Tuesday, September 22, 2009

September 22 2009: Ali Baba and the Forty Thieves

Samuel H. Gottscho Gone fishing April 11, 1933
Fishing boat at Fulton Market Pier, New York City

One day, when Ali Baba was in the forest, and had just cut wood enough to load his asses, he saw at a distance a great cloud of dust approaching him. He observed it with attention, and distinguished soon after a body of horsemen, whom he suspected to be robbers. He determined to leave his asses in order to save himself; so climbed up a large tree, planted on a high rock, the branches of which were thick enough to conceal him, and yet enabled him to see all that passed without being discovered.

The troop, to the number of forty, well mounted and armed, came to the foot of the rock on which the tree stood, and there dismounted. Every man unbridled his horse, tied him to some shrub, and hung about his neck a bag of corn which they carried behind them. Then each took off his saddle-bag, which from its weight seemed to Ali Baba to be full of gold and silver. One, whom he took to be their captain, came under the tree in which he was concealed, and making his way through some shrubs, pronounced the words: “Open, Simsim!” A door opened in the rock; and after he had made all his troop enter before him, he followed them, when the door shut again of itself.

The reason I was thinking of Ali Baba is, I was wondering: how do we open our present treasury chambers and political backrooms, what are the magic words that will open up and shine a light on today's secrets? Many of those secrets are so ugly and festering and rotting, at the very least they badly need a ray of daylight. The fact that Ali comes with Forty Thieves in tow of course makes his tale all the more appealing as a metaphor for our times.

President Obama thinks he can help: he considers bailing out newspapers, ostensibly to promote journalistic notions such as truth-finding.
"I am concerned that if the direction of the news is all blogosphere, all opinions, with no serious fact-checking, no serious attempts to put stories in context, that what you will end up getting is people shouting at each other across the void but not a lot of mutual understanding,"

But that of course is the horse a mile and a half behind the cart. And in left field to boot. The reason the blogosphere has gained so much attention is that "serious fact-checking" is a long forgotten part of American journalism. And -financial- government involvement in the news industry, whatever else it may indeed accomplish, is not exactly the most obvious way to get a reporter to go digging in that same government's dirt. What Obama complains about in the blogosphere, that it's all about opinions, doesn't describe that sphere, it describes the news industry that is no longer able to deliver any shrapnel of news without having first run it through the opinion wringer of its editors and ownership.

Whoever wishes to get a fair picture of today's reality has no choice but to turn to the internet. This is so obvious by now, it's become useless to deny. Which means it would be a far better idea to fund those sources, not the established papers, so people can go out digging for the truth who are not affiliated in some way or another with existing interests.

Let me give two examples of subjects that badly need the kind of serious journalism that is simply not provided by the media we expect it from.

Ron Paul has long clamored for an audit of the Federal Reserve. Tim Geithner apparently has proposed a setting in which the Fed, along with "outside experts", can go through its own books. That should work....

The Fed, of course, has said no. I don't find this all that interesting. Simply because I don't think a real audit of the Fed has any chance of happening. What I would like to see answered first of all is on what authority Congress, or the White House for that matter, could force the Fed to open up.

Go through the 1913 statutes, or whatever they may be called, with which Congress founded the Federal Reserve. In those statutes, Congress gave away its constitutional right to issue the nation's money, an act that in itself may very well be unconstitutional: the Founding Fathers never meant for a privately owned central bank to issue the nation's currency, so is it legal for Congress to hand over its constitutional authority to such an institution?

And when it did anyway, did Congress still retain the right to audit the Fed? I'm no lawyer, but I would seriously doubt it. Which is why I think that all the noise Ron Paul is making is just that, noise. Whether he knows that, I can't tell. You would hope, though, that he's prepared before making his noise. But that makes him a suspect person in my view.

I'd venture that all Congress can do is to abolish the Fed (not going to happen), not audit it. But yes, by all means, let's have some Woodwards and Bernsteins out there figure it out in the interest of the American people. If the president wants to fund the research, fine by me, as long as he keeps his nose out of it. Oh, and while they're at it, perhaps their bosses can explain to us why this wasn't already done a long time ago.

A second story that badly needs good reporting is the Bank of America takeover of Merrill Lynch, along with the questions concerning who knew what when and what on earth made the SEC try and sweep it under the carpet for $33 million.

In a nutshell: Fed chairman Ben Bernanke and then Treasury Secretary Paulson are alleged to have pressured BofA into taking over Merrill, after it found out Merrill's situation was much worse than it initially presumed (which is weird in itself: why didn't they read the books a bit better?). The extent of Merrill's problems was then -allegedly- kept from BofA's shareholders leading up to their December 5 2008 vote on the takeover. What was also not revealed, nay, even denied, was that BofA's execs had agreed to pay Merrill execs $5.8 billion in bonuses for running their bank into the ground.

It's that last little ditty that the SEC, on August 3 2009, agreed to settle with BofA for $33 million. However, 2 days later, Federal Judge Jed Rakoff refused to accept the settlement. A nice detail: at least one former Merrill employee received a bonus bigger than the intended $33 million settlement sum. What seems to have irked Judge Rakoff more than anything is that the shareholders, whose interests were harmed by the failure to disclose the bonus payment agreement, would be on the hook for the $33 million supposed to settle the case that harmed them. Rakoff has set a court date no later than February 10, 2010.

So far, it looks like just another tale out of 1001 nights of Wall Street toxicity, albeit with a refreshing point of view from the judicial branch in the playbook. But this may still not be the whole story.

New York Attorney General Andrew Cuomo is also looking into the case, and he subpoenaed 5 BofA directors last week. Cuomo wants to know whether BofA directors withheld information from shareholders. Cuomo’s investigators will ask directors how much they knew about Merrill’s losses, and the role they played in decisions about disclosing information to shareholders. They will also ask if government officials threatened to remove BofA’s management and the board if the bank didn’t proceed with the deal.

Cuomo. Ran for governor in 2002, and failed. Would like another run. He's a career man, married a Kennedy and all that. Has a good team at his disposal, like Elliot Spitzer did when he held the AG post. Spitzer successfully did make the jump to governor.

Cuomo. What would happen if he keeps digging? How would his investigation cross-pollinate with the case before Judge Rakoff? Looks like a great case for a group of go-getting reporters to me. The problem I think with this case is that it looks so much like Watergate, in that it reaches right up to the highest offices in the land. Maybe not the Oval Office, we’ll have to see about that, but certainly uncomfortably close to it.

There are persistent rumors that the Obama team is pressuring New York State Governor David Paterson not to run for another term. Not because it would hurt the Democratic Party, which is the "official"reason, say these rumors, but to open the way for Andrew Cuomo, to move from being Attorney General to making a run for Governor. What the rumors argue (if rumors can be said to do such a thing) is that this would conveniently move Cuomo out of the way of an investigation that he's in the middle of, and that has the potential to damage the reputations of eminent Wall Street bankers as well as very eminent Washington politicians, from both the Bush and Obama administrations.

Now we're getting closer. From where I am seated, I'd suspect that Tim Geithner is sitting neither pretty nor easy. Geithner has so far largely been kept out of the limelight, but he was leading the New York Fed when the BofA/Merrill takeover was being pushed through. It was Geithner's legal team that handled all the details surrounding the deal, which obviously took place inside the New York Fed's jurisdiction.

So what did Geithner know? On April 23, the Wall Street Journal published this revealing article: Lewis Testifies U.S. Urged Silence on Deal, which claims that Paulson and Bernanke pushed BofA CEO Ken Lewis to hide the truth about Merrill Lynch from BofA shareholders ahead of their vote on the takeover. Yes, that would be highly illegal if it turns out to be true. Threatening to kick Lewis out of his job if he didn't comply with the plans is then merely the icing on the criminal cake.

The article doesn't mention Geithner at all. Ain't that just the most curious thing? However, Rep. Edolphus Towns (D-N.Y.) asked Geithner about his role in the takeover. On April 24, the Washington Independent reported:
Geithner, of course, was neck deep in crafting the bailout strategies under the Bush administration, and now Towns, who heads the House Oversight and Government Reform Committee, has joined forces with Rep. Dennis Kucinich (D-Ohio), who chairs the Domestic Policy subpanel, to ask what role Geithner played in the controversial BofA-Merrill deal. From the lawmakers’ April 23 letter to Geithner:
If Mr. Lewis’s statement, as reported by the Journal, of discussions that occurred between Mr. Paulson, Mr. Bernanke and himself is accurate, then federal officials were potentially involved in knowingly denying BOA investors material information.
The lawmakers are asking Geithner for “all documents prepared for internal use related to discussions with Bank of America and/or Treasury about compensation packages, bonuses, annual losses at Merrill Lynch, and federal guarantees against losses on Merrill Lynch assets, for the period August I, 2008 through January 19,2009,” as well as “discussions relating to public disclosure of information about compensation packages, bonuses, and annual losses at Merrill Lynch.”

A similar version of the letter went to Bernanke. And unlike the first inquiry over executive compensation limits — which Geithner still hasn’t responded to, even eight days after the requested deadline –  Towns and Kucinich are threatening to subpoena the officials for the information if they don’t get it otherwise.
The implications of Mr. Lewis’ testimony, if accurate, are extremely serious. Under these circumstances failure to comply with the Subcommittee’s request raises the prospect that we will be forced to consider compulsory means to achieve compliance with our request. However, we would prefer your voluntary compliance.

I know what you're thinking: what the hell ever happened to that letter? How did Geithner respond? Where are Towns and Kucinich now? Surely they must be tragically drugged and gagged in an alley someplace, or they would be raising hell? And why does that silence hurt my ears?

Well, that's where the inquiring reporters should come in. And don't. On June 24, Huffington Post had this to say:
Breaking News: Tim Geithner, Treasury Secretary, supposedly emailed telling BofA that they couldn't back out of acquiring Merrill Lynch, according to CNBC.

An email by Geithner telling BofA to close the deal would be a proverbial smoking gun, since BofA honcho Ken Lewis has said he was forced into buying the bank and not publicly revealing the poor financial shape that Merrill Lynch was in, in the wake of pressure from the government.

So what's going on? Why does the White House turn on NY Governor Paterson 15 months before his term is up? Washington meddling in state politics is awkward in the best of times, and this ain't one of them. The world may well be a whole different place by December 2010, and Paterson may be a hero by then. And why does the Obama team choose to leak this so overtly to the press?

We’ll find out more, going forward, by following what the next steps are that Andrew Cuomo is going to take. If he continues his aggressive pursuit of the BofA case, and includes the role played by Geithner in his quest, my suspicions will be unfounded. But that may well cost Geithner his job, if not more. If Cuomo announces he'll run for governor soon, that's a whole different story. Getting Paulson, Bernanke and Geithner behind bars is too much to ask right now, even if these are serious criminal allegations. Pushing those of them out of their public jobs that still hold them looks more realistic. Still, to reiterate, I don't think Congress has the authority to fire Bernanke. Nor does the president, for that matter, though that facade will be kept standing upright at just about any price.

For now, though, forget about Cuomo. I think the best bet to get to Open Sesame is Judge Rakoff. He's set in motion a course of events that may be hard to stop. Even if strange things have been known to happen to judges between September and February.

I hope that what people will take away from this case, from reading and hearing about it as time progresses, is a more complete notion of the depths to which this once democratic system has sunk. If and when the law states that the acts of many of the most powerful people in the country are illegal to such an extent that they should be in jail, while those same people are allowed to continue to make decisions involving trillions of dollars of other people's money, it's safe to say there is a bit of a problem.

And hoping for a few magic words to solve it just won't do. Too much innocence has been lost on the way here.

U.S. mortgage delinquencies set record
High U.S. unemployment keeps pushing up the rate of mortgage delinquencies, which could in turn drive personal bankruptcies and home foreclosures, monthly data from the Equifax Inc credit bureau showed on Monday. Among U.S. homeowners with mortgages, a record 7.58 percent were at least 30 days late on payments in August, up from 7.32 percent in July, according to the data obtained exclusively by Reuters.

August marked the fourth consecutive monthly increase in delinquencies, and the report showed an accelerating pace. By comparison, 4.89 percent of mortgages were 30 days past due in August 2008, while in August 2007, the rate was 3.44 percent, Equifax data showed. The rate of subprime mortgage delinquencies now tops 41 percent, up from about 39 percent in each of the prior five months.

The results, which correlate with consumer bankruptcy filings, suggest U.S. homeowners remain under financial stress despite signs of improving sentiment and fundamentals in the U.S. housing market. August bankruptcy filings were up 32 percent from a year earlier, compared with a 35 percent year-over-year increase in July.

Still, while more Americans were late with mortgage payments, they are keeping up with other bills. The proportion of credit card accounts at least 60 days past due was down in August for the third straight month, while subprime card delinquencies also fell. That improvement in delinquency rates partly reflects risk-aversion among issuers, which have cut the number of cards by 82 million, or 19 percent, over the past year, while slashing credit limits by $721 billion, to about $3.6 trillion.

The number of new cards being issued is down even more dramatically. In June, 2.6 million new cards were issued, compared with 4.7 million a year earlier. Lenders are increasingly targeting consumers with high credit scores, Equifax found. While in 2007, about one in five new cards went to people with a credit score above 760, such consumers account for two in five new cards in 2009. Equifax found similar trends in auto loans.

"The data from August further confirms that we're witnessing a dramatic change in consumer habits," said Dann Adams, president of Equifax's Consumer Information Solutions group. Total consumer debt is down more than $300 billion, or almost 3 percent, from its peak in September 2008, Adams said, while the savings rate is nearing 5 percent, "a level we haven't seen in years."

Housing Suffering Relapse Confronts Bernanke Credit Conundrum
The recovering housing market may be heading for a relapse as President Barack Obama and Federal Reserve Chairman Ben S. Bernanke consider ending support for the source of the global financial crisis.

The Obama administration is studying whether to let a first-time home buyers’ tax credit expire as scheduled at the end of November. Bernanke and his Fed colleagues may continue talking this week about how to wind down purchases of mortgage- backed securities, according to Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. The two programs have helped stabilize real-estate demand, with new-house sales rising 9.6 percent in July from the prior month, the most since 2005.

Ending these efforts may stifle the housing rebound by depressing sales and pushing up both mortgage-backed bond yields and interest rates on home loans, even in the face of the record-low zero to 0.25 percent short-term rates the Fed has engineered, said economist Thomas Lawler. A weaker housing market would likely dampen the economic recovery and undercut shares of builders including Fort Worth, Texas-based D.R. Horton Inc. and Miami-based Lennar Corp., that have risen 40 percent this year, based on the Standard and Poor’s Supercomposite Homebuilding Index of 12 companies.

"Things could get ugly," said Lawler, an independent consultant in Leesburg, Virginia, who spent 22 years at Fannie Mae, a Washington, D.C.-based government-controlled mortgage- finance company. "We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program and rising foreclosures."

This is the first major test of policy makers’ ability to coordinate exit strategies as they seek to wean the economy off government support, said Brian Bethune, chief financial economist of IHS Global Insight, a forecasting company in Lexington, Massachusetts. They have already acted separately, with the administration ending its $3 billion "cash-for-clunkers" automobile trade-in program on Aug. 24 and the Fed starting to wind down its purchases of Treasury debt, which totaled $285.2 billion between March 25, when the initiative began, and Sept. 16.

The 55-year-old Bernanke and his colleagues, who meet tomorrow and Wednesday to map monetary strategy, discussed "tapering" off the Fed’s purchases of mortgage-backed securities and housing-agency debt at their last gathering in August, according to the minutes of that meeting. No decision was made by the central bank’s policy-making Federal Open Market Committee.

Under the current program, the Fed is scheduled to buy up to $1.25 trillion of mortgage-backed securities and $200 billion of agency debt by the end of the year. So far, it has purchased $862 billion of the former and $125 billion of the latter. A trio of Fed presidents -- Jeffrey Lacker of Richmond, James Bullard of St. Louis and Dennis Lockhart of Atlanta -- has publicly raised the possibility the central bank might not spend all the money authorized for the mortgage-backed securities. Lacker questioned whether the economy needs the additional stimulus in an Aug. 27 speech.

New York Fed President William Dudley, who is vice chairman of the FOMC, has sounded more cautious. "The market expects us to complete these programs," he said Aug 31. "To contradict that market expectation is a pretty high hurdle."

An abrupt stop might push up mortgage rates by a half to one percentage point, said Hooper, a former Fed official. Tapering off -- by reducing weekly purchases and stretching them beyond the end of the year -- would have a more muted effect, pushing rates up by at least a quarter percentage point, he said, adding that the Fed may announce just such a strategy after its meeting this week. Mortgage rates for 30-year fixed home loans averaged 5.04 percent in the week ended Sept. 17, down from 5.07 percent the previous week, according to McLean, Virginia-based Freddie Mac, a government-controlled mortgage-finance company.

Borrowing costs for home buyers are relatively high based on the historical relationship with the Fed’s target rate for overnight loans between banks, currently at zero to 0.25 percent. The yield on the benchmark 10-year Treasury note is 3.22 percentage points more than the federal-funds rate, compared with an average of 1.45 percentage points during the past 20 years, according to data compiled by Bloomberg. Thirty-year mortgage rates average 1.69 percentage points more. While that is down from 3.19 percentage points in December, it is still above the average of 1.4 percentage points for this decade before the credit markets seized up in the second half of 2007.

The Fed’s purchases of mortgage-backed debt so far this year have dwarfed net issues of such securities by Fannie Mae, Freddie Mac and government-run mortgage-bond insurer Ginnie Mae, which totaled about $440 billion through the end of August, said Walt Schmidt, a mortgage-bond strategist in Chicago at FTN Financial. Once the Fed exits the market, the spread between yields on mortgage-backed debt and Treasury securities will have to rise, perhaps by a half percentage point, in order to attract other buyers, he said. The spread now is about 140 to 145 basis points, down from around 215 at the start of the year.

"One of the key linchpins to the restabilization of our economy is getting housing back," said Laurence Fink, chairman and chief executive officer of New York-based BlackRock Inc., the largest publicly traded U.S. money manager. "There is a great need" for the Fed to "continue to invest in the mortgage market right now," added Fink, 56. A number of Washington-based organizations -- the National Association of Home Builders, the National Association of Realtors and the Mortgage Bankers Association -- say an extension of the buyer’s tax credit is also crucial.

Lawrence Yun, chief economist of the realtors’ group, estimates that about 350,000 home sales through August were directly attributable to the tax credit of up to $8,000 for first-time buyers. Treasury Secretary Timothy Geithner, 48, called signs of stabilization in the U.S. housing market "very encouraging" and told reporters on Sept. 17 that the Obama administration will take a "careful look" at extending the credit.

Congress may not pass an extension; the chances "seem slim," said Mark Calabria, director of financial-regulation studies at the Cato Institute in Washington and a former staffer on the Senate Banking Committee. Public opposition to increasing the federal budget deficit is high, and there’s little appetite on Capitol Hill for finding spending cuts to offset the cost of the tax credit, he said.

The deficit will total $1.6 trillion this year as revenue falls and the government spends at the fastest pace in 57 years, according to the nonpartisan Congressional Budget Office. In a sign of the public’s concern about the deficit, 62 percent of people surveyed in a Sept. 10-14 Bloomberg News poll said they would be willing to risk a longer-lasting recession to avoid more government spending. The impact of terminating the tax credit will show up first in the new-home market, said David Crowe, chief economist of the home-builders’ association. "It takes at least four months to build a house, and you need to buy it before Dec. 1 to qualify," he said. "If you haven’t started building it by now, it’s too late."

Single-family housing starts fell 3 percent in August to a 479,000 annual rate -- the first decline since January -- according to seasonally adjusted figures in a Sept. 17 report from the Commerce Department. Residential construction and home sales led the way out of the previous seven recessions going back to 1960, according to David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California. Real-estate sales fuel consumer spending, which historically accounts for about 70 percent of gross domestic product, he said.

"Housing has been the sector of the economy with the largest multiplier effect," said Berson, former chief economist at Fannie Mae. "Whether buying new homes or existing homes, people tend to fill them up with things: new furniture, new appliances, new window coverings." To be sure, some economists are betting the housing recovery is here to stay. The market has "clearly bottomed," said Dean Maki, chief U.S. economist for Barclays Capital in New York.

Even some of the optimists are hedging their bets given how dependent the market has been on government and central bank support. "I’m right in there with the rest of the cheerleaders, but there are no historical anecdotes, no historical data points to use for this," said Lewis Ranieri, the 62-year-old mortgage- bond pioneer who is chairman of New York-based Hyperion Partners LP. The U.S. housing market is "still very fragile."

Moody’s Property Index Resumes 'Steep' Fall in July
Commercial real estate prices in the U.S. resumed a "steep decline" in July after showing signs of leveling off in June, Moody’s Investors Service said, as credit restrictions curtail lending and push landlords toward default. The Moody’s/REAL Commercial Property Price Indices fell 5.1 percent in July from the month before, Moody’s said today in a statement. The index is down almost 39 percent from its October 2007 peak. The decline in June was 1 percent.

Commercial property sales this year may fall to an 18-year low. This latest set of numbers suggests no letup in that trend, said Neal Elkin, president of Real Estate Analytics LLC, a New York firm that partners with Moody’s in producing the report. "We are still vulnerable to moves on the downside," Elkin said in a telephone interview. "As time passes, the distress and the stress among those who need to sell is growing."

Elkin cited figures from Real Capital Analytics Inc., whose data are used in compiling the report, showing the portion of sales classified as "troubled" -- those properties in or close to default -- almost doubled to 23 percent in July from March. That’s "something we’ve never seen," Elkin said. Sales this year through July totaled about one-third of the year-earlier number, Moody’s Managing Director Nick Levidy said in the statement. The market averaged about 375 sales a month this year compared with almost 1,100 a month last year, he said.

Office sale prices fell 23 percent from a year ago in New York, 27 percent in San Francisco and 22 percent in Washington, according to the report. Prices of apartment buildings in the U.S. South have seen some of the steepest value declines, according to the report. Apartment prices in the [South] dropped 44 percent in the 12 months through June, almost twice the nationwide decline of 24 percent, and are now about half what they were two years ago. Florida apartment values tumbled 40 percent in a year, the report said. "That’s eye-popping," Elkin said. The decline is being caused in part by "a ripple effect" from the overbuilding of condominiums in those markets, many of which are now competing as rentals, he said.

Clunkers and Housing: A Government Subsidized Facade
by Michael Panzner

Although it was obvious from the start that the cash-for-clunkers program would not live up to the promises of proponents, hard evidence is beginning to trickle in that the pessimists were right. Instead of priming the pump for a self-sustaining recovery in the beleaguered auto sector (or the economy at large), the initiative simply borrowed sales from the future. Now that the government is no longer throwing free money at buyers, Automotive News reports in "September Sales Rate Will Tie Lowest on Record, Edmunds Says," the bottom has fallen out:

Edmunds’ SAAR of 8.8 million would be lowest in nearly 28 years

September’s light-vehicle sales rate will fall to 8.8 million units, consumer auto site Edmunds.com said. That would be the lowest rate in nearly 28 years, tying the worst demand on record.

After the cash-for-clunkers program boosted August sales to their first year-over-year increase since October 2007, demand has plunged. In at least the last 33 years, the U.S. seasonally adjusted annual rate has only dropped as low as 8.8 million units once -- in December 1981 -- with records stretching back to January 1976.

Amid a global recession, U.S. sales fell to 13.2 million units in 2008, from 16.2 million in 2007. The slide continued, with demand ranging from 9.1 million to 9.9 million in the first half of this year.

Cynic that I am, I wonder if this rapid and painful reversal of fortunes is giving us a taste of what's to come in the housing market, which is at risk of losing at least some of the substantial financial assistance being provided to it by Washington in the months ahead? In "Policy and Housing: Someone’s Gotta Give!" Angry Bear's Rebecca Wilder highlights some developments to keep an eye on:

Housing demand is being propped up by government subsidies and low mortgage rates, and the level of supply is held back by low prices. Right now, the housing market is a complicated hodgepodge of policy, foreclosures, and very weary potential home-buyers.

Home sales are stabilizing; home building is stabilizing; and home prices (might be) stabilizing - the chart to the left illustrates a positive trend in sales away from distressed and first-time home-buyers, the targets of policy, according to the NAR. But what would the housing market look like if the massive policy expired this year? Not good, and it will.

