Wednesday, September 30, 2009

September 30 2009: The Worth of the Earth


National Photo Co. Arms and Asses 1912
U.S. Army burro and cart, near Washington, D.C.


Ilargi: (Here's for a first, I think: I don’t remember ever doing this before, but this is -largely- a "repost" (not to be confused with a "riposte"), with a few editing tweaks.

I wrote the article below 17 months ago, on May 27, 2008. While checking out some things a few days ago, I found a -flattering- reference to it somewhere on the Web and re-read my own words. Which is another first.

It is a reaction to an article in the German magazine Der Spiegel, entitled The Price Of Survival: What Would It Cost to Save Nature?, which you can find posted here below my humble essay. I wrote it because the article, despite its obvious qualities, is based on a series of fundamentally flawed assumptions regarding the way our economic system handles our natural world.

In essence, the authors claim that protecting our planet's biodiversity is a potentially profitable undertaking within our present economics. I say it's not.

It takes us a little bit off the pure finance path, but at the same time it seeks to explain why that path exists in the first place, why we do what we do as "economic actors", and why we're doomed to keep on doing it. Can't get much more essential than that. Here goes, May last year:)








Ilargi: I’ll just write, not think, here. Stream of consciousness. Seems appropriate. Please, if you’re so inclined, bear with me.

You’ll find another great article from Der Spiegel below. It has one huge problem, though: it is based on ideas and assumptions that are so wrong and misguided they can only do harm.
We can not buy back our world once it's gone, and we can neither restore nor save it with money.

And
As long as we keep stating the earth’s value in monetary terms, we are irrevocably doomed.

If you accept that you come from, and belong to, the world around you, and understand that Darwin has delivered proof that (wo)man has come from all that has been before, that 90% of our genes are identical to those of our pets and so on, then putting a dollar price on plants and animals and rivers and skies is identical to putting a dollar price on your own life, and on your children and loved ones.

Everything alive is a part of you. Dollars are not.

In our economic system, based on debt, credit and interest, the future value of everything under the sun necessarily gets discounted over time. That is because currencies lose their value over time. It’s also in our genes: we prefer what we have now over what we might have later. Our ancestors were the ones who focused on immediate threats. Those who focused on future ones generally didn’t live long enough to procreate.

There is an economist in the Spiegel article who says:
"Protecting diversity is much cheaper than allowing its destruction."

He’s wrong, because of what I just said: all future values are discounted, so destruction is more profitable than preservation. This economist has never grasped the essence of his own chosen field.

The article continues:
"Biodiversity - and efforts to preserve it - could in fact become an enormous business in the future".

See, there's the rub, right there, in the word 'could', [sometime] in the future . In the here and now, using and destroying all we can get our hands on is the only thing that makes sense economically. If that is hard to wrap your mind around, wait till you get hungry, and you face the choice between eating or protecting diversity. You’ll eat.

The only things in the natural world that have a value in our particular breed of economics are those that can be sold at a profit, today; and that is all the value they have. All else is luxury.

Preservation only has a chance in times of plenty, and even then only in theory. After all, we are today coming out of the by far most plentiful time in human existence, but it has not exactly been a time of preservation. Quite the contrary, it has both led to, and was accommodated by, the worst destruction of the natural environment ever in history. That is not a coincidence; it’s destruction that gave us our riches.

Now, we are entering a much poorer time economically, and that will lead to an even worse destruction, by an order of magnitude, if only because the riches made us multiply like so many rabbits.

As long as our world views emanate from an economic system based on perpetual growth, there is, after the short high we are now leaving, no way but down and worse.

We would need to take food, water and indeed the entire natural world, including ourselves, out of any and all profit calculations, or they’ll all be devoured in the course of time by the ever-growing credit monster that requires us to pay interest over every breath we take, every plant we grow, every meal we eat, and every house we build. As long as we run our societies on that system, there is no other possible outcome than what we are witnessing today.

To fully understand this, you need to shake off your dreams and illusions about preservation and doing good, and take a good hard open look at the numbers on species extinctions and environmental degradation. People have been talking about saving the planet for a long time, but all the planet does is deteriorates. And not just that, the deterioration accelerates.

Groups like Greenpeace are almost religiously accepted as being highly beneficial, but in reality they are some of the worst players around, since they facilitate the perpetuation of the lies and illusions about saving and preserving, while the roof, the roof, the roof is on fire. Donating to them is like paying the Medieval church to be absolved of your sins. That makes them guilty, if not of perpetrating crimes outright, then certainly of aiding and abetting, of being accomplices to the foul deed. Good intentions don’t buy you salvation, not when they’re built on illusions that serve only to make you feel good.

If we are to save this planet, we will have to throw out our economic model. But that is an issue utterly absent from any green program. Green movements indeed are but modern religions, far removed from reality, unable to grasp what happens right before their eyes, and focused instead on making those who donate feel good -so they’ll keep sending donations- , on keeping the false idea alive that we can continue to live close enough to the way we do and save the planet at the same time.

Man is like yeast, which destroy their own living environment when given the chance. At least yeast have the excuse that they can’t think. Man can think, but is still incapable of understanding that thinking does not control his actions.

What does drive us to do what we do happen to be the same things that drive yeast: billion-year-old primitive instincts with no regard whatsoever for the future. We discount the future in the exact same way that our economic system does. It's a system ideally fitted for how our brains function, and that will make it -near- impossible to get rid of it before it’s too late.

Being able to think equals being able to lie, to lie to ourselves and to others about why we do what we do. That makes man both the most tragic and the most destructive animal ever assembled by evolution. As such, we are at the same time both a unique success and a unique failure.

I’ve often wondered why it is, and what it means, that man allows himself to destroy the world his children need to live in after he’s gone. What does that say about the idea of "love for your progeny"? It drags down that love to the level of some semi-automated, genetically predetermined (re-)action, like a cat that licks her kittens; but perhaps that’s where love stops, for man and cat. And even then, an amoeba's care for its infants may be a more appropriate example.

And yes, it can be puzzling at first glance: while they obliterate the natural world without which their sons and daughters have no chance of survival, most parents would die to save their kids from a fire today. And there is the essence: it’s about today. Everything we do is. We are no better at "doing future" than yeast is.

"But now a revolution is taking shape in the way we think", claims the article, citing the value of biodiversity to our economic model. "[..] the economic weapon must shoot in the right direction."

But that weapon can only shoot in one direction, and there’s no reverse, no steering wheel, and it’s short-range only. The sole chance we have is to take out that "economic weapon" altogether, not try in vain to point it in the "right" direction.

We shouldn’t have multinationals giving money to the Congo, we should make sure no multinational ever sets another foot there. For every dollar they donate, they destroy a hundred; that is solidly engraved in the system.

I will gladly admit I cannot say this better than Herman Daly and Kenneth Townsend did in their 1993 book "Valuing the Earth” (note how similar the title is to those of this post and the original Der Spiegel piece) as they discuss the 2nd Law of Thermodynamics:

"Erwin Schrodinger (1945) has described life as a system in steady-state thermodynamic disequilibrium that maintains its constant distance from equilibrium (death) by feeding on low entropy from its environment—that is, by exchanging high-entropy outputs for low-entropy inputs.

The same statement would hold verbatium as a physical description of our economic process.

A corollary of this statement is that an organism cannot live in a medium of its own waste products."


It is impossible to overestimate the relevance of that statement as well as its corollary. That is, if you’re curious to know why you do what you do.





Click on images for larger versions







The Price Of Survival: What Would It Cost to Save Nature?
by Philip Bethge, Rafaela von Bredow and Christian Schwägerl




How much is the Earth worth to us? At a global conference in Bonn, Germany, representatives of 191 nations are discussing a revolution in conservation. By making a highly profitable business out of saving forests, whales and coral reefs, environmentalists hope to put a stop to a dramatic wave of extinctions.

The envoy from Europe can hardly believe his eyes. Butterflies the size of dessert plates are fluttering around his nose. Orchids hang in cascades from towering trees. Hornbills sail across the treetops. The tropical air is filled with the saturated scent of growth and proliferation.

Biologists have already tracked down more than 10,000 plant and 400 mammal species in the Congo basin. These plants and animals are part of the world's second-largest uninterrupted rainforest, one of the planet's most potent carbon storage systems. Indeed, it is for precisely this reason that Hans Schipulle, 63, is tramping around in the wilderness near the Sangha River on a humid morning in the Central African Republic.

"This forest stores carbon dioxide, and thus helps to slow down global warming. It regulates the global water supply and holds valuable pharmaceuticals," says Schipulle, a veteran environmentalist who works for the German government. "We must finally realize that these are services that are worth something to us."

Schipulle is in the region on a sensitive mission. Since December, he has headed the Congo Basin Forest Partnership (CBFP), a group founded by Americans, Europeans and the countries along the Congo River. The alliance aims to prevent the Congo basin from being plundered and transformed into oil palm and coffee plantations by mid-century. The Congo rainforest is still largely in one piece, but investors from around the world have already discovered the region's potential for big business -- ore, diamonds, plantations and lumber.



But Schipulle and his partners have other plans for the Congo basin. They want international financial institutions or the world community to fork over money to preserve the rainforest as it is today. The threat of clear-cutting poses a double risk for the world. First, destroying the Congo rainforest would eliminate one of the earth's most important cooling systems. Second, the carbon dioxide (CO2) released as a result of slash-and-burn agriculture would further accelerate global warming.

Bayanga, a nearby village, is living proof of the traditional conflict between protecting the environment and fighting poverty. Until recently, its residents benefited from the destruction of the rainforest. A sawmill in Bayanga provided employment for 370 people, but the mill was shut down after Schipulle and his alliance presented an urgent appeal to the government in the capital Bangui to prevent a dubious logging company from being allowed to overexploit 4,520 square kilometers (1,745 square miles) of forest.

It was a small victory for nature, but village residents still need work and income. An eco-tourism project sponsored by the World Wide Fund for Nature (WWF) and the German Society for Technical Cooperation (GTZ) has created jobs for only 94 people so far, providing the community with about €10,000 ($15,500) in annual revenue -- but not enough to reduce poverty.

How can Schipulle explain to the people of Bayanga what their forest means for the rest of the world? Is it really possible that eco-tourism, environmentally responsible forestry and coffee plantations along the fringe of the future protected forest regions will be capable of feeding the men, women and children of the village?


An Emissions Trading Market for the Congo Rainforest

Schipulle firmly believes in this vision. The World Bank already plans to incorporate the entire Congo basin into its Forest Carbon Partnership program. The Washington-based organization wants to enter the emissions trading market with the CO2 stored by the Congo rainforest. Because deforestation in tropical regions is responsible for about 20 percent of climate change, protecting the forest is synonymous with protecting the climate -- and the world community is increasingly willing to pay a lot of money to make that happen.


The possible rescue of the Congo rainforest is only one of many examples. A new age of conservation is dawning. For the first time, a value is being assigned to forests, plants and coral reefs, a value that makes them worthy of protection. It is nothing short of a paradigm shift in the environmental movement.

Romantic notions about nature and the environment aside, governments, conservationists and scientists are posing new questions, the answers to which will shape the future of mankind: How much is the Earth worth? Can the value of its diversity be quantified? How much should taking inventory of the planet be worth to us? Finally, who should foot the bill for decades of mismanagement at nature's expense?


Officials from around the world are currently addressing these crucial concerns at a United Nations conference on bio-diversity in Bonn, Germany. Representatives from 191 nations and roughly 250 environmental, conservation and development aid organizations are focusing on ways to stop the loss of species and natural habitats. Dozens of draft resolutions, many of them controversial despite being formulated in the dry language of international diplomacy, are under review. Even the name of the gathering belies its importance: the Ninth Conference of the Parties to the United Nations Convention on Biological Diversity.

At issue in Bonn is no less than the future of the planet and man's dramatic failure to leave a livable earth to his children. Wilderness, species, habitats and ecosystems are disappearing at an unprecedented rate. From one day to the next, human beings wipe out between three and 130 species, depending on which estimate you go by. Each year, virgin forest one-and-a-half times the size of Switzerland falls victim to logging. Moors are disappearing, rivers are being forced into concrete channels and erosion is transforming mountainsides into wasteland.


A Nail in the Coffin for the Amazon Rainforest?

Agriculture is taking up an ever larger portion of the Earth, especially now that plants are no longer grown solely as food, but also -- like sugar cane and oil palm -- to produce biofuel. Just last week, German Chancellor Angela Merkel signed an energy agreement in Brasilia with Brazilian President Lula da Silva. Under the agreement, Brazil can continue to supply Germany with biofuel as long as it complies with certain environmental standards. But for many environmental protection groups, the deal is merely another nail in the coffin for the Amazon rainforest.

In addition, the destruction of nature and global warming tend to reinforce one another. When sea levels rise and mangrove forests disappear, coastlines become more exposed to the elements than ever before. As carbon dioxide continues to acidify the oceans, the calcium structures of corals, snails and mussels become brittle.

At issue is the survival of exotic species like the red-headed vulture, the Banggai cardinalfish, the Gulf of California harbor porpoise, the Santa Catalina rattlesnake and the Indian gharial. But the survival of mankind as a species is also at stake, as the example of the recent cyclone in Burma illustrates. If the mangrove forests that once protected the Burmese coastline had been intact, the flooding would likely have been much less devastating.

Without corals, many types of fish would not exist, because reefs protect fish as they mature. The flora and fauna of the oceans hold potential cancer drugs worth, according to economists' estimates, as much as $1 billion (€645 million) a year.

Many of the things humanity considers costly and desirable are also part of biodiversity, such as turbot fillets, teak garden furniture and caviar from Russian sturgeon. But we also value the song of the nightingale, the scent of lilac, a view of untamed mountains, empty meadows and dense jungles.

The parties to the Convention on Biological Diversity (CBD), well aware of these riches, hope to "significantly" slow down the loss of eco-systems and species by 2010. But what exactly does this "sufficiently fuzzy objective" mean, Jochen Flasbarth, head of nature protection at Germany's Environment Ministry (BMU) asks sarcastically?

At the Bonn conference, about 6,000 experts are debating exactly that question. Ideally, they will bring meaning to what might otherwise be empty words and phrases, but in the worst case scenario the conference will end in little more than bland declarations of intent. The parties can only adopt resolutions in consensus, and there are no mechanisms to apply pressure to obstructionists.

Despite the potential difficulties, some of the approaches being taken at the conference are at least promising:


  • One of the goals is to create a global network of sanctuaries with representative habitats.

  • Using the Intergovernmental Panel on Climate Change (IPCC) as a model, the delegates hope to establish a panel of experts for the biodiversity convention that brings together representatives of the scientific and political communities.

  • The agenda calls for the fair balancing of interests between developing countries, with their abundant diversity, and the industrialized nations, which want to exploit these resources.

  • The experts intend to search for new mechanisms to pay for the protection of diversity. Without new sources of funding, all negotiation can be nothing but empty talk.


"This conference deals with economic interests," says German Environment Minister Sigmar Gabriel. According to Gabriel, it is critical that we assign "a measurable cost to the loss (of environment)," or else we run the risk "of deleting data from nature's hard drive." Chancellor Merkel has already indicated that she will announce a significant increase in German government funding for the protection of the world's forests when she appears at the conference next Wednesday. Norway, which invests $500 million (€323 million) a year, is her benchmark. Back home, the government in Berlin is urging German states, responsible for domestic environmental protection issues, to allow 10 percent of forests owned by states and municipalities to return to nature.


Environment Minister Gabriel also plans to present the initial results of a study, initiated in collaboration with the European Union, on the global costs of species and habitat loss. According to an excerpt SPIEGEL has obtained of the document -- titled "The Economics of Ecosystems and Biodiversity" -- the loss of biodiversity costs the world 6 percent of global gross domestic product. Poor countries are the hardest-hit. The annual cost of species and habitat loss amounts to as much as half of their already modest economic strength.

