow rich through usury”.
Here is the best gem.

Educate and change the usury system.

Welcome to the Model Economy Wiki.
These Wikispaces have been created as a means for members to communicate, collaborate and share ideas for designing sustainable systems for the Third Millennium – monetary, political, agricultural, educational, economic, etc. John Gelles initiated the project, Ellen Brown is the organizer, and Reece suggested the model.
I will be following that blog to try to understand if they can come up with a model that can be implemented.
I had to delete the previous entry because I forgot to inserts some (BR)

Anonymous said...

Holly bat guano el gallinazo, I bet you went home by bus rather than in your car!?

anon 2:37 PM

south florida said...

This is another query for Stoneleigh (and, again, anyone else who cares to weigh in):

When the GM bankruptcy does go through, will the fallout from that be sufficient to squash the herd instinct that is driving the current rally in Stocks? After all, a GM bankruptcy would be a huge deal in a very negative sense.

Or does this argument overlook a possible way in which even a GM bankruptcy can be spun as a "green shoot"?

Greenpa said...

South Florida; "Or does this argument overlook a possible way in which even a GM bankruptcy can be spun as a "green shoot"?"

My take, and I'll bet it will be Stoneleigh's, too: indeed, a GM bankruptcy can and will be spun as a good thing. The market will rise.

Yes, it will be a big fat disaster,that pushes many people and businesses into total failure. BUT, don'tcha know; it will also be "proof that the government and management of GM are willing to make the hard decisions, and take difficult actions!"

Check me on that!

Why will it be spun that way? NOT because it makes any sense, whatsoever; but because those reacting WANT it to be true; and will mutually reinforce the idea.

Anonymous said...

{Smelly}Old bird,I had to clean the keyboard again after reading that....

My box picked up a bug and is being re-brained if you have tried to contact me...

Its over I think...I now am a true Dis-believer in the O-man.As was posted..he thinks those who have been sucking the lifeblood out of the healthcare system are going to go vegan for the good of the country....good luck with that O-man..

Ilargi,you have pointed out a cruel and evil practice...the loan structure,as I understand it is non-recource...which means they can come after you for the paper losses incured...which means debt slavery under the current structure of the bankruptcy law.ugggh

I have come to terms with the fact I will not see the "value" once given my home.That my wife and I bought raw land,and built the house ourselves is the only reason our payments are about 1/3 of what most pay...about what most pay for a apt...
My "value" is tied up in a good spring,water..a developed garden,and huge orchard...[of which I spent a lot of time admiring]I love passive food producers...

Dimitry Orluv has pointed out "shelter" is what many will need...not ticky tack suburban homes.This may be met in many ways.Knowing that over 50%of a entire market is being manipulated should make anyone shudder...especially if the largest investment they are likely to make in their lives is affected.
I dont know...It has been a moot point how much my home is "valued"except at property tax time,as I intend to stay here..permenently


John Hemingway said...

excellent post Ilargi, telling it like it is, as usual:-)

centiare said...

Does anyone else think we are experiencing emotions similar to those felt by the French/British during the winter months of the WWII phony war?

Here they were, wondering perhaps why in the world they had declared war on Germany in defense of Poland, when the Russians had taken the other half but had gotten off scot free?

To make matters worse, now the Germans were busily preparing an attack on the Western front all over again. Don't you think the Allies were fervently hoping that things would somehow just "turn out all right"?

That's were we are right now. We KNOW what's in store for us, yet we can't quite get off the dime. There's all this counter intuitive propaganda trying to confound anyone with even a basic modicum of economic knowledge that reality is somehow different from what the facts clearly state.

Oh well, just like that famous photo of the French soldier having a peaceful drink while patiently waiting for the SHTF, we wait patiently for a clear indication of the break.

My take is that it may be this week's Treasury auction. Ilargi may have posted his essay before the news came out that the 10 year hit 3.55%.

Inquiring minds want to know if Ben will kill the $USD via QE in defense of maintaining lower rates, or unleash the next GD by allowing rates to spike, thereby crashing all associated asset values.

Anonymous said...

"The New York Times reported last week that the Chinese seem to be maintaining dollar-asset ownership levels, but shifting their holdings into maturities of a year or less—something they have not previously done."

Must be following TAE!

Ventriloquist said...

@ Mr. Vulture,

"The high point of my plumber career on my island is when I had to cut a 3" PVC sewer pipe with about a 15 foot elevation pressure of sewage in it with a sawzall. I thought I could get out of the way in time. I couldn't."

I thought that those kind of jobs were reserved for the apprentices.

dark_matter said...

