Saturday, October 24, 2009

October 24 2009: The greatest theft in American history

G. G. Bain Auto Polo December 1912
Somewhere in New York

Ilargi: Most of us probably lose sight, from time to time, of the importance of the US housing market to the American banking system, the US economy and, for good measure, the entire global economy. Still, it's virtually impossible to overestimate that importance. So when a good reason presents itself to return to the topic, we are well advised to do so, and recent developments more than justify it. Much more than.

In the past, I have repeatedly talked about the perverse role the US government plays in the domestic housing market, through government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which have total mortgage portfolio's of between $5 trillion and $6 trillion on their books, as well as an unknown amount and degree of "involvement" in mortgage-backed securities, and whose common and preferred equity were recently assessed as "worthless" by an analyst team at Keefe, Bruyette & Woods. Which of course only confirmed a poorly hidden secret.

The KBW analysts concluded that the only way to deal with Fannie and Freddie would be a bad bank construction. The government, however, as I’ve pointed out before, seems to be ahead of them. A rapidly growing share of mortgage loans are now processed through the Federal Housing Administration (FHA) and the Government National Mortgage Association (GNMA, a.k.a. Ginnie Mae).

Unlike Fannie and Freddie, these are full-blooded government-owned agencies. And that makes them even easier tools to manipulate the housing market. Ginnie Mae guarantees mortgage-backed securities backed by federally insured or guaranteed loans issued by the Federal Housing Administration. In other words, the government guarantees securities backed by loans issued by the government. These loans, however and of course, don't originate with the government.

Earlier this week, a story made the rounds of a 20-year old girl of Salvadorian origin who holds 3 jobs and bought a $155,000 home (and got a $34,000 "embellishment" extension on top of that) with an FHA-guaranteed loan with a 3.5% down payment. That story had subprime written all over it right from the start, and loudly begged the question what on earth moves the US government to move into (make that induce) subprime lending.

But that was just the first chapter of the tale. In chapter 2, we see that the damsel in distress didn't just see her loan guaranteed by the Obama administration. Crucially, she also qualifies for the $8000 tax credit for first time home-buyers.

Please pay attention. Now it gets interesting.

$8000 may not seem like a lot compared to the $155,000 purchase price. But that's not the way to look at it. You see, the government allows those who qualify for the credit to use it towards their down payment. And now the picture changes dramatically.

Remember, our protagonist needed to put down only 3.5% of her loan. 3.5% of $155,000 is $5425. Hence, she still has $2575 left on her $8000 credit. So she adds $34,000, which brings the total loan to $189,000. 3.5% of that is $6615. So even with the embellishments, she still has $1385 left.

In the end, if we focus only on the government involvement in this particular situation, she actually gets paid to get a mortgage loan for her home. In effect, she gets a 105% loan. Of course, if we look beyond government involvement, the mortgage lender which "approved" her will slap an avalanche of fees and bills on her, and she's still sure to be made to pay and bleed through the teeth.

But the principle has been established. The US government has silently and secretly entered a situation in which its presence is even far more perverting than it was before, when its involvement was channeled through Fannie and Freddie. One aspect of this change pertains to mortgage insurance, which takes on an entirely different shape now that the government effectively guarantees all money involved. There is still an insurance premium, but it can be smeared out over the course of the loan, and nobody cares much about it with the full weight of Washington behind it to begin with.

This is just one side of the home-buyer tax credit that should be reason for concern.

At 3.5% down, an $8000 tax credit potentially (and yes, I know this is a simplified version of reality) increases the amount a buyer can spend on a home by over $200,000. A sharp mind named Nemo at Self Evident says that this is bound to increase both the supply of homes on the market (since it allows buyers to spend -much- more, getting rid of -perceived- bottom prices) and the price per home. "Nemo" estimates the rise in prices could be as much as $100,000 per home. While we might discuss or even dispute that number, the principle is obvious and not disputable.

That principle is: the US government is busy actively raising home prices. And there we are back to what I've been saying about Fannie and Freddie for the longest time. While the reason given by Washington is that its involvement is driven by a desire to "stabilize" the markets, that is at best only part of the truth. What the White House and Capitol Hill are trying to do is "stabilizing" the markets at a level that they find acceptable. Which, if we recognize that their policies increase the number of homes on the market as well as their prices, evokes the image of a hamster on a flywheel. And that hamster WILL get tired at some point.

Who loses in this set-up? First, homebuyers, since they pay much more for their homes than if the government would stay out of the market. Then again, what obligations do the buyers really have? They get a home for free, more or less, and often with a non-recourse loan to boot. In the end, the by far biggest losers are the American taxpayers, who have to watch helplessly as their own chosen government shifts a fast increasing share of the losses of the housing market onto their tab, all solely for the benefit of the one and only party that stands to profit.

That is, the banks. Which can unload repossessed properties at much higher prices, given the tax credits. Which can keep properties and loans at greatly elevated prices on their books, which allows them to fool their shareholders and depositors into thinking they are far more healthy than they would be without government involvement. Who can use the artificially raised "values" on their books for highly leveraged financial wagers that if they pay off allow for multi-billion dollar bonuses, and if they don't can be channeled back to the taxpayers' account.

Why is this so important for the government? Why does Barney Frank proudly declare that the nation has a solemn commitment to those alleged "stable" housing prices?

Because without them, a huge chunk of America's 8000+ banks will be toast. More importantly, much of Tim Geithner's speed-dial list will be gone. He'll have no-one left to talk to before breakfast.

There are many of us who feel offended by the bank bail-outs and the bonuses paid with the bail-out money. But there is nothing that perverts America more than its government's housing policies. Take away Fannie, Freddie, Ginnie and the FHA, and you bankrupt the entire financial system with the stroke of a pen. The entire far too highly leveraged structure of loans, securities and derivatives in the end is based on the US housing market. That's why Obama and his people do what they do. Losing a million jobs a month is much less important than average home prices falling by $10,000 in that same month.

It's a lost battle, and they know it. But that means that they have nothing more to lose either, and they might as well transfer all the losses to you that they can get away with. Which is what is happening. While you discuss who does or does not stay on at reality TV shows, who gets vaccinated and who doesn't, who gets to fly a balloon and who stays at home, who should or should not be part of a health care system the government can't afford to implement anyway.

And I haven’t even touched on the home buyer tax credit fraud that lets infants, inmates and non-Americans cash in. Or the Nancy Pelosi proposal, sure to be voted in, that will extend the homebuyer tax credit to everybody who can fog a mirror, no questions asked, and make it $15,000 from the original $8000. Nor the fact that home sales have not, as claimed, increased by 9.4% in September, not even with all the credits in place.

There is no better and easier way to rob people blind than to make them think you're doing them a favor. Giving them an $8000 credit on a home priced at $250,000, that without that credit would cost them no more than $100,000, will be preferred over the cheaper home. Hey, it's free money. Isn't it?

The greatest theft in American history is not in the past. It's on ongoing operation. And it's run by your government.

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Pelosi Floats Tax Credit For All Home Buyers
Speaker Nancy Pelosi (D-Calif.) said Wednesday that the House not only plans to extend an $8,000 first-time home-buyer's tax credit -- it may be broadened to include all home purchases. "It might be expanded to anytime home buyers," Pelosi told reporters. The credit is scheduled to expire November 30th and has already cost the government roughly $10 billion. Expanding it to all homeowners would dramatically raise that cost. Some 1.4 million tax returns have so far been filed that take advantage of the credit.

The credit is refundable, which means that the government cuts a check to the homeowner. The program has repeatedly been ripped off and operates within an industry which helped bring about the financial collapse. The inspector general for the Internal Revenue Service recently reported that claims for at least 70,000 tax credit claims, adding up to $489 million, appeared to be fraudulent, Reuters reported. Also on Wednesday, Senate Majority Leader Harry Reid (D-Nev.) expressed support for moving forward with an extension of the credit, but focused on first-time home buyers.

Pelosi's comments came amid a call for more economic stimulus by prominent economists at a Capitol press conference. Alan Blinder, a former Fed vice chair, told reporters that the deficit must be brought under control, jobs and an economic recovery must come first. "Now is not the time," he said. Pelosi also said the leadership was considering a GOP-backed proposal, allowing greater tax write-offs for past losses -- known as "net operating loss carryback" -- and "other accelerated depreciation initiatives like that," Pelosi said.

The first-time home buyer tax credit is idiotic
Suppose one day the government decided to give $1 to every person who buys a screwdriver. What would happen?

The immediate effect would be to increase the price of all screwdrivers by $1. Why? If the going rate for screwdrivers is (say) $5, then that is what someone who actually needs a screwdriver is willing to pay. (Put another way, that is the “economic utility” of a screwdriver. Put yet another way, that is the “market clearing” price that balances screwdriver supply with screwdriver demand.) If you pay $6 for a screwdriver and get a $1 rebate, from your point of view that is identical to simply buying the screwdriver for $5; either way, you are parting with $5 and getting a screwdriver, which you do because $5 is the screwdriver’s economic value to you.

Any idiot can see that this hypothetical government policy is not a gift to screwdriver buyers; it is a gift to screwdriver sellers. That gift would be shared with buyers only to the extent that it encouraged the production of screwdrivers in excess of natural demand.

Which brings us to the first-time home buyer tax credit, where the government reimburses buyers 10% of the price of the house or $8000, whichever is smaller. By the screwdriver analogy, this should have the simple effect of increasing the price of every starter home by $8000, right?

Wrong. Nobody buys a starter home with cash. The tax credit does not add $8000 to someone’s capacity to buy a house; it adds $8000 to their capacity to make a down payment. Maybe they take out a loan with 20% down. Or maybe they get an FHA loan with 10%, 5% or even 3.5% down. So the tax credit increases their purchasing power by $40k (20% down) or $80k (10% down) or $160k (5% down) or more.

Thus the net effect is twofold:

  1. Increase the price of all starter homes by $100k or more

  2. Increase the supply of houses

Is the problem with the housing market too little supply? Because that is the only “problem” this tax credit is solving.

If you are considering participating in the frenzy, my advice is “don’t”. Sure, the $8000 will help with your down payment, but that is more than offset by the extra tens of thousands in debt you will incur by purchasing an overpriced house. (Plus there’s the general rule that “frenzy” is the antonym of “buying opportunity”.)

Why was this tax credit enacted? Here is a thought. Over the past several years, our banks made a large number of loans that could never be paid back and were secured by essentially worthless collateral (i.e., unnecessary houses). Once upon a time, if you were a bank, as soon as you realized a loan was never going to be paid back and the collateral was worthless, you had to recognize such on your books.

Now, thanks to the elimination of mark-to-market accounting, our banks can simply pretend that the loans will be paid back and/or that the collateral is worth a lot. Just one problem: Eventually the cash from a bad loan actually stops flowing. Then you must foreclose on the house and (gasp) try to sell it. Even “mark to management” accounting admits the truth at that point.

Enter the home buyer tax credit. First, banks can now offload their foreclosed properties at inflated prices. Second, they can issue fresh loans against those inflated prices, and they can pretend the new loans are worth something because they have not gone bad yet.

Like most of our government’s and central bank’s actions in the past two years, this is primarily a transfer of wealth from taxpayers to banks.

Bottom line: While the tax credit is in place, it is a good time to sell a house and a great time to be a bank. It is a bad time to buy a house and a terrible time to be a U.S. citizen.

Incidentally, the White House does not want the credit renewed. But that is irrelevant, since as near as I can tell Obama’s job description is “give speeches and sign whatever Pelosi and Reid cram through their respective chambers”. Too harsh? Read what Pelosi said yesterday. The tax credit will be renewed.

All that, and I did not even mention the fraud

What I do not understand is why so many people seem to think this is a good idea. Has the world gone mad, or have I?

Existing Home Sales FALL in September 2009
by Barry Ritholtz

Existing Home Sales fell 5.4% last month, despite the nonsense you have read elsewhere.

NAR continues to bullshit America with their garbage data and spin, month after month, with few people calling them on it. Well, I’ve had it up to here with their garbage:.

Big Rebound in Existing-Home Sales Shows First-Time Buyer Momentum

Existing-home sales bounced back strongly in September with first-time buyers driving much of the activity, marking five gains in the past six months, according to the National Association of Realtors

No, home sales did not rebound — that was purely the result of SEASONAL ADJUSTMENTS

As you can see on the NON SEASONALLY adjusted chart below, from August to September (Red Bar) Sales actually dropped. In prior years — 2005, 2006, 2007, and 2008 — there was always a big fall from August to September.

This year, the fall was more modest.

Why was this year so different? We have ZIRP (which will eventually go up) and a large 1st time buyers tax credit that is scheduled to expire.  Hence, the unusual September activity that dos not reflect the traditional drop off.

Mark Hanson notes that on a NSA basis, Existing Home Sales actually dropped 5.2% — this was the second straight monthly drop on an NSA basis.