"Protecting diversity is much cheaper than allowing its destruction," says Indian economist Pavan Sukhdev, who Gabriel and EU Environment Commissioner Stavros Dimas convinced to head the study. Biodiversity -- and efforts to preserve it -- could in fact become an enormous business in the future. The new conservationists hope to sell intact forests because they store the greenhouse gas carbon dioxide (CO2). They also expect to see drugs developed from creatures like the cone snail and corals produce handsome profits in the future. The last oases of diversity are also expected to attract more and more well-heeled eco-tourists.

"Bonn has to push for a breakthrough," says Achim Steiner, the head of the United Nations Environment Program (UNEP). To this day, according to Steiner, the promises made at the Earth Summit in Rio de Janeiro 16 years ago, where both the Framework Convention on Climate Change and the Convention on Biological Diversity were born, have "not been kept or have been systematically broken."


Biodiversity is more than just the diversity of plant and animal species. It also encompasses the entire cornucopia of habitats, as well as the genetic information that lies hidden, as a biological treasure, in many organisms that have yet to be studied. Experts estimate that the planet's inventory includes between 10 and 20 million species of animals, plants, fungi and microbes. This diversity is not evenly distributed, however. Life is concentrated in so-called hot spots, which include regions like the Mediterranean coast, the tropical Andes and the Philippines.

And the future of diversity is not bright. Take Germany, for example. According to a study published in April by the German Federal Agency for Nature Conservation (BfN), titled "Facts about Nature 2008," 36 percent of all animal species studied in Germany are threatened. More than two-thirds of German habitats are considered threatened. Nature reserves make up only 3.3 percent of the country's land mass. Every day, 113 hectares (279 acres) of land disappear under asphalt and concrete.

The global situation is equally alarming. Last year, the International Union for Conservation of Nature (IUCN) red listed 16,297 plant and animal species as threatened, including almost a third of all amphibians, one in eight bird species and almost one-fourth of all mammal species. To develop its list, the IUCNB evaluated more than 41,000 species. The ones on its threatened list make up close to 40 percent of the total.


"A Sixth Global Mass Exctinction Has Begun"

To make matters worse, the rate of decline is formidable. A current UNEP estimate concludes that species are becoming extinct 100 times faster today than would normally occur as a result of evolution.

"A sixth global mass extinction has begun," says UNEP Executive Director Steiner. The diversity of species has already been severely compromised five times in the past in the wake of meteorite collisions, volcanic eruptions and rising sea levels. But today it is the more than 6.6 billion people that are destroying nature at an unprecedented pace. They hunt and fish at uncontrolled rates. They transform more and more land into farmland to fill their bellies. They chop down the last virgin forests to produce biofuel for their automobiles. They pollute the water, the soil and the air with toxic substances. And they drag species from one part of the earth to another -- with sometimes devastating consequences.


Ascribing a Monetary Value to Nature

Man's footprint on the globe is growing inexorably. And Homo sapiens, the supposedly perceptive human race, have failed miserably to secure the Earth's biological diversity. But now a revolution is taking shape in the way we think, as environmentalists and economists discover the marketplace of nature. They are putting their heads together to translate the achievements of mangroves and nightshade, whales, moors and rainforests into monetary value. Under this new mindset, destroying nature will no longer be profitable while protecting it will. Pavan Sukhdev, the director of the joint German-EU study on biodiversity, considers this the obvious solution. It is now or never, says Sukhdev, that "the economic weapon must shoot in the right direction."
>p>On a recent spring morning, the 48-year-old Indian pointed to the concrete wasteland of Berlin's Alexanderplatz square. "That's how desolate the entire earth will be if we don't succeed," says Sukhdev, who also heads the global markets division at Deutsche Bank's Indian office in Mumbai. Ten years ago, he says, a friend asked him the following question: "You're a banker. So tell me, why are some things worth something while others are not?" While searching for an answer to her question, he hit upon the idea of calculating prices for forests, wetlands and the courses of rivers.

Sukhdev's calculations, ridiculed at first, have since become the driving force behind the conservation revolution. Economists now perform detailed calculations to reflect what diversity does for people. Bees, for instance, are worth $2 to $8 billion (€1.3 to €5.2 billion) a year, because they pollinate important crop plants worldwide. Reeds growing along riverbanks are also considered valuable. Along the central part of Germany's Elbe River, for example, they are responsible for €7.7 million ($11.9 million) in annual savings, because they filter the water, thereby eliminating the need to build additional sewage treatment plants.


On the coast of Pakistan's Beluchistan Province, one hectare (2.47 acres) of intact mangrove forest produces the equivalent of about $2,200 (€1,420) in annual income. The ecosystem is a breeding ground for economically attractive fish species, as well as acting as a protective wall against flooding. Salt marshes in Scotland are worth about €1,000 ($1,555) per hectare to the region's mussel industry.

Tourists visiting Germany's Müritz National Park to marvel at sea eagles, ospreys, cranes and red deer contribute €13 million ($20 million) in annual revenue. In Britain, a team of researchers working with conservation biologist Andrew Balmford has calculated that a global network of protected areas could produce about $5 billion (€3.2 billion) in annual revenue. The group's calculations reflected the reserves' economic benefits for tourism, climate protection, nutrient cycles and the water supply.

If the destruction of natural habitats continues unabated, even the key to the earth's future energy supply could go undiscovered. US geneticist Craig Venter has collected thousands of samples of microorganisms living in seawater during voyages on his yacht, the Sorcerer II. Venter hopes that the samples will contain genetic sequences that could be used to produce fuels for cars and airplanes in the future.

In 1997, American ecological economist Robert Costanza estimated the annual value of the services nature provides for mankind at $33 trillion, a figure that was 1.8 times the world GNP at the time.


A Shift in Thinking

Despite their enormity, these numbers have been of little use to species and ecosystems in the past, because few have been willing to pay money for nature's assets. Indeed, the world's powerful corporations continue to treat animals, plants, forests, rivers and wetlands as a free resource. But at least some industries seem to be approaching an important watershed moment.

For instance, companies already earn $43 billion (€28 billion) in annual revenues with plant-based natural remedies. The active agents in 10 of the world's 25 most successful drugs were originally derived from fungi, bacteria, plants and animals living in the wild. The precursors of aspirin came from willow bark and meadowsweet. The purple foxglove plant is the source of the agent in the heart drug digitoxin.

Companies spend billions searching for the next mega-drugs derived from nature's diverse sources. But does nature get anything out of the bargain? Initial models show that it can. In Costa Rica, for example, there is already a tradition to the search for miracle drugs from the jungle. The Instituto Nacional de Biodiversidad (INBio) was founded in the capital San José in 1989. In the 1990s the pharmaceutical company Merck invested $4 million (€2.6 million) in the research institute, which has since acquired a global reputation. Merck executives pledged to donate 10 percent of the profits of potential discoveries to the country, with part of the proceeds to be earmarked for conservation.


Do Costa Rica's butterflies, forest plants and slime molds hold the key to new drugs to fight malaria and cancer, or can they at least provide the ingredients for new skin creams and anti-dandruff shampoos? World-renowned researchers at INBio continue to seek answers to these questions, constantly hunting for useful natural substances.

On a recent morning, for example, fungus specialist Jorge Blanco was carefully scrutinizing the leaves of Monimiaceae siparuna, a plant that resembles the laurel family. Using a scalpel, he cut apart the precious green leaves and placed the pieces into dishes of culture medium. Soon fungi that previously thrived only inside the leaves would sprout. To get the plant Diego Vargas, a biologist working at INBio, spent two hours on the previous day in an SUV, driving the winding roads in the Parque Nacional Braulio Carrillo along the slopes of the Barva volcano.

Vargas, wearing a baseball cap, a white T-shirt and blue rubber gloves, photographs plants in the virgin forest, then uses garden shears to snip off the seed heads of various plants and carefully places them in bags. Peering into the undergrowth, he finds Monimiaceae siparuna, a plant with tiny yellowish blossoms. He twirls his garden shears like a cowboy wielding his Colt, then deftly cuts off the seed heads: a small snip for Vargas, but could it be a giant snip for mankind?

"Many of the fungi that live in the leaves of this plant have never been studied, because they are so hard to isolate," says Vargas. "They may very well produce many interesting substances with which we aren't even familiar yet."

Since INBio was established in the late 1980s, its scientists have examined thousands of insects in their quest for useful natural substances. Nowadays, the high-tech equipment at the institute's special laboratory in Heredia, a San José suburb, is used mainly to analyze plant extracts, microbes and fungi.

The great bio-boom has not materialized yet, prompting Merck and a few other major investors to withdraw their funding. "The pharmaceutical companies no longer want to pay for the long process that is needed to find promising substances in nature," says Giselle Tamayo, technical coordinator of INBio’s biodiversity prospecting division.


Sharing the Blessings, While Protecting Biodiversity

Nevertheless, Tamayo insists that the research facility, which now works primarily with universities, is still "a model of success." The institute, says Tamayo, helps to demonstrate how developing countries can share in the blessings of biotechnology while simultaneously protecting their own biodiversity. A share of the licensing fees INBio receives goes into protecting Costa Rican forests.

Costa Rica is already considered a model country within the international conservation movement. In the country's booming ecotourism industry, about 1.5 million tourists spend close to $1.5 billion (€970 million) a year to visit the natural wonders of Costa Rica's rainforests and montane forests. And protecting those forests has been elevated to a national doctrine in Costa Rica. In the 1970s and 1980s, loggers cleared almost 80 percent of the Costa Rican rainforest. Today more than half of the country is forested once again.


In the southern part of the country, the densely forested Osa Peninsula juts out into the Pacific. Deep in the jungle, in the mountains above the tiny village of Golfito, Jorge Marin Picado keeps watch over 46 hectares (114 acres) of primeval forest. A flock of pale red Aras flies over the site, where the smell of rotting vegetation fills the air. Lianas snake their way up giant trees. Picado, wearing the standard machete in his belt, is the manager of the finca, or farm, perched along the edge of the coastal range. Under an agreement the farm's owner has signed with the Costa Rican forestry agency, the government pays him $350 (€225) per hectare each year to keep the forest undisturbed and prevent anyone from stealing plants or illegally cutting down trees.


Rewarding Farmers for Keeping Trees Untouched

The government calls the system its "Environmental Services" program, and conservationists consider it exemplary. Under the program, the government rewards landowners for planting new trees or leaving existing forest untouched. "We want to enlarge the forest area and offer farmers an alternative," says Katia Alegria of the forestry agency. As a result, pastureland where cattle have grazed until now is becoming forest once again. Instead of oil palms and banana trees, species like teak and the local ron-ron tree are growing in the new and preserved forests.

The program is funded with taxes on the sale of gasoline and funds from the World Bank and the Global Environment Facility, into which the CBD member states pay. But Costa Rica also hopes to turn a profit in the future from the carbon dioxide captured by trees.

Indeed, the ability to capture enormous amounts of CO2 from the atmosphere and store it could ultimately be forests' lifeline in this era when man is desperately searching for ways to halt global warming. Bogs can also bind substantial amounts of CO2. Restoring and preserving them "offers a cost-effective way of curbing climate change and protecting diversity," says UNEP Executive Director Steiner. This is also an opportunity for Germany. Researchers at Greifswald University have calculated that restoring one hectare of lowland bog in Germany and allowing the native alder forest to grow results in the capture of 30 tons of CO2 a year.


The governments of countries with large tropical rainforests, like Guyana, Indonesia, Brazil and Papua-New Guinea, have become especially enthusiastic advocates of the revolutionary idea of selling their forests as greenhouse gas sinks. If the plan works, they could rake in billions in profits, which in turn could be spent on protecting forests.


A New Currency for Environmentalism

The currency in the new environmental age is called a "forest certificate," and a potential market for the green money already exists. In the EU emissions trading system, for example, industrial corporations and energy utilities are allocated carbon dioxide pollution rights known as CO2 certificates. They define how much carbon dioxide a given company's factories are permitted to emit into the atmosphere. If a company's CO2 emissions exceed its allocated limit, it must buy additional certificates to offset the difference. Unused pollution rights can be sold. In other words, the certificates have a real monetary value, which is currently at €25 ($39) per ton of CO2, but could increase to €60 ($93) in the future.

The tropical rainforest countries are keenly interested in entering this growing market. At the next UN Climate Change Conference, in Copenhagen in 2009, the course could be set for the development of a market in forest certificates. Large electric utilities, like Germany's RWE, are already waiting in the wings. "Forests as a part of a global emissions trading system would be of interest to us," says Michael Fübi, the company's climate protection manager. The company would benefit by satisfying climate protection requirements more quickly and at a lower cost than through the installation of costly new technologies. In the medium term, however, this could not serve as a replacement for modernizing power plants, says Fübi.

How much money this forest certificate system would ultimately generate is still written in the stars. Experts estimate that it would cost $10 billion (€6.45 billion) a year to truly benefit the world's forests. Otherwise it would be far more profitable for tropical countries to cut down their forests for lumber.

"Logging produces from $100 to $500 million (€65 to €322 million) a year in revenues for Papua-New Guinea," says Kevin Conrad, Papua-New Guinea's special envoy for climate protection and conservation, highlighting the country's dilemma. The country has to be offered more than this amount to make protecting its forests an attractive proposition, "otherwise the forest will be gone -- and it'll happen very soon."


Turning Canopies into Capital

In Brazil, the chainsaw is still winning out over conservation. Almost 20 percent of the country's 3.65 million square kilometers (1.41 million square miles) of Amazon rainforest have already been cut down and turned into pastureland and soybean fields. After taking office in 2003, Brazilian Environment Minister Marina Silva managed to reduce the rate of deforestation from 28,000 to 12,000 square kilometers (10,810 to 4,633 square miles) a year. She introduced new rules that allowed owners of forests to log on no more than 20 percent of their property, and imposed a credit freeze on violators. But last week Silva, an icon of the global forest protection movement, made the surprising announcement that she was resigning, saying that she was tired of "playing the green fig leaf" for President Lula da Silva.

As it happens, dead forests are more valuable than living forests on global markets, and it will take a lot of money to reverse this. There are, however, a few initial success stories. The World Bank, for example, has introduced its Forest Carbon Partnership, a program designed to protect both the climate and the environment simultaneously. One of the partnership's model projects could soon be that of Germany's Hans Schipulle, who hopes to transform the Congo basin rainforest into a cash cow.


In anticipation of a growing market for forest certificates, the US investment bank Merrill Lynch recently agreed to pay Indonesia's Aceh Province $9 million (€5.8 million) a year for four years to protect the rainforest in its Ulu Masen preserve. Canopy Capital, a London-based company, has spent a sum numbering in the millions to secure the value that it believes Guyana's Iwokrama rainforest could soon have for mankind. Canopy's managing director, Hylton Murray-Philipson, explains the concept: "No one would pay anything for the intact forest today, but I believe that it is extremely likely that markets will soon take a different view of the value of nature." Experts predict that the trade in the natural assets of forests, bogs and reefs could translate into $10 billion (€6.5 billion) in revenues by 2010.

Can such global financial transfers truly bring about change? "Once CO2 trading translates into large amounts of money, the question that inevitably arises is who actually owns the forest," says Tom Griffiths, who is with the human rights organization Forest Peoples Programme. "Is it the investors or the people who live in the forest?"


Future Power Struggles over Carbon Sinks

Griffiths fears that a highly profitable forest protection system could lead to power struggles over lucrative carbon sinks, which in turn would translate into more corruption, speculation, land grabs and conflicts. The logging company Asia Pacific Resources International, for example, clears forests and drains peat bogs in Indonesia to plant new tree plantations. Suddenly the company has launched a CO2 pilot project in which it plans to restore a few bogs. But the project smacks of an eco-scam, too, because Asia Pacific will only be able to pocket profits from CO2 trading as a result of the fact that it destroyed large swathes of the ecosystem in the first place.