El G,

A vivid picture. Maybe we should be saying "when the sh*t hits the sawzall". This is a nice metaphor since it denotes you are trying to fix something and you think you know what your are doing but then...

VK said...

@ el gallinazo

Well that's a real stinker...

@ Board

What arrogance on display in the following article and a sense of entitlement,

"The US dollar’s position as the dominant global reserve currency is secure. It boils down to this: in a fiat currency world (unlike the gold- and quasi-gold standards that prevailed until 1971), the dominant reserve currency nation must be a net debtor, not a net creditor."

And this is the icing on the cake,

"For the renminbi to become even a secondary reserve currency, it must therefore fully liberalise its capital account and set up reliable financial markets that are reasonably free of government interference. Technical difficulties aside, this will require a significant retreat from the current state-dominated model of credit allocation – and this cannot happen quickly."

Good lord, then what does the author think the continued intervention and distortion by the FED and US govt into the workings of the capital market are? Is the FED a magic hand of god? Is TALF, TARP, QE and all that other mumbo jumbo an efficient allocation of capital and worthy of reserve status?

Anonymous said...

Looking back through several weeks of photo headings on this blog I see several depictions of low wage ag-workers. Is Mr. Ilargi trying to tell us something?

--cherry picker--

Ilargi said...

"Good lord, then what does the author think the continued intervention............"
Glad you picked up on it, but note that he does specify:

"The problem of recent years was not that the US ran a current-account deficit, but simply that the deficit grew too large – nearly 7 per cent of GDP rather than the sustainable 1 per cent of GDP or so."
Basically, the argument is that a post gold standard reserve currency is viable only if the nation involved runs a deficit, since if it doesn't, there's not enough for everyone to go around.

I think the assumption that the country needs to have"reliable financial markets that are reasonably free of government interference." is utter bogus, as the US has demonstrated over the past 38 years. Maybe he means that it has to create the illusion that such markets exist?!

That aside, I think the main point is interesting. If the reserve currency nation does not import more than it exports, not nearly enough of the currency will ever end up in the hands of the rest of the world, who are supposed to run bilateral trade in it.

Obviously, no country should have the reserve currency, it's perverted on too many fronts than is funny. And it will be over soon. Not to be replaced by another single coin, but by some international standard.

Ilargi said...

"Is Mr. Ilargi trying to tell us something?"
Yes, I'm trying to tell you to stop looking for meaning in the photographs. Nothing there unless perhaps there's a freaked out reptilian part of my brain that invisibly guides me. But then what would I know to say about that?

Anonymous said...

There is an editorial from the SFGate today which goes well with your post today, I.
Signs of more trouble ahead for housing marketFunny cartoon. Ha.

RC said...

Mr. David, vis a vis Gallinazo's lack of a helper: You must to read
"Don't Stop the Carnival" and in the meantime, Gallinazo will forward you my email and I {for a fee of course} will explain why it is virtually impossible to find an island helper.
Maybe you would really rather not know.
In the meantime, I offer this scenario: Death comes for the plumber, the lights grow dim, the breath grows long then short, he expires while the loved ones {if he has any living on that damn island} moan and rent, etc, but now, on the Other Side, the pipe twister comes to, and suddenly, the lights seem to almost theatrically brighten and he can see and hear a group of goofy males approaching his shade. It's all of his helpers he ever hired and/or fired, and they are the only greeting committee. He understands now the true depths of the meaning of Diabolical and he knows that surely he has gone to Hell. He is doomed to be "Helped" for all eternity.

el gallinazo said...

dark_matter said...
El G,
"A vivid picture. Maybe we should be saying "when the sh*t hits the sawzall". This is a nice metaphor since it denotes you are trying to fix something and you think you know what your are doing but then..."

But of course I did fix it, and I fixed it properly. Fortunately, it was in my neighborhood - only a few hundred yards from my shower. My clothes wound up double wrapped in heavy trash bags and thrown into the dumpster - no attempt at rehabilitation.

What I did was necessary, but if I had given it more thought and circumspection, I might have succeeded with less personal sacrifice. I was to some extent the victim of my own hubris

But it just goes to show that it is not only the armed forces of a country which demonstrate bravery and courage under fire. Perhaps plumbers should have their own internationally recognized memorial day and cemetery.

As to helpers and our islands, what RC says is completely correct. However, there is another aspect to it which could best be understood by reading Matthew Crawford's phenomenal article, "The Case for Working with Your Hands," in this week's NY Times magazine (available on-line). Reflects my sentiments and life experience to a tee. I could have written it myself if my IQ were 40 points higher.