Mark adds:

The NAR’s attempt to annualize seasonality never before seen has resulted in a headline very far off base . . . The fact is, Sept NSA sales were above last year’s 438k but below last month’s 498k coming in at 472k as shown below. In addition, sales prices fell. This pulled-forward demand sets up the slow season to be one of the slowest on record.

The tax credit effectively extended the purchase season which is why sales were even this strong. But when you consider the hundreds of billions spent to prop up the housing market, which only resulted in 34k additional sales over last September (one of the worst years on record for housing) and fewer sales YoY in CA, sales were really not that great. When organic sales go away suddenly for the season, which will happen in the near-term whether the tax credit is extended or not, it sets sales and prices up for the largest swings lower we have seen since all this began two years ago.

That’s precisely correct — the usual selling season was extended due to the tax credit.



courtesy of calculated risk


NSA home sales


I am honestly unsure of whether the folks at the NAR are dumb as lawn furniture and make these misreperesntations honestly — or whether are justa nother group of disgusting spin doctors, willfuylly peddling lies because it helps their own agenda.

Those are pretty much the only options: Idiots or full of shit.  (You decide).

Home sales hit 26-year high in September
Motivated first-time buyers racing toward the Nov. 30 deadline for an $8,000 tax credit propelled sales of previously owned homes in September to the highest monthly gain in 26 years. Sales rose 9.2 percent over the same month in 2008 and 9.4 percent from August, the National Association of Realtors reported yesterday. Since February, more than 340,000 qualified first-time buyers have taken advantage of the credit, which is retroactive to Jan. 1.

Recognizing how critical the tax credit has been to a market on life support since the end of the national real estate boom in 2006, the housing industry has been pressuring Congress to extend it for another year and make it available to all buyers except investors and second-home purchasers. "We are hopeful the tax credit will be extended and possibly expanded to more buyers, at least through the middle of next year, because the rising sales momentum needs to continue for a few additional quarters, until we reach a point of a self-sustaining recovery," said Lawrence Yun, chief economist for the Realtors' group. Economists agree that continuing the tax credit - estimated to cost the government an additional $1 billion - is key to a housing recovery, now forecast for the second half of 2010.

The Realtors' group report "raises almost as many questions as it answers," said Joel L. Naroff of Naroff Economic Advisers in Bucks County. "Clearly, the housing market is in much better shape than six months ago, when demand hit rock bottom. But aid from government incentives is disappearing, and how much demand will fall is somewhat unclear." Unless the tax credit is both extended and expanded, economist Patrick Newport of IHS Global Insight said, sales will take a hit and "house prices, which have stabilized recently, will start falling again." Newport says he expects the credit also will have boosted new-home sales when the September data are released by the Commerce Department on Wednesday.

Although the eight-county Philadelphia region also is benefiting from the credit for first-time buyers, September sales year-over-year were basically flat, data collected by Prudential Fox & Roach's HomExpert Market Report show. Sales rose 0.9 percent last month over September 2008. Median prices fell 4.1 percent in that time, to $207,275 from $216,120, reflecting the high percentage of first-timers looking to close deals on lower-priced homes ($350,000 and under) before the credit goes away. "The majority of my buyers are first-time buyers seeking the tax credit," said Murray Rubin, a Prudential Fox & Roach agent in Marlton. "Market activity is gaining momentum," he added.

Through September, fixed rates for 30-year mortgages ranged from 4.82 percent to slightly above 5 percent. On Thursday, Freddie Mac reported average 30-year fixed rates at 5 percent. The previous best monthly percentage gain in sales was in January 1983, as the country was easing out of a recession that had been accompanied by interest rates in the high teens, according to Hanley Wood Market Intelligence.

Last month, median prices nationally fell 8.1 percent year over year, not only reflecting the first-timers in the market but the huge volume of foreclosed houses in Sun Belt and Rust Belt states, where values have plummeted 30 percent to 50 percent from the 2006 peak. Foreclosure sales are a relatively small percentage of the Philadelphia region's market. Econsult Corp. vice president Kevin Gillen estimates that since the real estate boom ended, prices here have fallen only 12 percent.

August Home Price Decline Erases July Gain, FHFA Says
US home prices fell 0.3% on a seasonally adjusted basis from July to August, erasing the 0.3% gain between June and July, according to the Federal Housing Finance Agency’s (FHFA) monthly house price index. For the 12 months ending in August, U.S. prices fell 3.6% and the index is 10.7% below its April 2007 peak.

Regionally, the Pacific Census Division — Alaska, California, Hawaii, Oregon and Washington — experienced a 1.2% increase in seasonally adjusted prices from July to August, the greatest of the nine divisions. The South Atlantic division — Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia — experienced a 1.6% decrease in prices during the same period, the biggest loss in the country.

The Mountain division — Arizona, Colorado, Idaho, Nevada, New Mexico, Montana, Utah and Wyoming — experienced the greatest annual decrease in prices, 7.8% on a seasonally adjusted basis. The West South division — Arkansas, Louisiana, Oklahoma and Texas — experienced a 0.4% increase year-over-year, the only division to have an annual increase in prices. The FHFA monthly index is calculated using purchase prices of houses backed by mortgages sold to or guaranteed by Fannie Mae or Freddie Mac.

IRS Wrongly Gave Homebuyer Tax Credit to Resident Aliens, Minors: Watchdog
The Treasury Inspector General for Tax Administration (TIGTA) believes the Internal Revenue Service (IRS) may have paid out millions of dollars in first-time homebuyer tax credits to individuals not eligible to receive the $8,000 credit. Nearly $4m of incorrectly paid credits were due to both alleged fraud and filing errors on claims by 580 taxpayers less than 18 years old. The youngest of these was 4 years old, TIGTA head J. Russell George said in prepared testimony to the House Ways and Means Oversight subcommittee.

TIGTA also found 3,200 taxpayers with Individual Taxpayer Identification Numbers (ITIN) claiming the credits. ITINs are generally used to track income tax for resident aliens, in lieu of a social security number. While the legislation creating the tax credit does not specifically address resident alien eligibility, other laws prohibit aliens residing without authorization in the US from receiving most federal public benefits, George said. It is possible that as much as $20.8m in tax credits were paid to resident aliens ineligible for the credit.

As of August 22, 2009, more than 1.4m taxpayers claimed the tax credit for homes purchased in 2008 and 2009, representing total foregone tax revenue of about $10bn, according to estimates presented by Government Accountability Office (GAO) director of strategic issues James White. While the tax credit was created, the IRS created Form 5405, the documentation homebuyers must complete to claim the credit, and implemented checks on the claims system to detect those in excess of the maximum allowable credit or allowable amounts for those taxpayers with a gross income above the credit’s income limitations and claims filed without Form 5405.

But shortly after the IRS began administering the tax credit, the TIGTA office suggested additional fraud and error reporting measures, like requiring taxpayers submit a copy of their Department of Housing and Urban Development (HUD) Settlement Statement, known as the HUD-1 form. TIGTA also recommended verifying the information on Form 5405 and manually transcribing paper versions of Form 5405. The IRS rejected both proposals, saying requiring the HUD-1 form would be burdensome to taxpayers and may deter them from taking the credit. IRS also indicated the tax credit was approved too late to manually transcribe the paper Forms 5405.

As a result of the IRS’ decision to not implement the additional checks, George said, more than 19,300 electronically filed 2008 tax returns improperly claimed the tax credit for homes that had yet to be purchased at the time of the tax filing. He said more than $139m in erroneous claims were paid to these individuals. Linda Stiff, IRS deputy commissioner for services and enforcement, said in prepared testimony that when the tax credit was created, it came in the middle of an already hectic tax season and put a strain on the department. "It was important that the IRS implement and administer the [tax credit] in a way that did not disrupt the annual tax return filing process," she said.

Stiff added the IRS is pursuing fraud cases and already selected thousands of returns of individuals claiming the credit for civil examination. She also indicated that until the IRS can follow up with individuals with questionable returns, it is impossible to determine whether the claim is fraudulent or not. "We will vigorously pursue those who filed fraudulent claims for this credit, but we also will seek to respect the rights of taxpayers who claim a credit to which they are lawfully entitled," Stiff said. George said his office also identified nearly 74,000 fraudulent claims for the tax credit by individuals who did not qualify because they were not considered first-time homebuyers. These individuals claimed deductions of home mortgage interest, real estate taxes, deductible points and qualified mortgage insurance premiums on previous years’ tax returns, indicating they had owned a home within the past three years.

On the other hand, George said his office identified about 48,500 taxpayers who did not file claims for enough of the tax credit. These taxpayers claimed $7,500 (the credit value when the incentive became available in 2008) for the 2009 credit, when the maximum is $8,000. Unless these taxpayers bought $75,000 homes, they are entitled to higher tax credits, George said. The GAO and TIGTA recommended Congress consider granting the IRS additional authority to assess taxes to those with incorrect homebuyer tax credit information. It is a streamlined process for minor errors on tax returns that eliminate the need for full audits when borrowers make a simple mistake on tax returns. The IRS has "math error authority" on some matters, but Congress must grant it for specific items, like the tax credit.

Is The Housing Market About To Get Even Uglier?
Despite some tentative signs of recovery, the U.S. housing market remains vulnerable to further price drops—especially in areas where large numbers of mortgages are headed toward foreclosure over the next few years.

The Wall Street Journal's quarterly survey of housing-market data in 28 major metro areas shows sharp drops in the number of homes listed for sale across the country. But the potential supply of homes is far larger because banks are likely to acquire significant numbers of foreclosed homes in some areas, notably Las Vegas, Atlanta, Detroit, Phoenix, Miami and other parts of Florida, and Sacramento, Calif., over the next few years.

Sales of those homes may depress prices further. By contrast, metro areas with relatively low foreclosure and mortgage-delinquency rates include Boston, Denver, Minneapolis, San Francisco, Seattle, Raleigh, N.C., and Portland, Ore., making them less vulnerable. Homeowners and potential buyers have been whipsawed by conflicting signals about the state of the market in recent months. Ulani and Mike Thiessen found the market surprisingly hot when they went shopping for their first home in Las Vegas during the summer. With the help of Kim Kelly-Reed, an agent from One Source Realty & Management, the Thiessens finally bought a foreclosed house in September for about $136,000—but only after being outbid on three other houses.

"It's a crazy market out there," says Ms. Thiessen, who works for an electrical contractor. Despite a continuing surge in defaults, there is a shortage of well-preserved foreclosed homes on the market in Las Vegas, Sacramento and some other metro areas where first-time home buyers have been competing with investors for newly affordable properties. "Anything under $300,000 that is decent within hours has dozens of offers," says Michael Lyon, CEO of Lyon Real Estate in Sacramento.

The supply of foreclosed homes listed for sale has dwindled largely because of government-mandated efforts to save as many borrowers as possible from losing their homes. That campaign has gummed up the foreclosure process, slowing the flow of houses into bank ownership—but only temporarily. Over the next few years, housing analysts believe, millions of other homes are heading for bank ownership, but no one can say how long that will take or when a sudden torrent of bank-owned properties may swamp certain local markets.

Nearly 27% of first-lien home mortgages are at least 30 days overdue or in foreclosure in the Miami-Fort Lauderdale area, according to research firm LPS Applied Analytics in Denver. The rate is 23% in Las Vegas, but about 8% in Denver and Seattle. The national average is 12.4%, up from 5.2% at the end of 2006. Among the millions of homeowners whose fate remains undecided are Jill and Robert Loy, who live in Scottsdale, Ariz. They bought their home in 2004 for $630,000 but figure it is now worth only about $350,000, well below the $470,000 owed on their mortgage.

The couple fell behind on their loan payments last spring when Ms. Loy was temporarily jobless, and they have been trying to work out a modification of their loan terms with the company that collects payments on their mortgage, Colonial Savings FA of Fort Worth, Texas. A Colonial spokeswoman says the bank is trying to help the Loys.

The housing market is heading into the winter doldrums—when fewer people shop for real estate—after a summer marked by strong demand for low-end to midrange homes, spurred by a temporary federal tax credit for first-time buyers. How the market fares in the spring will depend largely on the state of the economy and the pace of foreclosures.

"The number of people receiving paychecks will drive the demand for houses and apartments," Jay Brinkmann, chief economist for the Mortgage Bankers Association, said Tuesday in testimony to the Senate Banking Committee, "and the recovery will begin when unemployment stops rising." For now, the market seems to be stabilizing, says Jeffrey Otteau, president of Otteau Valuation Group, an East Brunswick, N.J., appraisal firm. But if the job market gets much worse and mortgage rates rise sharply, "that could be the tipping point" for another drop in prices.

