Monday, October 12, 2009

October 12 2009: Don't audit the Fed, pull the rug

Dorothea Lange Happy Camper November 1938
Migrant cotton picker's child who lives in a tent in the government camp instead of along the highway or in a ditch bank. Shafter Camp, California

Ilargi: You would expect the Obama administration to make a lot of happy green shoot noise if and when one of their economic programs shows signs of success, or can be made to look as if it does. So it’s a bit strange at first glance that it's been pretty much silent in the media regarding the fact that the $75 billion Making Home Affordable Program managed, three weeks earlier than expected, to modify 500,000 mortgages out of a total of 4 million envisioned.

But that's only at first glance, though. A second one reveals why the government and its spin team are not all that eager to shout this particular one from the rooftops. On Friday, one day after the "success" was announced, Elizabeth Warren's Congressional Oversight Panel issued a report that is as polite as it is highly critical about the program and its numbers, and states that the plan won't even be able to slow foreclosures, let alone halt them.. In the words of the New York Times:
  • On Thursday, Treasury announced that 500,000 homeowners had since had their payments lowered on a trial basis, celebrating this as a milestone. But the report from the oversight panel directly challenged the administration’s characterizations. Most prominently, the panel had grave uncertainty about whether large numbers of the trial loan modifications — which typically run for three months — would successfully be converted to permanent terms.

  • As of the beginning of September, only 1.26 percent of trial modifications that had made it through the three-month trial period had become permanent [..]

  • As of Sept. 1, the Obama plan had produced 1,711 permanent loan modifications.

1711 out of 500,00, and even some of those are guaranteed to re-default. Obviously, there's not much of a success to report. At all. That is, not for the government. The lenders, who have probably already been paid fees for all 500,000 modifications, have more reason for joy. On the other hand, the homeowners who have allegedly been "helped" have much less to be happy about, though most may have to wait a while before they find that out. The program, like everything other "help" the government is involved in, all the guarantees, the securities purchases and other support programs, depends for the difference between success and failure on one simple assumption. Home prices need to be kept from falling, at least by more a few percentage points.

And that is a goal that will not be achieved. Nor is all that desirable to start with. Higher real estate prices may be a boon for banks, they are a burden for buyers and, because of government-issues guarantees, for taxpayers. The stake the Federal Reserve and the Treasury now hold in the US housing market means that every American owns a substantial stake in everybody else's home.

Now imagine that prices will fall another 25%, and you can start calculating some losses. They will run in the trillions of dollars. The Fed and the feds put another $1.2 trillion into the housing market in FY 2009 alone. The most important point is that none of these exorbitantly expensive initiatives manages to halt the increase in foreclosures; in fact, the rate is still accelerating. America has an inventory that could satisfy all demand for more than two years, but builders come knocking for government support.

Obviously, this madness has to stop somewhere. Fannie and Freddie take their share of the $1.2 trillion (the Fed now buys up their securities as soon as they are issued) and use part of it to sell foreclosed homes under a program that requires a mere 3% downpayment and for which no private mortgage insurance is needed. The argumentation, for what I understand of it, is that the GSEs own the whole risk already anyway, so why bother with something as petty as prudence? Why indeed, since in the end the ownership of course lies not with Fannie and Freddie, but with you, the citizen and taxpayer.

So when will it stop? When the mess has become too large to oversee, when the inventory glut and foreclosure waves cause prices to decrease so much, defying the flood of subsidies, that just about every single mortgage must be modified and over two-thirds are deeply underwater. Or it could stop now. Congress might decline any additional demands for bail-out funds that are sure to come before the year is over, and wrap up Fannie and Freddie before they can cause any more damage. Or maybe it will stop here:
Writedowns on Mortgage-Collection Servicing Make Even JPMorgan Vulnerable
The four biggest U.S. banks by assets may have to take writedowns on $55 billion of mortgage- collection contracts after marking them up by $11 billion in the second quarter, casting a shadow over earnings. Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. wrote up the value of the contracts, known as mortgage-servicing rights or MSRs, by 26 percent in the quarter as mortgage rates climbed by about 0.35 percentage point. Net gains on the contracts added more than $1 billion to Wells Fargo’s record earnings in the quarter and $1 billion to JPMorgan’s first-quarter profit.

Losses of $55 billion just on mortgage servicing. In just the 4 biggest banks. Sounds promising, doesn't it? But they'll survive, no matter what their losses. Too big to fail and all that. Sorry, Joe Blow, but the peace prize winner deems it necessary that you, who can't afford a home anymore or get a loan to buy one, fork over for those who can.

As for the banks who are not that big, the picture, as it is revealed through the media, is becoming clearer at a pretty rapid clip. 1000 bank failures over the next few years has turned into a widely accepted number, never mind that the FDIC didn't close a single on this week for the first time in months. The 2009 total stands at 98, and for some reason we can only guess at, the decision was made to go over 100 only next Friday. Nice try, but commercial real estate is bursting at the seams, and scores of smaller banks have no chance of surviving that.

Look, the core of America's economic problems lies in real estate. The only answer the government manages to come up with is throwing your money at it. That's the only answer it has for any economic problem it's faced with. The answer is sure to fail, because home prices are still much too high; all you need to do is look at the fast increasing numbers of foreclosures and job losses.

And Congress has the key. Obama, Summers, Geithner and Bernanke have made it crystal clear that they have no intention of taking a break in their practice of throwing your money away to keep housing finance fees flowing in order to keep Wall Street satisfied.

Auditing the Fed is a useless initiative that only serves to divert attention away from what is really sinking the economy and putting you into debt faster and deeper than you can say "No Mas". Even if Congress has the legal authority to audit the Fed, which I very much doubt they have, it'll take many years to reach any sort of conclusion or even have any relevant books -fully- opened. What would be useful, however, is for Congress to demand (by refusing provide further funding) that the White House withdraw its support for Fannie Mae, Freddie Mac, Ginnie Mae, the FHA and all other channels that could potentially be used to prop up a dead market.

Cutting off all government support for the real estate market can be done in a manner of weeks or months. Yes, the effects will be devastating. But not nearly as bad as letting this multi-trillion dollar circus continue its mind-boggling contortionist act. Supporting homeowners is of course not a bad thing in itself, But if you pay attention, you can see that's not what the government is doing. It's supporting the banks on Tim Geithner's speed-dial instead, under the guise of homeowner support, and all the losses will be transferred to you, while most owners will lose their property and/or equity regardless. The whole call for that Fed audit is just an ill-guided attempt to make you look the other way, away from what really hurts. You, and your representatives can simply make it impossible for the Fed to keep buying mortgage securities, by making sure none are issued.

Don't audit the Fed, pull the rug right from under its feet.

Ilargi: On a bit of a side note, you may have seen our new Fall Fund Drive as it appears these days in the left hand column. We are not very comfortable at all asking you for money, but at the same time we realize, and we think you should too, that without your donations there can and will be no Automatic Earth. Clicking the ads our pages display, on a regular basis, helps as well. I have always been, and remain, confident that you, our readers, have a pretty good understanding of the value The Automatic Earth represents to you. Still, evidently, you may have to be reminded from time to time of the role you yourself play in the continued existence of this site.

We're not talking about, nor asking for, large amounts of money. There are many thousands of people who read us every single day. It's easy to see that if every single one of them would donate a dime for every time they read us, and what's a dime these days, we'd be doing just fine, thank you. It’s, however, not just about the continuation of the present situation here that I think about. I would love to be able to expand on what we do, to involve more people, more opinions, a more diverse view from more places in the world. And that is unfortunately not possible right now. Along the same lines, we would like for Stoneleigh to be much more involved at TAE. Which also is not in the cards right now.

As you probably know, Stoneleigh and I are convinced that all of us are moving into a crucial phase in the development of our financial systems, our economy and indeed our societies. Which of course means we are about to enter a time when The Automatic Earth, in order to do what we set out to do, will be busier than ever. What we've done so far was just a dress rehearsal compared to what lies ahead. Inevitably that will take more from us, and we hope you will do more as well.

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October surprise from bank earnings?
Some experts worry results may be much more negative than investors expect

Bank stocks surged during the third quarter, but as companies prepare to report results from the period, several industry experts remain concerned. "We are very early on in this credit cycle," Timothy Long, chief national bank examiner at the Office of the Comptroller of the Currency, said at a recent conference. "That statement caught everyone by surprise," said Nancy Bush, a veteran bank analyst who attended the conference. J.P. Morgan Chase kicks off the bank-reporting season on Wednesday. The KBW Bank Index , which tracks shares of lenders, including Bank of America, Citigroup and Chase, jumped 30% in the third quarter, as investors bet that huge increases in bad loans from the mortgage meltdown and broader financial crisis were easing.

Thinking the worst is behind the industry, investors began looking to 2010 and 2011 when banks should be a lot healthier, according to Richard Bove, an analyst at Rochdale Securities. Third-quarter results will make that leap of faith harder to maintain, he said. "Third-quarter earnings for most banks, particularly the regional lenders, will be extraordinarily negative," Bove said. He estimates that about 60% of banks will report losses in the period as nonperforming assets continue to grow and charge-offs remain very high. Lenders will also have to increase reserves because they didn't bolster them enough during the second quarter, Bove added.

Loan growth will likely remain sluggish and net interest margins won't increase much, partly because funding costs have already dropped so much that they can't fall much further, the analyst explained. "None of this bodes well for the third quarter," Bove said. "Once the market is faced with the reality of how bad the earnings are, it will be interesting to see whether investors will be able to hold on to these stocks at these price levels." Bush is concerned that commercial real estate problems may begin to escalate, while consumer credit losses linger.

At the end of September, K.C. Conway, a real-estate expert at the Federal Reserve Bank of Atlanta, warned of big commercial real-estate losses and said banks will be slow to recognize the severity of those losses, according to a presentation to bank regulators reviewed by The Wall Street Journal. More than half of the $3.4 trillion in outstanding commercial real-estate debt is held by banks and vacancy rates in the apartment, retail and warehouse sectors have already exceeded levels seen in the real-estate collapse of the early 1990's, the newspaper noted.

"That's the big bogey-bear staring us in the face," Bush said. "But when I ask banks about their commercial real-estate exposure, they all say the same thing -- that they don't have many major problems. Then you read the Fed report and it's completely different. I don't know which to believe." Regional banks are particularly exposed to commercial real estate loans because they didn't sell them through securitization as much as larger rivals, according to Keefe, Bruyette & Woods analyst Julianna Balicka. These types of loans make up more than 35% of regional banks' total loans, up from 25% in 2000, she said in a recent note to investors.

The California bank units of Zions Bancorp and Western Alliance had more than 40% of their loans in commercial real estate at the end of June. At Center Financial , Hanmi Financial , Nara Bancorp and Wilshire Bancorp those types of loans accounted for more than 70% of total loans, according to KBW's Balicka. But it's not only regional banks that are exposed. Commercial real-estate loans made up 12% of large banks' total loans at the end of June, up from 9% in 2000, the analyst noted.

J.P. Morgan Chase , which is due to report third-quarter results on Wednesday, recently gave up trying to sell One Chase Manhattan Plaza, a 60-story skyscraper in lower Manhattan, after bids came in too low, according to a person familiar with the situation. The landmark office tower was one of 23 U.S. office properties J.P. Morgan was trying to sell, according to Bloomberg News, which noted the remaining properties are still for sale. At the end of June, the bank had almost $65 billion of wholesale loans extended for real-estate related purposes, according to its latest quarterly regulatory filing.

However, J.P. Morgan is more exposed to consumers, holding over $85 billion in credit card loans at the end of June. Consumer loan losses from the subprime mortgage crisis have begun to abate, but Bush is concerned that rising long-term unemployment in the U.S. will mean lingering consumer credit problems for banks. "I'm not convinced consumer credit will improve a lot," she said. Indeed, the OCC's Long said this past week that the severe threat from last year's financial crisis has been replaced by a more traditional unemployment-driven economic cycle, which may be in its early stages, according to Robert Garsson, a spokesman for the regulator.

J.P. Morgan Chase is expected to make 49 cents a share in the third quarter, according to the averaged estimate of 19 analysts in a Thomson Reuters survey. Profit will come mainly from the bank's capital markets and investment banking businesses, while credit costs remain high, Matt O'Connor, an analyst at Deutsche Bank, wrote in a note to investors earlier this week. Provisions for credit losses will likely come in at $8 billion during the third quarter, in line with the second quarter. Credit card losses could rise to 11.5% in the third quarter, from 10% in the second, the analyst estimated. Still, J.P. Morgan has more capital than most of its peers, O'Connor noted. And those rivals likely struggled more in the third quarter.

Citigroup , which reports on Thursday, is expected to lose 21 cents a share in the third quarter, according to the average estimate of 17 analysts polled by Thomson Reuters. Citigroup had more than $67 billion of credit card loans that weren't covered by a government guarantee at the end of June, according to KBW analyst David Konrad. Potential losses on these exposures could reach almost $18 billion through the current credit cycle, which Konrad expects will end in the fourth quarter of 2010. Konrad reckons Citigroup faces total potential losses of more than $124 billion before the cycle ends. The bank has taken $5.7 billion in net charge-offs so far, the analyst pointed out in a note to investors on Oct. 2. He's forecasting annual losses for Citigroup through 2011.

Bank of America , which reports results on Oct. 16, is forecast to lose 6 cents a share, according to a Thomson Reuters poll of 22 analysts. Deutsche Bank's O'Connor expects Bank of America to lose 42 cents a share. The bank had $13.4 billion in loan loss provisions during the second quarter and it could set aside the same amount or slightly less during the third quarter, the analyst said. Reserves could be bolstered by $3.5 billion, down from $3.7 billion in the second quarter, he added. Bank of America's credit-card business could be one of the main drags this quarter. Losses in this area could reach 13.5% in the third quarter, up from 11.7% in the second, O'Connor forecast.

Wells Fargo , scheduled to report on Oct. 21, is expected to make 36 cents a share, according to the average forecast of 23 analysts surveyed by Thomson Reuters. That's down from 57 cents a share in the second quarter.
The bank's mortgage business will likely generate about $3 billion in revenue during the third quarter, up from $2.5 billion in the second, O'Connor forecast. However, credit losses will continue to weigh on the San Francisco-based bank. O'Connor sees loan loss provisions rising to $6.2 billion in the third quarter, from $5.1 billion in the second. Charge-offs may jump 15% to 20%, the analyst added. Although that would be down from a 35% surge during the second quarter.

Scant Earnings Relief as Banks Build Reserves
Costs to cover sour loans could double, helping to cut earnings by 28% for the third quarter when banks report results this week. When will loan losses bottom out? Three months from now, maybe—just maybe—banks will announce quarterly results that finally bring a sense of closure to losses from loans they made during the credit boom. The current round of reports, which start coming out this week, certainly isn't expected to provide much relief. This will mark the 11th-straight quarter in which the industry has delivered worse results than the previous year, according to Keefe, Bruyette & Woods (KBW), the financial-services specialty firm. Median earnings per share will be down more than 28% for the 171 banks, the firm estimates.

Not all individual results will be so dire. On Wednesday, Oct. 14, JPMorgan Chase will be the first big bank to report. Analysts expect Chase to turn in earnings of 52¢ a share, compared with a loss of 6¢ a year ago, according to Thomson Reuters. Bank of America, on the other hand, is expected to report a loss on Oct. 16 of 4¢ a share, vs. a profit of 15¢ in the same quarter last year, according to Thomson Reuters. The industry's woes particularly stem from its need to build reserves for souring loans of all types—to consumers, businesses, and commercial real estate owners. Bank executives have already warned investors that they spent more for such provisions during the quarter. The bankers are reacting to increasing delinquencies and to the fact that more troubled loans have moved beyond rehabilitation. KBW expects the industry's median cost for the provisions to come in at about double last year's figure.

The amount of provisioning expenses will vary a lot by bank, of course. BofA will likely report setting aside about $11.2 billion in the third quarter for loan losses, nearly twice as much as in last year's third quarter, estimates analyst Chris Kotowski of Oppenheimer (OPY). JPMorgan Chase is likely to up its expenses, too, but not by as much, setting aside $7.9 billion, compared with $5.8 billion last year. Many analysts say this quarter's results have been so well-anticipated that what's most likely to move stock prices during the reporting season is what bank executives say about the loss provisions they'll be taking in the fourth quarter. Wall Street hopes bankers will drop hints that they're about to have the recession's version of a "blow-out quarter"—one in which they clear out the losses, as opposed to stunning the Street with amazing profits.

"I think they're going to be very aggressive in the fourth quarter about recognizing problems and reserving for them so they won't have that drag on earnings" in 2010, says Kotowski of Oppenheimer. The Securities & Exchange Commission frowns on decisions that shift losses from one quarter to another, but bankers have a fair amount of discretion when recording costs for bad loans. They can estimate how much is reasonable to set aside in advance for loans expected to go bad. Later they can decide when to give up on a specific loan and how much of it to count as a loss to reserves. (It helps to have facts on hand to support their estimates and judgments in case auditors and regulators check their numbers.)

Additional facts will be made clear in the coming weeks, and Kotowski believes bankers should offer a pretty good read later this year on the ultimate damage. Given how quickly bank assets are souring now, he says, "the final rightsizing of reserves" will likely take place in the fourth quarter. That would be the 11th-straight quarter banks have built reserves in spite of rising losses. By then, Kotowski figures, reserves at the five biggest banks in the U.S. will be up to 3.4% of their outstanding loans—about twice the norm. Is this wishful thinking, like a food-poisoning victim hoping that each heave will be the last? A predictable end to losses is most plausible in the consumer-loan category. If unemployment stops rising later this year and if house prices hold steady—as many economists expect—it's fair to think bankers will then have the right numbers for loans on credit cards, cars, and houses.