Greenpa said...

RC " It's all of his helpers he ever hired and/or fired"

OMG!! You've just given me the most lucid image of hell I've ever envisioned!

In my case, it would be all the interns I've ever taken on...

I don't see how I could ever do anything so evil as to deserve that.


el gallinazo said...


Perhaps the Bank of Sweden could sponsor a prize for the Plumbing Sciences in memory of Alfred Nobel.

Greenpa said...

El Gallinazo " Perhaps plumbers should have their own internationally recognized memorial day and cemetery."

You should do it. Others have.

Last fall on a speaking engagement in Chattanooga, I was startled as we drove by "The International Towing and Recovery Hall of Fame And Museum".

I kid you not. I took pictures.

el gallinazo said...

Anon 10:58 am

Thanks for the links and explanation.

RC said...

I appreciated Crawford's good wishes, but the man was viewing the world as a PhD would and not as an un-degreed artisan would. I'm good for about 1,000,000 words on the topic {positive and negative} of labor, as in sweat producing or requiring handiwork or manual skills.
He is a bit young, and here is the rub about the main drawback: the body rebels sooner or later, to some degree or completely or accidents {pretty much the rule} happen on the job or off that make the physicality very challenging.
I'm legally very disabled due to being run over by a pickup {yes, on the job} but still, I do earn my living primarily by skills, but consulting fills the gaps for when the body just won't co-operate.
We don't have the dictates and politics of the office or professional life to irritate us, but except for the rare cases, the aging confronts us in our basic instrument: our bodies. Well, enough for now.

EBrown said...

South Florida,
I agree with Greenpa.

And for what it's worth, another line you will probably see in articles that pretend to explain the rise in markets worldwide is that "stock markets are forward looking and priced in GM's bankruptcy a while back". Or somthing to that effect.

This is one permutation of the efficient market hypothesis. IMHO it is demonstrably false, yet many, many people buy it.

Starcade said...

Schwarznegger has done it.

He has officially called for the end of welfare in the state of California.


Anonymous said...

Hello TAE,

When our currency is worthless, I hope you will consider this link as I believe that fertilizer will be incredibly valuable:


Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

VK said...

Aaah! Interesting thoughts Ilargi, maybe the IMF's SDR's will be considered for the role of global currency.

Now for "Green Shoots" of hope, via bloomberg

May 27 (Bloomberg) -- The U.S. recession will probably end in the third quarter, a survey of business economists showed, even as rising joblessness indicates the recovery will be weaker than previously estimated.

The world’s largest economy will begin to expand next quarter, according to 74 percent of economists in a National Association for Business Economics survey. Compared with NABE’s February poll, growth will be slower and unemployment will be higher in the second half of this year and through 2010.

Government stimulus spending and Federal Reserve efforts to thaw credit markets are helping pull the economy out of the worst slump in half a century, the survey said. While housing is stabilizing, the economists predicted consumer spending will be restrained by a deteriorating labor market as job losses continue for the rest of the year.

“There are emerging signs that the economy is stabilizing,” Chris Varvares, president of the group and of Macroeconomic Advisers LLC in St. Louis, said in a statement. Still, the recovery may be “considerably more moderate than those typically experienced following steep declines,” he said.

So there you go, 74% of economists in America live in their own dream world. The American economy is like a Disney movie, there can't be a sad ending. It just wouldn't fit. I mean the Prince and Princess and PIMPCO all have to live happily ever after with 3% growth.

No limits to growths here folks, no consideration of the Debt to GDP ratios, no reform in banking salaries and incentive structure, no changes in regulatory bodies, no changes in Govt laws such as Glass-Steagal, no over sight of the FED and Treasury is required. If the people are broke from spending, the Govt can spend to infinity.

See economists have this thing they believe in (well 74% of em), it's called the free lunch theory, although they were taught in school that it's impossible. In their hearts of hearts they believe it to be so, trouble? Borrow your way out, consequences? HAH! more trouble? Borrow some more? Consequences? Hah! We're entitled American economists, things will work better. Even more trouble? Heck, might as well print, everyone loves the smell of freshly printed dollars. Consequences? Still rosy as ever. Even more more more trouble? Hey Honey, I won the Swedish Bank Prize in Economics in memory of Alfred Nobel.

The definition of an economist - someone who gets paid to be wrong.

Jim R said...

Nice comment, VK. You win this week's gold plated sawzall in memory of a Caribbean sunset.

Greenpa said...