To secure biological diversity in the long term, the parties to the Biodiversity Convention are also promoting classic methods of conservation. There are roughly 100,000 nature reserves around the globe. According to a recent study by the WWF, the world community spends $6.5 to $10 billion (€4.2 to €6.5 billion) a year on protected areas. This sounds like a lot of money, but in fact is well short of what is needed.

Experts estimate that at least twice as much will be required to protect nature in the long term. Professional environment police officers must monitor the reserves. Education is critical in helping local populations find new ways to live in harmony with nature. Microloans are needed to help people implement new business models compatible with the natural environment.


Connecting Countries that are Biodiversity Rich with those with Deep Pockets

But one of the most immediate goals should be to establish additional reserves in the world's biodiversity hot spots. BMU conservation strategist Flasbarth has high hopes for a German initiative called LifeWeb. The program is designed to bring together countries with great biodiversity and those with deep pockets.

"Every country can use the system to specify which areas it would protect, and at what price. The hope is that interested parties will then bid for the right to pay for conservation," says Flasbarth. The Democratic Republic of Congo, for example, is traveling to the Bonn conference with an offer to place 140,000 square kilometers (54,054 square miles) of rainforest under protection. But will it be able to attract investors for the project?

The CBD member states plan to place 10 percent of all the earth's land-based ecosystems under protection by 2010, as well as 10 percent of the ocean surface by 2012. It is a bold plan. The goal could be reached on land, albeit with great effort. But achieving such a goal in the oceans is pure illusion. Strict protections have only been applied to less than 1 percent of the world's oceans to date. Indeed, the oceans are where international conservation and species protection efforts have failed most markedly.


Declining Fish Stocks

Some experts estimate that if the current trend of overfishing continues, commercial ocean fishing will have become all but impossible by 2050. Meanwhile, the countries of the world pay more than €20 billion ($31 billion) a year to subsidize the fishing industry -- and in doing so they pay for one in five fish caught in the world. Around the globe, there are about 4 million fishing boats routinely hunting down all manner of sea creatures. Experts say that to prevent the destruction of current populations, the global fishing fleet would have to be cut in half.

Overfishing threatens to destroy entire ecosystems. According to the UN Millennium Ecosystem Assessment study, 20 percent of the world's coral reefs have already been destroyed, while another 20 percent are severely compromised. The heavy equipment used by trawlers is destroying coral banks in the northeast Atlantic. Deep-sea fishermen are steadily scraping away at the unique natural wonders of underwater mountains.

"Imagine if hunters were to cut down entire forests to catch a few deer," says Carl Gustaf Lundin, head of the IUCN's Global Marine Program, "people would be outraged." But this is precisely the sort of devastation caused by the use of trawl nets, Lundin explains. "Many people have no concept of the destruction of the oceans."


Zoologists demand tighter controls on board trawlers to limit illegal fishing. Most of all, they hope to see the establishment of zones where fishing would be banned completely. The concept they envision would involve zones of intensive fishing alternating with these protected regions, where young fish could grow to maturity undisturbed and populations could recover. The international community is still hesitant when it comes to establishing marine reserves and few laws govern the high seas. But opinions are gradually changing when it comes to the territorial waters of nations.


A Plan for the Caribbean

The goal of an initiative currently taking shape in the Caribbean, for example, is to place 20 percent of all ecosystems in the Caribbean Sea under protection by 2020. At issue are 5 million hectares (12.35 million acres) of waters complete with shimmering coral reefs, dense mangrove forests and so-called Blue Holes, often circular, underwater sinkholes inside atolls that can be up to 200 meters (656 feet) deep.

Details of the ambitious program, known as the Caribbean Challenge Marine Initiative, will be presented in Bonn next week. The countries that have signed on so far include the Bahamas, Grenada, the Dominican Republic, as well as St. Vincent and the Grenadines. Conservation groups like the US-based Nature Conservancy (TNC) are also involved. The effort centers around conservation funds, the proceeds of which would pay for rangers, patrol boats, research and environmental education.

"The funding must be secured for the long term, otherwise the entire idea will fail after a few years for lack of funds," says Eleanor Phillips, the director of TNC's Northern Caribbean program. She helps run the project from her office in Nassau, the capital of the Bahamas. The city is on New Providence, one of the islands in the Bahamas archipelago. The conservation problems faced by groups like TNC are concentrated on a few square kilometers in Nassau.

Tourists, especially from the United States, routinely overrun the city. They live in concrete hotels or gated residential communities. Entire mangrove forests, says Philips, are cleared to make room for the houses of the rich. But the forests are breeding grounds for many Caribbean fish species. Every day in Nassau harbor, fishing boats bring in tons of Nassau grouper and Caribbean queen conch, which are then hawked as island specialties in every snack bar.


The two species were once abundant. The tropical waters used to be filled with enormous schools of Nassau grouper. Within hours, fishermen would bring up hundreds of the large fish, which can weigh up to 25 kilos (55 lbs.). The queen conch was so plentiful that islanders could gather an entire evening meal by snorkeling in the azure-blue ocean for a few minutes. Now, fishermen like Eudie Rolle, often to be found sitting on a quay in Nassau harbor behind a table covered with the tasty sea snails, are left to complain about how difficult the beautiful pink shells are to find. Rolle has been fishing for 57 years. "In the past," he says, "all we had to do was gather the conch in waist-high water. But now my sons have to sail 150 miles out to find any."

"We are very concerned," says Michael Braynen of the island nation's Department of Marine Resources. "In the long term, we need to reduce the number of fishermen in the Bahamas. But then we have to offer them alternatives."


Balancing Nature Protection with Livelihoods

This is the underlying problem. Those who seek to effectively protect nature, make ocean zones off-limits and allow forests to remain untouched must ensure that the people who have depended on these facets of nature for their livelihoods are given new opportunities. The solution in the Bahamas is called ecotourism.

Andros is a short, 15-minute flight from Nassau. The island, roughly 170 kilometers (106 miles) long, is home to about 8,000 people and the world's third-largest barrier reef lies off its eastern coast. Islanders like Peter Douglas take the island's few tourists on tours of the colorful, luminescent coral banks and undersea bluffs. Enterprising islanders have developed eco-lodges in the bush behind the coast. Prescott Smith, for example, offers fly-fishing vacations for wealthy business executives. For $1,600 (€1,030) a day, his customers can learn to elegantly cast their flies in the island's mangrove swamps for longfin bonefish or Atlantic tarpon. But instead of keeping their catch, they adhere to a "catch and release" policy.


The islanders are defending their small paradise against investors in mass tourism. They have found ways to profit from nature without destroying it. "Scientists, governments and the big conservation groups are fighting the locals," says Prescott Smith. "They come here and say: You're the problem." But true conservation, according to Smith, must incorporate the local population. "Only if the people here truly get the feeling that their own interests are at stake will they protect the country."

Indeed, even as the world gathers to discuss the CBD, such small-scale, bottom up projects may be the world's best hope. Such a grassroots approach is especially valid in places where poverty is widespread. The poor have no other choice but to live from the resources of nature and, if necessary, to destroy them. This too is an issue that will be discussed at the Bonn conference in the coming days.

Most of all, however, the CBD partners must attempt to establish a focus for the next two years. The 10th Conference of the Parties of the CBD takes place in 2010, presumably in Japan. By then, the group hopes to have implemented many of its ambitious environmental goals.

"In Bonn, it is especially important that the parties do not block one another on the major issues," says BMU conservation director Flasbarth. The sticking points are predictable. When the CBD came into being, for example, many of the parties wanted to see mechanisms established to ensure a fair balancing of benefits among industrialized and developing nations. The idea was that everyone ought to be able to benefit from the planet's genetic treasures. At the same time, the parties argued, the populations of the countries in which the profitable species originate should also share in the profits.

But it has been 16 years since the Rio Earth Summit took place, and still, rules to address this problem have yet to be established. The developing countries are suspicious, because bio-pirates have already hijacked parts of their biological treasures. In early May, for example, it was reported that residents of the South African village of Alice are challenging two patents, held by the German company Dr. Willmar Schwabe Arzneimittel, for the production of the drug Umckaloabo. Umckaloabo is made from the roots of the Capeland pelargonium. The locals claim that they have been preparing tinctures from the plant for centuries and using them to treat colds.

They claim that ased on this knowledge, Spitzner, a subsidiary of Schwabe, now produces Umckaloabo. "The patents are illegal and must be revoked," says Mariam Mayet of the African Centre for Biosafety. Besides, says Mayet, the company owes the people of Alice a share of profits.

Another bone of contention is the biofuel boom. German Chancellor Merkel did little to ease tensions when she recently signed an energy treaty with Brazilian President Lula da Silva. The Brazilians see German concern for the Amazon rainforest as an attempt to corner the biofuels market. To produce bio-ethanol, they plan to have planted sugarcane in an area almost as large as Great Britain by 2025. "If we tell the Brazilians that we're boycotting this, the negotiations over rainforest protection will come to an abrupt end," warns German Environment Minister Gabriel. Merely the attempt to place the topic of bio-energy on the agenda at the Bonn conference was met with indignation in Brasilia.


The Pricetag of Curtailing Exctinction: €30 billion

In short, a high level of diplomatic skill will be needed in Bonn to advance to the core issue: Who will pay how much and for what? The annual cost of curtailing species extinction by 2010 is estimated at €30 billion ($46.5 billion). The EU heads of state are even more ambitious and want to put a complete stop to the loss of biodiversity in Europe by 2010. However, the WWF believes that this goal can only be reached "at a significant additional cost."

Mastering the crisis will likely require a wide range of funding models. Focusing on biodiversity as a source for new drugs and cosmetics is one possibility, the trade in CO2 certificates is another. Private sponsors can also have an important impact. The conservation group TNC, for example, manages a fortune of $5.4 billion (€3.5 billion), some of it donated by wealthy patrons. In 2007 alone, TNC spent $566 million (€365 million) to purchase land and protect it for future generations.

Others have chosen to engage in something akin to colonial megalomania and personally control the fate of nature. Patagonia, for example, appears to be firmly in the hands of billionaires. For years, Douglas and Kris Tompkins, the co-founders of the apparel companies North Face and Patagonia, have
owned several thousand square kilometers of untouched wilderness in the region. Some of their neighbors are speculator George Soros, fashion magnates Luciano and Carlo Benetton, actors Sharon Stone and Christopher Lambert, and CNN founder Ted Turner.

The not-quite-fabulously-rich can acquire tropical islands or hectare-sized pieces of wild animal corridors through organizations like TNC or World Land Trust.


Economist Pavan Sukhdev also recommends levying, in addition to the value-added tax, a kind of value reduction tax in wealthy countries -- a way of compensating for the environmental damage associated with the production of a car or a refrigerator. The revenues from such a tax could flow directly into large-scale conservation projects.

Sukhdev also wants to force companies and consumers to assume more responsibility. "A coffee company could charge a small surcharge and invest the money in the rainforest next to its plantations," he says. When it comes to organic food, consumers are already prepared to pay a premium today. "So why not create an Eco-Plus label to test whether they are willing to pay an additional premium to fund conservation projects?"

Nowadays, people can already make their travel climate-neutral by offsetting the emissions from aircraft or rental cars through companies like the German firm global-woods. The company uses the revenues to support reforestation programs in Argentina, Paraguay and Uganda. Another example is the Marriott hotel chain. The company has paid $2 million (€1.3 million) to the Brazilian state of Amazonas to protect the 589,000-hectare (1.45 million-acre) Juma preserve from loggers. In return, Marriott receives CO2 credits, which are then offered for sale to hotel guests so that they can continue to relax in their hotel saunas without suffering a bad conscience.

Fisheries experts, on the other hand, recommend only buying fish with the Marine Stewardship Council eco-label. Anyone hoping to enjoy eating marine creatures in an environmentally responsible way in the future will have to do without species like halibut or sole. When it comes to wood, most conservationists recognize the certification awarded by the Forest Stewardship Council.

According to estimates, within only two years consumers worldwide could be spending up to $75 billion (€48 billion) on fish, wood, medicinal herbs and food produced in an environmentally friendly way. In addition, people have long been willing to pay directly for species protection. According to the BfN, every household in Germany would pay an average of €100 ($155) a year to preserve biodiversity. This would amount to a total of €3.5 billion ($5.4 billion). "That's three times as much money as we have had at our disposal so far for species and habitat protection," says Burkhard Schweppe-Kraft, an economist with the BfN.

If natural landscapes are increasingly assigned a value, they could lose their role as "the world's free garbage dump," as Gordon Shepherd of the WWF puts it. But Shepherd also warns that adding value to nature is "no panacea." Indeed, it raises many questions. For instance, developing countries would have to prove that their goal is not simply to rake in additional cash, but that they are serious about protecting diversity.


The industrialized countries, for their part, are likely to be accused of merely orchestrating an enormous green-washing of a failed industrial policy, which for decades treated nature as a cheap self-service shop. Are the mechanisms of the global economy truly suitable for ensuring diversity?

"Conservation based purely on profit could fail in places where, for example, it seeks to protect animals that collide with our interests," writes Douglas McCauley of Stanford University in the journal Nature. According to McCauley, nature that does no harm, but is also of no benefit to man would also fail the economic test.

When wolves kill sheep or cormorants wreak havoc in commercial fish ponds, it is nothing but nature at work. On the other hand, people would be unlikely to pay for conservation based solely on its benefit to man.

Economics and the preservation of diversity are often diametrically opposed. About 50 years ago, for example, the Nile perch was deliberately introduced into Lake Victoria in East Africa. Fishermen in the countries adjoining the lake, Uganda, Tanzania and Kenya, remain enthusiastic about the arrival of the edible fish to this day, because it helped fuel copious economic growth. But the new arrivals spelled ecological disaster for the lake's diverse and unique population of haplochromine cichlids, leading to what social biologist Edward Wilson once called "the most catastrophic wave of extinctions in recent history."


Making the economic value of ecosystems the sole basis of conservation would mean that "nature is only worth protecting if it is also profitable," warns biologist McCauley, referring to the risk of a sudden decline in value.

What happens to the rainforest, which we now want to see serving as a CO2 storage system, if a cheaper technical solution is ultimately found to dispose of greenhouse gases? Will the forest then be liquidated, to borrow an economic term? The value of nature -- its beauty, and its cultural and evolutionary importance -- cannot be estimated, says McCauley. "In the long run, we will achieve more progress if we appeal to human hearts and not their wallets."

In other words, it is up to man to decide what kind of world he wishes to inhabit. Anyone familiar with wilderness knows what will be lost if environmental destruction continues unabated. By the time the world community can agree to a business model to save biodiversity, it could be too late.

We should also consider the need to preserve "refuges for the soul," says Beate Jessel, the president of the BfN. The CBD partners should also take this to heart if they hope to avoid becoming lost in a jungle of international agreements and bilateral sensitivities in Bonn.

Are we negotiating ourselves to death? Words must soon be followed by deeds. Indian economist Pavan Sukhdev, at any rate, sees the situation as dead serious. We face a decision, says Sukhdev, one whether or not our civilization is to survive.

Sukhdev was in Berlin recently for a meeting with German Environment Minister Gabriel to discuss the crisis. The ministry lies across the barren Alexanderplatz square, past a gray, concrete desert. "It's an ideal place for an environment ministry," says Sukhdev. "Every day you see the things you want to prevent."


Translated from the German by Christopher Sultan.



Monday, September 28, 2009

September 28 2009: A Quicksand Quagmire


Unknown Once was warship Thanksgiving Day, 1864
Army of the James. Butler's dredge-boat, sunk by a Confederate shell, James River, Virginia


Ilargi: After a 50%+ rise in the US stock markets, against the backdrop of unprecedented injections of taxpayer funds (who were dirt poor even before their money was spent and are now dead broke), ongoing horrendous job losses and equally awful increases in foreclosures, it might be a good time to ask two questions:
  1. Why do people invest in stocks?
  2. What are the chances that stock markets will continue to rise?