The biggest doubts revolve around the banks' loans on apartment complexes, shopping centers, and office buildings. Commercial real estate losses are always the last to sink to lows after a recession because multiyear tenant leases delay the inevitable declines in building cash flows. Some real estate experts say it could be at least another year before building prices find their lows. That means it could take that long before bankers can reliably estimate how much they'll lose in foreclosures—and whether the reserves they will take next quarter are enough.

Writedowns on Mortgage-Collection Servicing Make Even JPMorgan Vulnerable
The four biggest U.S. banks by assets may have to take writedowns on $55 billion of mortgage- collection contracts after marking them up by $11 billion in the second quarter, casting a shadow over earnings. Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. wrote up the value of the contracts, known as mortgage-servicing rights or MSRs, by 26 percent in the quarter as mortgage rates climbed by about 0.35 percentage point. Net gains on the contracts added more than $1 billion to Wells Fargo’s record earnings in the quarter and $1 billion to JPMorgan’s first-quarter profit.

Mortgage rates fell about 0.26 percentage point in the third quarter, according to Freddie Mac, and servicing costs are rising, meaning the four banks, which handle collections on more than $5.9 trillion of U.S. mortgages, may face writedowns. "We’re very bearish on MSR valuations," said Paul Miller, a banking analyst at FBR Capital Markets in Arlington, Virginia. "They are overvalued. There are higher costs associated with the servicing, and we’re very concerned about it."

The four banks control 56 percent of the market for the contracts, according to Inside Mortgage Finance, a Bethesda, Maryland-based newsletter that has covered the industry since 1984. Servicers collect payments from borrowers and pass them on to mortgage lenders or investors, less fees. They also keep records, manage escrow accounts and contact delinquent debtors.

The value of the rights depends largely on the expected life of the mortgage, which ends when a borrower pays off the loan, refinances or defaults. When rates drop and more borrowers refinance, MSR values decline. Banks typically hedge those movements using interest-rate swaps and other derivatives. Under U.S. accounting rules in place since 1995, banks are supposed to report the value of their mortgage-servicing rights on a fair-market basis, or roughly what they would fetch in a sale. A bank must record a loss whenever it sells MSRs for a price below where they’re marked on the books.

Because there’s no active trading in the contracts, there are no reliable prices to gauge whether banks are valuing the rights accurately, analysts said. "It’s an accounting game," said Richard Bove, an analyst at Rochdale Securities Inc. in Lutz, Florida. "The deeper you get into the subject, the more items you find that are impossible to determine, and therefore it becomes a give up. Whatever they want to show, they show."

JPMorgan reports its third-quarter earnings on Oct. 14. Seven analysts surveyed by Bloomberg expect the bank to post a profit of $2 billion, down 27 percent from the second quarter. Citigroup, which reports the next day, is estimated by eight analysts to post a loss of $2.5 billion after recording a $4.3 billion profit in the second quarter when it sold a controlling stake in its Smith Barney brokerage.

Bank of America’s earnings are expected to drop 95 percent from the second quarter to about $165 million when the lender announces results on Oct. 16, according to the mean estimate of 10 analysts. Eight analysts estimate Wells Fargo will post net income of $2.1 billion on Oct. 21, down 34 percent from its record earnings the previous quarter.

Whether the banks will take losses as a result of any MSR writedowns in the third and fourth quarters depends on the level of their hedging. Bank of America, which lowered the value of its rights last year by $6.7 billion, still added $2 billion to its earnings as hedges outperformed the declines. JPMorgan’s hedges earned $1.5 billion more than the $6.8 billion it took in writedowns on its collection contracts in 2008.

Bank of America holds the largest amount of MSRs, with $18.5 billion as of June 30. JPMorgan had $14.6 billion, while Wells Fargo owned $15.7 billion and Citigroup $6.8 billion. The four banks don’t own most of the mortgages they service. Wells Fargo handles $270 billion of its own residential mortgages and $1.39 trillion of loans for others, according to company filings. Bank of America services $2.11 trillion of mortgages, $1.70 trillion of them for investors. Citigroup services $770 billion, including $579 billion of loans it doesn’t own.

JPMorgan, which handles $1.4 trillion of mortgages, said it services $1.1 trillion of loans for other investors. Spokesmen for the four banks declined to comment about how the rights are valued. The companies say in regulatory filings that the assets are volatile and marking them requires making assumptions about future conditions. "The valuation of MSRs can be highly subjective and involve complex judgments by management about matters that are inherently unpredictable," San Francisco-based Wells Fargo said in its second-quarter regulatory filing.

Wells Fargo wrote up the value of its MSRs by $2.3 billion in the quarter, the result, it said, of model inputs and assumptions. The hedges it used to offset the movement of the servicing rights fell $1.3 billion, resulting in a net gain of $1 billion to its $3.2 billion second-quarter profit. New York-based JPMorgan, which wrote up its MSRs by $3.83 billion in the quarter, reported a $3.75 billion loss on its hedges, leaving it with an $81 million profit. Bank of America based in Charlotte, North Carolina, gained $3.5 billion on the increase in value of its collection contracts. The bank didn’t disclose the performance of its hedges. Citigroup, which marked up the value of its rights by $1.3 billion, also didn’t disclose its hedges.

"Nobody wants to point out that the emperor has no clothes," said FBR’s Miller. "They all took massive hedging losses over the last quarter, mainly coming out of May, when rates shot up 150 basis points, and mysteriously MSRs were written up to match those losses." A basis point is 0.01 percentage point. Banks say there is no liquid market for the securities, as the volatility of the rights has pushed some smaller firms out of the market and record delinquencies have led others to shun mortgage assets. The banks list the rights as Level 3 assets, an accounting term for securities whose value is unclear, and they rely on internal models to determine their value.

"About 75 percent of residential MSR assets are owned by 10 firms, so when you’ve got that supply-demand dynamic that changes, there’s not going to be a whole lot of trading," said Daniel Thomas, a managing director in asset sales at Mortgage Industry Advisory Corp. in New York. "When the market is dry like it is as far as trading volume, these guys have a lot of latitude for a Level 3 input valuation."

Servicing rights provide a steady stream of income. The four banks collected about $4.1 billion from fees in the second quarter. Much of that revenue, about $3.2 billion, was already accounted for in the valuations of the rights. Servicers face higher costs as delinquencies rose almost 80 percent in the last year and large banks move to implement President Barack Obama’s mortgage-modification program. Home loans 60 days or more past due climbed to 5.3 percent of loans through June 30, up from 4.8 percent on March 31 and 3 percent a year earlier, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a Sept. 30 report.

Contacting and working with borrowers who fall behind on their mortgages is time consuming and costly. Loan-servicing employees can handle as few as one-tenth the number of delinquent loans as performing loans, said Steven Horne, the former director of servicing-risk strategy at Fannie Mae who now heads Wingspan Portfolio Advisors LLC, a specialist in distressed-loan collections in Carrollton, Texas. First Tennessee Bank National Association, a subsidiary of First Horizon National Corp., saw its servicing costs rise to about $80 a year per loan from $60 a loan a year earlier as delinquencies and defaults rose, said David Miller, head of investor relations at the bank.

While higher servicing costs and falling mortgage rates lower the value of the rights, the weak economy can push them higher. Borrowers who owe more than their home is worth or who have lost their jobs are often unable to refinance, tempering the impact of lower rates on prepayments. Banks’ hedges also often benefit from lower rates. In the U.S., 26 percent of borrowers owe more than their home is worth, said Karen Weaver, global head of securitization research for Deutsche Bank Securities in New York. In parts of California, Florida and Nevada, it’s as high as 75 percent. The U.S. economy has lost about 6.9 million jobs since the recession started in December 2007.

Difficulties in refinancing mortgages during the worst recession since World War II are reflected in banks’ expectations of the life of the servicing rights. The assumed weighted average life of a servicing right tied to a fixed-rate mortgage jumped to 5.11 years as of June 30, Bank of America said in a regulatory filing. That’s up from 3.26 years at the end of 2008, following a 0.28 percentage point rise in mortgage rates. The assumed weighted average life had fallen from 5.38 years on Sept. 30, 2008, after mortgage rates dropped 0.95 percentage point in the fourth quarter.

A change in prepayment rates that would cause a 0.48 year drop in the weighted-average life of the portfolio would result in an estimated $1.43 billion decline in the value of its servicing rights, the bank said. "Either because people are underwater, which means it’s unlikely they are going to jump out of that mortgage, or they just aren’t moving around as much, those mortgages are going to last a lot longer, and that would help the valuations," said Ray Pfeiffer, chairman of the accounting department at Texas Christian University’s Neeley School of Business.

The volatility of the rights and the cost of hedging them have led First Tennessee Bank to cut more than half of its MSR holdings, which included contracts to service about $100 billion of mortgages at its peak in 2008. "The underlying cash flow of the servicing business is pretty good, the fees relative to the servicing costs are actually fairly attractive," Miller said. "It’s a very difficult asset to hedge, and that’s one of the things that makes that business, in our mind, less attractive."

State Budgets Get 'Boost' from Clunkers
Struggling states and towns got a dose of badly needed money this summer from a Cash for Clunkers program that poured hundreds of millions of dollars of tax revenue into their budgets. Now, like the auto industry, recession-ravaged governments are seeing revenue fall off as car buyers take a breather from the frenzied sales of July and August. That means less money for schools, roads, public safety and other projects that get much of their funding from sales tax collections.

And while officials welcomed the shot in the arm, the extra clunkers money won't come close to filling the gaping holes in their budgets or do much to solve the worst revenue downturn in decades. "It is chump change," said David Zin, an economist with the Michigan state senate's fiscal agency. State and city officials say their budget problems are too severe for one government program to fix.

"Fifty-thousand is not to be sneezed at," Dean Rich, finance director of O'Fallon, Ill., said of the city's expected tax gain from its 16 car dealerships. But it's not enough to prevent a job freeze and cuts to capital projects for the town of 29,000 people. "It's not the windfall that is going to fix the $1 million shortage we have this year," he said.

Like most governments, O'Fallon suffered during the recession as people facing job losses, reduced pay, lost homes and general unease over the economy snapped their wallets shut. That means big drops in sales tax, which makes up around half of many state budgets. Sales of cars and trucks, big-ticket items with high price tags, are a big component of sales tax collections.
Cash for Clunkers held some promise — customers bought nearly 700,000 new vehicles during late July and August, taking advantage of rebates of up to $4,500 on new cars in return for trading in their older vehicles.

The program ended up tripling the size of its original $1 billion price tag due to its broad popularity. For government budget offices, that represented some rare good news. The auto forecaster estimated that the average clunker sales price was $26,321, meaning roughly $18 billion worth of new vehicles were sold under the program. Multiplied by the average combined state and local sales tax of 7.5 percent, the total tax bill amounts to a loose estimate of $1.36 billion.

But here's some perspective — the budget shortfall of Michigan alone, the symbolic heartland of the U.S. auto industry, amounts to $2.8 billion. And it pales in comparison to the $240 billion that states collected in total general sales taxes in 2008. "That's more than a drop in the bucket ... but not much more for state budgets," said Robert Ward, director of fiscal studies for the Rockefeller Institute of Government in New York.

The taxes brought in by clunkers offered a summer shot of adrenaline for most states. The funds — often earmarked for school aid, highway repairs and law enforcement — came at a time when they were struggling with big shortfalls. Kentucky reported that clunkers' taxes propped up its Road Fund, which supports the state's network of roadways. Motor vehicle usage taxes grew 11.4 percent to $36 million in August, helping keep the fund flat for the month. The state estimates it can now afford to see receipts fall more than 4 percent for the rest of fiscal year and still meet its budget forecasts.

Legislative estimates in Michigan show the state may have taken in $39 million from Cash for Clunkers. About a third of that money is devoted to education. Massachusetts reported that motor vehicle sales tax revenue rose nearly 36 percent in August from a year earlier, higher than the state's monthly target. That gain, combined with a rise in the overall sales tax that month, pushed vehicle tax collections above the monthly goal.

The extra money may be a help, but state budget officials say it's minor compared with their huge problems. Kentucky officials have warned that until unemployment improves — about 11 percent of state residents are now jobless — tax revenues will remain in the doldrums. In Michigan, where the state sales tax is the major source of aid for schools, lawmakers proposed cutting $218 per pupil from the aid the state government gives to local school districts. That's despite the clunkers money and extra vehicle sales tax revenue from laid-off auto workers who got vouchers for new cars as part of their severance. Sales tax collections are still down 9 percent.

Auto sales nationally fell 41 percent from August to September, a drop caused largely by people who would have normally waited a few months to buy a new vehicle rushing in to take advantage of the federal program's big rebates. That hangover showed up in Massachusetts' sales tax collections last month, which were 5 percent below forecasts. That worries Robert Bliss, a spokesman for the state revenue department. "Has the pool been drained as a result of this program for the next couple of months? That is the question," he said.

California Budget Is Already in the Red 10 Weeks After Passage
California Governor Arnold Schwarzenegger will know within a month whether a $1.1 billion drop in revenue collections is part of a growing budget shortfall or an isolated event, his budget spokesman said. Revenue in the three months ended Sept. 30 was 5.3 percent less than assumed in the $85 billion annual budget, state controller John Chiang reported yesterday. Income tax receipts led the gap, as unemployment reached 12.2 percent in August.

"The culprit here appears to be estimated quarterly personal income tax statements," H.D. Palmer, the governor’s budget spokesman, said yesterday. "The numbers are cause for concern, but the issue now for us is to determine if this is a one-time event or whether it has more long-term implications." The latest figures show that California is facing resurgent fiscal strains brought on by the U.S. recession. Since February, Schwarzenegger and lawmakers have cut $32 billion from spending, raised taxes by $12.5 billion and covered $6 billion more with accounting gimmicks and borrowing. Even with those actions, state budget officials predict an additional $38 billion in deficits in the next three fiscal years combined, including $7.4 billion in the year starting July 1.

Schwarzenegger must present a budget for the coming fiscal year in January. The state’s Franchise Tax Board will deliver new data to the governor in November. The budget news comes as the most populous U.S. state prepares to sell as much as $15 billion of bonds in the next nine months to refinance debt and fund public-works projects, and as a surge in fixed-rate municipal issuance sent benchmark rates up by the most in almost four months.

California, already the largest borrower in the municipal market, may offer $4 billion of debt during the week of Oct. 26 to refinance the bonds used by Schwarzenegger to cover previous budget deficits. The budget enacted in July would allow the sale of as much as $11 billion more of general obligation bonds through the June 30 end of the fiscal year if financial markets allow, state Treasurer Bill Lockyer said. The exact sale amount hasn’t been decided. "If the market is inhospitable, we won’t go," Lockyer said in an interview yesterday. "We’ll just have to wait and see how the feelings are when we get ready to think about it again."

Additional bond sales by California would follow an offering of $4.1 billion of general obligation bonds this week. The state was forced to scale back the size of the deal by almost $400 million as benchmark yields surged. The yields climbed after gains in the tax-exempt market last week pushed them to a 42-year low. California’s sale follows a two-month rally in municipal bond prices, fueled by a record flow of money into mutual funds that outweighed lingering fiscal strains on localities, said Craig Elder at Milwaukee-based Robert W. Baird & Co.

U.S. Treasuries also fell, sending two-year notes toward their first weekly loss since the period ended Sept. 18. Federal Reserve Chairman Ben S. Bernanke said the central bank is ready to tighten monetary policy once the outlook for the economy improves. California, a state that’s been among the hardest hit by the recession, had already issued $22 billion of debt since March, including $8.8 billion of notes that provided the state with an advance on taxes collected next year.

Even after increasing what it would pay, California still borrowed more cheaply than during previous offerings. A taxable California bond maturing in 2039 yielded 7.23 percent this week, down from a yield of 7.43 percent during a sale in April. "Everybody thinks there’s still an appetite for California bonds," Lockyer said. "There’s certainly a continuing need for long-term investments in schools, high-speed rail, stem-cell research centers and so on."

Appliances Get Rebates
Missed out on "cash for clunkers?" Don't worry, there's a new government program on the way. The Department of Energy's $300 million "cash for refrigerators" rebate program, meant to spur the purchase of energy-efficient refrigerators and other appliances, will take effect in the coming months.

The program doesn't require a trade-in of old appliances. Instead, customers will receive a rebate on the purchase of a qualifying new Energy Star-rated appliance, regardless of what happens to their old one, says Department of Energy spokeswoman Chris Kielich. In many cases, the store where you purchase your new appliance will remove the old one, she says, and some states have recycling programs.

Guidelines and criteria, including eligible purchases and rebate amounts, are determined by each state. States have to submit their detailed plans for how the program will work by Thursday. The rebates should be available for consumers by the end of the year or the beginning of 2010. For more information, check your state energy office Web site. For a list of state energy officials, go online to InYourState.htm.

The 'Democratization of Credit' Is Over -- Now It's Payback Time
Karen King owes nearly $36,000, more than she's ever earned in a year. All day long, bill collectors call. She hunts for a second job, sometimes skips meals, and stays with other family members at a grandfather's crowded apartment, trying to get out of debt and turn her life around. She largely holds herself at fault. "Years ago, I lived for now. It was so stupid," the 28-year-old says. "It's depressing, but I can't live that life anymore." Now, she says, "I basically want to live for the future."

The recession has forced a financial reckoning for Americans across the income spectrum. The pressure is especially acute for the low-income Americans who relied on borrowing for daily expenses or to gain the trappings of middle-class life. Shifting credit practices over several decades had enabled them to live beyond their means by borrowing nearly as readily as the more affluent. But the financial crisis and recession have reversed what some economists dubbed the "democratization of credit," forcing a tough adjustment on both low-income families and the businesses that serve them.