Some points on the housing market:

Subsidies are set to expire. If the Fed continues to buy its average of $105 billion in GSE-backed MBS per month (see the NY Fed’s website for weekly updates), it will max out the announced $1.25 trillion in four months. The $8,000 tax credit for first-time home-buyers expires at the end of this year. The Fed’s Treasury buyback program will run its course by October.

There are several home price indices out there, each painting a slightly different picture of the level and trend in aggregate home values (see AB post).

The foreclosure modifications program is holding off some foreclosures; but the program is no match for market forces.

There is a large shadow inventory out there - potential sellers that are reluctant or unwilling (TIME calls some of these sellers accidental landlords”) to relinquish home ownership at current prices. However, if home values continue to take baby steps forward, shadow sellers (new supply) will emerge.

There is a bimodal distribution of sales across the high-end and low-end housing markets. Low-end sales are hot, while the upper end is not.

House Moves To Extend Unemployment Benefits
Despite predictions the Great Recession is running out of steam, the House is taking up emergency legislation this week to help the millions of Americans who see no immediate end to their economic miseries. A bill offered by Rep. Jim McDermott, D-Wash., and expected to pass easily would provide 13 weeks of extended unemployment benefits for more than 300,000 jobless people who live in states with unemployment rates of at least 8.5 percent and who are scheduled to run out of benefits by the end of September.

The 13-week extension would supplement the 26 weeks of benefits most states offer and the federally funded extensions of up to 53 weeks that Congress approved in legislation last year and in the stimulus bill enacted last February. People from North Carolina to California "have been calling my office to tell me they still cannot find work a year or more after becoming unemployed, and they need some additional help to keep their heads above water," McDermott said.

Critics of unemployment insurance argue that it can be a disincentive to looking for work, and that extending benefits at a time the economy is showing signs of recovery could be counterproductive. But this recession has been particularly pernicious to the job market, others say. Some 5 million people, about one-third of those on the unemployment list, have been without a job for six months or more, a record since data started being recorded in 1948, according to the research and advocacy group National Employment Law Project. "It smashes any other figure we have ever seen. It is an unthinkable number," said Andrew Stettner, NELP's deputy director. He said there are currently about six jobless people for every job opening, so it's unlikely people are purposefully living off unemployment insurance while waiting for something better to come along.

The current state unemployment check is about $300 a week, supplemented by $25 included in the stimulus act. That doesn't go very far when a loaf of bread can cost $2.79 and a gallon of milk $2.72, Senate Finance Committee Chairman Max Baucus, D-Mont., said at a hearing last week on the unemployment insurance issue. "We need to keep our unemployed neighbors from falling into poverty. We need to figure out how best to make our safety net work," Baucus said.

The jobless rate currently stands at 9.7 percent and is likely to hover above 10 percent for much of 2010. Gary Burtless, a senior fellow at the Brookings Institution, said at the Finance Committee hearing that, according to Labor Department figures, 51 percent of unemployment insurance claimants exhausted their regular benefits in July, the highest rate ever. "It is likely the exhaustion rate will continue to increase in coming months" as the unemployment rate continues to rise, he said. Stettner predicted that Congress will likely have to continue extending jobless benefits through 2011.

McDermott in July introduced a more ambitious bill that would have extended through 2010 the compensation programs included in the stimulus act. Those benefits are now scheduled to expire at the end of this year. But with a price tag of up to $70 billion, that bill would have been far more difficult to pass. McDermott instead decided to offer the scaled-down 13-week extension to meet the urgent needs of those seeing their benefits disappear this year.

McDermott said his bill would not add to the deficit because it would extend for a year a federal unemployment tax of $14 per employee per year that employers have been paying for more than 30 years. It would also require better reporting on newly hired employees to reduce unemployment insurance overpayments. Three-fourths of the 400,000 workers projected to exhaust their benefits this month live in high unemployment states that would qualify for the additional 13 weeks of benefits under his bill, McDermott said.

They include Alabama, Arizona, California, District of Columbia, Florida, Georgia, Illinois, Indiana, Kentucky, Massachusetts, Michigan, Mississippi, Missouri, Nevada, New Jersey, North Carolina, New York, Ohio, Oregon, Pennsylvania, Puerto Rico, South Carolina, Tennessee, Washington, Wisconsin and West Virginia. Other states could qualify for more benefits if their unemployment rates are approaching the 8.5 percent threshold.

Bank of England warns of the consequences of thrift
An attempt by British consumers to rein in spending after the harsh lessons of the recession could limit growth and therefore depress household income further, the Bank of England warns today. It says in its latest Quarterly Bulletin that household decisions to spend or save will have major consequences for the economic outlook, because consumer spending accounts for two-thirds of total spending in the UK. "Any attempt to reduce consumption is likely to push down on output and hence household incomes. That could actually make it harder for households to increase their savings – known as the paradox of thrift."

The Bank says that even if households saved as much as 10pc of income, it would take nine years to bring wealth back up to the average of the last 20 years. Credit conditions are likely to remain tight, the Bank says, which could limit spending – as could job insecurity. The Bank also says that most financial asset prices have continued to increase over the third quarter and conditions in bank funding markets have improved. Improvement in sentiment has prompted analysts to revise upwards their expectations for short-term corporate earnings, coinciding with a rise in equity prices. It reveals in the Bulletin that, from July 24 to August 4, the Bank did not buy any corporate bonds after receiving no offers in five consecutive auctions.

Retirement? Good luck with that
The destructive effects of the financial crisis may be waning, but your retirement account won't soon forget. Savers lost 40% or more in the downturn -- a collective $2.1 trillion disappeared from 401(k) and IRA assets in 2008 alone -- and while the recent stock-market recovery may feel good, it's done little to stem a mounting crisis in the retirement system in the United States. It's not just investments that are the problem: Social Security needs financial resuscitation, and the bursting of the housing bubble that helped spark the financial crisis vaporized the home equity many people were counting on to fund their golden years. Corporations are curtailing traditional pensions and older Americans are being forced to work longer to make up the difference.

Where does this leave our retirement plans? Ask a middle-class American when he plans to retire, and more often than not you'll get a wry chuckle and "I'll be working until I die." The attempt at humor masks what may be close to reality for some people. The retirement-savings system in the U.S. is "a failed experiment," said Teresa Ghilarducci, the Bernard Schwartz professor of economics at The New School for Social Research in New York.

The U.S. system is "headed for a serious train wreck," said John Bogle, founder and former chief executive of the Vanguard Group, in testimony to a House committee hearing on retirement security in February.
Separately, Ghilarducci and Bogle each have called for some substantial changes to the current system, but even those who like what we've got now say it needs improving -- and certainly demands better financial education be offered to savers.

"Many people are very overwhelmed with the notion of retirement," said Gregg S. Fisher, president and chief investment officer of Gerstein Fisher, a financial advisory firm. "How much do we need to put away? Where should it go? How should I invest?" Read tips on how you could help your nest egg recover more quickly.

Of course, people's retirement outlooks vary widely. Some 20 million workers still participate in a traditional pension plan, and employers pay pension benefits to millions more retirees (that doesn't even count government-sponsored public plans), according to Boston College's Center for Retirement Research. Those workers are sitting a lot prettier than the more than half of U.S. families who aren't covered by any kind of pension at their current job, according to the Employee Benefit Research Institute, a nonprofit, nonpartisan group. Still, even a well-prepared person may get thrown off by a job loss or unexpected health-care costs. (Average medical costs in retirement can run into the six figures even for those covered by Medicare, according to EBRI.)

And those lucky people with traditional pensions likely are wondering how long the money will last as the financial crisis shreds employers' ability to fund such plans for the long haul. See related story on PBGC.
Defined-contribution plans such as 401(k)s have largely taken the place of traditional pensions: 67% of workers say they have a DC plan, up from 26% in 1988, while 31% of workers participate in a traditional pension, down from 57% in 1988, according to EBRI.

But, while lower-income workers face a worrisome retirement reality all their own, middle- and upper-middle class workers likely face the biggest living-standard shock. That's because lower-income people can replace a good chunk of their preretirement income with Social Security, and high-income people generally have enough personal savings. But middle-class workers may see their relatively comfortable life change drastically come retirement.

"People in the middle and upper-middle have highly variable rates of savings," said Eric Toder, a fellow at the Urban Institute, a nonprofit, nonpartisan research center in Washington. Social Security will take up some of the slack, but the program was never intended to provide full wages -- it replaces about 57% of lower-income workers' preretirement wages, about 43% of medium-income earnings, and 35% of higher-income earnings. A replacement rate of 70% to 75% usually allows retirees to maintain their standard of living, according to a report by the Center for Retirement Research.

And Social Security's and Medicare's financial outlook means that future retirees likely will find the program pays even less. Without changes, the Social Security trust fund is expected to run out in 2037 and Medicare will be broke by 2017. The financial outlook for both programs has worsened as the recession and 6 million job losses have shrunk tax revenues.

You could argue that whatever system we have now is better than nothing, and before the creation of Social Security in 1935, few people other than government workers had a retirement-savings plan. Of course, back then, shorter life spans made retirement savings less crucial. Combine the growth in private pension plans during World War II with Social Security and you get a veritable golden age of retirement savings, at least for those -- never more than about half the work force -- who participate in workplace plans.

Now, thanks to the slow death of the traditional pension and the rise of 401(k)-type plans, one thing is clear: Workers are increasingly responsible for managing their retirement investments. Some say that's a major problem. "For 30 years we thought that if we gave people financial advice that over time they would learn something," Ghilarducci said. "But just as we can't expect people to excise their own molars or do their own surgery, we can't expect them to professionally manage their money over a long period of time."

Others agree risk is an issue. "People are being exposed to risk that they're not even aware of and they're being told don't worry about it, as long as it's far in the future everything will be all right," said Zvi Bodie, professor of finance at Boston University's School of Management and co-author of the book "Worry-Free Investing." "That's complete nonsense," he said. What matters, he said, is the risk that on the day you need the money your investments have tanked.

The recent market crash is a sharp reminder of what can go wrong. Sure, the S&P 500's almost 35% rebound since March is good news, but it's not enough to make savers whole. From its peak in Oct. 2007 through this March, the S&P 500 lost almost 49%. Shave 49% off a $100,000 investment and you'll need a 96% gain just to get back to even. Younger savers can overcome that hit with time, but it's a lot tougher for people close to retirement, and nigh impossible for retirees forced to pull money out to live on just as the market swoons.

As for tapping into home equity in retirement? While homeowners' equity did rise in the second quarter, U.S. households lost real-estate wealth for nine consecutive quarters before this second-quarter gain, according to the Federal Reserve. Moody's Investors Service said recently it'll take 10 years before housing prices regain their peak. U.S. household net worth is down $12.2 trillion from the high in 2007, thanks to the stock-market crash and the housing-market meltdown.

The retirement-savings crisis is not going unnoticed. The Obama administration, plus the AARP and many academic researchers, see automatic workplace-plan enrollment as the first step to pumping up retirement savings. Forcing workers to opt out of their 401(k) rather than waiting for them to opt in dramatically raises participation rates (inertia leads most people to stick with the plan). The president has proposed at least two retirement-savings laws (Congress has yet to act on either). With "automatic IRAs," employers who don't offer a workplace plan now would enroll workers in an IRA to which workers could contribute via their paycheck. Obama also wants to expand the savers' credit, which rewards people who put money aside for retirement.

Some are calling for more extreme changes. In February, Bogle, the Vanguard founder, spoke in favor of defined-contribution plans, but decried the inadequate savings rates -- the median balance at the end of 2008 was just $15,000 -- and steep costs, among other problems. He called for a Federal Retirement Board to oversee the system and look out for participants' best interests. Ghilarducci, the economist, proposes reducing the tax break for 401(k)s by lowering the maximum annual contribution to $5,000, then using the tax revenues to create mandatory guaranteed accounts for all. The government would contribute $600 annually to every account; people would contribute 5% of income annually.

The government-managed account would belong to the individual, and would be in addition to Social Security. Ghilarducci said capping 401(k) contributions pays for the plan. One of Ghilarducci's gripes with the current system is that retirement-plan tax breaks go largely to higher-income earners -- she'd like to see the government's largesse spread more equitably. Looking at all types of tax-advantaged retirement plans, people with income above $104,000 enjoy 80% of the tax breaks, according to research co-authored by Toder of the Urban Institute.

It's not hard to find people who disagree with Ghilarducci's approach. "The idea of centrally planning peoples' investment strategies is not appropriate and is going to take away from the beauty of the system, which is really one of self-determination," said Mike Francis, president of Francis Investment Counsel LLC in Pewaukee, Wis. Currently, he said, people can choose a low-risk, low-return plan (which may require a higher savings rate) or they can take on more risk to get more return.

Plus, in surveys, employees usually say they like their 401(k) plans. Also, workers can take their 401(k) to a new job, unlike traditional pensions. That's important in economic times like this, Francis said. "You could argue," he said, that the millions of people who've lost a job in the recession "are meaningfully better off having participated in a defined-contribution program than they would have been in a defined-benefit plan." But there's still that nagging problem: A huge amount of risk is being put on individual's shoulders. Bodie says 401(k)s are fine as long as savers invest the right way -- for Bodie that means not putting essential assets at risk in the stock market.

His choice for retirement plans: Treasury Inflation Protected Securities. "What anybody wants," Bodie said, "is a supplement to their Social Security benefits -- something that is protected against inflation, is guaranteed for life, and doesn't have the same political risk as Social Security." In the end, it may be that baby boomers simply pay a steep cost for living at a time when defined-benefit plans started disappearing. As the retirement-savings system goes through a seismic shift, young adults today are seeing the mistakes their parents made -- most notably, failing to save early and often.

Younger people will "learn a lot of lessons about the stock market. They won't expect a job for life. They'll probably be more self-reliant," said Frank Haines, chief investment officer with Christian Brothers Investment Services Inc. in New York. "If you can do it at a young enough age, the power of compounding is very, very powerful," he said. "Unfortunately, it's the generations in their 30s to 60s who probably weren't instructed to do that as much as they should have been."

Bank of America to Pay for Merrill Backstop, Faces SEC Trial
Bank of America Corp., the biggest U.S. bank, said it will pay the government $425 million to cancel an unused guarantee of Merrill Lynch & Co.’s assets and cut reliance on federal support after two bailouts. The payment would end a dispute over what the bank owes the U.S. for a promise to help absorb losses on $118 billion of holdings, mostly at Merrill Lynch. The federal guarantee helped seal Bank of America’s takeover of the New York-based brokerage after fourth-quarter losses spiraled past $15 billion. While the accord was announced in January, an agreement was never signed and the bank resisted paying.

Chief Executive Officer Kenneth D. Lewis has said he wants to shrink the U.S. role in company affairs. Paying the fee is part of a plan to reduce "reliance on government support and return to normal market funding," the company said today in a statement. The Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. will get the money. "The bank is a wounded duck and everybody wants a piece of them," said Robert Serino, a partner at Buckley Sandler LLP in Washington and a former director of the Comptroller of the Currency’s enforcement and compliance division.

"In the past, Ken Lewis was a pretty strong character but now he’s been beaten down like everybody else." Even as the payment was announced, the Securities and Exchange Commission pledged to "vigorously pursue" a case against the bank for not disclosing $3.6 billion in bonuses to Merrill before the acquisition was completed. U.S. Judge Jed Rakoff last week rejected a $33 million settlement, accusing both the bank and SEC of trying to avoid a public trial.

Bank of America also faces pressure from Representative Edolphus Towns, a New York Democrat and chairman of the House Oversight Committee, who scolded the bank today for missing a deadline to turn over documents sought by his panel. Chief Marketing Officer Anne Finucane plans to meet with Towns to discuss how to provide information "without violating attorney- client privilege," bank spokesman Scott Silvestri said. Lewis "is holding up very well," spokesman Robert Stickler said. "He doesn’t dwell on things that he can’t control and he remains convinced that the deal will be a good one for shareholders over time."

The Merrill asset guarantees prompted regulators to press for compensation from the Charlotte, North Carolina-based bank. The government said Bank of America benefited from the accord’s implied U.S. backing for three to four months as investors were speculating the company might fail or be nationalized. The agreement reflects "an encouraging sign of increased stability in the financial system," Treasury spokesman Andrew Williams said. The bank said in July it expected a settlement of the dispute within 30 days.

"This is another terrible deal for taxpayers negotiated by the U.S. Treasury," said Linus Wilson, a University of Louisiana professor who has studied government bailout programs. The bank is paying less than 10 percent of a potential $4.3 billion cost, including warrants associated with $4 billion in preferred shares cited in the term sheet and never issued. "The insurance company does not refund most of your premium just because you did not wreck your car in the last six months," Wilson said. Bank of America hasn’t received permission to repay the extra $20 billion of U.S. rescue funds that came with the Merrill deal, Chief Financial Officer Joe Price said last week. The bank received a total of $45 billion from the Troubled Asset Relief Program and expects to repay the money in installments, pending approval by regulators, Price said.

The bank today added its sixth new board member this year, tapping DuPont Co. Chairman Charles "Chad" Holliday Jr. Bank of America will have 15 members on its board, down from 18, with all positions now filled. Holliday "will get the board to gel in the proper way," said Ram Charan, an author, management consultant and former Harvard Business School professor who said he has known the DuPont executive for 25 years. "The board will do what is necessary to get the most out of a franchise that is the envy of the rest of the banking industry." During Holliday’s 11 years as DuPont CEO, the shares of the third-biggest U.S. chemical maker declined 55 percent. Bank of America shares have dropped by more than a third since Lewis took over as CEO in April 2001. Holliday didn’t respond to a request for a comment through DuPont spokeswoman Lori Captain.

It takes character to call time on a cover-up
First there was Bloodgate – a leader ordering a disreputable act, attempting to cover it up and almost getting away with it. The leader was Dean Richards, veteran England rugby international and, latterly, rugby director at the London club Harlequins. In the final minutes of a crucial cup match, Richards wanted Tom Williams, one of his players, off the field so that he could send someone else on. He gave instructions that Williams should fake a bloody injury.
Williams did this by biting a joke-shop blood capsule he had been given and lying on the field. To the staff of the opposing team, it was clearly not blood dribbling from his mouth. He did not improve matters by winking as he came off.

At the disciplinary hearing, Richards, Williams and two other Harlequins officials denied everything. The hearing decided there was insufficient evidence to find anyone guilty, apart from Williams, whom it suspended from playing for 12 months. Shocked at being singled out, Williams took independent advice for the first time. He decided to tell the full story to an appeal committee. Richards then confessed to organising both the incident and the cover-up. He admitted that Williams’ fake injury "looked like something out of the circus". The appeal committee suspended Richards from rugby management for three years. It reduced Williams’ suspension to four months.

Now we have Crashgate. Once again, a leader is accused of organising a cheating incident – this one potentially lethal. Nelson Piquet Jr, a Formula One racing driver, claimed he had been ordered by his bosses at Renault to crash during last year’s Singapore Grand Prix, which he did, to help team-mate Fernando Alonso win. Flavio Briatore, managing director of the Renault team, initially denied it and accused Piquet and his father of blackmail. Last week, however, Renault announced the departure of Briatore and Pat Symonds, the engineering director, and said it would "not dispute" Piquet’s allegations. Briatore was yesterday banned for life and Symonds for five years. Piquet had less compunction about pointing the finger than Williams, but then Renault had fired him during the summer.

Our third attempted cover-up does not seem to have a name yet, but perhaps we can call it "Merrillgate". Last year, when Bank of America announced the acquisition of Merrill Lynch, it told its shareholders that Merrill had agreed not to pay year-end performance bonuses without BofA’s consent. In fact, BofA had already agreed that Merrill could hand out up to $5.8bn in bonuses. The Securities and Exchange Commission investigated but did not discover who was responsible. To resolve the matter, the SEC and BofA agreed that the bank would pay a fine of $33m and undertake not to make any future false statements. The bank would not admit or deny the accusations. The SEC and the BofA submitted this agreement for the approval of Judge Jed Rakoff of the US district court, southern district of New York.

I like US court judgments: their type-written appearance is often matched by a similarly old-fashioned clarity of exposition. Judge Rakoff did not disappoint. Usually, he said in his judgment last week, the courts did not interfere with the amicable resolution of disputes, provided they were "within the bounds of fairness, reasonableness and adequacy". Was this one? No. "It does not comport with the most elementary notions of justice and morality," he said. What the two sides were proposing was that "the management of Bank of America – having allegedly hidden from the bank’s shareholders that as much as $5.8bn of their money would be given as bonuses to the executives of Merrill who had run that company nearly into bankruptcy – would now settle the legal consequences of their lying by paying the SEC $33m more of their shareholders’ money".

The SEC and BofA were asking him to agree that "the victims of the violation pay an additional penalty for their own victimisation". The SEC argued the penalty sent a signal that shareholders needed to assess the quality of BofA management. Judge Rakoff replied: "The notion that Bank of America shareholders, having been lied to...need to lose another $33m of their money in order to ‘better assess the quality and performance of management’ is absurd." Corporate cover-ups go on all the time. If Williams had not felt scapegoated and Piquet not been fired, perhaps their bosses would have escaped detection. BofA’s executives seem to have thought they could get away with it too. Another judge might have let them. Their misfortune was to come up against one as luminous as he was angry.

Bank chiefs owe a personal debt to taxpayers
by William Cohan

Few could argue with Barack Obama last week when the US president said Wall Street owed a debt of gratitude to taxpayers. Some of America’s largest banks would not have survived without the trillions of dollars the government used to shore up the financial sector. Less remarked upon, however, is the personal windfall executives of the bailed-out institutions received as a result of Washington’s largesse. This is no doubt a controversial conclusion, since most of the chief executives whose banks were forced to take funds from the troubled asset relief programme, or Tarp, nearly a year ago will point immediately – and correctly – to the fact that many of them eschewed a bonus for 2008.

For instance, Lloyd Blankfein of Goldman Sachs was paid about $70m in 2007 but only his $600,000 salary for 2008 (plus $111,000 for the cost of a car and driver). John Mack, who has just announced his resignation as chief executive of Morgan Stanley effective from January 2010, received an annual salary of $800,000 (plus $438,000 of imputed income from perks such as use of the corporate jet, which Morgan Stanley requires for "security" purposes) in 2008. He never received a cash bonus during his four and a half years at the helm at Morgan Stanley, although he did receive 500,000 shares of restricted stock, then worth $26m, when he rejoined the bank from Credit Suisse in June 2005. Jamie Dimon, chief executive of JPMorgan Chase, had to make do with his $1m salary in 2008 (plus car and driver and aircraft income) but received no cash bonus. Ken Lewis, the chief executive of the beleaguered Bank of America, somehow came out the winner on a relative cash basis in 2008, with a salary of $1.5m and, like the others, perk allowances and no cash bonus.

But whether these men received a cash bonus or not in 2008 almost certainly obscures the important larger point: the bail-outs of their banks through the Tarp, through the Federal Deposit Insurance Corporation guarantees of their debt financings and through government-backed securitisation programmes such as the term asset-backed loan facility, or Talf, provided an essential boost to long-term investor confidence – and their stock prices – at a crucial juncture. This is how each of these men benefited personally from the government bail-outs.

To be sure, the government’s initiatives were not solely responsible for keeping these institutions alive. Their own efforts were crucial too, whether it was Goldman’s decision to raise $10bn from both the public markets and from investor Warren Buffett on September 29 or Morgan Stanley’s ability to raise – in a cliffhanger – $9bn from UFJ Mitsubishi on October 10. But the $10bn both Goldman and Morgan Stanley received from the Tarp on October 13 did not hurt either, and nor did the swift approval by the Federal Reserve – on September 22 – that allowed the two to become bank holding companies and thus receive virtually free financing on a regular basis from the central bank. As for Bank of America, it would be hard to argue that without the US taxpayers’ $45bn the bank would still be around. (For what it is worth, JPMorgan does not believe it was bailed out but rather that it helped save other banks.)

What is not hard to argue is that the smorgasbord of government programmes and initiatives have helped ensure the survival of these institutions by restoring investor confidence, in turn boosting their stock prices and the value of the chief executives’ stock holdings.

