Tuesday, August 18, 2009

August 18 2009: You are using the wrong image

Lewis Wickes Hine Doffer Donnie November 1910
Donnie Cole. 'Our baby doffer,' they called him. This is one of the machines he has been working at for some months at the Avondale Mills, Birmingham, Alabama. Said, after hesitation, 'I'm 12,' and another small boy added, 'He can't work unless he's twelve.' Child labor regulations conspicuously posted in the mill

Ilargi: I see all sorts of people claim that Germany, France and Japan are now no longer in a recession. This is an idea based on a set of numbers that cover one single quarter. While there may well be some technical interpretation that says that a recession is over as soon as one quarter, month, or week, looks positive, I don't see it contributing much to anyone's credibility. That is, if numbers for this month or quarter, or subsequent ones later in the year, turn negative again, what will be the party line then? That a second recession has started hot on the heels of the first one?

Moreover, even if Germany and France could find a way to make these 2nd quarter claims stick, they are, as I mentioned a few days ago, surrounded by neighbors that are mired deep in their respective doghouses, and if they remain there, they’ll draw the two right back in with them. As for Japan, that country has lived through such a long time of such profound economic trouble that only caution vis-à-vis one-off numbers would seem to constitute an appropriate approach.

And then there's the rest of the world, starting with the US and UK, which have spent obscene amounts of yet-to-be-earned revenues, but are still hovering below the zero line, despite using the most creative accountancy money can buy. All in all, "the end of the recession" sounds like a call that's ridiculously premature, if not simply ridiculous, period. The desire for this thing to be over gets the better of objective reasoning every single time a number is discovered that's not painted in thick red strokes. And whereas optimism may be a noble trait, realism can't be all that far behind. If this recession lasts until 2012, and turns into a depression on its way there, the sunny calls will look preposterous. But for some reason the rose-colored pundits don't seem to mind looking foolish. Perhaps it's a group thing; they sure don't risk standing out from the crowd.

That's a long detour to get where I wanted to be: the -mental- visualization of the present financial (as well as economic and political) crisis in all its aspects. If the picture of a recession that you have in your head is one of a stone being thrown out of the window of a high-rise, you will automatically assume it will have to keep on falling all the way down, and if and when it stops doing that, however briefly, the picture doesn't fit the assumptions anymore. Hence, you will conclude that the recession must be over.

You are using the wrong image. The picture that best describes the way in which recessions and depressions behave is that of a boulder rolling down the side of a mountain. It doesn't go straight down, it follows the shape of the slope, and it will hit all sorts of objects along the way that will interrupt its fall, and perhaps even cause it to bounce upward for a few seconds. But it's certain to resume its way down and keep on going, for reasons Isaac Newton very eloquently explained, unless and until it finds a new equilibrium, which will most likely happen at the foot of the slope.

To complete the metaphor, you could add that only at the moment the new equilibrium has been reached, the millions of little human ants can once again go about their daily grind of dragging the boulder back up the mountain. A nice little last visual detail for your viewing pleasure: the angle of the slope is determined by the amount of debt that exists right before the moment the boulder is pushed off the top of the mountain.

Quote of the day:
....... the banking industry is an integral part of the UK economy and as such is more powerful as a sector than the UK government and the UK regulators put together.

U.S. housing starts, producer prices fall in July
Ground breaking for new U.S. homes fell unexpectedly in July, but a rise in single-family home construction for a fifth straight month kept hopes alive the economy was poised to recover from recession. The Commerce Department on Tuesday said housing starts fell 1 percent to a seasonally adjusted annual rate of 581,000 units, well below market expectations for 600,000 units.

June's housing starts were revised up to 587,000 units from the previously reported 582,000 units. Groundbreaking for single family homes, the worst-hit part of the housing market, rose 1.7 percent to an annual rate of 490,000 units -- the highest since October. "The single-family sector continued to edge higher and that was the silver lining of the report," said Michelle Meyer, an economist at Barclays Capital in New York. U.S. stock index futures pared gains, while U.S. government debt prices trimmed losses after the weak housing and prices data.

While data has pointed to the likely end of the recession, analysts have warned of a weak recovery as rising unemployment crimps consumer spending. A higher-than-expected quarterly profit reported by Home Depot Inc on Tuesday helped ease investor fears as the world's largest home-improvement chain partly offset weak sales with cost cutting. No. 2 U.S. discount retailer Target Corp also reported better than expected results.

Compared to July last year, housing starts dropped 37.7 percent. New building permits , which give a sense of future home construction, fell 1.8 percent to 560,000 units in July, and were down 39.4 percent from a year ago . The inventory of total houses under construction fell to record low 609,000 in July, the department said, while the total number of permits authorized but not yet started also hit a record low at 102,300.

A separate report from the Labor Department showed U.S. producer prices fell 0.9 percent versus a 1.8 percent gain in June. Compared with the same period last year, producer prices were a record 6.8 percent lower in July. Core producer prices, which exclude food and energy costs, edged 0.1 percent lower in July compared with a forecast for a 0.1 percent rise, and after a 0.5 percent increase in June. The core producer price index stood 2.6 percent higher measured on a year-on-year basis, versus a forecast for a 2.8 percent advance.

US Wholesale Prices Fell In July, Showed Biggest Drop In 60 Years Over Last Year
Wholesale prices dropped sharply in July, and over the past 12 months fell by the largest amount in more than six decades of record-keeping. The Labor Department said Tuesday that wholesale prices dropped 0.9 percent last month. That's triple the decline economists had expected and was driven by big decreases in both energy and food costs. Over the past 12 months, the prices of goods before they reach store shelves fell 6.8 percent.
Core inflation, which excludes energy and food, also was well-behaved. It dropped 0.1 percent in July, better than 0.1 percent gain economists expected.

With inflation under control, some may worry about a dangerous bout of falling prices that can also drive wages down, but most economists said deflation remains a remote threat. The last period of deflation in the U.S. occurred in the 1930s during the Great Depression. "Deflation-worriers will find some cause for concern in the general picture, though the broad pattern remains one of gently oscillating monthly price changes, rather than sustained tip into decline," Pierre Ellis, senior economist at Decision Economics, wrote in a note to clients.

Meanwhile, housing starts and applications for future projects both dipped unexpectedly last month, a sign that the building industry's recovery from the prolonged housing slump is likely to be bumpy and gradual. The Commerce Department said new construction fell 1 percent in July to a seasonally adjusted annual rate of 581,000 units. Economists expected a pace of 600,000 units. Applications for building permits, an indicator of future activity, fell 1.8 percent to an annual rate of 560,000 units, also below economists' estimates of 580,000 units. The declines in the Producer Price Index showed wholesale inflation pressures were even more subdued than prices at the consumer level. The government last week reported that the Consumer Price Index was unchanged in July and over the past 12 months fell 2.1 percent, the biggest decline in nearly 60 years.

For July, wholesale energy prices fell 2.4 percent after having surged 6.6 percent in June. Gasoline dropped 10.2 percent and home heating oil plunged 11.9 percent. Food prices at the wholesale level fell 1.5 percent last month, reversing a 1.1 percent rise in June. A big drop in vegetable prices led the overall decline, but beef and egg prices also fell. The 6.8 percent decline in wholesale prices over the past year was the biggest since the government began keeping such records in 1947. It surpassed the 5.2 percent drop in the period ending in August 1949. The 0.1 percent drop in core inflation left those prices rising 2.6 percent over the past 12 months. In July, prices for passenger cars fell 1.7 percent, the biggest decline in nearly three years.

On Wall Street, stocks rose a bit in morning trading following gains in overseas markets driven by upbeat economic news from Germany, Europe's largest economy. The Dow Jones industrial average added about 60 points and broader indices also rose. The 1.8 percent gain in wholesale prices in June was the biggest one-month increase since November 2007. But economists said it represented a temporary burst and was not the beginning of a dangerous bout of spiraling prices. Economists believe energy prices, which had propelled much of the gain, will level out and that the weak economy will keep the lid on overall inflation. Crude oil prices topped $72 a barrel in June but were trading below $67 per barrel Tuesday.

After hitting a record at $147 per barrel in July 2008, oil prices slid for most of the rest of 2008, a decline that trimmed earnings at oil companies. Many major oil companies, including Exxon Mobil Corp., Chevron Corp., Royal Dutch Shell and French petroleum giant Total SA, recently reported second-quarter profit declines of more than 50 percent. The Federal Reserve believes inflation will remain subdued for some time as the country struggles to emerge from the worst recession since World War II. The Fed last week they planned to keep a key bank lending rate at a record low near zero for an "extended period," despite seeing signs that the economic downturn was "leveling out."

US Mortgage Deliquency Rate Hits All-Time High In 2nd Quarter
The delinquency rate on U.S. mortgage loans hit an all-time high in the second quarter, but the pace of growth for the rate slowed, a possible sign the mortgage crisis may be beginning to turn the corner. Data provided by credit reporting agency TransUnion shows the ratio of mortgage holders who are 60 days or more behind on their payments increased for the 10th straight quarter, to 5.81 percent nationwide for the three months ended June 30. That's up 65 percent, from 3.53 percent, in the 2008 second quarter.

Deliquency of 60 days is considered a precursor to foreclosure, because of the difficulty homeowners would have coming up with two back payments to bring themselves current. While the deliquency rate hit a new high, however, the increase from the first quarter to the second was 11.3 percent. In the two prior quarters, the rate jumped nearly 16 percent. That slowdown may be a good sign, said FJ Guarrera, vice president of TransUnion's financial services division. "We have reason to be cautiously optimistic," he said.

While there's no way to know exactly why the pace of growth is slowing, Guarrera said, it appears that programs aimed at helping distressed homeowners from both the government and mortgage lenders are beginning to help. In addition, he said, consumers are being more careful with their spending. For the second quarter, Nevada, Florida, Arizona and California remained the four states with the highest deliquency rates, mirroring the locations where foreclosures are the highest. Nevada's deliquency rate spiked to 13.8 percent, from 11.6 percent in the first quarter and 6.63 percent in the 2008 second quarter.

In Florida, the delinquency rate rose to 12.3 percent, from 11 percent in the first quarter, and 6.47 percent in the 2008 second quarter. TransUnion culls its database of 27 million consumer records to produce the statistics. North Dakota and South Dakota remained the states with the lowest deliquency rates. North Dakota's rate actually edged down a hundreth of a percent, to 1.5 percent. Ohio, Idaho and Connecticut also saw decreases from the first quarter to the second. Guarrera saw particular importance in the statistics for Ohio, where deliquency edged down to 4.57 percent from 4.58 percent in the first quarter.

The Ohio rate remains up substantially from the 2008 second quarter, when it stood at 3.77 percent, but the quarter-over-quarter decline, while small, was significant, he said. "I believe this is a precursor to recovery," Guarrera stated, noting that the recession was felt first in the Rust Belt and Sun Belt states. "We see this as a really good sign." Not all of the news was positive, Wyoming and Utah, two states that have been far from the center of the foreclosure crisis, saw their deliquency rates jump the most, to 2.85 percent and 4.68 percent, respectively. Guarrera noted both states has a small populations, so results can be skewed by small changes.

TransUnion still expects the mortgage deliquency rate to keep rising, but now expects the national rate to top out just under 7 percent around the end of the year. That's a slight revision from earlier in the year, when the company predicted the rate would go past that mark. Nevertheless, it's going to take about a year before the rates start to fall across most of the country, Guarrera said, and it will be quite some time before the national rate returns to its historic norm between 1.5 percent and 2 percent. "Forecasts are telling us that the recovery will be slow," he said.

Tax Bills Put Pressure on Struggling Homeowners
Hard times are causing more homeowners to fall behind on their property taxes. But in thousands of cases, they are not responsible to their local governments, but to private companies that charge double-digit interest and thousands of dollars in service fees. This is because in recent years struggling cities and counties have sold their delinquent tax bills to the highest bidder. It seemed a painless way to turn old debts into cash to finance schools or public services.

But housing advocates say the private companies may be exacerbating the foreclosure crisis, pushing out homeowners faster than would governments, which are increasingly concerned about neighborhoods becoming wastelands of abandoned properties. "In the beginning, you’re getting this immediate windfall of cash," said Anita Lopez, the auditor of Lucas County, Ohio, which sold off more than 3,000 tax liens for $14.7 million. The county includes Toledo. "But when you think about abandoned properties, foreclosed properties — the cost to the community is far more expensive than the short-term benefits."

Investors say the arrangement actually benefits everyone. School districts, fire departments and public parks get an infusion of cash. The investors take on a risky but potentially high-yielding investment. And taxpayers do not have to pick up the slack from scofflaw landlords or tax evaders. Governments, of course, can charge interest and penalties too, and they foreclose on properties for back taxes. But governments charge interest rates that are half what private investors charge — often offering no-interest payment plans — and are also more likely to be concerned about the long-term prospects of neighborhoods.

In Toledo, one of the areas hardest hit by the downturn and by private lenders holding tax liens, homeowners like Richard Fix are facing foreclosure for a few thousand dollars in overdue taxes.
Mr. Fix said he lost his job with Chrysler in January 2008 and took a lower-paying job. As he and his family struggled to pay their mortgage, credit cards and other bills, he said they fell behind on $5,900 in taxes. "I’m in a no-win situation at this point," he said.

With the economy faltering and property values plunging, homeowners and landlords are falling behind on their bills or abandoning their property, just as governments are facing huge budget shortfalls. Private investors step in and buy tax liens, paying governments upfront all or part of the value of the taxes. The investors then get the right to foreclose on the properties, taking priority over mortgage lenders, and to charge interest rates as high as 18 percent on the unpaid taxes. "It beats the heck out of any certificate of deposit," said Howard Liggett, executive director of the National Tax Lien Association.

Because the sales occur in a patchwork of cities and counties across more than two dozen states, there are no figures tracking the number of tax-lien sales nationwide. The liens that are sold come from cases in which homeowners pay taxes to the local government, not through their lenders. But Mr. Liggett, whose group represents tax-lien investors, said they generated about $10 billion every year. In 2006, Lucas County began selling off its overdue tax certificates to a New Jersey company named Plymouth Park Tax Services, a subsidiary of JPMorgan Chase. It also operates under the name Xspand.

The company, once run by the former governor of New Jersey, James J. Florio, was sold to Bear Stearns and then absorbed into JPMorgan after Bear’s collapse last year. Today, Plymouth Park is one of the largest players in the tax-lien business. Plymouth Park has filed more than 1,000 foreclosure actions against delinquent taxpayers, more than any single mortgage lender in the county. But it says that it has only foreclosed on 56 of those filings. Plymouth Park has bought $2 billion in tax liens across the country since 2008, and says the number of foreclosures around Toledo is an aberration.

All told, foreclosures in Lucas County rose to 4,093 in 2008 from 3,486 in 2007, and they are on track to be 7 percent higher this year than 2008, according to county figures. Plymouth Park’s president, John Garzone, said the company tried to set up payment plans with homeowners and foreclosed only as a last resort. The company said that the government would most likely have initiated many of those foreclosures on its own. "Less than 1 percent of our overall investment actually becomes a foreclosed-on property," Mr. Garzone said. "Our main interest is to try and get the properties back onto the tax rolls."

But now, many are in danger of falling off them. Christopher Clark, 57, lives in the Toledo home where he spent his teenage years and where he cared for his mother before she died. He said he scrapes by on $674 in monthly disability payments and assistance from friends and by selling old books and a pipe collection on eBay. He amassed $6,450 in delinquent taxes over the years, a debt that was sold to Plymouth Park in 2007 and 2008. The company added $1,853 in interest charges to the original bill, and various fees, according to Mr. Clark’s lawyer, Deborah Tassie, and filed for foreclosure. "I’m still in denial," Mr. Clark said. "I’ve been here through good times and bad, lousy neighbors and good neighbors. What I’m going to do, I have no idea."

Plymouth Park said that it charged fees related to its legal costs only, and did not charge homeowners for its own administrative costs. The county treasurer who arranged the tax sales, Wade Kapszukiewicz, said they were aimed at "out-of-town land speculators" and the most chronic tax delinquents, and were intended to avoid the elderly and disabled. "What is the alternative?" he said. "The alternative is to let people not pay taxes and do nothing about it." But housing advocates in Lucas County said homeowners were overwhelmed by the fees and interest rates. Debts of $3,300 grew to $6,800. And while Plymouth Park offered a payment plan, lawyers said that many homeowners did not have enough money to make upfront payments of a $1,000 or more.

Danyell Copeland, 36, is in court over a tax bill of less than $2,000, her lawyer said. Ms. Copeland, who works as a cook at the University of Toledo, said she had been fallen behind on her bills after her hours and overtime were cut. She chose to not pay her taxes so she could make her mortgage payments, she said. Now she worries about losing the two-bedroom house where she grows tomatoes and peppers in the garden, and where her niece and nephew spend the summer. "This is not just a house," she said. "This is a home."

Unemployment Spike Compounds Foreclosure Crisis
The country's growing unemployment is overtaking subprime mortgages as the main driver of foreclosures, according to bankers and economists, threatening to send even higher the number of borrowers who will lose their homes and making the foreclosure crisis far more complicated to unwind. Economists estimate that 1.8 million borrowers will lose their homes this year, up from 1.4 million last year, according to Moody's Economy.com. And the government, which has already committed billions of dollars to foreclosure-prevention efforts, has found it far more difficult to help people who have lost their paychecks than those whose mortgage payments became unaffordable because of an interest-rate increase.

"It's a much harder nut to crack, unemployment," said Mark A. Calabria, director of financial regulation studies at the Cato Institute. "It's much easier to bash lenders than to create jobs." During the first three months of this year, the largest share of foreclosures shifted from subprime loans to prime loans, according to the Mortgage Bankers Association. The change to prime loans -- traditionally considered safer -- reflects the growing numbers of unemployed who are being caught up in the foreclosure process, economists say.

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, has proposed using $2 billion in government rescue funding to provide emergency loans to these borrowers. "We are going to be seeing more foreclosures because of prolonged unemployment," he said. "These are people who weren't in trouble and wouldn't be in trouble if they hadn't lost their job."

Unlike the borrowers with subprime mortgages who helped ignite the housing downturn more than two years ago, Deepak Malla, 42, fell behind on his payments when his information technology job was shipped overseas late last year. He does not have a subprime loan, and he made a 20 percent down payment when he bought his five-bedroom house in Ashburn in 2005. The payments were affordable -- until he lost his job. Last year, about 40 percent of borrowers who sought help at NeighborWorks, a large housing counseling group, cited unemployment or a pay cut as a primary reason for their delinquency. Now it is about 65 percent. The number citing a subprime loan fell significantly.

"Rising unemployment, for the sake of this downturn, has magnified things considerably," said John Snyder, manager of foreclosure programs for NeighborWorks. "It's less about the payment adjustment." When a subprime borrower becomes delinquent because of a hefty payment increase, the fix often involves lowering the interest rate to its original level. Unemployment poses a more difficult challenge, industry officials and consumer advocates said. During extended periods of joblessness, the borrower accrues large late fees that drive up monthly payments. And a new job often comes with lower pay, making it more difficult to catch up.

When Malla landed another job earlier this year, he took a pay cut of more than 25 percent. He launched a six-month campaign to get Wells Fargo to lower his mortgage payments from $3,500 to reflect his new financial reality, but he was rebuffed repeatedly. "I wanted to work out with them based on my current scenario," Malla said. He considered refinancing his mortgage, which had a 5.8 percent interest rate, but his home's value had fallen significantly since the market peak, making that impossible. Instead, the lender recommended that he sell the house in a short sale. That would mean selling for less than he owed and walking away with nothing.

"They didn't say why -- just that [a loan modification] is outside the investor guidelines," Malla said. "I was very, very frustrated." (After being contacted by The Washington Post, a Wells Fargo spokesman said Malla does qualify for a loan modification after all.) Banks and government regulators are studying how to address the shifting nature of the crisis, which has been exacerbated by falling home prices. When the housing crisis began in 2007, the unemployment rate was about 4.6 percent. It hit 9.4 percent last month, and many economists expect it to reach 10 percent by the end of the year.

Hope Now, a government-backed group of mortgage lenders, has established a task force to look at how to best help unemployed borrowers; one strategy involves creating new types of loan modifications. The Obama administration is also studying the issue as it considers how to make its foreclosure prevention program, known as Making Home Affordable, more effective. Many housing experts say it will take more than the $75 billion the administration has already said will be spent on foreclosure prevention.

Several economists at the Federal Reserve Bank of Boston have proposed creating a government lending or grant program for unemployed borrowers, lowering their payments for up to two years while they look for work. Such a program could cost $25 billion annually and help 3 million homeowners, lowering their payments by 50 percent on average, according to the economists' proposal. Currently, unemployed borrowers have few options to save their homes. Banks often will allow two or three missed payments, known as forbearance, to give borrowers time to find a job. Others offer to temporarily lower their payments by 50 percent. But both of these options are not permanent and are ill-suited to the current crisis, consumer advocates and industry officials say.

Part of the problem is that it is taking longer for borrowers to find new employment -- a three-month suspension of payments often is not enough. The number of unemployed people who have been looking for a job for more than 26 weeks rose more than 500,000 last month. And under the current system, once borrowers resume payments, their monthly balances rise to make up for overdue amounts. "Who knows what's going to happen at the end of the [forbearance], even if they can get it?" said Paul S. Willen, senior economist for the Federal Reserve Bank of Boston.