VK - yep, that same study is now being flogged over at CNN, with headlines like "Recession to End in 2009"

An internal bit: "Almost three out of four survey respondents expect the recession will end by the third quarter of 2009, the report said.

But 19% predicted that a turnaround won't come until the fourth quarter, and 7% said it may not come until early 2010. None of the panelists expected the recession to continue past the first quarter of next year."

This WILL be a wonderful tool for reformers in the years to come. Headlines will read "Study by business economists show they are always wrong."

Eventually, I think the preponderance of evidence may have an effect. Particularly when people are once again totally pissed off at them. A whole bunch of folks will now get back into stocks- and every penny of it will disappear.

Lovely and lucid. Future headline in the NYT: "Economists Predict Market Will Turn To Shinola"

That will be intended as irony.

Unknown said...

I wonder at one point most people, and perhaps news organizations, will stop listening to and stop reporting on the predictions of people who got everything wrong last year, the year before that, the year before that, and so on, as far back as we can see.

I wonder if that point will ever come.

Greenpa said...

Rumor: "I wonder if that point will ever come."

That is a very excellent question.

There is an answer- but very few of us like it.

The answer is: No.

It's the herd. Neither "the market", nor "the herd" operate on rational inputs or outputs.

Homo exists as a social herd animal. Rational analysis of herd dynamics is extremely difficult; the problem being, how do you analyze a situation where you are inside what's being analyzed?

Objectivity is IMPOSSIBLE. Acknowledging that helps a lot- but doesn't fix the problem.

Long training helps; and can make it possible to recognize patterns; but the core problem never goes away; we always see through the lenses of our culture and personal history, and what we had for breakfast.

Nonetheless; some trained persons can operate like astronauts- taking a quick trip outside the earth, and looking back at it; seeing, momentarily, the entire earth from a radically different perspective. They can bring back photos- but...

It's probably a hard, hard fact- Homo does not now, and never will, behave as a rational entity.

On the good side- the photos the astronauts brought back from the moon did introduce a new force in the herd dynamic; a force for ecological sensitivity.

So. Join the astronaut corps. But don't expect your insights to have any quick effects.

Penny said...

In the spirit of full disclosure, I learned about this site after my site re-calculator.com was linked to in the previous post "Dismal Abysmal". Thank goodness for that. What a read! I'm hooked!

Ilargi, thank you for pointing out the human element in all of this. What does a young family do when they just had a baby and the market's experiencing a bubble??? A home is not an investment. It's a necessary expense to have a life, like clothing and food, yet the housing market behaves more like the stock market. Which leads me to my question:

Why has the North Carolina/Charlotte markert held so steady compared to other areas? As a Bostonian facing what feels like the most stubborn of all markets, I'm envious.


Penny said...

To clarify, by 'steady' I mean the NC markets looks to have grown lockstep with inflation, not experiencing a bubble.

Anonymous said...

I can't believe everyone has missed this one.

The Bank of Sweden ... Nobel Prize can simply and properly be abbreviated to the B.S. Nobel Prize.

Let's put some truth back into Economics.

PseudoSummary (not NS) said...

I am a big fan of NS. I decided to try my hand at his work of art.

*Confidence is up because news is now Jessica Simpson on her wedding night; Californians will need viagra.

*475 American/hour join the shadowy foreclosure closet; US gov deploys military policy to cope; no one speaking out or touches the real world; R. Schiller could open closet door saving much psychic angst; Ethically dubious Obama team plants selves in front of door to save Wall Street's life; Everyone would be better off with an open door.

*Feces under pressure must be approached with great humility and forethought; plumbers deserve a museum; interns and apprentices are worse than the hell of using a sawzall on a 3" PVC sewer pipe with 15 feet of head.

*S & I link to diamonds; lending with interest on diamonds should be illegal.

*House values continue to fall, but all we need is shelter; O-man is the crony of vampires; asks vampires to turn vegan; TAE holds collective breath at use of V-word hoping diet related flamewar does not ensue.

*Present moment may be similar to August 1939; will Bernanke choose Poland or France for the opening salvo?

*Chinese Gov takes advice from TAE; Fed may be god incarnate but doubts about god's efficiency aired; single reserve currency is a perversion and will soon end.

*Photos have no theme beyond iguanas on PCP.

*Working with hands is noble; consulting is OK; Fertilizer is priceless.

*74% of economists believe in free lunches; 19% think free lunches will begin soon; 7% think free lunches to begin in 2010; TAE think economists are out to lunch; TAEers and astronauts converge, both have unsual perspectives and freeze dried lunches.

Anonymous said...