"We saw an extension of credit to a much deeper socioeconomic level, and they got access to the same credit instruments as middle-class and mainstream Americans," says Ronald Mann, a Columbia University law professor. Now, "it will be harder for families at the bottom of the income ladder to get credit cards," he says.

The financial crisis has forced lenders to be especially cautious with the riskiest borrowers, a category that low-income families often fall into because their debt tends to be higher relative to income and assets. The ratio of credit-card debt to income is 50% higher for the lowest two-fifths of Americans by income than for the top two-fifths, Federal Reserve data show. For families with incomes between about $20,500 and $37,000, the ratio of debt to assets rose to 18.5% in 2007 from 14.4% in 1998 -- more sharply than the increase among the overall population -- according to the Fed's Survey of Consumer Finances.

In addition, the chances of default and delinquency on home mortgages are higher among lower-income households, according to data from Equifax and Moody's The democratization of credit began decades ago. Federal legislation in the late 1970s required banks to avoid discriminatory lending and meet the needs of local communities, spawning a wave of home buying and entrepreneurship in lower-income neighborhoods. The rate of homeownership in families with incomes in the bottom two-fifths rose to nearly 49% by 2001 from below 44% in 1989, according to Fed data analyzed by Mr. Mann at Columbia.

Credit-card borrowing took a similar path. One cause was a 1978 Supreme Court decision that let banks charge whatever interest rate was legal in the state where their card operation was headquartered. The ability to charge higher rates made it more profitable to offer cards to risky borrowers. Adding oomph to both credit-card and mortgage lending was the growth of markets where lenders could sell their loans. By 2007, 35% of Americans in the bottom two-fifths of income had a credit card with a balance, up from just over 21% in 1989. And use of these cards increased. The median balance on the cards, adjusted for inflation, grew 180% over that period for people in the bottom fifth of income and 80% for those in the next higher fifth.

When the recession struck, banks that had eagerly wooed new credit-card customers reversed course. "Rather than keeping accounts that have high loss potential and limited revenue opportunity, the mission becomes to close out those customers' active lines and drive them off the books," said a report from TowerGroup, a research firm. By June 2009, banks were closing credit-card accounts at a rate of 14% or 15% annually, double the rate of a year earlier.

Government policy, in some ways, has reinforced lenders' business imperative to pull back. A new credit-card law limits banks' freedom to raise interest rates without 45 days' notice. Anticipating this and other changes, card companies took aim at delinquent accounts and shed customers deemed most at risk of default, says Chris Stinebert, president and chief executive of the American Financial Services Association, a trade group. "Banks and credit issuers are looking at their own debt and trying to collect as much as they possibly can," he says.

Backers of the card legislation say one goal is to erect some obstacles to both the lending and the borrowing excesses of recent years. Treasury Secretary Timothy Geithner, testifying before Congress in July, said: "We now know that millions of Americans were...unable to evaluate the risks associated with borrowing to support the purchase of a home, a car or an education." All this means a new reality for consumers like Ms. King. Most of the credit cards she had were maxed out by 2004. She would sometimes just let the bills pile up and not pay the minimum. "I would start paying it, and then my sister almost got evicted from her old apartment, or my grandfather decided he couldn't pay the rent. They needed help," she says.

Later, the store cut her work hours. As she fell further behind, issuers canceled her credit cards and handed the debts over to collectors. Ms. King's credit score slid to 576, a level that deems her a high-risk borrower. Last fall, wanting to buy gifts for her mother and sister and clothes for a young niece, she applied for credit and was rejected at Macy's and Dress Barn, finally getting a card with a $250 limit at the Children's Place.

Her biggest chunk of debt, $26,000, stems from student loans to pay for her two-year associate's degree from a community college -- loans now in the hands of collectors. The remaining $10,000 or so includes old credit-card balances, debt to a store that rents furniture, utility bills and back taxes. Another obligation is $400 a month she contributes to the rent on her grandfather's two-bedroom apartment, where her mother, uncle and sister also live. Ms. King's father died when she was four, and her mother reared her and two siblings. A basketball star in high school, she was the first in the family to pursue higher education. She got her first credit card when she began college and was working at a fast-food restaurant. But, she says, she never learned how to mind a budget.

Legislation passed this year will require that when banks issue a credit card to someone under 21, a parent or guardian must co-sign and have joint liability. Out of college and working at the shoe store, Ms. King kept up a busy social life, eating out several times a week and going to movies -- even as the collectors called. But she lost the shoe-store job in January, and then learned that a prospective new employer had rejected her after running a credit check. Fearing that her credit record would trip her up again and again, she resolved to fix her financial mess.

Gone are dinners at Red Lobster and Olive Garden and purchases like new basketball shoes. She has a part-time job as a tour-bus driver that pays $13 an hour plus tips. She held a second part-time job, in telemarketing, for several months, but it was on suburban Long Island, and getting there, using both the subway and a commuter train, finally became too much. She now is looking for a second part-time job closer by. One day, when the subway to her tour-bus job was rerouted, she had to take a taxi. She watched the meter anxiously the whole way, groaning when she had to hand over a $12 fare. With the aid of a financial counselor provided by a nonprofit, Ms. King is applying triage to her debts. "First, I want to take care of all the little things," she says, "and then the student loans."

When a utility to which she owed $300 offered to settle for less, Ms. King says, she declined, because she was told an overdue bill takes longer to come off a person's credit report when it is settled for a partial payment. She rejected any idea of a bankruptcy filing for the same reason. "It takes forever to come off" the credit report, she says. To help people like her, several American cities have added financial-counseling centers. In New York, their clients' average debt is $18,000, and half have incomes under $10,000. Counselors work with families to follow a budget, imposing choices they may not have had to make in years.

On a warm day, Ms. King ducked into a bodega, H&M Madison Express. She allowed herself a bottle of water, skipping a snack, unlike in the old days. Decisions like that add up, said the bodega's manager, Hekmat Mustafa. Until 11 months ago, he accepted credit cards, but with fewer customers using them he stopped, to avoid a monthly fee and small fixed fee on each tiny purchase. "The rise I see now is in food stamps, even from teenagers," Mr. Mustafa said. The number of food-stamp recipients was up 22% in June from a year earlier. As he spoke, two customers walked in, both to buy individual cigarettes for 50 cents. Not long ago, he said, they would have bought a pack, for $9.

At the other end of the retailing spectrum, Sears Holdings Corp. last year began promoting its layaway program to enable credit-deprived families to continue to shop. In Ms. King's world, she says, "all of my friends are going through the same thing I am." It looked that way at a cookout she held in late summer -- potluck, to save costs. Her younger sister, Janice, said she was also awash in debt, from medical expenses and a bad shopping habit. She has a part-time job at a supermarket. Their mother, also named Janice, left her apartment amid mounting utility bills and moved in with her father and daughters. She is trying to pay off $5,000 of debt so she can rebuild her credit and get an apartment of her own.

A 22-year-old friend, Norman Broggin, lost his job at the same shoe store as Ms. King in the spring. He said he had no money to socialize anymore. Looking around at the laughing group, he said it was the first time they had been together in a long while. Before, "we would hang out every weekend," he said. "Get a drink at a nice bar, eat dinner at a nice restaurant. We don't do anything anymore." Some are turning to wherever they can for credit. A publicly traded pawnshop chain, EZCorp., reported a 37% rise in revenue in the second quarter. "With credit limited and other options disappearing, there are people looking for somewhere they can get emergency cash," said David Crume, president of the National Pawnbrokers Association.

Cash-strapped workers have long obtained advances through "payday loans," available at storefront lenders for fees that equate to high annual interest rates. Even that move is not so easy now. "More customers are walking in the door, but turndowns are up," said Steven Schlein, a spokesman for the payday-loan industry's trade group, the Community Financial Services Association of America. Federal Reserve data show that the use of credit cards has been eclipsed by use of debit cards, which don't entail a loan. A counselor advised Ms. King to use her debit card for purchases as she tries to rebuild her credit score.

Sometimes, in spare moments between work and commuting and budget calculations, Ms. King flips through a photo album that records her old life: house parties, birthdays, pro-basketball games. "I was a social person. I had interest in a lot of things," she says. "I had dreams. Now I'm just paying off the past."

Failures of Small Banks Grow, Straining F.D.I.C.
A year after Washington rescued the banks considered too big to fail, the ones deemed too small to save are approaching a grim milestone: the 100th bank failure of 2009. In what has become a ritual, the Federal Deposit Insurance Corporation has swooped down on a handful of troubled lenders almost every Friday, seizing 98 since January alone and putting their assets into the hands of another bank.

While the parade of failures still represents a mere fraction of America’s small banks, it underscores a growing divide between them and large institutions like Goldman Sachs, JPMorgan Chase and U.S. Bancorp, which are slowly growing stronger as the economy improves. Burdened by worsening commercial real estate loans, many small banks’ troubles are just beginning. Many analysts say that the now-toxic loans could sink hundreds of small lenders over the next few years and place a significant drag on the economy.

Already, the bank failures are placing enormous strain on the F.D.I.C. and its fund, which keeps depositors whole. Flush with more than $50 billion only two years ago, the fund recently fell into the red. The prospect of more failures has led the F.D.I.C. to seek new ways to replenish the fund with higher and earlier payments by healthy banks, even after setting aside reserves for future losses. The initial wave of failures has also unsettled some communities, even though most of the troubled institutions have been bought by other banks rather than shuttered. While deposits are safe thanks to federal insurance, the new buyers often do not have the same ties to local businesses as the former owners.

In some cases, they tighten lending and make it harder for longtime customers to obtain loans or favorable terms. In other cases, managers of the new bank make other changes, like ending offers for high-interest certificates of deposit and calling in certain lines of credit. In the longer term, some new owners are likely to close branches of the bank they have acquired in order to cut costs.

"In the near term, bank failures can be painful," said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation. But a bank that is teetering on collapse is not going to lend, she said, and "that’s not good for the economy." Regulators expect closures to ripple through hundreds of small banks over the next couple of years, especially in the Midwest and Southeast, where lenders have been hard hit by the recession.

These banks loaded their balance sheets with loans to home builders and other property developers to make up for lost business in credit card and mortgage lending that bigger competitors wrested away. They eased their lending standards during the boom years and made big bets on new housing developments, strip malls and office projects. Now, many of those deals are falling apart, and the lenders are scrambling to raise capital to cushion the losses.

"These banks were big enough that they could do loans that were fairly sizable," said John R. Chrin, a former investment banker who is now an executive in residence at Lehigh University. "If they go bad, they are toast." The pace of bank failures is expected to accelerate in the coming months. There were just 25 bank failures in 2008 and just 10 in the five previous years. But in September alone, regulators took over 11 banks in nine states that were saddled with soured commercial real estate loans, from Corus Bank, a $7 billion construction lender based in Chicago that financed projects across the country, to Brickwell Community Bank in Woodbury, Minn., which had just a single branch and $72.6 million in assets.

Three others were taken over this month, including Warren Bank, a small lender just outside Detroit. Regulators swept into the offices on a recent Friday night after brokering a sale to Huntington Bancshares of Ohio, a regional bank with a big presence in Michigan. By Saturday morning, Huntington had taken control of the bank’s computer systems, started reassuring depositors and placed vinyl signs with its name outside some of the Warren Bank branches. Even though the process went smoothly, customers still found it unnerving.

"People expect companies to go out of business, not banks," said James R. Fouts, the mayor of Warren, Mich., whose working class city of 140,000 has had a front row seat to the collapses of General Motors and Chrysler. "That is something that you expect to hear about in the Great Depression, and it further exacerbates the feeling that financially, the country is not yet in stable shape."

The banking system may also be facing a long recovery. About $870 billion, or roughly half of the industry’s $1.8 trillion of commercial real estate loans, now sit on the balance sheets of small and medium-size banks like these, according to an analysis by Foresight Analytics, a research firm. For most of the banks, this represents the biggest and riskiest part of their loan portfolio, since they lack the trading streams and fee businesses of their larger rivals. And as a group, small banks have written off only a tiny percentage of the losses that analysts expect them to incur.

In fact, applying only the commercial real estate loss assumptions that federal regulators used during the stress tests for the big banks last spring, Foresight analysts estimated that as many as 581 small banks were at risk of collapse by 2011. By contrast, commercial real estate losses put none of the nation’s 19 biggest banks, and only about 5 of the next 100 largest lenders, in jeopardy.

Even Citigroup, the biggest and most troubled of the banks, has a relatively small portion of its loans tied to commercial real estate and may begin to recover faster than other rivals. Gerard Cassidy, a veteran banking analyst, said the problems call to mind the wave of small bank failures in Texas and New England two decades ago during the savings and loan crisis — only on a national scale. Back then, regulators closed more than 700 lenders in those regions. Today, Mr. Cassidy projects that as many as 1,000 small banks will close over the next few years and that their losses will be more severe. "It’s a repeat on steroids," he said.

But Ms. Bair said the savings-and-loan crisis far surpassed the current situation. "We aren’t anywhere close to that today, and based on current projections, I don’t think we will get near that pace," she said. Even if hundreds of banks collapsed, they would not threaten to bring the financial system to its knees. Together, the 8,176 smallest banks control just 15 percent of the industry’s $13.3 trillion in assets. And thanks to the expansion of the government’s deposit insurance program, regulators also appear to have squelched the threat of bank runs that brought down IndyMac Bank and Washington Mutual last year.

Consumer deposits are now insured up to $250,000 per account, and the F.D.I.C. offers unlimited coverage on noninterest payroll accounts used by businesses. "We’ve passed the panic stage," said Frederick Cannon, the chief equity analyst at Keefe, Bruyette & Woods in New York. What is more, community bank supporters say the bulk of their institutions will emerge from the crisis stronger. "The community banks are picking up market share," said Camden R. Fine, the head of the Independent Community Bankers of America. "People are angry with all the shenanigans on Wall Street," he said. "They believe their money stays local when they put it in a community bank, rather than sent off to Never-Never land."

Elizabeth Warren's Oversight Panel Says Obama Plan Won’t Slow Foreclosures
A day after the Obama administration proclaimed significant progress in its effort to spare troubled homeowners from foreclosure, an oversight panel on Friday sharply criticized the program and declared it would leave millions of Americans vulnerable to losing their homes. In a report mild in language but pointed in substance, the Congressional Oversight Panel — a watchdog created last year to keep tabs on taxpayer bailout funds — said the administration’s program would, "in the best case," prevent "fewer than half of the predicted foreclosures."

The report rebuked the administration for failing to shape a program that addressed the most significant engines of the foreclosure crisis — soaring joblessness and exotic mortgages with low introductory interest rates that give way to sharply higher payments over the next three years. Many of those mortgages are too large to qualify for modification under the administration’s plan. People who lose their jobs often lack enough income to qualify for relief.

The administration’s plan appears "targeted at the housing crisis as it existed six months ago, rather than as it exists now," asserted the oversight panel in its report. "The panel urges Treasury to reconsider the scope, scalability and permanence of the programs designed to minimize the economic impact of foreclosures and consider whether new programs or program enhancements could be adopted."

In a telephone briefing with reporters, the oversight panel’s chairwoman, Elizabeth Warren, said the administration’s housing program was so limited that it was unlikely to keep pace with the growing wave of foreclosures. "Even when Treasury’s programs are running at full speed, foreclosures are estimated to outpace modifications by about two to one," Ms. Warren said. "It simply isn’t clear that the programs in place will do enough to tame the crisis and have a significant impact on the broader economy."

The Treasury acknowledged that its anti-foreclosure program was limited, with the effect of rising unemployment not fully checked. But the department said other relief efforts, like extended jobless benefits and continued health insurance for people who lose work, were better suited to alleviating economic distress than the housing program. "In developing this program, it was critical that we address challenges that could be solved quickly with the tools available to us to ensure the most effective use of taxpayer money," said Meg Reilly, a Treasury spokeswoman.

The administration’s decision to limit the cost of its one program aimed at helping homeowners could become more contentious as the foreclosure crisis grinds on. Populist anger has flashed over the rescues of major institutions including Citigroup and the American International Group — the most prominent components of a $700 billion taxpayer-financed bailout — while homeowners struggle. "These Treasury people are all from Wall Street, and they’re not doing anything but protecting Wall Street," said Melissa A. Huelsman, a Seattle lawyer who represents homeowners fighting foreclosure. "They don’t care in the least about protecting homeowners."

When the Obama administration began its $75 billion Making Home Affordable program in March, it said the plan would spare as many as four million households from foreclosure. On Thursday, Treasury announced that 500,000 homeowners had since had their payments lowered on a trial basis, celebrating this as a milestone. But the report from the oversight panel directly challenged the administration’s characterizations. Most prominently, the panel had grave uncertainty about whether large numbers of the trial loan modifications — which typically run for three months — would successfully be converted to permanent terms.

As of the beginning of September, only 1.26 percent of trial modifications that had made it through the three-month trial period had become permanent, the report found. Of course, very few of those trial loans had reached their three-month expiration because the program only recently began processing large numbers of applications. As of Sept. 1, the Obama plan had produced 1,711 permanent loan modifications. Some homeowners complain they have received trial modifications only to have them canceled for what seem dubious reasons — checks sent but supposedly never received, documents once in the file but suddenly missing.

"We’re on the phone arguing with mortgage companies every day," said Dan Harris, chief executive of Home Retention Group, a company that negotiates with mortgage companies for loan modifications on behalf of homeowners, adding that trial modifications for four of his clients had been canceled over the last month. "It’s incredible." Major mortgage companies say they have significantly increased staffing to better manage the flow of paperwork, while notifying customers of the need to send in fresh documents to make their trial modifications permanent. But the companies offer no assurances that a large number of trial modifications will indeed become permanent.

