Wednesday, May 27, 2009

May 27 2009: All the prophets in history


Jack Delano Always up, never down January 1940
Long stairway in mill district of Pittsburgh, Pennsylvania


Ilargi: Although it's under threat of being swamped by tons and tons of rotting shoots, the most interesting number today, for me, probably comes from Dean Baker, who has this statement about US real estate:
Housing equity continues to be destroyed at the rate of $400 billion a month ....

What intrigues me about this, of course, is how it rhymes with Nouriel Roubini, Paul Kasriel, Henry Blodget plus a whole slew of anonymous economists hired by a spin bureau with great media access, who all came out today proclaiming recovery is here, or at least it'll be here before the end of the year. If US homeowners, who also double as consumers, and as such bear responsibility for over 70% of US GDP, lose $1333 per capita every month, or $15.996 per year, or $63.984 per nuclear family, where for all the mothers of all the prophets in history, or so I wonder, will that recovery originate?

Now, I know that man cannot live by home (or home-made bread) alone, that there is more to the economy than real estate and mortgages, but if on average a family needs to earn over $60.000 just in order to not fall even deeper into the debt trap, while at the same time every single month over 600.000 jobs are lost that are crucially needed to pay for just that play-even scenario, I’m starting to have some serious questions about that recovery. Come to think of it and while we’re at it, I also get serious doubts as to the reasons why these folks say these things to begin with. It makes no sense to me, that much is clear.

As far as I can see, the best thing that they can possibly envision, and that would still be greenshootingly delusional, is for houses to lose 10% per year instead of 15%, and for the US to shed 500.000 jobs instead of 600.000. It’s of course challenging at times to state the obvious in the face of all the oh-so-pretty predictions, but that’s fine, I just play the numbers in my head and hope to be wrong. After all, if I’m right, my own world will steeply degrade with everyone else's. But I'm not wrong, and all these voices are not right. I know, that means calling a lot of respected economists out as dulled drillbits, but so be it. The numbers don't lie. The government, the banks and the economists do.

Why are we still listening to these people? All they do is just erase from the field all considerations concerning anything serious. Economics is politics, and economists merely function to justify whatever political model they happen to serve in their respective nations and regimes.

We are in the middle of a crisis. Which has to do with money. And so we're all thrown into the hands of a bunch of people how pose as scientists, even though their field demonstrably fails in even the most basic requirements to be recognized as such. Economists cannot solve this crisis. First, they have no proven models, they only have theories that could fail as easily as they could succeed, and that's already handing them leeway. Second, and I return to what I've said many times before, this is not a financial or economical crisis, and neither should nor can therefore be solved by economists.

We are being eaten up alive by an all-out all-encompassing societal crisis. It's not about money. It's about you, and your families and friends, and ultimately about survival. Forget about recovery. You'll never get back to what you once had. And knowing that, accepting that, it's time to celebrate life as it will be, to make the best of what is, not of what was or could have been.

Smoking green shoots doesn’t seem to me to be the best way to do that. What we are in is not something we would ever have chosen, but here we are. And for once it's accurate to say that nothing will ever be the same. There's no way back, no recovery. And we're going to have the work the land real long and real hard before it rewards us with anything green.








U.S. MBA Mortgage Applications Index Fell 14 Percent Last Week
Mortgage applications in the U.S. declined last week, led by a plunge in refinancing as lending rates rose. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan dropped 14 percent to 786 in the week ended May 22, from 915.9 the week before. The group’s refinancing gauge plunged 19 percent, and the purchase measure rose 1 percent.

Refinancing likely slowed as the average rate on a 30-year fixed mortgage climbed to the highest level in more than two months. Still, borrowing costs near record lows and falling prices are making houses more affordable, stemming the almost four-year slide in sales and raising speculation the worst housing slump since the Great Depression may be ending. "We are seeing a leveling off in home sales," Michelle Meyer, an economist at Barclays Capital Inc. in New York, said before the report. "We’ve started to see evidence the refinancing boom has started to slow."

The mortgage bankers’ refinancing gauge decreased to 3,890.4 from 4,794.4 the previous week. The purchase index rose to 256.6 from 254. A report from the National Association of Realtors today at 10 a.m. in Washington may show sales of existing homes rose to an annual rate of 4.66 million in April from 4.57 million the prior month, according to economists surveyed by Bloomberg. Sales have hovered around 4.6 million since November, sparking forecasts that the slide than began in 2005 is ending. The share of applicants seeking to refinance loans fell to 69.3 percent of total applications last week from 73.6 percent.

The average rate on a 30-year fixed-rate loan rose to 4.81 percent from 4.69 percent the prior week. The rate was 4.61 percent in late March, the lowest level since the mortgage bankers group began records in 1990. At the current 30-year rate, monthly borrowing costs for each $100,000 of a loan would be about $525, or $71 less than the same week a year earlier, when the rate was 5.96 percent. The average rate on a 15-year fixed mortgage rose to 4.44 percent from 4.43 percent the prior week. The rate on a one-year adjustable mortgage climbed to 6.55 percent from 6.38 percent.

The Washington-based Mortgage Bankers Association’s loan survey, compiled every week, covers about half of all U.S. retail residential mortgage originations. Builders are still suffering as they have to lower prices to boost sales. Pulte Homes Inc. and Centex Corp., the homebuilders that plan to combine this year, both reported quarterly losses this month that exceeded analysts’ estimates. "The housing market remains turbulent," Centex Chief Executive Officer Timothy Eller said on a May 6 conference call with analysts. "There won’t be a lot of builders remaining."




US House Prices Continue to Sink Rapidly
The March Case-Shiller 20-city index showed that house prices are still falling at a very rapid pace. Prices fell by 2.2 percent in March, the fastest pace on record. They have been falling at a 22.8 percent annual rate over the last quarter, up from an 18.7 percent annual rate over the last year. The rate of house price decline through the first three months of 2009 is slightly faster than the rate assumed in the adverse scenario in the stress tests performed by the Fed on the country’s 19 largest banks.

Several of the usual suspects remain near the top of the list for rates of price decline, with prices in March falling by 3.7 percent in Las Vegas, 4.4 percent in Phoenix, and 4.6 percent in Detroit. However, some other former bubble markets are now jumping to the top in the rate of price decline. In Chicago prices declined 3.0 percent in March, in New York prices fell 2.3 percent, and in both Seattle and Portland prices dropped by 2.5 percent. The biggest loser in March was Minneapolis, where prices fell by 5.4 percent. None of these price declines appear to be anomalous. Over the last quarter, prices have fallen at a 34.7 percent annual rate in Chicago and a 19.2 percent annual rate in New York.

The downturn in the financial industry in New York should make it likely that this rate of price decline accelerates in future months. Prices in Seattle have fallen at a 23.3 percent rate in the last quarter, while they have fallen at a 21.8 percent rate in Portland. This compares to year-over-year declines of 16.4 percent and 15.3 percent, respectively. This acceleration should put to rest the view that these Northwest cities would somehow be immune to the housing downturn. Prices in Minneapolis have fallen at a 38.6 percent rate over the last quarter, up from a 23.3 percent decline over the last year.

While prices are falling nearly everywhere and for all segments of the housing market, the bottom tier continues to see the sharpest price declines in most markets. In San Francisco, prices for homes in the bottom third of the market fell in March by 4.6 percent, compared with a 2.5 percent drop for homes in the middle tier and a 3.5 percent drop for homes in the top third of the market. Prices in the bottom tier have been falling at a 41.3 percent annual rate through the last quarter.

Prices for homes in the bottom of the market in Miami fell by 7.9 percent in March, bringing their annual rate of decline to 48.0 percent over the quarter. In Phoenix, home prices in the bottom tier dropped by 9.4 percent in March, bringing the rate of price decline over the last quarter to 75.8 percent. The extraordinary rates of price decline in recent months have brought several of the bubble markets back to their pre-bubble levels. For example, in Phoenix, nominal house prices are just 36.8 percent above their level at the beginning of 1996, an increase only slightly higher than the inflation over this period. In Las Vegas the increase over this period has been just 32.2 percent.

On the other hand, some of the bubble markets likely still face substantial corrections. Prices in New York are 120.2 percent above their early 1996 level. In Boston the increase is 109.7 percent and in Seattle 106.1 percent. While some of this increase may reflect an increase in the relative attractiveness of these metropolitan areas, the run-up in house prices in all three markets hugely exceeds the increase in rents, suggesting that a substantial fall in house prices is likely.

From the standpoint of the economy as a whole, this is yet another piece of data contradicting the ‘green shoots of recovery’ story. Housing equity continues to be destroyed at the rate of $400 billion a month. This will further crimp consumption and guarantee that the record rate of foreclosures continues, as will the record rates of losses at banks.  




U.S. Home Sales Remain Sluggish as Supply Soars
Sales of previously owned homes picked up last month, an industry group reported on Wednesday, as buyers went looking for bargains and lower-priced houses. But there were more troubling notes in the housing figures. Home sales are still sluggish compared with a year ago, and the glut of unsold single-family homes, townhouses and condominiums swelled last month, suggesting that a sharp imbalance remains between the supply of housing and demand among potential buyers.

The median home price nationwide climbed slightly, to $170,200 in April from $169,900 in March, the group reported. Prices, however, were down from $201,300 in April a year ago. Across the country, existing home sales rose 2.9 percent in April from a month earlier but were down 3.5 percent from a year ago, the National Association of Realtors reported. Sales jumped 11.6 percent in the Northeast and were up modestly in the South and the West. Even as sales in some markets pick up, home prices are still bumping along the bottom.

Prices of single-family homes fell as fast as ever in March, according to figures released Tuesday by the closely watched Standard & Poor’s Case-Shiller Home Price Index. Home values in 20 major metropolitan areas fell 18.7 percent from a year earlier, an almost identicial drop to a month earlier. To some degree, the same factors dragging down home prices are the ones that have revived sales in some regions. Activity has picked up in some hard-hit markets where the foreclosure crisis is the most acute and housing prices have plunged the most.

In places like Florida, Phoenix and California’s Inland Empire, potential buyers are getting back into the housing market, enticed by low prices and some of the lowest mortgage rates in years. But economists and housing specialists worry that foreclosures will continue to grow, swamping the market, as unemployment rises and programs that temporarily halted foreclosures expire. "Because foreclosed properties will likely be released into the market over the rest of year, it is critical that distressed homes be quickly cleared from the market," Lawrence Yun, chief economist of the National Association of Realtors, said in a statement.




Signs of more trouble ahead for housing market
Warren Buffett and Alan Greenspan say the housing market is near bottom. Peppy real estate agents and gloomy stock-market traders alike eagerly embrace that supposition. Wall Street is so hungry for good news that stocks rallied at the barest hint of upbeat indicators several times this month. But an array of serious pending issues undercuts the turnaround theorists. To be sure, an end to the precipitous collapse that triggered a foreclosure avalanche and wiped out more than $6 trillion of home equity nationwide, not to mention setting off a worldwide economic collapse, would be something to celebrate. And several recent market barometers - diminishing inventory, increasing buyer competition, slowing price depreciation, rising builder confidence - lend credence to the idea that real estate could soon rebound.

A healthy housing market has a decent balance between supply and demand. While at a quick glance those components appear to be stabilizing, on closer look there are numerous factors that are likely to weaken demand and deluge the market with supply in coming months. On the demand side, the surge in joblessness, still-high home prices, the credit crunch and a dearth of move-up buyers cut into the pool of potential home buyers. On the supply side, an assortment of factors seems poised to trigger new waves of foreclosures that will continue to bloat inventory. They include the expiration of foreclosure moratoriums, more underwater "walk-away" homeowners, pending recasts of option ARM loans, rising delinquencies in prime and Alt-A loans, and soft sales of high-end homes. Here is a rundown of key problems that could continue to undercut real estate.

Demand still softens

  • Rising unemployment. It doesn't take an economist to realize people will not buy homes if they're worried they might lose their jobs.
    "Employment is crucially important," said Peter Morici, a professor at the University of Maryland business school. "We lost more than 600,000 private-sector jobs last month. That means the housing market is not going to turn up yet for a while." Unemployment also will spur supply. While the first wave of foreclosed-upon homeowners comprised people who could not afford their homes from the get-go, as more people lose their jobs, they are likely to lose their homes because they no longer have enough income to make the payments.
  • No "move-up" buyers. In a normal real estate market, about 80 percent of buyers are "moving up" or "moving across" - people who sell one home before buying another, said Mark Hanson, principal of Walnut Creek's the Field Check Group, a mortgage consultant. Remaining purchasers are split between first-time buyers and investors. In today's market, about half of buyers are first-timers and a third are investors, leaving just 15 percent of what he calls "organic" buyers. Those first-timers and investors all troll for bargain-basement foreclosures - leaving few buyers who are interested in the homes being sold by "Ma and Pa Homeowner." That, in turn, leaves Ma and Pa unable to move up to a nicer home. "The organic seller is left out in the cold," he said. It also could impact supply down the road, when all those pent-up sellers finally decide to put their homes on the market.
  • Tight credit.Even people who do want to buy a home can't necessarily find someone willing to give them a mortgage. The standards of 20 percent down payment; solid, provable income; and good credit are back in force. While that more-stringent underwriting represents a return to classic values that should avoid future delinquencies, it leaves quite a few potential borrowers out in the cold. Most notably, self-employed workers - even ones with high income, such as doctors - are finding a less-cordial reception from lenders.
  • Homes still overpriced. Home values have plunged nationwide. The authoritative Case-Shiller index shows prices nationwide at 158, down from a spring 2006 peak of 226. (That compares to a base value of 100 in January 2000.)

So that means homes are now affordable, right? Not so, say many analysts who believe prices are still wildly inflated compared to historic appreciation rates. From 1950 to 2000, home prices grew 4.4 percent a year, modestly outpacing inflation, said Andrew Schiff, a spokesman for Euro Pacific Capital in Connecticut. Following that metric, the Case-Shiller index should be at 132. "We're still way above where we should be in a normal market," he said.

Supply likely to surge

  • Foreclosure moratoriums end. Major lenders temporarily halted foreclosures late last year and early this year in anticipation of President Obama's housing rescue plan. In addition, California enacted a new law this fall that slowed down foreclosures. That means the foreclosure rate was artificially depressed over the past several months. The moratoriums have now expired. The net result is likely to be fresh batches of foreclosures from all those deferred troubled loans. California statistics illustrate the problem. According to research firm MDA DataQuick, mortgage default notices - the first step in the foreclosure process - hit record highs in the first quarter, implying that, within months, foreclosures will resurge.
  • Shadow inventory. Banks appear to be sitting on a vast inventory of homes that they have repossessed but not yet listed for sale. As previously reported in The Chronicle, this shadow foreclosure inventory could number in the hundreds of thousands nationwide. In addition, observers say banks appear to be deliberately delaying foreclosures, for example, not yet sending notices of default to homeowners who are months behind on their mortgages. All those properties eventually will have to hit the market, and, like all foreclosures, are likely to sell at cut-rate prices, driving down home values.
  • Walk-away underwater homeowners. The number of people who owe more than their home is worth continues to rise. Almost 22 percent of all mortgage holders were underwater by March, according to real estate site Zillow.com. That's spurring a phenomenon of "walk-away" homeowners - people who choose foreclosure because they don't want to pay off an upside-down asset. Matt Bording and Mangala Abeysinghe are an example. They have poured love and energy into their three-bedroom Richmond home; the garden alone is a work of art. Bording has a steady job as an ICU nurse, Abeysinghe, a nurse in her native Sri Lanka, should readily find work once she passes the U.S. licensing exam. They made a down payment and can afford their monthly payments.

    On paper, they sound like ideal borrowers. But as their home value plummeted, leaving them underwater by more than $200,000, they decided to walk away. They stopped paying their mortgage in October, and are still living in the home, although the lender sold it at a foreclosure auction last week. Bording described the decision as "a bit of brinkmanship and bravado, along with fear of being financially trapped. I'm wondering about the possibility of many more prime borrowers doing the same thing, causing some kind of ripple in the economy."
  • Loan modification shortfalls. Modifying borrower's mortgages to make them more affordable is a cornerstone of foreclosure prevention. But to date, most such efforts have simply deferred foreclosure, rather than providing a permanent fix. An authoritative study by the Comptroller of the Currency found that more than half of modified loans end up delinquent again within months. However, the study was done before the Obama administration's mortgage mod plan came into play. The jury is still out on how effective it will be at preventing foreclosures.
  • Option ARM, Alt-A time bombs. Two categories of loans used for higher-end homes are emerging as the next trouble spots, as foreclosure contagion spreads beyond subprime. Delinquencies are rising for Alt-A loans given to people with good credit who could not document their income. Meanwhile, millions of option ARMs, or adjustable rate mortgages in which borrowers can choose to start off making minimum payments that don't even cover the interest, are expected to start resetting next summer. At reset, borrowers suddenly must make sharply higher payments, which can trigger foreclosures.

    The underwater issue comes into play here, too: People who owe more than their home is worth find the door slammed shut on refinancing their way out of trouble. "Option ARM and Alt-A products will be the next big wave of foreclosures," said Jeffrey Taylor, a forensic accountant with Digital Risk LLC, which provides risk mitigation services for financial firms. "Many of those (borrowers) reached a little further than they should have. With the economy deteriorating, will those people be able to afford those houses?"
  • High end taking a hit. Until recently, most of the market activity and price drops have been among lower-cost homes. Homes under $350,000 have had the most severe price drops, while those above $750,000 have remained relatively stable. That appears to be changing, as foreclosure woes spread to the upper end. The difficulty of getting "jumbo" loans to buy pricey houses has exacerbated the situation to the point where unsold inventories of high-end homes are swelling. "The mid- to upper-end housing market is sitting on the exact precipice that the lower-end market was sitting on in early 2008," Hanson said.




Is Your Home A Good Investment?
There's the usual talk about what the latest Case-Shiller house price data mean for the next short term move in the real estate market. Has housing bottomed? If not, has the rate of decline slowed? And when will we see an upturn? Human nature likes the short term. Which is why so little attention is paid to something that is probably more important, if less urgent: What the latest data show about the long-term of the real estate market. And it's startling. We have just been through the biggest boom in real estate in American history. The subsequent bust surely hasn't finished.

Yet look at the numbers. Since 1987, when the Case-Shiller index of 10 major cities begins, it's risen from an index value of 63 to 151. Annual return: Just 4.1% a year. During that period, according to the Bureau of Labor Statistics, consumer prices rose by 3% a year. Net result: Home prices produced a real return of just 1.15% a year over inflation over that time. Critics may point out that the analysis is unfair -- after all, it starts counting near the peak of the 1980s housing boom. Fair enough. Look at the performance since, say, early 1994, when home prices were near a historic trough. Surely someone who bought then has made a bundle.

Not necessarily. Since then the ten-city index has risen from a value of 76 to 151. Annual return: 4.7%. Inflation over that period: 2.5%. That's still only a real return of 2.2% a year above inflation. You can often do better on long-term inflation protected government bonds. And real estate often costs 2% or more a year in property taxes, condo fees, maintenance, insurance and the like. Conventional wisdom long held that home ownership was a route to wealth, and the imputed rent -- in other words, the right to live in your home -- was just part of the value you got from it.

Under that widespread view, the recent housing bust was simply a temporary, though deep, pothole. Yet for very many people, even over the past 15 or 20 years, the imputed rent may have been all, or nearly all, the real value they actually got from their home. Yes, it's only recent data. And it's only ten cities. But there's some reason to suspect these numbers may, if anything, flatter real estate performance. After all, it's hard to look at the data and figure the bust is now over. And if they fall further, those long-term return figures will fall too.

Prices weren't just down 19% over the past year. They fell 2% just between February and March. And it's not the worst-hit markets that worry me the most -- Phoenix is down 53% from its peak, Miami 47%. That smells of capitulation. It's the other markets. New York and Boston are only down 20%. Denver's only down 14%. Overall the ten- and 20-city Case-Shiller indices are merely back to mid-2003 levels. After the biggest boom and bust on record, history suggests things don't stop getting worse until they've gotten a lot worse than that.




Strange but true - the credit specs are back
With all this reflationary work by the central banks and governments, don't you wonder what the new cash is buying? Know anyone who's getting a new Porsche? Suezmax tanker? Damien Hirst pickled shark? Semiconductor test equipment? Didn't think so. Neither do I. But the cash is going somewhere, such as into credit and credit derivative speculation. A few months ago, you might not have expected to see those words again, outside congressional or parliamentary hearing transcripts. But that's what's been going on since March.

The credit specs are back. After all, if the dictates of style and tax auditors say you have to go easy on conspicuous consumption, and if there's no demand for the products of real capital spending, then you might as well take your cash to the track, or the corner credit default swap dealer. Credit hedge fund managers, and even the banks' own desks, have uncoiled themselves from their foetal positions, and are back taking advantage of what are either risk-free arbitrages or value traps, depending on how the next few months go. If I were them, I might be taking the money made in the past two and a half months off the table. But then I don't have to be reaching to get past a high-water mark.