Mark Zandi, chief economist at Moody's, predicts that average national home prices will bottom out in next year's third quarter, assuming that employment begins growing again in mid-2010. But prices in some metro areas still have a long way to fall, he believes. Prices in the second quarter of 2010 will be down about 30% from a year earlier in Miami, 27% in Orlando, Fla., 24% in Las Vegas and 23% in Phoenix, Moody's forecasts.

Foreclosures and short sales (in which a home is offered for less than the mortgage balance) dominate the markets in some metro areas. Satish M. Mansukhani, a market strategist in New York, estimates that such "distressed" homes account for 79% of home listings in the Detroit area and 75% in Las Vegas, but just 16% in Houston and 7% in Boston.

One big question is how much more the federal government will do to prop up housing. Congress is debating whether to extend the tax credit for home buyers beyond Nov. 30. Meanwhile, the Federal Reserve is phasing out its massive purchases of mortgage-backed securities and plans to conclude the program by the end of March. Those purchases have helped keep interest rates on 30-year fixed-rate mortgages around 5%. Mr. Zandi says mortgage rates are likely to rise as much as one percentage point after the Fed ends that support. Analysts at Barclays Capital in New York forecast mortgage rates will be slightly over 6% by the end of March.

While supplies of moderately priced homes have shrunk, there is still a glut of high-priced houses in many areas, suggesting that prices on those properties may fall sharply as more owners default. In Sacramento, there are enough homes on the market at $600,000 and above to last more than 15 months at the recent rate of sales, compared with just 1.5 months for homes priced at $300,000 and below, according to Lyon Real Estate.

Home sellers will also face tougher competition from landlords, who generally have been cutting rents in the past year. The national apartment-vacancy rate in the third quarter was 7.8%, the highest in 23 years, according to Reis Inc., a New York research firm. It predicts "a few more quarters of distress, lower rents and higher vacancies." Apartment rents may face further downward pressure as investors buy foreclosed single-family homes and turn them into rental units, says Ryan Severino, an economist at Reis, who notes that there is little data on the number of houses being converted into rental properties.

Yes, Housing Recovery Is Still "Mother Of All Head-Fakes"

Whitney Tilson, Founder and Managing Partner, T2 Partners:
  • The NAR's sales numbers this morning were a complete joke: Take a look at the numbers on a non-seasonal basis
  • Yes, the housing recovery is still the mother of all head-fakes
  • House prices will start falling again when the seasonal summer dboom ends (now), and they'll fall another 10%-15% before they bottom
  • The continuation of the housing collapse will make the economic recovery "feeble, at best."

Ilargi: It’s when government officials deem it necessary to issue statements such as these that the little man inside starts to act up.

A Message from FDIC Chairman Sheila C. Bair

Citigroup, JP Morgan Chase, Wells Fargo and Others to Lose FDIC Debt Guarantees
Some of the nation’s largest financial companies, including Citigroup, GE Capital, JPMorgan Chase, Wells Fargo, Bank of America and others will no longer have certain debt guaranteed by the federal government through the FDIC’s Temporary Liquidity Guarantee Program as of October 31st. The FDIC voted on Tuesday to end the Temporary Liquidity Guarantee Program that is being used to guarantee certain debt issued by some of the nation’s largest banks, but also setup a 6-month safety net facility as part of the process. All five members of the FDIC’s panel of regulators voted to end the program as scheduled on October 31st.

New debt can be issued and guaranteed under the program up until the deadline. The deadline on the newly placed debt would expire no later than December 31st, 2012. FDIC Chairman, Sheila Bair, stated, "It should be clear that this is not a continuation of the program but an ending of the program." The program does leave open a 6-month safety-net feature for banks suffering from "market disruptions" beyond their control. Under the transitional facility, banks can have new debt guaranteed through April 30th, 2010 if the FDIC approves the guarantee.

During the month of September, the FDIC requested public comment about two different approaches to ending the program. One of the programs would let the program finish by the end of the month and the other would include a 6-month guarantee facility for some banks on a case-by-case basis. The FDIC established the Temporary Liquidity Guarantee Program last October in order to boost confidence in the banking industry, add more liquidity, and reduce the possibility of bank runs. The TLGP program places a government guarantee on some senior unsecured debt and mandatory convertible debt, as well as on banks’ transaction deposit accounts.

Regulators are hoping to phase out the program now that stress on the credit market has eased. FDIC officials are also want to avoid promoting reliance on government aid by the financial industry. As of October 14th, 2009, the FDIC had $309.4 billion in outstanding debt-guarantees.

Freddie Mac Sept portfolio up, delinquencies jump
Freddie Mac, the second-largest U.S. home funding company, said on Friday its mortgage investment portfolio grew by an annualized 7.3 percent rate in September, while delinquencies on loans it guarantees accelerated. The portfolio increased to $784.2 billion, for an annualized 3.4 percent decrease year to date, the McLean, Virginia-based company said in its monthly volume summary.

The portfolio size increased on a year-over-year basis. In September 2008, the portfolio was $736.9 billion. Freddie Mac in early August reported a surprising profit in the second quarter and indicated that it may not need additional federal aid, at least for now. Delinquencies, which increase stress on the company's capital, jumped to 3.33 percent of its book of business in September from 3.13 percent in August and 1.22 percent in September 2008.

The multifamily delinquency rate accelerated slightly in September to 0.11 percent from 0.10 percent in August. A year earlier it was 0.01 percent. Freddie Mac said refinance-loan purchase volume was $21.4 billion in September, down from August's $35.6 billion. Activity peaked earlier this year, with March's $52 billion its largest refinance month since 2003.

The net amount of mortgage-related investments portfolio mortgage purchase agreements entered into during the month of September totaled $4.6 billion, down from the $12.1 billion entered into during the month of August. The company's total mortgage portfolio increased at a 0.8 percent annualized rate in September to $2.243 trillion, for an annualized 2.1 percent increase year to date.

In early September 2008, the U.S. government seized control of Freddie Mac and its larger sibling, Fannie Mae, amid heightened worries about shrinking capital at the congressionally chartered companies. The current agreement with the U.S. Treasury has the retained portfolio at Fannie Mae and Freddie Mac capped at $900 billion until Dec. 31, when they are to start declining by 10 percent per year until they reach $250 billion.

The government has been relying heavily on Fannie Mae and Freddie Mac in its efforts to stimulate the battered U.S. housing market by buying more mortgage loans, easing refinancing and helping homeowners avoid foreclosure. After the worst downturn since the Great Depression, the housing market has shown signs of stabilization. Home price declines have moderated in many regions of the country and, according to some indexes, prices in some regions have risen.

Freddie Mac’s Secrecy Pacts Face Court Test
One year after the government took over and bailed out Freddie Mac, the giant mortgage finance company, federal regulators are blocking former employees from revealing information to investors who are suing the company for fraud, lawyers for shareholders say. The Treasury has propped up Freddie Mac with more than $50 billion in taxpayer money since the company nearly collapsed more than a year ago, and officials warn that the company will probably need additional billions in the months ahead.

Federal prosecutors in Virginia and the Securities and Exchange Commission are already investigating whether the company misled investors about the risks it was taking with securities backed by subprime mortgages and no-document loans. But in a battle that will surface on Friday in a federal courtroom in New York, the company and its primary government overseer, the Federal Housing Finance Agency, are trying to enforce secrecy agreements that scores of former employees signed as a condition for receiving severance payments when they left the company.

In their class-action lawsuit against Freddie Mac, three big union-based pension funds charge that Freddie Mac executives defrauded investors by concealing the company’s exposure to high-risk mortgages, its mounting losses and its inadequate capital position. At the hearing on Friday, lawyers for shareholders will argue that Freddie Mac’s secrecy agreements amount to buying silence from willing witnesses who may have crucial information about what the company’s top executives knew at the time they were assuring investors that all was well. The lawyers will ask a judge to invalidate the restrictions, a move that Freddie Mac and federal regulators will say the court has no right to do.

“Federal dollars are being used to bribe people, to buy their silence,” said David George, a lawyer representing the pension funds in a class-action lawsuit. Under the secrecy provisions, former employees would be permitted to answer questions from government prosecutors and investigators in any criminal case or in a regulatory proceeding. But, barring a court order, the former employees are prohibited from cooperating with anyone involved in a civil lawsuit against Freddie Mac. Several former employees, who insisted on anonymity, confirmed that they were eager to talk with the shareholder group and said they might have valuable information.

“I would say more, but I don’t want somebody knocking on my door and asking for $50,000 back,” said one former employee who worked on Freddie Mac’s internal financial controls. “It’s almost like bribery; I felt that I was supposed to sign the agreement, take the money and keep all their secrets.” The severance deals were so strict, according to former employees, that they prohibited those who accepted them from saying almost anything about their old jobs or even about the secrecy pledges themselves.

“I was told that in volunteering to take a buyout, I couldn’t even talk about the agreement or it would be off the table,” said an 18-year veteran of Freddie Mac, who insisted on anonymity because of the restrictions. “I was told that you don’t talk about the terms of agreement, you don’t talk to the news media and you don’t talk to attorneys involved in lawsuits against the company.” Lawyers for pension funds that have filed a class-action lawsuit against the company say the secrecy provisions have already muzzled at least two dozen former employees with potentially important information. Spokesmen for both Freddie Mac and the Federal Housing Finance Agency said they could not comment on the case because it is in litigation.

In a legal brief filed in August, the Federal Housing Finance Agency refused to confirm that the secrecy pacts even existed, saying their existence was “hypothetical.” But if the restrictions did exist, the agency continued, neither shareholders nor the courts had any authority to interfere with them. Though secrecy provisions have become a common feature of corporate severance deals, legal experts said this appeared to be the first time that federal regulators have invoked them to thwart investors. And because Freddie Mac is now effectively owned by the government and is receiving a vast taxpayer bailout, the case has already raised alarms among some public officials.

Rob McCord, Pennsylvania’s state treasurer, said his state had lost millions of dollars on Freddie Mac shares that became almost worthless in 2008. Though Mr. McCord is not a party to the class-action lawsuit, he said Freddie Mac’s secrecy agreements were thwarting taxpayers as well as shareholders, and making it harder to prevent similar debacles in the future. “I would be greatly concerned if Freddie Mac, by conditioning departing employees’ severance payments on contractual gags, is preventing investors from learning what really happened,” Mr. McCord wrote in a letter on Wednesday to Freddie Mac and to many members of Congress.

He added, “Given that Freddie Mac is supported by tax dollars, the public has a right to hear from former employees.” The dispute highlights the conflicts that face federal policy makers as the government tries to rescue giant corporations ranging from Freddie Mac to the American International Group to General Motors. On one hand, the government has a responsibility to uncover fraud and other corporate misconduct, especially at companies being bailed out by taxpayers. At the same time, officials are trying to protect taxpayers by rehabilitating the companies as quickly as possible. Paying out money to shareholders, even if they were defrauded, increases the cost to taxpayers.

Freddie Mac and its sister company, Fannie Mae, are government-sponsored corporations that finance and guarantee trillions of dollars worth of home mortgages. Both companies became insolvent after the housing market and financial markets imploded, and both were taken over by the government in September 2008. Lawyers for shareholders, citing provisions obtained from former employees, said the secrecy provisions explicitly prohibit employees from voluntarily helping anybody trying to sue Freddie Mac.

Stephen Singer, a shareholder lawyer who has led class-action lawsuits against numerous subprime mortgage lenders, said the Freddie Mac restrictions could, if upheld in court, make it difficult for shareholders to sue companies for fraud and misrepresentation. “These restrictions are more sweeping than anything I’ve seen before,” said Mr. Singer, who is not involved with the Freddie Mac case. If they were upheld, he added, shareholders would find it much more difficult to sue corporations because courts will generally not force company executives to testify or to produce documents until after the shareholders have provided solid evidence of fraud and misrepresentation from voluntary witnesses, often former employees.

U.S. government is new 'dead man walking'
When so-called quantitative easing by central banks ends, the world economy may slip back into trouble, Canadian hedge fund manager Eric Sprott warned on Tuesday. Toronto-based Sprott called Citigroup, Fannie Mae, Freddie Mac, and General Motors "dead men walking" in late 2007. On Tuesday, he said the U.S. government is the new dead man walking, partly because it may struggle to keep borrowing enough money if the Federal Reserve stops buying Treasury bonds.

Sprott's Canadian hedge fund, Sprott Hedge Fund LP, is up more than 400% since inception in 2000 as it rode a surge in gold prices and shares of gold miners and other raw materials companies. Bank bailouts and other dramatic efforts by central banks have stopped the world "going into the abyss," Sprott said during a presentation at the Value Investing Congress in New York. The "granddaddy" of all those bailout efforts is quantitative easing, in which central banks in the U.S. and the U.K. especially buy government bonds to keep interest rates low, Sprott said.