"The process is too new," said Dan Frahm, a spokesman for Bank of America. "We don’t know the number." He estimated that 15 percent to half of all trial modifications would fail to become permanent. The Treasury expressed hopes that a newly streamlined process that allowed borrowers to submit documents to mortgage companies more easily would help make large numbers of trial modifications permanent. "We are intent on working with servicers to ensure that eligible borrowers receive permanent modifications," said the department spokesperson, Ms. Reilly.

The oversight panel’s report expressed chagrin that the vast majority of loan modifications did not lower loan balances, leaving many homeowners still "under water," or owing more than their homes were worth. This tends to lower all property values, the report noted, because underwater borrowers have less incentive to care for their homes, and greater reason to stop making payments and default.

An Obama administration official who spoke on condition of anonymity, citing a lack of authorization to speak publicly, said the Treasury would have preferred that the program focused more on writing down principal balances but ultimately opted against it because "that would make it significantly more expensive to the taxpayer." In Wauwatosa, Wis., Theresa Lutz, 47, has been seeking to lower the payments on her home for several months. She is a graphic designer whose working hours were cut last summer. In September, her employer cut her salary by 6 percent. That has made it difficult for her to pay her monthly mortgage of $1,307.

As Ms. Lutz described it, her mortgage company, Wells Fargo, initially agreed to lower her payments. But then, last week, the bank informed her that she would have to come up with a fresh $3,000 to compensate the investor who owned her loan. A Wells Fargo spokesman, Kevin Waetke, said that information had been conveyed "in error" and "the customer has been notified that payment does not need to be made."

As Ms. Lutz struggled to clarify her agreement with Wells Fargo, she expressed dismay at news of the oversight panel’s report, and its finding that not enough help seemed to be on the way. "It looks to me like Wall Street is too invested in our government," she said. "Big business is winning out over the average person."

Mortgage modification program hits initial target
Federal officials say the Making Home Affordable program reached its goal of 500,000 more than three weeks ahead of schedule.

The often-criticized government program to help homeowners avoid home foreclosures has reached its initial goal for modifying mortgages -- after the Obama administration started prodding banks in July to move more quickly in easing loan terms. But it might be too little too late to stem the tide of foreclosures. A government oversight report to be released today expressed doubts that the administration would reach its overall objective of preventing 3 million to 4 million foreclosures, much less keep many of those who modified their mortgages from losing their homes.

Federal officials said Thursday that the Making Home Affordable program reached its initial target of 500,000 trial mortgage modifications more than three weeks ahead of schedule. The result indicated that despite their early sluggish response, banks and mortgage servicing companies could have pushed modifications through the program more aggressively since its launch in March, said Ken Stein, associate director of the California Reinvestment Coalition, an advocacy group for homeowners. "They're improving and that's good, but the numbers are still insufficient," he said.

Industry officials, however, said banks already were modifying loans on their own -- about 2 million since late 2007 through the industry's Hope Now program -- and they pointed out that it took time for the government initiative to get up and running. "This is a new program that had a lot of kinks," said Scott Talbott, the top lobbyist for the Financial Services Roundtable, which represents large financial institutions. "And now it is up to speed, and I expect the pace to continue."

But in a report today, the Congressional Oversight Panel monitoring use of government bailout money raised concerns about the effectiveness of the $75-billion Making Home Affordable program. "It isn't clear the program in place will do enough to tame the crisis," said Elizabeth Warren, the panel's chairwoman. The report also questioned whether the modifications would put homeowners into "long-term stable situations."

Analysts echoed those worries, saying there's a long way to go to get those 500,000 homeowners into long-term restructured mortgages that they would be able to afford. And although the program is helping ease the foreclosure crisis, it's unlikely to end it. "The [program] is kicking into a higher gear, but not high enough to forestall a continued increase in foreclosures and more house price declines," said Mark Zandi, chief economist at Moody's

Borrowers whose mortgages are modified tend to default on the new terms at a high rate, he said. Of the estimated 4.5 million homeowners in foreclosure or headed there with mortgages 90 days or more delinquent, the program ultimately will save only 1 million of them, Zandi predicted. Obama administration officials said they understood that foreclosures continued to rise and intended to keep the pressure on mortgage companies. But they touted the improved participation in the program.

"We believe we are absolutely moving in the right direction and have reached an important turning point in our modification efforts . . . but we are nowhere near the finish line yet," Housing and Urban Development Secretary Shaun Donovan said. Officials from HUD and the Treasury Department met Thursday with top mortgage servicers in Washington to discuss improving responsiveness to borrowers and the efficiency of the program.

The program was designed to ease foreclosures by helping struggling homeowners modify their mortgages, such as by cutting interest rates and extending the length of the loans. But government guidelines and other rules weren't released right away, and banks shied away from the program even after it was refined. This spring, the government added cash incentives for borrowers and lenders to participate. And in July Donovan and Treasury Secretary Timothy F. Geithner pushed the chief executives of mortgage servicers to increase staffing, streamline application procedures and improve their customer response.

Geithner said the three-month trial modifications are being added at a faster rate than homeowners are becoming eligible for the program. Administration officials said that about 40% of the nation's estimated 1.2 million eligible homeowners were taking part. The latest comprehensive data, as of Sept. 30, showed that JPMorgan Chase & Co. had modified the most mortgages, 117,196, followed by Bank of America Corp.'s 94,918 and Citigroup Inc.'s 68,248. The pace of loan modifications has nearly doubled since the end of July. But the 487,081 trial modifications as of the end of September amount to just 16% of the eligible delinquent mortgages.

Help From Fannie and Freddie for Foreclosed Homes
Home buyers are not accustomed to getting much help with their mortgage financing; generally, they’re happy just to get a loan closed. At least one group of borrowers, though, could get a break. Fannie Mae and Freddie Mac, the government-controlled companies that buy mortgages in bulk from lenders, are offering financing incentives for buyers of foreclosed homes that Fannie and Freddie own.

Home buyers have until Oct. 30 to apply to take advantage of Freddie Mac’s SmartBuy program, which began in July and offers up to 3.5 percent of a home’s sale price to help cover closing costs. To qualify, the home must be a principal residence and must be chosen from Freddie Mac’s HomeSteps Web site for its foreclosed properties ( Loans must close by year’s end. The HomeSteps properties also include two-year warranties on major appliances and electrical, plumbing, air-conditioning and heating systems.

HomeSteps includes relatively few properties in New York City and the surrounding counties, however, in part because Freddie Mac accepts few loans greater than $417,000. Last week, for instance, the site had no homes in Manhattan and five in Westchester County, including a three-bedroom apartment in Yonkers and a four-bedroom home in South Salem, both listed for $300,000. (There were a few more homes in New Jersey and in Fairfield County, Connecticut.)

Nor does the Fannie Mae program,, have many foreclosed homes for sale in the greater New York region. A one-bedroom apartment on West 110th Street, selling for $378,000, was the site’s only Manhattan listing last week. (Thirteen homes were available in Nassau County, by contrast.) The incentives for buyers in Fannie Mae’s ongoing program are even more aggressive than those offered by Freddie Mac. Through participating lenders, Fannie will offer mortgages to buyers who make a down payment of 3 percent, and these buyers do not have to secure private mortgage insurance, or P.M.I., as they would when doing business with nearly any other lender.

A Fannie Mae spokeswoman, Amy Bonitatibus, said the company "already owns the risk" on the property. "So buyers can save a couple hundred dollars a month in insurance," she said.
Fannie Mae will often offer closing cost assistance to buyers, so long as they negotiate for it. Unlike Freddie Mac’s, Fannie’s assistance level is not capped. Under the program, the average homeowner has received payments equivalent to 3.75 percent of the loan’s value.

Until June, Fannie Mae also offered to pay for home repairs during the borrower’s first six months in the property, up to $3,000. The company is considering whether to renew, or change, that program. Also, in areas hit hardest by the economic downturn that have qualified for federal financing through the National Stabilization Program, which helps distressed communities, Fannie Mae may discount its foreclosed properties by up to 15 percent. Most of Fannie Mae’s foreclosure incentives are offered to buyers who will use the property as their primary residence, or so-called public entities like Neighborhood Housing Services and other organizations that rehabilitate properties and sell them to owner-occupants.

Banks, meanwhile, have been leery of offering financing incentives on foreclosed homes. But Brad Geissen, the chief executive of, which, among other things, posts listings of foreclosed homes, said that in his discussions with banking executives, banks appear ready to offer similar programs. "We’re starting to see banks loosen up on financing and consider a number of different incentive programs to move their inventory," Mr. Geissen said. "I know a number of banks who are getting ready to release programs like this, between now and the end of the year."

Fed Buys Notes Fannie Mae Sold Yesterday as Part of Purchases
The Federal Reserve bought $170 million of two-year notes sold yesterday by Fannie Mae, the quickest purchase after issuance of benchmark bonds from the company or similar institutions since the central bank began acquiring so-called agency debt. The purchase was part of $2.6 billion of buying today, the New York Fed said on its Web site. The central bank listed the notes among ones it would accept bids for yesterday, about 90 minutes after Washington-based Fannie Mae announced the results of its $5 billion sale in a statement.

The Fed last month said it would begin buying "on-the- run" agency debt, or the most recently issued notes in different maturities. It has purchased $136.3 billion of Fannie Mae, Freddie Mac or Federal Home Loan Bank bonds since December, according to data complied by Bloomberg. The $200 billion program was extended to March 31, from yearend, by the central bank last month. David Giradin, a spokesman for the New York Fed, didn’t immediately return a telephone message seeking additional comment.

High Court to Hear Two Big Finance Cases
Two major court cases that could rock Wall Street.

The last time a Supreme Court decision roiled the stock markets was December 13, 2000. Remember Bush versus Gore and the hanging chads? This year, another High Court verdict has that potential. Plaintiffs in a blockbuster separation-of-powers case are challenging the constitutionality of the Public Company Accounting Oversight Board, a regulator created under the Sarbanes-Oxley Act passed in 2002 after the Enron scandal. The PCAOB oversees accounting firms that audit public companies.

If the Supremes find the PCAOB unconstitutional, look out below! Because Congress didn't provide a way to address the PCAOB separately from Sarbanes-Oxley, the whole act could end up being viewed as unconstitutional by lower courts. Congress would then have to revisit the law, rather than crafting a fix specifically for the PCAOB. Stocks initially might soar because Sarbanes-Oxley imposes significant costs on publicly traded companies. Afterwards, however, the markets might have second thoughts: Congress could make the law even tougher.

Fittingly, the High Court is scheduled to hear oral arguments in "Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Board and the United States of America" on December 7. A decision would come months later. The Free Enterprise Fund is a nonprofit, libertarian organization that has long opposed Sarbanes-Oxley because it says that Sarbanes-Oxley imposes too many costly regulations on American companies, hobbling them in highly competitive global markets. Beckstead and Watts is an accounting firm based in Henderson, Nev., that audits small, publicly traded companies.

The PCAOB is empowered to regulate accounting firms that audit public companies. The law states its board members and employees are not part of the federal government. Congress wanted them to be free from political meddling. But the PCAOB, according to the plaintiffs, has the unchecked power to tax the accounting firms to fund its operations. "The President is given all executive power under the constitution -- yet no power to regulate this powerful agency which exercises executive powers," says Jones Day lawyer Michael Carvin, lead counsel for the plaintiffs.

The PCAOB falls under the purview of the Securities and Exchange Commission, an independent regulator whose chairman is appointed by the president. A lower court ruled against the plaintiffs, and the court of appeals affirmed the ruling. They said there was no violation of the constitution because the PCAOB board members are "inferior officers" appointed by the SEC. The one dissenting appeals judge concluded that the Act violates the separation of powers because the PCAOB is an independent agency whose board members are removable for cause only by another independent agency -- encroaching on the president's authority. Watch out for market swings if the high court remands the case to a district court for a rehearing.

Another major case could rock the profitability of mutual-fund companies by exposing them to a raft of lawsuits. In Jones v. Harris Associates, parent company of Oakmark Funds, the plaintiffs allege that the advisory fees charged by Harris were steep enough to be a breach of Harris' fiduciary duties under the Investment Company Act of 1940. Harris, which served as advisor, charged Oakmark Funds a fee of 0.88% on assets of $6.3 billion. The plaintiffs said Harris charged an institutional investor 0.45% on assets of $160 million. Charged that amount, the mutual funds would have saved up to $58 million, the disgruntled investors contend. Harris argues that it provides fund customers more services.

Since 1982, fund managers have adhered to a legal standard which advises that fees not be disproportionately larger than those charged by other fund companies. A district court sided with the funds. So did an appeals court. However, the plaintiffs complained to the Supreme Court that one appeals judge said shareholders had to prove that the asset manager misled directors about the fairness of fees. The funds are upset because another judge in the same panel did not recognize the 1982 precedent. Without this standard, they are vulnerable to lawsuits. Supporters of the plaintiffs, including state regulators and John Bogle, founder of mutual-fund giant Vanguard Group, argue in a pro-plaintiff brief that fund boards have no incentive to negotiate favorable fee deals for investors. Hmmm. ETFs, anyone?

A Home Price Rebound Isn't Necessarily a Boom
by Robert Shiller

The sudden rise in home prices suggests that the psychology of the market has shifted substantially. But what should we expect in the months ahead? Not necessarily that we’re entering a new housing boom. To a large extent, where we’re heading depends on what home buyers are thinking. Some clues are found in the annual home-buyer surveys that Karl Case, the Wellesley economics professor, and I have run for years.

For the surveys, we canvas recent home buyers in four cities — Los Angeles, San Francisco, Milwaukee and Boston; the surveys are now being conducted under the auspices of the Yale School of Management. We have just received the 2009 results, with responses from June and July. This year’s survey coincides nicely with the upturn in home prices, the sharpest change in direction we have ever seen. The data show that the Standard & Poor’s/Case-Shiller 10-City Composite Home Price Index for the United States rose 3.6 percent between April and July. While that is not a whopping increase, it followed a decline of 4.8 percent in the previous period, between January and April.

The suddenness of this shift surprised me. In my column in June, I wrote that home prices might well continue to decline for years. As of that time, the S.& P./Case-Shiller price index had fallen every month for almost three years. Add to that the prospect of continuing high unemployment and a weak economy for years to come, and the prospects for home prices did not seem rosy. But the new data are startling. Since the indexes began in 1987, the closest parallel to such a change came at the conclusion of the last housing bust, at the end of the 1990-91 recession. Home prices rose 2.3 percent from April to July 1991 after having fallen 2.1 percent from January to April that year. By July 1996, five years after that "turnaround," home prices were down 0.6 percent from their July 1991 level, and down 13.8 percent in inflation-adjusted terms.

Could the more extreme recent shift mean that home prices will just keep rising this time? Here is where our new survey results are helpful. We looked at both the long- and short-term attitudes of home buyers. In our survey, we ask, "On average over the next 10 years, how much do you expect the value of your property to change each year?" The average answer among 311 respondents in 2009 was an increase of 11.2 percent. The median response — with half above, half below — was 5 percent, also high. That sounds rather like bubble thinking.

For a home buyer who borrows 90 percent of the money to acquire a house, an appreciation rate of 11.2 percent offers an investment bonanza. By putting a small amount of money down, investors stand to make a large gain if home prices climb. That is the power of leveraging. Recently, however, home buyers have also experienced the unpleasant consequences of leverage when home prices fall. Investing in a home during the wild past few years has been like gambling in a casino: You can leave with riches or empty pockets.

In our survey data from one year earlier, when prices were falling at an annual rate of nearly 20 percent, buyers were still expressing long-term optimism. Then, the average answer to the question about expected yearly increases in home values was 9.5 percent a year, with a median of 5 percent — high figures indeed for that time. The bubble thinking is not new. Those long-term expectations may not have changed much in character, but short-term expectations certainly have. In the survey, we also ask, "How much of a change do you expect there to be in the value of your home over the next 12 months?" Here, the average answer for June-July 2009 was a 2.3 percent rise, versus a negative 0.4 percent a year earlier. That was a dramatic change.

Another survey question is this: "If you think that present trends will not continue forever, what do you think will stop them?" Respondents were asked to answer in their own words. In 2008, when the current trend was unambiguously down, people nonetheless made it clear that they thought a housing recovery would come as the recession ended, with a new president after the election, and after home prices have come back down. What has changed in 2009 is that they suddenly see this anticipated scenario as actually playing out.

An additional question pertains to short-run considerations of market timing. We have been asking respondents whether they agree with this statement: "I bought now because I felt that I had to even though I might have done better financially if I had waited." During the housing boom in 2004, only 17.9 percent agreed with that statement. That figure doubled, to 36.7 percent, when prices were dropping fast in 2008, and now has come back to 24.8 percent.

WHAT should we conclude? Given the abnormality of the economic environment, the sudden turn in the housing market probably reflects a new home-buyer emphasis on market timing. For years, people have been bulls for the long term. The change has been in their short-term thinking. The latest answers suggest that people think the price slide is over, so there is no longer such a good reason to wait to buy. And so they cause an upward blip in prices.

At the moment, it appears that the extreme ups and downs of the housing market have turned many Americans into housing speculators. Many people are still playing a leverage game, watching various economic indicators as well as the state of federal bailout programs — including the $8,000 first-time home-buyer tax credit that is currently scheduled to expire before Dec. 1 — in an effort to time their home-buying decisions. The sudden turn could signal a new housing boom, but is more likely just a sign of a period of higher short-run price volatility.
Robert J. Shiller is professor of economics and finance at Yale

IMF hears how banker's sins are paid for by the public
While I am not a drama critic I have witnessed a few economic dramas in my time and can thoroughly recommend David Hare's attempt to understand the financial crisis, The Power of Yes, at the National Theatre. For anyone wanting a dramatic explanation of the crisis which led the Queen to ask why she had not been warned, this is a tour de force. I saw it on return from the annual meetings of the World Bank and International Monetary Fund in Istanbul, where the international debt set were still trying to come to grips with the magnitude of the crisis and agonising about the so-called "exit strategy".