"I am totally mystified by this rally," says one friend of mine in the credit fund trade. He's made money on both the downside and the upside during the past year, and generally isn't at a loss to describe the parallelogram of forces, as they say in classical mechanics. "Look, the system has taken out some of its financial leverage, but the economy still has too much excess capacity that will have to be dealt with. If we sit in the muck for five years [low growth], then there will be a tremendous number of defaults." That isn't being priced in to credit spreads. Even after they've been reviled by talking heads and politicians from here to Ulan Bator, credit default swaps are still a very low-cost way of putting on speculative positions, as long as they still trade. And so, thanks to the Geithner Treasury's policy of reform, rather than dissolution, CDS trading has regained a vampiric strength the real economy still lacks.

Some specific credit sectors have done particularly well, such as retailers and chemicals. "They are just too expensive," says a German volatility trader. "JC Penney has gone from 800 or 900 over [the swaps curve] in the five year down to 190 to 200. That shows not [only] short covering, but [also] people jumping in after that." The consumer-dependent retailers and cyclicals such as the chemical companies still have issues with real-world demand, but the credit market people only see them as sources of cheap beta. For now. The intrinsic leverage of CDS trades makes it possible to hope the portfolio manager might actually get paid a bonus some day.

For five-year CDS on credits such as those back-from-the-dead names every basis point on a $10m position can be worth $3,500 to $4,000. Apart from going outright long "cheap" credit, there are, once again, fun games such as the "negative basis trades". That is, you can own a corporate bond, or emerging market sovereign bond, buy default protection on the paper with CDS, and collect interest payments for taking no risk. That's right: because CDS prices are depressed, relative to the comparable bonds, you can collect money for taking no risk. A couple of years ago, someone might have said there was a risk that a CDS counterparty, such as, hypothetically, AIG, might get into trouble, and you would be unable to count on that leg of the trade. Then a risk-free arbitrage could turn into a money trap.

But thanks to Hank Paulson, Tim Geithner, and the rest of Team USA, that risk is no longer seen to be a problem. So you can now collect a couple of hundred basis points of risk-free money, as long as you have a line of credit with a dealer. You may not be able to use credit markets to make reliably secured loans to auto companies, but the system can be used to collect more than 100 basis points of fully credit risk-hedged income from 10-year Turkish state bonds. To be sure, not everyone has the nerve for this sort of game, risk free or not. The big problem is that while you don't have credit risk, or, thanks to the taxpayers, counterparty risk, you do fatten up the balance sheet in the process.

As a recent Barclays Capital publication put it: "Some banks are still holding back on bond financing in order to shrink their balance sheets in advance of Q2 reporting, but interestingly, some hedge funds that still have cash are taking their places, seduced by rates of nearly 2 per cent over Libor and the ability to manage counterparty risk through tri-party repo arrangements." In a perfect - or even a functional - world, the Law of One Price would prevent such fat arbitrages from opening up. Until that day arrives we have to make do with what's at hand: Steve Rattner to run the auto industry, and negative basis trades for credit portfolios.




Quantitative Easing Fail Revisited
Treasury yields have surged since the Fed officially began their quantitative easing program in the middle of March. Of course, the U.S. government believes they can eliminate a debt problem by creating more debt (brilliant, huh?). They’re seeing the direct effects of their money printing strategy as investors around the globe pile out of U.S. treasuries as a result of the U.S. government’s total disregard for its own currency. 

We’ve been saying it for a year - you can’t solve a debt crisis with more debt. Consumer debt based de-leveraging recessions aren’t your average recessions that can be solved with lower rates and a printing press. The Obama administration is playing a very dangerous game of chicken here with the bond market. I doubt the bond market will lose - as it rarely does. Stocks are tanking as yields soar and commodity prices jump. Exactly what global consumers need: higher raw material prices, stagnant wages and more expensive money. 






Mortgage-Bond Yields Jump, Jeopardizing Fed’s Housing Effort
Yields on Fannie Mae and Freddie Mac mortgage bonds rose for a fourth day, after exceeding for the first time yesterday their levels before the Federal Reserve announced it would expand purchases to drive down loan rates. Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds climbed to 4.55 percent as of 3:15 p.m. in New York, the highest since Dec. 5 and up from 3.94 percent on May 20, data compiled by Bloomberg show.

Rising mortgage-bond yields, driven higher in part by climbing Treasury rates, means the Fed now "faces a challenge to its ability to sustain low mortgage rates," according to Jeffrey Rosenberg at Bank of America Corp. The Fed, seeking to use lower home-loan rates to stem the housing slump and bolster consumers, said March 18 it would increase its planned purchases of so-called agency mortgage bonds by $750 billion, to as much as $1.25 trillion, and start buying government notes. "Market participants may be asking themselves the same question as Scorpio in ‘Dirty Harry’: ‘Do I feel lucky?’ " Rosenberg, the bank’s head of credit strategy research in New York, wrote in a report yesterday, referring to a character in the 1971 Clint Eastwood film who may be shot.

Crashing U.S. home prices have fueled the first global recession since World War II. The Fed, led by Chairman Ben S. Bernanke, may need to again adjust its mortgage-bond buying, after initially announcing the program in November, or boost its purchases of Treasuries, Rosenberg said. Home prices in 20 major metropolitan areas fell more than forecast in March, declining 18.7 percent from a year earlier, according to an S&P/Case Shiller index released yesterday.

As rising Treasury yields sparked speculation that higher mortgage rates would extend the average lives of home-loan bonds by reducing the pace of refinancing, holders of the bonds, lenders and servicers began seeking to shorten the durations of holdings to make up for the effect, according to Mahesh Swaminathan, a mortgage-bond analyst in New York at Credit Suisse Group. Their actions last week started causing interest-rate swap spreads to widen, as they sought to use those contracts to lessen their durations, "a canary in the coal mine pointing to the extension pressures building up," Swaminathan said in a telephone interview.

Today, they are driving mortgage and government bonds lower, with the Treasury market, which "started the process, now sort of being taken for a ride," exacerbating the situation, he said. The average rate on a typical 30-year fixed mortgage was 4.82 percent in the week ended May 21, according to a survey by McLean, Virginia-based Freddie Mac. Rates are down from 6.46 percent in late October, and up from a record low of 4.78 percent in the first and last weeks of April.

Yields on agency mortgage bonds are now guiding rates on almost all new U.S. home lending following the collapse of the non-agency market in 2007 and retreats by banks. The almost $5 trillion market includes securities guaranteed by government- controlled Fannie Mae and Freddie Mac and bonds of government- backed loans guaranteed by federal agency Ginnie Mae. "Capacity constraints" at lenders dealing with increased mortgage applications since December have caused the rates offered to borrowers to be higher in relationship to the bonds yields than in the past, according to Bank of America and Credit Suisse analysts. That suggests loan rates may not initially rise as yields do.

Yields on benchmark 10-year Treasuries climbed to 3.72 percent today, a six-month high, from 2.54 percent on March 18 and a low this month of 3.09 percent on May 14. Treasuries are slumping amid concern that record bond sales will overwhelm demand as U.S. bailout and stimulus spending stems deflation while adding to the nation’s debt burden, and as the economy shows signs of stabilizing. The difference between yields on Fannie Mae’s current- coupon 30-year fixed-rate mortgage bonds and 10-year Treasuries narrowed to 0.92 percentage point today, from as high as 2.38 percentage points in March 2008, according to Bloomberg data.

The Fed’s purchases drove the spread to 0.70 percentage point, the lowest since 1992, on May 22. The yield gap jumped from 0.71 percentage point yesterday. "Many investors who felt MBS spreads were too tight thought it might be time to take chips off the table," Credit Suisse’s Swaminathan said. "This is something we anticipated would build up" as many mortgage-bond holders who were previously wary of lightening their positions on the view the Fed buying would continue to support the market finally decided to act.

The so-called option-adjusted spread to interest-rate swaps yesterday was negative 0.16 percentage point, the lowest since March 2007 and a level suggesting an investor borrowing funds at the London interbank offered rate to buy the Fannie Mae mortgage securities would lose money, according to Bloomberg data. That spread reached as high as 1.06 percentage points in October, and jumped to positive 0.01 percentage point today.

Mortgage servicers also were dumping the securities because "once rates backed up, they needed to shed duration," Art Frank, the head of mortgage-bond research at Deutsche Bank AG in New York, said in a telephone interview. "Today, the volume really came out because we crossed what apparently many of them thought was an important threshold" in terms of rates. Servicers, who handle billing and collections, have contracts whose expected lives extend when the odds of refinancing drop.

Bloomberg current-coupon indexes represent the yields for hypothetical mortgage bonds trading at roughly face value. The levels are typically based on calculations derived from yields on the two groups trading just above and below par because of the size of their coupons, into which lenders typically package new loans. A swap rate is the fixed yield paid in return for floating- rate payments linked to short-term interest rates, through a derivative contract called a swap. Swap spreads are the difference between those yields and Treasury rates.




U.S. 'Problem' Banks Rise to 15-Year High, FDIC Says
U.S. "problem" banks climbed 21 percent to the highest total in 15 years in the first quarter as provisions set aside for loan losses weighed on earnings, the Federal Deposit Insurance Corp. said. The FDIC classified 305 banks as "problem" and their total assets rose 38 percent to $220 billion, the highest since 1993, the agency said without identifying any lender. The FDIC said its insurance fund slumped 25 percent to the lowest level in 15 years. "The banking industry still faces tremendous challenges," FDIC Chairman Sheila Bair said today at a briefing in Washington. "Asset quality remains a major concern."

Regulators have taken over 36 lenders this year, including BankUnited Financial Corp. in Florida on May 21 and Silverton Bank of Atlanta on May 1, which combined cost the FDIC’s deposit insurance fund $6.2 billion. Twenty-one banks collapsed in the quarter, the most since late 1992, as the pace of failures accelerated amid the worst crisis since the Great Depression. Bair today said the agency is "actively working" on guidelines to encourage private-equity firms to bid for failed banks, after BankUnited was bought May 21 by a group including WL Ross & Co. and Carlyle Group. The FDIC sold IndyMac Bank in January to investors led by Steven Mnuchin, a former executive at Goldman Sachs Group Inc., and buyout firm J.C. Flowers & Co.

"I am comfortable with the transactions we’ve done so far, but I think we need to have some guidelines," Bair said. Funds set aside by banks to cover loan losses rose 64 percent to $60.9 billion in the first quarter from $37.2 billion in the year-earlier quarter. Bair said 97 percent of banks were "well-capitalized" at the end of the first quarter. "Banks are taking prudent actions to set aside reserves and build more capital because they know they need to be prepared for problems over the next couple of quarters," said James Chessen, chief economist for the American Bankers Association in Washington.

The insurance fund, generated by fees paid by banks, fell to $13 billion from $17.3 billion in the previous quarter, and failures in the quarter cost the fund $2.2 billion, the FDIC said. The FDIC imposed an emergency fee to raise $5.6 billion to rebuild the fund, with more assessments possible this year. The agency forecasts failures will cost $70 billion through 2013. JPMorgan Chase & Co. today estimated it will pay $700 million to $750 million as its share of the FDIC one-time assessment. Banks classified as "problem" based on measures including asset quality, earnings and liquidity accounted for 1.62 percent of total assets, up from 1.14 percent in the fourth quarter.

Regulators rate banks on a scale, with 1 being the highest and 5 the lowest. A bank rated 4 or 5 is classified as a "problem." FDIC-insured banks had net income of $7.6 billion in the first quarter compared with a $36.9 billion loss in the fourth as trading revenue at larger banks increased. The FDIC said 22 percent of U.S. banks had a net loss and 59 percent reported lower net income compared with a year earlier. Industry earnings were the highest in four quarters, the FDIC said. Citigroup Inc. reported a $1.6 billion first quarter profit on April 17 after five consecutive quarterly losses. JPMorgan, Goldman Sachs Group Inc., and Wells Fargo & Co. also beat analysts’ expectations with quarterly gains.

Bank capital rose by $82.1 billion, the biggest three-month gain since the third quarter of 2004, with most of the increase coming from a "relatively small" number of lenders including recipients of U.S. aid, the FDIC said. "The good news is that banks have been able to raise a lot of new capital even before taking a more aggressive steps to cleanse their balance sheets," Bair said. The agency said of 3,603 banks that paid dividends in the first quarter, two thirds cut the rate in the current quarter and 995 eliminated the payout. The FDIC insures deposits at 8,246 institutions with $13.5 trillion in assets. The agency reimburses customers for deposits of as much as $250,000 when a bank fails.




Yes, We Are Now Giving Free Money to GM
Some extraordinary things are happening in the bailout of General Motors. Too bad everyone is too numb to notice. Consider this extraordinary fact: The U.S. government is likely putting up to $50 billion in new money to back the company’s bankruptcy reorganization, according to people familiar with the plan. Most of this is what is known as a "debtor-in-possession" financing made to companies in bankruptcy protection. The sum is also expected to include $6 billion to buyout GM’s secured lenders and another $7.6 billion requested by GM last week to fund ongoing operations. It’s clear that a large portion of this amount will be secured with the equity of the "new GM." Why is the government likely to get equity and not, say, debt with interest and a repayment schedule?

Because too much debt would apparently make the company unviable. It’s as if the government has devised an SAT exam for GM, and is blatantly funneling the company the answers. Okay, fine. So what will this equity be worth? That’s anyone’s guess. By the logic of some of the people who know the company best – its own unionized workforce – the bet is that it won’t be worth much.
Remember that the union just agreed to take a relatively small portion of its health-care trust in GM equity. The rest will be funded via annual payments on preferred stock. In other words, UAW’s view of the future is clear: Cash today over equity value tomorrow. That comes on top of another $20 billion of existing loans that the government is likely to wipe out as part of the bankruptcy plan.

Put it all together and the government will own an extraordinary 70% of the company. And a large portion of that will have an uncertain value for an uncertain length of time. President Obama may believe this is necessary to save the industry. But it’s the kind of salvation that only comes with a printing press. What began as a temporary "bridge loan" has become a free-money bonanza with no historic precedent.




Billions in new cuts loom for California — including eliminating welfare and closing most state parks
Faced with a ballooning deficit and a clear signal that voters won't pay more to fix it, California Gov. Arnold Schwarzenegger released a budget plan Tuesday that would eliminate welfare, drop 1 million poor children from health insurance, cut off new grants for college students and shut down 80 percent of state parks. In a state that long has prided itself on its social safety net, it could well go down in history as the most drastic reduction in social programs ever. And billions in further cuts will be unveiled later this week. The governor's proposal to whack an additional $5.5 billion from state programs stunned even longtime Capitol-watchers with its blunt force.

Ending cash assistance for 1.3 million impoverished state residents, for example, would make California the only state with no welfare program. "Every single first-world nation has a safety net program for children," said Will Lightbourne, Santa Clara County's social services director. "This would return us to the era of Dickens — you'd have to go back to the 19th century to find a comparable proposal." The governor's office reiterated that the cuts were painful but unavoidable, with the proposed budget for the 2009-10 fiscal year already outdated before lawmakers even begin debate.

Schwarzenegger's finance team now says the deficit will grow to $24.3 billion by July 1, up from the previous $21.3 billion projected shortfall. "The scope and the severity of this recession have forced us to put options on the table that would have been unthinkable just a few short months ago," said H.D. Palmer, the state's deputy director of finance. Schwarzenegger had warned before last week's special election that if voters did not approve a host of tax and budget-reform measures, stunning cuts to social services, education and other vital state programs would be necessary. So, in the wake of the resounding "no" that came from a disillusioned electorate, he has held true to his promise and then some:
  • The budget proposal would eliminate vast swaths of programs, including CalWORKs — the welfare program serving more than 521,000 families who now receive $526 average monthly grants — and Healthy Families, which subsidizes health care for low-income children whose families don't qualify for Medi-Cal. Those cuts would also cost the state billions in federal matching funds.
  • Medi-Cal coverage for dialysis and for breast and cervical cancer treatment for those over age 65 would be cut. Undocumented immigrants would lose nonemergency health care.
  • In the prisons, rehabilitation, education and vocational programs would be hacked. So would the sentences of nonviolent, non-serious offenders, who would go free a year early.
  • More than 200,000 college-bound students would lose some or all of their tuition assistance under the Cal Grant program. New grants for students to attend college would be eliminated, and existing grants would be reduced. All of that would come on top of $335 million in cuts for the University of California and California State University systems — which already have seen $415 million in cuts this year, forcing student fee increases.
  • Surprisingly spared the ax — so far, anyway — were the state's battered K-12 schools. Though they represent California's single biggest budget expense, the governor proposed no new cuts Tuesday.

But the depth of the proposal had some analysts calling it a political stunt to jar bickering legislators, and still others saying nothing would surprise them in these recessionary times of record unemployment. Lauren Asher, acting president of the nonprofit Institute for College Access & Success in Berkeley, said eliminating tens of millions in financial aid would reduce students' tuition assistance by up to $9,708 apiece. At least 118,000 students would lose their entire grants, she said, adding that "the proposed cuts will wreak havoc with college plans for this fall."

The governor's budget also proposes massive and historic cuts to California's system of 279 state parks, from Big Basin Redwoods in the Santa Cruz Mountains to the Malibu beaches. Schwarzenegger has proposed cutting general fund money to parks in half this year and eliminating it entirely next year — cuts on a scale that have never been imposed on the state parks system since it began in earnest in the 1920s. "Absolutely, we will have to close parks. The question is how many," said Roy Stearns, a spokesman for the state parks department in Sacramento.

While Schwarzenegger and Republican legislators have made clear new taxes or fees are off the table, Assembly budget committee Chairwoman Noreen Evans — embodying Democratic reaction to the Republican governor's proposal — vowed to push for new revenue measures such as taxes on soda or oil production as alternatives to more spending cuts. "I will look under every rock and every leaf," the Santa Rosa Democrat said, "so that we can make sure women and children are fed and their medical needs are taken care of."




Green shoots or yellow weeds?
by Nouriel Roubini

Recent data suggest that the rate of contraction in the world economy may be slowing. But hopes that "green shoots" of recovery may be springing up have been dashed by plenty of yellow weeds. The numbers on employment, retail sales, industrial production and housing in the United States remain extremely weak; Europe's first-quarter gross domestic product figures are dismal; Japan's economy is still comatose; and even China - which is recovering - has very weak exports. Thus, the view that the global economy will soon bottom out has proved - once again - to be overly optimistic.

After the collapse of Lehman Brothers in September, 2008, the global financial system nearly melted down and the world economy went into free fall. Indeed, the rate of economic contraction in the fourth quarter of 2008 and the first quarter of 2009 reached near-depression levels. At that point, global policy-makers got religion and started to use most of the weapons in their arsenal: vast fiscal-policy easing; conventional and unconventional monetary expansion; trillions of dollars in liquidity support, recapitalization, guarantees and insurance to stem the liquidity and credit crunch; and, finally, massive support to emerging-market economies. In the past two months, one can count more than 150 different policy interventions around the world.

This policy equivalent of former U.S. secretary of state Colin Powell's doctrine of "overwhelming force," together with the sharp contraction of output below final demand for goods and services (which drew down inventories of unsold goods), sets the stage for most economies to bottom out early next year. Even so, the optimists who spoke last year of a soft landing or a mild "V-shaped" eight-month recession were proved wrong, while those who argued that this would be a longer and more severe "U-shaped" 24-month recession - the U.S. downturn is already in its 18th month - were correct. And the recent optimism that economies will bottom out by midyear have been dashed by the most recent economic data.

The crucial issue, however, is not when the global economy will bottom out, but whether the global recovery - whenever it comes - will be robust or weak over the medium term. One cannot rule out a couple of quarters of sharp GDP growth as the inventory cycle and the massive policy boost lead to a short-term revival. But those tentative green shoots that we hear so much about these days may well be overrun by yellow weeds even in the medium term, heralding a weak global recovery over the next two years.

First, employment is still falling sharply in the U.S. and other countries. Indeed, in advanced economies, the unemployment rate will be above 10 per cent by 2010. This will be bad news for consumption and the size of bank losses.

Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not really started, because private losses and debts of households, financial institutions and even corporations are not being reduced, but rather socialized and put on government balance sheets. A lack of deleveraging will limit the ability of banks to lend, households to spend and firms to invest.

Third, in countries running current-account deficits, consumers need to cut spending and save much more for many years. Shopped out, savings-less and debt-burdened consumers have been hit by a wealth shock (falling home prices and stock markets), rising debt-service ratios and falling incomes and employment.

Fourth, the financial system - despite the policy backstop - is severely damaged. Most of the shadow banking system has disappeared, and traditional commercial banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalized. So the credit crunch will not ease quickly.

Fifth, weak profitability, owing to high debts and default risk, low economic - and thus revenue - growth, and persistent deflationary pressure on companies' margins, will continue to constrain firms' willingness to produce, hire workers and invest.

Sixth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending and even lead to sovereign refinancing risk.

Seventh, monetization of fiscal deficits is not inflationary in the short run, whereas slack product and labour markets imply massive deflationary forces. But if central banks don't find a clear exit strategy from policies that double or triple the monetary base, eventually either goods-price inflation or another dangerous asset and credit bubble (or both) will ensue. Some recent rises in the prices of equities, commodities and other risky assets are liquidity-driven.