The U.S. government has raised roughly 200% more by selling bonds this year, versus last year, Sprott noted. Through the end of the second quarter of 2009, he said the only major buyers of these government bonds were central banks. "When quantitative easing ends, what's going to happen?" he added, noting that there are already two clues to answer that question. When the U.S. government's cash-for-clunkers program ended, car sales slumped. Meanwhile, as the end of the government's first-time homebuyer incentive approaches, recent data suggest weakness building again in the housing market, Sprott said.

Roughly 35% of all homes bought in the U.S. recently were purchased through the incentive program. If it is not extended, December home sales could slump 25%, Sprott estimated. Sprott remains concerned about banks and other financial institutions in the U.S., because he thinks they remain too leveraged. Banks leveraged roughly 20 to 1, have about 5% of equity supporting mostly paper assets. If those assets fall by more than 5%, the institutions are effectively bankrupt, Sprott said.

"The fundamental problem today is that the appropriate leverage ratio is certainly not 20 to 1," Sprott said, citing some of the bank failures this year in the U.S. To be seized by the Federal Deposit Insurance Corp., these banks have already lost their 5% equity cushion. But some of the largest bank failures this year, including Colonial Bank, Guaranty Financial, and Corus, involved write-downs of between 11% and 25%, Sprott noted.

Our Drunken Uncle

Spending: According to two separate Government Accountability Office scenarios, America's long-term fiscal outlook is "unsustainable." No surprise, since Uncle Sam is spending like a drunken sailor.

The GAO, Congress' in-house think tank, warns that in "little over 10 years, debt held by the public as a percent of GDP" will hit a record high, exceeding the debt-to-GDP ratio seen after World War II. Then it will "grow at a steady rate thereafter," according to the government forecasters.

"Social Security cash surpluses, which have been used to help finance other government activities, are projected to turn to cash deficits by 2016," the GAO warns.

The agency's fall update of its "Long-Term Fiscal Outlook" adds that "the Social Security trust fund will be exhausted in 2037, 4 years earlier than estimated last year." The Medicare trust fund's day of reckoning, meanwhile, "was also moved forward by 2 years to 2017."

The GAO used two simulations, an optimistic one making the assumption of historically lower-than-average nonentitlement spending and higher-than-average tax revenues, and a second model assuming that spending and revenues would keep to historical averages. But "both simulations show that the federal government is on an unsustainable fiscal path."

The non-optimistic simulation "shows persistent annual budget deficits in excess of 7% of GDP — levels not seen since the aftermath of World War II." Under that scenario, "roughly 92 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2019."

Even if revenue remains constant at 20.2% of GDP — higher than the historical average — by 2030 there will be little room for "all other spending," which includes "national defense, homeland security, investment in highways and mass transit and alternative energy sources, plus smaller entitlement programs such as Supplemental Security Income, Temporary Assistance for Needy Families, and farm price supports."

It sounds like doomsday. But the politicians who run Washington are ignoring the dire warnings.

This week, House Speaker Nancy Pelosi is convening a gaggle of ideologically friendly economists with the aim of getting cover for yet another stimulus — even though the last one of $787 billion made no discernible dent in unemployment, which threatens to reach double digits.

And Sen. Ben Cardin, D-Md., appearing on Fox News Wednesday, spoke for lots of his fellow liberals in blithely proposing a brand-new, massive entitlement in the form of a government-run health scheme, claiming that "a public option helps bring down the costs."

Also appearing on Fox Wednesday, Sen. Judd Gregg, R-N.H., after accusing Democrats on the Senate floor of a "Bernie Madoff approach to (health care) funding," warned that when disguised funding is tallied up, the true cost of Congress' proposed government health takeover — even without the public option — is $1.8 trillion.

Government spending is burning our children's futures to the ground, yet our "leaders" in Washington think it's time to spray the kerosene of still more spending on the fire.

Poof! Government Has Already Lost $20 Billion On GM Investment
In the newspaper business, reporters are often admonished not to " bury the lead." That’s another way of saying don’t take too long to get to the most newsworthy point of the article. Apparently Steve Rattner, a former New York Times reporter, veteran deal maker and Obama administration "car czar" forgot the rule when he published a first person account of his time as the auto czar in Fortune this week. At a speech sponsored by the Brookings Institution, Rattner estimated the government’s $50 billion investment in General Motors is now worth only about $30 billion, the Washington Post reported today.

Rattner said there’s "a good chance" the United States can recover the $30 billion invested in GM by the Obama administration earlier this year. But of the other roughly $20 billion previously lent to GM in the wanning days of the Bush Administration in 2008, he said, "I don’t think we are going to see [it] again." Rattner is careful to draw a distinction between the $20 billion doled to GM by the Bush administration and the $30 billion the Obama White House approved earlier this year. While the Bush administration gave the money with few strings attached, the Obama administration required a management shake up, including the ouster of CEO Rick Wagoner, and had the government take a 60% stake in the company.

But regardless of the distinctions between the two administrations, GM is struggling to sustain sales after the expiration of the "cash for clunkers" subsidies in early September. GM sold 156,673 units in September, down 45% from a year earlier and off 36% from August. For Rattner, at least, it’s not all about profits. He said the GM and Chrysler bailouts saved a million jobs and prevented unemployment in several states from hitting a shocking level of 20%. "We soon could not imagine this country without an automaker of the scale and scope of General Motors," Rattner said, according to the Post article. In Rattner’s view, that’s the dividend that the GM investment is paying right now to taxpayers.

Bank failures hit 106, only part of industry woes
The cascade of bank failures this year surpassed 100 on Friday, the most in nearly two decades. And the trouble in the banking system from bad loans and the recession goes even deeper than the number suggests. Dozens, perhaps hundreds, of other banks remain open even though they are as weak as many that have been shuttered. Regulators are seizing banks slowly and selectively -- partly to avoid inciting panic and partly because buyers for bad banks are hard to find. Going slow buys time. An economic recovery could save some banks that would otherwise go under. But if the recovery is slow and smaller banks' finances get even worse, it could wind up costing even more.

The bank failures, 106 in all, are the most in any year since 181 collapsed in 1992, at the end of the savings-and-loan crisis. On Friday, regulators took over three small Florida banks -- Partners Bank and Hillcrest Bank Florida, both of Naples, and Flagship National Bank in Bradenton -- along with American United Bank of Lawrenceville, Ga., Bank of Elmwood in Racine, Wis., Riverview Community Bank in Otsego, Minn., and First Dupage Bank in Westmont, Ill. When a bank fails, the Federal Deposit Insurance Corp. swoops in, usually on a Friday afternoon. It tries to sell off the bank's assets to buyers and cover its liabilities, primarily customer deposits. It taps the insurance fund to cover the rest.

Bank failures have cost the FDIC's fund that insures deposits an estimated $25 billion this year and are expected to cost $100 billion through 2013. To replenish the fund, the agency wants banks to pay in advance $45 billion in premiums that would have been due over the next three years. The FDIC won't say how deep a hole its deposit insurance fund is in. It can tap a credit line from the Treasury of up to a half-trillion dollars to cover the gap. The list of banks in trouble is getting longer. At the end of June, the FDIC had flagged 416 as being at risk of failure, up from 305 at the end of March and 252 at the beginning of the year. Yet the pace of actual bank failures appears to be slowing. The FDIC seized 24 banks in July, 11 in September and 11 in October.

If any bank poses an immediate danger to customers or the broader financial system, regulators close it immediately, bank supervisors said. The issue is murkier for troubled banks that might qualify to close but whose closings might still be postponed or even prevented. The FDIC's first priority, spokesman Andrew Gray said, is to maintain public confidence in the banking system. "As evidenced by the stability of insured deposits throughout last year, this mission has been a success," he said. He said public confidence isn't reason enough to delay a bank closing, because legally the decision to close rests with whoever chartered the bank -- a state or federal agency. But more than a dozen experts, including current and former regulators, bankers and lawyers, say the FDIC's mission to maintain public confidence in the banking system contributes to the go-slow approach.

"The FDIC was set up to create confidence and prevent bank runs," says Mark Williams, a former bank examiner for the Federal Reserve. Being too aggressive about bank closings "can be counter to the mission." Sarah Bloom Raskin, Maryland's top banking regulator, said: "Technically it's the states who decide, but in reality it's the FDIC calling you to say" when the bank will be closed.

Last fall, the financial turmoil was rooted in bad bets that the nation's biggest banks, like Citigroup Inc. and Bank of America Corp., had made on complicated, high-risk mortgage investments. Smaller banks have been undone by something more conventional -- real estate, construction and industrial loans that have soured as the recession has deepened. Defaults are up as developers abandon failing projects and landlords can't meet their loan payments. Small- and mid-sized banks hold lots of those loans and have been hurt more than big ones by the sinking commercial real estate market, especially in states like California, Georgia and Illinois. As defaults rise, these banks must set aside more money to cover losses. For the banks, this means mounting losses and shrinking reserves.

In a healthy economy, Williams said, the Fed and the FDIC would be inclined to close such weak banks. But these days, those agencies and other regulators prefer to hold off, hoping an economic recovery will eventually restore the health of some of the banks. But the recovery is expected to be slow. Americans remain hesitant to spend money because of job losses, flat wages, tight credit and high debt. Their cutbacks have triggered tens of thousands of business failures. Abandoned retail space in downtowns and suburban malls means no rental income for property owners. As landlords default on real estate loans, they weaken the banks that hold the loans.

The situation now is especially grave in Southern California, Georgia and Illinois, which have some of the highest home foreclosure rates. Twenty banks have closed in Georgia alone. Individual bank depositors aren't at risk when a bank fails. Their money is guaranteed up to $250,000 by the government. Ever conscious of maintaining public confidence, agency officials hammer this point in public statements. When weak banks are allowed to stay open, their growing losses potentially can drain the FDIC's deposit insurance fund faster, says Bert Ely, an independent banking consultant. Federal agencies aren't the only ones with an interest in slowing the pace of bank closings. State regulators with closer ties to local communities want to avoid the ripple effects when a town loses its main source of consumer and business credit, Williams said.

But finding buyers for wobbly banks has been tough. FDIC Chairman Sheila Bair acknowledged as much in testimony this month before a Senate panel. The FDIC has been offering to share buyers' losses on the assets being transferred, she said. "In the past several months investor interest has been low," she said in prepared testimony. In an effort to find more potential buyers, the FDIC has relaxed the rules for private-equity firms to buy banks. In the past, regulators had feared such a move would allow investors to protect themselves from the cost of bank failures, escaping serious consequences while drawing down the FDIC's fund.

An early success of the new strategy was a deal announced this month to sell assets from Corus Bank of Chicago to a group of private investors. But there still aren't enough buyers to absorb quickly all the assets held by at-risk banks. That's because there are so many weak and failing banks on the market -- and so few others strong enough to buy them. That's one reason it's hard to know how many more banks could be closed in coming months, said Daniel Alpert, Managing Partner of the New York investment bank Westwood Capital LLC. "How many banks will survive?" Alpert asked. "Loans are still deteriorating, but there are glimmers of hope in the economy. Ultimately, it's all about employment."

Rally fuelled by cheap money brings a sense of foreboding
by Gillian Tett

Earlier this month, I received a sobering e-mail from a senior, recently-retired banker. This particular man, a veteran of the credit world, had just chatted with ex-colleagues who are still in the markets – and was feeling deeply shocked. "Forget about the events of the past 12 months ... the punters are back punting as aggressively as ever," he wrote. "Highly leveraged short-term trades are back in vogue as players ... jostle to load up on everything from Reits [real estate investment trusts] and commercial property, commodities, emerging markets and regular stocks and bonds.

"Oh, I am sure the banks’ public relations people will talk about the subdued atmosphere in banking, but don’t you believe it," he continued bitterly, noting that when money is virtually free – or, at least, at 0.5 per cent – traders feel stupid if they don’t leverage up. "Any sense of control is being chucked out of the window. After the dotcom boom and bust it took a good few years for the market to get its collective mojo back [but] this time it has taken just a few months," he added. He finished with a despairing question: "Was October 2008 just a dress rehearsal for the crash when this latest bubble bursts?"

I daresay this missive reflects some element of hyperbole. But I have quoted it at length because the question is becoming more critical. Six months ago, the financial system was in deep distress, reeling from a meltdown. Now despair and panic have been replaced not simply by relief – but, in some quarters, euphoria. Never mind the high-profile rally that has occurred in the equity markets; what is perhaps most stunning is the less visible rebound in debt and derivatives markets, as risk assets have displayed what Barclays describes as a "stellar performance".

In the corporate bond world, for example, spreads have collapsed for both risky and investment grade credit. Emerging market spreads have shrunk too. Meanwhile, publicly traded real estate markets (the EPRA index) have soared some 70 per cent, according to Barclays, helping to spark a surge in its overall measure of market risk appetite – a pattern that is reflected, even more dramatically, in similar metrics compiled by Goldman Sachs.