Since nobody has any idea where the exit is, there was quite a lot of agonising. However, your intrepid reporter can reveal that the meeting was not quite as agonising on a personal level for the British Treasury team as it was at the last Bank/Fund meeting in Istanbul, which took place in 1955. On that occasion there were riots in Istanbul (this was pre-globalisation and nothing to do with the IMF) and the Treasury team had difficulty in leaving their hotel. Sterling was under pressure and the chancellor, "Rab" Butler, later recalled: "I repeated to the domes and minarets several times the incantation that the pound… would… be steadily defended by our resources combined with stiff anti-inflationary measures."

At the time there was a plan – known as Operation Robot – to float the pound, but it was never implemented. The pressures were such that it was feared that sterling would sink deep into the Bosphorus and be swept who knew where. It took the break-up of the Bretton Woods system in the 1970s to float the pound; and its downward float in the past year or so has been quietly, and not so quietly, welcomed by those who care about the competitiveness of British industry.

The only pressure our present Chancellor, Alistair Darling, was under in Istanbul was to recognise the UK's diminished role in the world by ceding some of its voting rights on the board of the IMF. But he was having none of it. It may be almost impossible these days to pick up a financial section without being told that economic power is shifting fast from west to east, but the UK boasts of its large contribution to IMF resources and the chancellor quotes a familiar slogan: "No taxation without representation."

The need to do something about the IMF is well argued in a new report from the Group of Thirty entitled "Reform of the International Monetary Fund". Unlike the G20, which comprises leading governments from the developed and developing world and has become the key decision-making body for world economic policy, the G30 is a private body with a highly prestigious membership of past and present policymakers, as well as senior private sector members.

Stanley Fischer, one of its senior members and a former IMF official, summarises its message thus: "The current financial crisis exposed weaknesses in the effectiveness of the fund's system of bilateral and multilateral surveillance. These weaknesses are linked to the reluctance of some members to accept surveillance advice; in some important cases, member countries ignore it entirely." It doesn't name names, but the US and UK come readily to mind. The G30 wants "greater focus on international economic and financial linkages and spillovers" and urges that the IMF "better reflect changing global economic realities and relationships". But it was not just that the IMF's advice was ignored.

An even bigger problem, surely, was that the IMF was itself a champion of what has proved to be a broken economic and financial model. Now that we are left with the wreckage, the IMF is as cautious as anybody else in forecasting recovery – its projection of a mere 1% real growth on average in the advanced economies next year implies a continuing rise in unemployment – and the general consensus at the Istanbul meetings seemed to be that recovery is far from assured.

Thus, for all the talk of the supposed need to tighten policy if and when recovery is well established, one normally hawkish IMF official confided: "I've been a bit uncomfortable, personally, [with] the emphasis on 'exit strategies'." One aspect of IMF analysis that certainly sticks in my throat is when the organisation or its officials publicly lecture governments such as Britain's on the putative need to cut social security budgets to deal with deficits that have been swollen by a recession precipitated by the financial sector.

Hare's play ends with an exchange between the author and financier George Soros in which Hare asks Soros what he said to Alan Greenspan when the latter observed: "The benefits of the market are so great that you have to live with the price." Soros replies: "I said: 'Yes, but Alan – the people who end up paying the price are never the people who get the benefits'." As one central banker pointed out in Istanbul, anyone who thinks things are going nicely forgets that such stability as there is comes in response to "an infinitely bold set of measures" and, in the face of the banking crisis, "taxpayers' risk equivalent to 25% to 30% of GDP to avoid Armageddon".

It is still not clear that the commercial bankers have appreciated the rightful degree of public anger. But central bankers have. In Istanbul Paul Tucker, the deputy governor of the Bank of England responsible for financial stability, told the Institute of International Finance: "We can't continue with a regime where, to put it crudely, the downside is picked up by the taxpayer and the upside is picked up by bank shareholders and executives." Talking of downsides and upsides, I could scarcely believe, on returning to London, that Tony Blair, who gave us the downside of Iraq, is being touted for the European presidential job. The Presidency of Pentonville would surely be a meet and just end to his career.

Dutch lender DSB in central bank's hands after run
The Netherlands' central bank said Monday it has taken control of DSB Bank NV after clients began a run amid fears the regional lender might collapse. Doubts about the health of DSB, a small but well-known bank based in the north of the country, grew since the start of October as media reports questioned its solvency and clients began having problems withdrawing money from their Internet accounts.

De Nederlandsche Bank said in a statement Monday it had asked the Amsterdam District Court to put DSB under its curatorship "because of a large outflow of liquidity that brought the existence of DSB in danger in the short term." DSB's failure is the first suffered by a bank in the Netherlands since several major banks were given bailouts or taken over by the government at the peak of the financial crisis last year.

DSB told critics at the start of October it had euro1.5 billion in cash -- enough of a buffer to withstand a run on its euro4.3 billion ($6.6 billion) in deposits. Bank accounts in the Netherlands are insured by the government for the first euro100,000, and the central bank said customers would be able to pull money from their accounts using bank passes until midnight Wednesday. DSB reported net profit of euro45.5 million in 2008, down from euro55 million in 2007.

The painful bills about to wallop New Zealand's wallets
Triple whammy for motorists: Petrol and car registrations will be more expensive, and there will be less support for accident victims. Steep hikes in the price of petrol and car registrations are about to hit taxpayers hard in the pocket, as the government moves to bail out the financially troubled Accident Compensation Corporation. Wage earners will also lose hundreds of dollars a year from their pay packets, as the ACC levy rises. The government is expected to announce the "substantial increases" on Wednesday.

On Friday, ACC revealed it had posted a $4.8 billion loss for the last financial year, in what is being described as the biggest corporate loss in New Zealand's history. Cabinet will tomorrow approve a bailout plan that also aims to safeguard ACC's financial future. The proposed changes will be open to public discussion for four to five weeks before ACC makes recommendations to the government. While motorists and wage earners will shoulder the burden, the rescue package also involves paring back entitlements and getting injured workers off the compensation scheme faster. Already, ACC has cut funding for some services, such as physiotherapy. Wage earners currently pay an ACC levy of 1.7% of what they earn, up to $110,000 (any income above that does not attract a levy). That is set to rise to 2.5%.

The Sunday Star-Times understands the ACC levy for a family earning $38,000 is likely to rise by $304 a year, plus an extra $52 to register the family car and 4c a litre more at the fuel pump. If the government chooses not to increase the ACC petrol excise, which is now 9c a litre, the ACC component of registering a car, now $168, will go up even more – possibly by as much as $107. Someone on the average wage of $45,000 will pay $360 more a year to ACC, plus the extra fuel and vehicle registration costs. The ACC levy for those on $65,000 will go up about $520 a year while those earning $85,000 will pay $680 more. To soften the blow for taxpayers, the government is expected to introduce the changes gradually, with higher car registration and levies likely to be implemented next June.

ACC chairman John Judge told the Star-Times ACC's debt was worth about $3000 for every New Zealander, and it was going to take a "hard-nosed" approach – and possibly up to 10 years – to get it into a sustainable position. This would require "substantial" levy increases and legislative change to get people off the scheme and back to work quicker. "In the last five years we've lost $9b. We need to act today because this liability is like a mortgage – if we don't start paying it off tomorrow it gets bigger by $700 million-$800 million a year." Judge said ACC would not slash entitlements "but we are going to make sure that you only get the entitlements that you are due and that you need".
ACC Minister Nick Smith said the choices for the government were "pretty ugly". "It is inevitable there will be levy increases," he said. "The government's preferred approach is to get savings out of ACC operationally and out of pulling back on some of the welfare-type entitlements ... Without change, ACC is on course to go broke. "This $4.8b loss will go down in New Zealand history as the biggest corporate loss of any entity, public or private, and is actually bigger than any deficit that the government has run collectively across all portfolios."

ACC's total liabilities over the past four years has blown out from $9.4b to $23.8b, mostly due to an increasing number of claims, a widening of entitlements that could be claimed, such as self-harm, and the actual cost of meeting the claims.
Labour's ACC spokesman David Parker said the situation was not as gloomy as the government was projecting. The ACC's liabilities and costs were increasing but it was also the country's biggest insurer, and the cost blow-out could not simply be blamed on poor management. The government could soften the blow for taxpayers by extending the date for the full funding of historic claims, which were due to come into effect in 2014.

Britain's state pension system needs revolution, not tinkering
Pensions have hit the headlines again, highlighted this time by Tory proposals to accelerate the timetable for raising state pension age. They say it is necessary to fund planned increases to the meagre basic state pension. Having risen only in line with price inflation for several decades, it has fallen way behind average earnings. The 2007 Pensions Act provided for a restoration of the link with earnings inflation by 2015 at the latest, yet even before this starts the Conservatives claim it may be unaffordable.

How can this be? The changes to the state pension were part of the detailed reforms arising from the 2006 Pensions Commission report. Just three years ago ministers assured us these represented "the most radical reform of the pension system since Beveridge", and the commission itself welcomed them as "a new pensions settlement which could last". But apparently they already need to be changed. So much for long-term thinking.

The reforms were not really radical; they were a political compromise. The changes entail tinkering with the existing system instead of carrying out the complete overhaul that is needed to bring the system into the 21st century. Can we rely on politicians to rise to this challenge? Political time horizons are short-term, pensions policy long-term.

Perhaps because pensions are so important to every potential voter, politicians have been too frightened to be truly radical. But there are times when such boldness is essential. Just changing state retirement age is not the answer. Just re-tying the basic state pension to earnings inflation is not a solution either. The national insurance system has failed pensioners. Our state pension is about the lowest – and by far the most complex – in the developed world. It has also failed to cope adequately with women's work patterns. Already, just under half of UK pensioners end up having to claim means-tested benefits to avoid poverty.

We should think afresh. We need to end the confusion between pensions as a later-life social safety net and as a long-term savings vehicle. If the state provides a social welfare base, people can be encouraged to provide more for themselves. At the moment, the state pension does not provide adequate social welfare, yet mass means-testing undermines private provision.

After a lifetime of contributions, a person with a full national insurance record will be entitled to the princely sum of £95.30 in basic state pension, perhaps with a bit extra from the state second pension. This is not enough to avoid poverty. So millions have to claim pension credit and other means-tested benefits, which give them at least £130 a week. Anyone over 60 who has not bothered to save, does not keep working and has no other income can receive more than those who contributed loyally to national insurance and saved for their future. This is not a sustainable position.

We need to sweep away the mind-boggling complexity of our current system. We do not need both a basic and a second state pension, each with different qualification rules, neither of which provides adequate welfare. Far more sensible would be to introduce a simple, flat-rate basic minimum pension, set at or slightly above the pension credit level, which could take over from the existing provisions from at least age 75. The majority of over-75s are entitled to pension credit anyway, and there would be savings from scrapping the means test. The costs would easily be funded by changes such as ending contracting out, reducing the regressivity of national insurance or adjusting the age allowance.

Such a pension would avoid mass means-testing of pensioners, so they would not be penalised for having saved, as well as encouraging more flexibility around retirement. Then people can decide whether and how much longer they want to work and more easily plan for later life income. This could end poverty among the elderly, end the means test for most older citizens and would finally be fair to women. It need not even entail extra government spending. But it would require visionary courage and a commitment to the true simplification of pensions, both conspicuous by their absence in recent years.

British house prices 'have further 17% to fall'
The recent rises in house prices will prove to be a false dawn because of the broader problems facing the British economy, Fitch Ratings said yesterday. The ratings agency predicted that house prices in Britain would fall by around 30pc in total from the October 2007 peak, indicating that they have a further 17pc left to fall. The current average house price of £162,000 is 13pc lower than that peak, Fitch said. Rising unemployment, which will peak next year and remain at that level into 2011, as well as a low wage inflation and poor credit availability, will drag on house prices, the report said.

"Despite the fact that a global economic recovery is under way, the economic fundamentals do not augur well for a sustained strong recovery in the UK housing market," said Alastair Bigley at Fitch. Both Halifax and Nationwide have reported house price rises in recent months but Mr Bigley said they were being driven by a lack of supply in the market and cash-rich buyers, which was not sustainable. Fitch says the UK’s average house price-to-income ratio is likely to come down to below the long-term average, as it did during the early 1990s recession. The ratio is currently "significantly higher" than the long-term average.

But not everyone is as downbeat as Fitch even though many analysts have reservations on the pace of recovery. Howard Archer, chief UK and European economist at IHS Global Insight, said: "Despite further likely gains in the very near term, we suspect that house prices will be prone to significant relapses and will probably be no more than flat overall between now and the end of 2010." Ray Boulger, senior technical manager at John Charcol, said: "I think during the next few months there is every indication that prices are going to keep rising."

Russia Needs 15 Years to Reduce Energy Reliance, Medvedev Says
Russia will need as long as 15 years to free itself of its reliance on raw materials and become a modern economy, President Dmitry Medvedev said. "That is a perfectly plausible time frame in which to create a new economy, an economy that will be competitive with other major world economies," Medvedev said in a television interview last night. "Once a significant portion of our revenue is generated by something other than energy exports, let’s say at least 30 or 40 percent of it, then we would already be living in a different economy and a different country."

Russia entered the credit crisis with its budget and current account in surplus and with the government assuming the world’s third-biggest currency reserves would shield it from the worst of the global recession. Slumping commodity prices shattered that assumption and helped plunge the economy into its worst decline for a decade, forcing the central bank to manage a 35 percent ruble decline in the six months through January.

"I must admit that we sank below our lowest expectations," Medvedev aid. "The real damage to our economy was far greater than anything predicted by ourselves, the World Bank, and other expert organizations."
Volatile commodity prices have continued to undermine stability in the world’s biggest energy exporter. Urals crude oil, Russia’s main export blend, fell $100 a barrel between its peak in July last year and the beginning of 2009.

Energy, including oil and natural gas, accounted for 69.1 percent of exports to countries outside the former Soviet Union and the Baltic states in the first seven months, according to the Federal Customs Service. About 30 percent of Russian gross domestic product comes from oil and gas, the government says. "Everything was okay as long as prices for energy and raw materials were high," Medvedev said. "Then those prices fell. Our economy was hit hard. Our citizens were hit hard."

Russia should pursue energy efficiency, including creation of new fuels and energy saving, develop nuclear power, information infrastructure, and produce its own medicines, the president said. Medvedev, who has called Russia’s raw material dependency "humiliating" and "primitive," said the economy will contract a "very serious" 7.5 percent this year, compared with an official government forecast for an 8.5 percent decline. The government predicted last month that the economy will return to growth in 2010.

Unemployment remains "very high," making it "a clear challenge for the president, the Cabinet and other government authorities," Medvedev said. The jobless rate fell to 7.8 percent in August, lower than previously estimated, from 8.3 percent in July on rising seasonal demand for agriculture and construction. The number of unemployed was 6 million, the Federal Statistics Service said. Russia aims to bring down inflation, which was "rampant in this country," to a range between 5 percent and 7 percent or less, according to the president. "Then we will be able to lend at normal rates," he said. "Then our citizens will be able to obtain mortgages and consumer loans at reasonable rates."

The annual inflation rate fell to 10.7 percent last month from 11.6 percent in August, according to the Federal Statistics Service. Inflation has averaged more than 14 percent a year since 1998. Russia’s goal is "to achieve a balanced budget or a budget with a minimal deficit within a year," Medvedev said. "‘All the government’s efforts and decisions should be directed toward this end." The deficit held steady at 4.7 percent of gross domestic product in the year through September as the government spent 1.35 trillion rubles ($43.9 billion) more than it collected, the Finance Ministry reported Oct. 9.

Soros says EU "wrong" to push austerity on Latvia
Billionaire investor George Soros blamed the European Union on Saturday for not doing enough to help Latvia, one of the bloc's most damaged economies, recover from the financial crisis and return to growth. The Baltic country, an EU member since 2004, is trying to meet the terms of a 7.5 billion euro ($11.06 billion) rescue package agreed with the EU and the International Monetary Fund.

Sweden, one of the bailout's main contributors, this week criticized its neighbor in a series of public comments for backtracking on promises to cut public spending. But George Soros, famous for making a fortune on currency markets, said that this approach was wrong. Without help from foreign lenders and more leniency on its budget, Latvia's currency peg with the euro would break, he said in an interview broadcast on Swedish public radio on Saturday.

"The pressure for them to reduce government spending -- the problem is in the private sector -- is the wrong kind of policy, which ought to be avoided," he said. "I think that the European Union countries ... ought to help Latvia more than they are currently doing." Asked if he thought the EU was misguided in urging austerity measures, Soros said: "Yes, I think that is the wrong policy," adding that Latvians had already made enough sacrifices to maintain their currency peg.

Foreign lenders, led by Sweden, have urged Latvia to cut public spending by 500 million lats ($1.04 billion) in its 2010 budget, but so far the country has only promised 325 million lats of cuts.
The shortfall provoked sharp criticism this week from the prime minister and central bank governor of Sweden, where banks are heavily exposed to Latvia through bad loans. On Friday, the International Monetary Fund said it had held "fruitful" discussions with Latvia about the budget. Separately, Latvia's prime minister said on Saturday that he was planning more measures to win approval from international lenders. The measures, he said, would be discussed with the European Commission next week.

How Iceland Is Coping With a Broken Economy

It's been one year since Iceland slid into the financial abyss with the failure of leading banks. The economy still hasn't recovered, but Icelanders appear to have gotten used to life in the crisis. They live more modestly now and seem surprisingly content. The prize came almost exactly a year later. The managers at Iceland's four banks -- Kaupthing Bank, Landsbanki, Glitnir Bank and the Central Bank of Iceland -- were honored for "demonstrating that tiny banks can be rapidly transformed into huge banks, and vice versa." The top brass were also lauded for showing "that similar things can be done to an entire national economy."