Eighth, some emerging-market economies with weaker economic fundamentals may not be able to avoid a severe financial crisis, despite massive support from the International Monetary Fund.

Finally, the reduction of global imbalances implies that the current-account deficits of profligate economies (the U.S. and other Anglo-Saxon countries) will narrow the current-account surpluses of over-saving countries (China and other emerging markets, Germany, and Japan).

But if domestic demand does not grow fast enough in surplus countries, the resulting lack of global demand relative to supply - or, equivalently, the excess of global savings relative to investment spending - will lead to a weaker recovery in global growth, with most economies expanding far more slowly than their potential. So green shoots of stabilization may be replaced by yellow weeds of stagnation if several medium-term factors constrain the global economy's ability to return to sustained growth. Unless these structural weaknesses are resolved, the global economy may grow in 2010-11, but at an anemic rate.




Even Roubini Now Sees Green Shoots!
When last we checked in with the good Dr. Doom, Nouriel Roubini, he was seeing light at the end of the tunnel.  But he was still dismissing the happy idea that recovery would begin in 2009. Well, Dr. D still thinks that the recovery will be weaker than expected, but now he sees it beginning in Q4. Maybe these green-shoot things aren't a dream, after all.  Or maybe this sucker's rally has been so persuasive that even Roubini has been fooled. (Based on the debt overhang and housing market, Roubini's argument that the recovery will be disappointing still seems persuasive).
Reuters:- Economist Nouriel Roubini on Wednesday said the end of the global recession is likely to occur at the end of the year rather than the middle, and that U.S. growth will remain below potential afterwards. "We are not yet at the bottom of the U.S. and the global recession," said Roubini. "The contraction is still occurring and the recession is going to be over more towards the end of the year rather than in the middle of the year." "There is still too much optimism that a recovery is just around the corner," said Roubini, a professor at New York University's Stern School of Business and chairman of RGE Monitor, an independent economic research firm.

Roubini, who is widely credited for predicting the current economic turmoil, was speaking at the Seoul Digital Forum. "A more sober analysis suggests we're closer to the bottom; there is light at the end of the tunnel, but it's going to take a while longer, and the recovery is going to be weaker than otherwise expected." Once the recession ends, "U.S. economic growth is going to be below potential for at least two years," he said, amid multiple imbalances in the housing sector and the financial system, and the rise of public debt. Roubini said the outlook for Asia was more positive than for Europe, Japan and the United States, thanks to stronger fundamentals.

"The latest economic indicators from Korea ... suggest there is the beginning of an economic recovery, and growth might be already positive in the second quarter." The downside risk, Roubini said, was if advanced countries did not recover fast enough and if China's rate of growth started to slow again. Roubini predicted China would post a 6 percent growth rate this year, a "hard landing" considering it grew by 10 percent for a decade. A robust recovery in Korean, China and other countries in the region would depend upon relying less on external demand and export-led growth and relying more on domestic growth, he said.




Ilargi: Henry Blodget posts comments on what Paul Kasreil sees these days: recovery in 6 months. He includes a lot of graphs that are supposed to offer proof, but ends with three that prove the opposite. Those are the only ones I think are relevant. Feel free to call me biased. Feel free to view the others as well. As always, click the headline to go to the original.

The Worst Is Over For The Economy
Paul Kasriel and Asha Bangalore of Northern Trust have done exceptional work on the economy in recent years. They were early in calling the recession, and they have now been early in calling the recovery.  Paul and Asha's latest reports argue that the worst is over and that we'll see a weak recovery by the end of the year. The stimulus is kicking in and the housing, manufacturing, employment, and consumer-spending trends are beginning to improve (which in some cases means "decline less"). Bank lending is loosening, finally, and spreads are returning to normal.  But the plunge in household net worth relative to debt will likely keep a lid on spending and growth for at least the next year. You can download Paul and Asha's reports here.  Here are some highlights:
  • Real GDP contracted at annualized rates of 6.3% and 6.1%, respectively in Q4:2008 and Q1:2009. These rates of contraction would appear to be the largest that are likely to occur before real economic growth commences in Q4:2009.
  • After having contracted in the second half of 2008, real personal consumption expenditures grew at an annual rate of 2.2% in Q1:2009. Although we expect that real consumption will resume its contraction in the second and third quarters of this year before posting growth again in the fourth quarter, the worst seems to be over for consumer spending.

Unfortunately, household net worth has been clobbered, and debt as a percentage of assets has hit an all-time high. This will keep a lid on spending and, likely, lead to a weak recovery:











Ilargi: "..NABE® is an association of professionals who have an interest in business economics and who want to use the latest economic data and trends to enhance their ability to make sound business decisions. There are approximately 2,500 members representing more than 1,500 businesses and other organizations from around the world. Since its founding in 1959, NABE® has continued to attract the attention of the most influential and prestigious economic leaders in business. Past Presidents have included several former Federal Reserve Governors, the former Chairman of the Board of Governors for the Federal Reserve System, Alan Greenspan, and other senior business leaders. NABE's mission is to provide leadership in the use and understanding of economics.."

Most Economists Predict Recession Will End In '09
More than 90 percent of economists predict the recession will end this year, although the recovery is likely to be bumpy. That assessment came from leading forecasters in a survey by the National Association for Business Economics to be released Wednesday. It is generally in line with the outlook from Federal Reserve Chairman Ben Bernanke and his colleagues. About 74 percent of the forecasters expect the recession _ which started in December 2007 and is the longest since World War II _ to end in the third quarter. Another 19 percent predict the turning point will come in the final three months of this year, and the remaining 7 percent believe the recession will end in the first quarter of 2010.

"While the overall tone remains soft, there are emerging signs that the economy is stabilizing," said NABE president Chris Varvares, head of Macroeconomic Advisers. "The economic recovery is likely to be considerably more moderate than those typically experienced following steep declines." One of the major forces that plunged the economy into a recession was the financial crisis that struck with force last fall and was the worst since the 1930s. Economists say recoveries after financial crises tend to be slower. Against that backdrop, unemployment will climb this year even if the economy is rebounding, the NABE forecasters predict.

Companies won't be in a rush to hire until they feel certain any recovery is firmly rooted. For all of this year, the forecasters said the unemployment rate should average 9.1 percent, a big jump from 5.8 percent last year and up from its current quarter-century peak of 8.9 percent. If NABE forecasters are right, it would be the highest since a 9.6 percent rate in 1983, when the country was struggling to recover from a severe recession. Some forecasters thought the unemployment rate could rise as high as 10.7 percent in the second quarter of next year. The NABE outlook from 45 economists was conducted April 27 through May 11.




Drop In Energy Investment Will Keep 1.6 Billion People Without Electricity
Across the board energy investment will decline severly in 2009, as the recession takes its toll. In the short term it doesn't matter as energy demand is slumping. In the coming years, though, the IEA says it "will have far-reaching and, depending on how governments respond, potentially grave effects on energy security, climate change and energy poverty."
Declines in investment across industries for 2009:
  • Global upstream oil and gas investment budgets down at least 21%
  • Renewables down 38%
  • Coal down 40%

Effects of the decline:
  • "A real danger" that we will have a shortage of energy capacity in the coming years.
  • For now, emissions drop, but once economy starts again, the gains will be wiped out, as more emissions are produced.
  • The concern about the recession could wreck any chance of a comprehensive global energy plan being implemented.
  • 1.6 billion people in sub-Saharan Africa and southern Asia don't have electricity. This number might grow due to the recession.
    • From the report: The crisis is also holding back progress in expanding access to electricity among the poor, as the financial crisis and falling cash flow is stymieing theability of utilities to fund investment in expanding networks. The governments of many emerging economies are facing serious difficulties in raising the funds they need to curb the effects of the downturn, with the implementation of energy-poverty alleviation programmes encountering delays in many cases.

      Africa, in particular, is already experiencing powershortages and this situation will worsen if investment in networks and new power generation capacity is reduced. The crisis is also expected to slow rural-to-urban migration and force someworkers to return to their villages, which often lack access to modern energy services. At present, roughly 2.4 billion people still rely on traditional fuels for their basic cooking andheating needs.

IEA recommendations:
  •  A "Clean New Deal" that increases investment in energy efficiency and clean tech by a factor of four, sustained for many years.










Energy Demand Will Rise 44% By 2030
It's a two-fer Wednesday on the international energy outlook front. Lucky us! First we got the IEA's horrifying report about the consequences of the recession on the energy sector. Now we get the EIA's report, which says the world's energy demands are set to soar in the next 21 years, with developing countries leading the way.



Here's the highlights of the report:
  • Energy demand will rise 44% by 2030, with 70% of the demand increase coming from developing countries.
  • Oil will go to $110 per barrel in 2015 and $130 per barrel in 2030.
  • World renewable energy use for electricity goes from 19% in 2015, to 21% in 2030.
  • CO2 emissions will rise 39% unless new policies like cap and trade are implemented.




Here's more minute, but interesting details:
  • World net electricity generation increases by 77%, from 18.0 trillion kilowatthours in 2006 to 23.2 trillion kilowatthours in 2015 and 31.8 trillion kilowatthours in 2030.
  • World coal consumption is projected to increase from 127 quadrillion Btu in 2006 to 190 quadrillion Btu in 2030, an average annual rate of 1.7 percent.
  • Electricity generation from nuclear power is projected to increase from about 2.7 trillion kilowatthours in 2006 to 3.8 trillion kilowatthours in 2030, as concerns about rising fossil fuel prices, energy security, and greenhouse gas emissions support the development of new nuclear generation capacity.
  • Major urban areas in the non-OECD nations are expected to address transportation congestion and strains on infrastructure with a variety of solutions, including development of mass transit (bus and/or rail) and urban design that reduces vehicle-miles traveled, among other improvements in transportation networks




Ilargi: Oil prices are set for a free fall. The timing is the only thing that's still a little uncertain.

OPEC's New Ally an Old Foe
When oil spiked in 2008, OPEC joined others in blaming speculators. These days, the group offers them encouragement. Ahead of this week's meeting of the Organization of Petroleum Exporting Countries, Saudi Arabian Oil Minister Ali al-Naimi warns that the fall in energy prices since 2008 could reduce investment in new supply, prompting another triple-digit price increase. With oil inventories high, OPEC normally would cut output quotas. Having made big cuts already, though, there is a risk of overplaying that card. Combined with the fall in crude prices, lower output could push cartel members' oil revenue down an estimated 55% this year compared with 2008. Output rose in April, suggesting discipline is cracking.

Luckily for OPEC, it has a helping hand. In the recent market rally, investors have targeted commodities as a hedge against the risk of inflation. Investment dollars bid up the price of futures relative to spot prices. This premium makes it profitable to store physical barrels and sell them forward, hence high inventories. "Fundamentally" negative demand and inventories data should be killing spot oil prices. Instead, expectations of inflation and lower investment in new supply prop them up. It is a risky bet. OPEC's spare capacity is rising and economic recovery is likely to be slow, hence the need for cheap money. Once this becomes clear, or storage space for oil runs out, carrying crude will become less profitable and inventories will be liquidated. Prices could fall sharply. The one-year forward Nymex crude contract's premium over the front-month contract has narrowed since April. That is reason enough for OPEC to ratchet up the rhetoric.




Revisiting WaMu
JP Morgan, having lopped $29.4 billion off the value of WaMu’s loans when it took over the troubled lender, now reckons it’s going to get the lion’s share of that money back: When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.

WaMu failed in the middle of the sleepless craziness following the Lehman collapse, and in hindsight might well have been at least as much of a factor in the scary gapping-out of Libor as Lehman was. It’s worth remembering that these are the only two US financial institutions where senior lenders took a haircut — and in both cases the senior lenders were pretty much wiped out. In other bank failures, even the junior lenders generally emerged unscathed. It increasingly seems as though a panicked FDIC thrust WaMu into the arms of Jamie Dimon, who could — and did — ask for pretty much anything he liked, including the right not to have to pay back any of WaMu’s creditors.

The result was that the bank wholesale-funding market went straight into crisis: one sui generis default (Lehman) might have been navigable, but when you have two in as many weeks, it’s pretty clear which way the wind is blowing. We’ve had endless rehashings of the weekends leading to the Bear Stearns and Lehman Brothers failures, but I’ve seen much less on the subject of WaMu, which is equally if not more fascinating and just as systemically important. The news out of JP Morgan that it massively undervalued WaMu’s loan books certainly seems to indicate that the likes of John Hempton have a point when they say that Sheila Bair got this particular decision spectacularly wrong, and in doing so put the entire US retail banking system on a much more fragile footing than was necessary.

Bair also took a relatively consumer-friendly bank (WaMu) and forced it to adopt the practices of a relatively consumer-unfriendly bank (Chase) — with predictable results: Chase is now telling former WaMu customers that even if they have directed the bank not to let their accounts go overdrawn, the bank can still push the account into overdrawn territory anyway, and, of course, "will assess an Insufficient Funds Fee" for doing so.It’s clear that the big winner here is JP Morgan, but the rest of us — taxpayers, WaMu account holders, WaMu creditors — increasingly look like very big losers.




Banks Aiming to Play Both Sides of Coin
Industry Lobbies FDIC to Let Some Buy Toxic Assets With Taypayer Aid From Own Loan Books

Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves. Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program. PPIP was hatched by the Obama administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets. The program, expected to start this summer, will get as much as $100 billion in taxpayer-funded capital.

That could increase to more than $500 billion in purchasing power with participation from private investors and FDIC financing. The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government's overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages. Federal officials haven't specified whether banks will be allowed to both buy and sell loans, but a list released by the FDIC and Treasury Department of the types of financial firms likely to be buyers made no mention of banks. Allowing banks to have it both ways would give them added incentive to sell assets at low prices, even at a loss, the banks contend.

They claim it also would free up capital by moving the assets off balance sheets, spurring more lending. "Banks may be more willing to accept a lower initial price if they and their shareholders have a meaningful opportunity to share in the upside," Norman R. Nelson, general counsel of the Clearing House Association LLC, wrote in a letter to the FDIC last month. The New York trade group represents 10 of the world's largest banks, including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. Those banks are seen as likely sellers of assets using PPIP. Officials at the banks declined to comment.

"It's an issue that's been raised and an issue we're aware will need specific guidelines," said an FDIC spokesman, adding that the agency still is working on the final structure of its program and plans to launch a $1 billion pilot program this summer, which likely won't include an infusion from the Treasury. Some critics see the proposal as an example of banks trying to profit through financial engineering at taxpayer expense, because the government would subsidize the asset purchases. "To allow the government to finance an off-balance-sheet maneuver that claims to shift risk off the parent firm's books but really doesn't offload it is highly problematic," said Arthur Levitt, a former Securities and Exchange Commission chairman who is an adviser to private-equity firm Carlyle Group LLC.

"The notion of banks doing this is incongruent with the original purpose of the PPIP and wrought with major conflicts," said Thomas Priore, president of ICP Capital, a New York fixed-income investment firm overseeing about $16 billion in assets. One risk is that certain hard-to-value assets mightn't be fairly priced if banks are essentially negotiating with themselves. Inflated prices could result in the government overpaying. Recipients of taxpayer-funded capital infusions under the Troubled Asset Relief Program also could use those funds to buy their own loans.

"Sensible restrictions should be placed on banks, especially those that have received government capital, from investing their own balance sheets in a backdoor effort to reacquire what could be their own assets with an enormous amount of federally guaranteed leverage," said Daniel Alpert, managing director at Westwood Capital LLC, an investment bank. Even supporters of letting banks buy their own loans said it could be a tough sell. "A bank bidding on its own assets really has the potential to look awful in the public's mind," said Mark J. Tenhundfeld, an American Bankers Association lobbyist. Some bankers said the concerns can be addressed through strong oversight by the government and outsiders.

The banking industry's lobbying is meant to overcome a hurdle facing PPIP: unwillingness by banks to sell assets at steep discounts. Banks generally would rather hold on to assets they believe have more inherent value, avoiding selling them at a low point in the market. Many mortgage securities are valued at less than half their original price. "Bankers see it as a win-win," said Tanya Wheeless, chief executive of the Arizona Bankers Association, which has urged the FDIC to let banks buy their own assets through PPIP. U.S. banks held about $4.7 trillion in commercial and residential mortgages of the type that banks are lobbying to buy as of the end of the third quarter of 2008, according to Federal Reserve data.

PPIP is designed in part to mitigate $600 billion of potential losses through the end of 2010 tied to toxic assets at the nation's 19 largest banks, according to the Fed's stress tests. Mr. Nelson proposed to the FDIC that banks be allowed to control as much as half the capital in a buyers' group. In some cases, he wrote, "the selling bank should be able to participate as the only private-sector equity investor." The California Bankers Association said in a letter that the FDIC's supervision of the asset-pricing process "should alleviate concerns about the inability to effect arm's length transactions between a bank and its affiliate that purchases through a public-private investment fund."

Irene Esteves, the chief financial officer at Regions Financial Corp., which has been lobbying to buy assets through PPIP, included a reference to gobbling up loans under the heading "Conflict of Interest" in a letter to the FDIC. A spokesman for the Birmingham, Ala., bank declined to comment. Towne Bank of Arizona plans to sell some of its soured real-estate loans into PPIP and wants to profit from the program. "We think it would be attractive to our shareholders to be able to share in whatever profits there are from the venture," said CEO Patrick Patrick.




Doubting Dows
It was the most hotly debated question at the unusually subdued money-saving Memorial Day weekend cocktail parties in the Hamptons where burgers, hot dogs and chicken frequently replaced the traditional steak and lobster, I was told. The question: Is the stock market's breathtaking 30% surge of the past two months on rapidly accelerating trading volume a sign that the worst of the economic skid is just about over and that the second half will produce the beginnings of a much peppier economy? The over-riding view seemed to be yes -- and this sunny scenario, so goes the bullish argument, will push stock prices even higher.

Sounds good, but a couple of highly regarded investment newsletters -- the Dow Theory Forecast of Hammond, Ind., and the Dow Theory Letters of La Jolla, Ca. -- think otherwise. Both newsletters closely track the various Dow averages and insist that when the Dow Industrials and the Dow Transports each struck new lows on March 9, that joint negative showing clearly confirmed that the primary trend of the market had turned down. On that day, the Dow wrapped up the trading session at a closing low of 6,547. Obviously, a lot of investors think the letters are all wet, as evident by a gung-ho buying spree, which sent the Dow rocketing above 8,500, a rise that both letters belittled as nothing more than a not-so-unusual 11-week rally in what they see as an ongoing bear market.

If indeed they're right, there's a clear risk the Dow could reverse course, if it already hasn't, and break below its March 9 low. Such a dive -- equivalent to about a 20% drop from current levels -- certainly wouldn't shock former Merrill Lynch economist David Rosenberg, who recently said he thought the Dow could retreat to its March low as consumer spending wanes. "Everyone is trying to play catch-up after last year's horror story (a 40% market decline), but they're playing with fire," says analyst Charles Carlson of the Dow Theory Forecasts. "There's a lot of danger out there; we're still dealing with a pretty soft economy, which means plenty of earnings shortfalls, and therefore it behooves investors to protect themselves by having at least 30% of their portfolios in cash."
Carlson views the financial stocks, a number of which have risen 400% to 500% from their recent lows, as especially vulnerable.

In light of its concerns, the latest issue of DTF features a special report on what it calls "the bad and ugly" -- a dozen stocks it monitors and which it feels should be shunned despite their sharp declines. In a number of cases, the letter's ugliest stocks reflect such characteristics as weak fundamentals, shabby growth, eroding earnings and genuinely poor operating momentum. The dirty dozen are General Motors, Fifth Third Bancorp., Freeport-McMoRan Copper & Gold, American International Group, Alcoa, Motorola, Citigroup, Vornado Realty, Ford Motor, Dow Chemical, Boston Scientific and Southwest Airlines.

At the same time, Carlson cited five stocks that he thought were attractive based on strong financials, solid earnings and good operating momentum. They are Dolby Laboratories, IBM, Direct TV, Precision Castparts and Johnson & Johnson. Richard Russell, editor of the Dow Theory Letters, contends investors are being brainwashed by the idea that the worst has been seen and past. After assessing the economic scene, Russell is convinced the economy is not fated to turn upwards towards the end of 2009. Nor, he believes, will it turn up in 2010.

The surprise of this bear market, he says, will be its length and its depth and the amount of damage it will do. Right now, he argues, we're in the second stage of a bear market that will be followed by the final down leg. As for the recent rally, Russell says that with the averages backing off their May highs, it's clear the market is having second thoughts about the recent rebound. With bonds and the dollar going down and gold going up, observes Russell, "it all fits together: more trouble ahead for the financial markets."

As our Dow bear sees it, we're entering the "world of unintended consequences," a deadly battle between deflation and over-creation of fiat money, meaning future inflation or even hyper inflation. As such, he reiterates his enthusiasm for gold, which he says should also be a beneficiary of increasing doubts about the viability of the dollar. In fact, he recently added a gold exchange-traded fund to his portfolio, which trades on the New York Stock Exchange under the symbol GDX. Normally, Russell says he would only add gold investments on a correction, but the precious metal seems to be on a roll. Gold currently trades at around $967.50 an ounce, but given the current financial turmoil, he maintains that "a gold price under $1,000 is cheap."