Greenpa...I think your analogy is spot on ..we cannot truely see the "The forest for the trees".I remember once,back in my early 20's when I learned the power of group dynamics in changing behavior..[I also learned I had the wrong attitude to be a psycologist].

If you hold "behavior" close to science you may think in terms of the observers interaction with the observed...herd animals..killer chimps we are,and easily manipulated by those who have studied us in those terms..who wish us to act a certain way...buy a certain product....hate a certain enemy.[Its still way dangerous for a brown skined man to act out of the ordinary on a airplane]

I am becoming more and more pessimistic about the way its going,and not only due to the fantasic work our gentle hosts I&S have done and continue to do,but observations of my own..I will give you one....

Construction starts by a plan,then permits,then dirt work,then concrete,then steel then finish[tenant improvements].One of my own guides to try and figure out what my own work load was going to be in the future was to track the amount of used heavy equipment was in the dealers lots,as used gear was the first to appear when times slowed down,and the first to disappear when contractors fire the beast up.Same is true with tools.There is a little used tool shop where I go that can show you the true ebb and flow of construction in this area.When he is packed to the top,and ladders and gear stacked 20 deep...its slow.If the shelves and tables are well-picked over and the prices high...times are good and all the[construction] men are working.We have talked before,and he the owner has told me that he can tell monthes ahead what the economy will be like.
Now the heavy equipment lots are fuller than I have ever seen before,and the owner of the used tool shop is not buying stock...hes full...
This is not good...

Time for me to be productive...


Anonymous said...

Since all economists expect the recovery to be under way by Q1 2010, if things go south in Q3 2009 it will be another chance for the MSM to report that "no one could have predicted this".

VK said...

@ Pseudo NS

Bravo, a fine attempt for NS himself!

@ Greenpa,rumor,DIYer, the old bird and all

An article with plenty of common sense and historical insight. Something no free lunching economist has yet grasped. Read must young economist warrior.


"There are some early terms to describe the sudden loss of liquidity that marks the end of a bubble. In the 1561 crash Gresham wrote the “Credit cannot be obtained – even on double collateral.”.

Another term goes back to the 1600s when Amsterdam was the commercial and financial center of the world. The Dutch described the good times as associated with "easy" credit and the consequence as "diseased" credit. I'm sure that all in this room would agree with the accuracy of the latter description. Diseased credit.

What can be done about it? Nothing – since the 1500s the literature is complete with many comments that someone, or some agency can set interest rates – either high or low depending upon the personal concerns of the writer.

Misselden in the 1618 to 1622 crash earnestly believed that throwing credit at a credit contraction would make it go away. Despite all this history, Keynes and his disciples cannot be accused of plagiarism.

What's next?

Virtually, all of the "good stuff" likely to be revived into May is being accomplished. This includes investments such as commodities, junk-bonds and stocks, as well as positive statements from the establishment. Both technical and sentiment measures on the stock market are at "tilt" levels.

Because it is up at the right time, the conclusion is that the down will come in on time as well. This would be the next step on the path towards another Great Depression. "

Sometimes being in a profession is an actual hindrance to understanding the subject. The oil industry refuses to get peak oil and economists refuse to understand credit and money!!

Ilargi said...

Hey Bob Shaw,

Good to see you!

Last time I looked (a while back), Potash wasn't doing very well. Where is it now?

Ilargi said...



There'll always be pockets that hold on a bit longer. Likely something to do with work facilities, army bases or something. Eventually, though, credit will dry up for everyone across the board.

As I tried to explain above, there are reasons why the finance-government complex holds prices as high as they can for the time being. Without their machinations, prices would easily be 20-30% lower than they already are, and that would finish off the big banks. Delaying the inevitable further price plunge serves to allow them to shift more debt to the public. When Fannie and Freddie's real losses are revealed, which will run in the hundreds of billions, that's where the game stops. Even they, crooked as their dealings are, have to apply certain accountancy standards, i.e. report writedowns on losses. It'll be a bloodbath, and all regions will be impacted.

Unknown said...

Ilargi said: "There'll always be pockets that hold on a bit longer."

Like Ottawa. This place is in a giant bubble. (The external information-free one, not necessarily the continually blowing one. Gosh, the metaphors are starting to overlap.)

Frank said...

@Penny My suggestion for the reason that NC kept rational housing prices is that it has multiple smaller cities, all surrounded by much buildable land. Throw in a pile of illegal immigrant labor, and the builders built too fast for a bubble to form. More like software than tulips.