The answer to the first, of course, is that they do so to make a profit, to get more return on their money than they would if they'd for instance put their money in the bank or buy bonds. Of course, this only works when share prices rise, as they have in the past 6 months. In the 6 months prior to that, not so much, obviously.

Which leads to the second question, and an assessment of the odds that the markets will keep going up. Somewhere down the line, even though you wouldn't know it to look at the past 6 months, these odds will; depend on what happens in the real world. There may be a certain tolerance for some job losses and other negative news, but that cannot be endless. As the government and the Federal Reserve will come under increasing pressure to wind down stimulus and easing measures, both from inside and outside sources, some sector or another within the economy will have to make up for what falls away. And do so at an especially precarious moment.

I gathered a large set of bullet points below that together should, I think, paint a rather comprehensive picture of what will be demanded of the economy in terms of performance. They also would seem to indicate that the economy is highly unlikely to provide that performance. In my view, it carries far too much dead weight on its back. Far too much.

One number that stands out for me is this from Money figures show there's trouble ahead :
Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14% since early Summer:

"There has been nothing like this in the USA since the 1930s."

When economic data for Q3 are released in early October, there will be undoubtedly be all sorts of positive twists and turns. That is inevitable when you add up everything that's been thrown at the wall in the hope something would stick. Something always does. Still, when at the same time lending plummets to that extent, not much of it is likely to stick. That is one solid indicator of the extent to which the whole system depends on the government, i.e. the broke taxpayer.

John Mauldin calculates that in order to get U3 unemployment down from 9.7% now to 5% in 5 years, by late 2014, 250.000 jobs would have to be created on average each and every single month for 60 months. This is so far removed from any historical trend, certainly over the past two decades, that it would truly be a monster effort. It would also likely take an economic growth rate of somewhere between 5% and 10% over that entire period.

How that could ever be accomplished with the hundreds of billions in losses and writedowns that are yet to be reported and absolved is hard, if not impossible, to imagine. An economy that is in its worst shape in 75 years would arguably have to perform better than it has in all that time. I would be inclined to say we are entering into magical thinking territory, but then again, we seem to have settled there quite a while ago.

What should worry everyone, and certainly the government, is that 52.2% of all young (16-24 years old) people who are not students are unemployed. That is a recipe for social disaster. And it wouldn't be all that hard to design a program that would allow for small businesses to hire them with government assistance. Buy out one or two less bankrupt financial institutions and you can afford such a program and have money left for a manned flight to Venus. Alternatively, you'll have millions of kids who will turn 30 without ever having worked at all. Overall, there's one job for every 6 job seekers. For the foreseeable future, it would even be a major victory if that could be reduced to one available job for every 3 jobless workers.
Since the end of 2008, job openings have diminished 47 percent in manufacturing, 37 percent in construction and 22 percent in retail. Even in education and health services — faster-growing areas in which many unemployed people have trained for new careers — job openings have dropped 21 percent this year.

That is not a foundation to create record numbers of jobs on for years to come.

Oh, and how about this one for a little background info?:
[..] M3 money has been falling at a 5% rate; M2 fell by 12% in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May [..]

The short and curly version: while stocks have gone up, the real world has been sucked down into a quicksand quagmire. To get back to the first question, Why do people invest in stocks?, the answer still stands: to make money. But when they think the risk of losing their money is too high, they will get out of stocks and into something else. The lucky ones, that is, who are gone in time. The rest, the delusional happy crowd that always enters last, when the party's largely over, will get fleeced.

Still, my bet is that there are not enough sufficiently delusional people left in the market to sustain this rally for much longer. Not with these numbers floating around. If only because too many remember what they lost last year. The fact that the rally’s lasted this long is not a sign that it's gpoing to keep on going; it means it's about to turn on a dime, bigtime.

But by all means, make up your own minds. Here come the bullets:







Welcome to the New Normal
  • [The] headline unemployment number (9.7%) is what we see when we read the paper. What we typically don't see is the real number of unemployed. For instance, if you have not actively looked for a job in the last four weeks, even if you would like one, you are not counted as unemployed. You are called a "marginally attached" or "discouraged" worker.

  • Right now, about one-third of marginally attached workers actively want jobs but have not bothered to look because they believe there are no jobs in their area, at least not for them. If you add that extra 758,000 to the unemployment data, you get what is called U-4 unemployment, which today is 10.2%. If you count all marginally attached workers the unemployment number is 11% (U-5 unemployment). And if you add those who are employed part-time for economic reasons (i.e., they can't get full-time jobs) the unemployment number rises to 16.8%. (That is called U-6 unemployment.)

  • [..] each year the number of potential workers rises. In fact, the number of workers has risen by about 15 million over the last ten years. This is from population growth and from immigration. Also notice that the normal rise did not happen last year. That is because the number of discouraged workers has risen rapidly and, as noted above, they are not counted. We will revisit this point later. But for now, there are 154,577,000 people in the available work force.

  • [..] we are down almost 8 million jobs since the onset of this recession, and [..] there are almost 15 million people unemployed.

  • [..] there are roughly 9 million people who are working part-time because of business conditions, or those are the only jobs they could find. The average work week is at an all-time low of 33 hours.

  • [..] when the economy does begin to recover, when we finally get to the other side of the mountain, companies are going to raise their labour input first by lifting the workweek from its record low. Just to get back to the pre-recession level of 33.8 hours would be equivalent to hiring three million workers. And, the record number of people working part-time against their will are going to be pushed back into full-time, which will be great news for them, but not so great news for the 125,000 - 150,000 new entrants into the labour market every month.

  • [..] we are adding about 1.5 million workers to the workplace every year. That means over the next five years we are going to need 7.5 million jobs just to maintain that growth, or about 125,000 a month. That is on the low side of what economists normally estimate, which is around 150,000 per month. If we used the 150,000 estimate, it would mean we need 9 million jobs.

  • There are at least 1 million (and probably more like 2 million) discouraged workers who would take jobs if the economy got better. You can derive that number by going back to early 2007 and seeing the level of discouraged workers. That means, by the end of 2014 we are going to have 163 million people in the work force. Today we have 139.6 million jobs, and that number is likely to slip at least another half million (last month the economy lost 216,000 jobs, with a very suspicious birth-death ratio accounting for a lot of job creation). So let's call it 139 million current jobs.

  • Let's assume that we would like to get back to a 5% unemployment rate. That would not be stellar, but it would certainly be better than where we are today. 5% unemployment in late 2014 will mean 8.1 million unemployed. To get to 5% unemployment we will have to create 14 million jobs in the five years from 2010-2014. (163 million in labor pool minus 8 million unemployed is 155 million jobs. We now have 139 million jobs, so the difference is roughly 15 million.) Plus the equivalent of 3 million jobs that Rosenberg estimates, just to get back to an average work week.

  • But let's ignore those latter jobs and round it off to 15 million. Let's hope that by the beginning of next year we stop losing jobs. That means that to get back to 5% unemployment within five years we need to see, on average, the creation of 250,000 jobs per month. As an AVERAGE!!!!!

  • Look at the table below. It is the number of jobs added or lost for the last ten years. Do you see a year that averaged 250,000? No.

  • If you take the best year, which was 2006, you get an average monthly growth of 232,000. If you average the ten years from 1999, you get average monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. If you take the best ten years I could find, which would be 1991-2000, the average is still only 150,000.

  • Because of the near-certain loss of jobs for the next few months and the slow recovery, it is a very real possibility that unemployment will still be well over 10% a year from now. Even with robust growth of 200,000 jobs a month thereafter for the next two years, unemployment will still be close to or over 9%.

  • There has never been a period of serious inflation in the US without wage inflation. But real incomes are falling, and there is little reason to believe we will see wage pressures within the next few years.

  • We have enormous excess capacity - capacity utilization is about 68%. Banks are cutting back on their loans, and consumers and businesses are borrowing less. Housing is likely to be in a funk for at least two years. We are deleveraging, which is causing the velocity of money to slow.

    All of this is very deflationary.


The dead end kids
  • The unemployment rate for young Americans has exploded to 52.2%

  • [..] without a clear economic recovery plan aimed at creating entry-level jobs, the odds of many of these young adults -- aged 16 to 24, excluding students -- getting a job and moving out of their parents' houses are long. Young workers have been among the hardest hit during the current recession -- in which a total of 9.5 million jobs have been lost.

  • During previous recessions, in the early '80s, early '90s and after Sept. 11, 2001, unemployment among 16-to-24 year olds never went above 50%.

  • "They should carve out $100 billion right now and create something like $5,000 to $6,000 job credits that would drive the hiring of young, idled workers by small business."


U.S. Job Seekers Exceed Openings by Record Ratio
  • According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.

  • During the last recession, in 2001, the number of jobless people reached little more than double the number of full-time job openings, according to the Labor Department data. By the beginning of this year, job seekers outnumbered jobs four-to-one, with the ratio growing ever more lopsided in recent months. From the beginning of the recession in December 2007 through July of this year, job openings declined 45% in the West and the South, 36% in the Midwest and 23% in the Northeast.

  • Since the end of 2008, job openings have diminished 47% in manufacturing, 37% in construction and 22% in retail. Even in education and health services — faster-growing areas in which many unemployed people have trained for new careers — job openings have dropped 21% this year. Despite the passage of a stimulus spending package aimed at shoring up state and local coffers, government job openings have diminished 17% this year.


Job losses, early retirements hurt Social Security
  • Big job losses and a spike in early retirement claims from laid-off seniors will force Social Security to pay out more in benefits than it collects in taxes the next two years, the first time that's happened since the 1980s.

  • Applications for retirement benefits are 23% higher than last year, while disability claims have risen by about 20%.

  • Job losses are forcing more retirements even though an increasing number of older people want to keep working. Many can't afford to retire, especially after the financial collapse demolished their nest eggs. Some have no choice.

  • This year, more than 55 percent of people age 60 to 64 are still in the labor force, compared with about 46 percent a decade ago.

  • Nearly 2.2 million people applied for Social Security retirement benefits from start of the budget year in October through July, compared with just under 1.8 million in the same period last year.

  • The Congressional Budget Office is projecting that Social Security will pay out more in benefits than it collects in taxes next year and in 2011, a first since the early 1980s [..] Social Security is projected to start generating surpluses again in 2012 before permanently returning to deficits in 2016.

  • About 43 million retirees and their dependents receive Social Security benefits. An additional 9.5 million receive disability benefits. The average monthly benefit for retirees is $1,100 while the average disability benefit is about $920.

  • In a typical year, about 2.5 million people apply for disability benefits, including Supplemental Security Income. Applications are on pace to reach 3 million in the budget year that ends this month and even more are expected next year [..]


Money figures show there's trouble ahead
  • The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy.

  • Some expect US car sales to slump 40% in September. Weaker US data is starting to trickle in. Shipments of capital goods fell by 1.9% in August. New house sales are stuck near 430,000 – down 70% from their peak – despite an $8,000 tax credit for first-time buyers. It expires in November.

  • If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China's exports were down 23% in August; Japan's were down 36%; industrial production has dropped by 23% in Japan, 18% in Italy, 17% in Germany, 13% in France and Russia and 11% in the US.

  • Fed chairman Ben Bernanke spoke in April 2008 of "a return to growth in the second half of this year", and again in July 2008 that growth would "pick up gradually over the next two years". He could only have thought such a thing if he was ignoring the money data.

  • Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14% since early Summer: "There has been nothing like this in the USA since the 1930s."

  • M3 money has been falling at a 5% rate; M2 fell by 12% in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1% rate since April. Private loans have fallen by €111bn since January.


A risky revival
  • [..] the question of whether this is a real recovery or a bubble must still be asked, and there are worrying signs. The rally has been achieved with global economic growth barely above zero and unemployment still rising. The S&P 500 index of US stocks is already far above the forecasts nine out of 10 Wall Street strategists have in place for the end of the year, according to a Bloomberg survey. Concerns are prevalent that US consumers will not return to their old buying habits because of high unemployment and the debts they need to pay off.

  • There are also concerns that China, the other leading source of growth, has achieved that only by stoking lending – notably, Chinese stocks sold off sharply in August when authorities hinted at tightening lending. The speed of the rally is itself cause for concern. Historically, big sell-offs have typically been followed by big bounces. But as measured by the S&P 500, the current rally is stronger after six months than any predecessor, including those that followed the lowest points of the market in 1932, 1974 and 1982.

  • "[Since early 2007] 40 per cent of all movement in the S&P 500 can be predicted or explained from the movement of the yen and vice versa. If we assume, quite reasonably, that the yen and the S&P 500 should be fundamentally unrelated instruments, this implies a breakdown of efficient price discovery in the markets."

  • "It’s the last game of pass the parcel. When the tech bubble burst, balance sheet problems were passed to the household sector [through mortgages]. This time they are being passed to the public sector [through governments’ assumption of banks’ debts]. There’s nobody left to pass it to in the future."











Welcome to the New Normal
by John Mauldin

Unemployment is high and rising. But if the recession is over, won't employment start to rise? The quick answer is no. We look deeper into the Statistical Recovery and find yet more reasons to be concerned about near-term deflation. This week we consider all things unemployment and ponder the need to create at least 15 million jobs in the next five years to return to a full-employment economy - and the implications for both the US and world economies if we don't. Economic is often about what we can clearly see, and yet it is understanding what we can't see that gives us true insight. We start with a collection of facts that we can see and then begin a thought exercise to find the implications.

What We See

First, the unemployment rate is now officially at 9.7%. We are approaching the official high we last saw at the end of the double-dip 1982 recession. In the chart below, notice that unemployment rose throughout 1980 and then began to decline, before rising rapidly as the economy entered the second recession within two years. Also notice the rapid drop in unemployment following that recession, as opposed to the recessions of 1991-92 and 2001-02, which have been characterized as jobless recoveries. Unemployment was as low as 3.8% in 2000 and saw a cycle low of 4.4% in early 2007.

(For the record, all this data is available on the Bureau of Labor Statistics website. There is a treasure trove of data. They are quite open about what they do and how they do it. When I call to ask a question, they are quite helpful. How people interpret the data is not their fault.)

This headline unemployment number (9.7%) is what we see when we read the paper. What we typically don't see is the real number of unemployed. For instance, if you have not actively looked for a job in the last four weeks, even if you would like one, you are not counted as unemployed. You are called a "marginally attached" or "discouraged" worker. Often there are very good reasons for this. You could be sick, dealing with a family emergency, going back to school, or not have transportation.

Right now, about one-third of marginally attached workers actively want jobs but have not bothered to look because they believe there are no jobs in their area, at least not for them. If you add that extra 758,000 to the unemployment data, you get what is called U-4 unemployment, which today is 10.2%. If you count all marginally attached workers the unemployment number is 11% (U-5 unemployment).

And if you add those who are employed part-time for economic reasons (i.e., they can't get full-time jobs) the unemployment number rises to 16.8%. (That is called U-6 unemployment.)

Now, stay with me for the next two tables taken directly from the BLS website. The first is the total number of people in the US civilian work force. Notice how each year the number of potential workers rises. In fact, the number of workers has risen by about 15 million over the last ten years. This is from population growth and from immigration. Also notice that the normal rise did not happen last year. That is because the number of discouraged workers has risen rapidly and, as noted above, they are not counted. We will revisit this point later. But for now, there are 154,577,000 people in the available work force.

Next we look at the tables for the actual level of employment. Here we note that we are down almost 8 million jobs since the onset of this recession, and that there are almost 15 million people unemployed.

Going back to the part-time workers, there are roughly 9 million people who are working part-time because of business conditions, or those are the only jobs they could find. The average work week is at an all-time low of 33 hours. The chart below is from my friend David Rosenberg.