Why ‘too big to fail’ is too much for us to take
Neither a democratic society nor a market economy can accept the notion that a private business is "too big to fail". Liberal democracies of the modern world based on lightly regulated capitalism acknowledge two mechanisms of accountability – the marketplace and the ballot box. In the marketplace, organisations that do not meet, or respond to, the needs of society are ground between the twin pressures of their customers and their investors. At the ballot box, politicians that do not meet, or respond to, the needs of society suffer popular rejection.

Commercial success and democratic election are the only sources of legitimate authority in a society that no longer relies on spiritual leadership nor respects hereditary titles. An organisation exempt from either of these disciplines represents an unaccountable concentration of power. As we have today at Citigroup, Barclays and Deutsche Bank. If "too big to fail" is incompatible with democracy, it also destroys the dynamism that is the central achievement of the market economy. In principle, there is no reason why disruptive innovations and radically new business models should not come from large, established, dominant companies. In practice, the bureaucratic culture of these organisations is such that this rarely happens.

Revolutions in business generally come from new entrants. That is why so many of today’s market leaders – Microsoft and Google, Vodafone and Easyjet – are companies that did not exist a generation ago. These companies could not have succeeded if governments had been committed to the continued leadership of IBM and AOL, AT&T and British Airways. Any form of selective government support distorts competition. To win such subsidy today, the companies concerned must, like General Motors and Citigroup, be both large and unsuccessful. It is difficult to imagine a policy more damaging to innovation and progress.

The assertion that in future we will supervise the activities of large banks so that their businesses do not fail represents a refusal to address the issue. Even if that assertion were credible – and it is not – the outcome would not deal with either the political problem or the economic problem. Such regulation fails to call managers effectively to account, while supervision that ruled out even the possibility of organisational failure would kill all enterprise. There should be a clear distinction in public policy between the requirement for essential activities to survive and the continued existence of particular companies engaged in their provision. There are many services we cannot do without – the electricity grid and the water supply, the transport system and the telecommunications network.

These activities are every bit as necessary to our personal and business lives as the banking sector and at least as interconnected. Even a brief hiatus in their supply is intolerable. But the need to keep the water flowing does not establish a need to keep the water company in business. We do not mind if one chain of high street shops closes its doors, because there are many other places to buy our clothes and groceries. Other industries are different. We cannot contemplate keeping aircraft circling over London while the liquidator of Heathrow Airport Ltd finds the way to his office.

In all industries where there is or might be a dominant position in the supply of essential public services, there needs to be a special resolution regime. The key requirement is that assets that are needed for the continued provision of these services can be quickly separated from the organisations engaged in their supply. The businesses involved must be required to operate in such a way that such a separation is possible. In some relevant industries such a scheme exists; in others it does not. In all cases, review and contingency planning is required. "Too big to fail" – whether the claimant is a bank or an auto company – is not a status we can live with. It is both better politics and better economics to deal with the problem by facilitating failure than by subsidising it.




Feeble domestic demand is a chronic European ailment
by Martin Wolf

Why has the European Union suffered so badly in a crisis that began in the US? The answer is to be found in four weaknesses: first, Germany, the EU’s biggest economy, is heavily dependent on foreign spending; second, several western European economies are suffering from post-bubble collapses in demand; third, parts of central and eastern Europe are also being forced to cut spending; and, fourth, European banks proved vulnerable to both the US crisis and to difficulties nearer home. Given these realities, recovery is likely to be slow and painful. According to the latest consensus forecasts, the EU economy is expected to contract by 3.6 per cent this year and the eurozone’s by 3.7 per cent, while the US is forecast to shrink by only 2.9 per cent. Thus the crisis punishes the frugal more than the profligate. It seems so unfair.

It is not: the frugal depend on the profligate. A remark in the European Commission’s spring forecast gets to the nub of the problem: "As exports are usually the first component to recover in the eurozone business cycle," it argues, "the export outlook is key." The eurozone is the world’s second largest economy. Why should it depend for recovery on external demand? The answer lies with Germany. The Commission forecasts that the fall in net exports will account for three-fifths of its 5.4 per cent economic shrinkage this year. One way of illustrating what is happening is in terms of sectoral balances – the difference between income and expenditure (or savings and investment) in the three principal sectors: government, private and foreign. By definition, these add to zero. Normally, changes in the private sector’s balance drive the economy.

When the private sector cuts back on its spending, the current account deficit shrinks and the fiscal balance deteriorates. Which of the two predominates depends on how a particular economy works. We can derive implicit private sector balances from the Commission’s forecasts. Within the eurozone, the Netherlands and Germany ran huge private surpluses in 2007, at 9.5 per cent and 7.8 per cent of gross domestic product, respectively. These were offset by current account surpluses, at 9.8 per cent and 7.6 per cent of GDP, respectively. Overall, however, the eurozone had almost no private sector and current account surpluses. Thus the German and Dutch surpluses were offset by deficits elsewhere. Spain’s were the most important: its bubble-fuelled private sector deficit was 12.3 per cent of GDP in 2007 and its current account deficit 10.1 per cent. But Greece, Ireland and Portugal also ran large private sector – and current account – deficits.

Between 2007 and 2009, private sector balances of bubble countries are forecast to swing dramatically towards surplus, by 15.8 per cent of GDP in Ireland and by 14 per cent in Spain (see chart). In both countries, the principal offset will be a huge deterioration in fiscal positions, but external balances are also expected to improve, by 3.6 per cent and 3.2 per cent of GDP, respectively. The UK’s private balance is also forecast to improve by 8.9 per cent of GDP, offset by the huge deterioration in the fiscal position. In the US, the private balance is forecast to shift from a deficit of 2.4 per cent of GDP to a surplus of 8.6 per cent over the two years, a swing of 11 per cent of GDP.
 
In essence, in post-bubble economies the private sector is expected to spend much less, relative to income, this year than two years ago. The impact on the surplus countries dependent on exports of manufactures has been devastating. In Germany, the private sector balance is barely expected to change but, as an export-dependent economy, it is badly affected by the declines in spending elsewhere. The impact of the crisis on central and eastern Europe is also striking. According to the latest World Economic Outlook, capital flows to emerging Europe will fall from 9.5 per cent of GDP in 2007 to -0.7 per cent this year (see chart). This swing will force huge declines in external deficits and very big recessions.

The figures for the tiny Baltic states are extraordinary: reductions in current account deficits forecast by the Commission of 21 per cent of GDP for Latvia, 17 per cent for Estonia and 13 per cent for Lithuania between 2007 and 2009. In Latvia, the private sector balance is expected to shift by 32 per cent of GDP in two years. No wonder the Commission forecasts that GDP may shrink by 13 per cent in Latvia, 11 per cent in Lithuania and 10 per cent in Estonia in 2009. Europe’s banking sector is also badly damaged. According to the International Monetary Fund’s most recent Global Financial Stability Report, expected writedowns on bank assets in 2009 and 2010 are $750bn (€536bn, £471bn) in the eurozone and $200bn in the UK, against just $550bn in the US.

Moreover, the equity needed to reduce leverage of eurozone banks to 25 to one would be $375bn and of UK banks $125bn, against $275bn for US banks. Western banks are also heavily exposed in central and eastern Europe: as the Commission remarks, "banks from the ‘old’ member states account for about €950bn foreign claims in the ‘new’ member states and the other European emerging markets, altogether around 82 per cent of total foreign claims. In absolute terms the largest exposure is by banks from Austria, Germany, Italy and France."
 
The details may seem complex. But the fundamental point is not: the European economy gained an illusion of health from unsustainable spending in peripheral countries in its west, south and east. The asset price bubbles, credit growth and investment booms that characterised this spending have all collapsed, at the same time as an even more significant bubble burst in the US. This timing is not, of course, a coincidence. The collapse has devastated activity in the export-dependent countries, of which Germany is much the most important. Moreover, as a result of poor risk management, many European banks have also been badly damaged.

The question is whether the European economy can hope to return to health via a normal private-sector-led recovery. Unfortunately, in the post-bubble economies such a recovery is unlikely: one would have to hope for the piling of yet more debt on to the already highly indebted. This leaves two European answers, one likely but undesirable, the second unlikely but desirable. The likely answer is that demand will be driven by unsustainable fiscal expansions in post-bubble economies. The unlikely answer is that private demand will pick up in creditworthy economies, particularly Germany. In the absence of either, Europe will wait for the US to spend itself back into (temporary) vigour. It is a sad picture, whatever the "green shoots" may seem to show.







Bankruptcy filing by GM would shake up Dow index
A bankruptcy filing by General Motors Corp. would not only send one of America's most storied automakers into further upheaval, it would also force a shake-up in the Dow Jones industrial average.
Once a company files for bankruptcy protection, it is disqualified from being one of the 30 Dow components, said John Prestbo, editor and executive director of Dow Jones Indexes. As for a replacement, that decision rests with the managing editor of The Wall Street Journal, Robert Thomson. Prestbo said he and other senior editors at the Journal consult with Thomson on any potential changes to the Dow, but Thomson has the final say.

While editors are always reviewing the components that comprise the Dow, Prestbo said "I think it would be fair to say we're aware of GM's situation and taking steps accordingly." GM, which was added to the Dow Jones industrials in 1925, has been hammered as the economy worsened and new car sales plummeted. Shares of GM have lost 55 percent of their value since the beginning of the year and 97 percent since they reached a multiyear high in October 2007. The Dow, meanwhile, is down 5.4 percent this year, and 41.4 since reaching its record high of 14,164.53, also in October 2007.

GM's replacement wouldn't have to be another automaker or even another manufacturing or industrial company. There are no hard rules as to which companies make up the index. The main goal is to try and duplicate in the Dow the weights of all market sectors excluding utilities and transportation companies, Prestbo said. The Dow has separate indexes to track utilities and transportation firms, which is why they are not included in the industrial average. In a research note last month, Nicholas Colas, chief market strategist for BNY ConvergEx Group, laid out seven possible replacements for GM: bankers Goldman Sachs Group Inc. and Wells Fargo & Co.; high-tech firms Cisco Systems Inc., Apple Inc., Google Inc. and Oracle Corp.; and agricultural products maker Monsanto Co.

Kenneth Froewiss, a professor of finance at New York University's Stern School of Business, said a company's addition to the Dow would likely have little impact on its stock. Fewer mutual funds track or mimic the Dow than they do broader indexes such as the Standard & Poor's 500. That means there would be little more than some added publicity for the company that replaces GM, he said. However, GM is also a component of the S&P 500, so a company chosen to replace it in that index could see a blip up in trading when funds that track the S&P 500 buy its shares. GM would be the second firm to be removed from the Dow amid the ongoing economic crisis. Last September, insurer American International Group Inc. was removed after the government took an 80 percent stake in the firm to help it avoid complete collapse. AIG was replaced by Kraft Foods Inc. on Sept. 22. A bankruptcy filing could also lead to GM's delisting from the New York Stock Exchange.

While GM currently meets all the minimum requirements for trading, a bankruptcy filing would spark a review among the qualitative standards that the exchange uses to determine if a company should be listed. Qualitative standards include the impact of bankruptcy filings, liquidity concerns or debt defaults. A bankruptcy-related review would determine what will happen to current shareholders, and if there is any possibility shareholders would still retain value in the company after it exits the proceedings. If GM's share price or other trading data falls below certain thresholds, that could also trigger a delisting. Only one company that is currently under bankruptcy protection, W.R. Grace Co., is listed on the New York Stock Exchange.




Stoneleigh vows to stay open in town
Reports of Stoneleigh Motors' demise are highly exaggerated, owner Matthew Stone declared Monday. "We are not closing! I'm a GM dealer until November 2010," Stone said referring to a notice he received from General Motors. "Stoneleigh Motors will be here long after that, whether I'm selling Chevies or Hyundais. "We've been around 36 years. I have a commitment to the 42 people who work here. I have a commitment to my customers. We have a huge customer base that will stay here no matter what and we will still be here to serve them.

What people need to understand is that GM cannot close Stoneleigh Motors. They can tell me I can't sell Pontiacs, but they can't close Stoneleigh. "The media are reporting that GM has closed stores. GM doesn't close stores. We are independent businesses and some of us will choose to fight them. What has happened in our town is an injustice. GM isn't able to arbitrarily do the things they have done and I will be looking at my legal options." "GM is scared. They are using the same threats with us they have used over the years with the union. After 36 year as a dealer, that's a little hard to take."

Stone said the next few weeks are crucial. "If they (GM) don't go bankrupt there could be a helluva lawsuit. That's what they are scared of. And that's why they are threatening some of us saying they will go bankrupt and offering some compensation if we will agree to close earlier. "Things may change next week when GM seeks Chapter 11 protection in the United States. The question is whether GM Canada will be filing for court protection from its creditors under the Companies' Creditors Arrangement Act (CCAA)," he added. CCAA gives a company time to try to work out its financial difficulties with its creditors while it tries to come up with a restructuring plan to rearrange its affairs so that it can keep operating. Meantime, Stone adds: "I anticipate we'll sell more cars in the next year than we have ever sold. There will be better deals than ever. There will be some fire sales going on."




More Small Firms Drop Health Care
Accelerating health-care premiums and sharp revenue shortfalls due to the recession are forcing some small companies to choose between dropping health insurance or laying off workers -- or staying in business at all. Sheryl Weldon, owner of Commerce Welding & Manufacturing Co., saw health-insurance payments increase to more than $800 monthly per employee from about $200 five years ago. With monthly revenue down 10% since December, Ms. Weldon stopped providing health coverage to employees, including one being treated for prostate cancer, for the first time in the 64-year-history of the Dallas sheet-metal company.

Ms. Weldon and several of her 14 employees are going uninsured and the third-generation business owner is struggling with the emotional toll of the decision. "I have a terrible time handling that I can't give them that coverage," says Ms. Weldon, 52 years old. "How do you expect someone to be at their job everyday and perform if they can't be healthy?" As the Obama administration wrestles with broader questions of health-care overhaul, tough economic times are forcing more businesses to grapple with stressful questions about discontinuing coverage. Health-insurance premiums for single workers rose 74% for small businesses from 2001 to 2008, the latest year data are available, according to nonprofit research group Kaiser Family Foundation.

About 10% of small businesses are considering eliminating coverage over the next year, up from 3% in 2005, according to a recent survey by National Small Business Association. That follows earlier declines in coverage, with just 38% of small businesses providing health insurance last year compared to 61% in 1993, according to the trade group. In 2007, 41% offered coverage. A Hewitt Associates survey found that 19% of all companies plan to stop providing health-care benefits in the next three to five years. Assurant Health, a national health-insurance provider, has recently seen more small businesses canceling coverage. Scott Krienke, senior vice president of product lines, says premiums typically increase 8% to 16% yearly for small businesses, with the smallest firms particularly at risk for large rate increases.

In March, after losing a large client that accounted for more than 50% of revenue, Kelly Reeves canceled health insurance for her three employees. Ms. Reeves, president of seven-year-old public-relations firm KLR Communications, says she had to choose between that and laying off an employee. Ms. Reeves says turnover is a concern even in this slack job market, but she has told her employees she understands if they leave for a job with medical benefits. Should business pick up, she plans to reinstate health insurance but provide less expensive coverage. "You want to attract good talent and benefits are important for that," says Ms. Reeves. Even small businesses that continue to provide benefits say the question of dropping medical insurance is one of the most difficult they face.

Shanahan Sound & Electronics Inc., a Lowell, Mass.-based sound- and video-design firm, has seen a 50% decrease in monthly revenue since last year. Health-insurance costs increased by 14% this year to approximately $7,000 per month. Catherine Shanahan, president of the 16-employee firm, refuses to cancel the plan. "I really believe it would be the worst thing in the world I can do for morale," she says. Karen McLeese, vice president of employee benefit regulatory affairs at business services firm CBIZ, has been steering companies that consider dropping insurance to less costly high-deductible plans and cost sharing.

"In today's environment, health insurance is extremely costly and to shift that burden to individual employees when raises and bonuses are trimmed really makes it a double whammy," says Dennis J. Ceru, professor of entrepreneurship at the Babson College Graduate School of Business near Boston. Many of the employees losing insurance are priced out of private plans. Mr. Ceru says the cost for a family on an private plan can exceed $20,000 a year. Dennis Morgan, a driver at Commerce who's being treated for prostate cancer, worries about how he will pay for surgery should he need it. The 60-year-old's $500-a-week salary makes him eligible for a program at his hospital where he can receive prescriptions at a low cost and pay between $5 and $10 for doctors' visits. But he would be required to pay a percentage of the cost of any medical procedure.

Mr. Morgan has looked into private health insurance but says he can't afford it. At the same time, he understands Ms. Weldon's decision to eliminate coverage. "We needed to cut health care," says Mr. Morgan. "It's the only thing left to cut." Still, the decision rarely sits easy with those making it. "If I think about it, I can't sleep," says Ms. Weldon, who says that her father and grandfather had always covered 100% of health-insurance expenses. Dana Korey, president of San Diego organizing company Away With Clutter, eliminated health insurance for her 15 employees in January. "It was incredibly painful, these people are like family to me and I felt like I let them down," says Ms. Korey. Amid the recession, many of her clients could no longer justify organizing jobs, which typically range between $3,000 and $7,000. Now Ms. Korey is changing her business strategy and creating a DVD on organizing. She is using the savings from canceling health insurance, roughly $5,500 monthly, to fund the venture.




EU unveils reforms to make financial markets safer
Banks will be more closely scrutinised under European Union plans unveiled on Wednesday to apply lessons from the credit crunch and better protect investors shaken by the worst financial crisis in decades. The European Commission's plans form a core plank of the EU's response to the crisis. They are aimed at spotting any build-up of risk earlier and avoiding a need for governments again to fork out billions of euros to prop up banks.

Britain, Europe's biggest banking centre, has already signalled its unease with the plans, fearing a loss of regulatory sovereignty to new, centralised bodies. The Commission's plans are based on a blueprint put forward by former Bank of France governor Jacques de Larosiere and backed in principle by European Union leaders. They represent an attempt to play regulatory catch-up with a financial market that is already integrated and dominated by cross-border banks like HSBC, BNP Paribas and Santander, even though supervision remains national.

Banks rapidly succumbed to the credit crunch partly because no overall picture existed of how easily instability in one institution could infect others. The Commission proposed setting up two pan-EU bodies to correct what it sees as gaping regulatory holes. A European Systemic Risk Council comprising central bankers and national regulators would monitor any build-up of risks and issue a call for action before they become unmanageable. The European Central Bank would be expected to host and chair the council, a step Britain and national banking regulators say gives too much power to the Frankfurt-based institution.

There would also be a steering group among three new authorities whose job would be to ensure EU rules are applied consistently across the 27-nation bloc. It would have powers to overrule a member state deemed not complying with common standards. Those three new authorities would oversee insurance, banking and securities markets. The Commission's plans will go to a summit of EU leaders in June for endorsement, and the executive will come forward with draft laws later in the year. It wants the new regulatory system in place by the end of 2010, faster than de Larosiere foresaw. The European Parliament and EU states will have the final word on the reforms.




UK Treasury warns of £70 billion hole in Budget forecasts
Alistair Darling faced fresh embarrassment last night when the Treasury's own survey of economic forecasts contradicted the Chancellor's and raised the possibility of a £70bn hole in the public finances. It could mean every taxpayer having to pay an extra £2,000 to plug the gap, according to the Conservatives, who said Labour's forecasts were based on "fantasy." Mr Darling's own forecast for growth to rebound strongly after this year were also thrown into doubt by the survey of 20 independent forecasts included in the Treasury report.
 
The survey predicts over the next four years the total borrowing figures will be £679bn. In the Budget Mr Darling said it would be £606billion, meaning the Treasury would need to find another £72.7bn.
Last month's Budget forecast that growth would be 1.25pc in 2010 before bouncing back to 3.5pc in 2011, 2012 and 2013. But the average forecast found that in 2010 growth would only be 1.25pc, and then 1.9pc in 2011, 2.4pc in 2012 and 2.6pc in 2013. George Osborne, the shadow chancellor, said: "The Treasury's own document shows that Labour are gambling Britain's economic credibility on fantasy forecasts for the recovery.

"While we all hope that this long recession will end later this year, Gordon Brown's claims that we will bounce back to boom-time levels of growth have now been discredited, first by the Bank of England and now the Government's own survey. "If the independent forecasters are right then the Government will have to borrow £73bn more over the next four years than it forecast a month ago. That's more than £2,000 in extra borrowing for every taxpayer in the country."

Earlier this month the Treasury select committee issued a withering verdict on Mr Darling's Budget projection. The Labour-dominated committee said it was "an optimistic assumption" to believe the Treasury's growth forecasts could be met amid continuing economic uncertainty. Last night a Treasury spokesman said: "We stand by the forecast we made in the Budget. It is going to be a difficult year but we expect growth to return." Mr Darling has repeatedly been accused of offering too rosy a view of the economic prospects. He has been forced to change forecasts as the recession took hold.