Citigroup established a test program for unemployed workers in March, offering to lower their payments to $500 a month for three months. But few of the 600 or so borrowers who have qualified for the plan have reported that they were able to find new jobs, and Citigroup is considering lengthening the period, company officials said. The test has shown that borrowers are at their most motivated shortly after losing their job, so the company may also lift a requirement that homeowners miss at least two payments to qualify for assistance. No decision on the changes has been made, company officials said.

The program has reinforced Citigroup's conclusion that "unemployment is in fact the root cause of many of the delinquencies," said Sanjiv Das, chief executive of CitiMortgage. The trick, he said, is to give borrowers enough assistance to keep them motivated to find a job quickly so they can resume making full mortgage payments. Under the federal foreclosure prevention program, unemployment insurance can be counted as income when a borrower applies for a modification. But the borrower must show eligibility for at least nine months of unemployment checks.

Bill Kachur of Jacksonville, Fla., lost his job as an online training instructor for a large government contractor in January and began scrambling to protect his four-bedroom home, purchased in 2000, from foreclosure. He has been able to scrape together enough to keep up his $850 monthly mortgage payments by liquidating his retirement and investment accounts to supplement his unemployment benefits of $1,200 a month. "I had to do it," said Kachur, 47. "If you have bad credit, you can't get another job."

Kachur estimates that he has enough for only a few more months of payments, but because he is eligible for more unemployment benefits, he is lobbying his lender, Bank of America, for help. A modification under the federal plan would cut his payments nearly in half, he said. He said his requests have been denied so far. Bank of America said it could not comment on Kachur's specific case. The company complies with the federal foreclosure-prevention plan, including considering unemployment benefits when appropriate, spokesman Rick Simon said. But a workout faces other tests, including whether a loan modification or foreclosure is better for the investor, he said. "It has to meet all the other guidelines as well," Simon said.

Deflation Coming In From Abroad
The deflation story [begins] to pick up steam. [Yesterday's] trading consisted of falling stocks, falling commodities, falling gold and a stronger dollar -- a classic deflationary combo. And new data from the Bureau of Labor Statistics shows that after several months of rising prices, imports are starting to drop again... watch out.

Time To Switch to Cash: Elliott Wave's Robert Prechter

In late February, we had long-time bear Robert Prechter, Founder & CEO of Elliott Wave International on the "Closing Bell," where he predicted a sharp rally. Prechter has been studying the charts for the past 30-years. That's a pretty bullish call for the perma-bear! Since March 9th, the S&P 500 has seen one of the fastest upside moves ever. According to Prechter's latest Elliott Wave Theorist, that 50% gain in five months carried the index to the lower end of his target zone of 1,000-1,100.

Now, he's turning bearish again. His biggest call: the dollar is forming a major bottom and starting a multi-year advance. Prechter also says that the potential for the dollar's bottom is an important thesis for deflation. Another bold prediction: Prechter is calling for the next wave of deflation! All of this just another bearish signal for stocks and he's recommending investors switch to cash.

German investor optimism at 3-year high
Germany’s economic rebound has gained momentum with a closely watched survey showing investor confidence surging to the highest level in more than three years. The Mannheim-based ZEW institute said its "economic sentiment" indicator, which gauges expectations about economic trends over the next six months, had jumped by 16.6 points to 56.1 points in August, the highest since April 2006. The latest data followed last week’s news that Germany and France had beaten the US and UK in escaping recession. Both countries reported a 0.3 per cent rise in gross domestic product in the second quarter.

Germany’s export-led economy – the largest in Europe – appears to be benefiting from revival in global prospects as well as fiscal stimulus measures, which have boosted car sales. With the ZEW index regarded as offering a guide to likely trends in economic activity in coming months, the latest reading has boosted expectations that the third quarter will see an even stronger German performance. The index was based on a poll of more than 300 analysts and institutional investors.

"The good second quarter was probably just the beginning of a mid-summer sprint," said Carsten Brzeski, European economist at ING in Brussels. Manufacturing orders data have also pointed to a revival in growth. Germany’s economy had been expected to contract by as much as 6 per cent this year but Axel Weber, Bundesbank president, told a German newspaper earlier this week that such forecasts would probably have to be revised upwards. He cautioned, however, against "calling too early the end of the financial crisis".

The ZEW index fell sharply after the collapse of Lehman Brothers, the US investment bank, last year. It has since recovered steadily, although it dipped temporarily in July, and is now well above its historical average of 26.5 points.
Wolfgang Franz, ZEW’s president, said that last week’s GDP data showed that financial market experts’ expectations about a recovery "have come true". But he also warned that there was "no reason for euphoria". German prospects depended on a global upturn and would "recover only gradually", he said. Economists think that rising unemployment and continuing worries about Germany’s banking sector will act as drags on growth. The effects of emergency measures by governments and central banks to boost growth may also prove short-lived.

Germany and France Really Out of Recession?

Aug. 14. MIG Investments Chief Market Analyst Paul Day on his skepticism of France and Germany's recovery from recession.

Waiting for Something to Prick China's Bubble
Why do I feel like the macro data reported by China Monday night made both China-bears and bulls smack their lips?

Well, as a China-bear myself right now, I wanted to interpret the data as the first signals of a slowdown, something that could be devastating given [among other things] the leveraged asset growth that's occurred over the last few quarters. My bullish adversaries will plug the data into their analyses to reconfirm that the Chinese government is wary of burgeoning bubbles and is taking measures to not overheat their economy.

Getting technical, FXP: Slow Stochastic set new ST highs on 7/31 & 8/7, which action was confirmed by the stock's price performance= BULLISH. Couple that with a MACD cross on 8/5, where the curve is sloping up and divergence is increasing= BULLISH.

I didn't get the definitive fundamental "go" I was looking for from July's data. Rather, I translate the data from an annual perspective, interpreting it in the context of the government's FY09 targets: yes, China reported some unexpected m/m and y/y drops, but those numbers seem to have the re-aligned the economy on a track to hit its year end goals. In that context, July's data showed a gravitational pull to the mean.

Although I'm net short China right now (long FXP and short the front 13 calls) in my own portfolio, I've kept my clients on the sidelines until I get more definitive fundamental sell signals. I can day-trade technicals in my own account, but I'm cautious not to let clients' capital stagnate while shorting a consolidating Chinese market for 2 quarters.That being said, some problems still remain. While China's economic targets seem appropriate, its means to that end weren't. We're all aware of the forced lending that occurred 2q09. Credit was easy, collateral requirements were lax, and credit investment was ill-advised.

Truth be told, July's data brought some pretty volatile performance to the table, like the m/m drop in bank lending. As I said, that's fine if China's trying to cool down after an unprecedented run, but all these loans and all this investment has been channeled into assets and markets. From Ambrose Prichard:

Beijing is walking a tightrope by trying to offset the collapse in exports – almost 40pc of GDP – with an investment blitz in roads, railways, and industry through state-owned companies.

The real economy cannot absorb the money, so it is leaking into asset speculation. The central bank estimates that 20pc of fresh credit has ended up in equity markets. The Shanghai Index is up 80pc this year, though profits have fallen by almost a third. The pattern echoes the final phase of Japan's Nikkei bubble in 1989.

There's a growth requirement necessary to keep loans and investments performing, to thereby substantiate these piles of leveraged capital. While the Shanghai has rallied, credit extension swelled mostly at the end of that market run, at which time the small-money decided to jump into the swimming pool.

With China diversifying away from an Export-driven model toward a more domestic, consumer-based model, the effect of a weak USD is taking a different role. The Yuan was kept artificially low for years to lure the US to Chinese exports. Now, facing an inevitably weaker USD and a more protectionist "Buy America" M.O., China changed its strategy by divesting dollar denominated assets and stockpiling hard assets (i.e. commodities).

A 23% y/y drop in exports, a 1.8% y/y drop in CPI! It's taking some serious stimulus to displace the export evaporation with domestic consumption.

From Andy Xie:

…China’s average [property] price per square meter nationwide is quite close to the average in the US. The US’s per capita income is seven times China’s urban per capita income. The nationwide average price is about three months of salary per square meter, probably the highest in the world. As far as I can tell, a lot of properties can’t be rented out at all. Those that can bring in 3% yield, barely compensating for depreciation. The average rental yield, if one including those that can’t be rented out, is probably negligible. China’s property price doesn’t make sense from affordability or yield perspective.

So what are the definitive signals I'm looking for to prick China's asset bubble? I'm watching CPI for deflation, but more importantly, I'm watching the Dollar Index, which sits around 77 today. A secular bear market for the Dollar redirected liquidity into China, that's the executive summary of what's happened here. With the Chinese government already stimulating the economy, they could be caught with their pants down when the dollar strengthens.

Kind of a contingency of the dollar's performance, I'm also watching commodity prices. Although Chinese GDP has a heavy allocation toward net exports, commodity price performance resonates top to bottom, government to consumer, because of the leveraged buying spree we've seen. Dollar strength will support higher net exports, but the damage resulting from commodity price destruction will be a negative multiple of whatever net benefits may arise.

China bank lending fell almost 77% in July
Lending by Chinese banks slowed in July, softening the pace of growth in the nation's broad money supply, following record loan issuance in the first half. Data released Tuesday by the People's Bank of China showed new loans for July totaled 355.9 billion yuan ($52 billion), down almost 77% from June's 1.53 trillion yuan. The latest figures brought total lending growth this year to 7.7 trillion yuan, a more than doubling from the first seven months of last year. Of July's loan figure, 236.5 billion yuan went to households while 119 billion yuan went to corporations, the smallest such issuance since November 2007.

"After the blowout in June (when 1.228 trillion of net loans were extended to corporations), a sharp slowdown was always going to happen, but this may still unnerve the market and is another signal that the momentum has dissipated," wrote Standard Chartered analysts in a note Tuesday. July's loan issuance was weaker than many expected, with consensus estimates pegging the figure at 500 billion yuan. Standard Chartered said loans in the second half will likely amount to 2.5 trillion yuan, bringing total loan growth for the year to 10 trillion yuan.

The bank said the weaker-than-expected loan figure would add to the argument that it was too early to tighten. It noted that the figures would have been seen by Premier Wen Jiabao ahead of his weekend speech, which called for continuation of a proactive fiscal policy and a moderately loose monetary policy. Merrill Lynch described the July loan figure "a decent amount" but said indications were that "overall monetary and credit policy will continue to be relatively loose before spring 2010." Meanwhile, China's money supply, as measured by M2, expanded 28.4% in July from the same month a year earlier, easing slightly from June's growth of 28.5%.

"China's banking regulator has advised banks to avoid sudden surges in lending and to ensure that loans are channeled into the real economy," said J.P. Morgan's head of China equities, Jing Ulrich. Chinese banks had issued 7.4 trillion in loans in the first half, about three times the year-earlier level. Other data released Tuesday showed household savings fell 19.2 billion yuan as households shifted funds out of savings accounts to mutual funds or accounts held with securities companies.

Expansive China faces grass-roots resentment
Algerian shopkeeper Abdelkrim Salouda has witnessed China's global economic expansion first-hand and he does not like it, especially since he was in a mass brawl this month with Chinese migrant workers. "They have offended us with their bad behavior," said Salouda, a devout Muslim who lives in a suburb of the Algerian capital. "In the evening ... they drink beer, and play cards and they wear shorts in front of the residents."

From Africa to Europe, the Middle East and the United States, China's drive to project its economic might abroad can sometimes breed fear and resentment. The risks are likely to grow as Beijing channels more of its foreign exchange reserves, which stood at $2.13 trillion at the end of June, into foreign investments. From having a handful of tiny investments abroad less than two decades ago, China has grown to the world's sixth-biggest foreign investor and overtook the United States as Africa's top trading partner last year. That breath-taking rise has brought problems: allegations from emerging countries that China is stripping them of resources and suspicions in the developed world that obscure state interests lurk behind Chinese investments.

Where governments welcome Chinese investments for the boost they bring to their economies, a widely perceived Chinese tendency for Chinese firms to import their own workers has created tensions with job-seekers. "It's very new, it's very big, it's full of potential hazards, it's also full of potential benefits," said Kerry Brown, Senior Fellow at Britain's Chatham House think tank.

The challenge of how to deal with such tensions will only be magnified as the global slowdown prompts Beijing to pump even more of its foreign exchange reserves overseas. China used to be content to keep its surplus dollars in the bank or in U.S. government debt. But the financial crisis and subsequent downturn have, in some quarters, shaken faith in the strength of the dollar and U.S. Treasuries. With China still needing to secure access to global resources, some Chinese policy-makers are talking about redirecting billions of dollars into overseas investment instead.

The resentment felt by the Algerian shopkeeper toward his new Chinese neighbors is not universal: people in many places welcome the benefits from Chinese investment. Those can include aid with few strings attached, capital for infrastructure that Western donors will not fund and competition that drives down prices. Despite the clashes in Algeria's capital this month, its government welcomes Chinese investment. A $9 billion minerals-for-infrastructure deal is presented by Congolese President Joseph Kabila as a cornerstone of his plan to rebuild the Democratic Republic of Congo after years of war.

China will build roads, schools and hospitals in exchange for mining rights. In Guinea's capital, Conakry, the Chinese government is building a 50,000-seat sports stadium as a gift. "We are very satisfied with our cooperation with China," said Denis Sassou-Nguesso, the president of Congo Republic on a visit to a hydro-electric dam being built by Chinese contractors. "Contrary to certain assertions, it's not just Chinese on the various construction sites, there are also numerous Congolese workers," he said.

But in some countries, it is the sheer size of the Chinese presence that causes tension. Russian officials estimated that last year there were 350,000 Chinese migrants living in the country's far eastern regions, many illegally. The native population, in an area almost 10 times the size of France, is just over 7 million. Asked if the numbers of Chinese migrants jeopardized Moscow's control there, a senior Russian migration official said: "There is a threat. It should not be overstated but there is a threat," said the official, who did not want to be identified because of the sensitivity of the subject.

Elsewhere, the fact that the lion's share of Chinese investments are from the state itself or state-controlled companies, is the source of friction. One of the best-known cases of thwarted Chinese expansion was when U.S. lawmakers blocked the sale of oil company Unocal to China's CNOOC Ltd. in 2005. One senator said the deal would effectively give the Chinese Communist Party control over a strategic U.S. resource. In Sudan, rebels accuse Beijing of supporting Khartoum in the six-year-old conflict in Darfur -- and they see Chinese companies as the embodiment of that policy.

"Their only interest in Sudan is their own economic benefit," said Al-Tahir al-Feki, a spokesman for Sudan's rebel Justice and Equality Movement. "As soon as that benefit is gone they will disappear, leaving so many things destroyed behind them."

Another accusation leveled at Chinese investors is that they cut corners. Five Zambians were shot and wounded in 2005 in a riot over pay and safety standards at a Chinese-owned mine, and a year later 52 Zambians were killed in an explosion at a Chinese firm manufacturing explosives for mining. In January, Chinese traders in Guinea closed their shops for several days for fear of reprisals after the authorities found Chinese-made fake medicines. "A part of the population attacked the Chinese expatriates, whom they associated with the offenders. We ... had to intervene to calm the situation," said a military source who was speaking on condition of anonymity because he was not authorized to speak to the media.

China says its investors are forced to go into "frontier markets" because developed countries lock them out of more stable economies. As a result, they say, the risks they face are higher. There is some truth in that argument, said Brown from the Chatham House think tank, a former British diplomat in Beijing and the author of "The Rise of the Dragon," a book on Chinese investment. "The underlying pattern we find is that in countries where governance is decent like Botswana or South Africa, where there's reasonable rule of law and some kinds of infrastructure to control ... Chinese investment, then it's not too problematic," he said.

"However, in countries where there are problems of governance, problems of environmental impact, problems of labor rights, unfortunately Chinese investment performs very poorly indeed." China has started to address the damage to its reputation as an overseas investor. Big firms have hired Western consultancy firms to give advice. Many are now seeking local partners, or favoring less high-profile indirect investments. There are signs too that the Chinese government is doing more to win over the trust of local communities.

In Algeria, the Chinese embassy said it had advised its nationals to respect the country's traditions. In Zambia, poor communities have received Chinese donations that include footballs and boreholes for drinking water. But much of the responsibility will still rest with investment recipients to set out clear rules on how they manage the growing flows of cash. "My hunch is that foreign governments have got to make decisions about where they want the money to go and where they say no," said Kerry.

Digg Dialogg: Timothy Geithner
Digg has partnered with The Wall Street Journal for an exclusive interview with U.S. Secretary of Treasury Timothy Geithner. Alan Murray, Deputy Managing Editor of The Wall Street Journal, will be asking him the most popular questions as submitted and voted upon by you. From now until Thursday, August 20th at 12 Noon PT, you can submit and Digg up questions to decide which will be asked.
  • Why has the federal reserve bank never been audited?
  • You failed to pay some of your federal taxes in 2001. And in 2002. And in 2003. And in 2004. Please explain.
  • What is your position on Ron Paul’s House Resolution 1207? (Which as of the writing of this question has 282 cosponsors.) http://www.auditthefed.com/
  • Last week you requested that Congress raise the $12.1 trillion statutory debt limit, saying that it could be breached as early as mid-October. This is in addition to the increase already approved in February this year to accommodate the added debt from the $787 Billion stimulus plan. How is this anything other than runaway government spending? What will it take for us to see US debt go the other direction?
  • How do you feel about the revolving door between high job positions in the treasury and Goldman Sachs?
  • You were a member of the Federal Reserve, a group that so thoroughly mismanaged our monetary policy that they helped create a massive housing bubble because of foolish loans and speculation enabled by low interest rates, and then you were involved in a horribly mismanaged bailout that hasn’t freed up credit markets and can’t even account for all the money it spent. Why are you running the Treasury Department?
  • What is one mistake you’ll admit to making since taking over as Treasury Secretary? What do you wish you’d done differently?

Why the 'Carry Trade' Is Back
As central bankers keep pumping huge sums into the global financial system, they are also pumping up one of the riskier investment strategies in the currency market. Known as the "carry trade," the strategy involves borrowing money in countries such as Japan where interest rates are low, then investing it where rates are higher and pocketing the difference. After flourishing during the boom years, the trade all but disappeared as big currency swings led to heavy losses amid the financial crisis. Now, though, as markets calm down and as some central banks signal interest-rate increases while others hold rates near zero, hedge funds and other investors are wading back in.

"It's starting to come back," says Stephen Jen, a managing director at BlueGold Capital Management LLP in London. "Investors are starting to think about rate hikes, which makes such trades more relevant and attractive." If the trade keeps growing, it is likely to have an effect on currencies, weighing on the ones in which traders borrow and pushing up those in which they choose to invest. It also can have the opposite effect at times when investors become more risk-averse, as they did Monday, pushing the yen up sharply against other currencies.

The Japanese yen remains a popular borrowing currency, given the central bank's adherence to an interest-rate target near zero. But other regions are attractive, such as Europe, where the key rate is 1%, or the U.S., where interest rates are close to zero and the Federal Reserve has pumped more than $1 trillion into the economy this year. While precise indicators on the carry trade are hard to come by, analysts at Deutsche Bank say they see money moving back into the Brazilian real, a bellwether for the carry trade given Brazil's history of high interest rates. As of mid-August, investors had a net $4 billion in bearish bets on the currency, down from $12 billion in early March. Meanwhile, the real has risen 28% against the U.S. dollar since the end of February.

Many of the carry trades are part of broader bets on a global economic recovery, analysts and investors say. Some investors are putting their borrowed yen and dollars into assets in Australia, a large commodity producer that stands to benefit from an economic rebound in one of its key customers, China. Since the end of February, the Australian dollar has risen 29% against the U.S. currency.

To be sure, the carry trade can entail big risks, particularly with differences among interest rates still thin compared with the boom years. A mere 1.5% fall in the Norwegian krone, a popular carry-trade play, against the dollar would wipe out the potential gains for a hedge fund doing the $10 million dollar-krone trade. Carry traders take comfort in the relative calm in stock and currency markets, as compared with the darkest days of the crisis. "Carry trades are for smooth rides," says Drausio Giacomelli, head of emerging-markets strategy at Deutsche Bank in New York.

Shame gene has disappeared from financial system
When Lazard Brothers, the London arm of the Lazard banking empire, was brought to its knees by a rogue trader in 1931, the miscreant made a confession and shot himself. Nowadays it is only a mild exaggeration to say that European rogue traders serve relatively short jail sentences before taking to the lecture circuit to explain that the damage they wrought was largely the fault of stupid directors. That, and the return of a "business as usual" ethos in relation to bank bonuses, suggests that the shame gene has gone missing in the financial system. Bankers’ lack of sensitivity to the wider concerns of society is also symptomatic of a culture that has become heavily transactional to the point of being blinkered.

The recent results of the big banks have shown once again that bank profits are increasingly driven by proprietary trading. And ethical niceties rarely rank high on the traders’ agenda. As Roger Bootle of Capital Economics points out, a curious and possibly unique feature of the financial business is that traders are often applauded by bosses and colleagues for eviscerating their clients. A similar ethical deficit has been evident in the subprime mortgage market where big bonuses were earned for extending loans to people with no prospect of being able to service or repay the debt.