The satirical "Ig Nobel" prize for economics was awarded to the Icelandic Banks by Harvard University. Financial institutions that no one had heard of a year ago became household names this time last year as the Icelandic economy imploded. To recap: Iceland's small banks had vastly expanded since the middle of the decade. Hundreds of thousands of savers had put money into online bank accounts with enticing names like Icesave or Kaupthing Edge. The billions of euros and pounds came primarily from Germany, the Netherlands and Great Britain. At the same time the Icelanders got heavily involved in the international speculation business -- with dramatic results. When the American investment bank Lehman Brothers collapsed in September 2008, debts at Kaupthing, Glitner and Landsbanki multiplied fivefold. Wihtin a few days the Icelandic economy went into shock, the banks became insolvent and were put under state control. The last bank to fall was the Kaupthing on Oct. 9, 2008.

What followed were the last throes of a tiny country, which within a few days had fallen victim to the vagaries of the global financial crisis. The Icelandic Central Bank and the government did everything they could to fend off disaster, taking over responsibility for the banks and pledging to include foreign bank customers in the state deposit insurance. However, they had to give in to outside pressure, particularly from Great Britain. London first of all applied anti-terrorism legislation against what was essentially a friendly country, using the so-called Landsbanki Freezing Order 2008 to freeze the banks assets in the United Kingdom.

The Icelanders may have protested vehemently at suddenly finding themselves on a par with rogue states like Libya and North Korea. Yet Reykjavik still had to give in eventually. It agreed in the end to a plan to write off the banks' debts and in exchange to get loans from the International Monetary Fund, the European Union and other Nordic countries. The furious street protests that hounded the government from office also ran out of steam. They still continued to vent their anger with charming home videos that were widely viewed on YouTube.

And yet, one year later it is surprisingly difficult to find traces of the consequences the crisis has had on the island of fire and ice. Particularly when one thinks of the horror scenes that were played out in the weeks following the collapse of Kaupthing. Of course there is now some unemployment, something the Icelanders had little experience with up until one year ago. In the second quarter of 2009 the unemployment rate had reached 9 percent, before the crisis it had been around 3 percent. The figures weren't higher because most of the poorly paid guest workers from the former Yugoslavia and other countries, who had few legal rights, were simply sent home. Still, in comparison with other countries such as Spain or Ireland, where almost one in five is out of work, the figure is surprisingly low.

At the same time, Icelanders do feel the crisis in their daily lives: Imports from Europe have become extremely expensive, including the goods available in the country's supermarkets. Large supermarket chains like Bónus and Hagkaup have more or less doubled the prices for many popular products. Fortunately, though, currencies in other countries have suffered as a result of the financial crisis, and Icelandic companies are now buying products there. Instead of Swiss chocolate, people are now consuming Polish candy bars.

Signs of the crisis can also be found on Laugavégur street, Reykjavik's shopping boulevard and the city's place to see and be seen. Fewer SUV's with grotesque airplane tires, so beloved by the Icelanders, can be seen plying their way down the street this fall. It could be a result of the horrendous costs of tires and gas, but perhaps it also a sign of a new environmental awareness that has caught on quickly with the trend-conscious Icelanders. In terms of fashion, the country is also reverting to simpler times. Newspaper supplements are paying adage to old Viking recipes for hair dyes made with roots and mosses, making it both fun and chic.

Indeed, it appears the Icelanders are faring better than many victims of the Viking banks would like to hear. Earlier this week, when the United Nations declared Norway to be the country with the world's highest quality of life, Iceland came in a remarkable third place. Germany, where depositors were damaged by the bankruptcy of Kaupthing (with accounts similar to those held by Dutch and British depositors in the company's Icesave subsidiary), placed 22nd. The ranking came despite the fact that a recent report by the Organization for Economic Cooperation and Development (OECD) has determined that the Icelandic economic and financial system is still lying in ruins and stated that taxes would have to be increased and public expenditures radically cut. It added that the government's own economic stimulus package had merely exacerbated the crisis.

But none of that seems to bother the Icelanders, who seem to embrace the contradictions. In the current "World Database of Happiness," the Iclanders are in first place, even ahead of the chronically happy Danes. Eric Weiner, author and publisher, explains the circumstances as such: "The Icelanders aren't perfectionists." Besides, they wouldn't listen if somebody wanted to make clear to them that they were inadequate. Instead, they just get on with things, regardless of what comes next.

Indigent Burials Are on the Rise
Coroners and medical examiners across the country are reporting spikes in the number of unclaimed bodies and indigent burials, with states, counties and private funeral homes having to foot the bill when families cannot. The increase comes as governments short on cash are cutting other social service programs, with some municipalities dipping into emergency and reserve funds to help cover the costs of burials or cremations.

Oregon, for example, has seen a 50 percent increase in the number of unclaimed bodies over the past few years, the majority left by families who say they cannot afford services. "There are more people in our cooler for a longer period of time," said Dr. Karen Gunson, the state’s medical examiner. "It’s not that we’re not finding families, but that the families are having a harder time coming up with funds to cover burial or cremation costs."

About a dozen states now subsidize the burial or cremation of unclaimed bodies, including Illinois, Massachusetts, West Virginia and Wisconsin. Most of the state programs provide disposition services to people on Medicaid, a cost that has grown along with Medicaid rolls. Financing in Oregon comes from fees paid to register the deaths with the state. The state legislature in June voted to raise the filing fee for death certificates to $20 from $7, to help offset the increased costs of state cremations, which cost $450. "I’ve been here for 24 years, and I can’t remember something like this happening before," Dr. Gunson said.

Already in 2009, Wisconsin has paid for 15 percent more cremations than it did last year, as the number of Medicaid recipients grew by more than 95,000 people since the end of January, said Stephanie Smiley, a spokeswoman for the Wisconsin Department of Health Services. In Illinois, Gov. Pat Quinn tried to end the state’s indigent burial program this year, shifting the financing to counties and funeral homes, but the state eventually found $12 million to continue the program when funeral directors balked.

The majority of burials and cremations, however, are handled on the city, county, town or township level, an added economic stress as many places face down wide budget gaps. Boone County, Mo., hit its $3,000 burial budget cap last month, and took $1,500 out of a reserve fund to cover the rest of the year. While the sum is relatively low, it comes as the county is facing a $2 million budget shortfall, tax collections are down 5 percent and the number of residents needing help is expected to grow.

"We’ve had a significant increase in unemployment, wages are dropping, industrial manufacturing jobs go away and companies scaled back or even closed their doors," said Skip Elkin, the county commissioner. "But we feel an obligation to help families who don’t have any assets." The medical examiner of Wayne County, Mich., Dr. Carl Schmidt, bought a refrigerated truck after the morgue ran out of space. The truck, which holds 35 bodies, is currently full, Dr. Schmidt said. "We’ll buy another truck if we have to," he said.

Many places are turning to cremation, which averages a third to half the price of a burial. However, they will accommodate families’ requests for burial. Clyde Gibbs, the chief medical examiner in Chapel Hill, N.C., said the office typically averaged 25 to 30 unclaimed bodies each year. At the end of the 2008 fiscal year there were at least 60, Dr. Gibbs said. The office cremates about three-quarters of the remains, and scatters the ashes at sea every few years.

In Tennessee, medical examiner and coroners’ offices donate unclaimed remains to the Forensic Anthropological Research Center, known as the "Body Farm," where students study decomposition at the University of Tennessee. The facility had to briefly halt donations because it had received so many this year, said its spokesman, Jay Mayfield.

The increase in indigent burials and cremations is also taking a toll on funeral homes, which are losing money as more people choose cremation over burial. In 2003, 29.5 percent of remains were cremated; by 2008 the number had grown to 36 percent, according to the Cremation Association of North America, and it is expected to soar to 46 percent by 2015, according to the association’s projection of current trends. Don Catchen, owner of Don Catchen & Son Funeral Homes in Elsmere, Ky., who handles cremations of the poor in Kenton County, said the $831 county reimbursement for cremations was "just enough to cover the cost of what I do — I donate my time."

In Florida, where counties switched to cremation a few years ago to save on costs, Prudencio Vallejo, general manager of the Unclaimed Bodies Unit of the Hillsborough County Medical Examiner’s Office, said cremations were $425, compared with $1,500 for a burial. They have risen about 10 percent this year, Mr. Vallejo said. "Most people, the first thing that they say is ‘We wouldn’t be coming to you if we could afford to do it ourselves,’ " he said.

Broward County, Fla., paid for the cremation of Renata Richardson’s daughter, Jazmyn Rose, who was born stillborn on Sept. 25, 2008. Ms. Richardson, 26, lost her job at an advertising agency in July and could not afford to pay. The county spent about $1,000 on a cremation and pink urn, engraved with the baby’s birth and death date, and a Bible passage. It now sits in the bassinette where she was to sleep. "I was strapped for cash, I was in mourning, and I didn’t know what they were going to do with her," Ms. Richardson, of Davie, Fla., said. "I was honored that they went that far to help me."

Debate Follows Bills to Remove Clotheslines Bans
After taking a class that covered global warming last year, Jill Saylor decided to save energy by drying her laundry on a clothesline at her mobile home. "I figured trailer parks were the one place left where hanging your laundry was actually still allowed," she said, standing in front of her tidy yellow mobile home on an impeccably manicured lawn. But she was wrong. Like the majority of the 60 million people who now live in the country’s roughly 300,000 private communities, Ms. Saylor was forbidden to dry her laundry outside because many people viewed it as an eyesore, not unlike storing junk cars in driveways, and a marker of poverty that lowers property values.

In the last year, however, state lawmakers in Colorado, Hawaii, Maine and Vermont have overridden these local rules with legislation protecting the right to hang laundry outdoors, citing environmental concerns since clothes dryers use at least 6 percent of all household electricity consumption. Florida and Utah already had such laws, and similar bills are being considered in Maryland, North Carolina, Oregon and Virginia, clothesline advocates say.

The new laws have provoked a debate. Proponents argue they should not be prohibited by their neighbors or local community agreements from saving on energy bills or acting in an environmentally minded way. Opponents say the laws lifting bans erode local property rights and undermine the autonomy of private communities.

"It’s already hard enough to sell a house in this economy," said Frank Rathbun, a spokesman for the national Community Associations Institute, an advocacy and education organization in Alexandria, Va., for community associations. "And when it comes to clotheslines, it should be up to each community association, not state lawmakers, to set rules, much like it is with rules involving parking, architectural guidelines or pets."

As much a cultural clash as a political and economic one, the issue is causing tensions as homeowners, landlords and property managers have traded nasty letters and threats of legal action.
"I think sheets dangling in the wind are beautiful if they’re helping the environment," said Mary Lou Sayer, 88, who was told firmly by fellow residents at her condominium in Concord, N.H., that she could not hang her laundry outdoors after her daughter recently suggested she do so to save energy.

Richard Jacques, 63, president of the condominium’s board, said he moved to the community specifically for its strict regulations. "Those rules are why when I look out my window I now see birds, trees and flowers, not laundry," he said. Driven in part by the same nostalgia that has restored the popularity of canning and private vegetable gardens, the right-to-dry movement has spawned an eclectic coalition.

"The issue has brought together younger folks who are more pro-environment and very older folks who remember a time before clotheslines became synonymous with being too poor to afford a dryer," said a Democratic lawmaker from Virginia, State Senator Linda T. Puller, who introduced a bill last session that would prohibit community associations in the state from restricting the use of "wind energy drying devices" — i.e., clotheslines.

At least eight states already limit the ability of homeowners associations to restrict the installation of solar-energy systems, and legal experts are debating whether clotheslines might qualify. "It seems like such a mundane thing, hanging laundry, and yet it draws in all these questions about individual rights, private property, class, aesthetics, the environment," said Steven Lake, a British filmmaker who is releasing a documentary next May called "Drying for Freedom," about the clothesline debate in the United States.

The film follows the actual case of feuding neighbors in Verona, Miss., where the police say one man shot and killed another last year because he was tired of telling the man to stop hanging his laundry outside. Jeanne Bridgforth, a real estate agent in Richmond, Va., said that while she had no personal opinion on clotheslines, most of her clients were not thrilled with the idea of seeing their neighbors’ underwear blowing in the breeze.

She recalled how she was unable to sell a beautifully restored Victorian home in the Church Hill neighborhood of Richmond because it looked out onto a neighbor’s laundry hanging from a second-story back porch. In June, the house went into foreclosure. "Where does it end?" Ms. Bridgforth said of the legislative push to prevent housing associations from forbidding clotheslines.

Dwight Merriam, a lawyer from Hartford and an expert in zoning law, dismissed this concern. "This is not some slippery slope toward government micromanaging of private agreements," Mr. Merriam said, adding, however, that for these state laws to succeed they need to exempt existing agreements. One of the biggest barriers to change, he said, is that most housing compacts that were written more than 30 or so years ago allow rules to be altered only if 80 percent to 100 percent of the association members attend a meeting and vote, which rarely happens.

Ms. Saylor, from the mobile home park, said, "Pressure makes a difference." After a petition calling on the owner of the property where she lived to reverse the prohibition against line drying laundry, she said, the owner recently acquiesced. But Alexander Lee, a lawyer in Concord, N.H., who runs a Web site, Project Laundry List to promote hanging clothes to dry, said the actual electricity consumption by dryers was probably three times as much as federal estimates because those estimates did not take into account actual use at laundromats and in multifamily homes. Change promises to be slow, said Mr. Lee, 35. "There are a lot of kids these days who don’t even know what a clothespin is," he said. "They think it’s a potato chip clip."


Anonymous said...

I&S, the actions we see taking place aren't limited to the government "throwing money at problems".

As Barney Frank clearly articulated, it is official US policy to not only maintain real estate prices, but in effect, to codify the nationalization of an economic system based on home equity-driven consumer spending.

In other words, the full faith & credit of the US taxpayer has been committed to preventing any clearing of mortgage debts and restructuring of mal-investments (eg retail malls, etc), which serves to prevent us from adapting to whatever future supply/demand factors may drive ongoing economic activity.

How long this can last - that is, the Fed printing money to buy Ts and agency debt to fund fed/state budgets and the equity bubble - is a function of two things:

* How long foreign entities are willing to hold $USD. (Not as a pricing mechanism, but as a store of value ie the $USD can still be accepted as the reserve currency simply as a benchmark to peg the value of whatever asset class/currency one may really want to hold.)

* How long it takes other developing nations to provide sufficiently large enough markets so that the US is no longer seen as important enough to devalue one's currency in order to maintain exports. (That is, pegging a country's currency to the $USD in a game of devaluation oneupmanship.)

A command/directed economy has never worked in all of recorded history. It is astounding to see the full capitulation of a nominally private/capitalistic system in less that 2 years.

Future historians are going to have a field day analyzing how this came about and what the net effect was in the (not so) long run. This cannot end well.

Hombre said...

A rather interesting interview - Bill Moyers int. M. Kaptur

Anonymous said...

Good piece by Michel Chossudovsky:

"Obama and the Nobel Prize: When War becomes Peace, When the Lie becomes the Truth"


When war becomes peace,

When concepts and realities are turned upside down,

When fiction becomes truth and truth becomes fiction.

When a global military agenda is heralded as a humanitarian endeavor,

When the killing of civilians is upheld as "collateral damage",

When those who resist the US-NATO led invasion of their homeland are categorized as "insurgents" or "terrorists".

When preemptive nuclear war is upheld as self defense.

When advanced torture and "interrogation" techniques are routinely used to "protect peacekeeping operations",

When tactical nuclear weapons are heralded by the Pentagon as "harmless to the surrounding civilian population"

When three quarters of US personal federal income tax revenues are allocated to financing what is euphemistically referred to as "national defense"

When the Commander in Chief of the largest military force on planet earth is presented as a global peace-maker,

When the Lie becomes the Truth.

Obama's "War Without Borders"

Hombre said...

and ... Former International Monetary Fund chief economist Simon Johnson

Hombre said...

BILL MOYERS: Does President Obama get it?

MARCY KAPTUR: I don't think President Obama has the right people around him. The poor man inherited a total mess, globally and domestically. I think some of the people that he trusted haven't delivered. I urge him to get new generals. It's time.

SIMON JOHNSON: Louis the Fourteenth of France, a very powerful monarch, was famous for having many bad things, you know, happen under his rule. And people would always say, 'If only Louis the Fourteenth knew. I'm sure he doesn't know. If we could just tell him, he'd sort it out.' You know. I'm skeptical.

COY OTE: I am skeptical as well!

Anonymous said...

Coy Ote,

Thank you for the link. Excellent!

I was going to say I'm skeptical as well. But no, I'll say OBAMA KNOWS!

Nelson said...

Of course Obama knows. Everyone knows - so what? They control the media, they control the lawmakers, it's a one-dollar-one-vote system, for pete's sake.

In the clothesline article above, it's a hoot to read the realtor Ms. Bridgforth blaming her inability to sell a "beautifully restored Victorian" on the neighbor's outdoor laundry line. It couldn't be due to an asking price that's an order of magnitude too high for that leaky, creaky old house - naw, that can't be it!

NZSanctuary said...

From yesterday:
ccpo said...
"Economic/political issues should be at the forefront at the moment, because that's where we will be squeezed hard for the next few years, but the bigger picture also needs to be understood

When I hear this I want to either laugh or tear my hair out. It would take more space than I should take here to address this, so let me say it simply: If you think you can separate climate, economy and energy at all, you are in for one huge surprise. Suffice to say all are happening now."