Canadian deficit swells from $34 billion to more than $50 billion – in 4 months
Finance Minister Jim Flaherty offered an impromptu fiscal update Tuesday, announcing that this year's budget deficit will balloon to more than $50-billion – a new record for red ink in Canada as the costs of the economic downturn mount. He said the rising deficit – which amounts to more than 3 per cent of the economy – reflects a triple whammy of extra costs, including auto-sector bailouts, rising Employment Insurance claims and a drop-off in tax revenue. Mr. Flaherty released the number the same day new statistics showed the number of Canadians collecting jobless benefits soared 10.6 per cent in March, the biggest monthly increase since the labour market started to weaken last fall.

"We will run a substantial short-term deficit this year which I would estimate at more than $50-billion," Mr. Flaherty told reporters after the House of Common's Question Period. "We are going through a deeper economic slowdown than anticipated … we also have the substantial auto payments that are going to be required." The Finance Minister's new estimate is $16.3-billion – or nearly 50 per cent – higher than what he forecast just four months ago. Tories say they released the deficit figure Tuesday to avoid "inaccurate" speculation on the shortfall that could confuse markets.

Mr. Flaherty sparked a flurry of interest in the size of the shortfall one day earlier when he divulged the deficit was soaring but said he'd withhold the actual figure until a June report card on stimulus spending progress. Sources say about half the deficit increase is due to higher EI payouts and sagging tax revenue. The other half is the cost of auto aid and other economic stimulus measures. Ottawa has not yet divulged its final bill for auto aid, but calculations based on publicly available information suggest it could exceed $10-billion. The rising budget shortfall comes amid growing concern that the federal government could end up mired in a structural deficit, one that requires tax hikes or spending cuts to eliminate. Economists, however, are divided on this.

The International Monetary Fund has sounded a different note, saying Canada has plenty of room to run a deficit. Analysts note that a $50-billion deficit – while numerically bigger than past shortfalls – is relatively smaller than the ones that plagued Ottawa in the 1980s and early 1990s. That's because the economy has grown significantly since then and Ottawa is therefore better equipped to shoulder bigger deficits and debt. A $50-billion deficit equals more than 3 per cent of Canada's economy but, as Parliamentary Budget Officer Kevin Page noted, past shortfalls exceeded 8 per cent of the economy in the mid-1980s and 5 per cent in the early 1990s. By comparison, the U.S. deficit this year is expected to exceed 12 per cent of the economy.

Still, Mr. Page said he's concerned about whether changes in Canada's economy during the recession are pushing Ottawa into a structural deficit. In other words, one that persists over the long term even when the economy is healthy and growing. In Mr. Page's opinion it's not a temporary spike in government spending that's the culprit but a possible erosion of capital investment in areas such as manufacturing and the resource sector. He fears this could ultimately yield a smaller economic engine – one that would generate less tax revenue even after a recovery. "The big issue is we're going through a really difficult recession right now and what's behind the auto bailout is potentially some big structural adjustments to the economy that could lower the potential growth rate."

The Harper Tories say they're still confident their plan will enable Ottawa to climb out of deficit by the 2013-14 fiscal year, as they pledged in the January budget. But Toronto Dominion Bank chief economist Don Drummond, a former federal Finance official, said he's been worried for some time about Canada being mired in a structural deficit as a result of a decade of budget decisions. Mr. Drummond said in his opinion a structural deficit facing Ottawa was caused by 10 years of rapid program spending growth and tax cuts – starting with the 2000 budget and including, more recently, the 2-percentage point cut to the Goods and Services Tax. He said that early this decade Ottawa was in a structural surplus position so for a time rapid spending growth and tax cuts just ate into this cushion.

"But that was gone by the time the economy got wounded," Mr. Drummond said. Dale Orr of Dale Orr Economic Insight doesn't believe Ottawa is in structural deficit, saying in his opinion the federal government has not made ongoing spending commitments that exceed the tax revenue it will collect when the economy recovers. He noted the reasons for the deeper deficit announced Tuesday are also temporary, including EI payouts that should fall as the economy rebounds and a tax revenue shortfall he predicts would also be reversed. Mr. Orr said a key to eliminating the deficit over the period the Tories promise will be the political will to keep a tight rein on new spending.




Canadian households $1.3 trillion in debt and still digging deeper hole
Canadian families are increasingly using credit to cover day-to-day living expenses, pushing national household debt to $1.3 trillion, according to the Certified General Accountants Association of Canada. CGA-Canada warned Tuesday that many individuals are unaware of how the economic downturn has hit their financial situation, and they continue to load up their credit cards and lines of credit while skimping on savings. According to the association's report, a consumer survey in November indicated 85 per cent of households had outstanding debt on a credit card. And 21 per cent of Canadians who were in debt said they could no longer manage their debt load.

"Household debt has increased significantly over recent years, jeopardizing the financial security of Canadian households," commented Anthony Ariganello, president of CGA-Canada. Forty-nine per cent of families with children under 18 said their debt had increased in the past three years, according to the online survey of 2,014 households, which claims a 95 per cent likelihood of being accurate within 2.2 percentage points. Lines of credit and credit cards account for the largest proportion of consumer debt, and the report says the escalation of debt "is primarily caused by consumption motives rather than asset accumulation."

One-quarter of those interviewed would not be able to handle an unforeseen expense of $5,000, and one in 10 would have trouble with an unforeseen cost of $500. The report says Canadian personal indebtedness "is a highly disturbing matter" and prospects are low for improving household financial security. "Although CGA-Canada recognizes the importance of consumer spending for business development and for economic growth, a balanced approach to spending, saving and paying down debt is a more desirable option than trying to promote consumer spending as a solution for the current economic downturn," the association says.

Bank of Canada data released Friday showed lending by the chartered banks has flagged in the weak economy - except in consumer credit, which continues to swell. Personal lines of credit expanded to a new high of $181 billion outstanding in April, an increase of 6.2 per cent year-to-date, and up 20.4 per cent from a year earlier. This type of debt has bloated from $100 billion five years ago and less than $50 billion at the start of the decade. Personal loans from banks totalled $48.5 billion, up 8.1 per cent from a year earlier, and bank credit-card receivables were up 8.9 per cent at $51.5 billion.




Will German Savings Banks Be the Next Casualties?
Germany's public sector-owned savings banks were long considered an oasis of stability amid the turbulence of the financial crisis. But now they too are looking shaky, with some institutions already at acute risk. German Finance Minister Peer Steinbrück has a penchant for grandstanding on occasion. At times he loudly criticizes tax havens while at other times he rails against the senior executives at large banks for what he calls their "cashing-in mentality." But when Steinbrück faces the management of Germany's association of public sector-controlled Sparkassen savings banks, he suddenly becomes quiet and cautious.

Two weeks ago, when the finance minister met behind closed doors with Heinrich Haasis, president of the German Savings Banks Association (DSGV), and his team, he brought along his own reinforcements: Thomas de Maizière, the chancellor's chief of staff, and Axel Weber, the president of Germany's central bank, the Bundesbank. The trio made an urgent appeal to Haasis and the heads of the regional savings bank associations, asking them to assume responsibility for the state-owned regional banks, the Landesbanken, of which they are part owners. Unless they took on their share of the state-owned regional banks' losses, the three Berlin officials threatened, the federal government could withdraw its support for the Landesbanken. The heads of the savings bank associations, many of them former politicians who have since embarked on careers in finance, listened to the government representatives' arguments for a while. But then they said in unison: "We won't pay." Their argument was that the savings banks have enough problems of their own, and they insisted that Landesbanken like WestLB would have to make do without their financial support from now on.

The financial crisis has apparently shaken the Sparkassen savings banks --  which were considered relatively stable until now -- more than they are willing to admit. It was long believed that Germany's 438 savings banks had been more or less untouched by the crisis, because they had not lost as much on the capital markets as the major banks. Last autumn, Haasis, seeking to calm fears among Germany's 50 million savings bank customers, said that their deposits were safe, "as long as the sky doesn't fall." Nowadays, Haasis avoids making such grandiose statements. Many savings banks have only been able to avoid showing losses on their balance sheets by resolutely dipping into their reserves. They have also benefited from special accounting rules.

Unlike private banks, Sparkassen are not required to, say, adjust the book value of their securities to reflect falling market prices. But this also means that no one knows exactly how much risk remains hidden on their balance sheets. Some savings bank association presidents are already envisioning the creation of a so-called "bad bank" exclusively for the Sparkassen. This shifting of risk would come at a convenient time for the cities and counties which own most of the savings banks, because it would involve shifting the risk in the direction of the federal government. Most of all, however, the heads of the state savings bank associations are trying to force Berlin to come to the rescue of the Landesbanken. The savings banks, through their associations, own more than 50 percent of the state-owned regional bank WestLB. The rest belongs to the state of North Rhine-Westphalia and its regional councils. Steinbrück wants to force these existing owners to pay for the risks of the past.

But the savings banks have boycotted every solution proposed to date. The first casualty was WestLB CEO Heinz Hilgert, who resigned last week after learning of the results of the closed-door meeting in Berlin. In explaining his decision to step down, Hilgert said that he lacked "the necessary economic support of the key owners." In an interview with SPIEGEL in early May, he had already complained about what he called their "wait-and-see policy." Apparently Hilgert was unwilling to quietly watch his bank go under without doing anything about it. He presented the supervisory board with a simulation scenario under which banking regulators would be forced to close WestLB in the autumn if its ratings continued to decline. If that happened, Hilgert argued, the bank's capital ratio would have fallen by that point to below the 4 percent threshold at which regulators are required to intervene.

It had already declined from 6.4 to 5.9 percent in the first three months of this year. But this is apparently of little concern to the savings bank owners. They figure that, because of the financial crisis, a major bank like WestLB will not be allowed to go under, and that the federal government ultimately has no choice but to bail out the state-owned regional banks. "The savings banks are deliberately pushing the bank toward the brink," says one of the executives of Düsseldorf-based WestLB. Ironically, the Sparkassen significantly increased their stakes in the Landesbanken only a few years ago. Haasis spent €6 billion ($8.4 billion) of the savings banks' funds to acquire one of the regional banks, Landesbank Berlin (LBB), in a move intended to prevent a private investor from penetrating into the realm of publicly owned financial institutions.

The savings banks, which financed some of their investment in LBB with loans, are now paying for the costly gamble. Because Berlin-based LBB is no longer paying dividends, the debt burden has a direct and negative impact on the savings banks' profits. Because the value of LBB has declined to -- at the most -- €2 billion ($2.8 billion), the savings banks have been forced to take massive write-offs on their investment. There are similar cases in other parts of Germany. The 15 savings banks in the northern state of Schleswig-Holstein, which own about 15 percent of the ailing state-owned regional bank HSH Nordbank, are beginning to run out of financial options. To date, they have written off only half of their €700 million ($980 million) investment in HSH. The savings banks are in no position to bail out the Hamburg-based bank, leaving the states of Hamburg and Schleswig-Holstein to shoulder the entire €3 billion ($4.2 billion) capital injection approved last Wednesday.

Nevertheless, the savings banks did their best to sabotage the emergency bailout for weeks as part of an unholy alliance. Together with a group of private investors led by the US-based private-equity group JC Flowers, they owned about 40 percent of HSH before the capital injection. Although both parties were unwilling to inject new capital into the bank, they also fought against an excessive dilution of their shares. "The savings banks went along for the ride on Flowers' back seat, with no regard for losses at HSH," one insider says bitterly. The dispute has been settled since last Wednesday. Flowers' stake is being reduced to just under 10 percent, while the savings banks will own 7 percent of HSH in the future. This leaves the states of Hamburg and Schleswig-Holstein holding more than 84 percent of the bank. In the case of Munich-based lender BayernLB, the savings banks' share dropped from 50 to 6 percent when Bavarian Governor Horst Seehofer approved a €10 billion ($14 billion) bailout for the troubled regional bank. The European Commission has already announced its intention to take a closer look at the BayernLB bailout.

Jürgen Rüttgers, the governor of North Rhine-Westphalia, is no longer willing to be quite as generous with his state's funds. At a meeting with other governors and Finance Minister Peer Steinbrück on May 11, Rüttgers made it clear that he refuses to release the savings banks from their liability when it comes to WestLB. A few days later, Rüttgers called Chancellor Angela Merkel to discuss the issue. To Merkel's annoyance, he even applied pressure during a CDU steering committee meeting. In the meeting, Baden-Württemberg Governor Günther Oettinger also argued that the savings banks should not be allowed to shirk their responsibility. But how solvent are the Sparkassen anymore? Association president Haasis likes to point out that they were one of the few groups of banks in the world that remained profitable in the crisis year of 2008. Nevertheless, he sounded the alarm at an internal strategy meeting of savings bank executives.

"In the event that, in exceptional cases, individual savings banks become overburdened, the heads of the associations have agreed to find ways to support (the troubled banks) through the group of savings banks as a whole," Haasis said. And there will undoubtedly be savings banks that run into difficulties, given the current grim economic situation. The risk of corporate loans defaulting "is being completely underestimated at this point," says the head of one Landesbank. He points out that some companies are now "planning to reduce capacity by up to 50 percent." Small suppliers will be the first to go under. For this reason, many savings banks that lend to small- and medium-sized enterprises are likely to encounter enormous problems, particularly as local governments facing declining tax revenues will no longer be capable of bailing them out. "We will see a rise in forced mergers of troubled savings banks," the bank executive predicts. This is not necessarily bad news for private customers, who do not need to worry about their savings deposits.

Thanks to solidarity among the Sparkassen, each ailing bank would be helped out by the other banks. And in the end, the government would step in as guarantor. But if the cases of crisis-weakened banks begin to multiply, customers will have to accept less attractive terms and conditions. The formerly rock-solid large Sparkassen are already garnering their fair share of negative headlines in the local tabloids. Chief among them is Stadtsparkasse Düsseldorf. A business relationship between the bank's senior management and the German celebrity couple Franjo and Verona Pooth ended up as an ugly provincial farce which landed on the desk of the local district attorney. The savings bank gave Pooth, a young entrepreneur, a generous credit line and hired his wife, a well-known German television personality, to take part in a charity golf tournament, at which, according to one insider, she "pulled the money out of people's pockets."

The boundaries between business and private life gradually disappeared over the years. A number of bankers were invited to the couple's wedding. Shortly before the end of Pooth's business career -- he went bankrupt in 2008 -- bankers were still accepting expensive gifts from Pooth, such as flat-screen TVs. Was it an anomaly? Or just another example of the typical sleazy relations between local entrepreneurs, politicians and Sparkassen executives? Pooth has already been convicted of granting undue advantages, and former bank executives are still under investigation. Stadtsparkasse Düsseldorf posted a loss in the double-digit millions in 2008. According to a spokesman, the bank "anticipates a significantly higher credit default risk" for 2009. But the Düsseldorf-based bank is not alone with its losses and petty scandals. The northern German savings bank Sparkasse Südholstein is practically bankrupt and requires government support to stay afloat. Other savings banks aggressively sold Lehman Brothers certificates to their unsophisticated customers and can now expect to face claims for damages.

Sparkasse KölnBonn had a gaping hole in its balance sheet of more than €180 million ($252 million) for 2008. Because some local and state governments are overwhelmed by the problems of their savings banks and state-owned regional banks, the federal government now plans to step in. The grand coalition government in Berlin is still managing to fend off requests for assistance, but the outcome of the power struggle is anything but certain. "You can't govern the country against the wishes of retirees or the Sparkassen," says someone familiar with the gray zone between public institutions and politics. Because the savings banks are extremely well connected, they can mobilize the grass roots at any time. When a mayor wants to nicely landscape a public path or put on a cultural event, he can usually count on the help of the local savings bank. Should push come to shove, the same official is likely to make the chancellor aware of this relationship. This influence extends into the parliaments. Thirty members of the Christian Democrats' parliamentary group in the Bundestag are also executives at savings banks or have worked there in the past.

The Sparkassen are also a force to be reckoned with within the SPD. Any attempt to question privileges or probe into ownership conditions is practically looked upon as high treason. "If I so much as write a sub-clause that contradicts the interests of the savings banks, the resulting commotion will be loud enough to make your ears hurt," says the financial expert of one party's parliamentary group. One of the current bones of contention is that the federal government wants to tighten requirements for the members of bank supervisory boards as a consequence of the financial crisis. In a letter to the chairman of the Bundestag finance committee dated April 29, the heads of the German Association of Cities, the German County Association and the German Association of Towns and Municipalities wrote, in all seriousness, "that committees staffed purely on the basis of professional qualifications do not exercise effective control."

The initiative by these representatives of local governments is mainly focused on the Sparkassen. The draft supervisory board legislation, they argue, should ensure that "the qualifications of mayors, state officials and other municipal representatives are adequate for service on the supervisory boards of savings banks and municipal insurance companies." Observers expect that the local government representatives will succeed with their demands for what is effectively a blank check. After all, sinecures are on the line. Governor Rüttgers of North Rhine-Westphalia has already experienced at first hand the power of those with an interest in the Sparkassen. When he attempted to amend his state's law governing savings banks to permit mergers between savings banks and the state's Landesbank, the powerful service workers' union Ver.di organized a large-scale demonstration. Rüttgers had to abandon his plan.  Nevertheless, such marriages between savings banks and state-owned regional banks could certainly make sense.

Helaba and Nord/LB, the two Landesbanken that have weathered the crisis most effectively to date, have a relatively stable business model due to their close liaison with savings banks. But the heads of the savings bank associations are doing their utmost to block changes, fearing that such innovations could make their jobs redundant. Given the many players involved, the reorganization of the public sector banks presents an enormous challenge to the entire federal financial landscape. For taxpayers, there's a lot at stake. Public guarantors still have outstanding loan guarantees worth about €400 billion ($560 billion) with the Landesbanken. At times, Finance Minister Peer Steinbrück will probably look with envy to France, where President Nicolas Sarkozy has forged a new financial giant within a short amount of time. After suffering massive losses, France's Caisse d'Epargne savings banks group and the Banque Populaire group of cooperative banks were forced to merge at Sarkozy's behest. As a government dowry, the new financial group, now France's second-largest, received €5 billion ($7 billion). Its new CEO, François Pérol, is a former economic adviser to Sarkozy.




Will Higher Education Be the Next Bubble to Burst?
The public has become all too aware of the term "bubble" to describe an asset that is irrationally and artificially overvalued and cannot be sustained. The dot-com bubble burst by 2000. More recently the overextended housing market collapsed, helping to trigger a credit meltdown. The stock market has declined more than 30 percent in the past year, as companies once considered flagship investments have withered in value. Is it possible that higher education might be the next bubble to burst? Some early warnings suggest that it could be.

With tuitions, fees, and room and board at dozens of colleges now reaching $50,000 a year, the ability to sustain private higher education for all but the very well-heeled is questionable. According to the National Center for Public Policy and Higher Education, over the past 25 years, average college tuition and fees have risen by 440 percent — more than four times the rate of inflation and almost twice the rate of medical care. Patrick M. Callan, the center's president, has warned that low-income students will find college unaffordable.

Meanwhile, the middle class, which has paid for higher education in the past mainly by taking out loans, may now be precluded from doing so as the private student-loan market has all but dried up. In addition, endowment cushions that allowed colleges to engage in steep tuition discounting are gone. Declines in housing valuations are making it difficult for families to rely on home-equity loans for college financing. Even when the equity is there, parents are reluctant to further leverage themselves into a future where job security is uncertain.

Consumers who have questioned whether it is worth spending $1,000 a square foot for a home are now asking whether it is worth spending $1,000 a week to send their kids to college. There is a growing sense among the public that higher education might be overpriced and under-delivering. In such a climate, it is not surprising that applications to some community colleges and other public institutions have risen by as much as 40 percent. Those institutions, particularly community colleges, will become a more-attractive option for a larger swath of the collegebound. Taking the first two years of college while living at home has been an attractive option since the 1920s, but it is now poised to grow significantly.

With a drift toward higher enrollments in public institutions, all but the most competitive highly endowed private colleges are beginning to wonder if their enrollments may start to evaporate. In an effort to secure students, some institutions, like Merrimack College near Boston, are freezing their tuition for the first time in decades. Could it get worse for colleges in the coming years? The numbers of college-aged students in the "baby-boom echo," which crested with this year's high-school senior class, will decline over the next decade. Certain Great Plains and Northeastern states may lose 10 percent of the 12th-graders eligible for college. Vermont is expected to lose 20 percent by 2020.

In the meantime, online, nontraditional institutions are becoming increasingly successful at challenging high-priced private colleges and those public universities that charge $25,000 or more per year. The best known is the for-profit University of Phoenix, which now teaches courses to more than 300,000 students a year — including traditional-age college students — half of them online. But other competitors are emerging. In collaboration with an organization called Higher Ed Holdings--which is affiliated with Whitney International University, owner of New England College of Business and Finance, where one of us is president and the other a trustee--some state universities have begun taking back market share by attracting thousands of students to online programs at reduced tuition rates.