In such markets trust is in short supply. Much has been written about how perverse incentives have encouraged bankers to put the whole system at risk. Less often observed is that when incentives are pushing people in a direction that is at odds with ethical behaviour, customers will be ripped off and conflicts of interest abused. In a financial world where trust is lacking, the only way to prevent bad behaviour is tough regulation. The scale of the financial debacle is such that it would be natural to expect a hefty regulatory response on these behavioural issues as well as on systemic risk. Yet the current controversy about bonuses on both sides of the Atlantic raises questions as to whether regulators have the stomach for the fight.

In the UK, government ministers clearly feel that the Financial Services Authority is pussy-footing on bankers’ pay for fear of encouraging senior bankers to stage a great British evacuation to more lenient jurisdictions. That underlines one of the more unfortunate consequences of the financial bust. On the one hand, we have deglobalisation, as supply chains are shortened and cross-border banking is threatened with tougher capital requirements. On the other, we have a potential acceleration in what might be dubbed malign globalisation. The labour market for top bankers is internationally flexible and could become more so if there are big differences between countries on the regulation of pay and incentives. And regulatory arbitrage will almost certainly increase as a result of the lawmakers’ response to the crisis.

Yet the politicians are not on the side of the angels in all this. They would like the banks to lend more and the bankers to be paid less. But the Anglophone world badly needs to deleverage. And because both the household and corporate sectors are indeed paying down debt, demand for credit is anyway weak. Meantime the central bankers’ remedy for cranking up credit, quantitative easing, merely pumps up asset prices as central bank purchases of bonds put money into the hands of institutional investors.

In the UK, ministers have also been seduced by the argument that Britain’s competitive advantage in financial services must not be jeopardised by an over-draconian regulatory response to the crisis. They are therefore relaxed about keeping a universal banking model that permits big risk-taking with complex financial instruments. They are also relaxed about moral hazard and reluctant to shrink banks that are too big to fail. None of this bodes well for our ability to avoid further bubbles and busts. Nor does it reflect well on those central bankers who argued that because it was too hard to identify bubbles and too dangerous anyway to prick them, the right policy was simply to clear up afterwards.

The mess is too great. And the clean-up seems unlikely to address adequately such problems as excessive and morally hazardous concentration in banking and a reward system that generously remunerates successful punting but imposes no penalty for loss-making bets. Some central bankers, like rogue traders, lack a shame gene.

US credit card rates rise in 1st half of '09
The nation's banks raised credit card rates and increased their profit from lending to consumers in the first half of 2009, according to a consumer advocacy group. The Pew Safe Credit Cards Project said Monday the median lowest advertised credit card rate rose to 11.99% in July from 9.99% in December. At the same time, the group said, the profit banks made on credit card debt rose 46%. The group, which says on its Web site that it seeks to "protect customers from unfair credit card practices," said its figures are based on a survey of nearly 400 credit card issuers. The full results of the survey are scheduled to be published next month.

The study said the rate banks charge on credit card loans on top of what it costs to borrow from the Federal Reserve rose to 8.74% in July from 5.99% in December. That came as banks' borrowing costs were cut in the wake of the Fed slashing its benchmark interest rate to a range near zero percent. A spokesman for the financial services industry said the ongoing financial crisis made raising money difficult and expensive, with the costs passed on to consumers in the form of higher rates.

"A key thing to recognize is that about half of the funding for credit card loans comes from securitization" through private investors, said Peter Garuccio, a spokesman for the American Bankers Association. "We all know what happened in the secondary (credit) market last fall, and it's still very dry, which has made it more difficult and more expensive to fund credit cards."

The initial findings from the study came days before the first provisions of the Obama administration's credit card reform act go into effect. Beginning Thursday, cardholders will be able to reject rate increases imposed by banks and will have up to five years to pay off their credit card balance at the current rate. The new provisions also prevent credit card issuers from more than doubling a borrowers' minimum payment and raised the minimum number of days that banks need to give before making significant changes to a contract to 45 from 30. The act, which President Obama signed into law in May, will not be fully implemented until February. Eleni Constantine, director of Pew's financial security portfolio. said the final version of the act will ban retroactive rate increases and prohibit "hair trigger" penalties for errors such as late payments. 

Banks Keep Tightening Loan Standards
Banks continued to tighten lending standards to businesses and households, but there are hints that the credit crisis is beginning to ease, according to the Federal Reserve's periodic survey of banks released Monday. Meanwhile, the Fed said it would extend a program aimed at bolstering consumer-loan and commercial-real-estate markets into 2010, even as it allows other recovery programs to expire. The Fed's Term Asset Backed Securities Loan Facility, or TALF, was set to expire at the end of the year. But Fed and Treasury officials said in a statement that consumer- and business-loan and commercial-real-estate markets were still "impaired" and were likely to remain so for some time. The program will be extended to March 31; some facets will run until the end of June.

Under TALF, the Fed makes low-interest loans to investors and offers them protection against losses. The investors in turn use the cash to buy securities backed by a wide range of assets -- from credit-card debt to auto loans. The aim of the program is to get credit to consumers, businesses and commercial-real-estate borrowers. The Treasury provides financial support to the Fed for any losses on the loans. "A lot of repair has been done, but the market is still not 100% operational," said Derrick Wulf, senior portfolio manager at Dwight Asset Management. "The Fed is being careful not to derail the frail recovery."

Indeed, about a third of banks surveyed said, on net, that they tightened lending to businesses in the three months ended in July, down from roughly 40% in April's survey. The percentage of banks that tightened standards on commercial-real-estate loans dropped 20 percentage points, to 45%. For residential real estate, the percentage fell to 20% from a peak of about 75% a year ago. Caution was evident in the Fed report as demand for loans weakened in every sector except for residential mortgages. The drop in demand was the top reason banks cited for the overall decrease in business lending. They also cited fewer borrowers with good credit as a factor for the drop in lending.

"Most banks reported that they expected their lending standards across all loan categories would remain tighter than their average levels over the past decade until at least the second half of 2010," the Fed report said. A separate report released by the Treasury said total average loan balances at the 22 largest recipients of government bailout dollars fell 1.1% to $4.3 trillion in June. Meanwhile, loan originations rose 12.7% to $312.1 billion, buoyed by strong growth in originations by Goldman Sachs Group Inc. and American Express Co. as well as seasonal factors and new-home purchases.

American Express saw a 41% increase in originations in its credit-card business. Goldman, which repaid in mid-June the money it had received through the Troubled Asset Relief Program, posted 131% growth in originations on new commitments for commercial and industrial loans.

S.E.C. Floats a Short-Selling Proposal
The Securities and Exchange Commission, after months of considering what to do about short-selling, came up with a new idea on Monday that could make it virtually impossible to place an order to sell stock short and be sure it would be executed quickly. The commission asked for additional comments on that idea, delaying for at least a month the possibility of commission action.

The proposal would require that short sales be made only at a price higher than the current best price being offered by would-be buyers of the stock. It is similar to the so-called tick-test, which was effective on many stock markets before 2007, but would be more restrictive and could be easier to apply given the current structure of markets. There is now no limit on short-selling, so long as the seller can locate shares to borrow.

Short-sellers trade borrowed shares of a stock, hoping to buy them back later at a lower price and pocket the difference. The latest proposal is not a completely new idea; the S.E.C. suggested it deep in its earlier proposal, but did not request detailed comment on it. That it is now seeking comment could indicate that at least some members of the commission think the approach could be a good one. Pressure on the S.E.C. to do something about short-selling grew last year when the stock market nearly collapsed in the wake of the failure of Lehman Brothers. The commission banned short-selling in some financial stocks for a time, and some investors, supported by members of Congress, demanded permanent changes in the rules.

Much of Wall Street has argued that there is no evidence that short-selling caused the plunge last year, and the academic studies available do not support the idea. But the pressure on the commission to do something has been intense. Several stock exchanges suggested a proposal similar to the new one, if the commission felt it had to do something. The commission asked for comment on whether the latest proposal should become effective for all stocks at all times, or should take effect only after a "circuit breaker" was tripped. Such a circuit breaker could be activated if the stock in question declined by a certain amount — say 10 percent — or for all stocks if a major market average fell by a similarly large percentage. The exchanges said a circuit breaker would be needed.

The old tick-test depended on whether the short sale was executed at a price that was higher than the last different price. Such a rule was relatively easy to impose when virtually all trading in stocks listed on the New York Stock Exchange was done on the exchange. Now, however, such trades are executed in dozens of locations, and markets can delay reporting trades for up to 90 seconds. As a result, brokerage firms argued, it is virtually impossible to know with certainty what the last trade was, and therefore something based on the old tick-test would be impossible to administer.

The "alternative uptick rule" that the S.E.C. suggested on Monday would be based solely on the current best bid price for a stock — a figure that is kept up to date and is readily accessible. If the best bid for a stock was $20 a share, a short-seller could put in a sell order at $20.01. If someone agreed to buy at that price, the trade could be completed. But no short sale could be executed immediately, at least until all the buy orders at the best bid price had been filled. The commission said that could "potentially lessen some of the benefits of legitimate short-selling, including market liquidity and pricing efficiency," and asked for comment on whether that was likely.

The commission asked for comment on whether such a rule would help to prevent "potentially abusive or manipulative short-selling" from driving the market down, and whether adopting such a rule would improve investor confidence. Even if the commission were to settle on the new approach, it would have to decide what circuit breakers, if any, would be needed. And the commission would have to decide what exemptions, if any, were appropriate. Much of Wall Street wants to exempt market makers and traders who follow certain market-neutral strategies, warning that without them, those traders would be subject to unnecessary risks of having to maintain positions overnight.

The old tick rule was dropped in 2004, after an experiment in which the commission found that eliminating it for some stocks had no apparent effect on trading. There was virtually no public controversy at the time, but that changed after the 2008 market plunge; the S.E.C. could face a hostile reaction from some members of Congress if it does not act. For some, the issue of short-selling has been tied up with the issue of "naked short-selling," a practice that involves selling stocks short without borrowing them. It appears that other S.E.C. rules have virtually eliminated such selling, particularly for stocks listed on Nasdaq or major stock exchanges. But it remains an emotional issue, and some believe naked short-selling is still a major problem.

America’s Japanese banks
A banking system loaded down with hundreds of billions of dollars worth of unrecognized bad debt — Japan in the 1990s? No, it’s the United States today. And where are American banks hiding their losses?  Among other places, in their loan portfolios.

Banks have  written down billions in toxic securities, but many toxic loans are still carried at close to full value. According to data published by the Federal Reserve late last year, banks are carrying $3 trillion of residential real estate loans and $1.7 trillion of commercial real estate loans on their books for a total of $4.7 trillion. Dan Alpert at Westwood Capital thinks as much as a fifth of that total could be uncollectable. "We know lots of mortgage loans are underwater," he says, describing the situation where the value of collateral has fallen below the principal balance of a loan.  "A majority of the loans banks are holding were originated at the height of the bubble, when securitization broke down."

When securitization markets were fully functional, banks had been able to package and sell their loans to investors. When those markets buckled, banks were forced to eat their own cooking — much of it rancid. Banks argue that loans should not be marked down if they’re still "performing."  As long as borrowers are meeting their contractual obligations, there’s no reason to take a writedown. The problem is, this gives banks an excuse to extend, amend and pretend. They can make concessions on loan terms or delay foreclosure notices, if only to maintain the fiction that borrowers will make good.

With real estate prices likely to fall, and stay, 40 percent below the peak, borrowers have a big incentive to renege on their side of the bargain. This is how we become Japan.  Emergency bailout facilities allow banks that otherwise would have failed under the weight of bad loans to hold those loans to maturity — pretending the bad ones will be paid off in full over time. In reality, many loans will default and banks will bleed capital for years.   Take commercial real estate.  As the Congressional Oversight Panel has reported, few CRE loans that were originated at the peak will qualify for refinancing when they mature. Banks can pretend they will, carrying the loans at values far above what will ever be paid back.

FASB wants to bring some clarity to the issue. A plan under discussion would force banks to record loans at fair value on their balance sheets. But it’s not clear how much good that would do. One problem is that it’s much more difficult to determine the fair value of a loan than it is the fair value of a security, where more liquid markets with more frequent price quotes make measurement relatively easier. With loans, banks must rely on internal models. Banks are now required to report fair value estimates four times a year.  But the most recent data raises just as many questions as it answers.

For instance, what estimates are banks using in their models?  As Jonathan Weil of Bloomberg noted, Regions Financial carries its loans at 34 percent above fair value, Citigroup carries its loans at no premium. This could mean Regions faces bigger losses down the road, or it could mean Citi’s fair-value calculation is too charitable. More likely, it means both. Determining fair value is largely subjective.  So FASB’s proposal, to make banks adjust their balance sheets accordingly, is imperfect. It could have a positive impact if regulators use the new information to force banks to raise more capital, cushioning balance sheets from the future writedowns we know are lurking.

But will banks raise enough? Probably not. Alpert is highly skeptical that banks’ fair value estimates are accurate: "Given the decline in value of collateral backing these loans, it’s very likely banks are underestimating the severity of future losses." So what do we do? We can start by eliminating government guarantees that allow banks to avoid dealing with the problem. As things stand, the biggest banks have no incentive to write down loans because the Federal Reserve, Federal Deposit Insurance Corporation and Treasury Department have, in effect, promised them unlimited financing to hold loans to maturity. As the Japanese can tell you, this is just a recipe for stagnation.  Thanks to a debt bubble that authorities refused to deal with decisively, that country is now entering its third consecutive lost decade.

Disclose the fair value of complex securities
Banks and other financial institutions are lobbying against fair-value accounting for their asset holdings. They claim many of their assets are not impaired, that they intend to hold them to maturity anyway and that recent transaction prices reflect distressed sales into an illiquid market, not what the assets are actually worth. Legislatures and regulators support these arguments, preferring to conceal depressed asset prices rather than deal with the consequences of insolvent banks.

This is not the way forward. While regulators and legislators are keen to find simple solutions to complex problems, allowing financial institutions to ignore market transactions is a bad idea. A bank typically argues that a mortgage loan for which it continues to receive regular monthly payments is not impaired and does not need to be written down. A potential purchaser of the loan, however, is unlikely to value it at its origination value. The purchaser calculates a loan-to-value ratio using the current, much lower value of the house. After calculating the likelihood of default, the potential buyer works out a price balancing the risk of default and amount that might be lost – a price well below the carrying value on the bank’s books.

The bank is likely to ignore this offered price, or trades of similar assets, with the claim that unusual market conditions, not a decline in the value of the assets, causes a lack of buyers at the origination price. Its real motive, however, is to avoid recognising a loss. Yet, by keeping assets at their origination value, the bank creates the curious possibility that its traders could buy an identical loan more cheaply and so carry two identical securities in the same not-for-sale account at vastly different prices.

Financial assets, even complex pools of assets, trade continuously in markets. Markets function best when companies disclose valid information about the values of their assets and future cash flows. If companies choose not to disclose their best estimates of the fair values of their assets, market participants will make their own judgments about future cash flows and subtract a risk premium for non-disclosure. Good accounting should reduce such dead-weight losses.

This already happens in another financial sector. Mutual funds in the US now use models, rather than the last traded price, to provide estimates of the fair values of their assets that trade in overseas markets. The models forecast the prices at which these overseas assets would have traded at the close of the US market, based on the closing prices of similar assets in the US market. In this way, the funds ensure that their shareholders do not trade at biased net asset values calculated from stale prices. Banks can similarly use models to update the prices that would be paid for various assets. Trading desks in financial institutions have models that allow them to predict prices to within 5 per cent of what would be offered for even their complex asset pools.

Obtaining fair-value estimates for complex pools of asset-backed securities, of course, is not trivial. But these days it is possible for a bank’s analysts to use recent market transaction prices as reference points and then adjust for the unique characteristics of the assets they actually hold, such as the specific local housing prices underlying their mortgage assets.

For fair-value estimates made by internal bank analysts to be credible, they need to be independently validated by external auditors. Many certified auditors, however, have little training or experience in the models used to calculate fair-value estimates. In this case, auditing firms can use outside experts, much as they do today with actuaries and lawyers who provide an independent attestation to other complex estimates disclosed in a company’s financial statements. The higher cost of using independent experts is part of the price of originating and investing in complex, infrequently traded financial instruments.

Legislators and regulators fear that marking banks’ assets down to fair-value estimates will trigger automatic actions as capital ratios deteriorate. But using accounting rules to mislead regulators with inaccurate information is a poor policy. If capital calculations are based on inaccurate values of assets, the ratios are already lower than they appear. Banks should provide regulators with the best information about their assets and liabilities and, separately, allow them the flexibility and discretion to adjust capital adequacy ratios based on the economic situation. Regulators can lower capital ratios during downturns and raise them during good economic times.

No system of disclosing the fair value of complex securities is perfect. Models can be misused or misinterpreted. But reasonable and auditable methods exist today to incorporate the information in the most recent market prices. Investors, creditors, boards and regulators need not base decisions on biased values of a company’s financial assets and liabilities.

Robert Kaplan and Robert Merton, 1997 Nobel laureate in economics, are professors at Harvard Business School. Scott Richard is a professor at the Wharton School of the University of Pennsylvania

Backdating Likely More Widespread
The majority of companies that improperly backdated stock options never were caught by regulators or confessed to the practice, according to a new academic study. Researchers at the University of Houston's C.T. Bauer College of Business used a sophisticated statistical test to sift through more than 4,000 publicly traded companies for those with patterns of granting options at abnormally favorable times, often at low points for their share prices.

The study identified 141 companies with such advantageous options-granting practices that the researchers concluded they were highly likely to have been involved in backdating. Ninety-two of those companies never were publicly linked to investigations or announced earnings restatements related to backdating. The companies include advertising giant Omnicom Group Inc., retailer Dress Barn Inc., trucking firm J.B. Hunt Transport Services Inc. and equipment-rental concern United Rentals Inc. Officials at the companies, which showed some of the strongest signs of likely backdating in the study, had no comment or said they found no evidence of wrongdoing.

The unpublished study is the latest sign since the backdating scandal erupted in 2006 that the practice might have been more widespread than thought at the time. Other researchers have drawn a similar conclusion. Scott Whisenant and Rick Edelson, authors of the University of Houston study, said such abnormally favorable options-granting patterns would be expected to occur by chance in only a couple of companies that they examined. Still, the study cautioned that the findings are "purely statistical" and don't "claim to provide categorical or absolute legal proof that any specific company has engaged in backdating."

Backdating companies reached back in time by weeks or months to select a date when their shares were trading at low points, then represented that options had been awarded to executives at that time. The practice gave executives a head start on rich options profits, generally contravening accounting and disclosure rules. Employee options allow the recipient to buy a particular stock at a preset price for a period of time, usually a decade. In the wake of the scandal, scores of companies conducted internal probes, and the Securities and Exchange Commission launched investigations into more than 140 firms. The agency has filed civil charges against 24 companies and 66 individuals for backdating-related offenses, and at least 15 people have been convicted of criminal conduct.

Mr. Edelson said extrapolating from the study's findings suggests that only one-third of all companies that backdated were investigated or caught. That would mean "at least 500 are still undisclosed," according to the study. Mr. Edelson briefed the SEC on the research a year ago, providing a preliminary list of suspected companies. An SEC spokesman said the agency "appreciated the input" but wouldn't confirm or deny whether it sparked any enforcement actions.

Stephen J. Crimmins, a securities lawyer at K&L Gates LLP in Washington, said the SEC devoted lots of resources to backdating cases but now is looking to other problems. "They came down like a ton of bricks on options backdating, and they believe the message has been sent and received," he said. Plaintiffs' lawyers still could file fresh backdating lawsuits, but the statute of limitations may complicate claims involving grants made more than five years ago, Mr. Crimmins said.

The study doesn't name the companies that the researchers concluded were highly likely to have backdated options. But the authors provided a list of companies to The Wall Street Journal, which compared options-grant dates listed in the companies' securities filings with their stock prices. At Dress Barn, based in Suffern, N.Y., securities filings show that top officials received options five times at unusual low points between 1996 and 2002, when backdating became difficult because of tighter rules. A 1996 award was dated at that year's lowest stock price, while one in 1999 came at the bottom of a trough in the stock price. An April 2001 award came at the lowest price of that year's second quarter.

Some of the well-timed options went to Chairman Elliot S. Jaffe and Chief Executive David R. Jaffe, members of the family that has run Dress Barn since it was founded in 1962. Dress Barn did an internal review of its options awards when the scandal erupted, and "we didn't feel there was an issue," said Armand Correia, the retailer's chief financial officer, who got options on two of those dates. The company's board and outside auditors were satisfied the grants were proper based on board minutes and other evidence, he said, and the firm didn't feel the need to disclose the review to shareholders.

At J.B. Hunt, CEO Kirk Thompson and other executives were granted options dated at low points in 1997, 2000 and 2001, according to securities filings. Other grants to top officials of the Lowell, Ark., company also came at unusual dips in the stock, including at the bottom of a V-shaped trough in 1998, a yearly low for J.B. Hunt shares. In a statement, a J.B. Hunt official said "no backdating occurred," adding that the firm's internal auditors investigated the issue in 2006 and found nothing significant. The official said the findings were reviewed by the firm's outside auditors. United Rentals has changed most of its top management following SEC allegations that the equipment-rental firm engaged in accounting misdeeds between 1998 and 2002.