I agree with Ilargi about army bases keeping the demand up. Also it seems to me that many early retiring boomers are heading for North Carolina rather than Florida. (Moving to Florida would be moving in with their folks after all.)

thethirdcoast said...

@ Penny:

I'd also add that the money-controlled media has spent the last 15-20 years shoving NC, particularly the Research Triangle area, down everyone's throat as some kind of "milk and honey utopia".

I was in a situation that would've seen me move to Cary, NC had it continued. I managed to remember that National Geographic had a bit on sprawl in Cary in 1993, and that was one of several reasons I exited the situation.

el gallinazo said...

I sort of see Ilargi and Stoneleigh's task similar to mine. Metaphorically, applying a giant golden sawzall to the huge soil pipe of the MSM with a 4 km head of raw sewage and getting out of the way in time. May we all be luckier this time than I was.

Dr J said...

Interesting panel discussion with Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros and Robin Wells.


Apologies if this has already been posted.

Pseudo NS - good first outing!

Anonymous said...

ilargi, on this:

When Fannie and Freddie's real losses are revealed, which will run in the hundreds of billions, that's where the game stops. Even they, crooked as their dealings are, have to apply certain accountancy standards, i.e. report writedowns on losses. It'll be a bloodbath, and all regions will be impacted.

Have you an idea when these losses will be revealed, do they have required reporting periods? Do you know when those would be?


Stoneleigh said...


Are you in Ottawa? If so we'd be happy to get together for a drink and a chat sometime :)

Penny said...

@Ilargi, Frank & thethirdcoast,

Thanks for the responses. Coming from the Northeast, the impact army bases can have on an area is a new concept. I'm sure that sounds crazy to some.

So if the construction boom in NC was so large as to keep housing prices inline with inflation over the bubble years, it reasons we should be seeing them plummet anytime now (government permitting). For a place with a decent income/cost-of-living ratio already, it should be very affordable.

Might infact be the the next FL!

VK said...

Even the gods will watch football tonight (soccer for ye Americans) the big games up in less then an hour. Herd mentality at it's finest :) Will they be dancing in Manchester or Barcelona at the end of the whistle? No one knows. But this is one herd I enjoy being a part of. Off to the bar folks!

Stoneleigh said...


We'll be tuning in here for sure :)

Greenpa said...

EB Brown :"And for what it's worth, another line you will probably see in articles that pretend to explain the rise in markets worldwide is that "stock markets are forward looking and priced in GM's bankruptcy a while back".

Excellent call! And here it is on a major CNN column!

Surprise! No More Surprises!"GM (GM, Fortune 500) going bankrupt? It's priced in. More declines in housing prices and rising unemployment. It's discounted. Swine flu? Been there, done that."

Unknown said...


Yes, I'm in Ottawa. I thought you and I were down near Toronto? Either way, even if you're just here occasionally (and I'm occasionally down that way too), I'd love to get together some time.

JP said...


Ottawa is a tough one to figure out. Having lived here for just under two years, I occasionally look at MLS prices in the downtown area and wonder if I have put in Toronto or Kelowna by mistake. I recently met a young fellow who had just graduated with a PhD in physics. He and his wife were expecting their first child and were living on EI. They reasoned that it was the right time to buy a house in Bell's Corners. How do "smart" people come to such decisions?!


Anonymous said...

Fortunately, the readers of this site do not need to concern themselves with the rosy predictions of mainstream economists and media types. According to Ilargi and Stoneleigh, the economy is going to head further south in the fall (only 5 more months) and crash into flames no later than 2010.

So why all the hand-wringing over the MSM projections?

Unknown said...

"How do "smart" people come to such decisions?!"

I've become very fond of the term "cognitive capture". Today seems full of discussion about how trapped we all are, to one degree or another, by the prevailing opinion in our environments. Once again I am very thankful for I&S's outstanding efforts to inform us all (and that's why I'll continue to donate monthly for a long time to come).

Still, that couple's decision seems extraordinarily poor.

Stoneleigh said...


We live within striking distance of Ottawa, although I've been spending a lot of time in Toronto recently on business. It's good to know people locally. By all means drop us a line at theautomaticearth(at)gmail(dot)com. We'll be in Montreal for the next couple of days, but back after that.

Greenpa said...

Anon 2:42 "So why all the hand-wringing over the MSM projections?"

I haven't noticed any hand-wringing. For my own part, it's closer to "cackling in glee" - at their obvious folly. :-)

Unknown said...


Because we're not discussing this just for our own edification. We're (most of us, I wager, and certainly I&S) also seriously concerned about people who will be unprepared or make poor choices in advance of the continuing unwind and thus suffer needlessly for it, due to their reliance on mainstream and politically correct information.

a COMmy said...