One such institution is Lamar University, in Texas, which has seen its enrollment mushroom since working with Higher Ed Holdings to increase access to some of its programs. Moreover, increases in federal financial aid and state scholarships have been unable to keep up with the incessant annual increases in tuition at traditional four-year colleges. For example, Congress has raised the Pell Grant limits from $4,731 to $5,350 a year by scrubbing the federal loan programs of bank subsidies thought to be excessive. But $5,350 pays for only about four to six weeks at a high-priced private college.

A few prominent universities, including Harvard and Princeton, have made commitments to reduce or eliminate loans for those students from families earning less than $75,000 or even $100,000 a year. But the hundreds of less-endowed colleges cannot reduce the price of education in that fashion. It is those colleges that are most at risk. What can they do to keep the bubble from bursting? They can look for more efficiency and other sources of tuition. Two former college presidents, Charles Karelis of Colgate University and Stephen J. Trachtenberg of George Washington University, recently argued for the year-round university, noting that the two-semester format now in vogue places students in classrooms barely 60 percent of the year, or 30 weeks out of 52. They propose a 15-percent increase in productivity without adding buildings if students agree to study one summer and spend one semester abroad or in another site, like Washington or New York. Such a model may command attention if more education is offered without more tuition.

Brigham Young University-Idaho charges only $3,000 in tuition a year, and $6,000 for room and board. Classes are held for three semesters, each 14 weeks, for 42 weeks a year. Faculty members teach three full semesters, which has helped to increase capacity from 25,000 students over two semesters to close to 38,000 over three, with everyone taking one month (August) off. The president, Kim B. Clark, is a former dean of the Harvard Business School and an authority on using technology to achieve efficiencies. By 2012 the university also plans to increase its online offerings to 20 percent of all courses, with 120 online courses that students can take to enrich or accelerate degree completion.

Colleges can also make productivity gains by using technology and re-engineering courses. For the past 10 years, the National Center for Academic Transformation, supported by the Pew Charitable Trusts, has helped major universities use technology to cut instructional costs by an average of 40 percent while reducing the number of large course sections, graduate teaching assistants, and faculty time on correcting quizzes. Grades have increased, and fewer students have dropped out. Meanwhile, students have a choice of learning styles and ways to get help online from either fellow students or faculty members. That "transformation" requires a commitment to break away from the medieval guild tradition of one faculty member controlling all forms of communication, and to give serious attention to helping students think and solve problems in new formats.

The economist Richard Vedder of Ohio University, a member of the federal Spellings Commission, offers more radical solutions. He urges that university presidents' salaries include incentives to contain and reduce costs, to make "affordability" a goal. In addition, he proposes that state policy makers conduct cost-benefit studies to see what the universities that receive state support are actually accomplishing. Fortunately, some other forces are at work that might help save higher education. The federal government recently raised significantly the amount of money that returning veterans might claim to pursue higher-education degrees, so it reaches at least the level of tuition and fees at many public universities.

In addition, the rest of the world respects American higher education, and whether studying at a college here or an American-based one abroad, the families of international students usually pay in full. The number of international students could rise from 600,000 to a million a year if visa reviews are expedited; the crisis of September 11, 2001, temporarily reduced the upward trajectory of overseas enrollments in American colleges. Accrediting agencies could also develop standards to expedite the exporting of American education into the international market.

But colleges cannot, and should not, rely on those trends. Although questions about the mounting prices of colleges have been raised for more than 30 years and just a few private colleges have closed, the stakes and volume of the warnings are mounting. Only during a critical moment in economic history can one warn of bubbles and suggest that the day of reckoning for higher education is, in fact, drawing near.




Recession Imperils Loan Forgiveness Programs
When a Kentucky agency cut back its program to forgive student loans for schoolteachers, Travis B. Gay knew he and his wife, Stephanie — both special-education teachers — were in trouble. "We’d gotten married in June and bought a house, pretty much planned our whole life," said Mr. Gay, 26. Together, they had about $100,000 in student loans that they expected the program to help them repay over five years. Then, he said, "we get a letter in the mail saying that our forgiveness this year was next to nothing."

Now they are weighing whether to sell their three-bedroom house in Lawrenceburg, Ky., some 20 miles west of Lexington. Otherwise, Mr. Gay said, "it’s going to be very difficult for us to do our student loan payments, house payments and just eat." From Kentucky to Iowa to California, loan forgiveness programs are on the chopping block. Typically founded by their states to help students pay for college, the state agencies and nonprofit organizations that make student loans and sponsor these programs are getting less money from the federal government and are having difficulty raising money elsewhere as a result of the financial crisis.

The organizations say the repayment programs have been hurt by a broader effort by Congress to tackle the high cost of the federal student loan program by reducing subsidies to lenders. Curbing the programs will make it harder to lure college graduates into high-value but often low-paying fields like teaching and nursing. While few schools may be hiring now in this economic climate, there may be shortages later, educators say. "You’re going to diminish the quality of the candidates who are thinking, ‘Do I take my skills in math and science into industry or do I take them into the classroom?’ " said Tracey L. Bailey, who had loans forgiven in Florida and now is director of education policy for the Association of American Educators.

The Kentucky Higher Education Student Loan Corporation is at the extreme in cutting payments to people in midstream who have already finished their educations and are repaying loans, but organizations in many other states have curtailed their new offers to prospective teachers, nurses and others. The New Hampshire Higher Education Loan Corporation has suspended its program for teachers, and the Pennsylvania Higher Education Assistance Authority has done so for nurses and people called to active duty in the military.

Iowa Student Loan has reduced the maximum amounts offered to people in two of its three program categories, one for teachers and one for certain types of nurses, in an effort to ensure the programs will last. ALL Student Loan, which is based in Los Angeles, ended a program for nurses last year. The changes leave students without a critical escape hatch from their federal college and graduate school loans, and they throw up a roadblock for those who dream of teaching but fear an oppressive combination of low wages and high debt.

"I remember sitting in the financial aid office and them saying, ‘Pay for every penny of it, pay for your books through loans, because they’re going to be forgiven,’ " Mr. Gay said. And he dutifully did, using federal loans to cover some of the costs of his undergraduate degree in communications and all the costs of his master’s program in special education, which he finished in 2006. If he had known the forgiveness program was vulnerable, Mr. Gay said, he would have chosen a different career, perhaps public relations. "Which I am actually contemplating doing right now," he added.

Teachers in Kentucky are hoping to get financing restored for the program. But it is not clear where the money could come from. "We’d obviously love to see something like that happen," said Ted Franzeim, vice president for customer relations of the organization. He added that the group had never told participants that financing for forgiveness was guaranteed — a point that schoolteachers dispute. About 7,500 teachers, nurses and public interest lawyers have benefited from the state’s loan forgiveness program since 2003, at a cost of $77 million, Mr. Franzeim said.

The federal government and some states continue to support their programs to lure promising young graduates to less lucrative jobs. The federal Education Department still offers up to $17,500 in loan forgiveness to math, science or education teachers who have worked for at least five years at an elementary or secondary school in a low-income area. New Mexico, New Jersey and New York pay for their programs directly instead of relying on nonprofit organizations, and they have not been cut by lawmakers. In Oregon the Legislature is debating whether to suspend funding of a program for nurses.

Another problem for some of the nonprofit groups that rely on selling their loans in a secondary market is that financing has dried up. The Missouri Higher Education Loan Authority, for example, has stopped offering to reduce interest rates for borrowers working in public service fields like teaching and firefighting, said Will Shaffner, director of business development and governmental relations. The only investor willing to buy its loans now is the federal Education Department, which purchases loans with standard terms only.

There is no clear accounting of how many people were swayed by loan forgiveness to pursue teaching, or how many might be deterred by the absence of such programs. But the anecdotal evidence suggests the programs matter. Mark Henderson said he weighed a job as an auditor at Humana, where he worked as temporary help in 2005, against the chance to teach math, a subject he loved. Kentucky’s loan forgiveness program persuaded him to try teaching.

"I thought, at least if I have somebody repay it, I can last five years and get rid of this debt," said Mr. Henderson, 26, a math teacher in Louisville. He enrolled at Spalding University and graduated in 2006 with a master’s in teaching; he is not yet in repayment on his loans because he is taking classes to improve his earning potential. He has ended up teaching at the very high school he attended, Mr. Henderson said, and teaches geometry in the same classroom where he learned it. "As it turned out, I really liked it," he said, "and I’ll stick around for a long time."




How the Financial Bailout Scams Taxpayers, Subsidizes Wall Street, and Props Up Our Broken Financial System
On October 3rd, as the spreading economic meltdown threatened to topple financial behemoths like American International Group (AIG) and Bank of America and plunged global markets into freefall, the U.S. government responded with the largest bailout in American history. The Emergency Economic Stabilization Act of 2008, better known as the Troubled Asset Relief Program (TARP), authorized the use of $700 billion to stabilize the nation's failing financial systems and restore the flow of credit in the economy.

The legislation's guidelines for crafting the rescue plan were clear: the TARP should protect home values and consumer savings, help citizens keep their homes, and create jobs. Above all, with the government poised to invest hundreds of billions of taxpayer dollars in various financial institutions, the legislation urged the bailout's architects to maximize returns to the American people.

That $700 billion bailout has since grown into a more than $12 trillion commitment by the U.S. government and the Federal Reserve. About $1.1 trillion of that is taxpayer money -- the TARP money and an additional $400 billion rescue of mortgage companies Fannie Mae and Freddie Mac. The TARP now includes 12 separate programs, and recipients range from megabanks like Citigroup and JPMorgan Chase to automakers Chrysler and General Motors.

Seven months in, the bailout's impact is unclear. The Treasury Department has used the recent "stress test" results it applied to 19 of the nation's largest banks to suggest that the worst might be over; yet the International Monetary Fund as well as economists like New York University professor and economist Nouriel Roubini and New York Times columnist Paul Krugman predict greater losses in U.S. markets, rising unemployment, and generally tougher economic times ahead.

What cannot be disputed, however, is the financial bailout's biggest loser: the American taxpayer. The U.S. government, led by the Treasury Department, has done little, if anything, to maximize returns on its trillion-dollar, taxpayer-funded investment. So far, the bailout has favored rescued financial institutions by subsidizing their losses to the tune of $356 billion, shying away from much-needed management changes and -- with the exception of the automakers -- letting companies take taxpayer money without a coherent plan for how they might return to viability.

The bailout's perks have been no less favorable for private investors who are now picking over the economy's still-smoking rubble at the taxpayers' expense. The newer bailout programs rolled out by Treasury Secretary Timothy Geithner give private equity firms, hedge funds, and other private investors significant leverage to buy "toxic" or distressed assets, while leaving taxpayers stuck with the lion's share of the risk and potential losses.

Given the lack of transparency and accountability, don't expect taxpayers to be able to object too much. After all, remarkably little is known about how TARP recipients have used the government aid received. Nonetheless, recent government reports, Congressional testimony, and commentaries offer those patient enough to pore over hundreds of pages of material glimpses of just how Wall Street friendly the bailout actually is. Here, then, based on the most definitive data and analyses available, are six of the most blatant and alarming ways taxpayers have been scammed by the government's $1.1-trillion, publicly-funded bailout.

1. By overpaying for its TARP investments, the Treasury Department provided bailout recipients with generous subsidies at the taxpayer's expense.

When the Treasury Department ditched its initial plan to buy up "toxic" assets and instead invest directly in financial institutions, then-Treasury Secretary Henry Paulson, Jr. assured Americans that they'd get a fair deal. "This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything," he said in October 2008.

Yet the Congressional Oversight Panel (COP), a five-person group tasked with ensuring that the Treasury Department acts in the public's best interest, concluded in its monthly report for February that the department had significantly overpaid by tens of billions of dollars for its investments. For the 10 largest TARP investments made in 2008, totaling $184.2 billion, Treasury received on average only $66 worth of assets for every $100 invested. Based on that shortfall, the panel calculated that Treasury had received only $176 billion in assets for its $254 billion investment, leaving a $78 billion hole in taxpayer pockets.

Not all investors subsidized the struggling banks so heavily while investing in them. The COP report notes that private investors received much closer to fair market value in investments made at the time of the early TARP transactions. When, for instance, Berkshire Hathaway invested $5 billion in Goldman Sachs in September, the Omaha-based company received securities worth $110 for each $100 invested. And when Mitsubishi invested in Morgan Stanley that same month, it received securities worth $91 for every $100 invested.

As of May 15th, according to the Ethisphere TARP Index, which tracks the government's bailout investments, its various investments had depreciated in value by almost $147.7 billion. In other words, TARP's losses come out to almost $1,300 per American taxpaying household.

2. As the government has no real oversight over bailout funds, taxpayers remain in the dark about how their money has been used and if it has made any difference.

While the Treasury Department can make TARP recipients report on just how they spend their government bailout funds, it has chosen not to do so. As a result, it's unclear whether institutions receiving such funds are using that money to increase lending -- which would, in turn, boost the economy -- or merely to fill in holes in their balance sheets.

Neil M. Barofsky, the special inspector general for TARP, summed the situation up this way in his office's April quarterly report to Congress: "The American people have a right to know how their tax dollars are being used, particularly as billions of dollars are going to institutions for which banking is certainly not part of the institution's core business and may be little more than a way to gain access to the low-cost capital provided under TARP."

This lack of transparency makes the bailout process highly susceptible to fraud and corruption. Barofsky's report stated that 20 separate criminal investigations were already underway involving corporate fraud, insider trading, and public corruption. He also told the Financial Times that his office was investigating whether banks manipulated their books to secure bailout funds. "I hope we don't find a single bank that's cooked its books to try to get money, but I don't think that's going to be the case."

Economist Dean Baker, co-director of the Center for Economic and Policy Research in Washington, suggested to TomDispatch in an interview that the opaque and complicated nature of the bailout may not be entirely unintentional, given the difficulties it raises for anyone wanting to follow the trail of taxpayer dollars from the government to the banks. "[Government officials] see this all as a Three Card Monte, moving everything around really quickly so the public won't understand that this really is an elaborate way to subsidize the banks," Baker says, adding that the public "won't realize we gave money away to some of the richest people."

3. The bailout's newer programs heavily favor the private sector, giving investors an opportunity to earn lucrative profits and leaving taxpayers with most of the risk.

Under Treasury Secretary Geithner, the Treasury Department has greatly expanded the financial bailout to troubling new programs like the Public-Private Investment Program (PPIP) and the Term Asset-Backed-Securities Loan Facility (TALF). The PPIP, for example, encourages private investors to buy "toxic" or risky assets on the books of struggling banks. Doing so, we're told, will get banks lending again because the burdensome assets won't weigh them down. Unfortunately, the incentives the Treasury Department is offering to get private investors to participate are so generous that the government -- and, by extension, American taxpayers -- are left with all the downside.

Joseph Stiglitz, the Nobel-prize winning economist, described the PPIP program in a New York Times op-ed this way:

"Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year's time. The average 'value' of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is 'worth.' Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

"Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That's 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest -- $12 in 'equity' plus $126 in the form of a guaranteed loan.

"If, in a year's time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that's left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37."


Worse still, the PPIP can be easily manipulated for private gain. As economist Jeffrey Sachs has described it, a bank with worthless toxic assets on its books could actually set up its own public-private fund to bid on those assets. Since no true bidder would pay for a worthless asset, the bank's public-private fund would win the bid, essentially using government money for the purchase. All the public-private fund would then have to do is quietly declare bankruptcy and disappear, leaving the bank to make off with the government money it received. With the PPIP deals set to begin in the coming months, time will tell whether private investors actually take advantage of the program's flaws in this fashion.

The Treasury Department's TALF program offers equally enticing possibilities for potential bailout profiteers, providing investors with a chance to double, triple, or even quadruple their investments. And like the PPIP, if the deal goes bad, taxpayers absorb most of the losses. "It beats any financing that the private sector could ever come up with," a Wall Street trader commented in a recent Fortune magazine story. "I almost want to say it is irresponsible."

4. The government has no coherent plan for returning failing financial institutions to profitability and maximizing returns on taxpayers' investments.

Compare the treatment of the auto industry and the financial sector, and a troubling double standard emerges: As a condition for taking bailout aid, the government required Chrysler and General Motors to present detailed plans on how the companies would return to profitability. Yet the Treasury Department attached minimal conditions to the billions injected into the largest bailed-out financial institutions. Moreover, neither Geithner nor Lawrence Summers, one of President Barack Obama's top economic advisors, nor the president himself has articulated any substantive plan or vision for how the bailout will help these institutions recover and, hopefully, maximize taxpayers' investment returns.

The Congressional Oversight Panel highlighted the absence of such a comprehensive plan in its January report. Three months into the bailout, the Treasury Department "has not yet explained its strategy," the report stated. "Treasury has identified its goals and announced its programs, but it has not yet explained how the programs chosen constitute a coherent plan to achieve those goals."

Today, the department's endgame for the bailout still remains vague. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, wrote in the Financial Times in May that the government's response to the financial meltdown has been "ad hoc, resulting in inequitable outcomes among firms, creditors, and investors." Rather than perpetually prop up banks with endless taxpayer funds, Hoenig suggests that the government should allow banks to fail. Only then, he believes, can crippled financial institutions and systems be fixed. "Because we still have far to go in this crisis, there remains time to define a clear process for resolving large institutional failure. Without one, the consequences will involve a series of short-term events and far more uncertainty for the global economy in the long run."

The healthier and more profitable bailout recipients are once financial markets rebound, the more taxpayers will earn on their investments. Without a plan, however, banks may limp back to viability while taxpayers lose their investments or even absorb further losses.

5. The bailout's focus on Wall Street mega-banks ignores smaller banks serving millions of American taxpayers that face an equally uncertain future.

The government may not have a long-term strategy for its trillion-dollar bailout, but its guiding principle, however misguided, is clear: What's good for Wall Street will be best for the rest of the country.

On the day the mega-bank stress tests were officially released, another set of stress-test results came out to much less fanfare. In its quarterly report on the health of individual banks and the banking industry as a whole, Institutional Risk Analytics (IRA), a respected financial services organization, found that the stress levels among more than 7,500 FDIC-reporting banks nationwide had risen dramatically. For 1,575 of the banks, net incomes had turned negative due to decreased lending and less risk-taking.

The conclusion IRA drew was telling: "Our overall observation is that U.S. policy makers may very well have been distracted by focusing on 19 large stress test banks designed to save Wall Street and the world's central bank bondholders, this while a trend is emerging of a going concern viability crash taking shape under the radar." The report concluded with a question: "Has the time come to shift the policy focus away from the things that we love, namely big zombie banks, to tackle things that are truly hurting us?"

6. The bailout encourages the very behaviors that created the economic crisis in the first place instead of overhauling our broken financial system and helping the individuals most affected by the crisis.

As Joseph Stiglitz explained in the New York Times, one major cause of the economic crisis was bank overleveraging. "[U]sing relatively little capital of their own," he wrote, "[banks] borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations." Financial institutions engaged in overleveraging in pursuit of the lucrative profits such deals promised -- even if those profits came with staggering levels of risk.

Sound familiar? It should, because in the PPIP and TALF bailout programs the Treasury Department has essentially replicated the very overleveraged, risky, complex system that got us into this mess in the first place: in other words, the government hopes to repair our financial system by using the flawed practices that caused this crisis.

Then there are the institutions deemed "too big to fail." These financial giants -- among them AIG, Citigroup, and Bank of America -- have been kept afloat by billions of dollars in bottomless bailout aid. Yet reinforcing the notion that any institution is "too big to fail" is dangerous to the economy. When a company like AIG grows so large that it becomes "too big to fail," the risk it carries is systemic, meaning failure could drag down the entire economy. The government should force "too big to fail" institutions to slim down to a safer, more modest size; instead, the Treasury Department continues to subsidize these financial giants, reinforcing their place in our economy.

Of even greater concern is the message the bailout sends to banks and lenders -- namely, that the risky investments that crippled the economy are fair game in the future. After all, if banks fail and teeter at the edge of collapse, the government promises to be there with a taxpayer-funded, potentially profitable safety net. The handling of the bailout makes at least one thing clear, however: It's not your health that the government is focused on, it's theirs -- the very banks and lenders whose convoluted financial systems provided the underpinnings for staggering salaries and bonuses while bringing our economy to the brink of another Great Depression.




The Finance-Government Complex & The End of U.S. Economic Dominance
by Satyajit Das

Banks remain in the ICU (intensive care unit). Even after around $900 billion in new capital, the global banking system remains short of capital by around $1-2 trillion. This translates into an effective reduction in available credit of around 20-30% from previous levels. Recent excitement about the "stress tests" of U.S. banks misses an essential point. At best if you accept the premises of the test, the risk of failure of these institutions is much reduced. But the banks’ ability to support lending levels that prevailed in say 2007 has not been restored. In short, the "credit crunch" or shortage of borrowing will continue for a prolonged period.

The financial system will need continued government support for some time to come. The performance of governments trying to rehabilitate the financial system has been problematic. Increasingly, government officials have become focused on "reassuring" the public and maintaining "confidence". The "political spin" has dominated substance. Many government proposals are "stillborn"; for example, progress on the famed Public Private Investment Partnership ("PPIP") has been painfully slow.