A former chief financial officer, Michael J. Nolan, pleaded guilty to criminal charges and settled SEC allegations, while former United Rentals President John N. Milne is contesting criminal and civil charges. Messrs. Nolan and Milne were among the United Rental executives who received a total of more than five million stock options in two favorably timed grants in 1998. One award in October was dated at the lowest price of the entire year. In 2002, four of the officers, including Messrs. Nolan and Milne, cashed in part of the October 1998 grant for a $14.1 million profit, securities filings show.

In a statement, United Rentals said the Greenwich, Conn., company in 2006 conducted a review of its historical options grants, including the October 1998 award, with the assistance of outside counsel. The review "found substantial evidence that these options were appropriately granted and approved on their recorded date." At Omnicom, a New York holding company for ad firms such as BBDO Worldwide, securities filings show that one options grant to top officials came in March 2000 at the lowest closing price of that year's first six months. All three grants in 2001 came at unusually low points, including a giant award of four million options to CEO John Wren just as the stock dipped to a quarterly low. Mr. Wren still holds all of those options.

Reappraising Home Appraisers
After being blamed for helping to inflate home values during the housing boom, the appraisal business is again coming under fire. Squeezed by a drop in fees, some appraisers are compensating by driving long distances to handle more assignments. Their wanderings are raising questions about whether they know enough about the neighborhoods to accurately assess the value of homes—which has implications for both home buyers and owners.

Bob Blake, a flight-test engineer who lives in Palm Beach Gardens, Fla., was shocked when an appraiser who traveled 44 miles from Port St. Lucie, Fla., valued his home at $228,000 in late May. Mr. Blake's mortgage broker, Skip McDonough, protested to the appraisal-management company, Nations Valuation Services Inc., that the appraiser had failed to look at comparable homes. Eventually, Nations sent another appraiser, who valued the home at $295,000. The dispute delayed Mr. Blake's refinancing by more than six weeks. A spokesman for Nations Valuation declined to discuss the details of the appraisals but said, "We feel we handled it properly."

Appraisals are supposed to shield home buyers from paying too much and lenders from overestimating the value of collateral. If appraisals come in too high, buyers may overpay, making defaults more likely. If they are too low, it becomes hard to sell or refinance homes. Many real-estate agents and builders say that the pendulum has swung too far toward caution, and that lowball appraisals threaten to snuff out any recovery in the housing market.

In June, Evie Salazar traveled about 75 miles from her office in Corona, Calif., to do an appraisal in Cathedral City, Calif. Usually, Ms. Salazar says, she tries to work within about 40 miles of her home, but business was slow at the time she accepted that job. "You do what you've got to do at times to feed the family and pay the bills," she says. Ms. Salazar, an appraiser for the past 12 years, says she researched the Cathedral City market carefully and did a good job. But many real estate agents and mortgage brokers charge that some wandering appraisers are coming up with dubious estimates. Too many appraisers are getting assignments in places where they "just don't know the nuances," says Rick Turley, who oversees the San Francisco Bay area for the Coldwell Banker real-estate-brokerage chain.

The debate over appraisals is inflamed by a natural tension: Real-estate agents and mortgage brokers, who need to complete transactions to collect their fees, are unhappy when an appraiser nixes the sale price. But it also suggests that there may be unintended consequences to an attempt by New York Attorney General Andrew Cuomo to reform the appraisal business. Using the threat of litigation, Mr. Cuomo last year prodded the government-backed mortgage investors Fannie Mae and Freddie Mac into adopting a new code of conduct for appraisers. Since those two companies provide funding for the bulk of U.S. home mortgages, the code, which took effect May 1, has become the national standard for most home loans.

The code bars loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers. One result is that more lenders have outsourced the selection to appraisal-management companies, or AMCs, which take a sizable cut of the appraisal fee, often 40% or more. The AMCs pay appraisers as little as $175 to $200 per assignment, compared with the $350 or more that many get when they work directly for a lender. "Many appraisers are struggling to survive on the fees paid by the AMCs," says Bill Garber, a spokesman for the Appraisal Institute, a trade group based in Chicago. Appraisers are being asked to work faster even as their fees are cut, and that conflicts with the goal of getting reliable appraisals, he says.

Appraisal-management companies deny they are squeezing appraisers too hard. A spokesman for banking giant Wells Fargo & Co., which owns an AMC, says it "has invested substantial time and resources in the quality control of the valuation process to, among other things, ensure that individual appraisers have relevant knowledge of the markets and properties they review." A spokeswoman for Mr. Cuomo says the new code is working well and helping protect appraisers from pressure to inflate estimates.

Appraisers are required to follow a set of national rules known as the Uniform Standards of Professional Appraisal Practice. Among other things, those rules require that "an appraiser preparing an appraisal in an unfamiliar location must spend sufficient time to understand the nuances of the local market." Yet some appraisers who travel long distances to find work may be hard-pressed to spend "sufficient time" in an unfamiliar market. LaRon Hall did an appraisal in early June on a home being sold in Palm Desert, Calif., about 86 miles from his office in Rancho Cucamonga, Calif. He says he needs to accept jobs within a broad swath of Southern California to earn a living. Under the new appraisal code, Mr. Hall says, "you're getting less money and you're having to do more. ... It's definitely a sticky situation."

Mr. Hall appraised the three-bedroom home at $186,000, far above the $138,000 for which it sold in late June. Concerned about accuracy, the mortgage lender that financed the purchase rejected Mr. Hall's appraisal and ordered one from another party before making the loan, according to a person involved in the transaction. A spokesman for Equifax Inc., whose AMC unit ordered the appraisal in Palm Desert, says Mr. Hall has an excellent record on appraisals and that Equifax has a "rigorous quality-control process."

Though consumers can't choose their own appraiser—unless they're paying cash for a home—they should request a copy of the appraisal and examine it to see whether it contains any errors in the description of the property and whether the nearby homes, or "comps," used to gauge its value are truly comparable. If they aren't, the consumer should present any evidence of flaws to the banks and insist that the appraisal be reviewed and redone if necessary. Carol Kearns, herself a real- estate agent, complains that an appraisal done on her own Montvale, N.J., home in June was "an unprofessional guess." The appraisal came in at $730,000, which was more than enough to qualify Ms. Kearns and her husband, Robert, to refinance their mortgage. But Ms. Kearns, upset at what she sees as sloppy work, maintains that the home is worth more than $900,000.

The appraiser was Uchenna Eboh, whose employer, Kobi Group, is about 46 miles away in Mendham, N.J. Ms. Kearns says Mr. Eboh didn't seem to know her neighborhood and used dissimilar houses as "comps." Among those, she says, were two on much smaller lots and one on a busy street corner. A colleague of Mr. Eboh says he couldn't comment and referred questions about the appraisal to the AMC that ordered it, Lender Processing Services Inc.'s LSI unit. A spokeswoman for LPS says the appraisal "followed the processes required" by federal standards and LSI's "more-stringent requirements." She says LSI "only uses local, knowledgeable appraisers located within a reasonable proximity to the properties."

Sometimes appraisers are called on to express opinions on the values of faraway homes without even seeing them. LandSafe, an appraisal unit of Bank of America Corp., in May assigned Jane Price, an appraiser in Dallas, to review another appraiser's estimate of a home in Cathedral City, Calif. Ms. Price didn't visit the neighborhood in question, but her review cited nearby homes she used to determine comparable value. Ms. Price declined to comment. A spokeswoman for Bank of America says Ms. Price was asked to do only a "desktop review" of the original appraisal. "California is a state which has a lot of market information available, which allows a reviewer to gather credible data about a property even when they are not in the immediate area," the spokeswoman adds.

Manhattan Office Sales Ground to Halt in First Half 2009
Manhattan office sales came to a near standstill in the first half, with less than one-tenth the average number of transactions seen during the same period in the previous five years, CB Richard Ellis Group Inc. said. Three office buildings valued at more than $30 million sold from January to June, down from an average of 32 in the first six months of the prior five years, said the Los Angeles-based firm, the largest publicly traded commercial real estate broker.

Buyers and sellers remain far apart on bids while low interest rates on existing loans mean many sellers can afford to wait, CB Richard Ellis said. The Federal Reserve yesterday extended by three to six months an emergency program aimed at restarting credit markets, a move that may cushion the real- estate industry from rising defaults and falling prices. "Lenders have largely withdrawn from the market," CB Richard Ellis said. Two Manhattan sales in the first half -- 1540 Broadway and 1334 York Ave. -- closed because buyers received seller financing and took over existing mortgages, the company said.

"It is likely that TALF will have a positive effect in jumpstarting the frozen CMBS market," the report said. TALF, short for Term Asset-Backed Securities Loan Facility, provides low-cost financing to buyers of asset-backed securities, part of the government’s effort to ease credit. "In the near term, there will be forced property sales but the number of these sales will be tempered," CB Richard Ellis said. More lenders probably will join forces to finance large loans, as they did with the $1.5 billion financing for Bank of America Tower at One Bryant Park. Such deals allow banks to share the risk, CB Richard Ellis said.

The scarcity of property sales has made it hard to calculate prices and yields on property purchases, the broker said. The so-called capitalization rate, or a property’s net operating income divided by purchase price, may have risen to about 7 percent for stable, prime Manhattan office buildings. CB Richard Ellis said. During the peak, cap rates in Manhattan got as low as about 3 percent. Actual cap rates vary by property.

More Are Hired to Speed Up the Clunker Reimbursements
The Obama administration is tripling the number of workers processing cash-for-clunkers transactions as some dealers complain the government has been slow to reimburse them for the incentives of up to $4,500 a vehicle. An administration official said on Monday that the Transportation Department hoped to have 1,100 public and private sector workers processing the vouchers by the end of the week, up from a work force of about 350 through the end of last week.

Employees at a department service center in Oklahoma City have taken the lead in processing the vouchers, the official said, and workers have responded to calls for voluntary overtime to process the forms. Some dealers have reported submitting tens of thousands of dollars — in some cases more — worth of rebates to the federal government for repayment that are still outstanding. Many report they have been repaid for only a small fraction of the deals they made under the program, creating a strain on cash flows. The National Automobile Dealers Association applauded the increase in staff reviewing the dealer claims. "Anything that will speed up the dealer reimbursement process is welcome news," an association spokesman, Charles Cyrill, said.

The government said on Monday that dealers have submitted requests for rebates that total $1.6 billion — more than half of the money provided to the program — through the online system set up to process and pay the claims. The program has led to more than 390,000 vehicle sales. Under the program, car buyers are eligible for vouchers of $3,500 or $4,500 depending on the fuel efficiency of the vehicles they trade in and buy. Dealers subtract the rebate from the sales price, and then submit paperwork to the government certifying the sale with the assurance that the trade-in will be scrapped.

Americans Want 'Freedom to Pay Too Much for Inferior Health Care'
US President Barack Obama has lost his messianic status in the row over health care reform, say German media commentators. The debate reveals the downside of America's ideological aversion towards government: Americans are ready to put up with an inferior health service in the name of freedom, it seems.

US President Barack Obama has made a key concession on his planned health-care reform in response to near-hysterical protests across the nation against the overhaul that was a key plank of his election campaign last year. Obama has signalled retreat on a proposed provision under which consumers could choose from health insurance sold by the federal government as well as those marketed by private companies. "The public option, whether we have it or we don't have it, is not the entirety of health care reform," the president told a town hall-style audience in Grand Junction, Colorado, on Saturday. "This is just one sliver of it, one aspect of it."

Obama's team is now suggesting a non-profit cooperative insurance system, in a bid to overcome the innate aversions many Americans have towards government involvement. German media commentators say Obama has lost his near- messianic status in the course of the health-care debate. Many Europeans, they say, can't understand why so many Americans are clinging on to a health-care system that is less efficient, and provides worse care for average citizens, than European systems.

The center-left Süddeutsche Zeitung writes:

"The 44th president, once revered as a messiah, is shrinking back to human proportions. This normalization, which is healthy, has been caused by the row over how to improve America's health-care system. Obama has given up core elements of his most important reform plan in the face of sometimes aggressive, even fired-up protests from a right-wing mob. "Many of Obama's most glowing supporters are sensing betrayal. The president himself is interpreting his concession as realpolitik. Given the resistance, even from conservative members of his own party, he prefers a modest reform to none at all. The public health insurance was 'just a sliver,' said Obama. But he must take care that his greatest election promise isn't hacked to little pieces by a revolt by America's right wing, or through a salami tactic where he himself is wielding the knife."

The left-leaning Die Tageszeitung writes:

"This is a step back regarding the substance of the overhaul, but it's a necessary step to get Congress to approve the reform. "The entire reform debate suffers from the problematic conviction that has never been questioned, namely that health is an asset from which it's OK to make money. A public health insurance system that doesn't need to make money will end up ruining the private companies in the sector -- that's the argument the opponents of the reform are seriously making. "Up to now, insurance companies and pharmaceutical firms have been making large profits. That won't change when a few cooperatives start competing with them. After all, they will be subject to market rules, unlike a public heath insurance system."

The center-left Berlin daily Der Tagesspiegel writes:

"In this dispute, arguments and examples from experience don't count for much. America's mistrust of government is refreshing in some areas, but not when it comes to health care. Health cover for the average citizen in the US against illness and its consequences is worse than in Germany, and they have to pay significantly more for it." "The resistance comes from citizens who are genuinely outraged at what they see as state interference and business groups that are earning good money from the existing system. They are abusing the founding myth for their own purposes. The US was created as a 'land of the free' against the dictatorship of monarchies in Europe. Opponents of the reform are going so far as to cite Thomas Jefferson: The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants."

"Obama is realizing what his nation will and won't accept. There's likely to be a health reform in the end. But the overhaul that gets majority backing in the end won't resemble what he promised in the election campaign." "This isn't about the uninsured anymore. They only amount to 15 percent of citizens and 10 percent of voters. The freedom to choose now takes precedence. Freedom as the Americans see it also includes the freedom to pay too much for health care that is inferior by comparison with other systems."

Mandelson Denies U.K. May Legislate to Curb Bonuses
Business Secretary Peter Mandelson denied the U.K. government is considering legislation to restrict banker bonuses after widespread criticism of a new code on payouts introduced by the financial regulator this week. "I don’t think legislation is being considered," Mandelson said in a British Broadcasting Corp. television interview today. "The job of the Financial Services Authority is to provide the regulatory framework in which banks and other financial institutions operate."

Mandelson spoke after the Financial Times today reported that he and other government ministers are unhappy with the FSA after it toned down some measures concerning executive pay. "Pay should be linked to risk," Mandelson said. "The reward you get should match the risks taken. You don’t want to see excessive pay and bonuses driving excessive risk." He added: "You have got to see this in perspective and adopt a much more sober view of risk and remuneration of our financial services and banks to prosper in the future."

In separate comments, Mandelson said Britain is "emerging into better times" after Germany and France unexpectedly returned to growth in the second quarter. In the same period, the U.K. economy slid deeper into its worst recession in at least a generation. "They went in first and are coming out earlier," Mandelson told Sky News. "I don’t think it’s got anything to do with the debt. You might say that because we have got a much bigger banking and financial-services sector we were more exposed to the impact of the shock the international financial system received."

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UK Business Secretary Peter Mandelson joins the argument regarding City bonuses
The UK government has again stepped in to attack the Financial Services Authority (FSA) and the ongoing attempt to curb bonuses and remuneration packages in the City. While Lord Mandelson himself, and his fellow MPs, are no strangers to the more lucrative end of the bonus and remuneration package market they have threatened legal action against the banking industry as a means of curbing future payouts. But how will this work?

The truth is, and the authorities are well aware of this, legislation to curb free-market bonuses and remuneration packages is something of a no-go although public fury may well dampen payments in the short term. The fact is that when the UK government had the opportunity to force banks and financial institutions to sign up to various guidelines and regulations, i.e. when they handed over billions upon billions of pounds of taxpayer’s money to save them, they failed miserably to pin them down to any criteria and any timescale.

As we approach the next general election many MPs and members of the government are desperate to pin the blame elsewhere and accuse other parties, such as the FSA, of wasting billions upon billions of pounds of taxpayer’s money. The truth is, as we have said on numerous occasions, the banking industry is an integral part of the UK economy and as such is more powerful as a sector than the UK government and the UK regulators put together.

Top executives pocket huge bonuses despite recession
FTSE 100 chief executives still took home bonuses equal to 90 per cent of their basic pay, despite plummeting profits and dividends at top companies. Research by the pay consultancy Hewitt New Bridge Street found that the median salary for a FTSE 100 chief executive was £800,000 last year, meaning the bonus would be £720,000. It also found that 40 per cent of FTSE 100 companies had handed pay rises to their directors despite the impact of the recession on profits.

David Tankel, principal consultant at Hewitt, said: "While the recession has had its impact on bonus payments, which fell from 2008 levels, bonuses still remained relatively high." Mr Tankel did find evidence that bonuses were starting to fall – companies with a March 2009 year-end paid less than those with a December 2008 year-end. But he said: "Overall bonus payments are higher than many would have expected.

Although bonus payments were lower than in recent years, companies have continued to pay over half of the maximum potential amount during a period when nearly all FTSE 100 companies saw their share price fall and when most companies' profits had been impacted by the recession. This has inevitably raised the question of whether bonus schemes are still linking pay and performance appropriately."

His research into bosses' pay comes at a time of mounting public anger at the level of City remuneration, particularly at banks which have returned to the practice of paying traders multimillion-pound packages despite the £1.2 trillion spent by the taxpayer on bailing out the financial system. Mr Tankel's comments suggest that the recession has done as little to put a break on boardroom avarice as it has on the traditional type of those working on the trading floor.

One hundred public figures have joined a campaign for a High Pay Commission, which they want to act as a watchdog on high City pay packages. It includes figures such as the Labour MP John Cruddas and the Liberal Democrat Treasury spokesperson, Vince Cable. The campaign, under the auspices of the centre-left Compass Group, calls for steps such as maximum wage ratios and bonus taxes.

Yesterday the Chancellor, Alistair Darling, said that it was "not the Government's role" to intervene in pay negotiations. He said: "I do think that government has a role in trying to stop undesirable practices, such as excessive risk-taking through bonus payments in the banking system where we all stand to lose if that goes wrong. But, generally, I think that pay agreements ought to be reached by employers and employees meeting together." His comments come despite polls showing that the public wants to see action taken to curb City excesses.

The Hewitt research pointed out that companies failing to act on shareholder concern about pay have been embarrassed. Shell, the oil major, saw its remuneration report voted down by shareholders in May after tweaking its bonus pay plan so that executives would be paid despite failing to hit targets, in what was the most prominent show of dissent this year. But such votes have been criticised because they continue to hold only advisory status and do not have to be acted upon.

The Hewitt research found that executive pay issues are likely to remain problematic into 2010, with the majority of companies likely to post results for 2009 that are worse than the previous year. Mr Tankel said that salary rises were unlikely to come in ahead of inflation or workforce pay settlements. However, he added: "Issues around bonus payments are more difficult to predict. If this year's trend of above target bonuses continues despite what is forecast as lower year-on-year financial figures, then we would expect investors to question bonus structures and demand significantly enhanced disclosure on bonus targets.

"Companies that are seen as paying bonuses that bear little reflection to the company's performance may well find themselves in very hot water." Mr Tankel said he believed that the "pay for performance" model was appropriate but argued that "it must be operated properly and be seen to be operating properly". The research found that variable pay – made up of an annual bonus and long-term share-based incentives – accounts for about 60 per cent of a FTSE executive's pay, up from 45 per cent in 2003. Some 60 per cent is linked to long-term performance, compared to 50 per cent in 2003.

Northern Rock Defers Payment of Subordinated Debt Coupons
Nationalized U.K. bank Northern Rock said Tuesday it was stopping payment of coupons on some of its subordinated debt, handing bond holders a big loss and further calling into question the future of subordinated debt as a source of bank funding. The 10 bonds affected are all perpetual, meaning the bank doesn't have to repay principal on a given date. Nathalie Deliens, credit analyst at Societe Generale, estimated the total outstanding value of the notes affected at around £1.65 billion ($2.7 billion). She estimated that Northern Rock will save £130 million in 2009 by deferring the interest payments.

The bonds affected currently trade at around 30% of face value, meaning any investor who bought them when they were issued and is looking to sell in response to Tuesday's announcement would suffer heavy losses. Subordinated debt ranks below other forms of debt, so that investors holding subordinated notes would expect to be last in line in the event of the issuer failing. The debt pays higher interest to attract investors. Many banks are looking to reduce reliance on subordinated debt to cut borrowing costs and strengthen their capital bases. There has also been reduced interest in lower-ranking debt because investors in subordinated bonds have increasingly had to share in losses so far borne by shareholders, whereas governments and regulators have protected holders of senior bank debt.

The European Commission has told some other banks, the latest being Belgium's KBC Group, that they can't make coupon payments on subordinated bonds. This isn't the first time that a bank taken over by the U.K. government has suspended payment on subordinated debt. Government-owned Bradford & Bingley PLC missed payments on £325 million of lower-Tier-2 bonds -- another type of subordinated debt -- earlier this year. Northern Rock's lower-Tier-2 bonds aren't included in Tuesday's announcement. "The market has been hoping that Bradford & Bingley was a one-off, and with some uncertainty surrounding Northern Rock's lower-Tier-2 debt under its restructuring, this is reassuring for now," said Ben Bennett, credit strategist at Legal & General Investment Management Ltd.