David wrote in a special report today:

"What does all this mean? It means that when the economy does begin to recover, when we finally get to the other side of the mountain, companies are going to raise their labour input first by lifting the workweek from its record low. Just to get back to the pre-recession level of 33.8 hours would be equivalent to hiring three million workers. And, the record number of people working part-time against their will are going to be pushed back into full-time, which will be great news for them, but not so great news for the 125,000 - 150,000 new entrants into the labour market every month. They won't have it so easy because employers are going to tap their existing under-utilized resources first since that is common sense. Also keep in mind that there are at least four million jobs in retail, financial, construction and manufacturing jobs lost this cycle that are likely not coming back. In fact, the number of unemployed who were let go for permanent reasons as opposed to temporary layoff rose by more than five million this cycle. This compares to the 1.2 million increase in the 2001 tech-led recession and in the 1990-91 housing-led recession (when Ross Perot talked about the sucking sound of jobs into Mexico)."

Then there is the matter of average weekly earnings. If you adjust for inflation, workers are making roughly what they did in 1980. The chart is straight from the BLS website.

And What We Don't See

Those are the facts. Now it's time to look at what we don't see, and what you don't read or hear from the mainstream media.

We saw above that we are adding about 1.5 million workers to the workplace every year. That means over the next five years we are going to need 7.5 million jobs just to maintain that growth, or about 125,000 a month. That is on the low side of what economists normally estimate, which is around 150,000 per month. If we used the 150,000 estimate, it would mean we need 9 million jobs.

There are at least 1 million (and probably more like 2 million) discouraged workers who would take jobs if the economy got better. You can derive that number by going back to early 2007 and seeing the level of discouraged workers. That means, by the end of 2014 we are going to have 163 million people in the work force (see table above).

Today we have 139.6 million jobs, and that number is likely to slip at least another half million (last month the economy lost 216,000 jobs, with a very suspicious birth-death ratio accounting for a lot of job creation). So let's call it 139 million current jobs.

Let's assume that we would like to get back to a 5% unemployment rate. That would not be stellar, but it would certainly be better than where we are today. Five percent unemployment in late 2014 will mean 8.1 million unemployed. To get to 5% unemployment we will have to create 14 million jobs in the five years from 2010-2014. (163 million in labor pool minus 8 million unemployed is 155 million jobs. We now have 139 million jobs, so the difference is roughly 15 million.) Plus the equivalent of 3 million jobs that Rosenberg estimates, just to get back to an average work week. And maybe the extra 1.5 million a year I mentioned above.

But let's ignore those latter jobs and round it off to 15 million. Let's hope that by the beginning of next year we stop losing jobs. That means that to get back to 5% unemployment within five years we need to see, on average,the creation of 250,000 jobs per month. As an AVERAGE!!!!!

Look at the table below. It is the number of jobs added or lost for the last ten years. Do you see a year that averaged 250,000? No.

If you take the best year, which was 2006, you get an average monthly growth of 232,000. If you average the ten years from 1999, you get average monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. If you take the best ten years I could find, which would be 1991-2000, the average is still only 150,000. That is a long way from 250,000.

Want to get back to 4%? Add another 25,000 jobs a month to 2006.

Let's jump forward to next September. We will need at least 1.5 million jobs to take into account growth in the population. Plus another half million jobs that we are likely to lose before we start to grow again. What is the likelihood of average job growth of 160,000 a month? Anyone want to take the "overs" bet?

Go back to 2003, the year after the end of the last recession. A few hundred thousand jobs were created. Why so slow? Because employers gave more time to those who were already employed and to part-time workers. Because of the near-certain loss of jobs for the next few months and the slow recovery, it is a very real possibility that unemployment will still be well over 10% a year from now.

Even with robust growth of 200,000 jobs a month thereafter for the next two years, unemployment will still be close to or over 9%. That would only be an additional 1.8 million jobs (making the most optimistic assumptions) over the new jobs needed for population growth.

A Double-Dip Recession?

And that is before this administration makes the economically suicidal move to raise the top tax rate by 10%. The popular image is that those who pay the highest tax rate are Wall Street execs, bankers, and corporate moguls. The reality is that 75% of them are small business owners, and they are responsible for the large majority of new jobs that are going to be needed, not to mention a large part of consumer spending. If you tax them more you are going to get fewer jobs (as they will have less to invest) and less consumer spending.

A tax increase of the size being contemplated, with unemployment at today's level, will guarantee a double-dip recession, which of course means that unemployment will rise, not fall. Go back and look at that chart on unemployment. Notice the very steep rise in the second recession of the early '80s. That is what we could be facing.

Without getting too political, think about elections in 2010 with unemployment levels still rising. And fast-forward to 2012, with deficits (optimistically) projected to be almost $1 trillion and rising. With a tax increase giving us another recession? Will the bond market provide another $4 trillion? My question is, from where?

There has never been a period of serious inflation in the US without wage inflation. But real incomes are falling, and there is little reason to believe we will see wage pressures within the next few years. The opposite is likely to be the case.

Today's Wall Street Journal tells us that 5 million people have been unemployed for over 6 months. And the longer you are unemployed, the harder it is to get a job. That means you have to settle for a job with less income than you had before.

The only group to see a rise in employment? Those over the age of 55, as they have to take a job, any job, so they can save for retirement.

The Statistical Recovery

The economy is in the process of bottoming. The year-over-year comparisons are getting easier. We will find that new level of spending and economic activity and grow from there. But it is going to be awhile before we get back to full employment. While the numbers may say recovery, it is not going to feel like one.

Let's review quickly what I have written about the last four weeks. We have enormous excess capacity - capacity utilization is about 68%. Banks are cutting back on their loans, and consumers and businesses are borrowing less. Housing is likely to be in a funk for at least two years. We are deleveraging, which is causing the velocity of money to slow.

All of this is very deflationary. Will the Fed print enough money to reflate the economy? You better hope so. Will we have to deal with it later? Of course. We have no good choices. We are in for a long five years, at the least. Yes, there will be opportunities, and new industries will be created. But it won't happen overnight.





The dead end kids
The unemployment rate for young Americans has exploded to 52.2%-- a post-World War II high, according to the Labor Dept. -- meaning millions of Americans are staring at the likelihood that their lifetime earning potential will be diminished and, combined with the predicted slow economic recovery, their transition into productive members of society could be put on hold for an extended period of time.

And worse, without a clear economic recovery plan aimed at creating entry-level jobs, the odds of many of these young adults -- aged 16 to 24, excluding students -- getting a job and moving out of their parents' houses are long. Young workers have been among the hardest hit during the current recession -- in which a total of 9.5 million jobs have been lost. "It's an extremely dire situation in the short run," said Heidi Shierholz, an economist with the Washington-based Economic Policy Institute. "This group won't do as well as their parents unless the jobs situation changes."

Al Angrisani, the former assistant Labor Department secretary under President Reagan, doesn't see a turnaround in the jobs picture for entry-level workers and places the blame squarely on the Obama administration and the construction of its stimulus bill. "There is no assistance provided for the development of job growth through small businesses, which create 70 percent of the jobs in the country," Angrisani said in an interview last week. "All those [unemployed young people] should be getting hired by small businesses."

There are six million small businesses in the country, those that employ less than 100 people, and a jobs stimulus bill should include tax credits to give incentives to those businesses to hire people, the former Labor official said. "If each of the businesses hired just one person, we would go a long way in growing ourselves back to where we were before the recession," Angrisani noted.

During previous recessions, in the early '80s, early '90s and after Sept. 11, 2001, unemployment among 16-to-24 year olds never went above 50 percent. Except after 9/11, jobs growth followed within two years. A much slower recovery is forecast today. Shierholz believes it could take four or five years to ramp up jobs again. A study from the National Longitudinal Survey of Youth, a government database, said the damage to a new career by a recession can last 15 years. And if young Americans are not working and becoming productive members of society, they are less likely to make major purchases -- from cars to homes -- thus putting the US economy further behind the eight ball.

Angrisani said he believes that Obama's economic team, led by Larry Summers, has a blind spot for small business because no senior member of the team -- dominated by academics and veterans of big business -- has ever started and grown a business. "The Reagan administration had people who knew of small business," he said. "They should carve out $100 billion right now and create something like $5,000 to $6,000 job credits that would drive the hiring of young, idled workers by small business."

Angrisani said the stimulus money going to extending unemployment benefits is like a narcotic that is keeping the unemployed content -- but doing little to get them jobs. Labor Dept. statistics also show that the number of chronically unemployed -- those without a job for 27 weeks or more -- has also hit a post-WWII high.




Another Reason We Won't Have A V-Shaped Recovery: Jobs
In order for the U.S. economy to go roaring right back to the 3%-4% long-term growth the bulls are looking for, consumer spending will have to rebound. 

Consumer spending is still 70%+ of the economy, and it's hard to get a supertanker cruising along at top speed if 70% of its power is removed.

In order for consumer spending to come roaring back, however, one critical thing has to happen:

Consumers have to be employed
If consumers don't have jobs, they don't have much disposable income.  They also can't borrow as easily (because, at least temporarily, banks have decided not to be stupid).  And if consumers aren't employed, companies that sell to them can't grow as quickly, which affects the other 30% of the economy.

And how is consumer employment going?  Badly.

The unemployment rate is now nearing the post-war peak of just over 10%.  Yes, the unemployment rate is a lagging indicator--in part because it doesn't count unemployed people who have given up looking for a job. (As a recovery begins, these folks start looking for jobs, so the ranks of "unemployed" as defined by the BLS suddenly swells).   But the rate is high enough that, unless it drops sharply, it's hard to see where the disposable income necessary to drive strong consumer spending growth (and borrowing capacity) is going to come from.

In the recession of the early 1980s, the unemployment rate dropped quickly in the beginning of the recovery.  In the two more recent recessions, however, it did not. 

The bulls say we'll have a sharp recovery this time because the rate of jobs recovery matches the rate of decline: Panicked employers cut too many jobs and now they'll have to hire them back.  Anything is possible, but this bullish argument does not explain how the job market will rapidly absorb the huge amount of slack that is not reflected in the unemployment rate.  It also does not explain how companies will rapidly increase their payrolls when they're selling to consumers that are hunkering down and trying to rebuild savings.

Specifically:

  • A record-low work-week suggests that employers have a lot of room to ramp production without hiring new employees (or old ones back).  David Rosenberg estimates that just increasing the work-week back to normal levels will be the same as creating 3 million jobs.

  • Consumers still have debt coming out of their ears (consumers are customers of most of the companies that need to start hiring)

  • Consumers' wealth has been clobbered, so they need to start saving instead of spending again (ditto)

  • Approximately 4 million jobs in finance, construction, and real-estate are gone for good (or at least a while)

  • Getting the unemployment rate back to 5% in 5 years would require average monthly job creation of 250,000.  The average for the major boom of the 1990s was 150,000.  The average for the past 30 years has been about 50,000.

  • The number of job openings to unemployed job-seekers has now hit a record high of 1-to-6.  So it will be a long time before we get back to normal on this ratio, let alone create a job-seekers' market.




U.S. Job Seekers Exceed Openings by Record Ratio
Despite signs that the economy has resumed growing, unemployed Americans now confront a job market that is bleaker than ever in the current recession, and employment prospects are still getting worse. Job seekers now outnumber openings six to one, the worst ratio since the government began tracking open positions in 2000. According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.

And even though the pace of layoffs is slowing, many companies remain anxious about growth prospects in the months ahead, making them reluctant to add to their payrolls. "There’s too much uncertainty out there," said Thomas A. Kochan, a labor economist at M.I.T.’s Sloan School of Management. "There’s not going to be an upsurge in job openings for quite a while, not until employers feel confident the economy is really growing." The dearth of jobs reflects the caution of many American businesses when no one knows what will emerge to propel the economy. With unemployment at 9.7 percent nationwide, the shortage of paychecks is both a cause and an effect of weak hiring.

In Milwaukee, Debbie Kransky has been without work since February, when she was laid off from a medical billing position — her second job loss in two years. She has exhausted her unemployment benefits, because her last job lasted for only a month. Indeed, in a perverse quirk of the unemployment system, she would have qualified for continued benefits had she stayed jobless the whole two years, rather than taking a new position this year. But since her latest unemployment claim stemmed from a job that lasted mere weeks, she recently drew her final check of $340.

Ms. Kransky, 51, has run through her life savings of roughly $10,000. Her job search has garnered little besides anxiety. "I’ve worked my entire life," said Ms. Kransky, who lives alone in a one-bedroom apartment. "I’ve got October rent. After that, I don’t know. I’ve never lived month to month my entire life. I’m just so scared, I can’t even put it into words." Last week, Ms. Kransky was invited to an interview for a clerical job with a health insurance company. She drove her Jeep truck downtown and waited in the lobby of an office building for nearly an hour, but no one showed. Despondent, she drove home, down $10 in gasoline.

For years, the economy has been powered by consumers, who borrowed exuberantly against real estate and tapped burgeoning stock portfolios to spend in excess of their incomes. Those sources of easy money have mostly dried up. Consumption is now tempered by saving; optimism has been eclipsed by worry. Meanwhile, some businesses are in a holding pattern as they await the financial consequences of the health care reforms being debated in Washington.



Even after companies regain an inclination to expand, they will probably not hire aggressively anytime soon. Experts say that so many businesses have pared back working hours for people on their payrolls, while eliminating temporary workers, that many can increase output simply by increasing the workload on existing employees. "They have tons of room to increase work without hiring a single person," said Heidi Shierholz, an economist at the Economic Policy Institute Economist. "For people who are out of work, we do not see signs of light at the end of the tunnel." Even typically hard-charging companies are showing caution.

During the technology bubble of the late 1990s and again this decade, Cisco Systems — which makes Internet equipment — expanded rapidly. As the sense takes hold that the recession has passed, Cisco is again envisioning double-digit rates of sales growth, with plans to move aggressively into new markets, like the business of operating large scale computer data servers. Yet even as Cisco pursues such designs, the company’s chief executive, John T. Chambers, said in an interview Friday that he anticipated "slow hiring," given concerns about the vigor of growth ahead. "We’ll be doing it selectively," he said.

Two recent surveys of newspaper help-wanted advertisements and of employers’ inclinations to add workers were at their lowest levels on record, noted Andrew Tilton, a Goldman Sachs economist. Job placement companies say their customers are not yet wiling to hire large numbers of temporary workers, usually a precursor to hiring full-timers. "It’s going to take quite some time before we see robust job growth," said Tig Gilliam, chief executive of Adecco North America, a major job placement and staffing company.

During the last recession, in 2001, the number of jobless people reached little more than double the number of full-time job openings, according to the Labor Department data. By the beginning of this year, job seekers outnumbered jobs four-to-one, with the ratio growing ever more lopsided in recent months. Though layoffs have been both severe and prominent, the greatest source of distress is a predilection against hiring by many American businesses. From the beginning of the recession in December 2007 through July of this year, job openings declined 45 percent in the West and the South, 36 percent in the Midwest and 23 percent in the Northeast.

Shrinking job opportunities have assailed virtually every industry this year. Since the end of 2008, job openings have diminished 47 percent in manufacturing, 37 percent in construction and 22 percent in retail. Even in education and health services — faster-growing areas in which many unemployed people have trained for new careers — job openings have dropped 21 percent this year. Despite the passage of a stimulus spending package aimed at shoring up state and local coffers, government job openings have diminished 17 percent this year.

In the suburbs of Chicago, Vicki Redican, 52, has been unemployed for almost two years, since she lost her $75,000-a-year job as a sales and marketing manager at a plastics company. College-educated, Ms. Redican first sought another management job. More recently, she has tried and failed to land a cashier’s position at a local grocery store, and a barista slot at a Starbucks coffee shop.

Substitute teaching assignments once helped her pay the bills. "Now, there are so many people substitute teaching that I can no longer get assignments," she said. "I’ve learned that I can’t look to tomorrow," she said. "Every day, I try to do the best I can. I say to myself, ‘I don’t control this process.’ That’s the only way you can look at it. Otherwise, you’d have to go up on the roof and crack your head open."




Job losses, early retirements hurt Social Security
Big job losses and a spike in early retirement claims from laid-off seniors will force Social Security to pay out more in benefits than it collects in taxes the next two years, the first time that's happened since the 1980s. The deficits — $10 billion in 2010 and $9 billion in 2011 — won't affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion. But they will add to the overall federal deficit.