In April 2009, Elizabeth Warren, Chairperson of the TARP Oversight Panel Report questioned the very approach to resolving the problems of the financial system: "Six months into the existence of TARP, evidence of success or failure is mixed. One key assumption that underlies Treasury’s [PPIP] approach is its belief that the system-wide deleveraging resulting from the decline in asset values, leading to an accompanying drop in net wealth across the country, is in large part the product of temporary liquidity constraints resulting from non-functioning markets for troubled assets. On the other hand, it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth."

Richard Neiman (New York State Superintendent of Banks) and John Sununu (former New Hampshire Senator), two other panel members, issued dissenting findings noting: "We are concerned that the prominence of alternate approaches presented in the report, particularly reorganization through nationalization, could incorrectly imply both that the banking system is insolvent and that the new administration does not have a workable plan." Many would question the selection of the words "incorrectly imply".

Constant changes do not suggest a consistent and well thought out strategy in dealing with the problems. Less than rigorous stress tests, using taxpayers monies in different guises provide lopsided subsidies for private investors to buy distressed assets with minimal risk or converting preferred stock into shares to avoid having to seek additional congressional mandates suggest a highly politicised and ideological approach. One online commentator noted the intersection between Wall Street, Constitution Avenue and Main Street was best named: "Confusion Corner".

Suggestions of political influence and a palpable lack of transparency are emerging. There are allegations that Henry Paulson, the previous U.S. Treasury Secretary, may have "pushed" Bank of America to consummate its controversial acquisition of Merrill Lynch when it sought to withdraw after additional losses came to light. Certainly, the purchase of Merrill Lynch does not fit comfortably with Ken Lewis’ (Bank of America’s Chairman) earlier statement that "he had just about as much fun in investment banking as he could take". The Treasury secretary is alleged to have suggested that Bank of America’s management and board could be removed if it did not proceed.

There are also suggestions that both the Treasury and Bank of America decided to avoid public disclosure of these events. The appointment of Timothy Geithner and Larry Summers initially was viewed favourably. The feeling was that "they knew where the bodies were buried". Critics pointed out that this was because they may have put them there! The "closeness" between banks and government officials and regulators that is being exposed daily is increasingly part of the problem in dealing with the real issues.

Mancur Olson, the American economist, in his books (The Logic of Collective Action and The Rise and Decline of Nations), speculated that small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well funded lobbying. The policies result in benefits for the coalitions and its members but large costs borne by the rest of population. Over time, the incentive structure means that more distributional coalitions accumulate burdening and ultimately paralysing the economic system causing inevitable and irretrievable economic decline.

Government attempts to deal with the problems of the financial system, especially in the U.S.A., Great Britain and other countries, may illustrate Olson’s thesis. Active well funded lobbying efforts and "regulatory capture" is impeding necessary actions to make needed changes in the financial system. For example, the Centre of Public Integrity reported that the expenditure on lobbying and political contribution of the top 25 sub-prime mortgage originators, most linked to large U.S. banks, was around $380 million (the Economist (9 May 2009).

Larry Summers, an uncompromising advocate of deregulation and liberalization blamed the Asian crisis, in part, on "crony capitalism". Increasingly, government actions to rescue and re-regulate the financial system display many of the characteristics of the policies that Summers once criticised. The phrase - "military industrial complex" - described the complex inter-relationships and influences that shaped America in the post-war era. The "finance government complex" (dubbed "Government Sachs" by its critics) replaced the original arrangement in the late twentieth century and may well prove to be the undoing of American economic dominance


77 comments:

Anonymous said...

Illargi said 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.Interesting. I actually have been thinking of the 'carrot in front of their face' idea in regards to your commentary.

I believe your analysis is incapable of dealing with the irrationality that exists in the markets. You seem to admit to the strength of that irrationality in your May 26th piece. The surreality involved is so strong, and so unbelievably bizarre that the old tools of analysis may be useless at this point. Even our ability to imagine what all the bad news may mean going forward seems impossible.

I wonder if, come autumn and things don't play out as Illargi has described, he will extend the carrot in front of our faces a bit further. Will he rationalize the imperfection involved in analyzing the make believe? Or will he admit that he, like everyone else, has no fucking idea what is happening, or what will be happening in the future?

Mmmmmm. I love carrots. Keep them coming please, Mr. McGregor.

Anonymous said...

Requesting Suggestions and/or Criticism of my Prep Strategy

My situation:
Location = Silicon Valley, CA
Age = early 30’s
Family = Married, No Children
Both sets of Parents and siblings live on east coast 3000 miles away
Financial situation:
Assets = $240000 all in cash equivalents
Debts = none
Savings Rate = Adding $3200/month after subtracting expenses
Jobs:
Hers = nurse practitioner
Mine = Postdoc - academic research – microbiology
Job Stability = Hers appears stable for next 1 year. Mine appears stable for the next 1 year. Beyond 1.5 years, I’ll need a new position.

Plan: My job situation less flexible than hers. I’m currently looking exclusively at jobs in federal government. I’m periodically scanning for positions in biofuels research at Dept of Energy and bioweapons at Dept of Defense. Some openings currently exist for technician level positions with less training than I have. A colleague just landed a successful Staff Scientist (PhD level) opening at DOE in biofuels. I’m holding out for a similar position but considering applying for the lower tier position. My fear is that I need to land a position soon, prior to bond market dislocation that cuts off further government expenditure and leads to hiring freeze. Job openings exist both on east coast and west coast. West coast advantages = biofuels (my desired career direction) positions here. East coast advantages = closer to parents and siblings.

Financial Gambling = Sometime this summer, I’m considering a wager of $25000 (~10% of total assets) on market crash this fall by investing in SDS or SH inverse ETFs. I’m not considering a home purchase due to arguments made daily at this site, but I’m looking ahead to when I’ll need to switch from the current defensive deflation posture to a defensive inflation posture (2 -3 years from now?). Somewhere in that time frame, it seems a home/land purchase might be wise prior to total bond market breakdown and serious inflation sets in to keep the government afloat.

Material Preparation = 3 month supply of freeze dried food, 1 week of MRE, water filter, hand crank radio, hand crank flashlights, 45 gallons of water. Currently, I don’t own a firearm, but I’m seriously considering buying one for protection in anticipation of social disorder (debating between shotgun vs. handgun).

Suggestions and/or Criticisms of my plans and preparations are requested. Examples: invest in more food now, more water now, firearms, move east closer to family ASAP, consider different career path, wait to buy more food until prices drop further etc…….
Thanks,
Johnny Dixon

Anonymous said...

Two Dow advisories say U.S. Bear market. You can pick from Dow Theories too. TheDowTheory.com is sure another new bull market is here.

I predict
monkeys with typewriters would eventually write
Shakespeare's plays given enough time.

Bigelow said...

The Finance-Government Complex & The End of U.S. Economic Dominance link back to TAE.

Anonymous said...

Anon 8:58

If you trace I&S to the start of this blog, and for that matter back into TOD, their predictions have been spot on. Particularly Stoneleigh, who does make very specific predictions with the caveat that they are simply wave probabilities. If one tries to evaluate if someone understands what is happening in a system, then you evaluate the logical construct of their theory; you evaluate the logical construct of the predictions coming out of the theory, and then you see what happens. I&S appear to be quite strong in this regard.

So anon 8:58, we presume you would include yourself in the "everyone" category, so you have "no fucking idea what is happening, or what will be happening in the future."

The readership here has a choice of taking our hosts understanding seriously or an anonymous poster who admits he doesn't know what the fuck is going on.

Jeez - that's a tough choice.

RC said...

Dear Johnny Dixon: let's trade places!

Anonymous said...

Good idea or buying into paranoia? Guess if you have the bucks to buy it's a kind of life insurance or anti-death insurance?!? I bet Geitner is a customer! :P

www.sovereigndeed.com

Life Continuity Preparedness Programs

You and your loved ones are at risk. That's the bad news. The good news is that now you can outsource your worries. Let us prepare you to protect and provide for your family, your business and yourself in all manner of emergencies and disasters. Our comprehensive outsourced preparedness programs can offer peace of mind in a changing, volatile and unpredictable world.

--snip--
Thus, we are left with this stark reality: we are each individually responsible for preparing and protecting ourselves and our loved-ones. Sadly, 98% of us haven’t taken this responsibility seriously.

The answer to this dilemma can now be found in an entirely new industry designed to provide preparation and response services to individuals, families and corporations. Some call it “Privatized FEMA™,” others call it “Private Civil Defense™,” but we call it a “Life Continuity™ preparedness program.” In today's world we spend an inordinate amount of time and money protecting the inanimate objects in our lives, but we spend almost no time or money preparing to protect something far more important – our lives and those of our loved ones.

jal said...

The implications are scary… for everyone.
It was announced that Canadians have 1.3T$ of debt and a consumer survey in November indicated 85 per cent of households had outstanding debt on a credit card. And 21 per cent of Canadians who were in debt said they could no longer manage their debt load. Forty-nine per cent of families with children under 18 said their debt had increased in the past three years, One-quarter of those interviewed would not be able to handle an unforeseen expense of $5,000, and one in 10 would have trouble with an unforeseen cost of $500. and bank credit-card receivables were up 8.9 per cent at $51.5 billion.
jal

timekeepr said...

Suggestions and/or Criticisms of my plans and preparations are requested. Examples: invest in more food now, more water now, firearms, move east closer to family ASAP, consider different career path, wait to buy more food until prices drop further etc…….
Thanks,
Johnny Dixon
Think about buying some farm land, you can grow all the food you need.

Ilargi said...

Johnny D.

Your family.

Starcade said...

The fact is that the only recovery will come when equilibrium is reached.

So, it gets back to the question: Are you going to raise taxes to a meaningful level to provide enough services for a population of 305 million (legals), or are you going to reduce said population (probably by some significant fraction) to restore equilibrium through violent means?

That's it. There is no option C. There is no recovery until the economy can actually have equilibrium to grow again. The fact is, the only thing which has given us the ability to grow (in population, or in much else) is the double-sword of cheap energy and free credit.

Anonymous said...

Timekeepr/Johnny Dixon

Too early to buy farmland, but not too early to learn the skills. Maybe "intern" for farmers on weekends.

Anonymous said...

I am convinced we are in a "faith based" economy and have been for a long time. In such times, people always listen to the high priests and act accordingly. In reality absolutely no one knows what is going on. Oh people understand this or that piece of it but that's it.

I just watched a CSPAN program with FDIC people stating that through the first quarter default rates in ALL loan categories continue to escalate. When asked when the bottom might be the answer was a vague "it will start in the residential loan area first" with a follow up of "several quarters" away. That will not be on the mass media tomorrow.

So as we all, frantically, seek answers to moderate our anxiety/insecurity, choose the "high priest" you most agree with. There are plenty to choose from.

My own analogy is one of "downsizing" one's lifestyle. It takes a long time, is emotionally painful and affects every life area. The US has been living an insane lifestyle for a long time. We have a long way to go.

Taizui said...

Another Request for Advice:


I'm having a barn/workshop built on family homestead and have just drilled a well which hit a plentiful water source.


Considering installing 5KW solar PV system with battery storage to power the pump and other essentials at a cost of about US$63K. Homestead is 15 acres in rural but not remote area (about 30 homes/square mile). Electric service has been reliable except for 4-day outage following an ice storm 3 years ago. Local utility offers net metering.


Worth the money?

thethirdcoast said...

@ Stoneleigh:

I take it you're rooting for Detroit. I used to go to school with their former captain :)Yes, I am.

Which former captain? You mean 'The Captain'? So not fair.

Stoneleigh said...

Thethirdcoast,

I mean Steve Yzerman. We were in the same class for several years. I haven't seen him for a very long time though.

Anonymous said...

Where is Mark Carney in all this 50 billion deficit business. A couple of weeks ago he was glue on the TV talking quantitative easing and now he slinks and slithers who knows where and in what low company?

jal said...

I wonder if the Canadians remember that the conservatives were forced to make a deficit budget by the 3 stooges.
jal

Dr J said...

Jal - a deficit budget was a foregone conclusion. It had nothing to do with the opposition. The current government erred in squandering a surplus in a vote-buying strategy that was also doomed from the outset.

Greenpa said...

Taizul- $63K??? What do you need that much water for- going to run a fish hatchery?

I run my modest commercial greenhouse on solar pumped water; panels, pump, and batteries under 10K. Pump puts out 1.5 gallons/minute. With a couple good tanks- that's plenty.

Anonymous said...

Taizui, since you have reasonably reliable power now why not just a small diesel or nat gas powered generator for that pump when the electric does go out at times. Maybe and put the rest of your bread into some safe investment and see how things go, you might make better use of that money in ways you can't see right now. I am so liquid right now I squish when I walk:)

-daze end-

Taizui said...

Greenpa,

The pump is just one of the loads that I would consider "essential." Freezers, refrigerator, microwave, computer and some lighting for the residence are others.
PV quotes for 3KW = US$25K without battery backup, $39K with.
For 5KW = $35K without, $63K with

Taizui said...

Daze End,

I squish also, but have a nagging concern about not being able to un-squish quickly enough when the time comes. Bond market dislocation seems to loom bigger by the day, and I wonder if anyone can reliably predict the "normalcy" of business transactions once that happens?

Anonymous said...

Anon 9.20

I think most great inspirations are sudden and spontaneous, even if the full realization of the embryonic idea takes years or a lifetime to realize. So no Monkey--I presume you mean hack--is going to be typing a masterpiece anytime soon--no matter the length of time banging on the keyboards.

And isn't that the real problem... no real clarity of vision concerning what type of idea to liberate ?

Anonymous said...

Anon 9:20 said (approximately):

I predict that millions of monkeys with keyboards could reproduce Shakespeare's playsThanks to the internet we now know this is false.

Anonymous said...

You wrote:

We are in the middle of a crisis. Which has to do with money.

...Second, and I return to what I've said many times before, this is not a financial or economical crisis, and neither should nor can therefore be solved by economists.

...We are being eaten up alive by an all-out all-encompassing societal crisis. It's not about money.
The first statement is a direct contradiction of the next two. Can you clarify?

Anonymous said...

Hello,

@ Anon at 17.05 in yesterday's edition

"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.No one has said that. The MSM should have been on the ball since at least 2004, informing people on the risks and dangers that were accumulating.

Failing that, and on the premise of better late than never, the MSM should be providing reality-grounded information to enable people to understand what is going on and what is coming. That is not inciting to panic, it is simply the public service expected.

In the end, what is better for the public? Forewarning or a steady dribble of incapacitating assurances?

Ciao,
FB

Mugabe said...

"You can't have a spike in interest rates in the long end without it impacting the economy," he said. "That's why the Fed has been a supporter of the quantitative easing. They have a choice. They could walk away from it or they could increase it to the point where it's meaningful. The $300 billion is not effective...You've got to start to talk trillions," [Cantor Fitgerald head of interest rate trading Brian] Edmonds said. (From CNBC this morning.)

So there is the big setup. How much will the Fed print in an effort to prevent the next leg down, which I&S and Mr. Edmonds above and the Dow theorists and lots of other skeptics see coming? Will the Fed start talking trillions, or walk away?

VK said...

LOL, stoneleigh motors! *chuckle*

House prices still have a long, long way to fall.

If house prices fell 90%, the case shiller index would be at 23 as the peak was 226. It's currently at 156. So there's an 85% drop still left to go from here!! It's a looong way down folks.

So lets summarize

Ilargi says 80%, so house prices would still have 71% more to drop to 45 on the Case Shiller.

Stoneleigh (Not Motors) says 90% so thats an 85% drop to 23 on the Case Shiller.

Starcade (I'm assuming) reckons 100% drop in housing, so that's 100% and ZERO on the case shiller. In which case there won't be a country, a market or much for that matter...Here's hoping we just get the 71% drop.

z said...

haven't visited this site for a while. too much stuff to plow through, not enough time. 為學日益, 為道日損, summary is closer to Dao. could NS or someone else start an email based letter of summary like POdaily?

is anyone here into straw bale construction? got a more than century old 3-story barn to restore and wondering if the straw bale construction concept could somehow be applied. please email me with any thoughts or advice.

ca said...

Interesting 2 part article on Faber v. Keen on inflation v. deflation.

http://cij.inspiriting.com/?p=657&ref=patrick.net

D. Benton Smith said...

Anonymous 1:31 asked (about Ilargi's analysis of the nature of the crisis) "The first statement is a direct contradiction of the next two. Can you clarify?"

The crisis does indeed "have to do with money" because it is destructively affecting all sorts of money related systems and conditions, but that doesn't mean its underlying cause is Economics.

To use an analogy, we are in a junkyard and a very large ill tempered doberman has just bitten the wallet right off our ass. We have a crisis, and losing the pocket book is one of the symptoms, but this is not a crisis of the billfold... it's a crisis of being trapped inside of a chain-link fence with a junkyard dog.

For a wide ranging number of earlier reasons and bad choices (in which we are all at least partially complicit) our society is under the control of a whole pack of junkyard dogs who believe that what's theirs is theirs, and what's ours is theirs, too.

These mutts (mixed breed Economist-Banker-Stockbroker-Corporatista-Investor) are operating on the insane premise that "growth" can continue forever (or for at least as long as it takes for them to own everything and everyone.)

They derive their power from our greed. We give them money and authority because they (used to) give us back two hundred dollars whenever we gave them a hundred.

We will not be rid of them until we are willing to work for a living instead of (insanely) believing that anyone can give us something for nothing.

That will happen at or around the time that we haven't got anything left to lose.

Ilargi said...

1:31

I did see it, and decided to leave it in, though I could have said it differently. "It has to do with money, but it's not about money" doesn't contradict, but it may confuse. The consequences of what has started with "mere" money matters grow into something much bigger, a crisis that will shake political systems and the structures of entire societies. The reactions to what started with dollars will overwhelm its root cause. To date, for instance, we opt to not persecute, to not let gamblers fail, but instead to pay off their losses with what belongs to everyone else. We could make other choices. The fact that we don't will lead to misery for many.

Bigelow said...

“Thus, we come to our own forecast: the gold price will.....change. It will go up, then down, then up again. Followed by more downside action, which in turn will be followed by moves to the upside. And, so on.

As for the one-way street (in either direction)? You might as well hang that one up. We predict. With 100% certainty. And with the right to change our mind half the time.

Still, the nearly-lost-in-this-deluge-of-prognostications tiny little observation that the metal is trading some 65% above its long-term historical average, keeps nagging us...
R.E.G.B. Feeding Frenzy. What Are They Eating?

Anonymous said...

The monkey / Shakespeare thing has been poorly expressed here. The original idea was that a monkey, diligently typing away through eternity, would eventually write the works of Shakespeare. The idea behind it was really mathematical, suggesting the possibilities that arise from infinity and the infinite. Of course, this is the basis of calculus.

Though most economists publish gibberish that should embarrass a monkey, this has no connection with the infinite idea other than given an infinite amount of time, even Paul Krugman will get it right.

Anonymous said...

D. Benton Smith

Your metaphor of an ill tempered Doberman biting the wallet off our collectives asses is quite wonderful in a terrifying way.

Anonymous said...

Taizui

Another option to the solar panel, wind generator, or gas/diesel generator for those who have good reason to expect intermittent electrical delivery is what I call the Baghdad solution. A 3 KW charger/inverter with a bank of 12v deep cycle batteries. The cost of the charger/inverter is currently $300-400 and the battery bank would, of course, be determined by how many you think you might need in reserve power. But a decent system is available for around $1000. If you expect the grid to go down for days or weeks at a time, this is pretty useless.

Anonymous said...

Denniger has a good analysis of the banks this morning titled "The Curtains are on Fire." He summarizes that the equities market could get real bad real fast, but his disclosure says, "lightly short the SPX."

andrew said...

Ilargi:

Bloomberg reports that hedge fund maven David Einhorn said, "We are short Moody's" and that he has effectively joined Warren Buffet in the call to abolish the credit ratings business.

Is this a case of killing the messenger after S&P's rumblings about downgrading the UK?

Anonymous said...

The posting by Mugabe at 6:17 AM referring to remarks by Cantor Fitzgerald's Head of Interest Trading and his view that the Fed needs to increase QE to trillions to make it effective.

The original article is here:

New Investor Worry: Treasury Selloff Spiking Interest Rates

http://www.cnbc.com/id/30968861

Ian

Greenpa said...

Taizui-"The pump is just one of the loads that I would consider "essential." Freezers, refrigerator, microwave, computer and some lighting for the residence are others. "

Ah. yeah, that makes a difference. :-)

You might want to consider dumping the refrigerator. You can check my blog for details; I've done without one for 30 odd years (ha). Really quite simple to do, with a little mental readjustment. I think just cutting the fridge could save you thousands in system expenses- and in my opinion, it winds up saving you money on food, too. For most people. It forces more thinking; less "oh, I'll just chuck the leftovers in the fridge" - so you can just chuck it out weeks later.

Greenpa said...

Maybe "main stream media" should be replaced by "mains stream clowns". It IS funny; in the Polka Dot Gallows kind of way.