The move may also convince rating agencies not to downgrade lower-Tier-2 debt issued by U.K. banks simply on the basis of Bradford & Bingley's action, he said. Northern Rock collapsed in 2007 after suffering a run on deposits, and the government's original plan was to run down its loan book. The government changed its plan earlier this year and now hopes to split it into a "good bank" and a "bad bank," with the good bank helping to lubricate the U.K.'s housing market by increasing lending to home buyers and eventually being sold off -- although there is no clear timetable.

"This won't take people by surprise because these bonds are being moved into the asset company, or 'bad bank,' and the wider implications for subordinated bank debt are limited," said Tom Jenkins, bank credit analyst at Royal Bank of Scotland in London. "It looks like a realistic approach by Northern Rock's management, which wants to preserve capital to pay senior debt holders. That's the point of being subordinated -- you rank below the senior debt." Other European banks have bought back or exchanged their subordinated debt in order to improve their capital positions, taking advantage of the fact that the debt trades below face value.

In March, Switzerland's UBS AG repurchased €577 million ($812.6 million) worth of subordinated bonds at a cost of approximately €355 million. Other banks that have conducted similar offers are Lloyds Banking Group, Royal Bank of Scotland Group PLC, Standard Chartered PLC, and Anglo Irish Bank Corp. On July 1, Northern Rock said its capital base has fallen to a level below the minimum regulatory requirement. Earlier this month the bank said it remained in the red for the six month ended June 30.

London bank pay up 6 percent
Average pay for financial employees in London rose 6 percent in July from June due to intensified competition for "star performers" and confidence continued to improve across the industry, a survey showed on Tuesday. The average salary paid to financial sector workers in London rose to 53,223 pounds in July, up 6 percent from June but down 1 percent from a year ago, recruiters Morgan McKinley said.

"Hiring managers are looking for candidates who have multiple skill sets and who are the star performers in their field and they are offering these individuals competitive salaries to secure them," said Andrew Evans, managing director of financial services business at Morgan McKinley. The number of new job opportunities in the city fell 7 percent in July from June, but it was still the second best month this year. Evans attributed the fall to seasonal fluctuations, adding that the data was encouraging and showed a gradual improvement in city confidence levels. Morgan McKinley, a recruitment consultancy covering financial services, based the survey on internal data and calculated for the sector using its market share.

Britain's Pension Corp. Considers 2010 IPO as Deficits Swell
Pension Corp. LLP, the British insurer of pension fund payouts started by Edmund Truell, is considering an initial public offering next year as pension plan deficits widen to their largest on record. "The amount of capital required to solve the U.K.’s pension problem is just gargantuan, and you can only begin to get that sort of money from public markets," Truell, 46, said in a telephone interview. The share sale "will be next year rather than this year."

Truell started Pension Corp. in 2006, raising 900 million pounds ($1.5 billion) from investors including Swiss Reinsurance Co., J.C. Flowers & Co. and Royal Bank of Scotland Group Plc. The firm manages 5 billion pounds of assets and plans to raise the money to insure more liabilities from pension funds seeking to secure future payouts for their members. About 87 percent of the U.K.’s 7,400 final salary pension plans are in deficit following the financial crisis, according to the Pension Protection Fund, a government-backed insurance program.

"The bulk-purchase annuity market is going to continue to be a good market because companies want to get their pension funds off their balance sheet," said Trevor Moss, a London- based analyst at MF Global Securities Ltd. who tracks insurers. Pension liabilities add "enormous volatility to their balance sheet and profit and loss accounts, so they’re all going to find ways to take that risk away." Companies including Cable & Wireless Plc, RSA Insurance Group Plc and Thorn Ltd. have insured the retirement payouts of their pension fund members in the last year to reduce their exposure to volatile investment returns and the risk of former employees living longer than expected.

Truell founded Pension Corp. after 18 years working for Duke Street Capital, which he helped start as part of Hambros Plc in 1988. Guernsey, Channel Islands-based Pension Corp. was the second-biggest insurer of pension plan liabilities last year behind Legal & General Group Plc, which, with Prudential Plc, has been the largest insurer in the market for almost 20 years. Shortfalls of the U.K.’s 100 biggest publicly traded companies more than doubled to a record 96 billion pounds last month from a year earlier, according to London-based actuary Lane Clark & Peacock LLP.

BP Plc, Europe’s second-largest oil company, said in June it would close its final salary pension plan to new U.K. workers, and lender Barclays Plc has asked 18,000 employees forgo up similar benefits. Half of British companies with defined benefit pension plans expect to close them to all employees by 2012, Watson Wyatt Worldwide Inc. said in a survey published yesterday. "More schemes closing to future accrual puts them into the back bucket from the employers’ point of view," said Paul Belok, a London-based actuary at Aon Consulting Ltd. Once a plan is closed companies "will really want to sever the link. The only way of doing that is in the bulk annuity market."

Pressure from pension trustees to secure members’ future payouts is likely to encourage companies to transfer as much as 20 billion pounds a year in retirement liabilities over each of the next 15 years to firms such as Pension Corp., Legal & General, and Goldman Sachs Group Inc.-owned Rothesay Life, Belok said. About 8 billion pounds of assets were moved in 2008, according to Aon. The amount of pension liabilities transferred dropped to 1.5 billion pounds in the first half of 2009. Rising defaults on corporate bonds, which typically back annuity payments, at the beginning of this year slowed dealmaking, Belok said. Transactions may resume in the second half as the bond market stabilizes, he added.

More insurers like Pension Corp. will have to raise capital if they wish to meet a long-term rise in demand for bulk annuities, according to Guy Coughlan, managing director of JPMorgan Chase & Co.’s pension advisory group. "There’s not enough capacity in the global insurance and reinsurance industry to transfer the longevity risk of corporate pension plans in the U.K. alone," he said. "It’s an overwhelming problem that you can’t solve without bringing multiples of the current capital that exist in the insurance industry."

British recovery hampered by excess debt
As the US economy succumbed to the Great Depression, President Herbert Hoover railed against global finance as "a loose cannon on the deck of the world in a tempest-tossed era". Policymakers in the great financial crash of 2007-08 have proved of a more practical bent. To varying degrees, they have slashed interests rates, cut taxes and increased public borrowing to compensate for a collapse in private consumption. The remedy is working patchily. Germany, France and Japan are no longer in recession. But the British economy is still contracting sharply. Provisional GDP figures for the second quarter showed a decline of 0.8 per cent from the first quarter.

So is the Anglo-Saxon model of free- market economies now losing vigour compared with more state-directed forms of capitalism? The answer is no. The first reason is that recent economic statistics are provisional. The apparent superiority of the performance of other advanced industrial economies may prove illusory. Revised data may yet show a convergence of British and continental European growth. Second, the apparently poor performance of the UK economy is not necessarily rooted in its model. The constraints on the British economy are partly due to bad fiscal policy and partly reflect a weak banking system and an irrational stress on investment in housing. Those are serious deficiencies, but they are far from integral parts of a market economy.

How then to explain the disparity in the figures, if indeed it exists? Germany’s return to growth in particular, given its reliance on manufacturing exports, suggests that the global economy may have rebounded from the pit of recession. Japan’s economy grew by just under 1 per cent in the second quarter, thereby marking the end of its worst postwar recession. Its exports benefited from resilient demand in China, which has undertaken a huge fiscal expansion. The command economies in Asia have been quickest to deploy fiscal and monetary policy to support economic activity and thereby stimulate trade.

Britain is different. The greatest drag on recovery is the indebtedness of the household sector. An expansion of credit, mediated by an incompetent banking sector, drove a housing bubble that has burst, taking with it a large slice of householders’ wealth. UK consumers have good reason to retrench. And public borrowing has expanded to such levels that the Government cannot responsibly take up the slack. These are the limits to growth. They are manufactured in the UK.

The principal reason for believing a market economy to be more efficient over the long run than a command economy is that its decisions are more dispersed. There is an impeccable theoretical case for intervention to rescue the banking sector and for public spending to prevent a vicious spiral of debt and deflation. But government cannot reliably forecast what goods and services will be demanded by consumers and in what quantities. It is a type of knowledge that can only be gained in a continual process of discovery through shifts in relative prices. Japan’s recovery programmes through its long recession of the 1990s foundered on the lack of economic value in wasteful public works projects.

The Bank of England has adopted the right policy to cope with the risk of deflation (prolonged falls in prices), by slashing interest rates and expanding the money supply. But this will not stimulate growth if households prefer to save, even with pitifully low returns, than spend. Monetary easing would then show up more quickly in higher inflation rather than a boost to growth. Rising prices of oil and other raw materials, generated by continued Chinese growth, do not augur well for UK recovery. These are the risks that Britain now contends with.

Brain Is a Co-Conspirator in a Vicious Stress Loop
If after a few months’ exposure to our David Lynch economy, in which housing markets spontaneously combust, coworkers mysteriously disappear and the stifled moans of dying 401(k) plans can be heard through the floorboards, you have the awful sensation that your body’s stress response has taken on a self-replicating and ultimately self-defeating life of its own, congratulations. You are very perceptive. It has.

As though it weren’t bad enough that chronic stress has been shown to raise blood pressure, stiffen arteries, suppress the immune system, heighten the risk of diabetes, depression and Alzheimer’s disease and make one a very undesirable dinner companion, now researchers have discovered that the sensation of being highly stressed can rewire the brain in ways that promote its sinister persistence. Reporting earlier this summer in the journal Science, Nuno Sousa of the Life and Health Sciences Research Institute at the University of Minho in Portugal and his colleagues described experiments in which chronically stressed rats lost their elastic rat cunning and instead fell back on familiar routines and rote responses, like compulsively pressing a bar for food pellets they had no intention of eating.

Moreover, the rats’ behavioral perturbations were reflected by a pair of complementary changes in their underlying neural circuitry. On the one hand, regions of the brain associated with executive decision-making and goal-directed behaviors had shriveled, while, conversely, brain sectors linked to habit formation had bloomed. In other words, the rodents were now cognitively predisposed to keep doing the same things over and over, to run laps in the same dead-ended rat race rather than seek a pipeline to greener sewers. "Behaviors become habitual faster in stressed animals than in the controls, and worse, the stressed animals can’t shift back to goal-directed behaviors when that would be the better approach," Dr. Sousa said. "I call this a vicious circle."

Robert Sapolsky, a neurobiologist who studies stress at Stanford University School of Medicine, said, "This is a great model for understanding why we end up in a rut, and then dig ourselves deeper and deeper into that rut." The truth is, Dr. Sapolsky said, "we’re lousy at recognizing when our normal coping mechanisms aren’t working. Our response is usually to do it five times more, instead of thinking, maybe it’s time to try something new."

And though perseverance can be an admirable trait and is essential for all success in life, when taken too far it becomes perseveration — uncontrollable repetition — or simple perversity. "If I were to try to break into the world of modern dance, after the first few rejections the logical response might be, practice even more," said Dr. Sapolsky, the author of "Why Zebras Don’t Get Ulcers," among other books. "But after the 12,000th rejection, maybe I should realize this isn’t a viable career option."

Happily, the stress-induced changes in behavior and brain appear to be reversible. To rattle the rats to the point where their stress response remained demonstrably hyperactive, the researchers exposed the animals to four weeks of varying stressors: moderate electric shocks, being encaged with dominant rats, prolonged dunks in water. Those chronically stressed animals were then compared with nonstressed peers. The stressed rats had no trouble learning a task like pressing a bar to get a food pellet or a squirt of sugar water, but they had difficulty deciding when to stop pressing the bar, as normal rats easily did.

But with only four weeks’ vacation in a supportive setting free of bullies and Tasers, the formerly stressed rats looked just like the controls, able to innovate, discriminate and lay off the bar. Atrophied synaptic connections in the decisive regions of the prefrontal cortex resprouted, while the overgrown dendritic vines of the habit-prone sensorimotor striatum retreated. According to Bruce S. McEwen, head of the neuroendocrinology laboratory at Rockefeller University, the new findings offer a particularly elegant demonstration of a principle that researchers have just begun to grasp. "The brain is a very resilient and plastic organ," he said. "Dendrites and synapses retract and reform, and reversible remodeling can occur throughout life."

Stress may be most readily associated with the attosecond pace of postindustrial society, but the body’s stress response is one of our oldest possessions. Its basic architecture, its linked network of neural and endocrine organs that spit out stimulatory and inhibitory hormones and other factors as needed, looks pretty much the same in a goldfish or a red-spotted newt as it does in us. The stress response is essential for maneuvering through a dynamic world — for dodging a predator or chasing down prey, swinging through the trees or fighting off disease — and it is itself dynamic. As we go about our days, Dr. McEwen said, the biochemical mediators of the stress response rise and fall, flutter and flare. "Cortisol and adrenaline go up and down," he said. "Our inflammatory cytokines go up and down."

The target organs of stress hormones likewise dance to the beat: blood pressure climbs and drops, the heart races and slows, the intestines constrict and relax. This system of so-called allostasis, of maintaining control through constant change, stands in contrast to the mechanisms of homeostasis that keep the pH level and oxygen concentration in the blood within a narrow and invariant range.

Unfortunately, the dynamism of our stress response makes it vulnerable to disruption, especially when the system is treated too roughly and not according to instructions. In most animals, a serious threat provokes a serious activation of the stimulatory, sympathetic, "fight or flight" side of the stress response. But when the danger has passed, the calming parasympathetic circuitry tamps everything back down to baseline flickering.

In humans, though, the brain can think too much, extracting phantom threats from every staff meeting or high school dance, and over time the constant hyperactivation of the stress response can unbalance the entire feedback loop. Reactions that are desirable in limited, targeted quantities become hazardous in promiscuous excess. You need a spike in blood pressure if you’re going to run, to speedily deliver oxygen to your muscles. But chronically elevated blood pressure is a source of multiple medical miseries.

Why should the stressed brain be prone to habit formation? Perhaps to help shunt as many behaviors as possible over to automatic pilot, the better to focus on the crisis at hand. Yet habits can become ruts, and as the novelist Ellen Glasgow observed, "The only difference between a rut and a grave are the dimensions." It’s still August. Time to relax, rewind and remodel the brain.


Bigelow said...

Drug Promises Fix for Radiation Poisoning

ric said...

Came across the quote below when reading about Schumpeter at Wikipedia and began thinking about our hosts. If Schumpeter believed the "intellectual class" would look after others and help guide society, he didn't understand human nature. I&S are among the few intellectuals I know who try to help anyone but themselves. In an advanced capitalist society, intellectual thought becomes just another product.

Schumpeter's theory is that the success of capitalism will lead to a form of corporatism and a fostering of values hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form. There will not be a revolution, but merely a trend in parliaments to elect social democratic parties of one stripe or another. He argued that capitalism's collapse from within will come about as democratic majorities vote for the creation of a welfare state and place restrictions upon entrepreneurship that will burden and destroy the capitalist structure. Schumpeter emphasizes throughout this book that he is analyzing trends, not engaging in political advocacy. In his vision, the intellectual class will play an important role in capitalism's demise. The term "intellectuals" denotes a class of persons in a position to develop critiques of societal matters for which they are not directly responsible and able to stand up for the interests of strata to which they themselves do not belong. One of the great advantages of capitalism, he argues, is that as compared with pre-capitalist periods, when education was a privilege of the few, more and more people acquire (higher) education. The availability of fulfilling work is however limited and this, coupled with the experience of unemployment, produces discontent. The intellectual class is then able to organise protest and develop critical ideas.

Gravity said...

I have often used the analogy of a truck rolling downhill because the forces involved are instantly recognizable, and difficult to misunderstand.

The concept of cognitive capitalism seems compatible with the well established doctrine of gravitational capitalism, so that capital is subject to gravity,
providing that symbols experience velocity and can thus attain relativistic mass.

The corporatist gravity-well is then established by bending cognition through a gravitational curvature, from which no unprofitable ideas can escape.

It is not the law of gravity, but the gravity of law which causes our descent to quicken.

Anonymous said...

Just had a visit from the repo man. Two two-week payments behind to the local credit union for a total of $157.00. I'm sure they will say "busines is business" when I confront them. But you know, "business is business" for everyone but the banks that take our tax money for their own bail-outs.

It's about time to get the pitchforks out.

Chaos said...

Got a question for the board.

Been trying to sell my house for over a year now. Despite the fact that the local real estate market has not gone through the convulsions of Cali and Florida (and others), there have been no offers of any kind, despite a series of significant price reductions. We're reaching the point of having to consider a short sale or other options. Given that my mortgage holder is Suntrust, and that entity's shaky balance sheet, am I crazy for considering daring them to foreclose on me?
Any thoughts appreciated.

Greenpa said...

DYer- re Katey Walter- oh, that was cruel! Such a cutie. And just got married. And a huge resemblance to my first Spouse, right down to frizzy curly blondish hair and limnology. Just no fantasy potential there.

Anonymous said...


If your house is on the market for more than 3 months, you're doing something wrong. I've never seen an exception to this.

Where people usually go wrong is their mindset. You need to actively hunt buyers. You can start by putting yourself in a buyer's shoes, and thinking like one. Visit every single open house nearby that's a competitor, and see what you're up against. There's a limited set of buyers these days, and you want to be the one to attract them.

Watch HGTV, continually. This is a superb learning experience. There's a new show on called "Real Estate Intervention", IIRC. The host is Sabrina something. Each of the families on it usually bought at the peak, and now need to sell. Only they are going about it completely the wrong way. And being unrealistic. Many look like deer caught in the headlights when the basics are shown to them.

It's a sad, brutally honest reflection of our time.

I just recently sold my home myself, and I'd swear that I got the last buyer who was in that market at that time.

Good luck.

Anonymous said...

"...But for some reason the rose-colored pundits don't seem to mind looking foolish...."

Well, to begin with, they're part of the Ministry of Propaganda.

This works in two basic ways.

The first 'line of defense' in spineless corporate lackey 'journalism', is to hire outright stupid people at media outlets.

Stupid people as journalist are far more pliable and open to stupid suggestions than people who can actually think.

And let's face it, people who went into journalism by and large could never have made the cut for let's say law or medicine or even scientific jobs. As a group, journalists are not first string candidates for any of the more rigorous mental occupations. They also were to lazy to be greedy enough to go to business school.

Second, outright intimidation and threats against 'journalists' are usually a very effective at warding them off a story TPTB don't want covered or explained to the Sheeple.

Outright intimidation and threats by your employer are also much more effective against stupid people masquerading as real 'journalists. They are prone to ass kissing and groveling in the face of sheer raw power.

So there you have it, why "rose-colored pundits don't seem to mind looking foolish".

It's what they're payed to do and it's a lifestyle statement that reflects the sad little misshapen core of their true being.

Anonymous said...

Speaking of HGTV, they still air programs that talk of remodleding kitchens that will add 25 grand to the value of a house. But I still like the programing, although I declined the possibilty of a "Modern Master' appearence way back in the 90's sometime.

Old habits do die a very slow death. Despite the reality and tragedy of the terrible economic situation, I still sit down and drool over the oppulence and sheer splendor featured in every new edition of Architectural Digest.


Anonymous said...

Architectural Digest is Interior Decorating porn.

Anonymous said...

“Architectural Digest is Interior Decorating porn.”

LOL, it really is. And let’s face it, this type of frivolity is about to go the way of the Rococo before the guillotines of reality are finished dropping.


scandia said...

@ Aesthete and Anon, Call it porn but I come alive in a well designed,functional space. Architecture is one of the art forms.

In the TimesOnline article, " British recovery hampered by excess debt" I came across a definition of deflation, "Bank of England has adopted the right policy to cope with the risk of deflation ( prolonged falling prices ).Ilargi, you have your work cut out for you getting out the definition that inflation/deflation are about money/credit supply.

Max said...

China cuts US Treasury holdings in June China Daily

jal said...

@ Max
China cuts US Treasury holdings in June China Daily

The comments on that article were interesting.

Anonymous said...

The corporate world is in bed with the Chinese, taking advantage of all that slave labor in a command economy. They've had you consume yourselves into penury and they profited handsomely during the process. Now it's time for you to give up your privileged lifestyle and join the ranks of the dispossessed, or should I say join the ranks of the Chinese peasants that never possessed.

It would be productive to organize a boycott of all Chinese, Indian and Southeast Asian manufactured goods, and oil to the extent possible. Bring the recycling of dollars to a relative standstill and watch the spiking interest rates finally penetrate the heart of the beast.

They can throw you in jail for not paying your taxes. They can't incarcerate you for not buying things you probably didn't need.

el gallinazo said...


"El G,

Great post, I enjoyed reading it--except for the OBL assertion. Couldn't you just as easily (and more accurately) qualified your commment with " I believe" or "In my opinion" ?

I'm sure it was no slip of the tongue, no, you're banging on the pipes again with that agitating pipe wrench."

The ones that Joe Bageant fittingly refers to for simplicity sake as "the Bastards" have enormous power to affect our lives. They can steal my money, steal the money of my child, lock me up, torture me, and shoot me. But in order to maintain my self respect, there is one thing that I will do my damndest to prevent ( Winston Smith not withstanding ) , and that is to force me to believe and echo their bullshit.