"Ottawa is a tough one to figure out"

Not really. I lived there for 10 years. High-class welfare bums. The sense of entitlement is out of this world. How about moving some of those civil service jobs to "the regions" as they refer to the world outside the bubble. Some years ago they were offered a gift of a real working windmill from the Netherlands for their tulip festival, but the namby-pambies rejected the gift: "Oh! It would dominate the view of Dows Lake too much." Grrrr. I would have taken it and used it to "grind their bones to make my bread".

Don't pay any attention, I am suffering from COMS (Cranky Old Man Syndrome)

Anonymous said...

@ Pseudo NS

(Holds up 7.9 sign) Nice one.

Dr J said...

Ottawa is 50 square miles surrounded by reality. It's basically a company town where the industry is government. That's about as recession-proof as you can get. I spent four years there and visit often but prefer the west coast where the bubble is stubbornly refusing to deflate enough so that I can afford to buy some arable land!

Stoneleigh said...

I grew up in Ottawa (in between being born in England and going back there for many years). It certainly benefits disproportionately from being able to suck in wealth from the rest of the country, as do all capitals. Economically there's no visible means of support. The capital that flooded in during the tech bubble mostly left in the tech wreck that followed, and there's not much else in terms of wealth generation. Home prices haven't really fallen here yet, but it's coming.

Anonymous said...

And to think that Ilargi was whining about how the Superbowl was a distraction for Americans.

It looks like some distractions are more politically acceptable than others.

Anonymous said...

Any one interested in bond facts along with their daily dose of rhetoric might mosey over to Jesse's Café Américain also Zero Hedge, while a trifle more obscure, is not without salient heh heh points. Oh and also on ZH, "It's a Ford!" just for laughs:)

Anonymous said...

Rumor wrote:

"Because we're not discussing this just for our own edification. We're (most of us, I wager, and certainly I&S) also seriously concerned about people who will be unprepared or make poor choices in advance of the continuing unwind and thus suffer needlessly for it, due to their reliance on mainstream and politically correct information."

So the MSM should throw in the towell on they system and basically guarantee a panic and collapse type scenario all in the name of protecting the unprepared. Brilliant.

It's high time some people start getting intellectually honest around here--they want, covet a collapse of the system as we have known it. Don't sugar coat this desire with a bunch of bull concerning the unprepared. That's about as believable as the socialsist with their forty acres, you know, for the day when help for the people will really be needed--nevermind the 600,000 losing their jobs right now, every month.

andrew said...

In the course of a relatively long life, not for one moment has my conscious mind ever flirted with the idea that General Motors could disappear.

This is a moment to pause and reflect on one of the monumental events in human history. General Motors is going bankrupt.

God damned General Motors is going down!

Something big has to be happening.

thethirdcoast said...

Gutless display by United.

Congrats to Europe's largest economic basketcase on winning the Champions' League!

Stoneleigh said...

Anon @5:05,

We can say what the MSM cannot. We can help people to prepare, and we do. We couldn't sleep at night if we didn't warn people. We're trying to prevent the little guy being completely dispossessed.

As I said before though, we can't save the world. No one can. All of us can only do what we can do, and we have chosen to do this. While we wouldn't be in a position to feed everyone who might show up at our farm in years to come, we can help to prevent them from being that hungry by helping them to preserve as much as possible of what they have now. I think this is a morally defensible position, even though it's primarily pragmatic.

Stoneleigh said...


Spain is on a roll in soccer this year - the European Cup and now the Champions league. United simply weren't up to the job.

Anonymous said...

Anon : May 27, 2009 5:05 PM : they want, covet a collapse of the system as we have known it

I see suppressed/channeled panic and/or genuine concern for the future in most of the posts here. These are sincere people you would be lucky to have as neighbours. I don't see many other misanthropes like me.

If you haven't read John Gray's Black Mass, do so. It deals with the history of the Apocalyptic yearnings some of us have. I recognized myself in some of what he had to say.

The Grinch

VK said...

@ stoneleigh, thethirdcoast

It was beautiful to watch Barca play but United never really got going. It was indeed a rather gutless display. I can only imagine how Chelsea fans must be feeling, they played a near perfect semi-final against Barca, played to their core strengths - defence and physical presence only to be denied by the referee. I reckon Chelsea or Liverpool are far more deserving English teams to have been in the final.

Football is like life, full of highs and lows, tears and joy, you can put in all the effort you want but at the end of the day you need the rub of the green as well (luck).

Anonymous said...