Simultaneous headlines right now:

"US Manufacturing Orders Rose Sharply in April" (New York Times)

"US Durable-Goods Orders Hover Near 13-Year Low" (Bloomberg)

yes, it's the same statistic they're talking about.

Anonymous said...

The idea behind it was really mathematical, suggesting the possibilities that arise from infinity and the infinite. Of course, this is the basis of calculus.The basis for calculus is the infintesimal rather than the infinite.

VK said...

This is exactly the clap trap we should be wary of. The rest of the world has been lulled into a deadly complacency. Most people have not truly felt the crisis outside of America and Britain given what I have felt in the newspapers. So the next leg down will be the big kahuna and maybe you folks in Oz, NZ and Ottawa will finally see big drops in home prices.

America sneezes and the world is germ-free

http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article6374863.ece

As the dust settles after the Great Depression That Never Was, the worldwide financial crisis is starting to look less like the seismic historical transformation so widely expected. With every week that passes, President Sarkozy's predictions about the death of Anglo-Saxon capitalism sound more premature, while ahistorical comparisons with the end of communism in 1989 seem ever sillier.

And yet it is clear that some permanent changes in the global balance of power really are occurring, as I saw this month while visiting Brazil and South Africa, two large economies hard hit by the crisis in statistical terms, but seemingly more emboldened by the experience than depressed.

timekeepr said...

Taizui said...

PV quotes for 3KW = US$25K without battery backup, $39K with.
For 5KW = $35K without, $63K w
I put in a grid tied 3.1KW PV system 2 years ago myself, $15k for the panels and ~$3k for the inverter & misc, $5k back from our state and fed tax credit.
Save a lot doing it yourself...

VK said...

@ Greenpa

Notice the huge downward revision LAST month to make this month look better!

March new orders were revised down to down 2.1% from 0.8% ! (that's huge). April's new orders went up 1.9% on the March number. With defence spending being the only component up, about 23% .

VK said...

@ Ilargi and Ilargites (via Chris Martenson)

http://www.minyanville.com/articles/libor-Federal-Reserve-tarp-PPIP/index/a/22824

If you add up all the government bailouts, explicit and implicit, along with actual government purchases of assets (debt from banks) it comes out to a surreal $30 trillion. Markets are cheering that things have “stabilized” and “things are getting less bad”. I ask you seriously when the government throws $30 trillion at the “crisis” (one which bankers are now claiming is over), can you call that stable? That is like declaring a patient being kept alive on a heart-lung machine healthy.

Of course we have stabilized. The government has bankrupted our future to do it. The government(s) control the LIBOR market, the swaps market, the bond markets with all the “money” they are printing. They are feeding “money” to banks under the table at an alarming rate.

Those declaring the economy is now recovering do not understand (still) the problem: we are stuck with too much debt. The government’s solutions are to create more debt, as their next to be announced PPIP does. But an economy grows from production, not lending at the wrong price. This is a long term problem; the government has only addressed the short run symptoms.

My question: How on earth did it balloon to 30 trillion? I thought it was around 15 trillion...

Anonymous said...

Anon 11:03

"The idea behind it was really mathematical, suggesting the possibilities that arise from infinity and the infinite. Of course, this is the basis of calculus. The basis for calculus is the infintesimal rather than the infinite."

And the infinitesimal is abstracted by dividing up the finite by the infinite.

Anonymous said...

VK


The MSM BS is like the wolf in grandma's dressing gown :-)

But what big teeth you have Grandma!

The better to eat you!

Anonymous said...

John Dixson...

You are in a good position to start...Some ideas..

1 Increased food supplies to 1 year./18mon. min.Store in 2 or more locations.You will find a use for it.
2 Firearm...Get a shotgun.Unless you already know how to use it,a pistol takes time to learn/use properly.[There is nothing like the sound of a a shell racked in the chamber of a 12 ga. to make folks reconsiter their actions.]
3 Small portible solar chagers..for trade and for use.
4 Start looking for a place to "light"[go]...there is a problem with your situation.The moment you leave your domicile,you are a refugee.Start developing a plan[s] A,B,C on what to do "if"...family?friends?.Got a good cabin you could lease a way out in the woods w/water ect?
You say biofuels..Have you come up with some ideas you could develope into small scale homestead systems that some one like me could use?think small scale..low tech..although low tech does not mean low brainpower...a cheap,reliable methane generator that works...or algae diesal /farmstead size.The field where you are is the one that could pull us out of this...How about geneticly modified electric eels in a fish tank hooked up to my battery pack...come on ,your the scientist!I am sure you have some ideas..but you need to think post industrial,with the ability to modifie existing gear.Manhatten Project for energy is not going to happen.No money,the banks got it all
Your timeframe is about perfect.Find a good hideout and be ready to jump,if it gets strange.

Taizui, wow...your dropping way too much money...for 60 k you can have a 24k gold plated system..look at a outfit call northern arizona wind and sun[google]they will give you a comp. system at abot half that...

I just keep watching,now..I cannot begin to understand what madness drives some of those I see "in power" now.Perhaps blindness to anything except what is needed to secure their position,is whats needed to achive power in the society we have created.I do know that a terrible price is soon to be paid by those who have entrusted their future,the very lives of their children ,to men and women who consiter them less than human...garbage ,to be swept up and hauled off ,out of sight and mind.

The junkyard dog analogy is great.You forget the obvious ploy of picking up a chunk of scrap steel and braining the mutt,while saying "nice dogggie"

What disturbs me most is the knowledge that those who have lead us to this place will slink off to their well-stocked hideouts and not face the same privation ,despair,and hunger that they have inflicted on so many of their fellow men,women&children.
I suppose I should get over it..with the understanding it has always been so...that those who abuse their position rarly ,if ever face those whom they have destroyed,even at the bar of justice.I was raised believeing in the rule of law,and justness of our system.Thats gone now,for me,and for a generation of americans who have seen their hopes for a quiet,prosperous retirement,as their parents enjoyed,Burned up in a orgy of greed by those who already had been blessed with wealth beyond measure.There will be a terrible price paid for this betrayal of trust,and not just by those betrayed.This will not end well for those who have seized the moment and looted what they should have protected.They will find the payback that society will demand a very high price....Its well to remember that records exist of all this and more in FBI/CIA/ NSA files that any administration [should they dare] could use under the existing law to make life very difficult....for those who believe,due to their position,and wealth,that they are "immune"to such pressure.We shall see.

time to be productive...some projects to finish before it gets hot...

snuffy

Anonymous said...

Hello,

On the up side, from Elizabeth Warren (in the S. Das article):
"On the other hand, it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth."Someone important from the U.S. government actually said that?!? I am impressed. I wonder if anyone heard her?


And on the down side, this title:
Industry Lobbies FDIC to Let Some Buy Toxic Assets With Taxpayer Aid From Own Loan Books

That is pretty blatant.

Ciao,
FB

Anonymous said...

Re: Johnny Dixon and what to do?

Do you have a shovel? Start digging and don't stop.

I am beginning to feel that any one of the three stooges, Israel, Pakistan, and N Korea (Iran is Shemp) are going to bring us to the precipice of a nuclear exchange. All four are lead by religeous zealots who think it's next stop paradise.

After a few missiles are lobbed back and forth are debt and cash on hand relevent?

Ontario

jal said...

Hi snuffy!
"What disturbs me most is the knowledge that those who have lead us to this place will slink off to their well-stocked hideouts and not face the same privation ,despair,and hunger that they have inflicted on so many of their fellow men,women&children."
--------
Yep!

The only way that I can think off to avoid being mistaken for one of "those" and to avoid the payback from the angry mobs ...

Be an established member of a community

Hide your wealth ... when everyone is starving skinny, don't go parading around the neighbourhood if you are obviously overweight in fat, resources, etc.

If things get really bad ...
Those that your share with may turn on you in desperation.

This will not be like an episode of "SURVIVOR".
jal

jal said...

OH!

One more point, depending on your location, learn the survival skills being employed by the "street people".
jal

Anonymous said...

Snuffy,

Here's some happy Wikipedia reading for you. Let's hope that history rhymes. Boy, those Parthians had a delightful sense of irony. I wonder what they would do to Hank Paulson?

Crassus received Syria as his province, which promised to be an inexhaustible source of wealth. It would have been had he not also sought military glory and crossed the Euphrates in an attempt to conquer Parthia. Crassus was reportedly the richest man in Rome, and attacked Parthia not only because of its great wealth, but because of a desire to match the military exploits of his two major rivals, Pompey the Great and Julius Caesar, and indeed those of Alexander the Great. The king of Armenia, Artavazd II, offered Crassus the aid of nearly fifty-thousand troops on the condition that Crassus invaded through Armenia so that the king could provide for his troops.[4] Crassus refused, and invaded across the Euphrates. His legions were defeated at Carrhae (modern Harran in Turkey) in 53 BC by a numerically inferior Parthian force composed mainly of armoured heavy cavalry and horse archers. Crassus' legions were unable to maneuver as swiftly as their opponents. Crassus refused his quaestor Gaius Cassius Longinus's plans to reconstitute the Roman battle line, and remained in the testudo formation. Subsequently Crassus' men, being near mutiny, demanded he parley with the Parthians, who had offered to meet with him. Crassus, despondent at the death of his son Publius in the battle, finally agreed to meet the Parthian general. Upon his arrival in the Parthian camp he was seized and killed by being forced to drink a cup of melted gold as a symbol of his thirst for riches.

the golden sawzall

Stoneleigh said...

Taizui,

5kW sounds excessive to me. We have a 3kW system, and that keeps the basics running 24/7 (fridge, 2 freezers, security system, invisible fence for dogs, well pump, sumps pumps, circulating pumps for solar domestic hot water and outdoor wood-burning furnace). The key thing is not to cheap out on the batteries. Even Baghdad gets a couple of hours of electricity per day. That can give you the essentials with batteries even without solar panels, but I'd suggest some panels anyway (assuming you already have no debt and sufficient liquidity).

Stoneleigh said...

John Dixon,

You're doing well. California is a dodgy location though, primarily for water reasons plus the fact that California will be bankrupt sooner than any other state. I think the NE with family might be a better idea. Of course the NE is very natural gas dependent, so you'd have to make sure you had alternative means of heating and generating power. Family makes a big difference though.

Nurse practitioners are employable anywhere. In fact it's a profession that I'd strongly recommend. Doctors have to spend many years stuffing their heads with information that won't be relevant a few years from now (once fancy drugs and machinery cease to be available). Nurse practioners will be the best qualified to provide the basic care people will need. Their skills will be barterable even if people have no money. I'm hoping that my eldest will take this route.

Biofuels will be big in the NE. I work in biofuels myself, and it's moving towards making a significant impact here in Ontario thanks to the new feed-in-tariff programme. Don't think ethanol though - that's nothing but a boondoggle. It only survives due to subsidies to corn production and is energy negative. Think biogas or biobutanol. If you'd like to chat about this drop me a line at theautomaticearth(at)gmail(dot)com.

g-minor said...

@ greenpa

Please explain how you do without refrigeration. Thanks.

g

Pseudo Summary said...

From the 27th -

*Inventory of used tools in shops at all time high; harbinger of doom if ever there was one.

* Oil industry insiders and economists are ostriches sticking their heads in piles of diseased potash and cannot see that which imperils their livlihoods.

*TBTB have managed to maintain housing markets in a patchwork manner; Exsanguination is coming - no patch to be spared; Ottawa is a big patch, a company town, or perhaps of bubble of indeterminate type that draws its wealth from the hinterlands; "Smart" namby-pambies buy houses in Ottawa and refuse gifts on aesthetic grounds; Caution is advised for all Ottawans named Jack; NC is another patch not yet bled out in the bathtub; Army bases for boomers were built around mid-size cities by illegal immigrants then mixed with milk and honey and stuffed into the American gullet; Gullet soon to choke on NC as it did on FL.

*Golden Sawzall taken to MSM and Fed; TAE snorts and chortles.

*Congrats to PS for debut edition. Score of 7.9 awarded (presumably out of ten). PS develops profound apprection for NS; TAE should not expect frequent contributions from PS.

*Barca is high now, one day will be low; Ilargi accused of diversion-related hypocrisy; S & I play soccer in the rain, which is better than being a cog in empire building.

* TAE accused of intellectual dishonesty - actually yearns for the apocalypse in the form of sugar-coated cow plops; TAE equated with social cysts with 40 acres and doesn't care about 600k job losses/month; TAE does care about the Whos in Whoville and could not sleep without warning about impending X-mas disenfranchisment; S & I will not divide loaves and fishes on their farm but can teach Whos to fish; The MSM are clowns; MSM are wolves dressed as grandmas; MSM should throw in the towel or do better; TAE cackles in glee.

*Goddamn GM; If god won't, Bob will.

*Americans have A LOT of stuff.

*Denninger says hounds of hell are loose; US house prices down 15% in one day; Interest rates to fall once stockmarket cascade ensues; Bernanke to water shoots using Treasury dept as his chopper.

May 28th -

Our economists proclaim greenshoots,
Relevant stats they overlook,
Bankrupt ideas me thinks they toots.
Their numbers, their lies, put us on hook,
For 16 thousand per person per year,
Why do we listen to such dulled bits
whose science is in a seizure and fits?
You, your friends and your family should fear,
for your 401k will be toast,
and survival will soon be fore-most.
Don't smoke those shoots which are rife - just go celebrate life!

*Ilargi accused of having no clue what comes down the pike, but carrots are good; Stoneleigh makes good predictions; Ilargi clarifies intro; Crisis is a doberman that bites wallet off ass, mutates into giant junkyard mutt pack with intention of growing forever; Mutts to rule junkyard until we have lost everything; Canine metaphor sends shiver up TAE spine; Scrap iron may be used to whack dog upside the head.

*Jonny Dixon = well prepared; should get close to family, buy farm land, wait to buy farmland, intern on farm and swap places with RC; Others can outsource to achieve similar levels of preparedness.

*Debt is crushing Canadians; Curly, Moe, and Larry at fault; In the US huge tax increases or a population cull are the only two paths now open, no third way out.

*Is 63k for essential power supplies worth it? Yes; No; Maybe; TAEers now squish upon moving; Stawbales might be squishy but refrigerators make for mental laziness and wasted food.

*Anatole says Anglo capitalism not dead yet; Einhorn and Buffet call for credit rating agency abolition; Denninger points to burning curtains; Martenson claims we are on a heart-lung machine; Will we be able to drag our H-L machine out of house before conflagration burns us to a crisp?

Greenpa said...

golem- I haven't Pollanized it yet, you'll have to read a bit. Original post: 30 yrs, no fridgeBut- there is far more info on my blog; several follow up posts, and tons of stuff in the comments.

Hm; maybe I can Pollanize a little. How do I do without? "Just like your grandparents did. And most of the people in the world still do."

Greenpa said...

PS - PG!

Stoneleigh said...

PS,

Very entertaining :)

Stoneleigh said...

I would take issue with Karl Denninger's timing again. I don't dispute for a moment that what he is predicting will happen, but I think it will take longer than he does. I think we are seeing a pullback in the current rally, and that is producing echos of the previous decline. IMO we will still see new highs before the whole counter-trend move is over, although this pullback could last a while. After the rally, watch out for exactly the things Karl is warning about now.

RC said...

I also thought that the Taizui off the grid setup should have been engineered for half the cost. If Mr T does not wish to listen to the Greenpa no refrigerator mantra, there are extremely low electrical use units available, or even better, use a very low amp freezer, you can even make your own.
All off grid work starts with the amp survey, so the more you discover about how to pare the amp demand, the better off you are with the expenses.
I recommend the use of a knowledgeable electrical engineer for a plan. Knowledgeable means the engineer has many built off grid projects that peeled off the amps from the beginning.
Too many setups start with the fantasy appliance use amp survey and they go downhill from there, or get more, much more expensive than they have to be.
On the other hand, once you reach realism, DO NOT make a system less than you need. It will be an enormous regret for you. I've seen it happen too many times. I've been involved in the game since 1976.
As soon as the client decides to underpower, I resign. That never has a happy ending and there is always someone besides the client that gets to take the blame. They never admit to being a fool. Mr T, I trust you are not a fool!
Also, please do not buy a cheapo invertor{s}. You'll kill all your motors.

Stoneleigh said...

Taizui, RC,

I agree with RC that getting your demand down before attempting to supply the essentials of what's left is very important. Too many people assume their necessities are far higher than they actually are. Given that very efficient forms of most appliances exist, going for the greatest efficiency first can make an enormous difference to the cost of supplying what you really need. Sunfrost fridges and freezers are the best, but they cost. Much lower cost efficient fridges can be found fairly easily though.

Be aware that even in California solar power will not be enough all year round. In combination with a lot of really good batteries you might get away with it, but you'll probably need a generator as well, or a wind turbine, depending on the wind energy density in your area.

If you decide to relocate, I'd suggest designing something along the lines of a hobbit hole - something that requires very little in the way of energy inputs for either heating or cooling. Small and well-insulated is the way to go, then your demand for external energy will be minimized.

Here in Canada we put in a heated greenhouse, using heat from our outdoor wood-burning furnace. We just put the greenhouse next to the furnace and ran a loop of hot water pipe round inside. That should extend the growing season in our area by a few months.

jal said...

Stoneleigh said...
"I don't dispute for a moment that what he is predicting will happen, but I think it will take longer than he does."
----
I am a skeptic of all forecasts ...
When have they been right?
Too many people are watching what is happening.

Obamas’ team are wearing iron gloves and are prepared to try to catch a falling knife and it will affect the outcome of the landing of the knife.
jal

Anonymous said...

Oil prices are set for a free fall. The timing is the only thing that's still a little uncertain.

-- Ilargi
Bravo! A peak-oilist pegging the counter trend. The economic cycling resembles the motion of an undamped shock absorber.

Oil's eventual rebound should also peg the next "recovery" - however short-lived it may be.

Gravity said...

Not all things are moved by a soul, but everything that is, is moved by a carrot.

Anonymous said...

By all accounts the entire world has crude coming out of its ears. They will soon have to fill up the unsold cars (passenger compartment) for additional storage. The price keeps climbing because Da Boyz are upping the futures options, just like last year. But last year we didn't have this glut. So I agree with Ilargi, I think the price will go below $30. Don't know if this is a suckers trap or if Da Boyz are just being stupid again.

Taizui said...

Thanks to all for PV advice.

I'll do a closer calculation of loads, and look into options other than the most local supplier, although I don't mind paying some premium since he has 30 years experience and excellent reputation.
Greenpa - thanks for the link to your initial fridge blog entry. Had not even considered that option, but it surely has sustainability merits. Do you use a freezer for food storage?
Freezing food is very easy, but I lost a lot of food last summer when lightning tripped a breaker while I was away for a few days.
Anyone have experience with lightning damage to PV systems?

g-minor said...

@ Taizui 5:50

I prefer drying to freezing. The taste is better. Most foods keep for a very long time when dried and there is no energy cost for storage.

I recently filled a ceramic water jug that I bought years ago someplace in North Africa, I think. It's just been standing on the floor in our living room. It keeps the water cold by sweating through the clay. I put our cold spring water into it and it got colder than when it came out of the tap. I wonder if such jugs could be used in an insulated space to keep foods cool, if not cold. You might have to change them a few times a day.

g

Anonymous said...

Golem

Wouldn't work well in an insulated, enclosed space because the cooling comes from the latent heat of vaporization as the water evaporates. This means that evaporating water needs lots of energy and sucks it out of whatever it is in contact with, there by cooling it. But if you keep it an enclosed area, then the water vapor reaches equilibrium and stops and so does your cooling.

Ilargi said...

New post up

redboat said...

National Debt Road Trip.
Yes it's easy enough to scream about Obama's profligate rate of spending while ignoring that these deficits have to repair eight years of being taken on a road trip.
Let's just ignore who's watch it was when Lehman collapsed and the tailspin took hold.
Let's ignore the total silence through the two wars and the tax cuts. Let's all become deficit hawks now that the horses have left the burning barn and scream.
The outrage is not about the deficits as much as it should be about the transfer of wealth itself once again back to the rich.
But it's easier to scream about the Obama and the democrats barely five months in office at least trying to get this country on a semblance of a plan back on a road leading somewhere that has its dear costs.

And let's boil everything down to a sophomoric Youtube with stick figures and speedometers to prove what a joke it must be to have to actually behave like an adult, trillion dollar deficits or not.

Unknown said...

IMHO the problems such as they are were created by all... Including yours truly. We've all been sucked into the vortex of more, more, more. At some point you look at that and realize the scam of it all. Happened to me two years ago before full realization of the economic situation. Being in the reno business (kitchens) when granite and stainless became "the new normal" woke me up. Thanks to mountains of debt and "want", our standards have crept to truly unsustainable levels. We all share in this mess.

The desire for our governments (and us) to maintain the illusion of wealth and growth appears to reflect a dangerous and delusional mindset, IMHO

Others are welcome to express a contrary opinion... and they will.

Anonymous said...

Selling out to the corporations? What's mcD doing advertising on the site? You that hard up to fund your ranting?

redcatbiker said...

A Rooftop Farm (yes, a farm!) in Brooklyn, NYC