Interesting that you regarded my little aside as rattling your pipes. Interesting that you didn't ask me for links to support my statement.

Well, in my limited knowledge base, aesthetics is a category of feeling, so an aesthete should have a certain expertise in the circumspection of his or her feelings. So let me ask you this; if someone (hypothetically) presented a set of facts to you that bordered on or surpassed the famous criminal criterion of beyond a reasonable doubt, that OBL did in fact die in December 2001, ***how would that make you feel?** I find this question very interesting.

Anonymous said...

El G said:

"Interesting that you didn't ask me for links to support my statement."

Please do share those links. I'm curious since I'm certain that 9/11 was a well executed inside job. Thanks.

Anonymous said...

El G,

You're not rattling my pipes at all--I was refering to the seemingly off-topic vibe of the subject on this blog.

As far as OBL being dead or alive in 2001, I just don't know. And let's be real, neither do you. Which was my point.

Is it still OK to admit ignorance, to just cop to the idea that as an American in the lower 48 in Dec of 2001 I cannot say for certain what happened in Tora Bora or Afghanistan or Pakistan or from the other end of a dialysis machine or from wherever you seem to know for certain that OBL took his final breath.

I don't know.


el gallinazo said...


The QED version:

Osama Bin Laden: Dead or Alive? by David Ray Griffin (Paperback - May 20, 2009)

The one hour radio interview version:

The KPFA website seems to be down at the moment, but the following link should get you to the mp3 when it is back up:


Hombre said...

El G - I was curious when I saw your OBL comment but had to run. Busy day.

Even though I have not seen any evidence for that, I would be open to look at some, especially from a well regarded TAE regular like yourself.

rapier said...

Some random thoughts about daring a foreclosure.

Taking a chance on a much delayed foreclosure is a viable business decision. Doubly so if your upside down or if a short sale is not acceptable to Sun.

I have run across numbers suggesting that non paying non foreclosures are huge. Like all RE there are probably large regional variations. You might try to find out if it's common in your area but I have no clue where to start. Also try to parse if Sun is letting a lot of people skate.

There is a funny thing about this in that nobody will advertise they are a deadbeat. There is another thing too. Many people just move out, and the foreclosure never comes. This puts them in other liability situations. Which brings to mind it might be best to keep paying taxes. If the mortgage servicer does because it's held in escrow that's a problem.

Take every penny you don't pay and save some and pay down other debt with the rest.

If you have almost zero intent to go this way it is almost imperative you explore it anyway. Knowledge is power as they say.

VK said...

I'm curious since I'm certain that 9/11 was a well executed inside job.

No it wasn't! That's a hoax IMO. I just can't buy all these 9/11 theories. It would require to much information to be hidden and one thing I've learnt is that incompetence and leakage of information are evident through all layers of Government. It's the people that can't see the plain facts.

The financial crisis has occurred in plain view and all the information has been available, we even have a good measure on fraudulent data and possible stock market tinkering by the FED.

Sure Bush used the attacks to further his cause by invading Iraq for the oil but they were itching to do it from the word go. A conspiracy of such a scale is immensely difficult to hide, you need just one or two leaks to derail it.

el gallinazo said...


I was hoping you would answer my question. "I don't know" has little to do with feelings. It is a fact that you don't know. It is also a fact that there are several, probably many people on this planet who do know for certain. I have no first hand knowledge, but there are informed, reasonably trustworthy people who do.

But I am not involved in a debate about the facts. Ilargi would skin me if I tried to start one. I was just interested in how you would feel if you learned beyond a reasonable doubt that he died in Dec. 2001. You choose not to answer, so let's drop it.

el gallinazo said...

ACA 8:58
(Asshole Chickenshit Anonymouse)

I am sure that not only does the awesome Stoneleigh attract 9-11 truthers, but she also attracts pederasts and sycophants and even useless, anonymous morons like yourself. Go back to your krill soup and repeat your catechisms! See you in hell.

jal said...

Here is an interesting point of view from “of two minds”
Rant or Revelation: My Money's on Revelation

"The thing to remember is that most of the third world has worse governance than we do, worse financial problems, fewer natural resources and a less educated population. Still, from Argentina to Poland to India, they just limp along. Anarchy does not break out. I see no reason for it to do so here either. It will just suck."


Ilargi said...

Oh Sweet mother of her son.

I can''t leave for even two hours... I really don't want those themes here, and y'all have been told umpteen times. I'll delete anything remotely touching on them from now on in.

Hombre said...
This comment has been removed by the author.
Anonymous said...


I hear ya!

Is this a FSBO? On our FSBO, we offer a percentage to buyer's agents even though we have no selling agent. Otherwise, local realtors may refuse to show our house to potential buyers!

Nevertheless, we've had no showings in 2 months of MLS listing!

I am hoping this has more to do with the fact that it took this long to finally put up a sign in the front yard.

But I suspect that it has more to do with dried up credit [ie no residential buyers at all] and the fact that most current sales are stressed/ bottom-priced. Current buyers are interested in foreclosure prices, there are so many foreclosures to choose from. By comparison, our house is over-priced.

What amazes me is that no-one has been even curious to look inside for a market comparison or even to low-ball an offer. This is a relatively new house [no renovation needed] in a great area with better employment than most regions, fabulous schools, easy commutes, and leisure activities like community pool, tennis, golf.

But the market is dead- Unless we drop the price 50% [which would maybe attract an investor]. But we don't have that much cash to bring to the settlement table. So it's got to sell at this price; or our family is stuck forever with this house.


Hombre said...

Ilargi - "I really don't want those themes here, and y'all have been told umpteen times."

I deleted my last post thinking you meant OBL stuff? Or.. what were you referring to?

Starcade said...

They can throw you in jail for not paying your taxes. They can't incarcerate you for not buying things you probably didn't need.


Starcade said...

A question for Ilargi, and if he wants to delete this for his call from earlier, I understand:

How much do you think this economic situation had to do with 9/11?

Because, if (as I do believe) this was an inside work, a lot of what has gone on since, including this economic downturn, might well have roots in events such as 9/11, especially if orchestrated.

el gallinazo said...


That is the common opinion, but I am quite sure it is incorrect. I must admit that I find it a bit discouraging that someone of your level of intelligence accepts this. But I can't build a case on this site. Send me an email. I highly respect your mind. I would like to pursue this further with you off the site.

VK said...

@ Starcade

If economic crisis are orchestrated, how does that explain the recent debacles in Russia and Argentina?

Was the Mississippi bubble a set up by the elite of France to over throw themselves in the revolution that resulted a few decades later as a result of the financial chaos?

What about GD1, was that a conspiracy?

It simply ain't so! These things are caused by mass stupidity, ideology and the belief in free lunches. A lot of sh*t happen and the criminal class, oligarchs and elite take advantage of what ensues.

The credit bubble was blown up ever faster following the 2001 recession to cover up the excesses of the tech boom but the original idea of borrow and spend came from the 80's. A 30 year plot? Hardly possible when incompetence and short sightedness rule the day.

Anonymous said...

market cycles are orchestrated; every bust had the seeds of destruction intentionally sown in its prior boom.

this is a bumper crop of seeds from banking deregulation, corporate greed, bought politicians, and propagandized info-tainment to supress wages and induce indebtedness of the many for the purpose of concentrating wealth in the hands of the few

we reap what we have sown... and it will surpass OBL's wildest dream of economic destruction

we have met the enemy and...it is US!

VK said...

@ El G

Just click on my name above and you will go to my blog, just created my first post. You can post links and info in the comments section. (hope it works!)

@ Ilargi and fellow deflationistas

A sight for your sore eyes! A chart fest


Starcade said...

VK: Unintended consequences, if they weren't orchestrated too.

And, as far as "free lunch" syndrome goes, you know as well as I do there is only one way to end it: Eliminate all who believe in it.

As in kill them...

Jim R said...

Now where was I ... oh, yeah.

I didn't mean for that reference to inspire a sentimental journey. But yeah, it doesn't hurt in getting the message across that Katey is cute.

Katey Walter is now my default response to anyone presenting me with AGW denialist BS about the weather on Pluto, cosmic rays, bee farts, and so forth. Here's a person with a PhD, who has actually gone out and taken some measurements. Get back to me when the IR spectrum of CO2 changes, and have an expert like that and we'll talk about your "doubts".

Bad juju indeed.

In other news, I dumped all, or most of, my SDS, SRS etc. yesterday and today. Stoneleigh was right again, the euphoria phase has another week or three to run. Pretty much of a wash; might have lost a smallish fraction.

These little pullbacks are not worth pursuing...

Also started moving out of that fricken CU (TAR = 107) account to an ordinary little local bank with a TAR of 2.7.

Ilargi said...

To all:

Neither WTC nor OBL are even remotely welcome themes here. Not now, not in the future. I can't believe you are all, a bunch of seemingly intelligent people who I've come to appreciate a lot and thought appreciated this site in return, so willing to destroy TAE. Because that would be the only possible outcome. And no, that is not up for discussion. Not one more word. Far enough said already.

NZSanctuary said...

@ Ric

Re: Schumpter

I think many intellectuals would genuinely like to help people/society, but the problem as I see it is more this:

The rising number of people getting "higher education" are often so indoctrinated into our system of education, government, finance, health, consumerism, etc., that they are no better than idiot savants when it comes to critically examining our way of life.

Basically, education in the modern world is very poor at teaching people how to think properly.

Anonymous said...

"If this recession lasts until 2012, and turns into a depression on its way there, the sunny calls will look preposterous."

For a politician, kicking the can down the road anyway possible until 2012 maybe all that matters.

VK said...


Basically, education in the modern world is very poor at teaching people how to think properly.

Maybe that was the whole idea? ;)

How else would you get people to take dull, repetitive jobs and live dead end lives without questioning.

Just brainwash them in school for 18-20 years and send them on their specialized ways. As Stoneleigh says, there are far too many specialists who can not connect the dots and too few generalists.

I suspect children read better books and high quality literature in the 1800's on their own then what they do today at a comparative age.

I know quite a few idiot savants you are referring to, knew quite a few from school and recently University. Their brains are truly amazing but their mind does not allow for deviation from the standard route of 'make money and work for the system, No questions asked as to how society really functions and if known duly ignore!'

thethirdcoast said...

Is it acceptable to view the financial crisis in conspiratorial terms?

Or do people generally think it is less well organized than that?

Gollum Sucks' high-level blanket penetration of the USFedgov and financial industry must have the KGB....I mean FSB and Mossad in tears.

Oh look...US Northcom wants the authority to post up to 400,000 troops on US soil in times of "emergency":

The Pentagon Wants Authority to Post Almost 400,000 Military Personnel in U.S.

Remember kids, "It could never happen here!"


jal said...

Beautiful quotes!

... These things are caused by mass stupidity, ideology and the belief in free lunches.

“And, as far as "free lunch" syndrome goes, you know as well as I do there is only one way to end it: Eliminate all who believe in it.”
Ask any grunt who is getting a free lunch ...

They are "the suits"

The capitalist are ironically asking for their demise.


VK said...


According to an article which appeared in the Spanish newspaper Expansion this morning, one in five Spanish mortgages is now considered as being high risk and liable to become "non performing".

The mortgages at greatest risk are naturally those contracted after 2005 where the loan to valuation was over 80% of the total. In 2006 and 2007, according to data from the bank of Spain, LtVs were over 80% in 17.7% of the mortgages granted.

I can't read the original article below, as it's in Spanish.


thethirdcoast said...

NZSanctuary won the thread:

The rising number of people getting "higher education" are often so indoctrinated into our system of education, government, finance, health, consumerism, etc., that they are no better than idiot savants when it comes to critically examining our way of life.

This is the core problem.

As a group Americans lack the introspective capacity that would allow them to identify and implement the necessary structural changes.

I say prepare for what's coming if you're able, but don't let that detract you from enjoying the generally good times we live in.

Ilargi said...


Spain, Ireland, UK, US, Baltics, you can put them all at at least 50% non-performing in a little while, and I'm sure I'm leaving out hands full of other countries.

Non-performing is when people can't pay up any longer. Simple as that. Come to think of it, I'm leaving out hands and feet full of other countries, and 99% of doofuses think they're sitting pretty.

VladTheBad said...

Please people...... leave the non-allowed topics out of your comments.... since I'd like to read your comments, and I'm not going to be able to do that if they get deleted.... .... And I agree that they should be deleted, since I&S don't want those topics here.

That being said, I'd like to thank Ilargi again for keeping the site such a high quality place to come and sit and read.

I would like to add, that to those sitting on houses and not dropping the prices at all, yet even hope for a lowball that they can take to their lender.... I don't see much lowballing going on at this point. Too many houses have been sitting too long. The house my wife and I want has been on the market better than 2 years now... same price. I'd love for them to cut the price in half, but I'm not 100% sure I want in even at that price, since I'd have to finance pretty much all of it, although I'd do it anyways to make my wife happy, and to quit paying rent. At least then I'd be in a position to move some family in with us in case things get worse.

VK said...

@ Ilargi

How do you do it, day in, day out? What's your muse? It's unbelievable how you power on, day after day. What motivates you!?

@ Richard Feynman fans

An acclaimed lecture series by the iconic physicist Richard Feynman is now freely available to the general public for the first time on a new Web site launched by Microsoft Research, in collaboration with Microsoft Chairman Bill Gates.

The lectures, which Feynman originally delivered at Cornell University in 1964, have been hugely influential for many people, including Gates.

The lecture series can be found here.


A relevant quote from the genius himself, "There are 10^11 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.

Ilargi said...

Make sure you read Dick Feynman's non-science autobiographical books.

• Surely You're Joking, Mr. Feynman!
• All the Adventures of a Curious Character
• What Do You Care What Other People Think?

Great human being, though he may well have been a pain to be around.

Stoneleigh said...


I know quite a few idiot savants you are referring to, knew quite a few from school and recently University. Their brains are truly amazing but their mind does not allow for deviation from the standard route of 'make money and work for the system, No questions asked as to how society really functions and if known duly ignore!'

I have a brother-in-law exactly like this. He's a brilliant man in his own sphere, but completely incapable of thinking outside the box. I find it so sad, as he won't prepare at all. If I so much as open my mouth his eyes glaze over and he stops listening.

Ilargi said...


I've told you before that I love you, but I don't want to see that language from you either.

ric said...


Is it acceptable to view the financial crisis in conspiratorial terms?
When I was in my 20's, I considered conspiratorial arguments to be the lowest form of argument because it seemed most people were too dim (or distracted) to plan anything in such a complex world beyond a second move. Today, it's much easier for me to suspect the world is being sucked dry by a conspiratorial group of financiers because...most people are too dim (or distracted) to plan anything in a world based on such a simple variable as value beyond a second move....

As a group Americans lack the introspective capacity that would allow them to identify and implement the necessary structural changes.

Is there any country in the world where people have the introspective capacity to make structural changes?

snuffy said...

While the concept that is behind the Idea that things will just "suck"my response is that "those folks" in 'those countries' were born to a life of heartache and pain,the kind that would send most of my American brothers and sisters right off the deep end.Remember,most of these "Da'mericans" are going to be looking for a reason...or anything close to a reason for why the world just shat on them.One fervent prayer I would make,[were I the praying kind]would be that they muzzle the haters before it gets too bad...like glen beck,and limp-paw and the rest.Those people have a audience ,and a microphone,and the skill to whip up a sickening evil in their wake,the kind of evil not seen here in a long time....

Its funny in one way.When I was young,I thought a collapse event would help our country...now,I know better.This will be so wide and deep and swift it will tear out by the roots much of what we have built here.Sure,the roads,the buildings ,and the suchlike will be here...but the guts of our society wont be.We will lose so much,I hope what we gain is worth the massive loss we are about to incur...

Wont be long I think...

time for sleep...


Anonymous said...

"The entire reform debate suffers from the problematic conviction that has never been questioned, namely that health is an asset from which it's OK to make money."


Anonymous said...

Once in a while it dawns on me that others have previously articulated a similar type of angst that imbues many of the current TAE posts...people such as Kenneth Rexroth from the 1950's:



Anonymous said...

"Basically, education in the modern world is very poor at teaching people how to think properly."

The concept is called "Corporate Universities". That concept explains a lot of what you are seeing.

Can you imagine what would happen if everyone were educated to be critical thinkers? I think you can.

Ilargi said...

""The entire reform debate suffers from the problematic conviction that has never been questioned, namely that health is an asset from which it's OK to make money.""

It's very simple, isn't it? How does anyone miss out on that one?

As I've said a thousand times, if you serve up basic human needs -food, water, shelter, health, clothing- for profit, you inevitably debase the value of a human life to the point where there is no such value left, first for the debased, then for the debaser.

Erin Winthrope said...

Re: 30-year Treasury Bonds and Institutional Investors

Hugh Hendry has argued that the impending equity collapse will provide an enormous boost to long duration government paper. One of his points focuses on the fact that long duration treasury securities are a largely overlooked asset class among institutional investors (e.g. pension fund managers and university endowment managers). For example, you virtually never read a headline in the WSJ extolling the virtues on long duration government paper (If you do, then it's time to get out!). During the upcoming equity collapse, Hugh predicts that fund managers will be desperate to deposit their much-depleted remaining capital in "safe" and liquid investments that are still capable of producing a yield greater than 1 - 2%. Only long duration govt. paper will satisfy those goals.

An article in today's Wall street journal supports Hugh's assertion that long duration govt. paper is underrepresented in the portfolios of university endowment managers. The article describes the performance of the Yale, Harvard, and Penn endowments, and it highlights the fact that Penn outperformed its peers by losing a mere 15% last year. How did Penn achieve such "amazing" results? The fund manager apparently thought-outside-the-box and diverted a whopping 15% of the endowment to Treasurys ahead of last fall's crash. This move helped insulate the fund from whopping losses in foreign equity and commodity investments.
Ivy League Schools Learn a Lesson in Liquidity

I'm sticking with Hugh's strategy. So far so good! I bought my 30yr T-bonds at last Wednesday's auction and received a 4.541% yield. As of yesterday, the 4.35% yield corresponded to a roughly 3% increase in price. If prices rise (yields fall) tomorrow, I'll probably cash-out and wail till next 30yr Treasury auction in mid-September to jump back into the fire.

Mish Shedlock recently wrote a bullish report about Treasury Securites. He made some pretty accurate predictions regarding Treasury yields prior to last year's bull run in govt. paper.

U.S. Treasuries Yields - Where To From Here?

Starcade said...


Sorry, but that's how I see a lot of this -- unless you are willing to bow down, your life is not even worth it to them for them to keep you alive.

Hence, what you said:

As I've said a thousand times, if you serve up basic human needs -food, water, shelter, health, clothing- for profit, you inevitably debase the value of a human life to the point where there is no such value left, first for the debased, then for the debaser.

My life has no value to them. I'm not going to bow down to anyone but the Big Guy Upstairs, and He probably wants a few words with me too.

That's why I basically have gotten to the point of accepting that, chances are, I'm not going to be around very long once TSHTF -- a few weeks, maybe a few months, maybe, if the Aforementioned has a plan for me after TSHTF, a year or so...

But, as I said, short of winning the lottery and lucking into an insulated community, I'm a goner, and, frankly, so are most of the rest of you, preparations or not.

Unless you are willing to shoot to kill, you ain't gonna make it - and they'll never let me have a gun, or I'll be the next one you hear about on the Evening News.

I don't have much sympathy, if any, for most of the people out there. Their world view's future will not include me. I know this for fact.

I've just gotten to the point that, before me or someone close to me goes postal, I just feel the need to speak up.

scandia said...

@NZSantuary, Last winter I took a Critical Thinking class at the university.It was transformative and I recommend it to others.
The downside is that it has been isolating.

Erin Winthrope said...
This comment has been removed by the author.
Erin Winthrope said...

Re: Important Message About Selling Treasury Securities in Your Treasury Direct Account Prior to Maturity: There is a 45 day holding period !!!

It seems the Treasury doesn't think much of gamblers. Overnight prices are rising (yields dropping) on the 30-year bond, so I planned to place a sell order and cash-out with a nice little profit. But, but, but, I just learned that Treasury Direct places a 45 day holding period on all sell orders starting from the day the securities are issued! Woops. I should have done more homework! This means I need to wait until end of September before I can cash-out. Oh well, I'm new to gambling so you live and learn (I didn't bet the farm). Now I'll be forced to put Hendry and Mish's thesis to the test. Wish me luck fellas.

I wanted to point out this fact to everyone because it clearly has implications for those of us who have shifted most of our money out of the banks and into the Treasury.

Implications include:
1) One needs to anticipate a major bond market dislocation at least 1.5 months before it happens!

2) If your cash is stashed in 1-month T-Bills, it's locked-up for the entire month.

3) It would be a good idea to keep an eye on this "holding period policy" to make sure it remains stable as a function of time. If lock-up duration begins to grow (e.g. 2 months - 3 months - 6 months etc.) that would be a MAJOR cause for concern!