May 27, 2009 5:05 PM


So the MSM should throw in the towell on they system and basically guarantee a panic and collapse type scenario all in the name of protecting the unprepared. Brilliant

Well actually yes I think the MSM should throw in the towel and a bunch of stuff more. The argument here is in the line of casting a ballot now that affects millions of future unborn voters and in essence disenfranchising them. Help those you can but why prolong a system that will only result in even more suffering and world degradation than a quick end would?

(courtesy - Bang or Whimper Foundation)

thethirdcoast said...

Sadly, I was unable to watch the CL final as I was stuck driving my cube to keep my cog in the imperialist war machine turning. I hope to manage a replay glimpse of Messi's header.

However, this eve I will get to tie one on at the bar as I watch my primary rooting interest move closer to the Stanley Cup.


VK said...

Did the Bond market just do a "golden sawzall" through the FED?

The steepness of those curves! A 30 year fixed mortgage at 6.52%. Up nearly 29% for the day!!! Ridiculous.

Greenpa said...

El Gallinazo- I think the "The Shit Hits The Sawzall" has really got legs. It'll be fun to see how long it takes to go viral, and hit the MSM.

I know I'll never pick up my sawzall again, without a good snort and chortle. :-)

Anonymous said...

? What football game?

Starcade said...

thethirdcoast: Depending on your company's policy: ESPN has an online service (free) which shows many major soccer matches, and had the CL "Final" -- more like "Gutless Laydown because United wasn't paid enough" or something to that effect.

VK said...


Americans have accumulated so much stuff that their McMansions can’t contain it all. At year-end 1984 there were 6,601 self storage facilities with 290 million square feet of rentable self storage in the U.S. At year end 2008, there were 51,250 “primary” self storage facilities representing 2.35 billion square feet -- an increase of more than 2.0 billion square feet. There is 7.4 square feet of self storage space for every man, woman and child in the nation; thus, it is physically possible that every American could stand – all at the same time – under the total canopy of self storage roofing. It took the self storage industry more than 25 years to build its first billion square feet of space; it added the second billion square feet in just 8 years (1998-2005). Boomer materialism was taken to whole new dimension in the last decade. Boomers would be bursting with pride if they had the room.

Stoneleigh said...


However, this eve I will get to tie one on at the bar as I watch my primary rooting interest move closer to the Stanley Cup.Shame our team (Montreal) is already out. I take it you're rooting for Detroit. I used to go to school with their former captain :)

This evening Ilargi and I will be going from watching soccer to playing it, despite the rain. I'd never played before last year, but Ilargi has been teaching me. I still have no talent for the game, but I get some extra exercise.

Anonymous said...

God damned General Motors is going down!

Something big has to be happening.

Andrew, chin up, stiff upper lip. Remember , what's good for General Motors is good for you and me, right?

It's just not so good for Bob here.

-depth plumber-

Anonymous said...


Denniger was all over it today. He says the hounds of hell (or perhaps its the helpers from hell) have been released. Every house in the USA has lost 15% of its nominal value in the last 24 hours. It is the start of the dislocation. Private money is shunning long term Treasuries.

Ilargi said...

New post up

VK said...

Indeed Anon, 8:44

Check out these bad boys!

See the end of the world talk over at http://www.mortgagenewsdaily.com/mortgage_rates/blog/

I reckon we'll see these rates going down again once the DOW crashes into reality - flight to safety and all. But if the rates keep rising till september then all the green shoots will wither and die.

ronald said...

ref: Bonds

ere does this leave us? With a bunch of problems I'm afraid. The massive decrease in money velocity has left us with a Alderaan-sized hole in the money supply. The Fed has already lowered the funds target to zero, so the only way to get more money into the system is to print it. Plain and simple.

The most efficient means to get printed money out into the world is to buy Treasury bonds. Not only does this put cash into the economy, but it also should lower borrowing yields and thus increase velocity.

When the Treasury buying program was announced, it was assumed that the Fed had some ceiling on Treasury yields in mind. This was a logical conclusion, since classically the Fed operates with a target, and buys or sells Fed Funds to meet that target. Why not do the same with the Treasury market? Target the 10-year at 3%?

But 3% came and went. 3.25% came and went. 3.5% came and went. The market kept waiting for the Fed to increase its purchases, but their purchase amounts have been remarkably consistent. Almost as though their only goal was to get money into the system, and they didn't really care about where Treasury bonds actually traded.

Helicopter Ben is trying to do just that. Print money and pass it out. He's just using the Treasury market as his helicopter. He's not actually trying to push yields lower."