For instance, Mr Blankfein’s 3.4m shares of Goldman, worth about $168m at one point last year, were worth closer to $623m (€425m, £385m) at Friday’s closing prices. Mr Mack’s 4m Morgan Stanley shares, which were worth as little as $27m, have rebounded to $125m. Mr Dimon’s 11.2m shares of JPMorgan are valued at about $503m these days, up considerably from their recent low of $168m. And Mr Lewis’s 4.7m Bank of America shares, at one point valued at around $15m, are now worth about $83m. These calculations do not reflect the additional increased value of the executives’ stock options and unvested stock awards, which have moved up smartly – at least on paper (they are not tradeable) – as a result of the rise in the banks’ stock prices.

This is not a trivial matter, although it is barely mentioned. Those who find the observation petty or unfair would do well to ask Dick Fuld, Lehman Brothers’ one-time chief executive, if he would be willing to trade places with any of his former Wall Street brethren. Unlike Mr Blankfein and Mr Mack, he could not win Fed approval to convert Lehman into a bank holding company. We all know there was no government bailout for Lehman. After Lehman filed for bankruptcy a year ago, Mr Fuld’s 10m shares of Lehman plus options – once worth as much as $1bn – were rendered worthless, which seems like the correct price for the stock of a bank that was way overleveraged and took too many foolish risks. "I don’t expect you to feel sorry for me," Mr Fuld testified in front of Congress last October. And we don’t.

But a year later, we still have no good answer as to why the other chief executives were permitted to benefit from the government’s largesse while Mr Fuld could not.

Congressional Report Says A.I.G. Has Stabilized
The research arm of Congress reported on Monday that the American International Group’s financial condition had stabilized but said it was not clear whether the giant insurance group would ever be able to restructure and repay its federal rescue package. The Government Accountability Office’s new report on the bailout of A.I.G. coincided with word that a senior House Democrat was planning to push for an easing of A.I.G.’s terms on its government debt.

Representative Edolphus Towns of New York, the chairman of the House Committee on Oversight and Government Reform, was said to be considering debt relief after meeting last week with Maurice R. Greenberg, A.I.G.’s former chief executive, who was forced out during an accounting scandal in 2005. The terms of A.I.G.’s rescue have already been eased three times because they were too tough for the troubled giant to manage. The company has been extended $182 billion by the Federal Reserve and the Treasury, although not all of it has been in use at the same time.

The G.A.O. said the huge bailout had succeeded in braking A.I.G.’s fall by the first half of this year, and was producing signs of improvement among A.I.G.’s individual insurance companies. Although the crisis at A.I.G. was touched off by exotic derivatives, other activities, such as a risky securities-lending program, harmed its insurance business, too. The government researchers said A.I.G.’s ability to turn the corner would depend on "the long-term health of the company, market conditions, and continued government support."

Fed not acting like there's a recovery
Federal Reserve Chairman Ben Bernanke has said that the recession is "very likely over," but the Fed isn't acting like we're in a recovery. Economists widely believe the central bank will keep interest rates between 0% and 0.25% at the conclusion of its two-day meeting Wednesday. The Fed is also expected to say very little about its plans to wind down more than a trillion dollars in lending and bailout programs, and it will likely stay away from any overly enthusiastic language about the economic outlook.

"This will be one the quietest Fed meetings in quite some time," said Rich Yamarone, director of economic research at Argus Research. "The last thing they want to do at this stage of the game is to upset the apple cart. They're liking what they're seeing in some of the economic data, so it's just steady as she goes." The Fed uses its rate-setting tool in an attempt to balance unemployment and inflation, typically lowering rates during a recession to boost economic activity and raising rates coming out of a downturn to stave off rampant inflation.

But experts argue that the recovery from this recession is so tenuous that the Fed is right to keep its finger off the rate-hike button for now. "The Fed normally anticipates the recovery by raising rates, taking away the punch bowl just as the party gets interesting," said Peter Morici, professor of economics at the University of Maryland. "But this is not a normal recovery. It's tepid and weak." Unemployment is still rising, retail sales are far from robust, manufacturers' capacity utilization remains at ultra-low levels and wages are still depressed. Home sales and new home construction are making a comeback, but they're coming off of historic lows.

Inflation not an issue for now: As a result of the still shaky economy and low consumer confidence, concerns about inflation have been mostly muted. "If people aren't spending the money, you can't have inflation," said Morici. "If Bernanke puts a pile of money out on the street, it doesn't count if it doesn't chase goods." Still, the Fed continues to oversee dozens of expensive and unprecedented economic rescue programs. They have largely been credited with staving off an even deeper and more prolonged recession, but they could contribute to out-of-control inflation if they are not pared back in time.

"Bernanke is a student of history, and he knows that the real problems during the Depression occurred when the government pulled back its stimulus too quickly," said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com. "Also, the Fed chief is up for reappointment, and he won't help his case if unemployment hits 12, 13 or 14%." "But at the same time, he should start to gently pull back some of the programs to ease inflation concerns," Roberts added.

No rate changes until next year: Roberts said a gradual winding down of those programs will reduce the risk of inflation without slamming the brakes on the recovery. Most economists think the Fed is keeping a close eye on any signs of stabilization in the labor, banking and housing sectors. When those become more obvious, the Fed will need to aggressively raise rates and end those emergency lending initiatives.

But a majority of forecasts don't show stabilization until the end of the year or beginning of 2010. Until then, the Fed is likely to keep rates unchanged so it doesn't disrupt what appear to be the underpinnings of an economic rebound. "The idea is to not tighten up too soon," said Morici. "If the economy turns down again, we could fall off the cliff." 

Fed Rejects Geithner Request for Study of Governance, Structure
The Federal Reserve Board has rejected a request by U.S. Treasury Secretary Timothy Geithner for a public review of the central bank’s structure and governance, three people familiar with the matter said. The Obama administration proposed on June 17 a financial- regulatory overhaul including a "comprehensive review" of the Fed’s "ability to accomplish its existing and proposed functions" and the role of its regional banks. The Fed was to lead the study and enlist the Treasury and "a wide range of external experts."

Some top central bank officials, after agreeing to the review, saw a potential threat to Fed independence after the Treasury released the proposal, two of the people said. The Obama plan said the Treasury would consider recommendations from the review and "propose any changes to the Fed’s governance and structure." "It is not obvious at all why that is a Treasury responsibility or even appropriate why the Treasury would undertake that kind of study," said Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey, and a former Atlanta Fed research director. "The Fed was created by Congress and it is not part of the executive branch."

U.S. lawmakers have also called for a review of the Fed’s power and structure, saying Fed Chairman Ben S. Bernanke overstepped his authority as he bailed out creditors of Bear Stearns Cos. and American International Group Inc. while battling a crisis that led to $1.62 trillion in writedowns and losses at financial firms. While the report requested by the Treasury hasn’t been formally scrapped, no work has been done on the project, which was due Oct. 1, the people said. Treasury spokesman Andrew Williams declined to comment, as did Fed spokeswoman Michelle Smith.

The central bank is performing its own reviews of possible operational changes following the financial crisis. Fed Governor Elizabeth Duke is leading an internal study of the roles of the directors that serve on each of the boards at regional Fed banks. "The institution is trying to keep a low profile," said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington and the former director of Division of Monetary Affairs at the Fed Board. "To publish a report now invites comment on that report."

The Senate passed 96-2 a nonbinding budget amendment in April supporting "an evaluation of the appropriate number and the associated costs" of the district banks. The measure was sponsored by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Alabama Senator Richard Shelby, the senior Republican on the panel. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, has also called for more scrutiny of the central bank, saying last year he aims to probe how the 12 regional Fed presidents are appointed and their role in setting interest rates. The Fed banks are semi-private entities, each overseen by a nine-member board of directors.

Legislation in both houses of Congress would allow for audits by the Government Accountability Office of the central bank’s monetary policy and other operations. Bernanke opposes the measure, which was introduced in the House by Representative Ron Paul of Texas, a Republican. Frank has scheduled a committee hearing on the issue for Sept. 25. Along with the study by Duke, the Fed is reviewing how to overhaul supervision based on lessons learned from the financial crisis. The Treasury interest in a Fed structural review partially stems from the administration’s proposal to make the central bank the lead regulator for the largest, most inter-connected financial institutions.

Fed Governor Daniel Tarullo, an Obama appointee, is working on changes to the supervisory process that are preparing the central bank for a larger role in tracking risks across the financial system. Tarullo is focusing on bank-to-bank comparisons and quantitative scenario testing of bank portfolios. The Fed is currently examining the vulnerability of banks with assets under $100 billion to falling commercial real estate values. Congressional leaders have balked at the notion of giving the Fed more power and are leaning toward vesting authority over capital, liquidity and risk-management practices of big banks in a council of regulators. "There will be a council," Frank told Bloomberg Television Sept. 14.

The review led by Duke followed the resignation in May of Stephen Friedman as New York Fed chairman because of ties to Goldman Sachs Group Inc. Friedman is a director on Goldman Sachs’s board.
Goldman Sachs became a bank holding company in September 2008, a change that would have normally barred Friedman from continuing to serve in his New York Fed post. Officials gave him a waiver so he could remain in the job, which has mostly an advisory role. Friedman, chairman of Stone Point Capital LLC, said at the time of his resignation that he had complied with all the Fed’s rules and his service on the board was "mischaracterized as improper." Some analysts said a Fed revision of the role of directors is overdue.

"Allowing local bankers to play a leading role in selecting reserve bank presidents is the most worrying aspect of the current system," Lou Crandall, chief economist at Wrightson ICAP LLC, wrote to clients in July. District bank presidents are nominated by committees made up of people whose institutions the nominees may have supervised. "The conflicts of interest inherent in the current system are glaring," Crandall said.

Ginnie Mae MBS seen vulnerable to FHA loan losses
Investors in U.S. mortgage bonds backed by the Federal Housing Administration own one of the safest bets on Wall Street, yet mounting defaults on the underlying collateral are seen posing risks. Ginnie Mae pools loans backed by the FHA and Veterans Administration and packages them into mortgage-backed securities. Unlike its mortgage market counterparts, Fannie Mae and Freddie Mac, they carry the full faith and credit of the U.S. government.

But homeowners have increasingly been defaulting on their mortgages, leading to uncertainty about the timing of cash flows and raising the risk that Ginnie Mae bonds will be paid back early, a phenomenon known as prepayment risk. MBS investors do not want to be paid early. An issuer may repurchase loans which are in default and this repurchased loan is paid in full to the investor at par, who then must reinvest the proceeds, possibly in lower yielding securities. The only risk of loss is to the extent an above par price was paid.

Ginnie Mae bonds have become very richly valued on the back of their government guarantee, and some investors are exiting the debt because they don't think the prices can hold. "We have been net sellers of Ginnie Mae MBS due to rich valuations of these securities," said Jeffery Elswick, director of fixed income at Frost Investment Advisors in San Antonio, Texas. So far in 2009, Ginnie Mae MBS prepayments have been running ahead of Fannie Mae and Freddie Mac due to greater, relative to the other U.S. mortgage agencies, mortgage defaults as well as a shorter timing in loan modifications.

"This has resulted in higher prepayment volatility and lower future relative valuations in Ginnie Mae MBS relative to the other conventional agency MBS," Elswick added. Some 7.8 percent of FHA-backed loans were 90 days late or more delinquent, or in the foreclosure at the end of June, according to the Mortgage Bankers Association, up from 5.4 percent year ago. These loan losses have taken a toll on the FHA's reserves. The FHA on Friday proposed a number of rules changes designed to improve credit quality of FHA-guaranteed loans. The changes are expected to help rebuild reserves falling below congressionally mandated levels.

In research published on Friday, Citigroup said the changes should lead to slower Ginnie prepayments, especially for higher-premium coupons. "Over the long run, the rules are likely to further improve Ginnie Mae credit quality," Citi said. Matt Hastings, portfolio manager of the Schwab Premier Income fund, who is based in San Francisco, California, said prepayment risk is inherent in Ginnie Mae MBS, but they are trying to limit their exposure, although they cannot reduce it entirely. Hastings, also co-manager of the Schwab GNMA fund, said their strategy is to focus on "older," or "seasoned," bonds, for example, those backed by loans originated earlier this decade. "Seasoned securities have more voluntary and involuntary prepayment history for investors to analyze," he said.

Ginnie Mae and the FHA, units of the U.S. Department of Housing and Urban Development, have been pivotal players in the hard-hit U.S. housing market. The FHA extends credit to borrowers who in many cases could not afford large down payments or who wanted to refinance, but had little home equity. Ginnie Mae's market share, while a relatively small component of the roughly $5 trillion agency MBS market, has ballooned.

The Ginnie Mae MBS market surged to $640 billion at the end of 2009's first quarter from $450 billion at the end of 2007. During the same time, Fannie Mae increased to $2.855 trillion from $2.259 trillion, while Freddie Mac grew to $1.819 trillion from $1.727 trillion, according to Arthur Frank, director and head of MBS research at Deutsche Bank Securities in New York. "The demise of the securitization market at the end of 2007 is behind the growth since the only outlet for new securitization became Fannie Mae, Freddie Mac and Ginnie Mae," he said.

Ginnie Mae MBS prices have gained more than Fannie Mae MBS, mostly since investors have demanded higher credit quality and depository investors prefer an asset with a lower risk weighting toward regulatory capital, according to Kevin Cavin, a mortgage strategist at FTN Financial Capital Markets in Chicago. MBS from Ginnie Mae have a zero percent risk weighting, while Fannie Mae and Freddie Mac have a 20 percent risk weighting. "This has made banks big buyers," Cavin said.

Using the 30-year 5.00 percent MBS coupon -- the most liquid coupon -- as a proxy, Ginnie Mae has seen 24 basis points more spread tightening to Treasuries this year than Fannie Mae, he said.
Ginnie Mae's 30-year 4.50 percent coupon is at it richest level since April versus Fannie Mae's 4.50 percent issue. Todd Abraham, co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh, Pennsylvania, said he is not overly concerned about Ginnie Mae MBS. "While the prepayment risk for Ginnie Mae defaults/repurchases is not insignificant, it is manageable and preferable to the substantial losses that are occurring in sectors lacking the government guarantee," he said.

$30 billion ARM home loan time bomb set for 2010 in Bay Area
Thousands of Bay Area homes have a ticking time bomb embedded in their mortgage. The homes were purchased with loans known as option ARMs, short for adjustable rate mortgages. Next year, many option ARM payments will begin to readjust, slamming borrowers with dramatically higher monthly mortgage bills. Analysts say that could unleash the next big wave of foreclosures - and home-loan data show that the risky loans were heavily used in the Bay Area.

From 2004 to 2008, "one in five people who took out a mortgage loan (for both purchases and refinancing) in the San Francisco metropolitan region (San Francisco, Alameda, Contra Costa, Marin and San Mateo counties) got an option ARM," said Bob Visini, senior director of marketing in San Francisco at First American CoreLogic, a mortgage research firm. "That's more than twice the national average. "People think option ARMs (will be) a national crisis," he said. "That's not really true. It's just in higher-cost areas like California where you see their prevalence."

Of the 10 metro areas nationwide with the most option ARMs, three are in the Bay Area, according to Fitch Ratings, a New York research firm. They are the East Bay counties of Alameda and Contra Costa, the South Bay area of Santa Clara and San Benito counties, and the counties of San Francisco, Marin and San Mateo. Together, these areas account for the second-most option ARMs in the country, although they are still far behind the greater Los Angeles area (including Los Angeles, Riverside, San Bernardino and Orange counties), according to Fitch data.

First American shows more than 54,000 option ARMs issued here with a value of about $30.9 billion. Fitch shows more than 47,000 option ARMs here with a value of about $28 billion. Both say their data underestimate the totals. Why are so many option ARMs clustered here? "In markets where home prices were going up rapidly, more and more borrowers needed a product like this to afford something," said Alla Sirotic, senior director at Fitch Ratings. Option ARMs were designed for savvy real estate investors and people whose income fluctuates, such as those paid on commission. Instead, the loans became a tool for regular people to "stretch" to buy homes that were beyond their means.

That's because option ARMs let borrowers choose to make very low payments for the first five years. During that initial period, borrowers can pick their payment option - they can pay interest and principal, interest only, or a minimum monthly payment that doesn't even cover the interest. Fitch said 94 percent of borrowers elected to make minimum payments only. The shortfall gets added to their loan balance, which is called negative amortization. The amount they owe can grow substantially.

After five years, or once the loan balance reaches a certain threshold above the original balance, the mortgages "recast" and borrowers must make full principal and interest payments spread over the loan's remaining life. Fitch said that new payments average 63 percent higher than the minimum payments, but could be more than double in some cases. "When option ARMs recast, the payment shock is much more intense than we've seen (with other types of loans, such as subprime)," said Maeve Elise Brown, executive director of Housing and Economic Rights Advocates in Oakland, a consumer advocacy group. "That makes them potentially much more damaging."

Unlike subprime loans, which were more commonly used for entry-level homes, option ARMs started out with high balances. In the five-county San Francisco area, option ARMs average about $584,000 and were used to buy homes averaging $823,000, according to an analysis of First American data. That means they'll spawn foreclosures among upper-end homes. "The mid- to high-end real estate market is already stranded right now," said Mark Hanson, principal of Walnut Creek's the Field Check Group, a mortgage consultant. "Any sort of extra inventory is not going to be welcome for that market whatsoever." Option ARMs became widespread starting in 2005, which is why the recasts and higher payments will hit starting in 2010, five years later.

Joey Amacker of Newark, who works as an account manager for a catering company, refinanced his home with an option ARM for $624,000 so he could pull out money to build an addition. The friend who sold him the loan assured him that an option ARM was a safe and affordable product, he said. Amacker said he initially made only the minimum monthly payment of $1,800, which covered part of his interest and none of the principal. The amount he owed grew to $660,000 by November 2008, according to loan documents.

Meanwhile, payments that would cover both interest and principal also escalated above his reach, said Amacker, a single father of twin teenage boys. Although he wanted to pay more than the minimum, "it was a struggle, borrowing from Peter to pay Paul," he said. His 21-year-old daughter moved in to help out, and he rented out the addition he'd built. But he couldn't keep up with the payments. He's been trying to get his bank to modify the loan, but says it doesn't get back to him. The bank did not respond to a request for comment.

Between the negative amortization and his missed payment and penalties, Amacker's total debt has ballooned to $725,000, while the house is probably worth about $500,000, he said. "I feel so ashamed of how I could have gotten myself in such a bad situation," he said. Like Amacker, most option ARM borrowers owe much more than their homes are worth, so they cannot refinance their way out of trouble.

"The average option ARM borrower is significantly underwater, so much that they don't think they'll get out," Sirotic said. On average nationwide, option ARM borrowers started out with loans for about 79 percent of their home's value (the other 21 percent may have been covered through a down payment, a second loan or a combination of the two). But now, on average, the amount these borrowers owe is 126 percent of their home's value, based on depreciation and not including the effects of negative amortization, Sirotic said. That means, for instance, someone with a $600,000 mortgage might have a home now worth only $476,000.

That could explain the ominously high default rates. Even though most option ARMs have not yet adjusted higher, 27 percent of option ARM loans in the five-county San Francisco metro area are at least 90 days past due or in foreclosure, First American said. The option ARM scenario will unfold over several years, which offers some hope that there may be time to avert a deluge of foreclosures. The bulk of option ARMs recast dates are spread out from 2010 through 2012. Especially for the loans that recast later, it's possible that a solution will arise, either through rising home prices allowing them to refinance, or through extra intervention from the government or lenders to help these borrowers.

"This will be another factor keeping home prices from recovering," said Cynthia Kroll, senior regional economist with the Fisher Center for Real Estate and Urban Economics at UC Berkeley's Haas School of Business. "It should be a message to policymakers in Washington that there is a big group out there that falls outside the parameters of what's being addressed by current policy."

From 2004 to 2008, almost one-fifth of all mortgages, for both home purchases and refinancing, in the San Francisco and San Jose metro areas were option ARMs - more than double the national average. Option ARMs were even more common in the suburban counties of Sonoma (25% of home loans) and Solano (28%). Though most option ARMs have not yet recast and hit borrowers with higher payments, they are going into default at extremely high rates. One quarter or more of all option ARMs in the regional areas are more than 60 days delinquent or already in foreclosure. Analysts say option ARM borrowers are so underwater that they may be choosing to walk away.

Debt deflation laboratory of the Baltics
Property prices in Estonia's Hanseatic capital of Tallinn have fallen by 59pc from their peak in the Baltic boom, a remarkable state of affairs for an EU country nestled against Russia on the most dangerous fault line in Europe. Cost per sq.m has dropped from €1,611 (£1,455) to €669 since April 2007, according to Ober-Haus Real Estate Advisors. Swedbank says up to 30pc of its mortgages in Estonia are in negative equity. Recent loans are in euros – not the local kroon.

Professor Ülo Ennuste from Tallinn University says the private net wealth of Estonia's people has fallen below zero. I know of no other country in the world where this has occurred, though Latvia may be deeper in hock. Estonia's foreign debt is 116pc of GDP, second highest in Eastern Europe. It is not a good moment for the poster-child of the flat-tax revolution, but those crowing the end of "Margaret Thatcher's Baltic Model" neglect half the story. Estonia's euro peg is anything but free-market. It makes Tallinn dance, awkwardly, to Frankfurt's distant tune. It stoked the boom by enticing people to borrow cheap at eurozone rates: it is now prolonging the bust.

The economy will contract by 14.5pc this year, twice as bad as Iceland (OECD forecasts). Industrial production has fallen 28pc. The unemployed receive half their former pay for a few months, then benefits fall to £12 a week. The shock awaits this winter. Chief victims will be ethnic Russians on the lower rungs of industry. Most governments would try to cushion the blow. Estonia is instead pushing through yet another austerity package to keep the budget deficit below the EMU ceiling of 3pc of GDP. Such is the totemic appeal of euro entry in 2011.

"This is an absolutely mad policy," Mr Ennuste told an Open Europe Forum. "We're in a vicious circle where thousands more lose their jobs and don't pay taxes, so there have to be more cuts. We need fiscal relief packages at once. This makes nobody happy but the Kremlin." The government could spend more. The national debt is just 5pc of GDP. It chooses not to do so. Such ultra-orthodoxy shows admirable discipline. Estonians will be a shining example to us all if they pull it off – and hold their society together. "Estonia's credit rating (A-) is going to rise against other countries next year," said economy minister Johan Parts. "The next phase of the global crisis is how states are going to manage their huge deficits."

Dag Kirsebom, the author of Hard Landing: a Fairy Tale of the Rise and Fall of the Estonian economy, said the elites had lost the plot. "They are complacent, and they shouldn't be. We're in a downward spiral but all they are focused on is joining euro. "The free-market model worked great for 15 years and then they ruined it with crazy lending. Did Margaret Thatcher say you should borrow money from Swedish banks to buy German cars? I don't think so. They screwed up, and now it is too late. They need to let the currency fall to reflect the damage already done."

The euro is more than a currency ambition for Estonia. Like joining Nato, it is part of a national strategy of locking into every part of Europe's security system as quickly as possible to keep Russia at bay. What puzzles me is the strange serenity in the ministries. Officialdom seems to think it enough that they have managed to defend their peg without recourse to the IMF, and that their neighbour has collapsed even faster. "The situation in Latvia is a tragedy," said Mr Parts. "Nobody will lend them any money except the IMF, and it has the same menu whether you are Latvia or Zimbabwe. The big difference between us and the rest of the Baltics is that we had a buffer of reserves, and we didn't run budget deficits in the good times."

Mr Parts quoted Aristotle to defend Estonia's currency peg: "Give me a single fixed point and I can move the globe". But is the euro the right "fixed point" when the currencies of Sweden, Russia, Poland, Ukraine have plunged around you? The official view is that exports are not sensitive to the exchange rate. This overlooks the suffocating effect of deflation in a post-bubble economy saddled by debts and wage levels that raced ahead of productivity. The country faces an "internal devaluation" within the EMU bloc to right the ship again. Such cures are painfully slow, and very damaging to democratic solidarity.

Edward Hugh from Baltic Watch advises the four fixed-peggers – Estonia, Latvia, Lithuania, and Bulgaria – to bite the bullet and negotiate a joint devaluation against the euro rather than suffer the political agonies of deflation. Estonia's leaders will hear none of it. They can defend the peg as long as reserves last at the central bank. They have the firepower to hold the line, but does that make it a wise policy?