No doubt many brokers would like to attribute this to fundamentals. After all, last year’s crash in asset prices was so extreme that some rebound was almost inevitable. And recent macro-economic data have been quite encouraging, particularly when compared with what was seen a year earlier.

Yet, if you talk at length to traders – or senior bankers – it seems that few truly believe that fundamentals alone explain this pattern. Instead, the real trigger is the amount of money that central bankers have poured into the system that is frantically seeking a home, because most banks simply do not want to use that cash to make loans. Hence, the fact that the prices of almost all risk assets are rallying – even as non-risky assets such as Treasuries bounce too.

Now, some western policymakers like to argue – or hope – that this striking rally could be beneficial, in a way, even if it is not initially based on fundamentals. After all, the argument goes, if markets rebound sharply, that should boost animal spirits in a way that could eventually seep through to the "real" economy. On this interpretation, the current rally could turn out to be akin to the firelighter that one uses to start a blaze in a pile of damp wood.

Yet, what worries me is that it is still very unclear that that pile of damp wood – aka the real economy – truly will catch fire, in a sustainable way, if the current stock of firelighters comes to an end. After all, much of the current economic rebound seems to reflect stimulus packages (and flattering year-on-year comparisons) that will end next year. And while there are still plenty of firelighters around – in the form of monetary stimulus and ultra low market rates – there seems to be a good chance of a future interest rate shock as central banks implement their exit strategies. Meanwhile, the securitisation sector could yet deliver another credit shock next year, since that is the one part of the financial system that has not started working yet – but where government support measures are supposed to stop next spring.

So I, like my e-mail correspondent, am growing uneasy. Perhaps, the optimistic "firelighter-igniting-the-damp-wood" scenario will yet come to play; but we will probably not really know whether the optimists are correct for at least another six months. In the meantime, it is crystal clear that the longer that money remains ultra cheap, the more traders will have an incentive to gamble (particularly if they privately suspect that today’s boom will be short-lived and want to score big over the next year). Somehow all this feels horribly familiar; I just hope that my sense of foreboding turns out to be wrong.

Goldman Sachs Is Too Big to Tell It Straight
Repeat after me: Goldman Sachs is not too big to fail. Goldman Sachs is not too big to fail. Goldman Sachs is not too big to fail. Are you laughing yet? This might be funny, except that Goldman Sachs Group Inc. wants us to believe it’s true.

Let’s begin with the obvious: Of course Goldman is too big to fail, and of course the government would intervene to prevent Goldman from collapsing if it ever came to that. It’s probably the most important investment bank in the world. There’s a decent chance it could take down the world’s financial system if it ever blew up. It’s the very embodiment of what’s known in government parlance as a "systemically significant" financial institution.

Only two U.S. bank-holding companies, JPMorgan Chase & Co. and Bank of America Corp., held greater amounts of derivatives than Goldman as of June 30, according to the Office of the Comptroller of the Currency. Citigroup Inc., which would be dead already if it hadn’t been too big, was No. 5 on that list. Fannie Mae and Freddie Mac also used to say they didn’t have any federal guarantee. Not many people believed them either.

It was against this backdrop that Goldman’s chief financial officer, David Viniar, got on a conference call with reporters last week and said Goldman enjoys no government guarantee. Not even an implicit one, he said. Viniar’s remarks came after a reporter for the Daily Mail of London, Simon Duke, posed a perfectly reasonable question: "It seems fairly clear that, post-Lehman, that the U.S. Treasury’s not going to let any bulge-bracket firms go under," Duke began, according to an audio recording of the call. "How can you justify these levels of pay, when you effectively enjoy an implicit guarantee from the U.S. taxpayer?"

The pay Duke was referring to was the $16.7 billion that Goldman has accrued for employee-compensation expenses so far this year. Viniar responded by attacking his question’s premise. "We’ve heard many people say that, but we certainly don’t operate the company that way," Viniar said. "We operate as an independent financial institution that stands on our own two feet." He didn’t stop there. "If we felt that we had an implicit guarantee, we would not be holding nearly $170 billion of cash on our balance sheet. We would not have reduced our balance sheet by $400 billion." (Actually, the "cash" figure he cited also included certain securities that Goldman considers to be highly liquid.)

After Duke pressed him further, Viniar turned emphatic. "I don’t believe any of our bondholders think that we have a guarantee, and we don’t think we have a guarantee," he said. It’s as if last year’s bailouts of everything from the money-market industry to American International Group Inc. never even happened. Sure, it’s of some comfort that Goldman is down to a measly $882 billion of assets, or 13.5 times equity. And it’s nice to hear Viniar say Goldman is operating as if it had no federal safety net. To say Goldman doesn’t have one, though, is crazy talk.

Consider what former Federal Reserve Board Chairman Paul Volcker said in a July interview published last month by the Minneapolis Fed’s in-house magazine, the Region. "Think of the situation with Goldman Sachs," said Volcker, one of President Barack Obama’s economic advisers. "They’ve had government assistance. They were presumably deemed too big to fail. And at the same time, they have an enormous trading book. They’ve made a lot of money. There’s nothing wrong with making money, but I don’t want them to make money by taking those risks with the support of the taxpayer."

Likewise, here’s what Fed Chairman Ben Bernanke told the House Financial Services Committee in July, when asked to estimate how many systemically significant, too-big-to-fail companies there might be. "A very rough guess would be about 25," he said. While Bernanke didn’t name names, leaving Goldman off that list would make as much sense as a Top 25 college football poll that didn’t include Tim Tebow’s undefeated Florida Gators.

Last spring, Goldman was one of the 19 major banks the Fed picked to undergo its so-called stress tests. Under that program, the government expressly committed to provide additional capital to any bank on the list that needed it and couldn’t raise enough from other investors. That capital would have been convertible into common-equity shares, meaning the government in effect was setting a floor for the banks’ stock prices. True, Goldman passed the test, and in June it returned the $10 billion it received last year under the Treasury Department’s Troubled Asset Relief Program. Yet the point remains: Goldman had a federal safety net. It’s just about impossible to imagine the government wouldn’t provide another lifeline if needed.

Goldman’s bosses obviously are concerned about the criticism they’ve received over the bank’s massive profits and bonus pool this year. Many Americans believe Goldman would have died were it not for last year’s taxpayer bailouts of the banking industry. And a lot of them feel like Goldman owes the country a debt -- of gratitude, if nothing else. As long as Goldman keeps feeling the need to explain itself, the least it could do is ease up on the hubris. Goldman Sachs doesn’t have an implicit government guarantee? Give me a break.

Wall Street Steps Up Political Donations, Lobbying
Some of the biggest Wall Street firms are back in the political-spending game after hunkering down while they were getting government bailout funds. Goldman Sachs Group Inc., Bank of America Corp., Morgan Stanley and other large financial-services firms stepped up their political donations in September to members of Congress, for many the first time this year they have joined the fray.

Most Wall Street firms stopped making donations to lawmakers when they were receiving government funds, and many lawmakers stopped accepting them. But now that the companies have begun returning the bailout funds, they are making campaign donations again. At the same time, they are increasing their spending on lobbying after a yearlong slump. To be sure, the donations from Wall Street are far below levels of the comparable period four years ago -- the first year of President George W. Bush's second term -- when companies' finances and the overall economy were much healthier.

The renewed assault on Washington comes as the Capitol Hill debate begins on a broad overhaul of financial-services regulations that is strongly backed by President Barack Obama and opposed by large swaths of the finance industry. The spending could also heighten tensions with Mr. Obama, who as recently as Tuesday called on Wall Street to stop lobbying against the proposed regulations. Wall Street and the Obama administration are at loggerheads over a number of issues, including compensation. The Treasury's pay czar, Kenneth Feinberg, is expected in coming days to slash pay at firms receiving substantial government assistance, including Citigroup Inc. and Bank of America.

New fund-raising data show that Morgan Stanley's political action committee made a total of $110,000 in political contributions in September. The only other month this year the company made donations was July, when it gave $43,000. About 60% of the September donations went to Republicans, who generally support Wall Street's efforts to block the regulations proposed by Mr. Obama and congressional Democrats, a shift to the minority party from July.

Morgan Stanley's fund-raising arm in September donated $2,500 to Alabama's Rep. Spencer Bachus, the top Republican on the House Financial Services Committee, and $5,000 to House Minority Leader John Boehner of Ohio. Half of Morgan Stanley's donations in September went to members of the House panel, which is crafting the financial-services overhaul. Mr. Bachus couldn't be reached. Mr. Boehner and Morgan Stanley declined to comment. Democrats received $43,000 from the company. Democratic Rep. Melissa Bean of Illinois received $5,000. Ms. Bean is considered a key swing vote on the financial-services panel and backs an effort to prevent state regulators from approving tougher consumer-protection rules than the federal legislation. Through a spokesman, Ms. Bean declined to comment.

Morgan Stanley also donated $5,000 to Majority Leader Steny Hoyer (D., Md.). Katie Grant, a spokeswoman for Mr. Hoyer, said it is his "policy to accept legal contributions and to pursue the policies he believes are in the best interests of our country irrespective of such contributions." The fund-raising arm of Bank of America donated $30,500 to Republicans in September and $13,500 to Democrats. The company gave a large amount in February, but otherwise has been quiet this year. Goldman Sachs made $37,500 in donations through its PACs in September, after donating $23,000 up until that month.

Records shows Goldman's PAC donated $22,500 to Democrats and $15,000 to Republicans in September. The company contributed $15,000 each to the Democratic and Republican parties, as well as $5,000 to Mr. Hoyer, the Democratic leader. A spokeswoman for Goldman Sachs declined to comment on the donations. J.P. Morgan Chase & Co. made nearly $50,000 in political donations through its PAC in September. The company's PAC made no donations from February through May, and only a small number of donations in June, July and August. Records show that the company's donations were split between Democrats and Republicans.

The company donated $2,000 to Alabama Sen. Richard Shelby, the senior Republican on the Senate Banking Committee. The company also donated $1,000 to Pennsylvania Rep. Paul Kanjorski, the No. 2 Democrat on the House financial-services panel. The lawmakers declined to comment. A J.P. Morgan spokeswoman declined to comment. The increase in spending by the big Wall Street firms comes amid an aggressive push by financial-services lobbyists on Capitol Hill to stop Mr. Obama's regulatory legislation as it winds its way through Congress.

The House Financial Services panel approved the first elements of the legislation this week and is expected to move to other parts next week. Mr. Obama has repeatedly called on Wall Street to support his overhaul plan, and he has complained about the industry's efforts to defeat the plan so soon after accepting government bailout funds. Separate lobbying records made public Wednesday show that several of the largest Wall Street firms have ramped up their lobbying efforts recently as Democrats advance their financial-services overhaul plan. Bank of America and Goldman Sachs each reported spending more on lobbyists in the three-month period ended Sept. 30 than in the previous quarter. Overall, most financial-services firms reported a decline in spending on lobbying, according to a Wall Street Journal analysis of the lobbying-disclosure forms.

Why curbing finance is hard to do
by Martin Wolf

About a month ago, I visited the aero engine factory of Rolls-Royce, in Derby. I was hugely impressed. Making jet engines able to work at extreme temperatures is an extraordinary achievement. Why does the financial industry not work this way? How might we bring the performance of finance close to that of other sophisticated businesses? This is, in its essence, the question Mervyn King, governor of the Bank of England, was addressing in his controversial speech this week. His answer: break up the banks into "utilities" and "casinos" The former would be safe. The latter would live and die in the market.

Both Alistair Darling, the UK's chancellor of the exchequer, and Gordon Brown, the prime minister, promptly slapped Mr King down , arguing that this division does not work: Northern Rock, a utility mortgage-lender, failed, while the collapse of Lehman Brothers, evidently a casino, led to the most expensive financial rescue yet. This, they argue, is a misdirected remedy: the distinction between utility and casino either cannot be drawn or, if it can, does not coincide with the distinction between what has to be safe and what need not be.

Yet it is evident why this distinction is appealing. If we define the utility parts of the financial system narrowly, as management of the payment system, it works like clockwork. It is in the management of risk (and the advice given to its clients) that the financial system fails. The limited liability businesses at the heart of our credit-based monetary system have a tendency to mismanage risk (and uncertainty), with devastating results.

Over time, the policy response has been to cushion their creditors from the consequences. But this effort to make the system safer has made it ever more dangerous. Today, as a result of this last crisis, we see, at the core of the system, behemoths whose creditors know they are too significant to fail. As Mr King, remarked, "the massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The 'too important to fail' problem is too important to ignore."

Mr King raises the right issue. He is justified in doing so, even if it makes politicians uncomfortable. Indeed, he is justified, becauseit makes politicians uncomfortable. I agree with him, too, that the two alternatives are either to make institutions that are "too important to fail" too good to do so or to be able to fail any institution, even in a crisis. If we do not achieve one of these, further crises are inevitable. Yet I remain unpersuaded that the structural solution - the separation of utility from casino finance - is workable, as I pointed out in a column on the "narrow banking" proposal of my colleague, John Kay. Indeed, Mr King himself is well aware of the difficulties.