Here are the rules from the Treasury Direct website:

"Securities are, however, subject to a mandatory holding period from the original date of issue in your TreasuryDirect account. 13-Week, 26-Week, and 52-Week Bills, as well as Notes, Bonds, and TIPS have a 45-day holding period. The mandatory holding period applies to the full term of the 4-Week Bill. Once this holding period has ended, your securities are listed as eligible for SellDirect. Additionally, any sales that subsequently fall into the Closed Book Period (see Transaction Restrictions) could be rejected and returned to your Current Holdings or delayed in processing. These transactions may be processed once the security is free of the holding period. Pending sales that reach final maturity during the Closed Book Period are paid to the original payment destination."
Sell Direct Rules

Frank said...

>>As I've said a thousand times, if you serve up basic human needs -food, water, shelter, health, clothing- for profit, you inevitably debase the value of a human life to the point where there is no such value left, first for the debased, then for the debaser.

However, the servers need to eat. One way or another the doctor must be paid. When you throw in the carpenter, the farmer and the guy with the wrench at the water works, you soon get some uncomfortable issues no matter what road you travel.

Earnest Lux said...

Denninger is worth a read today IMHO


Chaos said...

Thanks for the comments on my house non-sale. A few more details, just for fun. I've reduced the price gradually for over a year by $100,000, and have had no offers, save for one tentative last minute one for less than I owe. The house is listed on the MLS by a flat fee broker (will recieve $700 at closing for this), but quite a lot of the lookers have come from my own posting on craigslist. My area of Texas has probably the least amount of issues with overpriced real estate in the country, but the oversupply of new homes has gotten in the way of moving previously owned real estate. My particular area is hampered by an enormous dysfunctional traffic problem,which won't really be solved for quite a long time, if ever. It makes commuting more difficult. I do appreciate any other thoughts; I may have to look into what Sun is doing with their foreclosures; their ratio of bad assets is about 38, almost 4X the median, but they are one of the entities deemed too big to fail and recipients of TARP money. Lastly, there's no escrow; I pay my own taxes,which would help.

el gallinazo said...


I am in SH and SDS until the government changes the rules or the rafters on fire at the NYSE start threatening to fall to the floor. Of course, Stoneleigh was right, but I am finished with day trading, though I made a bundle last year. I can't see the S&P500 over 1100. I am too distracted now and don't want to be left on the dock as the ferry to doom departs. Just as the ancient Greeks poured a little wine on the floor in homage to the gods, I'll pour a little on the floor in homage to Gollem Sucks.

I expect to take a paper loss for the next month or so.

Ed Gorey

I have no problem with Hugh Hendry's approach though it is one I chose not to follow. The 4+% interest is indeed attractive, but I believe that the dislocation is inevitable within the next 18 months, and 30 year holders will trample themselves running for the exists as will equity holders shortly.

As to the 13 week T-Bill strategy, it is simply to preserve wealth, not to build it. But as deflation accelerates, the real interest rate on T-Bills will be well over 0.2%.

1) If treasure doesn't give you your money back at maturity, i.e. starts a previously unannounced stop-loss program with money as well as bodies, that will mark the end of the Treasury market. One would have to be a raving idiot to buy them after that. It would be a one shot heist game ender. Within a month all our oil would be coming from Alaska and Texas. Happy motoring!

2) As to tying up your money in 13 week T-Bills, it goes without saying that you should have at least 13 weeks of expenses in the mattress. 13 week T-Bills are simply a safer place to put your money for the moment than FDIC insured instruments.

el gallinazo said...


" My particular area is hampered by an enormous dysfunctional traffic problem,which won't really be solved for quite a long time, if ever. It makes commuting more difficult."

Stoneleigh and Kunstler disagree with you. They think your traffic problem will be sorted out in the fairly near future.

Chaos said...

El Gal,

Yeah, totally correct, but not in a way that will facilitate housing sales, unfortunately for me. The details for the curious: the state of Texas has reached a point of diminishing marginal returns on the Lege and governor, what with a balanced budget requirement and a conflicting electoral mandate not to raise taxes for any reason at all. Hence, the gas tax, which is supposed to be used for highways, has been repeatedly raided for other purposes. So, no more money for new road construction, which the governor has responded to by pushing toll roads on an unwilling populace, some of whom have reacted by filing lawsuits and causing endless delays. It's actually pretty amusing, more so if it wasn't affecting my personal situation. On the other hand, our compost bins are growing nicely...

el gallinazo said...

Be sure to read Mish this morning:

"Bright Side of Falling Home Prices"

el gallinazo said...


I sent a posting to your site about 9/11 an hour ago but it didn't show up. Is there a moderator delay or did I screw up the posting somehow?


I am sure that you noticed that the Shanghai dropped another 4.30% last night.

Repent Sinners! The end is near!

Anonymous said...

From the mere fact that the Ivy League schools like Harvard and Yale took a torpedo below the water line to their endowment funds last fall, proves to me that these 'well connected' institutions of specialized elite scholars don't have a clue as to the impending wide spread economic collapse. Their alumni include a who's who of American elite over achievers in every conceivable field and none of them apparently dropped a dime on their old school to warn them with 'inside information'.

Are financial meltdowns planned? Well, it's not a hard guess to say the most everything under the Sun is cyclical and hence has the seeds of it's own destruction baked in. What goes up must come down is not high science.

Why did the old school Yankee Blue Blood institution take a swift kick to the groin on their endowment funds? Are the alumni who gave billions to the endowment to help their old schools royally pissed off to see their donations lost to the stupidity and management incompetence of the fund 'brain trust'? It's doubly embarrassing for a group of snobs and prigs like the Ivy League crowd to lose their collective shirts in the investment game. Harvard business school has more than egg on it's face here, it has economic puke dripping down it's chin.

The Chicago school of Uncle Milton seem to have been calling the shots up until now. Power moves West is the old chestnut. Harvard yard and such are has-beens it seems. Is this financially conspiratorial? The players seem all puffed up on their own hubris and think that their 'brain trust' can beat your brain trust with one hemisphere tied behind their back.

Fact is, it's a little 'cabal' and a lot of FUBAR.

Anonymous said...


This is incredible... From the Monday August 17, 2009 US print version of the Financial Times...

An ad for the Hawker 900XP mid-size business jet states:


* "Valid in the United States only through the American Recovery and Reinvestment Act of 2009. Must place your order before Dec. 31, 2009 and take delivery now through 2010. $9.8 million in the first year based on a $15.4 million purchase and Sales tax of 6%."


Stoneleigh said...


When Britain went through a real estate market downturn around 1990, a few enterprising people who were trying to sell their homes managed to do so by setting up a lottery. They sold tickets for a modest sum to a large number of people who were prepared to pay for a chance to win a house for next to nothing. They actually sold enough tickets to end up with a very good price for the home, helped by the fact that the novelty of the approach attracted the attention of the media. Of course the novelty factor would only work a few times. Craig's List would be good for advertising.

thethirdcoast said...

@ ric:

Is there any country in the world where people have the introspective capacity to make structural changes?

Possibly. A few Polynesian islands have done so in the past, but the impact of their collapse would have been microscopic in comparison to the potential fallout from a US collapse.

@ scandia Re: Critical Thinking:

Yesterday at lunch I was attempting to simply explain GS' high-frequency trading/frontrunning practices to my colleagues. Their eyes glazed over at light speed. No, their foremost concert is running out to Home Depot every weekend and dropping $1000 on home improvements.

"The Market will come back, it always does!!!"

Yeah, right.

el gallinazo said...

A 8:49

Despite the fact that I am this site's undisputed tin foil hat "conspiracy theorist" kook/moron, I view it as an interesting but probably insoluble problem as to how much of the economic collapse was planned and how much just is the outcome of individualized greed. This gets to the point of just how smart or stupid are our MOTU? If one can put a satellite in orbit around Saturn, is it too much to expect that the Rocket Scientists who assist Satan at the BIS didn't understand what was coming?

The CEO of the MOTU (David Rockefeller) has been planning a new world order globalized government and economy for most of his over-extended life. The economic collapse can only mark the end of globalization and economic and political world fracture.

So did these guys conspire? Of course they did. They spend most of their waking (and perhaps sleeping) lives "breathing together." They are the world's fixers a la Don Corleone. But they apparently took their blueprints from the engineers who designed the Tower of Babel.


Couldn't they just put a giant condom over the Arctic Ocean and pump all that methane to our electrical and fertilizer plants? We could then just consider it priming the pump.

bluebird said...

Lottery to sell property - Yes, something similar was done to sell a unique cafe restaurant that was near my house. It was more like an essay contest...in 250 words or less, to tell what you and the community would gain if you owned and operated this restaurant. I think the entry fee was $200.

hagar said...

How about Norway?

ric said...

Is there any country in the world where people have the introspective capacity to make structural changes?

Unknown said...

Oh, look:

"A spectacular Calgary mansion has sold for $10.3-million -- setting a record for the highest MLS residential sale price in Calgary.

The sale of former Calgary Flames goaltender Mike Vernon's custom-built estate eclipsed the previous record sale in June 2008 of a six-bedroom home that sold for $7.5-million.

"We're finding the real estate market to be quite strong right now," said Donna Rooney, one of the realtors who listed Mr. Vernon's property along the Elbow River. "This was not our one and only offer. We sold the property in a period of six weeks, which is consistent with what's going on in real estate.

"This is a real statement that things are pretty good in this city still. There is a lot of confidence in real estate."

Sigh. On the precipice...

Anonymous said...

"Couldn't they just put a giant condom over the Arctic Ocean"

This just feeds the 'drill baby drill' morons into dangerous emotional highs.

"Free methane, I told you so dude, high five!"

The appalling state of Sheeple science understanding in Ah-Duh-merica morphs into just jumping up and down with child like glee and clapping hands at the prospect of the GMC (Giant Methane Condom) project.

"It's do-ah-bull dude, go for it!" sounds like a toss away line from Dumb & Dumber XVII.

Maybe if we all ate enough cheap re-fried beans, we could recreate the clathrate hydrate phenom in the lower 48.

Hope springs (farts) eternal.

el gallinazo said...

A 9:42

My suggestion was quite tongue in beak.

But when the Arctic Ocean hits a pH of 5 and the Gaia fart bubbles start hitting the atmosphere, I am sure that Russia, Canada, and Sarah Palin will conduct a feasibility study.

Nassim said...

Don't fall for the deflation hype


Anonymous said...

Ilargi, I read your blog on a regular basis, but I cant believe that you are that close minded..the evidence is out there and should and needs to be reviewed.

Chaos said...

Hi Stoneleigh,

I'd read about house sales through homeowner lotteries awhile back, but the sticking point in the US seems to be that most states consider it a form of illegal gambling. I can't find the article, but it appeared in the NYTimes, and their search engine leaves much to be desired.

Bigelow said...

Timing is everything.

“There is no viable immediate alternative to the U.S. dollar for now as the euro region lacks a political union while Japan’s economic weakness makes it impossible to consider the yen for such a role, Pimco’s Mewbourne wrote. The currencies of emerging states such as China can’t play a reserve role as long as they are subject to capital controls, which restrict international traders to using non-deliverable forwards, he wrote.”
Pimco Says Dollar to Weaken as Reserve Status Erodes

Bigelow said...

Of course Prechter says dollar is forming a major bottom and will strengthen over several years.

Anonymous said...

@ Nassim
'Don't fall for the deflation hype'


Author is relying on Consumer Price Index as a measuring stick. Real issue is number of £ and credit declining or not?

Brian M. said...

@Anon 9:58

The issue isn't whether the evidence is out there or needs to be reviewed, but rather whether TAE is the appropriate location to review it, and the answer is NO, not here. Review that evidence somewhere else, go build your own site for that. Frankly, I'll bet Ilargi isn't particularly close-minded on any topic, even on locally forbidden topics like conspiracies or diet he has always answered not with a "you fools!" but with a firm "not here!"

TAE is impressive, but it is trying to tackle a HUGE range of issues as it is (from China, to Real estate, to the Banking industry, to political credibility). It needs to maintain some boundaries and something like thematic focus.

Anonymous said...

The Chinese don't want to be the reserve currency.

They would end up like the U.S.

Flooded with exports, no more industrial base, a FIRE economy on fire, impossibly high un-payable debts racked up funding hopeless, useless military aggression around the world.

Where's the up side for them?

Better to have a currency basket average based on real stuff, food, oil, strategic metals and minerals (phosphorus for one)

All the hand wringing and yammering about 'reserve currency' is just that. With globalization in the toilet for good (thank God), reserve currency for facilitating import/export trade deals will become an increasing moot point.

All vital imports, oil/food, will be bartered for with REAL COMMODITIES (gold also), not ass-wipe fiat slips of paper or worse yet, Pixels on a Screen.

The whole paradigm of Pixels on a Screen as 'wealth' is so over.

Get use to it.

Bigelow said...

@Anon 10:35
"All vital imports, oil/food, will be bartered for with REAL COMMODITIES (gold also), not ass-wipe fiat slips of paper or worse yet, Pixels on a Screen."

I see nothing wrong with wanting my lousy savings to stay intact. Suggest food becomes the new international barter currency. Though converting fiat paper into wheat or soy suffers problems too; they all rot.

Ilargi said...

"Don't fall for the deflation hype


The author doesn't know what he's talking about, and manages to deliver even that incoherently.

Frank said...


Iceland did it about 1000 years ago. Necessity, like the Polynesians. They had turned half the island into desert by farming as if they were still in Norway. They made changes before they lost the other half.

BTW, Greenpeace is now mounting a campaign there against desert reclamation. Don't plant any more introduced lupines, even if it does stop the sandstorms. (yes, they actually put it just that way.)

Stoneleigh said...

Anon @8:49,

Are financial meltdowns planned? Well, it's not a hard guess to say the most everything under the Sun is cyclical and hence has the seeds of it's own destruction baked in.

This is essentially my view of life grounded in destabilizing positive feedback.

Endowment funds will are going to fail, as their trustees are generally not allowed to do anything that conflicts with received wisdom, even if they know perfectly well what the consequences will be. Trying to be contrarian if you are a trustee is a recipe for huge personal liability.

jal said...

This blog, and others, are trying to communicate what happened and how bad it was and how bad its going to get.
Change is considered bad by almost everyone who are affected, especially when it does not involve winning the lottery.
MSM will not tell the real story because it would require them to follow up with a solution.
There does not exist a solution that would prevent chaos.

Stoneleigh said...

"Endowment funds will are going to fail, as their trustees are generally not allowed to do anything that conflicts with received wisdom, even if they know perfectly well what the consequences will be. Trying to be contrarian if you are a trustee is a recipe for huge personal liability.'

That is pretty bad!

Buffett said...
“With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.”

Did you read a solution in that statement?

Of course not. Even the problems have not been detailed out.
Those following the blogs can fill in the the details but not J6P.
Karl Denninger said ...
“What Bernanke and Paulson feared in September of 2008.
What they failed to tell Congress and The American People is that the reason the system was threatening to shut down and revert to "cash on the barrel" - a system that would implode GDP by 90% instantly - was because everyone in the financial system had been and was continuing to lie about their ability to pay!
We cannot obtain a strong, durable recovery without clearing the credit transmission mechanism, and doing that requires honest marks.  That, in turn, mandates the closure of all the insolvent institutions, a colossal but inescapable task.”
Sure Karl ... You are going to tell your grans that all their saving have been stolen by the wheelers and dealers of the financial markets.
All those safe investment ... was just a big lie.
The money is all gone.
That grainery that you thought was full of grain to carry you during bad times ...
sorry ... the rats got in and ate 90% of your grain.

There does not exist a solution that would prevent chaos.

Hombre said...

VK - "It simply ain't so! These things are caused by mass stupidity, ideology and the belief in free lunches. A lot of sh*t happen and the criminal class, oligarchs and elite take advantage of what ensues.

Yes, I call it a thing that evolved, an evolution. I have lived through the evolution of the predicament that we now find ourselves in. There is not a single culprit, a single "ism", a position (left or right) that is totally at fault.

To me the term "free market" has been applied mistakenly in places where sound decision making should have prevailed. But fixing the problem(s) should take precedence now over defining why it happened.

thethirdcoast said...

Here's a potentially interesting court case that may set a significant precedent that affects bloggers and their anonymity:


Anonymous said...

I get a lot of mail from conspiracy enthusiasts.
I am reminded that paranoia is the most intractable of thought disorders.

Unknown said...


Seems to me the fate of endowments is the same that awaits DB pension funds, sadly. Leo Kolivakis over at nakencapitalism/pension pulse has been beating that drum for a while.

Anonymous said...

Who cares about anons when youse gots lotsa kunstlers?

Da economy is not the only thing going downhill alla way.

Jim R said...

I am reminded that paranoia is the most intractable of thought disorders.

Just because you're paranoid doesn't mean somebody isn't out to get you ;-)

Anonymous said...

"It's not paranoia if they really are out to get you"

If I were missing an arm and believed everyone in the supermarket were staring at me, would I be paranoid? (yes, but I would also be justified in my paranoia)

I personally do not believe in that which cannot be named or care if he who must be named is dead, but it is always worth questioning received wisdom.

kunstler said...

I get a lot of mail from conspiracy enthusiasts.
I am reminded that paranoia is the most intractable of thought disorders.

August 19, 2009 11:37 AM

Farmerod said...

@Chaos: The house is listed on the MLS by a flat fee broker (will recieve $700 at closing for this)

The flat fee could also be a problem. Buyers' agents have little incentive to show your property to their clients since there may only be $350 in it for them. Out here 1% commission seems to be gaining popularity; sellers have lost a bundle (on paper) and are trying to make it up within the 5-6% difference in commission rates. Although buyers get all suitable properties emailed to them on a daily basis regardless of buyer's agent commission rate, how much do you want to bet that the average buyer's agent will subtly discourage the purchase of those properties?

If you're not even getting showings, I suspect your price is too high. If you're already upside down at the current price, then it's time to plan how/when you're going to walk, assuming your loan is non-recourse.

Edward Lowe said...

The intertubes are rumblin this AM about the pending H1N1 influenza pandemic this fall and winter. The Ticker Guy claims that this will insure a great depression if the worst of the claims found among the nervous heard comes to pass.

Some data are up at the CDC for anyone who actually has an active mind and recognizes that appeal's to authority are the worst kind of sloth....

Here's the basic break down (there is more at my blog)

According to the most recent reports (August 13, 2009), only 7511 people have been hospitalized with H1N1 complications in the United States -- remember that in an average year about 200,000 people in the United States are hospitalized for normal influenza complications, if we annualize the 7511 number we only get to 10,000 (I know ... the flu is worse in the fall and winter than summer and spring, so we will have to watch closely). Still, 10,000 is a far cry from the 200,000 hospitalizations we get from the normal flu on average. Even at 100,000 H1N1 related hospitalizations, it would be a rather wimpy flu season (that's assuming exponential growth in rates of H1N1 related illnesses this fall and winter.

The CDC reports that about 477 deaths have been attributed to H1N1 so far this year. That's a rate of about 6 deaths per 100 hospitalizations ((477/7511)*100) -- or only about ONE THIRD the rate of a normal flu season!

Um ... so... sorry Ticker Guy, no Flu Pandemic from wimpy little H1N1.

HappySurfer said...
This comment has been removed by the author.
Hombre said...

El G - "If one can put a satellite in orbit around Saturn, is it too much to expect that the Rocket Scientists who assist Satan at the BIS didn't understand what was coming?"

My simple take, and there is value in simplicity...
The guys around the table (lab)planning a science project are using their brains. The guys around the table at the corporation are counting their money! (or planning to...)

Thinking by gray matter is an apple. Thinking by $$, re: marketing, profit, etc. is an orange.

The first group are honest, the second group are crooks!

Anonymous said...

Ho talk about the dipstick gullible generation ... Hey guys why haven't you sung happy birthday for the brand new Blogger, kunstler, I mean he has been blogging since August 2009 and no song no party hats, wot gifs dolinks.


Hombre said...

StoneLady - "This is essentially my view of life grounded in destabilizing positive feedback."

Are you an electrician also?!

Exactly my view, for example, whether a single NPN device or an integrated amplifier, if the feedback loop is not CONTROLLED it will saturate and BOOM!

Control, balance. there are times when too much "freedom" (read uncontrolled) is bad... no... disastrous!

Anonymous said...

From the chart I saw about the 1918 flu, it was 'around' for two years previous to 1918. It mutated in the late summer and fall of 1918 and killed the vast majority of people in October and early Nov. It was very swift from mutation to lethal pandemic, even without jet planes and cargo container ships and massive import of goods from elsewhere to help increase it's velocity.

Any pandemic now would spread very quickly in comparison.

Jim R said...

... reading more of the discussion ...

I think it's reasonable to use the term "conspiracy of greed" here -- William K Black was asked, and gave a reasonable response in his lecture (from Jesse's site) -- no, there isn't this cabal of six or eight guys feverishly plotting out the future. Or if they did, it was an epic failure: look at the ¾$Tril bailout they required.

It's just that everybody from a truck mechanic in Des Moines to some plumber living on St John to Lloyd Blankfein thinks they're going to get rich in this here tulip craze. And some will, but more will be ruined.

(Not her real name) said...