China weighs purchase of IMF gold
China is considering buying gold being offered for sale by the International Monetary Fund, Market News International said on Monday, citing two unnamed government sources, but the report could not immediately be confirmed. "China will consider buying if the price is right and the return is relatively high," MNI quoted one of the government sources as saying. Gold, which had dipped just below $1,000 an ounce, rebounded to $1,003.45 after the report. That would put the market value of the 403.3 tonnes on offer from the IMF at close to $13 billion.

"There was a small reaction to the news that China may discuss its gold plans at the G20, it recovered a little, but overall the market isn't overly concerned, not yet anyway," a Europe-based trader said. China, the world's biggest producer and buyer of gold, revealed earlier this year that it had lifted its own stocks of gold to 1,054 tonnes from 400 tonnes when it last reported its holdings in 2003.

The IMF formally endorsed a plan on Friday to sell 403.3 tonnes of gold, one eighth of its holdings, to central banks or in the gold market. Two Chinese central bank officials not directly involved in the issue told Reuters China should consider buying the gold being put up for sale by the IMF, but only at a big discount. The officials, neither of whom had direct knowledge of the gold strategy, said they were expressing personal opinions.

"China only has about 1,000 tonnes of gold reserves and the investments in other assets are performing not very well," said one official, who declined to be named. "I think we should build up more gold with foreign reserves, but when to buy is the key. It's a good idea if China can buy the gold from IMF at prices well below market level." The official said he had no idea if the sale would be on the agenda for the G20 summit. "I personally think China should buy the IMF gold. It will help China to diversify its reserve assets," the second official said. "For the purpose of reserve safety, it is also good to increase the proportion of gold by a suitable amount."

The estimated $13 billion cost of the is small beer for the Chinese exchequer, with foreign exchange reserves of more than $2 trillion. If it decided to buy the gold, China would be likely to seek a discount for the bulk purchase, since a market sale would put heavy pressure on the price. The IMF has said it will try to sell the gold, one-eighth of its holdings, to central banks. If there are no takers, it could sell to the market, which saw world gold demand of 3,880 tonnes last year, according to World Gold Council figures. The huge increase in reserves that China announced earlier this year had had little impact on the market because the gold was accumulated over a long period and mainly through direct purchases from Chinese producers.

HSBC bids farewell to dollar supremacy
The sun is setting on the US dollar as the ultra-loose monetary policy of the US Federal Reserve forces China and the vibrant economies of the emerging world to forge a new global currency order, according to a new report by HSBC. "The dollar looks awfully like sterling after the First World War," said David Bloom, the bank's currency chief. "The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK – debt is racing up to 100pc of GDP," he said.

Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia's "mercantilist mindset" of recent decades is about to be broken by the spectre of an inflation spiral. The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.

A monetary policy of near zero rates – further juiced by quantitative easing – is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis. What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt.

The Fed's super-loose policy is turning the dollar into the key funding currency for the next phase of the global "carry trade", taking over the role of Japan during its period of emergency stimulus. Mr Bloom said regional currencies would emerge as the anchor for their smaller trading partners, with China, Brazil, or South Africa substituting the role of the US. Australia is already linking its fortunes to China through commodity ties.

Nations Ready Big Changes to Global Economic Policy
The Group of 20 nations is scrambling to finalize a plan before this week's Pittsburgh summit that would commit the U.S., Europe and China to make big changes in national economic policies to produce lasting growth as the world recovers from the worst recession in decades.

The G-20 summit, the third such gathering in a year, is shaping up as a test of whether industrialized and developing nations can function as a board of directors for the global economy. The focus is on a U.S. proposal, called the "Framework for Sustainable and Balanced Growth," whose details haven't been previously disclosed. If implemented, the framework would involve measures such as the U.S. saving more and cutting its budget deficit, China relying less on exports, and Europe making structural changes to boost business investment.

Leaders from the G-20 are working on ways to enforce commitments countries make, which would involve reviews -- though no specific sanctions. Similar efforts have been attempted and have failed in the past. This time, though, the U.S. and other nations believe they can produce a different result, having grappled with the deepest recession since the Great Depression.

"As private and public saving rises," in the U.S. and other countries, "the world will face lower growth unless other G-20 countries undertake policies that support a shift towards greater domestic, demand-led growth," senior White House aide Michael Froman wrote to his G-20 colleagues in a letter dated Sept. 3. In the missive, which has not been made public, he called the framework "a pledge on the part of G-20 leaders" to press new policies.

The proposal has set off political wrangling among the G-20, with European countries arguing that the U.S. may be unrealistic about how rapidly the global economy can grow and with China only reluctantly agreeing to participate. The U.S. helped bring along the Chinese by endorsing Beijing's view that developing countries deserve a bigger stake in international institutions such as the International Monetary Fund.

The G-20 countries have yet to decide how detailed to make their pledges to change. And the U.S. and Europe have different ideas on how to enforce them. "Implementation is always the issue," says Timothy Adams, a former senior Bush Treasury official. "If we wait even one more year, it may be too late." The sense of urgency will have faded, he says. Past efforts to remedy these issues have collapsed, especially after a sense of crisis had passed. In the 1980s and early 1990s, the Reagan, Bush and Clinton administrations regularly pushed for rebalancing -- although Japan was the target then -- and never made much headway. Once Japan plunged into a decade-long slump, the U.S. eased off.

In the days leading up to the Pittsburgh summit, representatives of the G-20 nations have agreed how to dodge one big issue: devising an "exit strategy" to withdraw the monetary and fiscal stimulus deployed to fight the global recession. The solution is to promote such a strategy as necessary, while stopping short of articulating specifics. Any prescription to phase out various economic programs could spook markets into anticipating a quick pullback, G-20 officials say.

A compromise is emerging on another, two-pronged issue: How best to keep financial excess and corporate compensation in check. The summit is likely to produce support for new limits on compensation, a theme being pushed by the Europeans. The G-20 is also expected to approve new requirements sought by the U.S. that banks hold more capital to discourage risk-taking and absorb big losses.

G-20 officials say they are counting on sense of camaraderie to keep them working together rather than pursuing conflicting national goals. "In this age of deeper globalization, international coordination is critical," says Il SaKong, a prominent South Korean economist who oversees that country's G-20 effort. "The leaders learned this lesson; they felt it."

China, meanwhile, has pressed for more voting power for developing countries at the IMF. In response, the U.S. is pushing the G-20 to agree to change IMF voting, so that it's split nearly 50-50 among industrialized and developing countries, rather than the current 57% to 43% lineup. Although much of the lost power would come at the expense of Europe, the European Union leaders said at a recent meeting that they are willing to support some degree of change.

The move to give developing countries a bigger voice has built a degree of trust within the G-20 and helped give impetus to make the framework for growth a central focus. If approved, the framework would require countries to make specific proposals promising significant change. Those countries running current account deficits, most notably the U.S., would have to define ways to boost savings. Nations running surpluses -- China, Germany and Japan, among others -- would detail how they propose to reduce any reliance on exports. The U.S. would likely need to commit to a sharp deficit reduction by government.

Europe would need to commit to improving competitiveness. That could mean passing investment-friendly tax measures and reopening the debate about making it easier to fire workers -- viewed as one way to encourage employers to hire more freely. China would face perhaps the biggest challenge: remaking its economy so it relies far less on exports to the U.S., thereby running up huge foreign-exchange reserves.

In the past, China has shied away from such "rebalancing" efforts because of the magnitude of the changes and because it believes it's being singled out for the world economic woes, which it feels were caused by regulatory lapses and other failings in the U.S. and Europe. "They don't want fingers pointed at them," says Nicholas Lardy, a China expert at the Peterson Institute for International Economics, a Washington D.C., think tank. "It comes up over and over again."

But U.S. and European officials say that this time China is on board because it recognizes that its export-driven model won't deliver sufficient growth in the future, and because the new framework would potentially spread the political pain to trading partners too. In 2006, the IMF tried its hand at rebalancing by convening talks among the U.S., euro-zone nations, Japan, China and Saudi Arabia. Specific proposals were made, but nothing was implemented, as Treasury Secretary Henry Paulson figured he'd have better luck bargaining bilaterally with China. He didn't, especially when each country's economy was expanding.

"The really hard part is getting an agreement of what the rules should be and what the penalty is" for breaking them, said Anne Krueger, a former IMF deputy managing director. G-20 officials argue that if they don't succeed this time, the world will remain stuck in economic patterns that could reduce potential growth and perhaps produce another crisis down the line. Any new framework hinges on proper enforcement. To that end, European sherpas, including the British, are pushing for a "trigger" mechanism. If country's current account surplus or deficit goes over a certain limit, for instance, that would require negotiations to get the country back in line.

The U.S. is pressing for what it calls a "peer review" process, by which G-20 countries, with the help of the IMF, would assess whether each other's policies are working. None of the countries, though, are calling for specific redress, such as trade sanctions or foreign-exchange penalties for countries that don't live up to their promises. Threats of penalties have frightened off Asian nations in the past and would likely sour any deal. Instead, the G-20 officials point to how they have dealt with protectionism as a model. Each country regularly pledges it won't take any protectionist action. The World Trade Organization calls out countries that violate their pledge. Generally, G-20 officials believe the pledges have had a restraining effect on governments.

European property groups face debt time-bomb
European commercial property owners face a wave of complex debt refinancings and restructurings that pose a threat to the sector, according to bankers and industry groups. Senior bankers and industry representatives in the UK used a meeting with the Bank of England in the summer to highlight the problems caused by billions of pounds worth of debt that needs to be refinanced or has breached banking agreements. They are particularly concerned about the amount of European debt packaged in complex bonds, known as commercial mortgage-backed securities (CMBS), where restructuring has proved especially difficult and highlighted this issue to the Bank for the first time.

The group, which includes senior bankers and representatives from the British Property Federation, the Royal Institution of Chartered Surveyors and the Investment Property Forum, believes the CMBS market remains important to the property sector. It discussed with the Bank whether a central bank guarantee could be used to underpin the debt issued, or whether the real estate investment trust market could be used by banks to offload their loans. There is mounting concern among industry professionals about how to restructure or refinance the $2,100bn of European commercial property loans, in particular the $200bn in CMBS.

A report from the UK industry group that met with the Bank highlighted that the UK commercial property sector could be in negative equity until 2017 and undercapitalised by up to £120bn ($195bn) based on current conservative banking refinancing terms. Close to £43bn of loans to the commercial property sector are due for repayment this year alone, according to De Montfort University research. Half of the outstanding European CMBS market needs to be repaid in 2011 and 2012, and CMBS in default have already proved difficult to restructure. "The amount of outstanding CMBS that need to be refinanced poses an absolutely huge problem, which is waiting to hit the market," said Edmund O’Kelly, head of real estate restructuring at KPMG. "A lot of the technology for creating the structures was imported from the US, but they have never been tested in Europe. Restructuring CMBS is unchartered territory."

Oil Options Hit Highs as Verleger Predicts 44% Price Plunge
Oil traders are paying more than ever in the options market to protect against a plunge in crude prices. The gap between prices of options betting on a decline and those that would profit from a rise in oil widened to a record 10 percentage points, according to five years of data compiled by Banc of America Securities-Merrill Lynch. Crude stockpiles in the U.S. are 14 percent larger than a year ago and OPEC is pumping 600,000 barrels a day more than the world needs, according to the International Energy Agency.

While the recovery from the first global recession since World War II pushed oil up 62 percent this year to $72.04 a barrel in New York, growth alone isn’t likely to erode the glut by the end of next year because production exceeds demand, data from the Paris-based IEA shows. A drop in prices would penalize companies from Exxon Mobil Corp. to BP Plc and exporters Russia and Saudi Arabia. "If ever there was going to be a retreat below $60 a barrel, it is now," Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a telephone interview. "It was a very weak summer. We came out with more gasoline than we started."

Options granting the right to sell, or put, oil in December below current prices have a so-called implied volatility of 54.3 percent, compared with 43.3 percent for the equivalent options to buy, or call, data from the New York Mercantile Exchange show. The premium for December and other put options shows "the market is worried," said Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA in London. "If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation" for the option, he said.

Demand for puts may be caused by speculators betting on lower prices or by producers hedging against a decline in the value of their oil, Tchilinguirian said. Oil inventories totaled about 2.8 billion barrels at the end of July within the 30 nations of the Organization for Economic Cooperation and Development, according to the IEA. The total is equal to 62 days of demand, and 4.6 percent more than the same time last year.

Supplies are brimming on both sides of the Atlantic. U.S. distillate fuel inventories, which include heating oil and jet fuel, are the highest since 1983 at 167.8 million barrels, according to the Energy Department. U.S. gasoline supplies are 2.2 percent greater than they were in late May, the start of the peak-demand summer driving season, at 207.7 million barrels. Gasoil stockpiles, the European equivalent of heating oil, near Europe’s refining hub of Rotterdam reached a record 3.03 million tons (23 million barrels) on Sept. 10, according to PJK International BV of Oosterhout, the Netherlands.
More than 60 million barrels of fuel is stored on tankers offshore, according to the IEA.

"There’s all this heating oil with no place to go," Philip Verleger, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a phone interview. "I’m fairly certain we’ll see prices in the $30s this year." Crude rose as high as $75 a barrel on Aug. 25 as government spending to revive growth spurred demand around the world. Oil for October delivery slumped as much as $2.94, 4.1 percent, today to $69.10 a barrel on the New York Mercantile Exchange.

Gross domestic product in the U.S., the world’s biggest energy consumer, will expand by 2.4 percent in 2010, after shrinking 2.6 percent this year, according to the median estimate of 57 forecasters surveyed by Bloomberg.

Saudi Arabia’s oil minister said stockpiles have become irrelevant to crude prices because of the rebound. "Economic growth is the name of the game," Ali al-Naimi told reporters in Vienna on Sept. 9 before a meeting of the Organization of Petroleum Exporting Countries. "Oil today is a commodity. As long as economic growth is there, the price is going to go up." Traders are betting with al-Naimi. Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures 38 percent in the week ended Sept. 15 to 45,557 contracts, according to U.S. Commodity Futures Trading Commission data.

OPEC, whose members supply about a 40 percent of the world’s oil, agreed at the meeting in Vienna to maintain current production quotas and eliminate surplus production. The group pumped 1.2 million barrels a day above its target of 24.845 million barrels a day in August, according to Bloomberg estimates, and more is on the way. The group will increase shipments by almost 1 percent this month, according to Halifax, England-based consultant Oil Movements.

Kuwait’s OPEC delegate, Mohammed al-Shatti, said Sept. 17 a "small" reduction in output will be needed next year because of lower demand. The group agreed to record production cuts of 4.2 million barrels a day through December of last year. Stockpiles would need to shrink by almost 1.1 million barrels a day in the OECD, close to the combined production of OPEC members Qatar and Ecuador, to get inventories to OPEC’s targeted levels a year from now, IEA data show.

The glut will cut demand at refiners from Valero Energy Corp. to Total SA as the seasonal peak in consumption approaches. The profit from turning West Texas Intermediate crude into gasoline and heating oil fell last week to $3.42 a barrel, the lowest since December. Plants in the U.S. and Europe are being idled. San Antonio, Texas-based Valero, the largest U.S. refiner, shut its plant in Aruba and is idling operations in Delaware City, Delaware. France’s Total, Repsol YPF SA of Madrid and Zug, Switzerland-based Petroplus Holdings AG have switched off refinery units in Europe.

"Combined refining margins for gasoline and heating oil have fallen to their lowest level since 2000 and refiners are going to respond by cutting runs, and cutting back on crude purchases," said Verleger, a former U.S. Treasury adviser. While Verleger has dropped a forecast made in July that oil would sink to $20 a barrel, traders are anticipating a decline. The Nymex’s most popular option is the right to sell December crude at $60 a barrel, with 69,244 contracts outstanding, exchange data show. The right to sell at $50 a barrel is the second most widely held.

Merkel, Steinmeier Face 'Mess' as Stimulus Peters Out
Germany’s recovery from recession came in time to give a boost to Chancellor Angela Merkel’s re- election bid in the Sept. 27 vote. It may not last much longer. Unemployment is set to jump and consumer spending to fall in 2010 as government stimulus runs out, according to the Halle- based IWH institute, an adviser to the government. Companies are warning of a credit crunch, and debt at a post-World War II high leaves policy makers with few options to counter a double dip. "The pace of the upswing can’t be maintained," said Klaus Baader, co-chief European economist at Societe Generale SA in London. "Next year is going to be more difficult, with unemployment rising and government stimulus petering out."

Exceptional measures of 85 billion euros ($124 billion) lifted spending and subsidized jobs, helping keep unemployment below levels in the U.S. and France, even as the economy suffered its worst post-World War II recession.
The return to growth in the second quarter enabled Merkel, 55, to "exploit" the issue in her campaign, Laurent Bilke, an economist at Nomura International, said in an interview. Five polls last week gave Merkel’s Christian Democratic Union a lead of between nine and 13 percentage points over her main challenger, Social Democratic Foreign Minister Frank-Walter Steinmeier, 53. "We’re through the worst," Laurenz Meyer, economic spokesman in parliament for the CDU, said in an interview. "But the second wave of this crisis has yet to hit us."

Germany, the world’s biggest exporter, was hammered by the global contraction as sales of Wolfsburg-based Volkswagen AG cars and Munich-based Siemens AG equipment slumped. The government has forecast a 2009 economic contraction of as much as 6 percent. Spurred by extra spending equal to 1.6 percent of gross domestic product in 2009, the economy grew 0.3 percent in the second quarter, confounding economists’ forecasts. It may expand another 0.8 percent in this quarter. Growth may reach 0.9 percent in 2010, the IWH institute says. Reflecting the rebound, the benchmark DAX stock index has rallied 56 percent since March 6. Still, German government bonds have outperformed U.S. Treasuries this year on expectations the U.S. economy will grow more strongly.

Germany, Europe’s biggest economy "isn’t out of the woods yet," Finance Minister Peer Steinbrueck, a Social Democrat, said Sept. 1. The Finance Ministry underlined the point in its monthly report today, when it said the rise in unemployment has been "unusually moderate" so far and that there’s a risk the buildup in joblessness may accelerate. "It’s still uncertain whether the positive economic signals are already indicating a fundamental and sustainable change toward the better," the ministry said.

The Christian Democrats have pledged across-the-board tax cuts worth about 15 billion euros and looser labor-market rules making it easier to fire employees. Steinmeier said during a televised debate on Sept. 13 that Merkel has a "credibility problem" over her plan to lower taxes even as debt soars. The Social Democrats propose tax cuts for the lowest incomes and want a universal minimum wage of 7.50 euros an hour. "The chancellor is not to be envied," Ulrich Kater, chief economist at Dekabank in Frankfurt, said in an interview. "Having rescued the economy through large government aid programs will soon be forgotten and what’s left is cleaning up the mess."

For instance, Germany’s 5 billion-euro "cash-for- clunkers" program, the world’s largest, ended this month, removing support that shoppers have depended upon. The car-scrapping premium, which was emulated from the U.K. to the U.S., led to a 23 percent increase on spending for vehicles in the first six months. The Federal Statistics Office attributed the second-quarter rebound to those purchases. There are no signs consumer spending overall has stabilized, the Kiel-based IfW economic institute said in a Sept. 9 report. The results are already being felt.

General Motors Co.’s German Opel unit, one of the main beneficiaries of the subsidy, may shed 4,000 jobs in Germany as part of a plan to cut 10,500 jobs across Europe to return to profitability. As many as 50 auto suppliers face insolvency by the end of this year, according to a study by Roland Berger Strategy Consultants. Insolvent retailer Arcandor AG, which failed in its quest for government aid this year, will cut 3,700 mail-order jobs and close 19 Karstadt department stores under plans unveiled last month by the company’s administrator.

The unemployment rate will jump to 10.3 percent in 2010 from 8.1 percent this year, the IWH institute forecast on Sept. 15. Consumer spending will drop 0.7 percent in 2010 after growing 0.5 percent this year, it said. Jobs have been subsidized by the Federal Labor Agency, which pays 60 percent of the net wage that’s lost due to reduced working hours. The program, extended to 24 months in May from 18 months, supported about 1.4 million employees at some 50,000 companies as of June. Holding on to workers with little to do may prove too expensive. Labor costs per working hour rose 4.8 percent in the second quarter from a year earlier, the second-biggest increase after a record 5.3 percent jump in the first three months, the statistics office said Sept. 15.

"It would be a mistake to underestimate the longer-term consequences of the past 18 months," the BDB association of German banks said in a report on Sept. 9. "It will take three to four years until production is back at a pre-crisis level." Adding to the burden, the BGA association of wholesalers and exporters said Sept. 15 that 42 percent of its members expect credit to tighten. Small and mid-sized companies, which provide 70 percent of jobs, will face tougher loan conditions in the first half of 2010, Deputy Economy Minister Hartmut Schauerte said last month.

Faced with such gloom, the next chancellor will have few tools to deploy. Net new borrowing will almost double next year to 86.1 billion euros from a record 47.6 billion euros this year, according to the government budget. "There’s quite a bit of bad news left to digest," Elga Bartsch, chief European economist at Morgan Stanley in London, said in an interview. "The challenge for the next government is that its fortunes hinge on economic indicators that trail the business cycle."

Obama open to newspaper bailout bill
The president said he is "happy to look at" bills before Congress that would give struggling news organizations tax breaks if they were to restructure as nonprofit businesses. "I haven't seen detailed proposals yet, but I'll be happy to look at them," Obama told the editors of the Pittsburgh Post-Gazette and Toledo Blade in an interview.

Sen. Ben Cardin (D-Md.) has introduced S. 673, the so-called "Newspaper Revitalization Act," that would give outlets tax deals if they were to restructure as 501(c)(3) corporations. That bill has so far attracted one cosponsor, Cardin's Maryland colleague Sen. Barbara Mikulski (D). White House Press Secretary Robert Gibbs had played down the possibility of government assistance for news organizations, which have been hit by an economic downturn and dwindling ad revenue.

In early May, Gibbs said that while he hadn't asked the president specifically about bailout options for newspapers, "I don't know what, in all honesty, government can do about it." Obama said that good journalism is "critical to the health of our democracy," but expressed concern toward growing trends in reporting -- especially on political blogs, from which a groundswell of support for his campaign emerged during the presidential election.

"I am concerned that if the direction of the news is all blogosphere, all opinions, with no serious fact-checking, no serious attempts to put stories in context, that what you will end up getting is people shouting at each other across the void but not a lot of mutual understanding," he said.

In New York, All Eyes on Obama and Paterson’s Meeting
Rarely has a simple greeting so transfixed the New York political world. At 11 a.m. on Monday, President Obama stepped off Air Force One and greeted the governor of New York on an airport tarmac here, crossing paths for first time since news broke that the White House was urging Gov. David A. Paterson to drop out of the 2010 election, Every interaction between the two men was closely scrutinized, from their first handshake, which was awkward, to the tenor of the president’s introductions during a speech, to the governor’s absence at a brief meeting between the president and other state officials.

But even as all eyes were focused on the president’s visit, there was more bad news for the governor from inside the state Democratic Party. At a meeting on Monday afternoon, held at a cigar bar in Midtown Manhattan, and organized by the Rev. Al Sharpton, an ally of the governor, some influential Democrats and labor leaders gathered to discuss the sudden turn of Mr. Paterson’s fortunes. While there was sympathy for the governor and some resentment of the White House’s involvement, according to people with knowledge of the meeting, it was also a discussion about "what the other options are" for Mr. Paterson, according to one person with knowledge of the meeting.

"The leadership in the black community has moved to the point where they think it may be hard for David to get re-elected," this person said. "If the president of the United States says that ‘I think this is probably going to be tough for you and maybe not in everyone’s best interest,’ that’s when people stop and say, ‘How do we deal with this?’ " The meeting capped an extraordinary 72 hours in which the governor suffered the embarrassing public disclosure that at least some in the White House thought he should consider stepping aside. Some New York Democrats have reacted angrily to what they perceive as the failure of the president and his team to treat Mr. Paterson with respect, including White House’s failure to invite him to a Wall Street speech last Monday.

The awkwardness of their meeting was perhaps reflected in Mr. Obama’s body language on the tarmac at Albany International Airport. He approached Mr. Paterson and gave him a quick half-hug but turned his back to the television news cameras, almost as if to avoid images of the two in a warm embrace. Mr. Obama also whispered a few words into Mr. Paterson’s ear. "It was sympathetic," said a person with knowledge of the exchange. "It was sort of a pat on the back, sympathetic," adding that the president "seemed to express some agitation that this had happened."