First, the border between utility and casino banking is impossible to draw. For Mr Kay, the utility is the payment system and protection of deposits. This would leave all lending - including to households and businesses - inside the casino. For those in the US who hark back to the Glass-Steagall Act, the distinction is between commercial and riskier investment banking.

Mr Kay's distinction is clear, but problematic. If we followed him, all risk management would become unregulated. It is inconceivable that governments would, or could, leave them so. If we moved back to a Glass-Steagall distinction (itself never accepted in continental Europe), we would need to draw a line. But where? Why would lending to households and business be good, but securitising those loans bad? Why would hedging be good, but speculating bad and how might one draw the line between them? Mr King counters that prudential regulation already draws such distinctions. I would respond that regulation has made a mess in doing so. Furthermore, these are not distinctions between businesses.

This is not to argue that there is no way of making finance safe. There is. But it would be far more radical: deposits would be 100 per cent reserve backed; and the liabilities of other investment vehicles would be adjusted for the market value of their assets at all times. Banking would disappear.

Short of such radicalism, we must approach the task in a more subtle manner. First, create a set of laws and institutions that make it possible to bankrupt any and all institutions, even in a crisis. Second, make financial institutions safer, with much higher capital requirements, against all activities. Third, prevent off-balance-sheet activities. Fourth, impose dynamic provisioning. Fifth, require huge cushions of contingent capital. Finally, cease to favour debt-finance, throughout the economy.

If we did all this, the world of finance would be duller and safer. It would still not have the reliability of jet engines. So long as we allow people to make leveraged bets on the future, breakdowns will occur. The division of finance into utility and casino cannot solve this problem. Only the end of leverage would do so. Do we want that? I doubt it.

7,000 unemployed Americans lose their benefits lifeline every day
Another day, another 7,000 people run out of unemployment benefits. One month after the House passed a bill extending unemployment benefits, the issue is still being debated in the Senate. Democratic leaders in the Senate introduced a bill two weeks ago to lengthen benefits in all states by 14 weeks. Those that live in states with unemployment greater than 8.5% would receive an additional six weeks.

Senate Republicans want to add several amendments, including one that would pay for the extra benefits with stimulus funds rather than by extending a federal unemployment tax. While leaders in both parties are trying to negotiate a compromise, Senate Democrats Wednesday took a step to bring the bill to the floor as early as the end of next week. If it passes, the Senate legislation must then be reconciled with the House version, which extends benefits by 13 weeks in high-unemployment states.

Meanwhile, the bickering has cost people like Crystal Jordan of Dolton, Ill., their benefits. The single mother of three ran out in late September. She is one of the 1.3 million people set to lose their benefits before year's end if Congress doesn't act, according to the National Employment Law Project, an advocacy group. In October alone, more than 200,000 people will fall off the rolls. Lawmakers twice lengthened the time people can receive checks to as much as 79 weeks, depending on the state.

Jordan lost her administrative support job in the spring of 2008. She had never been unemployed before and hasn't been able to find work since, despite sending out 10 resumes a day. Jordan is also finishing her bachelor's degree in business management. She hopes that will give her the edge she needs to find a job in 2010. The $1,000 check she received every two weeks allowed her to pay the rent and feed her family. Now, she doesn't know how she'll cover next month's bills. "I am fearful we will all end up on the street because I can't find a job and have no income," Jordan said. "Everyone's household is extremely tight at the moment so I cannot lean on friends or family for any support."

More Americans than ever before are in Jordan's situation. More than one in three people who are unemployed have been out of work for at least six months, according to the law project. The unemployment rate hit a 26-year high of 9.8% in September. "We're talking about people who've been unemployed for well over a year," said Judy Conti, federal advocacy coordinator at the law project. "If they had savings, it's gone. This is their last lifeline." Gregg Rock, a business strategy consultant, drained his savings after joining the ranks of the unemployed in summer 2008. He was forced to move back to his mother's home in Huntington, N.Y., for the first time in more than 20 years.

With so many people looking for work, Rock feels his best chance is land a new job is through networking. But it costs him $18 just to trek into Manhattan, not to mention $4 for a cup of coffee at Starbucks, where he often meets people who he hopes will lead him to a job. Rock's benefits ran out last week. Now, he says, he'll be forced to drive a cab at night or take a bartending job just to earn enough to keep job hunting. "Unemployment is what allows you to afford to be out there networking," Rock said.

Slump Prods Firms to Seek New Compact With Workers
The deep recession appears to be drawing to a close, but not its effect on the workplace. Since the downturn began, thousands of employers have cut pay, increased workers' share of health-care costs or reduced the employer contribution to retirement plans. Two-thirds of big companies that cut health-care benefits don't plan to restore them to pre-recession levels, they recently told consulting firm Watson Wyatt. When the firm asked companies that have trimmed retirement benefits when they expect to restore them, fewer than half said they would do so within a year, and 8% said they didn't expect to ever.

Changes like these are reshaping employment in America, injecting uncertainty and delivering the jolting news that pay can go down as well as up. The changes are eroding two pillars of the late-20th-century employment relationship: employer-subsidized retirement benefits and employer-paid health care. Even as Congress wrestles with how to extend health insurance to more Americans, and considers putting pressure on employers to offer coverage, some companies feel they have no choice but to pull back -- dropping health plans or weighing such a move.

One reason: Although employers pay a smaller percentage of health costs, their dollar outlays continue to rise rapidly, as medical costs do. Employers that offer health insurance spend an average of $6,700 per employee on it this year, nearly twice as much as in 2001, according to consulting firm Hewitt Associates. Some shifts in the employer-employee relationship have been building for years, but the recession, by making companies acutely cost-conscious, has accelerated them. "I think we've entered into a fundamentally new era," says David Lewin, of the Anderson School of Management at the University of California, Los Angeles. He describes employers as "leery of long-term commitments," including both benefits and pay increases.

Bonnie Templeton is living in the new era. The information-technology specialist in Loveland, Colo., went to work for a small sign company last year in a job that pays about $42,000, just over half what she earned in her previous job at a university. Her new employer doesn't offer a traditional health-care plan covering most expenses. It has a high-deductible plan, under which she must pay the first $3,000 of her medical bills each year. Most bills after that are covered, but Ms. Templeton also owes a $75 monthly premium. "You really are covering your own expenses," she says.

Like most private-sector employers today, hers doesn't offer a pension such as the one her 89-year-old father collects via Exxon Mobil Corp. There's a 401(k) plan, enabling workers to set aside some pay tax-deferred, sometimes partly or fully matched by the employer. These accounts have the advantage of portability. Workers don't lose what they have accrued if they leave after a few years, as can happen with a pension.

Ms. Templeton hasn't had her job long enough to qualify for the 401(k). In any case, she says, with her reduced pay, she couldn't afford to contribute. Her husband lost his job as a technical writer in March. Large employers began shouldering retirement and health care after World War II, partly to retain talent in an era of ample opportunity. Corporate giants in industries like steel and autos led the way, and could pass the costs on to customers, says Mr. Lewin at UCLA. In the 1970s and 1980s, amid rising foreign competition and recessions, the same companies took the lead in paring this system.

At Ford Motor Co., salaried workers hired after 2003 no longer get pensions. Instead, Ford contributes to retirement accounts they manage. They are eligible for 401(k) accounts, but Ford has frequently suspended its matching contributions, most recently on Jan. 1. In all, Ford has contributed in 2? of the past eight years. "I don't think anyone really counts on" the company's 401(k) contributions, says Charles Lambreth, a 49-year-old Ford manager who handles parts marketing and sales to dealers in Texas.

Ford says it made the switch to self-managed accounts for the portability. Younger employees "don't think of a career with one company anymore," a spokeswoman for the auto maker said. Last year, Ford dropped a no-deductible health plan in which Mr. Lambreth, his wife and two children were enrolled. Now, each family member must meet a $400 deductible before insurance kicks in. After that, the Lambreths pay 20% of most bills.

Such changes helped Ford cut its health-care costs for U.S. employees to $800 million in 2008 from $1.3 billion in 2006. During a stretch when employers' per-worker health-care costs rose about 10%, Ford held per-worker spending roughly flat. Ford says it offers multiple plans for varying needs and has been adding coverage for preventive care. Mr. Lambreth says the benefit-plan changes are necessary in a brutal time for auto makers. But he has changed the way he regards his employer. "I don't look for protection from the company any more," he says. In today's weak economy, reducing benefit costs can make it possible for employers to minimize job cuts.

At a small rubber-stamp maker called Hero Arts Inc., CEO Aaron Leventhal called his 100 employees together in July last year, asking for cost-cut suggestions so he could avoid layoffs. Someone suggested stopping company 401(k) contributions. Hero Arts, in Richmond, Calif., did so, saving around $10,000 a month -- and everyone's job. Mr. Leventhal says Hero Arts is on track to restore contributions next year. Autodesk Inc., in San Rafael, Calif., faced the same hard choice, but went the other way.

"One of the things employers struggle with," says Autodesk personnel chief Jan Becker, "is you get a whole group of employees who say, 'I'll take cuts rather than have others lose jobs.' But others say: 'I won't work here if it's not nurturing.' You have to balance. You don't want to make this place so draconian that they say, 'I don't want to stay here.' "

Autodesk laid off about 15% of its work force earlier this year, and Ms. Becker says most won't be replaced. Those who remain got no salary increase. Executives had their pay cut 5% to 10%, and directors 2%. The software maker, which is in the business of helping firms be more efficient, is applying the same principle to itself. It eliminated 70 software testers by automating tasks, and created a Web site so people could perform scheduling tasks previously assigned to the training group.

Autodesk also is among employers that have given some workers unpaid furloughs, in its case of three weeks. This strategy has reached into traditionally stable government jobs. More than 20 state governments have required workers to take unpaid time off this year. Going further, 16% of big companies have taken the previously rare step of reducing pay, for at least some, according to the Watson Wyatt survey; 61% have frozen pay. More than half of 638 chief financial officers surveyed by a Duke University professor, John Graham, said they expected their companies to employ fewer people in 2012 than in 2007.

In some cases, employers keep workers, but not on the payroll. Last December, staffing company Spherion Corp. laid off Roberta Marcantonio, a 14-year veteran who sold franchises to local operators. It brought her back as a contractor paid by commission. "We didn't need the fixed costs, because of the recession," says Spherion's chief executive, Roy Krause. "But we needed the skills when she was able to sell something." Ms. Marcantonio, 52, still sometimes works at Spherion's suburban Atlanta offices. She is glad for the work, but losing her six-figure salary hurts. If the economy improves, "I could be back to where I was, maybe in the third year," she says.

She is keeping her health insurance, under a law that lets ex-employees buy the coverage for a time. But she pays the whole $850 monthly premium; Spherion used to pay more than half. Some labor-market watchers think such situations could grow more common as companies tap temporary or contract workers to hold down overhead. Mr. Krause says clients are wary of hiring back permanent workers because they want to keep labor costs flexible.

A sign of that attitude turned up in a Hewitt survey of 1,156 employers. This year, it showed, they set aside 12% of their payroll for "variable pay," such as performance awards, up from 6.4% in 1994. Routine pay increases for salaried employees averaged 1.8%, the least since Hewitt began tracking the data in the 1970s. "The overall trend is 'travel light' by companies, because the new normal is constant change," says Edward Lawler III, a professor at the University of Southern California's Marshall School of Business.

This can mean eliminating programs. The percentage of employers offering health-care benefits is 60% this year, down from 63% in 2008 and 69% in 2000, according to the Kaiser Family Foundation. In a survey by Hewitt last winter, 19% of large employers said they planned to move away from directly sponsoring health-care benefits over the next five years. In the meantime, workers' share of health costs is headed up. For next year, 63% of employers that offer health coverage plan to increase employees' share of the expense, according to a survey of 1,500 employers by another consulting firm, Mercer.

One vehicle is the high-deductible plan. Twelve percent of employers offer such a plan today, up from 4% in 2005, the Kaiser Family Foundation says. Centerstate Banks Inc. in Davenport, Fla., began offering one last year. Employees pay the first $3,000 of medical expenses for family coverage and $400 mont hly premiums for coverage above that. To encourage switching to this from a costlier traditional plan, the bank covered $1,000 of the employees' $3,000 deductible last year and this year. It says that more than 75% of employees switched, and that its health-insurance expense fell 27% in the second quarter from a year earlier.

Switching to the high-deductible plan changed how workers approach health care, says the bank's chief financial officer, James Antal. "If Suzie has a cold, you don't run to the doctor all the time thinking it's free, because it's not," he says. The recession also has led some firms to reverse past moves to sweeten their 401(k) plans. Employees have long been paying a rising share of the cost of their future retirement, as traditional pension plans dwindle. In 1980, employees contributed about 11% of the cost, according to the Labor Department. By 2006, their share was 48%. Just 20% of workers now are covered by traditional pensions, the department says.