Eh? How on earth did you jump to the conclusion that I think they can be separated? Quite the contrary - as stated in the paragraph following the one quoted above, I believe an integrated discussion of the interrelated problems would be best.

Is it that you do not agree that the economic/political side should be at the forefront at the moment? (You say you could have got along without the understanding presented at TAE.) On that we differ.

ccpo said...

Re TOD vs. TAE (last on this I mightily hope.)

I don't think it's vs. In fact, the opposite. The original break is the issue. (I thought I'd been clear on that.)

Egos? Seems so to me, but I'm not married to the idea. And it would cut both ways, if so. In the end, between the players, but a loss for us all.

Driven out or left? No comment. I don't know. Again, a mistake either way from my point of view. TOD with Stoneleigh and Ilargi would, imo, be what it is now trying to sort out that it should be. Again, the break was silly from my perspective.

Then, again, maybe the two need such space that the break was necessary as a practical matter in the end, thus making the root causes moot.

The loss, imo, is as described by a poster yesterday: if you don't stumble upon TAE from TOD, then you are missing a big part of the picture, e.g. That's a huge problem for us all now; there are many who don't have the dots connected. Having the best PO site and the best economics site all in one would be nice and paint a clearer picture.


We must agree to disagree. You *cannot* make policy and individual choices accurately without the energetics being involved. Some solutions are suicidal for one aspect of The Perfect Storm even if a "good" solution for another. Those that lie in the intersection are those we need to pursue.

While I agree the economy falling decreases demand, it does not happen linearly and the energy decline is an important underlying factor of it all, anyway. How does that just get dismissed? This is where I see ego. *Your* bailiwick is THE issue? I see the same misguided thinking at TOD with those that dismiss climate issues. It comes of not understanding the links between the three and not understanding the speed of change.

The economy WILL undulate, no? It will NOT simply fall linearly. Peak production will bump against economic activity and costs of energy will continue to drain dollars from more productive uses. And climate is changing a hell of a lot faster than the vast majority realize. I keep repeating that and being ignored even though year after year the science gets worse and worse... slowly catching up to where I've said it really is. Mitigating climate is NOW (thirty years ago, actually), not in a couple decades. The same for peak. The same for the economy. There is no time to dicker, there is no time to pretend our pet aspect of the three-headed monster is THE issue.

What we decide now on these three integrated issues *is* the future.

Decoupling the three issues is crazy, imo; suigenocidal (yes, I made that up).


Hombre said...

Ahimsa - Thankyou. I appreciated very much your 3:12 link as well.

Board - I don't really care about the split or odds re: TOD and TAE.

I read them both, try to add a little something here, and spend most of my limited time here.

I imagine if I had been foreclosed on (like my neighbor), lost my job, lost my health care, etc. I would be very sure that the immediate and overriding predicament was economic, rather than peak resources.
In an analogy worthy of the NRA though... ;-) ...if I have been shot by a 38 special it matters not that another enemy is approaching with a 357 magnum.

deflationista said...

can anyone link me to that pretty little chart that stoneleigh posted a while back that gives a good graphical visualization to the size and scope of how much debt we will be seeing contract...



Blackbird said...

About your donations requests.....

I'm relatively new to the automatic earth, and from what I can gather, you folks were pretty accurate about predicting things last year.

And, you've made some pretty specific calls about what's about to shake down in the near future.

However, so far as I can see, none of what you've been saying lately has come true. It's all just pie in the sky so far.

That's not to say you're wrong.

I'm just pointing out the obvious by saying that you're track record for this fall ain't so far.

If your predictions pan out, then by all means, give Mr. Ilargi some dough. But it seems a bit early to be putting your hand out.

I'll pay for performance.

Starcade said...

I reiterate something I have said before:

Not that I don't think, on balance, auditing the Fed should be done, but auditing the Fed ends the Fed, and, since the US$ is a Fed Note, it's the end of the US$ too.

The fact is that snerfling is right: Without the home-as-ATM crowd, we're a third-world nation. And that's why this will continue to last until it absolutely can go no further, and then we literally snap back as if we were bit by a nuclear attack, all at once.

Obama with the Nobel Peace Prize: Obama is nothing short of an American Idol President -- I almost expect him sometime in the next series. He's a freaking celebrity and NOTHING more.

EconomicDisconnect said...

I agree 100% that all funding of mortgages by the government must stop immediately. I am also 100% confident that the leadership will allow the country to go bust before they allow home prices to fall much further. What is the definition of democracy again? Oh yeah, a choice to vote for various charlatans that do whatever they want anyways.

Syn said...

Online documentary worth watching;

Golden Rule: The Investment Theory of Politics

The film offers an in depth look at business influence on politics--analyzing social forces and events that the corporate media and mainstream scholarship has largely distorted or kept hidden. It also analyzes the meaning of democracy.

Ilargi said...

"... you folks were pretty accurate about predicting things last year.

And, you've made some pretty specific calls about what's about to shake down in the near future.

However, so far as I can see, none of what you've been saying lately has come true."

We haven't been saying anything about for instance the past month, we've been talking about this fall, which is 3 weeks old and has 10 weeks to go.

In other words, there's, to my knowledge, precious little we've said that has not come true, whereas things we've mentioned like states getting into much deeper trouble, as well as job losses and foreclosures rising, have.

That and a little something called the market rally we're in the later stages of.

I'll take that record any day.


Ilargi said...

Is it just my imagination, or is Oliver Williamson not the sharpest blade on the block? Alternatively, perhaps something else is the matter? He's mighty positive about corporations, to the point of sounding utterly silly. They are, according to Ollie, efficient and beneficial. I must admit, it's been a while since I heard that one.

Fauxbelist Williamson Sees No Easy Answer to 'Too Big to Fail'

• Williamson is a founder of organizational economics -- the study of how institutions are created and developed and how they affect growth. In research that may have applications to the financial crisis, he suggested that it is better to regulate large companies than to try to break them up or limit their size.

• “There’s a possibility we could foresee some of the hazards” such as those in the current crisis and “take advance action,” Williamson said.

• In his academic work, Williamson found that large corporations exist primarily because they are efficient and benefit owners, workers, suppliers and customers, the Royal Swedish Academy of Sciences said today in Stockholm.


Hombre said...

Oliver Williamson - "...he suggested that it is better to regulate large companies than to try to break them up or limit their size."

Well for one thing, it sounds like he doesn't have a proper notion of complexity and the difficulties related to regulating such large and complex companies, nor their inherent bulk being a hazard to anything like efficiency. One wonders if he ever heard of GM!

el gallinazo said...

I'm incredibly impressed with Anonymous's posting simply because he got the blogspot franchise on the moniker. Who would have thunk?

Are wind energy drying devices still under patent? Need one pay a royalty to use one? It appears that America will die in its sleep. Usually it's said that this is a painless way to go, but it might be different for a country.

The article on the bodies stacking up like cordwood suggests that perhaps it's time for Americans to consider the Tibetan practice of sky burial. But first we would need an absolute ban on the human administration of diclofenac.

Protect the kidneys of your local vultures!

VK said...

The view that corporations are good in the eyes of many economists is probably due to the unprecedented prosperity of the past few decades. The industrialization of the planet has propelled living standards in the West to the level of Gods.

Ofcourse many economists do not take into consideration something that is found in basic economic texts. The question of externalities, while it is a private good that a corporation like Toyota can produce cars so cheaply and of high quality to both Toyota and the consumer, the fact is that over the long run there are major externalities aka side effects that are completely over looked.

1) Obviously the depletion of non renewable energy resources like oil and gas.

2) Water pollution, soil pollution etc.

3) Contribution to climate change.

4) Rising obesity due to longer hours spent commuting and the fact that life is now so automated.

5) Exploitation of poorer people's in the rest of the world.

etc, etc.

If these externalities were accounted for, the number of corporations would be severely cut down and the cost of various goods and services would shoot up. Long term this would be highly beneficial, short term it's obviously a disaster for profits, share prices, Govt revenue and the mantra of growth.

Yes Corporations have come up with many wondrous and amazing new technologies and products but this is at the expense of future generations and the planet as a whole. A small segment of humanity has effectively bought a few decades of prosperity for millennia of suffering and we are as a species to stupid to realize that.

My favourite Ilargi quote is something like this, We humans are a most tragic species, we can see what we are doing but we can do nothing to stop it.

EconomicDisconnect said...

It is obvious to this observer that Oliver Williamson is looking to parlay his Nobel Prize win into a Goldman Sachs board seat and then onwards and upwards to being the Treasury Head! Brilliant! He will fit right in.

The sad thing is, on the surface, too big to fail is a concept that works in theory, so you have plenty of supporters touting "efficiency" or "productivity gains" and on paper this is true. Of course practice shows us something very different, but never let reality alter your worldview.

Ilargi said...

Ollie Williamson is too old to desire a new career. It looks to me like perhaps he stopped looking at the world outside altogether in his early 20's, when GM might have looked like a might smart company, which paid real good salaries compared to just about anyone else.

The fact that this had much to do with a near monopoly (shared with Ford and Chrysler) would easily have escaped attention, as would the destruction of alternative transport systems in the 1930's, the construction of the US interstate highway system, excuse me, the Dwight D. Eisenhower National System of Interstate and Defense Highways, and the beginning of whole scale sprawl that forced everyone to have first one and later a dozen cars per family.

Starting at the very latest in the late 1960's, GM's inefficiency started being exposed by the Japanese and Germans who had lost a war 20 years prior and built from scratch. That last point is crucial: corporations may start off as or become efficient entities, but that never lasts long. And there are reasons for that which are easily identified.

Which means that giving Joseph Tainter the award would have made a lot more sense, if the objective were insight into the inner mechanisms of large business entities. But then, sense is not the most readily available local commodity in Stockholm, where aquavit and lutefisk rule the day.


Hombre said...

"Which means that giving Joseph Tainter the award would have made a lot more sense, if the objective were insight into the inner mechanisms of large business entities."

I hear... hear... that!

jal said...

I wonder how much the crown jewel would be worth?
U.K. Plans Sale to Cut Its Debt

About £3 billion of this would come from selling a portfolio of assets such as the state betting organization, the Tote; the Dartford bridge and tunnel crossing over the Thames; a book of student loans; the English Channel tunnel rail link; and the government's stake in Urenco, a nuclear-fuel company that operates several uranium-enrichment plants in Germany, the Netherlands and the U.K.
Speaking to an audience of economists, Mr. Brown plans to say that this "marks the beginning of a radical program" in which his Labour government will examine what other state assets can be sold.

YD said...

On the laundry debate, I have sympathy for the man who bought his home on the implicit promise that it would take an 80% consensus to overturn the ban on laundry. But the guy whining because the state is overturning his (homeowners association) community standards? Isn't his state also his community? Sounds like he is cherry picking venues. By his logic if smaller is better then the ultimate decision should be in the hands of the smallest body, the homeowner themselves. Group think be damned!

el gallinazo said...

There are those that would argue that Robert Louis Stevenson actually stole his The Strange Case of Dr. Jekyll and Mr. Hyde tale from Norway, and Dr. Jekyll's secret transformative potion was, in reality, lutefisk. A committee of these transformed Mr. Hydes would then sit down and elect the winners of the Peace and Economic prizes respectively before the potion wore off. For those unfamiliar with lutefisk, I offer these two descriptive quotes from Garrison Keillor:

"Every Advent we entered the purgatory of lutefisk, a repulsive gelatinous fishlike dish that tasted of soap and gave off an odor that would gag a goat. We did this in honor of Norwegian ancestors, much as if survivors of a famine might celebrate their deliverance by feasting on elm bark. I always felt the cold creeps as Advent approached, knowing that this dread delicacy would be put before me and I’d be told, "Just have a little." Eating a little was like vomiting a little, just as bad as a lot."

"Lutefisk is cod that has been dried in a lye solution. It looks like the desiccated cadavers of squirrels run over by trucks, but after it is soaked and reconstituted and the lye is washed out and it’s cooked, it looks more fish-related, though with lutefisk, the window of success is small. It can be tasty, but the statistics aren’t on your side. It is the hereditary delicacy of Swedes and Norwegians who serve it around the holidays, in memory of their ancestors, who ate it because they were poor. Most lutefisk is not edible by normal people. It is reminiscent of the afterbirth of a dog or the world’s largest chunk of phlegm."

And then there is the old Ollie joke from northern MN:

Well, we tried the lutefisk trick and the raccoons went away, but now we've got a family of Norwegians living under our house!

And the bumper sticker:

When Lutefisk is Outlawed, Only Outlaws Will Have Lutefisk!

Tristram said...

The Anti-Stoneleigh has been crowing in the media again (from Yahoo finance):

It's a V! Recovery "A Lot Stronger" Than Consensus, ECRI's Achuthan Says

"Good news for those worried about the economy: "We are in the early stages of the recovery and it looks to be a lot stronger" than the consensus for modest 2%-3% GDP growth, says
Lakshman Achuthan, managing director of the Economic Cycle Research Institute (ECRI).

"Furthermore, the recovery will be "V-shaped" and is now "virtually unstoppable" - at least through the first half of 2010 -- Achuthan says, citing a "positive contagion" in the economy right now, based on leading economic indicators. Most notably, the ECRI's index of Weekly Economic Indicators just hit a new record high.

"The cycle watcher also points out that a recovery, by definition, doesn't just mean GDP goes positive. "It must include jobs growth and consumption," which Achuthan says will start to recover by early 2010, at the latest.

"That's not to say Achuthan is ignoring the "laundry list" of negatives, which he says "will take the shine off" the rebound -- and he's not forecasting good times beyond the first half of 2010. But for now, the "train has left the station" on the recovery, he declares.

"In the accompanying video, Achuthan explains how the ECRI puts together its index of leading indicators, but the important thing to remember is they have a stellar track record of forecasting both recessions and recoveries."

Just to keep in mind where a lot of the green-shoots stuff is coming from. Not to say it's correct.

P.S. Maybe TAE should start an escrow service for skeptical readers who don't want to contribute until the correctness of I&S's boldly contrarian predictions is seen.

Ilargi said...

Oh, the Oaxaca grappa, it can lead a horse to oodles of water and a man to multiple profound understandings of eveyrthing under the sun but himself.

Think of it this way: at least in Oaxaca the same man can hang his freshly washed knickers, which mere hours before smelled convincingly of dried (or not so) fish barf, outside his home for all the neighbors to admire. "Those few square inches of garment held the huevos of a giant less than a day ago", the girls would squirm.

This all was, of course, before the flood.

Ilargi said...

"Maybe TAE should start an escrow service for skeptical readers who don't want to contribute until the correctness of I&S's boldly contrarian predictions is seen."

Huh? Why would we want to do that?

We don't kick suckers when they're down.

Ilargi said...

Headline I just saw:

"Obama didn't choose himself for peace prize"

First thing my brain comes back with:

"Obama didn't choose himself for president either"


Tristram said...

In an escrow arrangement, skeptics make contributions which are held by a third party, and later returned to the contributor if I&S predictions don't come true. But if I&S are correct, the contribution passes to them. Just a suggestion re: the guy who complained earlier. I don't see how it amounts to kicking suckers while they are down. You can even call it a hedge for anyone investing on the expectation of collapse.

Suckers will all be broke if TAE predictions come true, so they won't be able to make contributions later even if forced to admit that I&S were right.

M said...

From his "Theses on the Philosophy of History," and by way of a Paul Klee painting, Walter Benjamin delivers a beautifully dark parable:

“A Klee painting named "Angelus Novus" shows an angel looking as though he is about to move away from something he is fixedly contemplating. His eyes are staring, his mouth is open, his wings are spread. This is how one pictures the angel of history. His face is turned toward the past. Where we perceive a chain of events, he sees one single catastrophe which keeps piling wreckage upon wreckage and hurls it in front of his feet. The angel would like to stay, awaken the dead, and make whole what has been smashed. But a storm is blowing in from Paradise; it has got caught in his wings with such violence that the angel can no longer close them. This storm irresistibly propels him into the future to which his back is turned, while the pile of debris before him grows skyward. This storm is what we call progress.”

Ilargi said...

"re: the guy who complained earlier. I don't see how it amounts to kicking suckers while they are down.

Suckers will all be broke if TAE predictions come true,"

Still unclear this way?

Down but not broke? Broke but not down?

el gallinazo said...

The only way that the USA can prevent an immediate Greater Depression is by TPTB to blow an even bigger debt bubble than the real estate bubble. They were successful in doing this and kicking the can down the road in 1987 and 2001. Now the private sector and the consumer are both totally unwilling to take on more debt. The government is forcing them to take on more debt involuntarily through imposed government debt in their names, in an attempt to kick the can down the road just one more time. This is bound to fail this time, because, to use a nuclear analogy, the debt has gone critical.. The only question is how long this tactic can delay the inevitable. A "V" shaped recovery is ridiculous. Stoneleigh has been uncanny with her predictions, and I think the implosion will take place this fall. If it doesn't, you can bet the farm it will happen in 2010.

Jim R said...

I think El Gallon Nozzle has been drinking the juice of the cacti. They have 'em in Oaxaca and how!

TAE Summary said...