Congressman Maurice Hinchey, a Democrat from upstate who was also at the airport to welcome Mr. Obama, said that Mr. Paterson appeared ill at ease before the president’s arrival, but that the exchange between them seemed cordial. "It seems like it was a reconciliation of some kind," Mr. Hinchey said. Later, the governor was not among a collection of top state officials, including Attorney General Andrew M. Cuomo, who attended a brief meeting with Mr. Obama and his political director, Patrick Gaspard, before Mr. Obama’s speech at Hudson Valley Community College in Troy. Mr. Gaspard met with Mr. Paterson last week to urge him to withdraw; Mr. Cuomo is the Democrat many leaders prefer as their gubernatorial candidate.

Though no snub was apparently intended — officials said the meeting was simply a way for Mr. Obama catch up with Mr. Cuomo and others, including Comptroller Thomas P. DiNapoli, who were not at the airport — Mr. Paterson’s absence led some to say they wondered why he did not attend. Then came the president’s speech, preceded by his introduction of Mr. Paterson and Mr. Cuomo. About the governor, he said that "a wonderful man, the governor of the great state of New York, David Paterson is in the house."

Next, he flashed a broad smile, turned to Mr. Cuomo and said, "Your shy and retiring attorney general, Andrew Cuomo, is in the house," and then pointing at him, Mr. Obama added, "Andrew’s doing great work, enforcing the laws that need to be enforced." On Monday, the White House publicly addressed the issue of the president’s involvement in New York politics for the first time and did not deny that the Obama administration had counseled Mr. Paterson to step aside. "Well, look, I think everybody understands the tough job that every elected official has right now in addressing many of the problems that we have," Robert Gibbs, the president’s press secretary, told reporters aboard Air Force One.

"I think people are aware of the tough situation that the governor of New York is in," he added. "I wouldn’t add a lot to what you’ve read, except this is a decision that he’s going to make. The president understands the tough job that everyone has and the pressure that they are under." But Mr. Paterson, in an interview on Monday, repeated his intention to stay in the race. "I’m planning to run," he said. "I’m not going to comment on any conversations that I’ve had that were confidential. And I have the utmost faith in the White House, and that is why I am not going to breach any confidences."

Republicans, meanwhile, delighted in the Democratic melodrama. Former Gov. George E. Pataki was in a teleconference Monday organized by the Republican National Committee and chastised the president for involving himself in New York politics. "I just think it’s wrong," Mr. Pataki said, though similar maneuvering in 1994 cleared the path for his own election to a first term. "To weaken and undermine the governor, beyond the weakness that already exists, at a time when he will be the governor for the next 15 years — 15 months — to me doesn’t serve the interest of the state."

Others close to the governor expressed concern about the public tarnishing of Mr. Paterson. "It just doesn’t smell right," Assemblyman Keith L. T. Wright, a Democrat, said of the disclosure of Mr. Gaspard’s meeting with Mr. Paterson. "Something as high level as this should not have been leaked. This has not been played well. Ostensibly this is supposed to have been a confidential meeting, but I guess it’s confidential with 18 million people."

Trailing Indicators: Out of a Job, Some Decide to Take a Hike
Unable to find steady work in a dismal Florida job market, Dan Kearns did something a lot of gainfully employed Americans can only dream of: Ditch the straight life and hike the length of the Appalachian Trail. Shouldering a 50-pound backpack, the 32-year-old construction worker hopped onto the trail in April at Neels Gap, Ga., joining other "through-hikers" bound for the AT's northern end point, nearly 2,200 miles away in Maine's Baxter State Park. He sold his car for $1,000 to finance the first leg of the trip, relying after that on handouts and the occasional farm job -- often backbreaking work weeding vegetable beds or rolling bales of hay.

"I wouldn't do this if I was employed," the New Jersey native explains. "I couldn't find any work, so I just decided to take a walk." He also took a trail moniker, "Snipe," and joined two hikers in Virginia who called themselves "Angry Hippie" and "Dance Party." Over Labor Day weekend, the three trudged into Rutland, the final stop before the slog through New Hampshire's White Mountains and Maine's 100-Mile Wilderness. An economist might have another name for Snipe and his fellow travelers: trailing indicators. Depending on one's level of optimism, an Appalachian Trail through-hiker is either a symbol of a jobless recovery or of a still-deepening recession.

In any case, there has been a surplus of hikers this year on the Appalachian Trail, which was unexpectedly in the news in June when South Carolina's Gov. Mark Sanford used the excuse of hiking the trail while pursuing an extramarital affair in Argentina. Typically, about 1,000 hikers leave Georgia each spring in hopes of completing the trail in one all-out trek. This year, trail monitors say, close to 1,400 hikers were in the first wave, with hundreds more following behind through early summer.

Now, as the last of the north-bounders -- known as NoBos -- enter New England, they're meeting lagging south-bounders, or SoBos, racing toward Georgia. Hikers say they budget $1 a mile for food and the rare motel stay, making life on the trail cheaper than life in town -- and much more socially acceptable. "If you do this on the trail, you're a hiker," says The Druid, a 48-year-old south-bounder from Tennessee. "If you do this off the trail, you're a bum."

NoBos and SoBos are reminiscent of the hobos of the Great Depression, though there aren't so many of them this time. Moreover, they're a throwback to a simpler economy, where swapping short-term labor for food and shelter was common. That barter system remains today. Dozens of "Trail Angels" provide free meals and lodging to hikers who are short of cash. "I was shooting pool in Duncannon, Pa., with a hiker named Big Camera. I heard a guy at the bar offering $12 an hour to clean his yard," recalls Jack Magullian, a 55-year-old through-hiker whose trail name is Archaeopterix. Motel operator Ron Haven of Franklin, N.C., is known as a generous soul, willing to exchange nights in beds that have real sheets for light labor like cleaning guest rooms.

Elmer Hall at the Sunnybank Inn nearby in Hot Springs is another soft touch. "People will stay for a week or a month," says Mr. Hall, who hiked most of the AT himself in 1976. He pays $8 an hour to anyone who stays more than a week and does chores. This season he has employed about 75 through-hikers, he says, mainly to toss feed to his ducks and chickens, or to pick berries or weed his organic garden. "I saw more people who are out of work this year," Mr. Hall adds. "You get six months' government unemployment, and it's cheaper to live off the land."

Some people complain of aggressive panhandling, robberies and homeless hikers blending in with genuine backpackers to take advantage of free food or work-for-stay opportunities. "The biggest problem is the have-nots latching onto the haves and trying to mooch their way up the trail," says Jeff Hooch, who runs The Hike Inn close to where the Appalachian Trail enters Great Smoky Mountains National Park. "This creates stress around the campsites." Up in New England, through-hikers have become a popular form of just-in-time labor for rural businesses, especially for organic farmers like Joseph De Sena.

He operates Amee Farm in Pittsfield, Vt., which lies a few miles from a trailhead. Mr. De Sena says that in a good year, "hikers could provide 50% of the labor we need," doing everything from watering lettuce in the greenhouse, to weeding the garden to shearing the sheep. He estimates that hiring similar labor locally, if he could find it, would cost $50 to $75 a day. He does a barter deal with hikers who stay at the farm in exchange for their labor. No money is exchanged.

But it isn't always an easy fit, Mr. De Sena says. "We thought there was a correlation between people who would hike the 2,200 miles and an incredible work ethic," says the 40-year-old entrepreneur, a former Wall Street trader who, besides farming, also operates an asset-management firm. "Turns out those people tend to be athletic hippies, just looking to have fun forever." He lucked out when he met Wes Foster and Stacy Burdett, two through-hikers from Tampa, Fla., who recently completed their journey. The couple decided to winter at Amee Farm, swapping their labor for room and board and the chance to learn organic farming.

"I'd love to have a farm like this one day," says Ms. Burdett, who has a degree in massage therapy and worked in theater production before hiking the trail. Dominic Palumbo's Moon in the Pond organic farm in Sheffield, Mass., is another AT neighbor who harvests through-hikers' labor. Mr. Palumbo's efforts began in 2005, when a former through-hiker named Rich Ciotola came to work at Moon in the Pond as an apprentice. "We were short of hands, and had no money to hire anyone," the 53-year-old farmer recalls. "Rich just ran up the trail and came back with some guys." Mr. Palumbo has been relying on hikers ever since, even publicizing his work-for-stay swap in trail guides. This summer Mr. Ciotola began working his own farm, employing hikers from his old mentor's spread whenever he had extras to spare.

Andrea Wilkins, from Maryland, and Jon Letteer, a Texan, were two south-bounders who worked at Moon in the Pond this month. The two labored 14-hour days in the late summer sun but were grateful for a respite from walking. Mr. Letteer, 23, has a job waiting for him in Austin, but his 22-year-old hiking partner doesn't. She says that once she finishes hiking, she hopes to join the Peace Corps and go to Africa or Micronesia. "They asked if I had farming experience when I applied, and I hadn't," she says, stretching as she weeds onions. "But this is farm experience that could go on my résumé. Man, they would love it!"

Recession results in steep fall in emissions
The recession has resulted in an unparalleled fall in greenhouse gas emissions, providing a "unique opportunity" to move the world away from high-carbon growth, an International Energy Agency study has found. In the first big study of the impact of the recession on climate change, the IEA found that CO2 emissions from burning fossil fuels had undergone "a significant decline" this year – further than in any year in the past 40. The fall will exceed the drop in the 1981 recession that followed the oil crisis.

Falling industrial output is largely responsible for the plunge in CO2, but other factors have played a role, including the shelving of many plans for new coal-fired power stations owing to falling demand and lack of financing. For the first time, government policies to cut emissions have also had a significant impact. The IEA estimates that about a quarter of the reduction is the result of regulation, an "unprecedented" proportion. Three initiatives had a particular effect: Europe’s target to cut emissions by 20 per cent by 2020; US car emission standards; and China’s energy efficiency policies.

Fatih Birol, chief IEA economist, said the fall was "surprising" and would make it "less difficult" to achieve the emissions reductions scientists say are needed to avoid dangerous global warming. "We have a new situation, with the changes in energy demand and the postponement of many energy investments," he said. "But this only has meaning if we can make use of this unique window of opportunity. [That means] a deal in Copenhagen."

The IEA’s study of energy-related CO2 emissions, which make up two-thirds of greenhouse gases, is an excerpt from its annual World Energy Outlook, to be published in November. The excerpt will be released early next month to reach policymakers in time for the final negotiating sessions before the climate-change conference in Copenhagen in December. On Tuesday, heads of government will gather in New York for a climate-change summit held by Ban Ki-moon, United Nations secretary-general.

Mr Birol said a global agreement was needed to create clarity for companies and encourage them to cut emissions. "We hope that an agreement in Copenhagen would give a signal for new investments to go in [an environmentally] sustainable direction," he said. "If we miss this opportunity, it will be much more expensive and therefore harder than ever to bring the world’ s energy system on to a sustainable path." Mr Birol’s call for a strong agreement at Copenhagen has been echoed by an increasing number of business leaders.

A group of 181 investors with $13,000bn under management last week demanded a deal requiring stringent emissions cuts, and on Tuesday 500 companies including General Electric, Coca-Cola and Procter & Gamble will make a similar call. Chad Holliday, chief executive of DuPont, said most business leaders were expecting to come under "some form of carbon trading" and were awaiting details. "If you had some very clear goals [set at Copenhagen] businesses would extrapolate from that what they need to do as an individual company."


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Anonymous said...

Did Ali Baba attempt to put the forty thieves in jail for theft?
He set out to get some of their ill-gotten loot.

Thanks Ilargi for making the connections between Cuomo and the recent WH dissing of the current Dem Gov of NY. Eye-opening.


VK said...

Just yesterday we read that Macy's is likely to be headed for bankruptcy and today Citi comes out and says Macy is great, shares up 6%.

The sun is shining, skies are blue, red roses and pretty girls. Aaaah, what a wonderful world :)

team10tim said...

The decline and fall of investigative journalism is largely due to a change in funding models.

Journalism used to be funded by subscriptions. The consumer was willing to pay for investigative journalism and that drove the quality of reporting.

High quality journalism requires ferreting out lots of data and primary sources and synthesizing it into a descriptive narrative. This process engenders critical thought for both the journalist and the reader.

Today journalism is primarily paid for by advertising. This inverts the model. The media no longer produces high quality journalism it produces a high quality audiences. Corporate advertisers have become the new consumer and the old consumer has become the product.

High quality audiences, by contrast, require very little data. Primary sources can be replaced with secondary and tertiary sources or press releases or even opinions. The narrative is free to rely on punditry and sensationalism. The entire process discourages critical thought as critical thought is not conducive to advertising.

The present advertising based model is suitable for infotainment, but not for investigative journalism. We either need a new model, not based around advertising, or we need to go back to the old model, not based around advertising.

The blogosphere isn't driven by revenue. It's driven by individuals with a purpose whether they get paid or not. The value and integrity of journalism in the blogosphere is entirely dependent on the integrity and purpose of the blogger. They run the spectrum from ideologically driven rants to rigorous and robust investigative journalism.

I don't know if Obama understands this dynamic or not. He could be trying to prop up the fourth branch of government with full understanding or he could be attempting a misguided approach to recall the old school journalism we all know and love.

Hombre said...

Ilargi - "Where are Towns and Kucinich now? Surely they must be tragically drugged and gagged in an alley someplace, or they would be raising hell? And why does that silence hurt my ears?"

Neither U.S. citizens nor their "virtual" representatives will get a handle on this one. IMO

This whole financial/economic scandal has such international implications and repercussions that I sense it will take international powers to bring it to a head, cross-border feuds, hue and cry, even war before it's all over.

dark_matter said...

Just wondered if anyone here has ever used www.prosper.com and has any comments. Seems like a way to get banks out of the lending loop.

thethirdcoast said...

@ VK Re: Macys


Chocolate ration. The chocolate ration in 1983 was 30 grams per week. (For comparison, a standard Hershey's Chocolate Bar is 43 grams) In the year 1984, the chocolate ration went up to 25 grams per week. Winston himself is charged with the task of re-writing history to make this little feat possible.

See, life is doubleplusgood!

Unknown said...

The reason I was thinking of Ali Baba is, I was wondering: how do we open our present treasury chambers and political backrooms, what are the magic words that will open up and shine a light on today's secrets?

Here's what I suspect you'd need to get that vault opened up- in large numbers of course:


Or the tried and true http://www.motherjones.com/files/images/Blog_Pitchforks_Torches.jpg

Anonymous said...

Let me give two examples of subjects that badly need the kind of serious journalism that is simply not provided by the media we expect it from...

Damn straight.

I've been in complete agreement on the former and I appreciate your discussion of the latter.

Perhaps if we cannot get a big a$$ed spotlight in the MSM, we can still get a lot of headlamps in th blogosphere for peering into the darkness.


dark_matter said...

Martin Weiss, Ph.D., has moved to the inflation camp here.

He gives 4 reasons:

1) Never-Ending, Out-of-Control
U.S. Federal Deficits
2) New Lows in the U.S. Dollar
3) U.S. Household Wealth
Now Expanding Again
4) Exploding U.S. Money Supply

I know I and S have addressed these arguments many times. I find 3) most interesting. He cites gains in stocks, mutual funds and real estate as causing expanding household wealth. Apparently having a job doesn't matter anymore. Happy days are here again.

Ilargi said...

Martin Weiss looks completely lost by now.

And unfortunately perhaps also not entirely honest. At shadowstats.com, the first graph on the right hand side, under alternate data, shows very clearly how M3, of which M1 is but a component, is sinking like a deceased mastodont.

Anonymous said...

Ilargi said,

Martin Weiss looks completely lost by now.

For some reason this made me laugh. I stopped reading his articles when he turned into a pureblood bull.

Zaphod said...

I think it's funny that the Yahoo headlines say "Oil Rebounds as Dollar Weakens" yet "Stocks are Up as Expectations Raised".

Wouldn't the converse be equally true? If you baseline "real" prices based on gold, I think the S&P would not look very healthy.

jal said...

Martin Weiss has got one thing right ...

... the U.S. dollar’s decline will accelerate in the months ahead.
Although it may seem like looking and waiting for jello to set, China has been doing what everyone should be doing. They even built a nice place to put all of their gold that they own.
... the best way to protect yourself from a falling dollar is with contra-dollar investments such as precious metals, natural resources and assets tied to strong foreign currencies.

The US needs a weak dollar for many reasons.

The US$ is being recognized as a bad place for “flight to safety” by foreigners.

Diversify ... diversify ... It starting to look like

Canada is benefiting from this diversification.


Brunswickian said...

Re Fuel Storage

Best info I found:


Re: Kerosene shelf life?
By: BigBarney On: Mon Feb 16, 2009 12:49 pm

When I worked as a petroleum lab technician in the army we tested gasoline,diesel fuel,and jet

fuel which had been stored in 55 gal barrels for 25+ years and most was good.The fuel that

tested bad was always from drums which were not sealed properly or were damaged

in the storage area.There was some pre WWII diesel fuel and it was also good.They

filtered and blended the off grade jet fuel for vehicle fuel.

Much of this fuel was stored right after WWII and then shipped to Israel for the

Israel-Arab war in 1967 for the Israel Armed Forces.

The trick to this long term storage is that the drums have to be sealed with high

quality bung caps and stored with the bungs parallel with the ground and elevated

so no moisture can get into the fuel.They are stored outside in 3-5 high drums and

in the open air with no cover.These drums are heavy reuseable drums which have

been rebuilt and painted with the highest quality seals and paint.

These new bio-cides work well to keep the layer between the fuel and the water

fungus and bacteria free or at least under control.You have to keep air out or they

will not be effective against the aerobic bacteria which are found in the fuel,also

many anaerobic bacteria are present and other chemicals in these products will

control these and the fungus too.It is best to add these products as you fill the

tank (container) so that they form this protective layer between the fuel/water

barrier where they are most effective.


Posts: 154
Joined: Wed Feb 08, 2006 3:48 pm Top

Zaphod said...

Is debt good? Is debt bad? What is the marginal GDP rate of return on debt?

Seems to me that if one borrows money cheaply to build a factory that successfully sells products locally and abroad, and it pays off in 10 years the country is value-positive. Workers, owners, and bankers all profit. The cycle can repeat as long as fundamental resources allow.

If you borrow expensive to money to buy a nice car or a big-screen TV that will be worthless in less time that than the loan duration, the "owner" pays 2x the initial value but ends up with nothing but residual debt, the factory workers have jobs for the time being, and the banker makes a nice profit. However, there is no repeat cycle, as the owner lacks credit, the banker strives mightily to figure out how to lend and receive more interest, and the factory workers wonder why nobody is buying anymore.

I'm not sure whether policy alone can push the marginal rate of return on debt back to positive, but I am quite convinced that there is no such thing as good "demand side" debt. I'm not sure any consumer should borrow money for any individual 'want', and only for 'needs' where the cash-flow return is high. Most purchases today simply don't make sense when you factor in the price of credit.

Anonymous said...



We're 8 miles east of Londontown.
It's nice out here too.


Ilargi said...

"Martin Weiss has got one thing right ...
... the U.S. dollar’s decline will accelerate in the months ahead."

No, far as I can see they all miss the point, the whole herd. A few weeks more, yes, maybe, or even probably, but not months. It would for one thing be fully inconsistent with falling US stock markets. The dollar falls when stocks rise, as we've seen for 6 months now. But when the Dow goes down, the US dollar is the only game in town.

Anonymous said...


Having just spotted this blog, I have to say that your work is really top shelf. IMO, TAE, and Zero Hedge, are the best two stops on the sphere.

What is your opinion about Martin Armstrong? Brilliant, mad scientist, political prisoner? Or delusional con man?

Thanks, Dan

Starcade said...


Audit the Fed, and you have no currency.

jal said...

@ Ilargi

"The dollar falls when stocks rise, as we've seen for 6 months now. "

So far ... Not true for the $C.

" But when the Dow goes down, the US dollar is the only game in town."

A lot of foreign investors, and China, are scrambling, ( as fast as setting jello), to find another game.


VK said...

@ Bears

Ok guys, my secret little plan to topple the markets over is for all of you to go bullish. One day of bullishness and der she goes maytey!


So today I capitulate and enter the camp of the bulls (like an undercover secret agent). Aaah! I can smell the optimism in this den of hopium. Aah, the sweet smell of positivity.

This land is V shaped, and it has a ceiling called 11% unemployment, there is a poster of Krugman on the wall telling Cheney, "deficits don't matter as long as you're a DemocRAT".

I see a lot of TV's as well, all tuned to CNBC. What a strange land, colours abound with lights and the bull babes are in the pit!! Yaay!
And who is that in the corner?! Phil Gramm! What an honour, this recession was indeed a mental one he tells me, all the leading indicators are going upwards.

Then I meet our hero, Benny and Timmy. To celebrate they are printing a whole stash of cash to pay Carnival cruise, just in time for sailing off to Copacabana beach in Rio. Aah! What a delight.

I see the great mysteries of bullishness revealed to me, the following laws illuminate the night sky like the Aurora Borealis

1) Thou shall believe in the power of the Printing press.

2) Thou shall learn to love deficits and Chinese made crap.

3) Thou shall drink optium and smoke hopium.

4) Thou must always trust your Treasury Secretary and love him (Images of Hank Paulson flash across the sky being serenaded by Lloyd Blankfein)

5) Thou shall honour thy debt and seek to endlessly consume in the honour of thy country.

6) Thou shall respect those too big to fail, for they are to be blessed on Mt Sinai.

What a beautiful land. Their main temple is the shape of a Walmart box and the playgrounds are covered with share certificates of Enron and Lehman, they pay tribute to capitalism and its too small to live mantra.

Rose coloured glasses adorn the main temple called QE. Alan Greenspan himself constructed this "Ode to Optimism" I hear. I am now on a highway named irrational exuberance and I hear What a Wonderful World in the Background...Smiles all round. How lovely it is to be a bull, our fantasy la-la land, our shangri la which no man shall and can understand.

ric2 said...

yo dark_matter -

chris martenson specifically addresses pt. 3 in a recent report from the members-only section of his site:

Luckily, the Federal Reserve recently switched the data set it uses to calculate real estate asset values from the publicly available OFHEO (now FHFA) House Price Index to one from a private firm.

I say luckily, because if the Federal Reserve was still using the FHFA data, they would have had to report a decline, not an increase, in the value of real estate assets in the second quarter of 2009.

in short, the only reason that households showed an increase in wealth is because the value of real estate assets held by households increased. and the only reason the "value" of these real estate assets as published by the Fed increased is because the Fed just switched to a different data source to obtain these values.

so itʻs a phantom increase caused by a switch in data sources, not a reversal of a downward trend as weiss claims.

bluebird said...

@VK - lol :)

Ilargi said...

"What is your opinion about Martin Armstrong? Brilliant, mad scientist, political prisoner? Or delusional con man?"

Dan, thanks for the kind words. As for Armstrong, from what i know of him, I'd go for all of the above.

el gallinazo said...

Mish has a good piece o the stock market today.

Greenpa said...

Robert Benchley, known in his time as The Caliph of New York, did once write one of his essays which included a reference to "Ali Baba And The Forty Rockefellers".

Ventriloquist said...

The Market Swan Dive Predictorium:

From yesterday's comments, roughly along the time continuum:

VK -- "The market has already peaked"

Coy Ote -- 9/29 2:36PM

Snuffy -- 10/15

David -- 10/16

El G -- 10/24-29

Bigelow -- 10/25

Scandia -- 11/5

Gylangirl -- 11/5-6

Bob(your uncle) -- "Mid-to-late Nov."

Starcade NFL -- 11/25/09 - 1/25/10 ("one month either side of Christmas")

Forgive me if I somehow missed your prediction.

LADEEEZ AN GENNELLMEN!! Step up now and place youse bets! The game is afoot!!

Anonymous said...

"Audit the Fed, and you have no currency"

Then in turn I would reckon that we would also have no debt. No?

Bigelow said...


The Market Swan Dive Predictorium:

Don't forget the 11/05 currency crash

Gravity said...