One effect of the trend is to heighten uncertainty, because employers can readily suspend their contributions to 401(k) plans. This year, hundreds did, including some nonprofits. They include AARP, the advocacy group for people over 50. A spokesman for AARP said it hasn't decided when it might resume matching contributions. Some employers that suspended contributions had previously enhanced them, when closing or freezing pension plans. Unisys Corp. froze pension benefits in 2006, and raised its maximum contribution to 401(k) accounts to 6% of workers' pay from 2%. Last December, the computer maker said it wouldn't match any employee contributions in 2009, to save costs. A spokesman said Unisys hasn't decided whether or when to restore contributions.

Phil Erickson, a longtime employee, says he and colleagues understand Unisys needed to reduce costs in tough times. In his mind, the cuts underscore how the workplace is changing. "When I started, the idea was you went into a company [and] lifetime employment was the norm. You expected to rely on a company pension plan when you're done and be pretty well taken care of," says Mr. Erickson, a consulting software engineer who is 53. Mr. Erickson recently became a certified financial planner, and now he is taking evening classes toward an M.B.A. Now, he says, "You've got to look out for yourself, take care of yourself."

New York Delays $959 Million Payment to Pension Fund
New York state, facing a $3.1 billion deficit and a cash squeeze, deferred a September payment to its $116.5 billion pension fund, forfeiting more than it would have cost to borrow the needed funds, Bloomberg data show. By delaying the $959.1 million payment, which isn’t legally required until March 1, the state sacrificed an 8 percent annualized discount equal to $6.1 million a month, said Matt Anderson, a spokesman for the Division of the Budget. "We have been paying in September for at least the past four years and received a discount for the early payments," Anderson said. The installment will be paid before March, he said.

While New York is capable of selling short-term notes for less than the cost of the 8 percent discount, "we want to instead work together with the Legislature and enact a responsible deficit reduction plan that does not require state borrowing," Anderson said in an interview today. The delayed payment causes no harm to the pension fund that covers 1.05 million workers and retirees, "though it isn’t the sort of thing you want to see year after year," said Comptroller Thomas DiNapoli, the plan’s sole trustee. The fund has assets equal to 100 percent of its liabilities, as calculated by actuaries, he said.

New York, the third-largest U.S. state by population, has a AA rating from Standard & Poor’s for bonds backed by its general obligation pledge. States with lower debt ratings have covered cash shortages by borrowing at costs of less than 2 percent. Illinois, whose bond rating of AA- by S&P is one level below New York’s and three from the highest, borrowed $1.25 billion in August, at costs ranging from 0.77 percent for a seven-month issue to 1.14 percent for notes due in 10 months. California sold $5.98 billion of nine-month notes Sept. 21 that yielded 1.5 percent, even after its bond ranking was cut to A, the lowest of any state. Illinois and California notes are rated SP-1, the second highest level.

With falling tax revenue squeezing budgets and creating cash shortages in states across the U.S., short-term note sales totaled $61.1 billion this year, up 26 percent from the same period a year ago, according to Bloomberg data. New York isn’t planning any note sale or bank borrowing, Budget Director Robert Megna said Oct. 15. The state weaned itself from annual note sales in 1995 by issuing $4.7 billion of long-term bonds to pay for accumulated deficits of previous years, according to reports by the Local Government Assistance Corp. and rating companies.

The state has the power to sell short-term notes to cover its cash needs, Lieutenant Governor Richard Ravitch said Oct. 21. Such temporary borrowing would be different from selling bonds to finance budget deficits, a practice he said allowed the state to maintain high spending and contributed to the current budget squeeze. Benjamin Asher, senior managing director of New York-based Public Resources Advisory Group, the state’s financial adviser, didn’t return voice mail and e-mail messages requesting comment. The $3.1 billion deficit for the fiscal year ending March 31 is based on Budget Division projections that will be updated at the end of this month, Anderson said. DiNapoli said Oct. 14 that the gap may be $4.1 billion, based on trends in tax collections and spending.

"This budget has simply not held together," DiNapoli said in a statement accompanying his office’s September cash report. Spending promises made in April, when lawmakers passed a record $133.5 billion spending plan, "are not sustainable in the face of falling revenue," he said. New York was hard-hit by the credit crunch and firings on Wall Street, where banks and securities firms reported losses of $42.6 billion in 2008 and year-end employee bonuses fell 44 percent, according a January report by DiNapoli’s office. By December, the state’s cash balance could be "a little over $2 billion," Paterson said, or less than the $5.1 billion of payments due that month for property tax rebates and aid to school districts, counties and cities.

To close the budget deficit for the current fiscal year, Paterson proposed a plan last week for $1.8 billion of spending cuts and $1.2 billion in actions that would produce revenue this year, though not in later years. The plan would require $2 billion of spending cuts next year. New York’s budget, updated in July, called for $133.5 billion of spending, including federal aid, up 9.8 percent from a year earlier. Spending of state-only funds was projected at $86 billion, up 3.4 percent. "If no corrective action is taken, we will have to begin to make difficult choices about which payments to delay," Megna said in a statement Oct. 21. Anderson said the state wouldn’t default on its debt.

Pension Funds to Buy Gold as Insurance
Pension funds will increase gold holdings to acquire "financial insurance," pushing prices higher as currencies drop, according to Shayne McGuire, director of global research at the Teacher Retirement System of Texas. "I think the largest institutions like our own are realizing that we barely own any," McGuire said in an interview in Hong Kong. "The same thing applies to most of the pension funds which manage trillions of dollars in world wealth."

Record government debt and interest rates close to zero percent are pushing gold higher for a ninth straight year as investors seek to protect their wealth against the prospect of rising inflation and currency debasement. Teacher Retirement, backed by $95 billion in assets, has launched its first internally managed gold fund, worth $250 million, invested in precious metals, mining stocks and exchange-traded funds. McGuire is the portfolio manager of this new fund.

The fund is "a reflection of our interest in gold," said McGuire, the author of "Buy Gold Now" published in March 2008 that correctly predicted the metal will rally. "That’s mostly because of diversification" that benefits our overall portfolio. Gold represents only 0.4 percent of total global financial assets valued at around $200 trillion in 2007, McGuire said, adding the future focus for the metal was investment demand. "The interest in the gold sector continues to be strong," said Stephen Goodman, investment banker with New York-based Casimir Capital L.P. "We are pleased to connect a growing number of institutional investors globally with opportunities."

Gold for immediate delivery climbed to a record $1,070.80 an ounce on Oct. 14 and traded at $1,059.25 at 4:42 p.m. in Singapore. It has risen 47 percent in the past year. Gold for December delivery in New York traded at $1,059.70. McGuire said it’s "difficult to estimate how quickly it will rise," and saw "significant upside" in the next two to three years. The U.S. Dollar Index, which measures the currency against those of six major trading partners, has fallen 7.5 percent this year as President Barack Obama increased the nation’s marketable debt 22 percent to $7.01 trillion to revive growth.

Financial institutions worldwide have reported credit losses and writedowns of about $1.62 trillion since the start of 2007, when the credit crisis began. Group of 20 governments have pledged about $11.9 trillion to ease credit and revive economic growth, according to the International Monetary Fund.

"I don’t think the question really is what is gold worth but what are currencies not worth," McGuire, 43, said yesterday. "Consider the tremendous fiscal excess that major governments have made to prevent the world economy from collapsing," he said. Owning gold today is "financial insurance," he said. McGuire, with 15 years of international financial experience, has worked for the seventh-largest pension fund in the U.S. since 2001. He had managed a $2 billion European equity portfolio and was ranked among the best Latin American analysts by Institutional Investor in 1995 and 1996, he said. Teacher Retirement has nearly 1.3 million public education and higher education employees and retirees participating in the system, according to its Web site.

Call to end middle class benefits
Benefits for the middle classes should be taken away to avoid higher taxes, a centre-right think tank has suggested. Reform says payments including maternity pay, child benefit, the winter fuel allowance and TV licences for the elderly could be scrapped. It says the UK spends £31bn a year on such benefits, equivalent to an extra 8 pence on the basic rate of income tax.

In a report, it also argues that flexible savings accounts should be set up to replace pension contributions. Chancellor Alistair Darling has predicted that public borrowing will reach a record £175bn next year. Reform says while times are hard, the leanest welfare system focused on the most needy, is all the UK can afford. It defines middle class as a household where the total income equates to at least £15,000 a year for each adult and £5,000 per child. The message is provocative and reignites the long running debate about the scope of the state, says BBC social affairs correspondent Sue Littlemore.

In its report, The end of entitlement, Reform suggests the "middle classes are being bribed with their own tax money". It says there is a political consensus for limited aspects of welfare reform but to deliver real benefits the UK needs a radical plan. Reform says recent proposals by the Conservatives did "not go far enough" as they promised to keep many middle class benefits in place. In his conference speech, shadow chancellor George Osborne was wrong to pledge to keep winter fuel payments, free TV licences for the over-75s and child benefit for middle class families, it says.

Reform argues his plan to means test child trust funds and abolish tax credits for people on an annual income of more than £50,000 would only save £700m a year. At the same time, the welfare system also has to improve for the poorest, the report says. Reform says rules on social enterprises and other organisations providing welfare-to-work services are too tight for them to make a real difference to the unemployed.

Director of Reform Andrew Haldenby said: "The middle classes need to read the small print of the welfare state." "They may think that benefits and subsidised higher education are a good deal. In fact they will cost an extra 8p on the basic rate of income tax in the next Parliament because of the hole in the public finances."

Kuwaiti Politicians Feud Over $21 Billion Consumer Debt Bailout
Lawmakers in Kuwait, which is richer per capita than Germany, are demanding a government bailout of all consumer loans, threatening to reignite a power struggle that’s already shut down the assembly twice in 18 months. At least half of the 50 elected lawmakers say they’ll back a plan for the government to buy all 6 billion dinars ($21 billion) of bank loans taken by Kuwaiti citizens to pay for homes, cars, holidays and other purchases, write off interest payments and reschedule the rest. The government opposes the bailout. Parliament convenes next week after a four-month break.

"It’s my right as a citizen to enjoy the wealth and resources of my country," said Essa al-Malki, a 32-year-old teacher of philosophy and psychology, who took out a 15-year 23,000 dinar loan in 2000 and supports the plan. The row dominated the local media during parliament’s recess, signaling a fresh dispute between Kuwait’s government, appointed by the emir, and elected lawmakers who are seeking broader powers and have blocked key investment programs in the past. Emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah last dissolved parliament in March saying relations with the legislature were "ruined."

Kuwaitis stepped up borrowing as a decade-long oil boom through 2008 fuelled growth. The emirate’s economic output per capita was about $46,000 in 2008, more than Germany or the U.K., according to International Monetary Fund data. Kuwait has a restrictive citizenship regime, with one-third of its 3.4 million residents holding citizenship. The bailout plan will only apply to Kuwaiti citizens. Repayment problems escalated in 2006 as the central bank raised interest rates as high as 6.25 percent to curb inflation. Legislators have criticized the government and central bank for failing to regulate lending properly.

"I will not hesitate to use any constitutional tool to pass a bill for purchasing and rescheduling citizens’ consumer loans," lawmaker Daifallah Bu Ramiah said in a phone interview. Bu Ramiah said at least 100,000 Kuwaiti borrowers face legal charges after falling behind on debt repayments. The government says that’s exaggerated. A total of 278,000 Kuwaitis held consumer loans at the end of last year, according to Kuwait-based Al-Shall Economic Consultants. There’s no official data on defaults. It’s "not very sensible" for the state to shoulder all the debt burden, Finance Minister Mustafa al-Shimali told state news agency KUNA on Oct. 10. He said the government may instead expand a 500 million dinar "defaulters fund" already set up to help Kuwaitis unable to repay loans.

That’s the solution favored by banks, said Abdul Majeed al- Shatti, chairman of the Kuwait Banking Association, and also of the country’s second-biggest publicly traded lender, Commercial Bank of Kuwait SAK. While government purchase of the loans would bring some benefits for banks it would also create "moral hazard," al- Shatti said in a phone interview. "It’ll affect the role of the private sector in the economy because you’re distorting market conditions." He declined to discuss his own bank’s loans. The plan could also create "a dangerous precedent with regional reverberation," as other Gulf countries face rising defaults, said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh.

Provisions for bad loans in the United Arab Emirates, the Arab world’s second-biggest economy, jumped 44 percent in August from a year earlier to $7.2 billion. Banks in Bahrain, where two Saudi-owned lenders were taken over by authorities this year after defaulting, face a rise in non-performing loans, Moody’s Investors Service said Aug. 17. Kuwaiti lawmakers who support the bailout point to the government’s willingness to spend money abroad, such as a proposed $25 billion investment in Iraq to solve a dispute over war damages. Kuwait is owed the money by Iraq, which invaded in 1990, and may invest it back into that country.