Applications for retirement benefits are 23 percent higher than last year, while disability claims have risen by about 20 percent. Social Security officials had expected applications to increase from the growing number of baby boomers reaching retirement, but they didn't expect the increase to be so large. What happened? The recession hit and many older workers suddenly found themselves laid off with no place to turn but Social Security. "A lot of people who in better times would have continued working are opting to retire," said Alan J. Auerbach, an economics and law professor at the University of California, Berkeley. "If they were younger, we would call them unemployed."

Job losses are forcing more retirements even though an increasing number of older people want to keep working. Many can't afford to retire, especially after the financial collapse demolished their nest eggs. Some have no choice. Marylyn Kish turns 62 in December, making her eligible for early benefits. She wants to put off applying for Social Security until she is at least 67 because the longer you wait, the larger your monthly check. But she first needs to find a job.

Kish lives in tiny Concord Township in Lake County, Ohio, northeast of Cleveland. The region, like many others, has been hit hard by the recession. She was laid off about a year ago from her job as an office manager at an employment agency and now spends hours each morning scouring job sites on the Internet. Neither she nor her husband, Raymond, has health insurance. "I want to work," she said. "I have a brain and I want to use it." Kish is far from alone. The share of U.S. residents in their 60s either working or looking for work has climbed steadily since the mid-1990s, according to data from the Bureau of Labor Statistics.

This year, more than 55 percent of people age 60 to 64 are still in the labor force, compared with about 46 percent a decade ago. Kish said her husband already gets early benefits. She will have to apply, too, if she doesn't soon find a job. "We won't starve," she said. "But I want more than that. I want to be able to do more than just pay my bills." Nearly 2.2 million people applied for Social Security retirement benefits from start of the budget year in October through July, compared with just under 1.8 million in the same period last year. The increase in early retirements is hurting Social Security's short-term finances, already strained from the loss of 6.9 million U.S. jobs. Social Security is funded through payroll taxes, which are down because of so many lost jobs.

The Congressional Budget Office is projecting that Social Security will pay out more in benefits than it collects in taxes next year and in 2011, a first since the early 1980s, when Congress last overhauled Social Security. Social Security is projected to start generating surpluses again in 2012 before permanently returning to deficits in 2016 unless Congress acts again to shore up the program. Without a new fix, the $2.5 trillion in Social Security's trust funds will be exhausted in 2037. Those funds have actually been spent over the years on other government programs. They are now represented by government bonds, or IOUs, that will have to be repaid as Social Security draws down its trust fund. President Barack Obama has said he would like to tackle Social Security next year.

"The thing to keep in mind is that it's unlikely we are going to pull out (of the recession) with a strong recovery," said Kent Smetters, an associate professor at the University of Pennsylvania's Wharton School. "These deficits may last longer than a year or two." About 43 million retirees and their dependents receive Social Security benefits. An additional 9.5 million receive disability benefits. The average monthly benefit for retirees is $1,100 while the average disability benefit is about $920.

The recession is also fueling applications for disability benefits, said Stephen C. Goss, the Social Security Administration's chief actuary. In a typical year, about 2.5 million people apply for disability benefits, including Supplemental Security Income. Applications are on pace to reach 3 million in the budget year that ends this month and even more are expected next year, Goss said. A lot of people who had been working despite their disabilities are applying for benefits after losing their jobs. "When there's a bad recession and we lose 6 million jobs, people of all types are going to be part of that," Goss said.

Nancy Rhoades said she dreads applying for disability benefits because of her multiple sclerosis. Rhoades, who lives in Orange, Va., about 75 miles northwest of Richmond, said her illness is physically draining, but she takes pride in working and caring for herself. In June, however, her hours were cut in half — to just 10 a week — at a community services organization. She lost her health benefits, though she is able to buy insurance through work, for about $530 a month. "I've had to go into my retirement annuity for medical costs," she said.

Her husband, Wayne, turned 62 on Sunday, and has applied for early Social Security benefits. He still works part time. Nancy Rhoades is just 56, so she won't be eligible for retirement benefits for six more years. She's pretty confident she would qualify for disability benefits, but would rather work. "You don't think of things like this happening to you," she said. "You want to be in a position to work until retirement, and even after retirement."




Cash-strapped sell their kidneys to pay off debts
British victims of the credit crunch are offering to sell their kidneys for £25,000 or more to help pay debts, an investigation by The Sunday Times has revealed. At least a dozen adverts have appeared on the internet offering kidneys for sale from British "donors". Five of the sellers corresponded with undercover journalists, who posed as friends and relatives of sick patients to negotiate sales.

One person willing to sell a kidney is a 26-year-old mental health nurse who said he needed the money to pay debts after a business he set up went bankrupt. Another is a 43-year-old taxi driver from Lancashire, who wants to raise cash to pay off some of his mortgage and buy a new kitchen. Both men said they wanted to help those in need of kidney transplants at the same time as relieving their financial difficulties. A leading doctor said the phenomenon highlighted the need for a public discussion of the issue of selling organs.

Professor Peter Friend, a former president of the British Transplant Society, said: "The West has outlawed it for all sorts of good reasons, but the result is it goes underground. It is really important to have a debate." Nearly 7,000 people in the UK are waiting for kidney transplants and 300 died last year while on the waiting list. Offering to sell an organ in England, Wales and Northern Ireland is an offence under the Human Tissue Act even if the seller is planning to travel to another country for the transplant operation.

Yesterday William Henderson, the taxi driver, justified his offer to sell a kidney by saying: "I thought I was going to give another man a chance of life. I wanted to help myself at the same time. We are in the middle of a giant credit crunch." He added: "A guy from Pakistan wanted one, but I turned him down. I think he was more buying it to sell it on. I’d rather . . . it’s got somewhere good to go."




Money figures show there's trouble ahead
by Ambrose Evans-Pritchard

Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise. Unemployment benefits have masked social hardship unto now but these are starting to expire with cliff-edge effects.The jobless army in Spain will be reduced to €100 a week; in Estonia to €15.

Whoever wins today's elections in Germany will face the reckoning so deftly dodged before. Kurzarbeit, that subsidises firms not to fire workers, is running out. The cash-for-clunkers scheme ended this month. It certainly "worked". Car sales were up 28% in August, but only by stealing from the future. The Center for Automotive Research says sales will fall by a million next year: "It will be the largest downturn ever suffered by the German car industry."

Fiat's Sergio Marchionne warns of "disaster" for Italy unless Rome renews its car scrappage subsidies. Chrysler too will see some "harsh reality" following the expiry of America's scheme this month. Some expect US car sales to slump 40% in September. Weaker US data is starting to trickle in. Shipments of capital goods fell by 1.9% in August. New house sales are stuck near 430,000 – down 70% from their peak – despite an $8,000 tax credit for first-time buyers. It expires in November.

We are moving into a phase when most OECD states must retrench to head off debt-compound traps. Britain faces the broad sword; Spain has told ministries to slash 8% of discretionary spending; the IMF says Japan risks a funding crisis. If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China's exports were down 23% in August; Japan's were down 36%; industrial production has dropped by 23% in Japan, 18% in Italy, 17% in Germany, 13% in France and Russia and 11% in the US.

Call this a "V-shaped" recovery if you want. Markets are pricing in economic growth that is not occurring. The overwhelming fact is that private spending has slumped in the deficit countries of the Anglosphere, Club Med, and East Europe but has not risen enough in the surplus countries (East Asia and Germany) to compensate. Excess capacity remains near post-war highs across the world. Yet hawks are already stamping feet at key central banks. Are they about to repeat the errors made in early 2007, and then again in the summer of 2008, when they tightened – or made hawkish noises – even as the underlying credit system fell apart?

Fed chairman Ben Bernanke spoke in April 2008 of "a return to growth in the second half of this year", and again in July 2008 that growth would "pick up gradually over the next two years". He could only have thought such a thing if he was ignoring the money data. Key aggregates had been in free-fall for months. I cited monetarists in July 2008 warning that the lifeblood of the Western credit was "draining away". For whatever reason (the lockhold of New Keynesian ideology?) the Fed missed the signal.

So did the European Central Bank when it raised rates weeks before the Lehman collapse, blathering about a "1970s inflation spiral." Yes, the money entrails can mislead. The gurus squabble like Trotskyists. But you ignore the data at your peril.

Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14% since early Summer: "There has been nothing like this in the USA since the 1930s." M3 money has been falling at a 5% rate; M2 fell by 12% in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1% rate since April. Private loans have fallen by €111bn since January. Whether you see a credit crunch in Euroland depends where you sit. It is already garrotting Spain. Germany's Mittelstand says it is "a reality", even if not for big companies that issue bonds. The Economy Ministry is drawing up plans for €250bn in state credit, knowing firms will be unable to roll over debts.

Bundesbank chief Axel Weber sees no crunch now, yet fears a second pulse of the crisis this winter. "We are threatened by stress from our domestic credit industry through the rise in the insolvency of firms and households," he says. Draw your own conclusion. Western central banks will have to "monetize" deficits on a huge scale to stave off debt deflation. The longer they think otherwise, the worse it will be.




A risky revival
by John Authers

This should have been a week for traders in the stock market to feel good about life. US stocks have rallied by close to 60 per cent in barely six months since they hit bottom in March. The Federal Reserve meanwhile pronounced this week that "economic activity has picked up" – the most confident language the central bank has used for some time.

But Crispin Odey, one of London’s most respected hedge fund managers, was seeing things differently. He chose Wednesday, the day of the Fed’s pronouncement, to ruminate, both in a note to clients and in the Financial Times, that the rally was "entering a bubble phase". The word "bubble" is highly emotive but Mr Odey could justify it. He argued that markets were being distorted by governments’ deliberate attempts to push down the price of money by buying bonds, a policy known as quantitative easing.

"At some point the quantitative easing will have to come to an end," he said, "but, until it does, this bull market is sponsored by [Her Majesty’s Government] and everyone should enjoy it." The remarks struck a chord. Stocks endured a sharp sell-off after his words . The fear that the unprecedented supply of cheap money from governments is creating another bubble has been circulating in Wall Street and the City of London for months.

To some, this seems alarmist. History is full of examples of strong rallies after big sell-offs – it is all part of the "physics" of markets. The all-time highs for developed market stocks, set in 2007, are not in sight. On conventional valuation measures, stocks are nowhere near as expensive as at the top of past investment bubbles. Also, the economic "free-fall" at the end of last year appears to have been halted. In addition, the Fed’s pronouncement signalled interest rates will remain low for a while – a sweet spot for risky assets such as stocks. A strong recovery for share prices since March, when there was a real fear of a second Great Depression, seems reasonable.

But the question of whether this is a real recovery or a bubble must still be asked, and there are worrying signs. The rally has been achieved with global economic growth barely above zero and unemployment still rising. The S&P 500 index of US stocks is already far above the forecasts nine out of 10 Wall Street strategists have in place for the end of the year, according to a Bloomberg survey. Concerns are prevalent that US consumers will not return to their old buying habits because of high unemployment and the debts they need to pay off.

There are also concerns that China, the other leading source of growth, has achieved that only by stoking lending – notably, Chinese stocks sold off sharply in August when authorities hinted at tightening lending. The speed of the rally is itself cause for concern. Historically, big sell-offs have typically been followed by big bounces. But as measured by the S&P 500, the current rally is stronger after six months than any predecessor, including those that followed the lowest points of the market in 1932, 1974 and 1982.

Relationships between markets also imply unhealthy levels of speculation. Currency and stock markets had minimal correlations before the crisis took hold in 2007, while oil and stocks were usually inversely correlated. But oil and stocks have been rising in tandem this year, just as they fell together during the crisis, while the correlations between the dollar and stock markets remain remarkably close.

The implication of such correlations is alarming. Tim Lee, of Pi Economics in Connecticut, puts it this way: "[Since early 2007] 40 per cent of all movement in the S&P 500 can be predicted or explained from the movement of the yen and vice versa. If we assume, quite reasonably, that the yen and the S&P 500 should be fundamentally unrelated instruments, this implies a breakdown of efficient price discovery in the markets."

So does this qualify as a bubble? The classic definition came from the economist Charles Kindleberger in his 1978 book Manias, Panics and Crashes. For him, a bubble is a phenomenon of mass psychology, and refers to the last stage of an investment mania, when assets are bought "not because of the rate of return on the investment but in anticipation that the asset or security can be sold to someone else at an even higher price". The bubble bursts when there is no longer a "greater fool" ready to pay too much for the asset.

Thus, in a true bubble, stocks are wildly overvalued compared with their fundamental measures, such as their earnings or the value of the assets on their balance sheets. But conventional valuation measures of stocks suggest they are still far from a true bubble. US stocks are trading at a multiple of 18.7 times their average earnings for the past 10 years, according to the data kept by Professor Robert Shiller of Yale University. Historically, extremes in cyclical price/earnings ratios have accurately signalled long-term market peaks and troughs. The cyclical p/e stood at 27 immediately before the crisis in 2007, for example, and reached 43 at the peak of the internet boom. So it looks premature to say stocks are in a bubble.
. . .
But an argument that this is an incipient bubble, carrying real risk that a mania will develop, is easier to sustain. First, according to Kindleberger, bubbles are driven by cheap credit. With US interest rates at zero, credit is very cheap. Second, many investors seem to be using bubble-like logic; they believe others will soon be prepared to buy even more.

There are true "bulls" who believe the global economy will recover strongly from here, bringing up corporate earnings in its wake. But others focus on the cash that has been on the sidelines, and on the pressures on fund managers who want to avoid the embarrassment of having stayed out of the market during the rally.

Mark Lapolla, of Sixth Man Research in California, who has called aggressively for investment in the market, says he "cannot emphasise strongly enough just how big a role simple game theory will play". He argues it is large equity mutual fund managers who are driving the market. Most have done well this year, and are ahead of the benchmark stock market indices against which they are compared. "Therefore the incentive is to not lose ground rather than gain it," he says, so they will stick closely to stocks in the main indices to protect their year-end bonuses.

Jeremy Grantham, co-founder of GMO, a large Boston-based fund manager, says: "Fund managers are simply not prepared to take the career risk of being wrong for a little while and losing business." Thus they are herding into the index, though Mr Grantham – who advocated buying at the bottom in March – already considers stocks too expensive given the many risks in the world economy.

Another concern comes from more recent history. After the internet bubble in 2000, world stocks endured a bear market, falling 49 per cent before hitting a bottom shortly before the invasion of Iraq in March 2003. They then enjoyed a four-year rally in which the main stock indices doubled. It was rational, and successful, to be in the market from 2003 to 2007 but with hindsight it was a "fools’ rally", triggered by cheap money, as Alan Greenspan’s Fed cut its target interest rate to 1 per cent. This fuelled a bubble in mortgages and housing.

The 2003 bounce came when stocks were not cheap – they traded at a multiple to cyclical earnings of about 21, according to Prof Shiller, when at the bottom of previous bear markets this multiple had fallen below 6. So it looks as though cheap money stopped markets taking all the medicine they needed. Similarly the current rally began with stocks trading at a multiple of 13 times the previous 10 years’ earnings. This was the cheapest in 21 years but still double the lows seen after previous great sell-offs, implying cheap money had once again saved prices before all speculative excess had been cleaned out of the system.
. . .
The danger, in this scenario, is that lenders lose confidence in the creditworthiness of governments, which could cause rates to rise and spark a renewed sell-off. But that is not imminent. Just as it made sense to stay in the market while the booming mortgage market kept credit unnaturally cheap, it may make sense to do so while state intervention keeps credit unnaturally cheap. And when bonds and cash pay so little, raising the risks of inflation in the future, the rational response is to buy assets that generate more reliable cash flows, such as stocks; or that act as a hedge against inflation, such as commodities. On this logic, investors may as well heed Mr Odey and "enjoy the bubble".