"How many green shoots, Winston?"
"Some! Some! Some!"
"No, Winston, that is no use.
You are lying.
You still think there are none."
"How many green shoots, please?"
"Some! Many! Lots!
Anything you like. Only stop it, stop the pain!"

"How many shoots, Winston?"
"Some. I suppose there are some.
I would see more if I could.
I am trying to see more."
"Which do you wish: to persuade me that you see green shoots, or really to see them?"
"Really to see them."

Frank said...


I'll go for the week between you and el G. I think you and Snuffy got the best days.

If it gets past October, then I'm with Starcade except I say not before there are actual sales numbers, say December 15.

Anonymous said...

Sign Of Depression Era and Channel Update


Anonymous said...

Hmmmph, Very wake-like around here, I think I will go visit Danielle Parks, she may be a bit mainstream but does talk dirty at the height of an overly exuberant party.

-naked shorts-

thethirdcoast said...

One of my local alternative newsrags is reporting that "citizens" in my area are asking the police to install surveillance cameras in their neighborhoods.

Of course, the police had a lot of reassuring quotes about how they have "technology" to automatically blur windows and that tours of the camera room would be available on request.

I told my friend, for their next request these people should ask if they can get on a train to some camp in the middle of nowhere and just disappear forever.

Lunch today was also fun. I got to listen to coworkers spew reactionary insurance industry shill talking points about how lousy Canada's healthcare system is and how the waiting lines have Canadians crossing the boarder in droves.

These same people are big Joe Wilson fans. If I had any guts I'd ask them if they'd feel the same about a member of the Congressional Black Caucus doing the same thing to GWB when he was spewing about WMDs. I'd bet dollars to donuts these people would stocking up on rope and white sheets if that hypothetical incident had occurred.

dark_matter said...


What exactly qualifies as a market swan dive? 300 point drop? 1000 point drop?

Phlogiston Água de Beber said...


Ummmm, donuts :-)

Anonymous said...

If the market rallies next week when September's disastrous auto sales figures are released....

then I capitulate.

Anonymous said...

Sept. 23 (Bloomberg) -- Inflation caused by the Federal Reserve’s efforts to prop up the U.S. economy will cause stocks to outperform cash and bond investments, Marc Faber said.


Anonymous said...

"If I had any guts I'd ask them if they'd feel the same about a member of the Congressional Black Caucus doing the same thing to GWB when he was spewing about WMDs."

Don't worry about it. Smile and keep your mouth shut (as long as your paychecks keep coming) They'll learn soon enough.

Anonymous said...

@ David

Tuesday, October 13


RC said...


Robert Benchley's "My Ten Years In A Quandary And How They Grew" would seem to be another good title for our times and the publication dates to the Depression. The stories within the work are not quite as good as the title, but the title has been one of my all time favorites for 50 years.

Wyote said...

Weighing in a bit late on the market decline date: I will see you all and wager that the decline begins with some horrible numbers this Friday. The following week will be frightful and sad. As VK suggested, we have topped out already.

It was snowing yesterday and I was suggesting to the kids in the school hallway that, “Christmas might be just around the corner. I’m putting my stocking up tonight, just in case.” Alas, youth is carried by optimism; as it should be.

So, at the autumnal equinox, I offer you adults the verses of a very old trad. I suggest you sing it with some mirth in your voice.

John Barleycorn Conflated by J. Mark Sugars

There were three men come from the West
Their fortunes for to try,
And these three made a solemn vow:
"John Barleycorn must die."

They plowed, they sowed, they harrowed him in,
Threw clods upon his head,
'Till these three men were satisfied
John Barleycorn was dead.

They let him lie for a very long time,
'Till the rains from heaven did fall,
When little Sir John raised up his head
And so amazed them all.

They let him stand 'til Mid-Summer's Day
When he looked both pale and wan;
Then little Sir John grew a long, long beard
And so became a man.

They hired men with their scythes so sharp
To cut him off at the knee;
They rolled him and tied him around the waist,
And served him barbarously.

They hired men with their sharp pitchforks
To pierce him to the heart,
But the loader did serve him worse than that,
For he bound him to the cart.
They wheeled him 'round and around the field
'Til they came unto a barn,
And there they took a solemn oath
On poor John Barleycorn.

They hired men with their crab-tree sticks
To split him skin from bone,
But the miller did serve him worse than that,
For he ground him between two stones.

There's little Sir John in the nut-brown bowl,
And there's brandy in the glass,
And little Sir John in the nut-brown bowl
Proved the strongest man at last.

The huntsman cannot hunt the fox
Nor loudly blow his horn
And the tinker cannot mend his pots
Without John Barleycorn.
And so the cycle goes, at least in simpler times. May it stay unbroken.


Jim R said...

Swan dive.

Black swan.

Black swan dive?

Dive, swan!

el gallinazo said...

dark_matter said...

What exactly qualifies as a market swan dive? 300 point drop? 1000 point drop?"

Like the Supreme Court and pornography, we'll know it when we see it.

Let's all agree to talk S&P500 and not the Dow Industrial 30. The latter is such as piss poor index.

Ilargi said...

"Let's all agree to talk S&P500 and not the Dow Industrial 30."

The S&P at 500 it is. For one thing, that should occur before the Dow hits 30.

Now, can we please show some restraint in turning this forum into the financial equivalent of American Idol?

Like, no more of this gaping abyss till the S&P actually hits 500?!

Anonymous said...

As VK siad, the findings from the Hubble telescope are mind boggling (they scanned a tiny "empty" space in the sky and found a THOUSAND galaxies):

In spite of our greediness which could take it all away, we are capable of great achievements.


Anonymous said...

U.S. Debt Crisis May Cause ‘Fall of Rome’ Scenario, Duncan Says

Sept. 23 (Bloomberg) -- U.S. budget deficits will continue to pile up in the next decade, eventually reaching an unsustainable level that may result in an economic collapse, according to Richard Duncan, author of “The Dollar Crisis.”

The U.S. has little chance of resolving its deteriorating financial position because the manufacturing industry continues to shrink, leaving the nation with few goods to export, said Duncan, now at Singapore-based Blackhorse Asset Management.

In “The Dollar Crisis,” first published in 2003, Duncan argued that persistent current account deficits by the U.S. were creating an unsustainable boom in global credit that was destined to break down, resulting in a worldwide recession.


Anonymous said...

@ Ilargi

"Like, no more of this gaping abyss till the S&P actually hits 500?!"

You're going to wait a really long time. There's no chance this market corrects more than 10%. The Feds pump in the money and it flows right into equities. Nothing can stop it. Interest rates can't rise either since the Feds will buy Treasuries to keep them low too. I don't understand why you're making this so difficult. The game is really quite simple.

NZSanctuary said...

team10tim @ 1:18

Nice summary on journalism.

NZSanctuary said...

@LP re: Hubble

I recently went to a show that had a bit about this in it at my local observatory. Very humbling.

Ilargi said...


Humbling would be my thought, way ahead of "we are capable of great achievements."

Sure, Hubble confirms that we are able to travel through time. But then, we always were.

Jim R said...

I have traveled forward through time. More than half a century so far.

Stoneleigh said...


Martin Weiss has got one thing right ...

... the U.S. dollar’s decline will accelerate in the months ahead.
Although it may seem like looking and waiting for jello to set, China has been doing what everyone should be doing. They even built a nice place to put all of their gold that they own.
... the best way to protect yourself from a falling dollar is with contra-dollar investments such as precious metals, natural resources and assets tied to strong foreign currencies.

The US needs a weak dollar for many reasons.

The US$ is being recognized as a bad place for “flight to safety” by foreigners.

The US dollar is seen as a hopeless case at the moment precisely because it's bottoming. At a bottom, conventional wisdom is that value can only go lower. The more unanimous this is, the closer we are to a trend change.

Once the market decline resumes the dollar will be seen as a safe haven again. Martin Weiss will change his mind again soon enough. Herding behaviour can make a lot of serious analysts look silly.

Stoneleigh said...


What is your opinion about Martin Armstrong? Brilliant, mad scientist, political prisoner? Or delusional con man?

When Martin Armstrong talks, I listen. That doesn't mean I always agree with him, but I take his opinions very seriously indeed.

Anonymous said...

Anon 9:49 PM said this:

"You're going to wait a really long time. There's no chance this market corrects more than 10%. The Feds pump in the money and it flows right into equities. Nothing can stop it. Interest rates can't rise either since the Feds will buy Treasuries to keep them low too.

First I told you there was no need for industry any more, now you come back, up the anti, and tell me and say there will be no need for profits, we will all just live on capital gains. Great, who said there was no perpetual motion machine? Sign me up for that Jackson while I drink from by broken cup.

- Mythmaker-

Ruben. said...

Before Ilargi gets too shirty about the Market Death Pool, maybe one of you smart people could figure out some method more effective to host splinter discussions. Maybe TAE could link to it. In addition to the MDP, I am really interested in collapse jobs, relating to TAE and The Archdruid Report. For example, I think it will be quite a while before we need actual blacksmiths. Probably not in my lifetime. But, I don't have much hope that I can be a bureaucrat forever, so I need some new skills. Which skills, though? A TAE splinter discussion forum would be a good place to have conversations like that.

Anonymous said...

DIYer said..."I have traveled forward through time. More than half a century so far."

Okay, now impress me and go back there.

(Sorry could not resist)

Ilargi said...

There's nothing I can see against a discussion about skills here. Nor would that be a first. I just like these discussions, like all others, to remain skillful.

In the same vein, picking dates at random for hardly at all defined events looks to me like something that we could do a much better job of. What constitutes a collapse such as people pretend to predict is absolutely unclear. 5%, 25%? In one day, in one week?

It's not all that hard to set the limiters first, and then take it from there. Barring such definitions, it all just fills space.

Anonymous said...

Sept. 22 (Bloomberg) -- Traders in the U.S. credit-default swaps market are paying the least in more than 16 months to protect corporate bonds from default as signs of an improving economy and almost-zero interest rates boosts demand for higher- yielding assets.

The Markit CDX North America Investment-Grade Index, a benchmark credit swaps index tied to 125 companies in the U.S. and Canada, is trading at the lowest level since May 2008. The cost to protect junk bonds from default using a benchmark index is the lowest since June 2008.

An influx of investor cash into bond funds as the Federal Reserve keeps interest rates near zero has foiled predictions of a turn in debt prices this month, leading Citigroup Inc. analysts John Fenn and Jason Shoup last week to say the rally in bonds sold by companies with the lowest credit-quality was “starting to become a bit ridiculous.”


Anonymous said...

If the US dollar bounces up before reaching 73-74, then the stock market will go down (vise-versa). However, if the US dollar crashes through 73, it is highly likely that the stock market will at least hold to current levels or even go a bit higher. I guess it all depends on the prevailing circumstances.

I agree with I&S that things are ripe for a blowup. But even in a critical state it could hold longer than one expects (barring a major event like war, an epidemic, etc), IMHO.


Anonymous said...

"The game is really quite simple."

Sell before the last sucker gets in usualy works.

Anonymous said...

Nobody has explained why the Fed money printing can't work.

The Fed prints and the cash flows into stocks.

The Fed prints and buys Treasuries.

A bond market dislocation is impossible if the Fed is buying Treasuries.

Will somebody please explain the flaw in this system. Everybody simply talks around it without addressing the elephant in the room. And no, this point is not addressed in the primers.

We keep printing until the debts are wiped clean.

Ilargi said...

"We keep printing until the debts are wiped clean."

You can't wipe clean debts by adding more of them.

Anonymous said...

"You can't wipe clean debts by adding more of them."

This sentence makes no sense. The Fed prints and buys the bad debts from the banks. So. What's the problem. No new debt has been created. The Fed absorbed the banks' rotten toxic assets. No fuss no muss.

The elephant is still in the room. This is the biggest flaw in Ilargi's analysis. Stoneleigh's as well.

Ilargi said...

"This is the biggest flaw in Ilargi's analysis. Stoneleigh's as well."

No, it's yours. Everything the Fed prints is new debt. This is not an issue.

Farmerod said...

I think I'm in a snippy mood. C'est la vie.

The elephant is still in the room. This is the biggest flaw in Ilargi's analysis. Stoneleigh's as well.

1. Fcuk off.
2. Read the primers.
3. Repeat 1.

Anonymous said...

"No, it's yours. Everything the Fed prints is new debt. This is not an issue."

It's not new debt if it's used to purchase existing debt, which is what's happening right now.

The fed prints a billion and buys a billion PRE-EXISTING MBS from any bank on wall street. No new debt has been created. Old bad toxic debt has been absorbed by the Fed.

This is the fix. This is the elephant in the room. Still, you don't address the issue.

Farmerod - enough with the name calling. Show me where I'm wrong.

Anonymous said...

What I'm pointing out is not in the primers.

Anonymous said...

Psst you! Yeah you, anon 11:55 PM. I got something for you, you will really like it, it is what you really are dreaming of, not those debt and bonds things. those mere imitations of this the Real McCoy

-El Los Prophet -

Anonymous said...

Pictures of a perpetual motion machine don't address the issue I'm raising.

Who's going to make the Fed stop?

Nobody, that's who.

Everyone around the world has a very big interest in having the fed buy the toxic mess off the banks balance sheets. China, Japan, Russia, Saudi Arabia and everybody else with something to export are chomping at the bit for the banks to start lending to consumers again. If the fed absorbs all the toxic waste, I don't think they'll offer much of peep.

Ilargi said...

"It's not new debt if it's used to purchase existing debt, which is what's happening right now."

You are confused. We pay a 6% interest rate over everything the Fed prints. Whether it uses the new debt to buy up old debt from banks is not even just merely irrelevant, it transfers what was someone else's debt to our accounts. In other words, it saddles us with a double serving of debt in one fell swoop.

"What I'm pointing out is not in the primers."

And for good reason.

Farmerod said...

El G:
Let's all agree to talk S&P500 and not the Dow Industrial 30. The latter is such as piss poor index.

How so? Near as I can see, the correlation is really, really high. S&P has outperformed in this bull trap but I'd then expect its cascade to be steeper than the DOW's, when they begin. But it all evens out, historically.

Maybe the SPX is the one to put...

BTW, most of you wankers in the calling-the-top pool should acknowledge how ...er, derivative your dates are. Like kids searching for Easter candy after mom has told you that they're hidden in the hall closet. Stoneleigh must be amused.

Anonymous said...

"We pay a 6% interest rate over everything the Fed prints."

Please flesh out that statement. I don't understand what you're talking about.

The Fed prints a billion and uses it directly to buy Fannie and Freddie paper from Wall Street. Where is this 6% interest rate coming from?

Anonymous said...

The Fed simply needs to offset its printing with assets. Those assets can be anything. Under normal circumstances, new printing is offset by purchasing US Treasuries (So yes, the taxpayer pays interest for issuing its own currency). But, we aren't in normal circumstances. So the Fed prints and offsets this printing by purchasing toxic assets from banks (Like fannie and freddie MBS or Ginnie Mae MBS or Countrywide financial-derived MBS). The taxpayer is not paying interest here.

Farmerod said...

Farmerod - enough with the name calling.

Neither of us has called you a name.

Anonymous said...


As you've argued many times before, the Fed isn't opening it's books for anybody come hell or high water. So, how exactly is the taxpayer stuck with this. Who's going to make the Fed fess up to the toxic assets. I'm not seeing anybody on the horizon. So, as I keep saying, the Fed absorbs the losses and keeps on printing to prop up assets (equities and corporate bonds).

Ilargi said...

""We pay a 6% interest rate over everything the Fed prints."

Please flesh out that statement. I don't understand what you're talking about."

That's what I figured. Go read up on the Federal Reserve. And don't come back before you have. We are not here to teach you that 1 and 1 equals 2.

NZSanctuary said...


"Humbling would be my thought, way ahead of "we are capable of great achievements.""

I think we are capable of great achievements, but suspect I would disagree with what most people would put in that category.

Anonymous said...

@ Ilargi

"That's what I figured. Go read up on the Federal Reserve. And don't come back before you have. We are not here to teach you that 1 and 1 equals 2."

I don't understand the sarcasm. Why not simply flesh out your answer.

I just wrote that: The Fed simply needs to offset its printing with assets. Those assets can be anything. Under normal circumstances, new printing is offset by purchasing US Treasuries (So yes, the taxpayer pays interest for issuing its own currency). But, we aren't in normal circumstances. So the Fed prints and offsets this printing by purchasing toxic assets from banks (Like fannie and freddie MBS or Ginnie Mae MBS or Countrywide financial-derived MBS). The taxpayer is not paying interest here.

Please explain the error.

Anonymous said...

Come the first big snowfall the market will fall below 32 degrees.


Anonymous said...

The Fed does not print money. Money is loaned into existance. As Steve Keen says, "We have a credit based monetary system with a paper fiat monetary system piggy backed on top". Problem is that the credit based component is about 10 times the size of the paper fiat component.

jal said...

I'll repeat what I said yesterday ...

"I cannot pick a date, because I want to see Xmas and because I don't see any "plates" that the juggler cannot re-spin for the next 2 weeks.

That does not mean that the stock market will keep going up for the next two weeks.

I cannot see an unforeseen event that would start a panic sell."
Timmy can keep printing money and buying bonds.
That is not the game changer.

The US$ can keep going down.
That is still not a game changer.

As of today ... there is not a game changer that would cause a panic exit,
(for the next two weeks),
from the market that would drive the S&P down by 100 points in a week time frame.

Anonymous said...

@ Ilargi and others

The Fed does in fact print money to buy any asset class it chooses.

From wikipedia (Quantitative Easing):
"In practical terms, the central bank purchases financial assets (mostly short-term), including government paper and corporate bonds, from financial institutions (such as banks) using money it has created ex nihilo (out of nothing)."
Wikipedia_Quantitative Easing

If yo don't like wikipeida, then
let's consult the Federal Reserve itself:
"To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. "
Federal Reserve Description of Quantitative Easing

Anonymous said...

Anon 10:43

Thanks for posting the Greenspan clip in which he asserts that things will not get better until home prices stabilize.

But how will home prices stabilize with continued rising unemployment and further depletion of manufacturing in the country. Oh, and that other little thing called outsourcing.

It seems to me that the root of the problem is far deeper. Home prices are just a symptom of a far more malignant disease which has metastasized to other areas of the economy -- precluding any possibility of stabilizing house prices.


snuffy said...


Ok here is some ideas

You mentioned "blacksmithing" as not being needed for awhile...

Think again...

Fixing things made of steel cheap is a skill always needed.Think welding,and associated skill.

Growing food...
I spent 4 years as a volunteer w/ "Master Gardeners".They give you the best training available by the local state univercity extension agents,then you payback by teaching gardening to those who wish to learn.You learn "site specific"local gardening.This is the only organization that I have personally give the most valuable thing I have...my time.I am too busy now to think about it but it is the only thing I will give time for.

Teaching folks how to garden...there is a job!!



Anonymous said...

Sept. 23 (Bloomberg) -- New Frontier Bank, the largest lender in northern Colorado, had a lot to be proud of in early 2007. Assets had grown by 66 percent the previous year and profits by 53 percent. American Banker rated the bank the ninth- most efficient in the country.

Regulators knew the reality was different. In mid-2007, the Federal Deposit Insurance Corp., citing weak management, a rise in soured loans and an increased reliance on volatile funding, told executives to slow growth and add capital, according to board minutes of the privately held bank obtained under the Freedom of Information Act.

While Greeley, Colorado-based New Frontier’s loan losses rose, it took almost two years for state and federal regulators to shut the bank -- a delay that may have made the closing more costly. On April 10, the lender, whose assets had grown to $2 billion under Chief Executive Officer Larry Seastrom, became the 10th-most expensive failure of 2009, costing the FDIC $670 million. No other bank could be found to take over, and the FDIC had to charter a new one to assume the liabilities.

Yes my pretty.

el gallinazo said...


Admittedly the correlation between the DOW and the S&P is fairly high, but I just don't like statistics based on 30 readings when one based on 500 is readily available. On a day to day basis it is too effected by the goings on in individual corporations. I think the DOW is just a bad habit - like calling U3 the official unemployment. It dates back to the days before computers when the numerical tabulation of better indices was just too slow and too tedious. But I wouldn't make a huge deal out of it.

Of course the pool on when the market is going to start to tank is silly. That's the whole point to it. It is taking something which could be deadly serious and making some childlike fun out of it. Even doomers need a little humor and playfulness.

tob said...

Ilargi said:
And unfortunately perhaps also not entirely honest. At shadowstats.com, the first graph on the right hand side, under alternate data, shows very clearly how M3, of which M1 is but a component, is sinking like a deceased mastodont.

I had a look at the graph, and it looks really bad at a glance, but if you look closer you see that they are plotting the first derivative (Rate of increase). The rate of increase is fast dropping towards zero. Looking on the real numbers you would expect the last data point in the fist graph to be negative, but it is hard to see as the graph is mostly flat but has a minor dip at the end.

Is a fall in the increase of M3 enough to cause deflation?

ric said...

Anon 12:58 Try this link: Money as Debt. One of the great videos of all time.

el gallinazo said...

Our current anonymouse reminds me of that wonderful episode on This American Life when an electrician / basement inventor abandoned his business on a one man crusade to disprove Einstein's theory of relativity. And its always done with such assertiveness.

team10tim said...

RE: skills

The skills to have depend on what type of collapse you expect to happen. The Long Descent vs catastrophic system failure. The best approach is to have multiple skills.

That said there are a few trades that are appropriate for all scenarios. Farmer, this has been covered extensively. Doctor/RN, I believe Stoneleigh has mentioned this a few times. Dentist, I'm surprised this hasn't been mentioned. Machinist/blacksmith, currently employable and as supply chains contract parts will become less available. Being able to manufacture or repair parts is going to be important. Tool and die maker, doing anything requires tools always has and always will.

There is also a wide range of secondary skills that won't necessarily pay the bills but will build social capital and increase standing in the community. Musician, Stoneleigh also mentioned this. Brewer, always good to know one in good times and bad. Martial arts instructor, keeps people in good health and insures that there are a always few people who both hold you in high regard and can throw down.

I think that the technical aspects are less important than the function in a community. We have become accustomed to having jobs. We focus more on the job than the function. Focus on the function whether it's employable or not.

My great grandfather was a dentist in the great depression. Although he rarely got paid he would frequently find a couple of eggs or a chicken or a sack of flour on the door step. Since the goods were traded anonymously and not at the time of service it would be a stretch to construe it as barter. It would be more accurate to label it as reciprocity for a function that the community valued.

Alan Greenshoots said...

James Kunstler's recent post on the catastrophe of American suburbia makes a humorous yet spot on reference to the American people's attitude on city life post WWII:

By the end of WW II, city life in the popular imagination was reduced to one potently awful image: Ralph Kramden's apartment in "The Honeymooners" TV show.

I think this is an astute observation, considering that even today, when I happen upon an old episode of Jackie Gleason's sitcom, still in syndication after all these years on one cable station or another, I find myself contemplating the idea that the Kramden's fondest dream must be to leave that dingy little apartment and move to "burbs."

I can just imagine the Kramdens boxing up their belongings, carrying them downstairs to the moving van, and the tearful goodbye with the Nortons. The Kramdens rue the loss of their city social life, and Ralph's membership in the Raccoon's Lodge, but console themselves with the independence that homeownership brings. Ralph will mow the lawn on Saturday. Mrs Kramden will have a garden. Ralph can sit in the shade on a lawn chair and sip Grain Belt out of long necked, brown bottles.

The American Dream of homeownership in the burbs is so intricately embedded in the American psyche that it is next to impossible to have a rational discussion on the subject.

jal said...

Re.: New Frontier Bank

Here is the cause of the problem ... the bankster made sure that there was nobody around to stop them.

22,549 vs 6,000 ... the banksters are still in control.

The FDIC and the organization created for cleaning up after the savings-and-loan crisis, the Resolution Trust Corp., had 22,549 employees in 1992. By the end of 2006, there were 4,476.
Gray, the FDIC spokesman, said that the reductions were in line with the reduction in the number of FDIC-supervised banks, and that the decline has been reversed since mid-2006, when Sheila Bair became chairman. The agency now has more than 6,000 employees, Gray said.


team10tim said...



It leaves out the massive consolidation that has occurred in the last 30 years, but I think it goes to the heart of the matter.

I know you said you were planning to decouple from NZ society, but I am really curious. How do you see NZ doing in this SNAFU? In relative and absolute terms?