Let’s see, about 7.2 billion people more than the biosphere can support without endless energy supplies and about that flu:

“Authorities admit to vaccines containing thimerosal. The majority of influenza vaccines distributed in the United States currently contain thimerosal as a preservative. However, some contain only trace amounts of thimerosal, still considered by the Food & Drug Admin (FDA) to be preservative-free in a blatant denial from expedience. Manufacturers of flu vaccines use thimerosal early in the manufacturing process. The thimerosal is diluted as the vaccine goes through the steps in processing. By the end of the manufacturing process, enough thimerosal remains in the vaccine to act as a preservative but the vaccine is still officially labeled preservative-free. Giving a 3-year old child the flu vaccine would raise the blood level of organic mercury beyond what the CDC has defined as a chemical poisoning. The recommended USGovt schedule requires that this dose be given twice, one month apart. See the Journal Sentinel article.

An orchestrated complex plan seems clearly underway to disseminate swine flu to the US population. The process has two steps. The first stage involves the spread of two weak swine flu types, which will certainly meet each other in the population. When they do, they will combine to form a more deadly flu strain, putting the lives of both parties in grave jeopardy. The second stage is actually intended to encourage that mutation, while introducing a more powerful live flu strain. On its face, this seems like premediated genocide. My research cannot find any strong evidence to the contrary. The mercury poisoning is anticipated to weaken the human immunity systems. Some believe the second stage is intended to deliver a stronger live flu virus to people whose systems have been weakened not only by mercury but also by the active flu from the first stage. People who do not participate in the process stand the best chance of survival. Investors and executives at the major pharmaceutical firms stand to profit in an outrageous way, which could result in their rise in global political power. The collusion among pharma firms, the CDC, and USMilitary has been well documented to produce a virus as a weaponized microbe. The CIA laboratories are located at Fort Dietrich in Maryland, where many other microbial weapons have been developed and are stored. Bear in mind that a combinant virus from human, swine, and bird is a natural impossibility. It can only be produced in a laboratory. The public is told that the vaccines are intended to be as powerful as possible for protection against different flu types. Actually, the same development process can be designed for genocide. See the Bilderberg chronicles for discussion in their meetings for virus release and global population reduction.”
Jim Willie August ’09 Hat Trick

Anonymous said...


Too bad you have not questioned official (government) conspiracy theories. Others have and their understanding of our predicament is way ahead of yours.

"American fascism is something different now. It's not just private, elite control over the legal system, nor private evasion of the rule of law. It's a crisis-induced transition from a society with a deeply compromised legal system to a society where force and surveillance completely supplant the system."
--MICHAEL C. RUPPERT, 2004 ("Crossing the Rubicon: The Decline of the American Empire at the End of the Age of Oil")

Chaos said...


My understanding is that any agent who brings a buyer is entitled to 3% commission, same as if I were represented by a full service agent (I'm just saving myself from having to pay my agent 3% in that instance).

I'm really doubting the price is too high, since I've reduced it $100,000 and it's now the cheapest property in the neighborhood. This area has always had slow sales, because a lot of the homes are quite large and elaborate, but mine is getting close to affordable for more people at this price. I"m not underwater yet, but I'm running out of margin.

Thanks for your thoughts.

Anonymous said...

conspiracy stuff.... willing to destroy TAE. Because that would be the only possible outcome.

Yes, even though some of this has merit, if the primary purpose of TAE is to warn as many of "the masses" as possible to prepare for the effects of debt deflation followed by resource constraint effects, these side topics could scare away many potential J6P readers who might otherwise benefit from the financial system information presented here.

cowpoke said...

Enter Bill, the hurricane, not Clinton.



via: http://www.ssd.noaa.gov/goes/

WARNING: JAVA image loop

well worth the 10 second wait.

Chaotic enough for you Stoneleigh?

Bigelow said...

“The great American superpower and its 300 million people are being driven straight into the ground by the narrow interest of the big banks and the munitions industry. People, and not only Americans, are losing their sons, husbands, brothers, and fathers for no other reason than the profits of US armaments corporations, and the gullible American people seem proud of it. Those ribbon decals on their cars, SUVs and monster trucks proclaim their naive loyalty to the armaments industries and to the whores in Washington who promote wars.”
Americans: Serfs Ruled by Oligarchs

Armando Gascón said...

Blogger VK said...
According to an article which appeared in the Spanish newspaper Expansion this morning, one in five Spanish mortgages is now considered as being high risk and liable to become "non performing"

Very good article, VK, thank you.
Your link says it all. The original article, I read it for you, expands on financial matters related to the property market/racket in Spain.

While they tell us that the drop in prices has been insignificant, The Daily Telegraph in an article about property in Menorca (Balearic Islands, Mediterranean) says it has been 40% and gives some examples of 'cheap' buys, i.e. 'Newbuild chalets in the Cala Llonga district are aimed specifically at investors wanting to let out to tourists. They have three bedrooms and two bathrooms, are south facing and have small private pools. €470,000'
(~ 12% drop in tourism this year... We'll see when the tourists stop and the Barbary Pirates start arriving)
elegant island of Menorca

Nassim said...

"Don't fall for the deflation hype


The author doesn't know what he's talking about, and manages to deliver even that incoherently.

I was afraid so. I cancelled my subscription some time ago but they send me daily emails.

Bigelow said...

The FDIC Is Broke. Now What?
Chris Martenson, Seeking Alpha

bluebird said...

Bigelow - The Paul Craig Roberts article - Roberts mentions the wars in Iraq and Afghanistan, but we also are at war in Pakistan? Does anyone know when we started that? Or maybe this is the drones?

Unknown said...

The FDIC's approach and resultant problems is frankly expected and unsurprising, and right in tune with the rest of the federal government. I keep wondering, however, whether the CDIC will go down the same road in Canada when real estate starts really plummetting and taking the banks with it. We're so dominated by the Big 5 Banks that it's not so simple to plunder the myriad smaller banks to prop up the biggies. The Biggies make up most (but not all) of the market.

Sam Dug said...

From the Seeking Alpha post on FDIC

The FDI Act provides for no additional source of funding to repay depositors other than funds located in the depleted DIF. The FDIC will need to have that fund restocked by the Treasury or some other source later this year.

After the small, solvent banks are depleted, the tentacles will be coming our way.

That’s a great post, thanks for posting the link.

Bigelow said...

@bluebird “Does anyone know when we started that?”
Fairly sure it was going on for years before it was “official” Jan. ‘09.

el gallinazo said...

Coy Ote

You know a plumber in St. John who thinks he is gonna get rich from this debacle? Can you give me his email? Like to talk to him before I leave.

Anonymous said...


If the FDIC's broke, then they'll just do what Americans normally do and tap their line of credit. They've got a $500 Billion Credit Card with the Treasury, so it should be no problem.

After that, the Treasury will just up their limit. No problem. All the way to the $8 Trillion needed to cover everyone. Or until the bond markets find out. Then there might be a problem. But that's not happening right now.

el gallinazo said...


You think that people are assuming that our new poster is James Howard Kunstler. The truth is that he is the late left wing lawyer, William Kunstler who died in 1995. My ex-wife, the psychic, is channeling his comments.

Anonymous said...

el gallinazo said...(see above)

In that case I wouldn't worry bout nothing, unless your ex-wife starts channeling your comments.

BTW how is she on channelling Elvises? Haven't seen any of him posting lately.


Hombre said...

El Galileo - "You know a plumber in St. John who thinks he is gonna get rich from this debacle? Can you give me his email? Like to talk to him before I leave."

I don't know anyone, plumber or InWestor (not investor) in St. John at all.

And... I don't know anyone anywhere who is going to get rich from this predicament!

As for me, I'm going to get low(er) income but stay happy.

BTW, Your belief in the unmentionable is intriguing given you don't seem the conspiracy type.

Bigelow said...

@Anon 3:09
"Or until the bond markets find out. Then there might be a problem. But that's not happening right now."

However Treasury auction buyers are thinning out. FED is now buying a lot of Treasuries from the Primaries almost as soon as they buy them. As Dr. Lizardo says (John Lithgow, Buckaroo Banzai 1984):
Where are we going?
Planet 10!
When are we going there?
Real soon!

el gallinazo said...

Re conspiracy theories

My absolute last comment about it on this web site, and it is inspired by all the cheap, dumb shots today. If Ilargi wants to pull this comment, he is more than welcome to. I actually agree with him that TAE is a bad forum for this, and I had not meant to start a 9/11 brouhaha here with that phrase in my post about fascism.

You cheap shooters are conspiracy theorists in that you buy the MSM line that a guy in a cave around the world **conspired** to get 19 Arabs with box cutters aboard four airplanes simultaneously to commit this mayhem. And you believe it because George Bush, the New York Times, and the Ministry of Truth told you so. Maybe you should look the word up in the dictionary. "Conspiracy theorist" has become the new "commie pinko queer" mantra of the new century. Once applied, all critical thought and independent fact checking may be dropped.

I did not bring it up because I have the slightest hope that the people who orchestrated this mayhem have the slightest chance of being brought to justice any more than do the financial oligarchs. They are essentially the same people. I have brought it up because most of you "free thinkers" on this site still don't have the slightest inkling of the ***ruthlessness*** of the oligarchs. There is **absolutely nothing** that they won't do to get their way and further their individual lust for power and wealth.

But from now on, my new mantra will be, "I just don't give a shit," and I will repeat it 20 times before going to bed every night.

As I said, my absolute last comment on this site about the subject. I don't give a shit.


Stoneleigh said...

You think that people are assuming that our new poster is James Howard Kunstler.

I know Mr Kunstler personally and I know he reads TAE. He has sent us donations and appreciative notes, for which we thank him kindly. I wouldn't be surprised to see him post here.

Anonymous said...

Frank said...

"However, the servers need to eat. One way or another the doctor must be paid. When you throw in the carpenter, the farmer and the guy with the wrench at the water works, you soon get some uncomfortable issues no matter what road you travel."

Since this issue is one that I have very strong opinions on, I will chime in with a little more substance...

Ilargi's argument brings to the forefront a crucial distinction and that is service. I don't mean service as in the service sector, but service to your society, your community and your fellow human being.

This simple concept needs to reinstalled as the basic foundation of health care. It is the true ideological framework underlying the hippocratic oath - that of "the benefit of the sick, remaining free of all intentional injustice..."

A physician's top priority should not be looking to build a stock portfolio, a house in The Hills or sending his/her children to private schools. Furthermore, he/she should not be accepting bribes in any form from drug manufacturers nor hand-picking patients from pre-authorized socio-economic-ethnic groups nor allowing businessmen to dictate the practice of medicine.

It should not be a physician's role to capitalize upon the suffering of others. Neither should it be to determine who is more or less worthy of his/her services.

In return, it is our role (individual, community, society) to make sure our doctors can meet their own basic needs according to our collective ability.

Anonymous said...

Coy Ote said to El G:

"BTW, Your belief in the unmentionable is intriguing given you don't seem the conspiracy type."

Your subconscious belief in "America" and American exceptionalism is making you blind. Please do study some world history, especially false flag operations. Yes, it's very painful when one realizes that the unmentionable was orchestrated by our government.

Anonymous said...

"However, the servers need to eat. "

so how about

"Deep-fried locust, anyone? Insects may be the answer to our looming food crisis"


it's actuaully worth considering. I remember years ago hearing that the chinese gov was promoting "ant pie". maybe greenpa experienced this treat in his chinese sojourn ?

any particular insects that would be dangerous (poisonous) to eat even after cooked?

Greenpa said...

"I remember years ago hearing that the chinese gov was promoting "ant pie". maybe greenpa experienced this treat in his chinese sojourn ? "

:-) Alas, no bugs that I know of. Grasshoppers and locusts have been eaten there for millennia of course; known as "forest shrimp".

I did eat tiny tiny frogs (about 2 inches long total) , 1,000 year eggs, tepid blocks of pork fat (translucent and 2 inches thick) and my hosts delighted in watching me eat cold hard boiled quail eggs which chopsticks (basically, my hosts were showing me off to the locals- they didn't believe any Big Nose could do it).

Erin Winthrope said...

Strange days for Equities and Bonds.

Both long duration Treasuries and the equity market rallied today.

That is very unusual. Typically, the two markets are inversely correlated.

Long duration govt. paper rallies if the bond market herd expects turbulent waters ahead.

Equity markets rally if the herd bets on sunny days and smooth sailing.

Personally, I don't know who is right about what is to come in the next few days. However, I would guess that bond market investors are anticipating bad news relating to weekly unemployment numbers tomorrow.

We'll see.

Bigelow said...

“Otherwise, employment levels become unsustainable, retail shopping centers unserviceable, automobile production facilities unprofitable, and the economy itself heads towards a new normal where unemployment averages 8 instead of 5%, housing starts total 1.5 instead of 2 million, and domestic auto sales 12, instead of 16 million annual units. Critically in the readjustment process, debts are haircutted via corporate defaults and home foreclosures, and equity P/Es are cut based upon increased risk and substantially lower growth expectations. A virtuous circle of expansion turns into a vicious cycle of recession or low-growth stagnation. Label it what you will, but a modern capitalistic economy based on levered financing and asset appreciation cannot thrive if its “return on capital” or nominal GDP suffers such a significant shock.

Policymakers/government to the rescue –we hope. 0% interest rates, quantitative easing, $1.5 trillion deficits, trillions more in FDIC or explicit government guarantees, a trillion plus in MBS and Treasury bond purchases, TALF, TARP – I could, but I need not go on. Can they do it? In other words, can they successfully reflate to 5% nominal GDP and recreate an “old” normal economy? Not likely.”
Investment Potions Bill Gross

Anonymous said...

"I did eat tiny tiny frogs (about 2 inches long total) , 1,000 year eggs, tepid blocks of pork fat (translucent and 2 inches thick)"

You need to visit Newfoundland and try fish and brewis: cod tongues, burnt pork fat and boiled bread.

Anonymous said...


Anonymous said...

Anonymous said...


August 19, 2009 4:58 PM

Thanks. There are some outside my office window making a racket. If I can catch a few I won't have to pay for supper tonight.

el gallinazo said...

I'm with VK that the real action right now is in Shanghai. Combined drop of over 10% on the index on Monday and Wednesday with a little hiccup up on Tuesday. I agree that the Shanghai index is the leading indicator. But why these huge drops? Is the Bank of China sucking the equities speculation money back into their reserves? Will the Fed be soon to follow as soon as GS and JPMC have their naked shorts in place?

Greenpa said...

A little actual good food news:




I don't see this as disruptive; basically a big tool to allow rice growers to have more stable, secure crops.

This rice has been "coming" for at least 6 years; looks like they're about to start getting it to farmers.

Anonymous said...

"...however Treasury auction buyers are thinning out. FED is now buying a lot of Treasuries from the Primaries almost as soon as they buy them..."

This is a very key feature leading up to a bond dislocation.

Foreign purchasers of U.S. 3-ply bathroom tissue bonds will have to decide when enough is enough. It is an algorithm probably already loaded into their bond portfolio computer programs.

It will just pop up one day real soon and that will be the deal breaker on any further buying of US government 'virtual' assets.

When no one bids on them, GS buys the treasuries they just offered as a prime dealer with taxpayer bailout funds, and unloads them to the Fed. It's more of the dog eating it's own barf, but with a new twist.

The decision to kill this pathetic ponzi End Game charade is in the hands of foreign powers. They will pull the plug when it does the least harm to their interests, not to ours.

Should be interesting this fall to see if this Wounded Beast of a Former Economy makes it to the tall grass where it can lay down and die in relative private or whether our creditors will want to see a humiliating Coup de Gras Financial Wedgie for the U.S.

Anonymous said...

"John Pilger Says That Obama Is A Corporate Marketing Creation"

"Obama is a Fake"


el gallinazo said...

From today's final article. Robert Sapolsky's "A Primates Memoirs" is one of the best reads that I have had in many years. It centers around closely watching the social interaction of a baboon troop, then shooting them in the butt with a tranq dart from a blowgun, and testing their hormone levels. There are parts of the book which are hilarious. One observation is that baboons are very well adapted to the environment. The only have to work four hours a day. This gives them the other 20 to make each other as miserable as possible.

APC said...

Jesus! What am I, like the 143 person commenting. And what do we start with on this thread?

Bigelow said...
Drug Promises Fix for Radiation Poisoning

August 18, 2009 3:24 PM

I love this website.

APC said...

I've had a bit of a chance to read some comments...

Hey, Starcade:

Eliminate all who believe in it.

As in kill them...

I mean, wow!

"...if you serve up basic human needs -food, water, shelter, health, clothing- for profit, you inevitably debase the value of a human life...

You really think? Shelter? Clothing? Where, or when rather, have you ever seen it otherwise? Where, for instance, in history? You speak of herd mentality. When has the herd acted otherwise?

Erin Winthrope said...

Re: Treasury Securities = 3-Ply Toilet Paper

We all agree that an equity market collapse will happen sometime in the next 6 months. We disagree about what will happen when equity markets begin to fall.

Clearly, most of the assumed wealth tied-up in the equities, commodities, real estate, and corporate bonds will simply vanish as the markets decline. However, some big players will manage to cash-out a fraction of their chips in time.

So, the question becomes, what will the big boys (e.g. pension funds) do with their remaining cash and the cash that flows in every month from automatic paycheck withholding? Big players won't be stuffing it in mattresses. It needs to go somewhere.

Options will include: Government Paper and Corporate Paper guaranteed by the government (the big boys will make sure they receive guarantees).

I think most money will go to govt. paper of all durations. Why? The government has at its disposal a wide array of options for raising the money needed to pay its debts.

Social Security and Medicare and public education and medical research and all the other useful things that our government currently does are luxuries that only the most affluent societies pursue. All of these activities can and will be curtailed sharply. Taxes and fees at all levels can be raised. All of this can and will be done in order to satisfy interest payments on the debt. Will it be done all at once? No, of course not. It will be instituted gradually. Why? Won't the public rise up in anger? Sure it will, but it won't make a bit of difference. We will face a national emergency and time and room for debate will be sharply limited. Why would the government choose this route rather than defaulting on the debt or inflating the debt away? Because those options would yield a worse outcome. Debt default will create punitive interest rates that punish all of the remaining big corporate players who still have influence in the government. Look, I'm not arguing that debt default will be avoided forever. I'm merely pointing out that over the next year(s), the government has lots of fat that it can incrementally trim in order to satisfy its domestic and international creditors.

Look around the world today at nations that are bumping up against the ceiling of their borrowing limits. What are they doing? What are Ireland and the Baltic states doing for example? They are gradually raising taxes and cutting state services/benefits. They are doing this in the face of rising unemployment and voter discontent because all other options yield bigger problems. Eventually, they'll cut services all the way to the bone. But in the meantime, they've satisfied their creditors. Are the people outraged. Sure. Can they do anything about it? No.

Will China and other foreign creditors hang onto their “3-ply toilet paper.” Of course. Why? Because selling at this point would produce more hardship for China. It loses more than it gains. Besides, as equities lose value, and Treasury securities gain value, the appeal of holding onto an appreciating asset will create an unstable positive feedback loop. Doesn't China realize that tax increases and service cuts by the American government to satisfy its (Chinese) creditors will in turn decrease the amount of Chinese imports that can be bought by American consumers. Of course China is aware of this fact, but it also realizes that American consumers would buy even fewer imports if interest rates spike. So in the short-term to medium-term, continuing to accumulate treasury securities represents the best available option. With each turn of the screw (service cut, tax increase, and debt purchase), the situation will become more unstable. However, the screw has several more rotations yet to go.

In this sense, government paper is far from 3-Ply toilet paper. In a world trapped in deflation, government paper is as good as, and probably more valuable than, gold.

Anonymous said...

Stoneleigh said re Kunstler:

I wouldn't be surprised to see him post here.

I would be totally surprised if that were Kunstler posting here today and saying that, then, if he is a friend of yours, It might be an idea to censure those posting using his name, otherwise you tend to look rather opportunistic or at least simple minded.


rapier said...

RE From the Seeking Alpha post on FDIC

The FDI Act provides for no additional source of funding to repay depositors other than funds located in the depleted DIF. The FDIC will need to have that fund restocked by the Treasury or some other source later this year.

And other claims that the FDIC is broke.

In June, I believe it was, congress gave the FDIC a 'line of credit' of $500 billion. The line of credit being the latest ruse ever to allow congress to avoid taking responsibility for anything.

The primary purpose of the money was purportedly to fund PPIP, the toxic asset sales program that never leaves the starting gate. I would guess the FDIC, which is part of the Treasury can and will do whatever they please with it and being sure depositors are made whole will be part of that.

The 'line of credit' means that congress has appropriated it, without appearing to actually appropriate anything. The same route was used for the IMF. Obama promised them $700billion which caused a minor shit storm to congress gave them $100 or so and gave Treasury a $600 billion 'line of credit'.

A line of credit with itself mind you. Better yet, don't mind it. Your head may explode.

These monies if taken will have to be borrowed through the usual mechanism. Auctions.

Hombre said...

El G - My apologies if you think I sent a cheap shot. I used poor wording. I was trying to be funny, which I am not good at.

Actually, if you recall yesterday I texted my interest in the subject before our host stopped things. I do respect your opinion on everything, even though I may not agree (yet).

Ahimsa, I AN NOT... AM NOT... what is referred to as an American exceptionalist. I see nothing exceptional, nor unexceptional about any people, culture, or tradition. Please don't try to put me in a box that I do not want to be in, nor do I agree with!

Anonymous said...

Coy Ote,

I did not put you in a box. You did it yourself by belittling those of us who question the official conspiracy theory regarding the "unmentionable."