* TOD leads some to TAE; Other tear their hair out at the irony

* Administration announces cash for clothes lines program; Subsidizes major appliance sales and raises neighborhood property values at same time

* The economy will undulate; Recovery will be \ / shaped; Sometimes we must just agree to be disagreeable

* Dr. Jekyll and Mr. Hyde on Nobel Committee; Jekyll voted for Obama in hopes of single payer health care; Hyde voted for Obama in hopes of all out war with Pakistan; Having done nothing so far Obama now pledges to Oblige both

* Daily Obama Amalgam:
- Obama wants war without borders
- Obama doesn't get it but he knows
- Obama is the Survivor President; He wasn't elected, he just didn't get voted off
- Obama didn't choose himself for Peace Prize; When asked to vote he Obstained
- Obama is like the Sun King, except no one gets to watch him dress; Pendant moi, la deluge

* The Return of Anonymous; Just when you thought it was safe to get back in the tip jar; Don't donate until after you've made your killing; Don't predict until after TSHTF

* If corporations = prosperity and prosperity = goodness then corporations = goodness; Damn the externalities, full speed ahead

* Oh Lutefisk... Oh Lutefisk... how fragrant your aroma
Oh Lutefisk... Oh Lutefisk... You put me, in a coma
You smell so strong... You look like glue
You taste just like an overshoe
But Lutefisk ... come Saturday
I think I'll eat you anyway.
(To the tune of O Tannenbaum - Robert L. Lee)

fossilfuelfugue said...

Pull the rug, eh?
What ever mechanism that was used to repeal Glass-Steagall Act should be used, albeit by different hands, to repeal the Federal Reserve Act of 1913,no?
Repealing an Act should follow precedent?
What this Nation lacks is ability and desire, soon to be known as desperation.

NZSanctuary said...

Syn said...
Online documentary worth watching;
Golden Rule: The Investment Theory of Politics

Thanks, Syn. Worth the look.

The public health care option that Noam talked about was interesting, too. I had wondered why Obama began pursuing that option... Noam suggests that having the public option in place to offer competition to private insurance companies (and hence lower costs to the system), would have been proposed by the manufacturing sector. GM, for example could produce a car more cheaply in Canada because (in part) of the difference between health coverage.

Obama backing off the health reform stuff reinforces the notion that the administration (a) does not intend to prop up manufacturing in the States (at least not in any meaningful way), and (b) would rather support finance/insurance/big pharma, than manufacturing. Yeah, that's gotta be for the benefit of the average citizen...

Starcade said...

The reason that there is no easy answer to "too big to fail" is that, once nothing is "too big to fail", _everything MUST fail_, because of the nature of how everything has been allowed to "succeed" for quite a while now.

el gallinazo is right on the mark -- the only way this can continue is for the lying to accelerate and, somehow, become the sustainable reality for the ongoing future. If this is a "V" shaped recovery, then, frankly, it will take full monetization of the debt and rolling it into the derivatives market, and somehow propping up that quadrillion-dollar beast...

EBrown said...

I've had many simliar thoughts about fostering small businesses in the US. The stats say that over 70% of the US workforce is employed by small businesses (<500 employees), so in theory government policy should encourage entrepreneurship. When it comes to healthcare, policy is anything but encouraging. If one risks losing house, and possesions, in addition to business and income due to unforseen illness the pool of people willing and able to take that chance decreases in size dramatically.

bluebird said...

What's going on with Latvia? Will this tiny country settle its budget on October 23? Will its problems cascade into other Eastern European countries igniting another financial crisis, panic and fear?

Hombre said...

Mugabe - I'm sticking with the Stonelady.

"It's a V! Recovery "A Lot Stronger" Than Consensus, ECRI's Achuthan Says"

--- is equal to ---

Neville Chamberlain - "Peace in our time!"

el gallinazo said...

Nice picture, DIYer. Makes my beak drool. Just thought I would get in a little humor in a jugular vein while I have some time and really fast apartment wifi. Though my efforts can't compare with Occasional Summary. Off to Costa Rica on Sunday looking at fincas and cacti. Probably be posting a lot less for a while.

The history of economics is a war between labor, capital (manufacturing) and finance. At the end of an empire, finance always wins the war. It is a parasite which kills its host.

Anonymous said...

The Commander in Chief a peacemaker indeed!

"US wants bunker-buster fast, denies Iran is reason"

bluebird said...

Chris Martenson has an odd article today, about tracking the wealthy and what they are doing with their wealth, from the perspective of inflation.

The Coming Wealth Trap

el gallinazo said...


Michael Hudson has become a consultant to the Latvian government. His advice is to give the lutefisk filled banks of Sweden and the IMF the finger. He will be interviewed by Mad Max On The Edge this Friday.

el gallinazo said...


From a Yahoo article:

"In the accompanying video, Achuthan explains how the ECRI puts together its index of leading indicators, but the important thing to remember is they have a stellar track record of forecasting both recessions and recoveries.""

Mish did an in depth analysis of their "stellar track record" this morning and I would be interested in your comment on this.

As to "Anti-Stoneleigh" - the crowd is anti-Stoneleigh as to their predictions of the future, but very much "pro-Stoneleigh" in as much as she predicts that there would be a paroxysm of euphoric sentiment just before the start of the "great crash."

As to your suggestion that the TAE readership withhold their tips until the crash takes place, since 95%+ of professional economists and their sponsoring organization got the current "Great Recession" (soon to become the Greater Depression) wrong, can you first suggest a viable mechanism to claw back the billions of dollars from these individuals and organizations?

VK said...


An analyst at credit rating firm Standard & Poor's says Dubai has "insufficient" funds to pay back billions of dollars worth of debt coming due, putting added pressure on the city-state to raise additional cash.

Farouk Soussa, S&P's head of Middle East government ratings, said Sunday that the sheikdom has about $4 billion left from a February bond issue, but must find a way to cover as much as $50 billion over the next three years.

He says "the notion that the government will be able and/or willing to stand 100 percent by all that debt on an equal basis is wrong."

Soussa's comments come two days after a top Dubai official told CNN the government could seek to raise another $10 billion through government bonds as early as this month.

jal said...

I just heard ...

The price of oil keeps going up.
There’s a glut of oil in the market.
There’s no fundamental for the price to be up.

I would say that he has gotten burned by betting the wrong way and lost his clients money.


How about thinking of some reasons why the price of oil is up.

Someone is manipulating the market.
The production rate is going down.
The cost of producing/finding more is going up.
The US$ is going down.
The Casino is taking and needs,(GS), a bigger take on the betting by the none users of oil.

Bigelow said...

“WASHINGTON — The Supreme Court will consider throwing out the convictions of former Enron Chief Executive Officer Jeff Skilling for his role in the collapse of the one-time energy giant.”
Supreme Court will hear appeal of Enron's Skilling

el gallinazo said...


Funny you should have left out:

7) USA / Israel will bomb Iran in the near future which will shut down all oil coming out of the Persian Gulf. Would be a dividend to Obama's Peace Prize.


This American Life has an excellent hour this week and next on the "American health care crisis." Definitely worth the listen.

Ilargi said...


Thanks, the term "honest services" fraud statute is such a brilliant way to show everyone why man developed language skills.

To lie to one another, of course. If I can make you believe that a cow is really called a table, I'm halfway there. As René Magritte said: Ceci n'est pas un pipe

If I can make a female believe through my language skills that the way to describe my testicles is not "petit", but really the size of "autriche huevos", I'm in her head. Next thing I tell her I'm not a cheap cheat, I'm a good provider, let's have kids, starting the deed right now.

We all think language is such a great and beneficial property to have, but like everything it comes with its own dark side of the moon. Our second best skill after language is to choose to see only the part we wish to see. We really are tragic, and granted, there's an enormous lot of beauty in our tragedy, but it's also in the end the ultimate tool of devastation. The more we can make with a particular skill or talent, the more we can also destroy with it.

And we do. And we will.

Skilling is asking judges to recognize him as a cheater, but an honest cheater. In which case, he should be let free. After all, he's honest.

Ilargi said...

And of course there's no better way to prove the perversity of language I was just talking about than Obama sending 13,000 extra troops into battle under the radar while he gets the peace prize.

All he needs to do is claim that more troops mean more peace. People will believe him! It's all in the words. It's the exact same thing as Jeffrey Skilling appealing his sentence claiming that while he admits he's a cheat, he's an honest one.

Chris Kresser said...

Re: Getting out of debt...

I've been thinking a lot lately about whether to pay off my student loan debt ($15k @ 3% interest) or keep that money in cash and gold as it is currently. I have no credit card debt, 2-3 months of expenses in cash, $30k tied up in land that we're trying to sell, and about $50k that is currently 50/50 in US dollars/gold.

I see why it's important to be debt-free, especially if we experience deflation for a period of time. But I think that even if we do experience deflation, it won't last more than a couple of years before inflation kicks in. Once inflation kicks in debt would be much easier to pay off - especially a student loan with a low fixed interest rate. I am in grad-school (not incurring any additional debt) until April of next year, and then I have an additional 6 months of loan forbearance after that. So I will not have to start making payments on the student loan debt until one year from now.

I'm just curious to hear what you would do in my situation.

Bigelow said...

This is a bit dated but
A Tom Tomorrow cartoon

Jim R said...

el g,
..., can you first suggest a viable mechanism to claw back the billions of dollars from these individuals and organizations?

Mad Max has suggested bringing back the guillotine. Meself, I'm sorta conflicted about having the unwashed masses running around shouting "Liberté, Egalité, Fraternité!" as the blade falls. Trends like that tend to overshoot..

Ilargi said...


SInce you seem to have the dollar/gold reserves needed to pay off the debt, it may not matter much when you pay it off.

However, your depiction of deflation is far too rosy. It's not going to be some minor walk in the park. Before inflation sets in, the world will have undergone a really thorough redecoration.

Chris Kresser said...


I didn't mean to discount the effects of deflation. But I guess the question at hand is whether it makes a difference if I pay off the debt now or later.

Ilargi said...


As long as you have more (cash-equivalent) reserves than debt, you could pay it off whenever you need to. It's a bit of a gamble then whether your dollars and gold will increase or decrease in relative value.

If the difference between the 50k+ you have and the debt you hold doesn't suffice to buy the essentials you feel you may need, paying later could be the preferred option. but you do need to realize that the "relative value" of debt will increase enormously during deflation, since wages and many other things will come down hard, whereas the debt is and remains that fixed amount.

The "don't get into debt" warning is for those who will not be able to pay when the debt is called in. That may lead to very ugly situations.

ccpo said...

Mad Max has suggested bringing back the guillotine. Meself, I'm sorta conflicted about having the unwashed masses running around shouting "Liberté, Egalité, Fraternité!" as the blade falls. Trends like that tend to overshoot..

Then you like the world as it is? Else, how else to get massive change if not through the demands made by the unwashed masses?

Note to self: stop showering.

Gravity said...

Good is voluntary, or walking
to the bank of its own accord.

Evil is involuntary, or running
to the bank against its will.

Chris Kresser said...


As long as you have more (cash-equivalent) reserves than debt, you could pay it off whenever you need to. It's a bit of a gamble then whether your dollars and gold will increase or decrease in relative value.

That's why I'm 50/50 gold/cash, because I'm not sure on the timing of all this. If the value of dollars rises, gold will likely fall and vice versa. I'm hoping I at least won't lose money with this allocation.

If the difference between the 50k+ you have and the debt you hold doesn't suffice to buy the essentials you feel you may need, paying later could be the preferred option. but you do need to realize that the "relative value" of debt will increase enormously during deflation, since wages and many other things will come down hard, whereas the debt is and remains that fixed amount.

Yes, this is why I'd like to pay the debt off. Although the monthly payment is relatively low (approx. $130) and doesn't kick in for a year, it's one more expense.

For now, though, I think I feel better having cash/gold on hand in case to maintain flexibility.

Hombre said...

Ahimsa - ""US wants bunker-buster fast, denies Iran is reason"
It's a insane and wasteful use of resources for whatever reason. I agree.

DIYer and CCPO - There are plenty of banksters and such that need to walk the plank, bite the dust,or take an apt. in Sing Sing, but if heads start rolling I have to wonder if I might not hold my mouth just right and lose my own! Who is going to do the picking and choosing? The right, or the left? The Fundamentalists or the Charismatics? Or both! The white hooded ones or the Rotary Club types?

Gravity said...

This is still a serious question, please consider the following: the IMF could influence the price of gold if they were to manipulate expectations in the following ways;

A. They announce that SDR's will contain as much as 50% - 70% gold, exploding the price, after which they cash in on their holdings, before announcing they made a mistake, and the actual proportion would be only 0% - 10% or so, thus collapsing price, after which they use their new found funds to buy every last ounce cheaply.

B. They announce that SDR's will only contain as little as 0% to 10% gold, suppressing or collapsing price, after which they buy up every available ounce cheaply, increasing their holdings, before announcing they made a mistake again, and the actual proportion would be as much as 40% - 80%, true or not, propelling price upwards, after which they use their funds to buy every last ounce of everything, including strategically solvable or simmering silvery metals, thus leaving anyone who's actually trying to peg to anything in a difficult place, before announcing that SDR's will consist of 80% cotton candy.

The same mechanism would apply to any other constituent ingredient.

Such a scheme would be exeedingly easy to pull off from their current position, because they remain the only authority on SDR's, and they presumably already have vast holdings of both gold and cotton candy.

They have direct pricing power over those things which might be used as ingredients for their renderings, with gold in particular seeming too prone to manipulation in this way. Is this something to consider? Are they devious enough?

Ilargi said...


I've on a few occasions dismissed gold as a valid investment short term, because of the opportunities for manipulation attached to it. But I don't see the IMF as a serious party at that table. If it would act on its own accord and try to manipulate prices, it would be likely to directly hurt its member countries and their central banks.

Its those central banks that deserve your attention. They have a lot of gold, compared to total reserves. If a few of them got together and decided to go short gold and sell off a chunk substantial enough to depress prices, they could a few days later buy back at $800 what they sold at $1000, and make a killing from their shorts to boot.

There are international treaties, for instance in the EU, that determine how much a particular country may sell during a given timeframe, so it would have to be well-coordinated, but it's certainly not impossible.

The IMF can't do these things.

Gravity said...

Such an event would be set in motion by those same banks coordinating their efforts through the IMF, which would not be acting as a separate entity, though optimal effects from such policy would only be achieved by means of deliberately ruining all countries which stand in the way of their monetary totality.

Since any individual monetary authority has no jurisdiction over the SDR, and the composition should influence certain factors, any precise call to crashes would be most efficiently issued by our friends.

Someone did succeed in cornering the tin-market this week, praise Jove, but as fortune would have, tin-foil doesn't actually contain any.

Fuser said...


I always thought that was a scotch you were holding .... now I see it's a pineapple.

There goes my image of you as a sophisticated connoisseur of strong drink, relaxing in front of TAE.

Jim R said...

Coy Ote, exactly.

c^2po, my answer:
Since we are talking hypotheticals...
William K Black or someone as similar as can be found, supported by a phalanx of forensic accountants and a phalanx of prosecutors, granted special powers to apprehend flight risks, and to detain financial terrorists quickly when a determination is made. They would have the support of the Secret Service and Federal Marshalls as needed.

Gravity said...

"Will you look into the mirror?"
"What will I see?"
"Even the wisest cannot tell,
for the mirror shows many things. Thefts that are, equities that were, and some crashings that have not yet come to pass."

"I know which abyss you saw,
for it is also in my mind. It is what will happen if the Fed should fail. It won't show what would happen if they should succeed, being limited to the amount of graphic violence it can portray."

Craig Morris said...

Did anyone else notice that the sweatshirt worn by the boy in the picture has "Who's afraid of the big bad wolf" written on it? It would make a good title for the blog one day.

Erin Winthrope said...


Have you heard anything from Stoneleigh regarding the ASPO meeting in Denver?

Was she able to convince any of the big-wig peak-oil speakers that the credit meltdown is going to make peak-oil irrelevant for many years?

Top Hat Cat said...

I got a t-shirt last spring as a gift. It was an army green looking thing with a stern admonishing no nonsense declarative statement on the back


I took it to be a Homeland Security kind of message for catastrophic situations until I looked at the front and saw a prominent stencil/painting of an electric drill with the words beneath it:

Ceci n'est pas une drill

I gave it to a friend who actually works on an emergency power utility crew. I'm not sure if the subtle irony is lost on him and his tough guy friends but it was worth it to hear one of them say when he saw it, "It sure looks like a drill to me!"

I think we are past rehearsal time on fixing 'the economy' or what's left of it.

The Happy Camper in the photo is heartbreaking in his innocence, the American public and their "Foggy Mountain Breakdown" financial system, not so much.

The Voodoo economics being practiced at present is as much a product of Willful Unawareness as it is of Willful Malice.

Willful unawareness, ce n'est pas l'innocence, it's a choice, a stupid choice at that, but one which has been taken by a multitude of adults who will shortly be very unhappy campers.

Remember kids, this is not a drill.

NZSanctuary said...

Fuser said...
I always thought that was a scotch you were holding .... now I see it's a pineapple."

Ditto! I never looked closely at the photo, and I assumed the same thing!

scandia said...

@TOP..." Foggy Mountain Breakdown", Thanks, enjoyed that!

el gallinazo said...

If the kid were 7 years old when the picture was taken, he would be 78 today. Which means that there are slightly better than even odds that he is still alive. So kid, if you are still alive and reading TAE, please check in.

Jim R said...

The scotch was already gone by the time that picture was taken. So you get to see the pineapple. I grew it myself, BTW. From the top of another pineapple we bought at the store.

jal said...

Why the governments are not letting the banks take their loses on mortgages.

1. The bank owners are not loosing their investment until FDIC steps in.
2. The financial advisors keep getting their commissions.

3. Millions of homeowners are bankrupt.

4. All of the bank depositors, innocent grans, pensions funds , trust etc., must take a lost for the bad investments done by their financial advisors.
5. Millions of savers must be declared bankrupt.

Would the economy be able to survive if the savers were told that they are also bankrupt?

Would the governments be able to survive?

jal said...

I&S are right!

Everybody is pushing worthless pieces of papers, (banks and stock market), and collecting commissions and declaring fictitious profits.

The only winners will be those that have cashed out.

Since the government have not invented anti-gravity they must dig a hole faster than the fall of Humpty dumppy to delay the outcome.

When humpty dumppy hits the ground it will be a mess.