Also, as an aside, are you on the south island, near Christchurch or Dunedin?

Farmerod said...

Even doomers need a little humor and playfulness

Indeed, and I hope y'all took the "wanker" thing ok (my neighbour and I always call each other wankers; a benign general insult). Just my over the top way of reminding the participants from where their premonitions originate. You know, in case there are a portion of winnings, other than bragging rights, to dispurse.

Here's a contest I prefer. I'll go on record as saying I will tithe TAE any net investment winnings after Stoneleigh calls the decline (subject to whatever RSP taxes and delays may occur). Add the 250 VIX December 100 calls I bought Aug 11 for a nickel (now 0-.05, last trade 3 weeks ago) in the TFSA which is not subject to taxes or delays. The cost of this trade was $CDN1424.

I have donated on this basis in the past (approximately) and would do more except that I need to secure arable land first. Once that is done, I will donate generously. In the mean time, I challenge anyone else to beat this pledge.

Anonymous said...


Why not simply address the issue I've raised.

The taxpayer does not pay the interest when the fed prints a billion and buys a billion MBS from Wall Street. The taxpayer only pays interest if the Fed prints a billion and then buys a billion worth of Treasuries from the Treasury. Under that specific circumstance, the taxpayer pays interest on the creation of new govt. credit-money. The taxpayer does not pay interest when the fed prints and buys MBS from Wall Street.

So, the Fed props up stocks and corporate bonds through its quantitative easing which exchanges newly printed dollars for wall streets toxic goo. Wall street puts the money to work in the markets buying up junk bonds and AIG stock.

The Fed buys treasuries and prevents a bond market dislocation.

Assets prices can remain levitated for quite a while under these circumstances.

Mansoor H. Khan said...

Ilargi: What do you think about this idea?
A Radical Solution for America's Insolvent Financial System
Here is my idea:
1) We essentially need an orderly bankruptcy and liquidation of the United States' financial system.
2) I suggest we create a government owned bank and transfer all deposits of the private commercial banking system to the new government owned bank. This "transfer" is really just new money creation. This new money will be digital cash (electronic version of physical paper cash). Very much like reserves at the FED.
3) Note that the plan will not create net new money since we will be destroying all deposits of the commercial banking system in the process.
4) All assets of the commercial banking system will be transferred to the government and auctioned off in an orderly manner over the next 10 years. The proceeds from the sale would go the United States treasury and not the commercial banks. The assumption here is that commercial banks deserve nothing since the entire industry would have been most likely destroyed any way. Even good banks would have been destroyed due to bank runs and defaults if the government had allowed the dominoes to fall. Of course bank shareholders, bank bond holders and counter parties of bank derivatives would not receive anything.
5) After the transfer FDIC protection will be removed for any private bank which wishes to remain in business or any new private depository institution or bank. From that point on the government should make it absolutely clear that there will be no more bailouts and no more conversions. This will discourage (but not completely eliminate) fractional reserve deposit banking and private money creation that results from pyramiding of government created money. This will also limit debasement of the currency that results from fractional reserve deposit banking. In fact, we can have "free banking" from that point on and not even have reserve requirements or capital requirements. All depositors who use private banks will be fully at-risk. The industry will have to set the interest rate high enough to attract depositors.
6) The new government bank will act as an electronic "piggy bank" only. All deposits will be 100% reserve and it will not make any loans. Loan making will be left to the private banking system (with no deposit insurance or a possibility of a future bailout). The new government owned bank exists only as a "safe" money storage and a payment clearing system so the public does not have to carry around physical paper cash to make purchases and pay bills.
7) Of course this plan is not without pain or cost. Cost of funds for banks and borrowers will probably rise as bank deposits are a source of very low cost money for the banks. Nothing is free. We are just exchanging higher cost of funds for removal of systemic failure risk. Economically we are recognizing that when money is loaned there is always credit risk.
8) We are just separating the payment and clearing transaction system which is absolutely necessary for day-to-day commerce (no credit risk) from the loan banking and investment system (has credit risk).
Mansoor H. Khan

NZSanctuary said...


I wish I were in the South Island, but family, social network, work (I have a good job in a limited industry), etc., are all in greater Auckland.

The decoupling is barely past the planning stages unfortunately (although all debt has been paid off and a sizable amount of money saved, plus I have learnt some of the necessary skills). It will take a few years yet, and the door will be left wide open, as far as staying in the hustle of modern living, as long as it suits (assuming that is still an option). My major hurdle now is land prices (which are still very high within 80km of Auckland).

As far as NZ goes, I am finding it hard to see how it will handle the global tumble, and would appreciate other's views who have some knowledge of the region. We are such a small community relatively speaking, with a lot of land and resources, so NZ may fare well (again relatively), plus we are geographically remote. Barring heavy-handed pressure from other countries to take our resources, I think NZ will do well in the long run.

robert61 said...

Celente says: Its all a cover up!


it's not the first time he has said that, but he is consistent.

Question is: how much did Goldman Sachs contribute to the DNC? For Obama? the Obama/GoldmanSachs connection is very high.

NZSanctuary said...

Anon @ 2:13

Just to clarify, what do you think the Federal Reserve is?

Anonymous said...

@ NZSanctuary

Just address the issues I've raised. I'm not going to answer condescending questions like that when nobody even bothers to address the elephant in the room.

Why? I'm beginning to think nobody can counter the issue I've raised. Come on, it can't be that hard. I'm sure you've worked out why the Fed can't save the day. Right? Bond market dislocation right? Wrong, I already addressed that. The Fed buys the Treasuries. No bond market dislocation. You'll need to look elsewhere for doomsday.

Starcade said...

I understand where you're coming from, except that I don't think it's going to be sales which are going to signal TSHTF...

Imagine, if you will, what's going to happen when a lot of families without jobs are going to have to tell their little ruffians Santa ain't coming this year?

Now imagine if those "little ruffians" are about 14-18...

There are going to be so many smash-and-grabs this holiday season (five black guys ran over an Apple Store and took $100K of display material in half a minute three weeks ago, as one example) that it's not going to be funny.

One thing I think people forget is that the whole consumer culture is ALSO designed to keep people in line. What if that's dead too? What if, with no hope of ever getting that Wii with Rock Band: The Beatles, a bunch of kids just knock over a Best Buy and ransack the place as people are getting killed for that Black Friday deal?

VK said...

Anon 2:53

You're clueless about the mechanisms of money. If you think the FED can simply print away then you too live in la-la land. Enjoy your stay.

Have had enough of these banters here, if you think they are going to print, then I recommend buying a house, a couple of condos, gold and stocks. Knock yourself out.

autarch said...

VK your thinking is very boxed in. Why not step outside your box for a moment?

Let us know when you're outside your box.

NZSanctuary said...

Re: the Fed.

It was a serious question.

"We keep printing until the debts are wiped clean."

This doesn't happen in a global market. When economies start dislocating from global markets you may see this - hence the steep (hyper?) inflation I&S foresee some time down the road.

Hombre said...

Ilargi - "...picking dates at random for hardly at all defined events looks to me like something that we could do a much better job of..."

Right, but my input on it--down to the precise hour and minute--was obviously just for the fun of it.

My serious take is that it matters less what day, week, or month the market / economy takes a big hit. Our discussion of all the reasons why it will, central and peripheral, are what keeps us awake and abreast.

On a peripheral note, right now Sen. Dan Imhoff is on Cspan calling climate change a massive leftist plot! I often have to wonder... where do all these conspirators meet to plot their devious deeds? ;-)

Hombre said...

Ruben - Medical related and educational related jobs in the short term. In the meantime keep busy learning manual skills that are related to gardening, smithing, water sourcing and power generation, etc.

Bigelow said...

Zerohedge and SeekingAlpha mentioned…

FinancialTimes Geoff Dyer, Beijing Bureau Chief interviews Michael Pettis, professor of finance at Peking University’s Guanghua School of Management.

Hombre said...

Bigelow's reference condensed. Interesting interview.


Anonymous said...

I’m a big fan of JK, but in at least a few major cities the upscale and fashionable have indeed returned to the city, dwelling in glorified apartments which are perfumed with terms such as “loft” and “flat.” These revitalized urban areas are typically occupied with people who take their lunch breaks in a Pilates studio. The nightlife and culture is most always vibrant, chic, and “avant garde’ with more than a little bit of ostentatious swagger elbowing its way thru the crowd. After all, the 'other people‘ have been sent on their way once again to the outer perimeters (read decaying suburbs). Diaspora, 2009 style, be gone unwelcome ones, you have just been priced out of the new,cooler neighborhood.

Even the great ideas proposed by great thinkers such as Kunstler have been co-opted and mangled by a greed and mentality that corrupts everything it touches. Society as whole needs to dig deeper and ‘Take A Stroll’ to that location where the real problem resides:



el gallinazo said...

Although people often bemoan political apathy as if it were a grave social ill, it seems to me that this is just as it should be. Why should essentially powerless people want to engage in a humiliating farce designed to demonstrate the legitimacy of those who wield the power? In Soviet-era Russia, intelligent people did their best to ignore the Communists: paying attention to them, whether through criticism or praise, would only serve to give them comfort and encouragement, making them feel as if they mattered. Why should Americans want to act any differently with regard to the Republicans and the Democrats? For love of donkeys and elephants?

www.gregor.us said...

The RSS feed to this blog is a total mess. And I wish that was not the case b/c I'd really like to read your work through a reader.



Zaphod said...

Re: The Fed

The Fed cannot, ever, print money without it becoming a debt. If they could, we could all be infinitely wealthy.

Instead, we (tax payers) pay interest for all "they" loan us. If they loaned us enough, the value of the dollar would plummet, but then so would the wealth of those who own the Fed. Ditto goes for Treasuries, if those were sold directly.

Obviously this will be the eventual outcome once inflation hits, but the deflationary collapse of credit should happen first, as the quantity of bad debt dwarfs any plausible number the Fed could print. Note that they've doubled the cash in circulation more or less, maybe a $1T at most, yet this is a small number compared to the debts of high-finance, mortgages, etc.

If the Fed works too hard to buy up bad debt, those who own "good" debt will see their value drop, and be forced to sell as well. Then interest rates jump up, the economy collapses, and a tidal wave of debt defaults.

At least that's my simplistic take on the situation. I think we're in a spot where anything we do, debt-wise, will make problems worse. The only new debt I could envision that has any value would be spent on raw resources -- cheap energy (not oil!) and new mineral extraction -- and improving energy efficiency of homes and buildings. Such cannot prevent a crash, but it will help lessen the suffering as we hit the bottom.

pentronicus said...

To the clueless anon.

I will attempt to answer your questions about 'just printing money', although my understanding of all this is only slightly better than your own.

The constitution allows two ways for the US government to legally raise money: by borrowing or by taxes. Borrowing eventually entails taxes. The constitution does allow the government to coin money, which, at the time the constitution was written was made of gold or silver. Making $10 dollar coins out of $10 worth of gold is not a good way to raise money. The right to issue bills of credit (i.e. paper money) was intentionally not addressed, although the right is specifically denied to the states. Of course now the US gov makes lots of paper and virtual money. It is created by borrowing from the Federal Reserve, who dutifully records the debt and twiddles the numbers on the government's account ledger.

Simply printing paper money, or twiddling bits on a computer to look like more money without increasing debt or producing something of value inflates the money supply. It is a form of theft that governments all too often engage in. In the long run such theft has disastrous consequences. It scares away potential business partners, discourages savings, drags down the economy and gets politicians thrown out of office. It isn't a viable option.

el gallinazo said...

Geoff Dyer gives the best floor plan yet to the Chinese Dollar Roach Motel to be found up the road on Highway 61. As JP Sartre would write - no exit.

el gallinazo said...


Great "back of the envelope" explanation. Guess there is a place here for the right :-) Maybe our anonymouse could now go on to debunking Einstein on another blog site. His posts would have a certain value because they led to an educational response for the newbies, if they just weren't so arrogant and pugnacious.

Ilargi said...

"The RSS feed to this blog is a total mess."

What does it mess up?

autarch said...

petronicus, money without attached debt is created all the time without recourse to printing presses. It is called an interest payment.

Anonymous said...


You guys don't understand the difference between normal open market operations and quantitative easing. The unusual aspect of quantitative easing is that the money is printed and directly used to buy assets OTHER than US treasuries. The ONLY time the taxpayer pays interest to the fed is when the fed buys US Treasuries. The taxpayer is not paying interest when the Fed prints an billion and buys a billion MBS.

Do yourselves a favor and read about quantitative easing.

Ilargi said...

"Do yourselves a favor and read about quantitative easing."

Provided you do the same.

Are there really folks out there who think that the Fed can buy anything at all without taxpayers picking up the bill? Or that the Fed would volunteer to give up its 6% because Mother Teresa's spirit has descended upon it?

Anonymous said...


Please read how the fed works. The fed has a balance sheet just like any bank. Printed money is a liability. The liability is offset by an asset. The asset can be anything. Normally, during open market operations, the assets are Treasuries. During times of extreme economic stress, central banks offset their liabilities created by new printing through the purchase of assets other than sovereign debt. The fed instead offsets its printing by purchasing things like MBS.

You guys spend all this time here and you don't even understand how the central bank works.

Anonymous said...

@ Ilargi

You're pulling this 6% thing out of thin air.

You can't even explain where you're getting it.

Go on then, let's here the sarcasm rather than an explanation. That's how you roll

Weaseldog said...

"We keep printing until the debts are wiped clean."

Ilargi said, "You can't wipe clean debts by adding more of them."

You can move them around and change the maturity dates.

This argument about whether the Fed prints money or not, seems a bit like arguing if a shell game is a con job or not. Creating debt, is creating money. Creating debt from debt, or assets composed of debts... Is still in the fiat system, generating money from debt... Which would seem to be, creating money from less than nothing, making a larger less than nothing...

And the little trick of borrowing money to make the interest payments on monies borrowed...

The reason they can't do this in perpetuity is that the seal between the banking system and the common man isn't airtight, if they go too far or too fast, they'll lose control of the currency and we will have inflation. In the mean time, the advancing debt and velocity of money is on an exponential rise. Already it seems surreal to me that the debts have grown into the $trillions while wages continue to run flat. Perhaps it can grow into the hundreds of $quadrillions with no job or wage growth?

Now I have no problem with the notion that Fed can't legally just print money from nothing. what they do resembles it though, much like a dead trout, smells much like a dead haddock...
But I have a nagging worry. If they were illegally printing money, how would anyone know? you can't look at their books. If they did it, and used Arthur Anderson style accounting, there would be no way for us to find out.

I'm reminded that Al Capone never executed anyone, because he didn't have the authority to do that. Tales of his murderous exploits must then be highly overblown...

As to Congress having authority over the Fed, I think it's pretty clear.

1. The Fed is acting as an agent of Congress in which case Congress is completely responsible and culpable for every action the Fed takes, while Congress has complete authority of the Fed as a government sponsored entity.


2. The Fed is an unconstitutional and illegal institution that does not have the authority to print money. It is in violation of numerous federal statues and has been engaging in felonious behavior for decades. All of the money that has come out it, is counterfeit and has no actual value and is subject to confiscation by the Treasury.

jal said...

Re.: S&P dropping off a cliff

Can the “Casino” be rigged?

I cannot see an unforeseen event that would start a panic sell that cannot be controlled.

I repeat ...

As of today ... there is not a game changer that would cause a panic exit,
(for the next two weeks),
from the market that would drive the S&P down by 100 points in a week time frame.

Look at what Karl D. had to say.

So Paulson's admission that he spoke with people on Wall Street regularly is fraught with inherent danger. That's especially a valid question after Paulson meets with the Fed chief, as he did on Aug. 16, 2007, when a crucial decision needed to be made.
The Fed indeed did surprise the markets by cutting interest rates by half a percentage point the next morning -- Aug. 17. And since it was the first of what turned out to be a long series of rate cuts, knowledge of what was about to occur did turn out to be extremely valuable.
No, really?
I have often raised hell about this little charade.  It was blatantly obvious that "certain inside people" had knowledge of what was to come the next morning - Options Expiration morning.
A huge number of people who were (correctly, based on the economic fundamentals) short, myself included, got literally corn-holed that morning - to the benefit of those certain "favored few" who were clearly told in advance and traded in front of it.
This, of course, is not the only example.  We had a similar event occur when the SEC announced the ban on short-selling of certain financial names.  Indeed, these "magical" reversals in the market (in both directions) have happened over the last two years more times than I can count.
What is also crystal-clear is that nobody in the government gives a good damn about the laws that are broken by this insider-trading; these are not small, random people that were making illegal profits, it is some of the biggest and best-connected names on Wall Street.
But when the law only applies to "the little people" we indict Martha Stewart while some of the biggest firms on Wall Street do the same sort of thing literally every day - with impunity.

“Actually, you (and I) got cornholed w/ 45 minutes left to trade on THURSDAY because the market turned up over 300 points in 45 minutes (for no apparent reason).”

Like I said before, ... Timmy is winning and beating back the waves.


Anonymous said...

@ Ilargi,

I'm waiting for your explanation of the 6% interest.

I'll be waiting a while because you haven't got one.

You're making things up as you go along.

Perhaps the loyal readers here at TAE could explain where Ilargi get's his mystical 6% interest. You must know right? The dear leader has explained it all countless times right?

I'm betting nobody knows what Ilargi is referring to with his 6% interest reference.

Let's hear it if you do.

Anonymous said...

QE is monetizing --printing. Sheesh! And it's been working quite well since March. There's no reason to believe it won't keep working into the foreseeable future--think in terms of years.

What do I mean by "work"? I mean stave off the imminent collapse of the financial system. QE buys time for all the financial elites to get out of Dodge. Buys literally years, perhaps decades. Watch.

Frank said...

@Anon the badger

The only 6% I'm aware of is the 6% dividend the Fed is supposed to pay to the US treasury. I've never been clear on '6% of what'. One would think profits, but one would also expect the books to be audited in that case. In any case, this is a dividend that the Fed pays out, not something that comes in.

I too would like to hear what Ilargi is referring to as 'the Fed's 6%'.


Anonymous said...

U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although ………….there are practical policies that approximate this behavior).

This is from Bernanke's helicopter speech, notice he says that the US government has a printing press not the FED, there are several problems here though, one of them being the economy can only grow if someone willing go into debt, the current choice that government is making is for future generations to go into debt as people in the private sector are tapped out and paying is down defaulting, or saving, this is what happened in Japan, every time the government tried to cut back on spending the economy collapsed again. Bernanke is going to find himself in the same situation that they did in 2007 when he cut interest rates, the dollar fell and commodities went on a moonlauch as there is simply not enough income or borrowing capacity to support the higher prices as he tries to inflate he's playing Inflation/deflation tennis.

el gallinazo said...

@autarch said...
"petronicus, money without attached debt is created all the time without recourse to printing presses. It is called an interest payment."

Money is **not** created with interest. Money As Debt both I and II spends a major part of the video showing how this fact is the poison dart in the whole system.

Time to review MAD.

Weaseldog said...

Anonymous said, "Buys literally years, perhaps decades. Watch."

Probably not decades...

We'll soon be sledding down the backside of the energy curve.

Those bankers will be struggling to keep value in what they have, while the USA loses relevance as any sort of financial safehouse. Though the dollar may not lose value in the face of other currencies, it's value when compared to goods and services will continue to erode.

As we ride the exponential curve upwards in debt, there's a corresponding effect in devaluation.

And we don't need inflation to drive prices up. Scarcity works fine too.

Greenpa said...

Snuf: "Fixing things made of steel cheap is a skill always needed.Think welding,and associated skill."


Let me add- stainless steel is likely to become a very valuable commodity; particularly if you know the specific alloy it is.

I never throw out a stainless scrap; I'll use it some day; or swap it, down the line. It could easily become the most valuable metal after silver-

autarch said...

grignons video is wrong.

if $1 of debt money is created, and circulates through 4 pairs of hands in a year then it can pay off $4 of interest in that year without need for further creation of money.

if $100K of debt money is created then when $110k say is repaid then the $100K asset/liability is destroyed and the remaining $10K interest has no liability.

now think.

Anonymous said...

Jesse's Café Américain

Has what looks to be an excellent discourse on inflation/deflation, debt and money.

"Confessions of a 'Flationary Agnostic"

Any flaws in it you can see ilargi?


Weaseldog said...

Autarch said, "if $100K of debt money is created then when $110k say is repaid then the $100K asset/liability is destroyed and the remaining $10K interest has no liability."

If a business borrows $100k and goes bankrupt, that $100k does not get repaid and stays in circulation.

Then the Gov gives the bank $100k+ and bills the taxpayer.

The bank does not have to repay the $100k+ so it gives it away as bonuses to execs. So now we have $200k+ in permanent money creation from nothing...

The bank then files an insurance claim with AIG, and AIG covers the loss, using free money given to them by the government.

Now we're up $300k+ of permanent money in circulation, created from nothing. And $200k+ in taxpayer debt. The taxpayer will pay, but the gov will not pay down the debt, it will just spend it.

Possibly from money the taxpayer borrowed and will never repay as the economy worsens and the taxpayers go bankrupt.

The money they borrowed, repeats the cycle, ballooning the effect of money creation from nothing.

Anonymous said...

Still waiting for Ilargi's explanation of 6% interest.

dark_matter said...

I work with engineers and we do lots of modeling of large systems. My feeling has always been that if you can't write a computer program to model a system you don't really understand it, i.e. part of your model depends on intuition, i.e. something you can't explain. We of course have such programs when we design things and we use these to settle disputes (though sometimes the disupute becomes whether the modeling is correct or not).

For something as numerical as the flow of money I would expect that a spreadsheet could be created to show what is going on, not as a predictive tool but to explain what has already happened. Does anyone have/know of such a spreadsheet of other model that one could look at? If there is no such thing then I have to conclude that nobody can really explain what is going on.

Anonymous said...

@ Ilargi

"Are there really folks out there who think that the Fed can buy anything at all without taxpayers picking up the bill?"

You've never offered any explanation as to how that would happen.

Who is going to make the Fed fess up to the mess on its balance sheet?

Who? Who? Who?

You can't answer the question because you don't know.

Nobody is the answer. Nobody has an interest in examining the Fed's balance sheet. Everyone wants the Fed to absorb the banks bad assets so lending can resume.

The issues I raise are really quite simple and straightforward. Yet still, you offer no answers and no explanations.

Neither do the blog's followers.

You've all got blind faith in the notion that "somebody" has got to make the Fed fess up.


Anonymous said...

Anonymous Anonymous said...

Still waiting for Ilargi's explanation of 6% interest.

September 23, 2009 12:53 PM

Have you done a word search of '6%' on Wikipedia, Subject : Federal Reserve System?

Links from there (52) go to a federal reserve site which I imagine will keep you busy, I still have better things to do with my time :)

-perpetual motion-

autarch said...

Of course such models exist and if you haven't found them yet then you haven't been looking.

Debt cannot be modelled properly without deltaT. Neither can the flow of water.

Grigon treats something that moves as if it were static, then publishes a video to immortalise his mistake.


Anonymous said...


Ilargi made up the 6% interest thing.

He's fast and loose with his facts, as well as his understanding of the way the system works.

I've already provided all the links and the definitions. I've already done the homework.

Anonymous said...

Ilargi from what I understand there is no marginal 6% cost on every dollar of debt issued by the Fed. Instead the 6% pertains to a dividend on the stock that each member bank has with the Fed. So in, fact the US government is not really paying interest to the Fed. In addition, all profits are sent to the Treasury. If I am wrong somewhere, I would appreciate anybody, not just Ilargi, to explain it to me.


Anonymous said...

September 23, 2009 1:23 PM

How is that stock valued? I imagine the total assets to be divided between member bank so that 6% dividend, I imagine, would result in increased or decreased sums depending on the total assets?

Anonymous said...

September 23, 2009 1:23 PM

How is that stock valued? I imagine the total assets to be divided between member bank so that 6% dividend, I imagine, would result in increased or decreased sums depending on the total assets?

Anonymous said...

1:31 - It is, I believe, based on the amount of non-voting stock held which is itself measured by the amount of reserves (from the member banks) parked at the Fed. I do not think it has any relation to the amount of assets or issuance of/by the Fed. In this scenario, Ilargi would be mistaken, but to be fair, I am just going off a very cursory glance and could be completely off on this. Thus, if I am, someone please clarify for me.