They should do so now because, if this theory is right, the denouement will be painful. David Bowers of Absolute Strategy Research in London, who has been bullish for a while and advises staying in stocks, says: "It’s the last game of pass the parcel. When the tech bubble burst, balance sheet problems were passed to the household sector [through mortgages]. This time they are being passed to the public sector [through governments’ assumption of banks’ debts]. There’s nobody left to pass it to in the future."




"We’re speaking Japanese without knowing it"
When you’ve studied "eight centuries of financial folly," as international economists Carmen Reinhart and Kenneth Rogoff have, patterns begin to emerge. The most striking pattern they’ve found is that people never learn. We gullible humans make the same mistake time after time, which is believing that the laws of financial physics have been repealed for us. Thus, Americans proclaim confidently that there’s no chance the U.S. will get caught in Japanese-style stagnation. Sure, deflation became entrenched in Japan starting after the stock-market crash that began in 1990. But this time is different, right?

Don’t be so sure. Reinhart says Americans seem to be unwittingly repeating the mistakes of the Japanese, including propping up "zombie" banks that aren’t healthy enough to make new loans and get the economy growing again. Americans kid themselves, she says, by saying, "These are not zombie loans. They’re just non-performing." Summarizes Reinhart: "We’re speaking Japanese without knowing it." (I love that quote.)

Reinhart and Rogoff spoke at a lunch for economics reporters at the Princeton Club in New York, where they discussed their comprehensive new book, "This Time Is Different: Eight Centuries of Financial Folly." To me, one of the most important findings of the book is that generations of economists, right up to the present, have misunderstood the causes of sovereign defaults (i.e., when a country fails to make payments on its foreign debt). It turns out, they say, that a country is much more likely to default on its foreign debt if it’s carrying a lot of domestic debt. No wonder: A country will try repaying its own citizens (who vote) before it worries too much about foreign creditors (who don’t vote and, in any case, tend to be stupidly forgiving).

OK, the importance of domestic debt may not sound too surprising. What’s surprising, rather, is that this factor was completely neglected in most economists’ work. One reason: Governments have not made data about the quantities of their domestic debt available to researchers. Reinhart and Rogoff compiled it and are planning to make it available to other scholars. One footnote: The U.S. does not have foreign debt, in the way that Reinhart and Rogoff use the term. Instead, it has lots of domestic debt (like Treasuries) that happened to be owned by foreigners. To them, foreign debt is debt that is issued in a foreign jurisdiction, usually in that foreign nation’s currency. The U.S. can still stick it to foreign creditors by inflating the dollar so much that foreign-held Treasury bonds become close to worthless. That is exactly what the Chinese are worried about lately.




The Mortgage Machine Backfires
by Gretchen Morgenson

With the mortgage bust approaching Year Three, it is increasingly up to the nation’s courts to examine the dubious practices that guided the mania. A ruling that the Kansas Supreme Court issued last month has done precisely that, and it has significant implications for both the mortgage industry and troubled borrowers. The opinion spotlights a crucial but obscure cog in the nation’s lending machinery: a privately owned loan tracking service known as the Mortgage Electronic Registration System.

This registry, created in 1997 to improve profits and efficiency among lenders, eliminates the need to record changes in property ownership in local land records. Dotting i’s and crossing t’s can be a costly bore, of course. And eliminating the need to record mortgage assignments helped keep the lending machine humming during the boom. Now, however, this clever setup is coming under fire. Legal experts say the fact that the most recent assault comes out of Kansas, a state not known for radical jurists, makes the ruling even more meaningful.

Here’s some background: For centuries, when a property changed hands, the transaction was submitted to county clerks who recorded it and filed it away. These records ensured that the history of a property’s ownership was complete and that the priority of multiple liens placed on the property — a mortgage and a home equity loan, for example — was accurate. During the mortgage lending spree, however, home loans changed hands constantly. Those that ended up packaged inside of mortgage pools, for instance, were often involved in a dizzying series of transactions.

To avoid the costs and complexity of tracking all these exchanges, Fannie Mae, Freddie Mac and the mortgage industry set up MERS to record loan assignments electronically. This company didn’t own the mortgages it registered, but it was listed in public records either as a nominee for the actual owner of the note or as the original mortgage holder. Cost savings to members who joined the registry were meaningful. In 2007, the organization calculated that it had saved the industry $1 billion during the previous decade. Some 60 million loans are registered in the name of MERS.

As long as real estate prices rose, this system ran smoothly. When that trajectory stopped, however, foreclosures brought against delinquent borrowers began flooding the nation’s courts. MERS filed many of them. "MERS is basically an electronic phone book for mortgages," said Kevin Byers, an expert on mortgage securities and a principal at Parkside Associates, a consulting firm in Atlanta. "To call this electronic registry a creditor in foreclosure and bankruptcy actions is legal pretzel logic, nothing more than an artifice constructed to save time, money and paperwork."

The system also led to confusion. When MERS was involved, borrowers who hoped to work out their loans couldn’t identify who they should turn to. As cases filed by MERS grew, lawyers representing troubled borrowers began questioning how an electronic registry with no ownership claims had the right to evict people. April Charney, a consumer lawyer at Jacksonville Area Legal Aid in Florida, was among the first to argue that MERS, which didn’t own the note or the mortgage, could not move against a borrower. Initially, judges rejected those arguments and allowed MERS foreclosures to proceed. Recently, however, MERS has begun losing some cases, and the Kansas ruling is a pivotal loss, experts say.

While the matter before the Kansas Supreme Court didn’t involve an action that MERS took against a borrower, the registry’s legal standing is still central to the ruling. The case involved a borrower named Boyd A. Kesler, who had taken out two mortgages from two different lenders on a property in Ford County, Kan. The first mortgage, for $50,000, was underwritten in 2004 by Landmark National Bank; the second, for $93,100, was issued by the Millennia Mortgage Corporation in 2005, but registered in MERS’s name. It seems to have been transferred to Sovereign Bank, but Ford County records show no such assignment.

In April 2006, Mr. Kesler filed for bankruptcy. That July, Landmark National Bank foreclosed. It did not notify either MERS or Sovereign of the proceedings, and in October, the court overseeing the matter ordered the property sold. It fetched $87,000 and Landmark received what it was owed. Mr. Kesler kept the rest; Sovereign received nothing. Days later, Sovereign asked the court to rescind the sale, arguing that it had an interest in the property and should have received some of the proceeds. It told the court that it hadn’t been alerted to the deal because its nominee, MERS, wasn’t named in the proceedings.

The court was unsympathetic. In January 2007, it found that Sovereign’s failure to register its interest with the county clerk barred it from asserting rights to the mortgage after the judgment had been entered. The court also said that even though MERS was named as mortgagee on the second loan, it didn’t have an interest in the underlying property. By letting the sale stand and by rejecting Sovereign’s argument, the lower court, in essence, rejected MERS’s business model.

Although the Kansas court’s ruling applies only to cases in its jurisdiction, foreclosure experts said it could encourage judges elsewhere to question MERS’s standing in their cases. "It’s as if there is this massive edifice of pretense with respect to how mortgage loans have been recorded all across the country and that edifice is creaking and groaning," said Christopher L. Peterson, a law professor at the University of Utah. "If courts are willing to say MERS doesn’t have any ownership interest in mortgage loans, that may eventually call into question the priority of liens recorded in MERS’s name, and there are millions and millions of them."

In other words, banks holding second mortgages could find themselves in the same pair of unlucky shoes that Sovereign found itself wearing in Kansas. Asked about the ruling, Karmela Lejarde, a spokeswoman for MERS, contested the court’s reasoning. "We believe the Kansas Supreme Court used an erroneous standard of review; this is not the end of the judicial process," she said. "The mortgages on which MERS is the mortgagee will remain binding contracts."

BUT Patrick A. Randolph, a law professor at the University of Missouri, Kansas City, who described himself as a friend of MERS, described the recent decision as unsettling. "This opinion is hostile to the notion of MERS as nominee and could lead to problems for it in foreclosing," he said. "The entire structure of MERS as a recorded nominee could collapse in Kansas, and that could lead to a patch-up job where they would have to run around and re-record the mortgages." If so, MERS would be hoisted on its own petard. And it would be a rare case of poetic justice in this long-running mortgage mess.




Derivatives: Bailed-Out Banks Still Making Billions Off Risky Bets
Derivatives is one of the dirty words of the financial crisis. Though these often-risky bets were blamed by many for helping fuel the credit crunch and the downfall of Lehman Brothers and AIG, it seems that Wall Street has yet to learn its lesson. U.S. commercial banks earned $5.2 billion trading derivatives in the second quarter of 2009, a 225 percent increase from the same period last year, according to the Treasury Department.

More than 1,100 banks now trade in derivatives, a 14 percent increase from last year. Four banks control the market: JPMorgan Chase, Goldman Sachs, Bank of America and Citibank account for 94 percent of the total derivatives reported to be held by U.S. commercial banks, according to national bank regulator the Office of the Comptroller of the Currency. The credit risk posed by derivatives in the banking system now stands at $555 billion, a 37 percent increase from 2008. "By any standard these [credit] exposures remain very high," Kathryn E. Dick, the OCC's deputy comptroller for credit and market risk, said in a statement.

The complex financial instruments, which take the form of futures, forwards, options and swaps, derive their value from an underlying investment or commodity such as currency rates, oil futures and interest rates. They are designed to reduce the risk of loss for one party from the underlying asset. Trading in an unregulated $600 trillion market, they were partly blamed for igniting the financial crisis a year ago. The New York Times reported earlier this month:
Derivatives drove the boom before 2008 by encouraging banks to make loans without adequate reserves. They also worsened the panic last fall because they inherently tie institutions together. Investors worried that the collapse of one bank would lead to big losses at others.

The Obama administration has included oversight of derivatives as part of its overhaul of financial regulations. Wall Street is fighting back as it seems to have returned to its much-criticized practices. Last Thursday former Fed chairman Paul Volcker, who now heads the White House Economic Recovery Advisory Board, warned lawmakers about the danger lurking behind derivatives. Testifying on Capitol Hill, Volcker discussed how "opaque trading in complex derivatives [have] become so large relative to underlying assets" and how "more and more complex financial instruments limit the transparency of markets," he said.

"As a general matter, I would exclude from commercial banking institutions, which are potential beneficiaries of official (i.e., taxpayer) financial support, certain risky activities entirely suitable for our capital markets," he added. But the OCC argues that derivatives trading is not inherently risky, explaining that banks are trading these instruments every minute of every day with institutions more creditworthy than a typical borrower. "The system has always worked on derivatives," said Kevin M. Mukri, an OCC spokesman. "You have higher-quality counterparties -- higher quality than in any other line of business." Furthermore, "the purpose of derivative trading to to mitigate risk -- not increase risk," he said. "Without derivatives it would be a very hectic marketplace."

Yet some well-respected investment banks seem to be exposed to significant risk, judging by their credit exposure from derivatives contracts. Goldman Sachs, formerly a pure investment bank, is now a bank-holding company regulated by the Federal Reserve. It owns Goldman Sachs Bank, an FDIC-insured depository. The bank has about $20 billion in total risk-based capital -- in short, the money it has to cover creditors in case they go belly-up. But the bank has about $186 billion in total credit exposure from its derivatives contracts.

Much of that $186 billion could be backed up by collateral -- banks with at least $100 billion in assets held a combination of cash, bonds and securities against 63 percent of their total net credit exposure as of June 30. But the OCC doesn't break that down by institution, and Goldman Sachs doesn't disclose it either. Nonetheless, the bank's exposure to derivatives losses is about nine times the amount of capital it has set aside. "It's extraordinary for a commercial bank," says Dean Baker, co-director of the Center for Economic and Policy Research, a Washington D.C.-based think tank. "And it really gets down to the central point with Glass-Steagall -- what's the separation here between government-insured deposits and speculative investment banking activity? You'd be very hard pressed to find out with Goldman right now."

Glass-Steagall, a Depression-era banking law that prohibited commercial banks from engaging in the investment business, was essentially repealed in 1999. Some economists have pointed to the repeal as the central cause behind the financial crisis. "Given Goldman Sachs's history as a securities firm, as opposed to being... a traditional commercial bank, you would expect that our derivatives exposure is higher than our exposure to other assets," says company spokesman Samuel Robinson. "It's much higher [because] we don't have a lot of these other assets."

Goldman Sachs announced that it would become a bank holding company last September, less than a week after Lehman Brothers declared bankruptcy. Coming under the Federal Reserve's protective umbrella gave the firm "access to permanent liquidity and funding," Lloyd C. Blankfein, chairman and CEO of Goldman Sachs, said at the time. Baker says that now that the firm is a bank holding company, the bank's exposure to losses from derivatives contracts (compared to available capital) poses particular problems. Now, "the public is on the hook for that. If they run into trouble they could go to the Fed and borrow at the discount window [and] they have access to the FDIC's special lending [program]," he explains. Goldman Sachs has issued about $25 billion in FDIC-backed debt as of June, according to regulatory filings.

"You're having the protections for what's supposed to be relatively boring commercial banking applied to risky investment banking. It's a real serious problem," Baker says. Robinson says that the firm's exposure to potential losses from its derivatives deals, as defined by the OCC, is misleading. "It includes a regulatory-defined measure ... which in aggregate does not represent the firm's ... risk exposure," he says. For example, it doesn't factor in hedges against potential losses or collateral put up by counterparties. "You can have an exposure that's fully hedged, but the hedging benefit does not appear anywhere in the [OCC's] analysis," Robinson says.

Last October Goldman received a $10 billion taxpayer bailout, which it repaid in June. The federal government earned $1.4 billion on its investment. JPMorgan Chase has about three times the amount of their capital exposed in derivatives deals; Citibank about double. For comparison's sake, if all commercial and industrial loans held by U.S. banks went bust the banking system has just enough capital set aside to cover those losses. Not all banks are so heavily invested in derivatives. PNC's exposure (relative to capital) is at 28 percent, and U.S. Bank, the country's sixth-largest by deposits, comes in at seven percent. "It's tough to think of the world without derivatives," Mukri said "And it's not a pleasant world either."




Ohio AG Targets Bank of America, Execs Over Merrill, Seeks Billions
Ohio Attorney General Richard Cordray said Monday his office could soon seek "billions" from Bank of America Corp. and some of its executives, including Chief Executive Ken Lewis, over the bank's handling of its merger with Merrill Lynch & Co. earlier this year. Cordray has filed a lawsuit on behalf of five pension funds accusing the bank and four executives, including Bank of America Chief Financial Officer Joe Price and Merrill's former chief executive, John Thain, with concealing widening losses at Merrill ahead of a shareholder vote last December to approve the deal. The lawsuit also names Bank of America's chief accounting officer, Neil Cotty.

Shirley Norton, a Bank of America spokeswoman, said: "We are confident we disclosed all that was required and look forward to presenting our position to the court." Cordray's announcement is the latest legal challenge to Bank of America and its chief executive over the bank's purchase of Merrill Lynch during the depths of the financial crisis. New York Attorney General Andrew Cuomo, the Securities and Exchange Commission, a U.S. Treasury investigator and lawmakers in Congress have all said they are investigating the conduct of Bank of America executives surrounding the Merrill deal.

In fact, a U.S. judge recently rejected a proposed $33 million settlement between Bank of America and the SEC over $3.6 billion in bonuses the SEC says Bank of America inappropriately allowed to be paid to Merrill employees late last year. The judge said the settlement is too lenient on Bank of America executives. Bank of America and Merrill agreed to merge last September as the financial crisis raged and the collapse of Wall Street titan Lehman Brothers Holdings Inc. threatened the livelihoods of other securities firms.