Anonymous said...

WASHINGTON, Sept 23 (Reuters) - The number of mass layoffs by U.S. employers rose by 533 in August from July, with the manufacturing sector the hardest hit, Labor Department data showed on Wednesday.

The number of mass layoff actions -- defined as job cuts involving at least 50 people from a single employer -- rose to 2,690 last month, affecting 259,307 workers. That brought the total of mass layoffs so far this year to 21,184.

A total of 279 mass layoff events were reported in the manufacturing sector in August, the department said.

Max said...

"If the large and growing federal deficits and the Federal Reserve's unprecedentedly easy policies tempt you to leverage up on inflation-sensitive assets, such as gold, give the idea a second thought. It likely will be a year or more until price inflation becomes obvious and undeniable (which is what it would take to bring the general public into the gold market). In the meantime, your inflation-sensitive assets could get paddled rudely as the deleveraging that began last year continues.

For at least the next year, the simple, fire-and-forget strategy is 50-50 gold and cash – gold for what looks to be inevitable but on its own schedule, cash to be ready for the bargains that may show up while we're waiting for the inevitable to arrive."

Casey Research

Anonymous said...

I'm frankly pissed off.

Ilargi presents himself as someone who's "in the know."

He's here to explain how things work to the little poeple so they can protect themselves.

Well, Ilargi doesn't really know what he's talking about

His ignorance regarding the federal reserve system has been demonstrated on this comments page today.

Folks, please protect your assets from these charlatans who present themselves as learned but who in fact don't even know how the system works.

6% interest. Hah!!

Please don't organize your life around such ignorance.

Anonymous said...

GREENWICH, Conn., Sept 23 (Reuters) - U.S. natural gas prices will have to move higher to spur a resurgence in drilling activity and keep output of the fuel steady, the head of Chesapeake Energy Corp (CHK.N) said on Wednesday.

The weak U.S. economy has knocked natural gas prices sharply lower in the past 14 months, and sluggish demand for fuel has prompted producers such as Chesapeake to curtail drilling for new supplies.

"The industry can cope with $4 gas. The industry can't grow or sustain production with $4 gas," Chesapeake CEO Aubrey McClendon told an IHS Herold energy conference.

Rebound to $6-$9 needed to boost rig count to 1,100

Anonymous said...

Rule #1 for running a finance blog:

Understand how the federal reserve system operates

Rule #2: Shut-up until you've mastered rule #1

team10tim said...


I'm afraid you are mistaken.

if $100K of debt money is created then when $110k say is repaid then the $100K asset/liability is destroyed and the remaining $10K interest has no liability.

When the loan is paid back plus interest there is indeed $10k free and clear, but the bank owns it. The bank got that $10k from the real economy. So, $10k was effectively removed from circulation. To get that money back into circulation more loans need to be made, which in turn generates more interest payments to the bank.

This process continually sucks money out of the real economy in the form of interest while simultaneously pouring new money into the economy in the form of new loans.

This process works like a charm as long as two conditions are met.

1) the total amount of loans is continuously increasing.

2) the economy is growing at least as fast as the interest. That is the economic growth rate is greater that the interest rate.

If growth rates fall below interest rates or banks reduce their lending then defaults are mathematically required.

See Denninger for a thorough explination.

Anonymous said...

By Peter Eichenbaum

Sept. 23 (Bloomberg) -- U.S. credit-card defaults rose to a record in August and more losses may lie ahead as delinquencies climbed for the first time since March, according to Moody’s Investors Service.

Write-offs rose to 11.49 percent from 10.52 percent in July, Moody’s said today in a report. Loans at least 30 days delinquent rose to 5.8 percent from 5.73 percent. “Early- stage” delinquencies, or loans overdue 30 to 59 days, surged to 1.65 percent, from 1.41 percent, signaling higher losses in coming months. Banks typically write off loans after 180 days.

Anonymous said...

Ilargi owes his reader an apology.

Anonymous said...

Where is Stoneleigh and her bond market dislocation?

How's that going to happen Stoneleigh when Fed can buy all the Treasuries it needs to keep interest rates low.

Who's going to stop it? Nobody that's who.

Weaseldog said...

Team10Tim said, "So, $10k was effectively removed from circulation."

Be sure and subtract overhead...

Salaries, expenses, fancy sports cars for board members... that money goes back into circulation.

Then there's games that can played by using the note itself as an asset before it is paid off.

And then there's collateral made from collateral made from the note....

Then you can bundle these notes into tranches and sell them, after you've used them as a collateral to borrow money...

Anonymous said...

I'm punching holes in automatic earth arguments and revealing the author's stunning ignorance.

Folks, you should demand your donations back.

Anonymous said...

Yeah, give us our money back you charlatans!!

Anonymous said...

The Fed can "print" what it needs? And what happens then? The more they "print," the farther the dollar falls, and the more oil costs. And if oil goes up, so does fuel. And if fuel goes up--our economy goes back down.

So--no--devaluing the currency has a certain limited band of usefulness.

TAE Right Winger

Anonymous said...

Eventually, our aircraft carriers will ensure that we get all the low cost oil we need.

team10tim said...

RE: 6%

From Wikipedia:
Federal Reserve System: Independent within government
The twelve Federal Reserve banks provide the financial means to operate the Federal Reserve System. Each reserve bank is organized much like a private corporation so that it can provide the necessary revenue to cover operational expenses and implement the demands of the board. Member banks are privately owned banks that must buy a certain amount of stock in the Reserve Bank within its region to be a member of the Federal Reserve System. This stock "may not be sold, traded, or pledged as security for a loan" and all member banks receive a 6% annual dividend[52] No stock in any Federal Reserve Bank has ever been sold to the public, to foreigners, or to any non-bank U.S. firm.

6% is the dividend that the Fed pays to the member banks that own the Fed.

It is the first link that appears when searching for:
federal reserve 6% wikipedia

And, I believe you owe Ilargi's readers an apology.

ric2 said...

Aloha QE Anon 11:16 AM -

You said:


You guys don't understand the difference between normal open market operations and quantitative easing. The unusual aspect of quantitative easing is that the money is printed and directly used to buy assets OTHER than US treasuries. The ONLY time the taxpayer pays interest to the fed is when the fed buys US Treasuries. The taxpayer is not paying interest when the Fed prints an billion and buys a billion MBS.

Do yourselves a favor and read about quantitative easing.

Can you point to the definition of Quantitative Easing you are using? The wikipedia def quoted earlier in the thread states that QE is this: "In practical terms, the central bank purchases financial assets (mostly short-term), including government paper and corporate bonds, from financial institutions (such as banks) using money it has created ex nihilo (out of nothing). This process is called open market operations."

This seems to contradict your stated definition of QE being when the "money is printed and directly used to buy assets OTHER than US treasuries." It also seems to imply you donʻt understand the full scope of "open market operations."

In addition to the wikipedia definition of quantitative easing, there is this definition I found from a Federal Reserve publication (of which Ben Bernanke was a co-author):

"increasing the size of the central bank’s balance sheet beyond what is needed to bring short-term rates to zero (quantitative easing);"

I think we need to get straight on some terms because weʻre getting snarky and starting to talk past each other. Also, I am assuming your main point (besides trying to educate us), is to show that the Fed can stop this deflationary depression and prevent a bond market dislocation? Is that correct?

Anonymous said...

Devaluing the currency is not that big a deal. Our exports will be much cheaper and domestic production will be encouraged. Put people to work in the marcellus shale natural gas fields of Pennsylvania and the oil shale fields of Colorado.

I say, bring it on, and make ownership of gold and silver illegal again.

Anonymous said...


1) I was not the one asking for Ilargi to apologize or some nonsense like that.

2) Nowhere does that indicate that the 6% relates to interest on issuance of FRN's for government debt. The 6% is a dividend on nonvoting shares, which are in turn related to commercial bank deposits at the Fed, to compensate them for not being able to use that money for business purposes. I think you need to read what you link to before attacking people.

3) Ilargi, I am not the poster who is attacking you.

Anonymous said...

@ ric2,

My main point is to press Ilargi and Stoneleigh on the details of their arguments in order to highlight gaps in their knowledge base.

They both have a frustrating tendency to repeat vague generalizations over and over again while failing to sidestep the elephants in the room.

Those elephants include:

1) Who is going to stop the federal reserve and examine it's books when everybody has a keen interest in their quantitative easing programs. Who? Who will make them stop? On this point we always get nothing but the sound of crickets chirping.

2) A bond market dislocation is impossible if the Fed is buying Treasuries. Again, we have a point which is never addressed.

3) If the currency devalues, then so be it. Our oil shale and marcellus natural gas will be competitive on the international markets. So will our farm produce, which will give farmers an incentive to hire folks again. Put people back to work doing real things rather than pushing paper from pile A to pile B.

Hombre said...

Those of us who are earthbound and not stratospheric economists are 6% confused at this point about the effect of money "creation".

But... we are 94% sure that our neighbors are losing their homes, jobs, and assets of all kinds!

So anon's 6% doesn't mean a damn thing to us if it does not improve things down here in the real world.

Anonymous said...

Ilargi doesn't know how the federal reserve system works.

His 6% interest claim clearly demonstrates big gaping holes in his knowledge base.

How can you have a finance blog and yet remain stunningly ignorant on this basic and fundamental component of the financial system?

Nassim said...

If the currency devalues ...
will give farmers an incentive to hire folks again.

Let's be generous and say that 2% of US workers are in the agricultural sector. Let's be generous again and assume that devaluation will lead to this number going up by 50% - this would lead to 3% of US workers being in agriculture.

Big deal.

Hombre said...

anon: 2:57 I think it is this statement which is stunningly simplistic...

"3) If the currency devalues, then so be it. Our oil shale and marcellus natural gas will be competitive on the international markets. So will our farm produce, which will give farmers an incentive to hire folks again. Put people back to work doing real things rather than pushing paper from pile A to pile B."

You, sir or ma'am are dragging a line and hook behind a moving boat!

Weaseldog said...

Anonymous said, "Our oil shale and marcellus natural gas will be competitive on the international markets."

The oil industry still hasn't found a way to make it profitable to get quality oil from oil shale. They've made improvements, but they aren't there yet. If it does become profitable, they'll produce and sell it on their own accord. They won't need subsidies to produce it. If it is profitable without subsidies, then it will produce a positive EROEI. This means it will return more energy than is needed to produce it. for now, it takes more energy to produce than you get back.

Natural gas is in decline in the USA. Sure, we see television commercials that tell us that our natural gas will last us generations, but they tell lies.

Natural gas supplies are estimated by the USGS by forecasting demand. This is like determining how much gas is in your tank, by deciding how much gas you want it to have in it.

There's a reason we're drilling in expensive city suburbs. It's because the supergiant fields are all going dry.

One reason prices have have been down so far and supplies seem abundant is because demand is being destroyed.

If we start exporting natural gas, we'd better be prepared for more demand destruction, because the economy can't come back without increasing consumption. And that consumption will just hit the wall again.

Anonymous said...

@ Coyote:

"You, sir or ma'am are dragging a line and hook behind a moving boat!"

Please link your words together so that they express ideas.

You've already stated that you don't understand the 6% interest argument, so from where I'm sitting, you don't have much to offer here.

Anonymous said...

@ Nassim

Let's put our thinking cap on and imagine whate products would become competitive through currency devluation:


I'm still on the letter "a" and the jobs are piling up fast.

I. M. Nobody said...

@anon 2:20 PM

How's that going to happen Stoneleigh when Fed can buy all the Treasuries it needs to keep interest rates low.

Who's going to stop it? Nobody that's who.

How did you know that was my plan? Of course my power is limited, so it may take awhile.

@anon 2:32 PM

Eventually, our aircraft carriers will ensure that we get all the low cost oil we need.

Paraphrasing Bill Maher, what are they waiting for?

More to the point, how are they gonna do that? It is well established that the low cost oil comes up first, then it starts to get expensive. We already used the low-cost oil.

I am the I. M. Nobody whose Google login is failing for some reason.

Anonymous said...

The thing that scares me, if I'm understanding it correctly, is that the Fed is buying bad debts/losses from the private sector/banks, thereby putting clean unencumbered money into the banks/economy.

Then, those bad debts/losses that used to be private are now the public's. Banks can default if they can't pay and yes, it causes massive problems, but still, they can default and the debt dissapears.

But now that the country owns those debts, how can it default? If those bad debts/losses were bringing down the banks, what will they do to the country?


Weaseldog said...

Coyote said "You, sir or ma'am are dragging a line and hook behind a moving boat!"

Anonymous said, "Please link your words together so that they express ideas."

Coy Ote was quite clear. His meaning wasn't lost or misconstrued by this poster...

If you think about it long enough, you'll get it.

Anonymous said...


1) I was not the one asking for Ilargi to apologize or some nonsense like that.

2) Nowhere does that indicate that the 6% relates to interest on issuance of FRN's for government debt. The 6% is a dividend on nonvoting shares, which are in turn related to commercial bank deposits at the Fed, to compensate them for not being able to use that money for business purposes. I think you need to read what you link to before attacking people.

3) Ilargi, I am not the poster who is attacking you.

Hombre said...

OK. Fair enough. Concerning your shale pipedream...

Despite a century of trying, and $10 billion in investment, oil shale currently provides an infinitesimal .0001 of world energy, said Randy Udall, director of the Community Office for Resource Efficiency in Aspen. The (Shell) technology is incredible - incredible in an insane way, incredible in a fantastic way, maybe both.

"Shell's new process involves sinking heaters deep underground, cooking the rock at 700 degrees and recovering the oil and natural gas with conventional drilling. Early results are promising, says Terry O'Connor, a vice president in the oil giant's unconventional resource division. But, he admits, "no one has been able to develop oil shale on a commercially sustainable basis." Shell has four more years of research here before it will know if it has the answer."

Anonymous said...

Add Team Trim to Ilargi as two individuals who don't know how the federal reserve operates.

ric2 said...

anon -

re: elephants

1. I donʻt think anyone here on this board actually thinks there is a realistic chance for the Fed being audited or having even some of its books with the toxic goo opened.

2. What is your definition of "bond market dislocation" ? Do you think it is possible for a US Treasuries auction to fail? Are you saying that the US gov needs no foreign or private purchases of its debt to fund all of the deficit spending occurring?

3. We are 100% for sure headed for an eventual currency devaluation via hyperinflation caused by government printing once the dollar decouples from other world currencies (foreigners lose confidence in the dollar as a store of value, so it stops being the world reserve currency / foreigners stop buying debt denominated in dollars or will only buy debt denominated in something other than the dollar). I&S have been saying this for a long time, but their main point is that we will have to survive historyʻs biggest deflationary depression first. Destruction of our currency via hyperinflation is years away.

Youʻre certainly correct about the need for an increase in local farming in US communities. My hope is that our young people pick up this burden peacefully and with aplomb

As for the shale and natural gas, I disagree it will ever be sold on the open market. The elites and their institutions (military mainly) will have first dibbs on any liquid fossil fuels. Us peons willl be biking or riding horses or walking. Hopefully freely, but that might be location-dependent.

As to the paper pushing, I am gladly ditching my paper pushing job (more like pushing digital bits around the inside of a computer, but almost the same thing). I donʻt think many people my age are going to be happy about losing their "paper pushing" jobs, but hopefully the younger folks will be able to adapt peacefully and somehow keep a non-violent society in existence near where I will be living with my family.

Anonymous said...


You're getting distracted by arguments that don't amount to a hill of beans.

Why not join me in asking our hosts to answer 2 very basic questions that they NEVER under any circumstances want to address:

1) Who is going to stop the federal reserve and examine it's books when everybody has a keen interest in their quantitative easing programs. Who? Who will make them stop? On this point we always get nothing but the sound of crickets chirping.

2) A bond market dislocation is impossible if the Fed is buying Treasuries. Again, we have a point which is never addressed.

Anonymous said...

@ ric2

You dodged question #1, which is critical point if you think Ilargi and Stoneleigh have any chance of being correct about their calls for market collapse in the weeks ahead.

#2 The fed makes up the difference for whatever the foreigners won't buy. Simple.

Anonymous said...

The latest Anonyassclown (2:53 PM) to plague TAE is very amusing in their insistence TAE doesn't understand the FED.

They seem to devoutly believe that the financial 'Road goes on Forever and the Party Never Ends'

Recycled 'free' market tripe anyone?

This is not a real Plan, just a desperate magical thinking exercise by what appears to me to be a desperate magical thinking speculator up to their eye balls in Debt.

Reminds me of the dumb blonde joke about 'I can't be out of money, I still have checks!'

The FED buying bad bank debt ad infinitum is the old Perpetual Motion Machine patent rearing it's pointed little head.


Infinite money for Everyone, drinks on the House Buckaroos!


Thanks for the comic relief oh wise Anonyassclown.

Anonymous said...

A walk in the woods,

The facts and the evidence are on my side in this argument.

I'm not arguing about events 10 years from now. I'm arguing about the next 5 years. Ilargi and Stoneleigh, through their ignorance of how the federal reserve operates, have made some horrendous calls about the next couple of years. Sure, the market faces a 10% jolt or so. That will be met by a flurry of succuessful printing. And so will the next jolt, and so will the next jolt, and so will the next jolts for years to come. Sit back an relax folks.

There's a reason I&S sit in a lonely camp by themselves, and it isn't because their brilliant or divine.

Anonymous said...

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased.

We have monetized a scad of debt and that cash has wound up in equity markets. They have risen in response to the dynamic of supply and demand.

Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Neither business or consumer activity supports stock prices or provides us with any sort of indication that credit demand growth is going to return any time soon.

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

We believe in the Easter Bunny and Santa Claus too, as shown by the clear contradiction with our previous paragraph.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

Prices are deflating, but we never use that word.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

We told you there was no credit demand and that neither consumer or business conditions warranted any sort of real optimism, but since you're hard-headed we'll say it again.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.

The flood of monetization that powered the market from 666 to 1070 is ending. We're going to taper this program down, mostly because we're rapidly becoming the entire market, and that's bad news (never mind that we might wind up with ALL of the credit risk, especially in the MBS market, which is substantial! That would suck.)

The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

We're sitting on a metric ton of used dog-food and are having trouble sleeping at night.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

We all hold hands now as we head for the cliff.... Wheeeeeee!

Anonymous said...

C'mon TAE

Let's here some answers to questions #1 and #2.

You're good. But are you that good?

Dagobaz said...

Anonymous: has it occurred to you that the people of the US will not stand for this nonsense forever ? When this economy declines to the point that the private sector cannot sell its debt on the open market because the fed has driven all legitimate credit buyers out of the market, the market will crash hard, and many millions more will become unemployed, millions more will starve. For government, this will rapidly become a crisis of simple survival: when Washington is eventually invaded by ~ >10 million hungry bankrupt souls, you will have the answer to your question of who will force an audit of the fed. Unfortunately, the audit will likely be conducted by something akin to The Committee for the Public Good complete with guillotines.

Anonymous said...


2012 brother! The Mayans warned us right?

C'mon. Answer #1 and #2.

Mike said...

A worthwhile read on the endless printing at Silver Bear


A Snippet:

"Every single sector of the real economy is deteriorating whether it is production, unemployment, corporate profits, real estate, credit defaults, construction, federal deficits, local government and state deficits etc.

And what is the government doing about it. They are doing the only thing they know which is to print more money.

This is total lunacy! How can any intelligent person believe that printed pieces of paper can solve an economic catastrophe?

If that were the case we could all go home and write out pieces of paper or use Monopoly money to spend in the shops or repay our debts."

Anonymous said...

Ilargi, from here forward I rename the "6% interest" as punishment for revealing such stunning ignorance whilst running a finance blog.

Dagobaz said...

slight correction: The group mentioned was actually called: The Committee of Public Safety . Memory served, but foggily.

VK said...

Anon attacks are amusing.

Ooh the FED is powerful, ooh the FED is Gawd, ooh the FED can print.

Blah, Blah, Blah.

Then why did total debt decline in the last quarter?

Why did we have the two consecutive quarters of the most powerful private sector credit contractions in history?

You want hard evidence, go check the FED flow of funds Sept 17th release.

Why is it that the FED is stopping it's bond purchase programme in a month or so?

The Chinese and other international investors have far more influence then even the 2,500 nuclear weapons that the US has, just ask the former Soviet Union.

The FED can do nothing, it can simply push on a string.

Heads you lose, tails you die. Good luck to you sir.

Anonymous said...

Predictable move in the dollar, unpredictable whiplash in Treasuries. As for the equity bubble, it will do what it does, until it pops. In other news, the cremation of the formerly reserve currency known as the dollar will be held in the Federal Reserve's back yard at a convenient date. Chairman Ben will deliver the eulogy.


Anonymous said...

beware of anons bearing homonyms, too much time talking, not enough reading..

here, hear!
they're their....

VK said...

Tsk, tsk, tsk, anon ignorance once again,

Ilargi, from here forward I rename the "6% interest" as punishment for revealing such stunning ignorance whilst running a finance blog.

The Fed generates profits for its shareholders.

The interest on bonds acquired with its newly-issued Federal Reserve Notes pays the Fed's operating expenses plus a guaranteed 6% return to its banker shareholders. A mere 6% a year may not be considered a profit in the world of Wall Street high finance, but most businesses that manage to cover all their expenses and give their shareholders a guaranteed 6% return are considered "for profit" corporations.


Heads you lose, tails you die.

Anonymous said...

MONTERREY, Mexico, Sept 23 (Reuters) - One in three Mexicans would migrate to the United States if they had the chance, and many would go illegally at a time of rising drug violence in Mexico, a survey released on Wednesday showed.

They had better haul ass and get here for free health care and in time of illegal amnesty.

Anonymous said...

@ VK,

We have not yet begun to print. Wait for the equity correction. Then you'll really see some printing. There ain't no way in hell we see S%P500 at 100 next year. The dollar/euro at $2, yes, I'll take that bet.

Anonymous said...

Add VK to the list of TAE members who don't know how the fed operates.

Steve lee said...

I don’t pretend to fully understand all the jousting going on today at TAE, but something occurred to me as Anonymous asked: “Who is going to stop the federal reserve and examine it's books when everybody has a keen interest in their quantitative easing programs. Who? Who will make them stop?”

Suppose he is right? Suppose nobody can make them stop...

Then what?

Doesn’t that scenario, then, provide the ultimate “validation” of the notion that it is possible to get something for nothing? And is it true that everybody has a keen interest in validating such a notion?

I don’t think so, because that immature notion naturally points towards irresponsibility and lack of accountability. And when the moral hollowness of the entire scheme becomes apparent to a tipping-point majority, then the fact that this is a political crisis of legitimacy (mapped on top of a financial crisis) will be revealed, and fur will fly.

Probably cow hide, too.

ric2 said...

anon -

I didnʻt dodge question #1. I just said a Fed audit would never happen.

I just disagree with your belief that an equities market cascade down canʻt happen without a Fed audit. Here is what I think will happen:

1. Fed will not get audited
2. Equities markets will still tank

I also disagree with your belief on point #2. The Fed/US gov canʻt ignore current and potentially future foreign holders of US debt without consequence. Doing so risks the status of the dollar as the worldʻs reserve currency, and once that status is lost, weʻll actually have to trade things of real value to get stuff like, um, oil.

I think our main point of disagreement is that of the power and autonomy of the Fed. You seem to think that the only actions that matter are what the Fed does. I happen to think that foreign central banks hold some power by holding our debt. And also, with the end of the summer lower trading volumes in the equities markets, the Fed will not be able to influence the markets as much as it has.

Anonymous said...


For christ sakes VK

Please don't get your ideas from members of the flat earth society like:


These guys spend their time looking for black helicopter and UFOs in the Arizona desert.

Anonymous said...

VK you are a good poster but you are arguing a strawman. The issue was weather the government pays the Fed 6% interest on Treasuries that the Fed buys. That is what was being asserted. This has been shown to be incorrect. Nobody is arguing your point.

Anonymous said...

@ ric2

The fact that the fed won't be audited explains why we'll print to our heart's content. Nobody is the wiser.

The role of the dollar in the world has way way way more to do with our military infrastructure around the globe than it does with the status of our fed printing press at home. We'll print and the Chinese will ask for more. So will the Saudis. They don't have any other options. They've got nobody to sell their goods to if the Fed doesn't print.

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