In December, before Bank of America shareholders voted to approve the deal, losses at Merrill Lynch widened sharply. Merrill, under then-CEO Thain, nonetheless paid out $3.6 billion in year-end bonuses before the deal closed and Thain has said that Bank of America approved the payments. In January, after the deal closed, Bank of America disclosed the Merrill losses to shareholders and also disclosed a fresh infusion of support from the U.S. Treasury, which agreed to absorb some of Merrill's future losses. Lewis has said he was pressured by then-Treasury Secretary Henry Paulson to go through with the deal, even as losses at Merrill widened, and to delay disclosing Merrill's deteriorating condition.

Although Merrill's businesses have already contributed profits to Bank of America's earnings this year, the flurry of probes has been a significant distraction for the bank and its embattled CEO. Lewis has made headline-making trips to testify before Congress and to answer questions from Cuomo. The lawsuit by Cordray's office in Ohio accuses executives at Bank of America and Merrill of breaking securities laws by concealing information from shareholders. Filed on behalf of five pension funds from Ohio, Texas, Sweden and the Netherlands, the litigation marks an attempt by the funds to recoup losses they suffered when Bank of America's share price fell after its purchase of then-crumbling Merrill Lynch.

The pension funds filed a legal document in March detailing hundreds of millions in losses, but have yet to formally declare how much in damages they're seeking. A spokesman for Cordray's office said the estimates of losses in the filing represent a "snapshot in time." He said, "Estimates of losses in these types of cases will change as the case moves forward based on court rulings and other factors." Cordray made it clear Monday that he will seek damages from the bank as well as executives specifically.

Like Cuomo, Cordray also said Monday he will ask for sworn testimony from executives. That process of interviewing the bank's leaders could bring renewed scrutiny of Thain, who was praised last year for agreeing to sell the company to Bank of America. Lewis then demanded Thain's resignation in January after Lewis grew angry about the way Thain handled the unexpectedly large fourth-quarter losses at Merrill.




China's Surge Confirmed by HSBC Move
In a highly symbolic move, HSBC announced the relocation of chief executive Michael Geoghegan from London to Hong Kong.

Stephen Green, chairman, old the Financial Times. ”Asia and China are the centre of gravity of the world and of our business. To drive the business, you have to be here – Hong Kong is the gateway to China”. Hong Kong and China together accounted for 40 per cent of HSBC’s pre-tax profits in the first half of the year and analysts predict this could reach 50 per cent in the next five to 10 years.

Do you believe it? China’s finance ministry announced in late June that half the $173 billion in central government spending had already been allocated to specific projects. Of much greater importance to China’s rebound are two other government efforts that are paying big dividends: reckless lending and oodles of export subsidies. The state-controlled banking system here opened the spigots with $1.2 trillion in extra lending to Chinese consumers and businesses in the first seven months of this year. This is for an economy with a GDP of about $4 trillion. Although most believe that China’s substantial stimulus package announced earlier this year is being invested in infrastructure, many analysts agree with my perception that most of it is ending up in overheated stock and real estate markets. The Chinese refer to this as “stir fried” markets.

This inevitably leads to the issue of credit quality and the possibility of China’s own homegrown debt bubble. Pivot’s research shows that rather than China having a manageable public debt to GDP ratio of 35%, then inclusion of off balance sheet items like guarantees of local government bonds brings this number up to closer to an uncomfortable 62%.

In addition, China’s non-performing loan data is clearly being managed and does not even include the $200 billion of bad loans from Chinas top four state-owned banks that were moved “off balance sheet” to state-run asset management companies. In return, the banks received $200 billion of bonds that are still on the books of the banks at face value even though their real value is a small fraction of face value. As the bonds come due, they are being rolled over for another 10 years.

China’s bank lending explosion has led to credit to GDP during the first half of 2009 rising to 140%, levels equal to America in 2008 and Japan in 1991 just before their market meltdowns. Chinese financial institutions extended $1.2 trillion worth of local currency loans in the first eight months of this year, an increase of 164 percent from the same period in 2008. China’s top banking regulator, Liu Mingkang, last week warned of growing risks to the country’s financial system as a result of the rapid expansion of new loans. “This year, all kinds of risks have arisen in the banking sector along with the rapid credit expansion,” said Mr. Liu in a recent written statement.

Beijing also has given huge tax breaks and other assistance to exporters. They include placing broad restrictions on imports and intervening heavily in currency markets to hold down the value of the renminbi, to keep Chinese exports competitive even in a weakened global economy.

Even so, American trade data shows that imports from China only eroded 14.2 percent in the first seven months of this year while imports from the rest of the world plunged 32.6 percent. China’s trade surplus, already the world’s largest, was $108 billion for the first seven months of this year. At least a third of the extra bank lending in China appears to have gone into real estate and stock market speculation.

Real estate markets throughout Asia are moving and few faster than in Hong Kong.

Two new luxury flats in Hong Kong have been put on the market for a record per square foot price of HK$75,000 (US$9,640) as the buoyant economy and stock markets on the Chinese mainland lift demand for exclusive properties beyond pre-crisis levels.

Prices for luxury apartments in Hong Kong, where property investment is a passion for many, have risen about 26 per cent since their peak ahead of the collapse of Lehman Brothers a year ago, according to DTZ, a property adviser.





Dutch Banks Have Adequate Capital In Test Scenario - Finance Ministry
The Dutch Finance Ministry Monday said that a stress test carried out by the Dutch Central Bank (DNB) showed that the 15 largest Dutch financial institutions won't need new government aid, except for state-owned ABN Amro and Fortis Bank Netherlands NV. The stress test assumed the Dutch economy would shrink by 6.3% over the period 2009-2010, while unemployment would rise to 9.7%, stock markets would fall 50% and house prices would decline 30%.

"If the fictional circumstances of the stress test would occur, the participating banks and insurers would need to write down an amount of around EUR47 billion. Even though losses would be high, the sector has enough buffers to be able to cope with them," Finance Minister Wouter Bos said in a letter to parliament. He added all banks' Tier 1 capital ratios would, if the stress test scenario occurred, remain within the regulatory capital requirement level of 4%. However, it added DNB could require financial institutions to have a higher Tier 1 ratio then the required 4%, based on the institutions' specific risks, while financial markets may also require higher capital levels for banks and insurers.

Bos, in the letter, said that although he didn't expect any financials, expect state-owned ABN Amro and Fortis Bank Netherlands, to need additional government aid, he couldn't rule out that banks or insurers would be required to raise additional capital. Earlier Monday, the finance ministry said it would give parliament details of its plan to recapitalize the group created by the combination of ABN Amro and Fortis Bank Netherlands in October. The level of refinancing will be based on how much capital is demanded by the DNB, plus costs related to the separation of ABN Amro from the former holding and its integration with Fortis Bank Netherlands. The Dutch government in October last year nationalized Fortis Bank Netherlands and the Dutch parts of ABN Amro, as part of a rescue operation.




The Shame in Breaking Records
by Mehmet Oz

As I listened to 14 month old Analeigha Rivera's tiny heart in the Reliant Center in Houston, I could hear the murmur interrupting her regular rhythm as blood swished through a hole between the main chambers of the heart. An echocardiogram confirmed the diagnosis, so I could show her mother Victoria exactly where the problem was and explained to her that if little Analeigha didn't get supervised care by a pediatric cardiologist, we might miss our window to prevent life-threatening damage.

I looked in her mother's tear-stained eyes and heard the same story that hundreds of others have recounted to me -- Victoria had a job but had lost her insurance. So Analeigha had nowhere to go. After I explained to her that we had resources on-site to help plan the next steps, one of my staff took me aside and told me we had just broken the record for the most people seen in a free clinic in one day. That's when my spirit sank a little.

I have always had a competitive personality. I have always tried to inspire those around me to win. But when I found myself on CNN on Saturday afternoon announcing that we had made history, I didn't feel an ounce of pride. Instead, I felt the underlying frustration that has slowly boiled every time I look into the face of a person on whom I am about to perform surgery who has no means of affording the care they need because they lack health insurance. I wanted to channel this outrage and use my new show as a way to put a face to these people.

The "uninsured" -- that word we keep hearing as our elected officials grapple with a reform initiative that dominates headlines, talk shows, and political rhetoric. But the "uninsured" is a word that refers to people in the abstract. I wanted to show America who these people were, their struggles, their fears, their true challenges. I had spent time at free clinics before, and wanted to shine a spotlight on this remarkable movement for all Americans, so we partnered with the National Association of Free Clinics to hold the free clinic in Houston's three football field size Reliant Center. This was an essential teaching opportunity as our nation finds itself in a time that tries our very soul.

We picked Houston because it has the highest rate of people living without insurance in the nation - 30% or about 1.3 million residents. Texas leads all 50 states with 25% of its residents living without insurance; the national average is a whopping 15%. We announced the clinic last week and after an article appeared in the Houston Chronicle on Wednesday, pre-registration surged and we had to close appointments by early Friday afternoon with 2000 people scheduled to receive free health care. Saturday turned out to be the largest health relief mobilization in Houston since Hurricane Katrina. More than 700 doctors, nurses and volunteers turned out to help. The part that you have to understand about Saturday is that it wasn't in response to a disaster - it was just another day in Houston.

And show up they did. They came as entire families. Many drove hours to get there; others hitchhiked. I walked out at 5am and greeted the first woman on line, Karen, a working school teacher who could not keep up with her insurance payments. Think about it for moment - sitting on the pavement at 5am in the dark waiting for a massive convention center to open just to see a doctor? This is what it's come to, and it should frustrate you as it does me. So many patients had tragic stories that still burn in my heart. Most were embarrassed to seek help and many felt invisible in society, like they didn't matter anymore.

Bobby Parker, a 63 year old woman from the Houston suburb of Channelworth had severe hypertension, putting her at grave risk for stroke and cardiovascular disease. She needed immediate care and I escorted her over to the mobile medical unit for more extensive screening. With us walked her 19-year-old granddaughter Amanda who suffers with acid reflux disease. She recently lost her Medicaid and cannot afford medical care to evaluate the problem or her prescription to keep it under control, giving her severe discomfort from the heartburn and putting her at risk for esophageal cancer. Her grandmother has an advanced degree in social work and worked her entire life in social services helping those in need. Should either woman be in this situation?

Anthony DeLane saw the free clinic on television that morning and decided to show up for problems he was having with his foot. Anthony actually had a diabetic foot ulcer with exposed bone that incurred a serious infection that was making its way up his leg. People often lose toes or feet at this advanced stage. Anthony works long hours as a commercial driver but doesn't have health insurance. He was rushed to the hospital and will get the care he needs to hopefully save his foot. Can you imagine the irony of a truck driver losing his foot so he can longer work, all because he could not afford health coverage?

These stories put a face on 47 million Americans without coverage. Many are hard-working people who took a wrong turn in their lives; 83% of the 4 million people seen last year in free clinics were employed. Analeigha's mother worked. Anthony Delane worked. Bobby Parker had worked her whole life. Should working people not have an option to see a doctor when there is bone protruding from their foot? If most of the people we saw Saturday were employed, it should be apparent to all of us that many people are one paycheck away from losing their existing insurance. These people work hard. They went to school. They deserve better from us.

I am asked constantly what my personal views are on the health care reform debate happening in Washington. People ask me which senator's plan I like. I really have no interest in discussing the dollars and cents of health care or specific insurance plan options. I purposefully extricate myself from that conversation because I don't think 14-monthold Analeigha's heart is a political discussion.

Smart people are working on the legal and financial nuances of fixing health care in America. Others are creating a distraction for reasons I can't imagine. My best contribution is to bear witness to the true nature of the life-threatening struggle facing one in seven Americans and make them real to my television audience and the American people so our policy makers have the empathy of the electorate while making decisions. My hope is that we get to a day when I never have to watch an echocardiogram on a floor normally reserved for rodeo trade shows.

My hope is that no one else ever has to break our record. While I am proud that the patients who came understood someone loved and cared about them and got them desperately needed care, I feel a sense of shame that Saturday had to happen at all. Do you?




David Paterson On Meet The Press: "I'm Blind, I'm Not Oblivious"



David Paterson thrived politically as a state senator, working his way up in a nearly all-white Albany political structure. Now, he's governor, and things have never been worse. For nearly a year, Paterson, the state's first black governor, has been battered by a faltering economy and with poll numbers hovering at record lows. This week, he learned President Barack Obama's administration is worried he'll drag other Democrats down in 2010 if he runs for a full term, perhaps even threatening the narrow margin the party needs to ward off filibusters in the U.S. Senate.

These days, Paterson finds himself very much alone. Paterson said Sunday on NBC's "Meet the Press" that Obama never directly asked him to step aside, and he wouldn't discuss what presidential aides may have told him confidentially. But the legally blind governor added he's heard the message from Democrats in New York and Washington: "I'm blind, I'm not oblivious." "But I am running for governor," he said. "I don't think I am a drag on the party. I think I'm fighting for the priorities of my party."

At an Associated Press event in Syracuse last week, Paterson said that when he was Gov. Eliot Spitzer's lieutenant governor, he had never envisioned becoming the state's chief executive. "I had this grand plan that Hillary Clinton was going to become president," he said. "Maybe the governor would appoint me to the Senate."

In January 2008, that was the plan. Paterson worked to draw black voters to Sen. Hillary Clinton's presidential campaign. On TV screens and front pages, he was wedged next to President Bill Clinton and closer to the senator than Chelsea. Democrats thought it was a well-deserved fit for Paterson as a reward for bringing the party close to controlling the state Senate for the first time in decades. Former New York City Mayor Ed Koch said Paterson was capable, highly intelligent and courageous. Paterson was the dashing statesman in an otherwise plodding Albany. He was smart, collegial, a reformer, ambitious and funny – on purpose.

Now, for many, he's a punch line. Even Paterson is starting to talk about exit scenarios. "I don't think anyone who is clearly hurting their party would take an action like running when it is going to make the party lose," he said. Then he added a shot: "I'm not sure those that are always calling for loyalty in the Democratic Party have been loyal themselves." Albany's top two legislative Democrats – Assembly Speaker Sheldon Silver and Senate Conference Leader John Sampson – last week committed to Paterson "right now" and "until otherwise known." Another Democratic pal, Rep. Gregory Meeks of Queens, called Paterson "my governor, my friend, who has done a relatively good job."

For a sitting governor, that praise is a few shades shy of faint. All of this comes days after Washington Democrats sent a clear message that Paterson should step aside for the popular Attorney General Andrew Cuomo. They are concerned that a weak top of the ticket could hurt other Democrats, including Kirsten Gillibrand, whom Paterson appointed to fill Clinton's Senate seat. A Paterson run could even entice Republican savior-in-waiting Rudy Giuliani to run for governor. "He needs a game-changer," said Lee Miringoff of the Marist College poll, which found Paterson had a 17 percent approval rating. Many, however, say the game is over.

Last week's criticism and an apparent snub by Obama who gushed over Cuomo during a New York visit was embarrassing publicly for Paterson. Worse, it may be lethal financially, giving Democratic campaign contributors cover to cut checks to Cuomo and, with the apparent blessing of the nation's first black president, not worry about a backlash. That will make Paterson's decision for him. It was the same force that made Cuomo exit the 2002 race for governor as money and support flowed to then-state Comptroller Carl McCall in his losing campaign to unseat Gov. George Pataki.

Without friends, a free flow of campaign cash and the contacts made from a previous campaign for governor, Paterson is mostly alone. Inheriting the job 18 months ago when Spitzer resigned amid a prostitution probe and governing through the worst fiscal crisis in state history left him saying "no" to powerful, well-funded special interests, while repeatedly committing his own political missteps, including the ugly process to replace Clinton with Gillibrand.

Paterson angered the Kennedy family when he didn't embrace Caroline Kennedy for the job and a Paterson operative later leaked unsubstantiated rumors about her in an attempt to show she was ill suited. He is left with a message that is not much more than his character – which polls show New Yorkers like – and how he feels he kept the state from worse fiscal fates faced by other states. So Paterson says he's "clearly running" even as Democrats urge him to reconsider. "You don't give up because you have low poll numbers," he told "Meet the Press." "If everybody can tell what the future is, why didn't they tell me I'd be governor? I could have used the heads-up."