"The government does nothing better than offering large financial aid to other countries, yet strictly refuses to purchase and reschedule loans of its citizens," lawmaker Musallam al-Barrack said. Many bailout supporters come from tribal areas where living standards are lower than in the city, and have been pushing for more handouts and subsidies on top of a program of government jobs and welfare. Kuwait’s government can veto legislation passed by the parliament. The assembly can override that with a majority of two-thirds in a vote that includes the government’s 16 ministers.

Investments blocked by government-parliament standoffs include Project Kuwait, a plan to bring international oil companies to develop fields in the country’s north. Lawmakers also opposed a joint venture with Midland, Michigan-based Dow Chemical Co., scrapped last December, and a planned fourth oil refinery that was put on hold in March. Kuwait is the sixth-biggest OPEC producer. Its benchmark stock index slumped 30 percent in the past year. Failure to resolve the loans dispute will delay needed investments and exacerbate social tensions, said Hajjaj Bu Khudour, an independent Kuwaiti economist. "If we leave it, it will continue to cause disagreement and government resignations and dissolutions of parliament," he said. "The cost of that to Kuwait’s development could be billions."

Irish Bar Values Plunge 40% as Pub Culture Mirrors Economy Bust
Dublin’s Thomas Read Group grew into a chain of more than 20 pubs as Ireland’s economy boomed in the mid 1990s. After real estate prices collapsed and drinkers stayed at home, the bars are being sold off.

A receiver, who has the power to sell assets to recover debt, is seeking buyers for nine of the city’s most fashionable hostelries. The bars on the block include Ron Black’s, home to the Champagne Bar during the boom, and the Harbourmaster in Dublin’s financial district, minutes walk from Citigroup Inc. and JPMorgan Chase & Co. offices.

"The sale of the Thomas Read pubs will be an acid test for the market," said John Ryan, director of hotels and licensed premises sales at CB Richard Ellis Group Inc. in Dublin. In a country famed for its pub culture, the industry is mirroring the rise and fall of Irish fortunes. Pubs surged in value as Ireland transformed into one of Europe’s richest countries from among its poorest, with developers snapping up buildings to refurbish and cater to free- spending Irish drinkers or convert into apartments.

Property brokers now estimate prices for pubs have sunk as much as 40 percent as Ireland suffered the worst collapse in its modern history. The benchmark ISEQ stock index has lost 48 percent over the past 18 months, with pub supplier C&C Group Plc, the maker of Magners cider, dropping 37 percent. "At the height of the Celtic Tiger, it was a different process entirely -- there would be full auction rooms with any sort of a decent pub," said Aidan Heffernan, an auctioneer at Dublin-based Sherry Fitzgerald Group. "The day is fast coming to an end when we would have 15 or 16 pubs in a town."

Heffernan last month sold the Royal Denn pub in Athboy, a medieval town 40 miles (64 kilometers) northwest of Dublin, for 470,000 euros ($702,000). Six years ago, the owners rejected a 750,000-euro offer as too low, he said. The sale of the Thomas Read pubs and one restaurant will be a better gauge of the collapse of the market, said Ryan. Only one Dublin bar so far was sold publicly this year, he said. Six changed hands last year, less than 1 percent of the total number of pubs, dropping from 4.8 percent in 2006 when more people wanted to get into the trade, according to Morrissey’s, the auctioneer handling the sale of Thomas Read. Bill Morrissey, who is overseeing the sale, told broadcaster RTE that he received more than 30 "solid" expressions of interest.

Thomas Read, which started life as one pub in 1991, sought protection from creditors in November last year. It controlled 13 bars and restaurants in Dublin and another eight bars at the city’s airport, the company said. After it failed to find an investor, a receiver was appointed in March on behalf of ACC Bank, the Irish unit of Dutch lender Rabobank NV, according to documents lodged at the Companies Registration Office in Dublin. The documents don’t say how much ACC is owed. The problems for bars are not confined to Ireland. London- based Regent Inns Plc, the owner of the Walkabout pub chain, was put into administration on Oct. 20.

In Ireland, sales are tumbling as unemployment edges beyond 12 percent and taxes rise. That’s amplifying a trend toward drinking at home, started by a 2004 ban on smoking in public places. Bar takings fell 13 percent in August from a year before, according to Ireland’s statistics office. "The bar trade here is incredibly challenging," said Andrew Richards, head of the Irish unit of Britvic Plc, which sells fruit juices and sodas to pubs. "People are much more mindful of their spending than in the past."

At least 4,800 pub jobs were cut in the past year, the Vintners Federation of Ireland said in an August report. Demand for bars as sites for homes is also evaporating. In 2006, a developer paid about 12 million euros for a north Dublin bar to turn into apartments overlooking Dublin Bay. The site is still idle awaiting work to start. Three years on, home prices are down 25 percent and the government is creating an asset management agency to purge lenders of souring property. That’s leaving realtors looking for any signs of life in the market. "If they sell and make satisfactory prices, it will be a big boost," Ryan said of the Thomas Read sale. "The boy meet girl thing is always there, and Irish people like to go out."

Does banking contribute to the good of society?
The whole of economic life is a mixture of creative and distributive activities. Some of what we "earn" derives from what is created out of nothing and adds to the total available for all to enjoy; but some of it merely takes what would otherwise be available to others and therefore comes at their expense. Successful societies maximise the creative and minimise the distributive. Societies where everyone can only achieve gains at the expense of others are by definition impoverished. They are also usually intensely violent.

This distinction between creative and distributive activities applies in today's society. Consider the doctor tending to a patient or the midwife helping to deliver a baby. Everything they do is creative rather than distributive. Interestingly, the same is not true of teachers. They are further along the spectrum toward distributive gains. Some of what they do is about advancing the interests and life chances of their charges against those of other teachers.

Or consider the marketing executive for a washing powder manufacturer. Her job is pretty much purely distributive. It is to do her best to ensure that her company sells more washing powder than its rivals. If she succeeds, the rewards will be greater for her and her company. But her success will be mirrored by other companies doing badly. Her contribution is purely distributive. Most jobs are a mixture of the creative and distributive. And society needs a mixture. But do the financial markets do too much of the distributive?

A leading British journalist recently decried the widespread condemnation of bankers' and hedge fund executives' high remuneration on the grounds that these people, it said, were "the wealth creators". The article argued that we should be praising, and even aping, such people rather than criticising them, and thereby concentrating on the distribution rather than the creation of wealth. This completely misses the point. We shouldn't be mesmerised by the millions of pounds squirreled into some private corner or other. The question is, what has the process that generated this money contributed to the common weal?

Much of what goes on in financial markets belongs right at the purely distributive end. The gains to one party reflect the losses to another, and the vast fees and charges racked up in the process end up being paid by Joe Public, since even if he is not directly involved in the deals, he is indirectly through the costs and charges that he pays for goods and services.

Even what the great investors do belongs at the distributive end of the spectrum. The genius of the great speculative investors is to see what others do not, or to see it earlier. That's all. This is a skill; of that I have no doubt. But so also is the ability to stand on tip-toe, balancing on one leg, while holding a pot of Earl Grey tea above your head, and pouring the contents into a cup on the ground, without spillage. I am not convinced, though, of the social worth of such a skill, still less of the wisdom of encouraging society's brightest and the best to try to perfect it.

This distinction between creative and distributive goes some way to explaining why the financial sector has become so large in relation to GDP – and why those working in it get paid so much. Even when a certain sort of financial activity is purely distributive, the returns to the winning parties are so enormous that the activity is immensely seductive – and the professionals who appear to be responsible for securing these gains are highly sought after and highly rewarded.

Meanwhile, the professionals who are "responsible" for the corresponding losses do not suffer commensurately. The worst they can suffer is not to be paid at all, which would scarcely offset the winners' rewards. In practice, even those working for "the losers" usually get a fair bit more than nothing. And we need to consider the identity of the investors who are making a lower return to make it possible for hedge funds and their like to make a higher return. They are the investors in slow-moving and restricted institutions such as pension funds and insurance companies, or central banks whose market activities are dictated by some objective of public policy, rather than private gain.

Yet there are reasons why we should want such institutions to be this way. Pensioners do not want their pension funds to be run like hedge funds – or their insurance companies, or their central banks. So we have allowed, and even encouraged, a system to develop in which clever people make huge amounts of money out of institutions that, for reasons of public policy, we constrain in a way that allows scope for such profits to be made. Is that clever or what?

Perhaps the greatest problems are caused by the interaction between financial markets and the real economy. There, time horizons are longer, price adjustments are more sluggish, and motivations less single-mindedly selfish. And so much the better – for them and for us. But how are they able to withstand the onrush of supercharged greed that floods out at them from the financial markets? If we think that it is right and proper – and economically advantageous – that some parts of the economic system should not be organised like investment banks, then we should make sure that they are protected from those parts of the system that are organised like investment banks.

Farmers sell wives to pay debts in rural India
The cattle slowly drag the old-fashioned plow as a bone-thin farmer walks behind, encouraging them to move faster with a series of yelps. It is a scene from times of old, but still the way many farmers operate in rural India, where the harvest often determines feast or famine. The region is called Bundelkhand, spanning the two northern Indian states of Uttar Pradesh and Madhya Pradesh. It is here that drought, debt and desperation have pushed people to extremes.

To survive the bad years, some farmers say they turn to the "Paisawalla" -- Hindi for the rich man who lends money. Farmers say the loans from these unofficial lenders usually come with very high interest. When the interest mounts up, lenders demand payment. Some farmers work as bonded laborers for a lifetime to pay off their debts. Others here say because of years of little rain and bad harvests they are forced to give money lenders whatever they ask for. Sometimes that includes their wives.

"It happens sometimes when somebody borrows money," says a farmer's wife who did not want to be identified. She should know, considering what police say she told them. She said a rich man bought her from her husband. "He did buy me," she says. "That's why he told me he bought me." For 30 days she says the man forced her to live with him. When her case drew public attention, she retracted her police report and her husband took her back. Ranjana Kumari with India's Center for Social Research says the exploitation of women is common in the region. And, she says, there is little support for women in India who have the courage to file a case with authorities.

"Nobody's going to support or help them," Kumari says. "If a family decides not to help them, the system is already not so sensitized towards them, whether it is police, judiciary, whether the legal system. So the women themselves tend to withdraw these cases." In another village, another story involving another farmer, and money lender. "I sold my water engine and land and gave back his 30,000 rupees," the farmer says, describing his $600 loan payment. The farmer, whom CNN is not identifying to protect his wife and children, says the lender then asked him to send his wife to help with chores while the lender's wife was sick. The farmer says he complied, and his children -- including his daughter -- went too.

But the mother never returned. The farmer says he believes she was stolen from him. The daughter says the lender sold her mother to another man. State authorities say they have investigated the matter and found that the mother denies she was sold and has simply gone to live with a lover. The daughter says that's not true, and claims that she and her father were told to keep quiet by some of the village leaders. During CNN's interview with the family, officials with the state magistrate's office barged into the farmer's home and began videotaping. An Indian government report completed in 1998 says the region is prone to what it calls "atrocities," including the buying and selling of women. However no one can say just how common these kinds of incidents are.

Social workers say this isn't just about poverty, but also an indication of the low social status of women in poverty-stricken areas such as Bundelkhand. "Those women are very vulnerable to all kinds of physical and sexual exploitation." Kumari says. "Also there is much higher level of violence against women in that area." The government and charities have been trying to help but the status of women and girls, often illiterate and seen as a financial burden, remains low. Nevertheless, attitudes are slowly beginning to change, Kumari says. A farmer's wife in yet another village in the region said she was sold by her own parents 14 years ago.

"My mother and father got 10,000 rupees (about $200)," she says. "That's why they sold me." She says she was 12 years old at the time her husband bought her. She never considered going to authorities because she says she had no where else to go. She accepted it as her destiny. But now she has a daughter of her own and her perspective has changed. Would she allow her daughter to be sold? She looked up and shook her head firmly. "No," she said, "I would not want this for her. Let her marry however she wants."


message_in_a_bottle said...

Whereas the decline of house prices is the root of the evil
therefore pumping up house prices seems to be a solution to the problem.

A debtors revolt must be averted.
Imagine what happens if significant numbers default on loans so that the stigma of default loses its sting:

There could be merry defaults on completely unsecured credit card loans.
There could be happy defaults on mortgages with extended rent free living.

The fear of the stigma is the last bit of glue that binds the dam that holds back the flood.

Frank said...

@GPP I'm with Mish on this. When Goldman and Morgan Stanley file annual reports based on buying back their notes at cents on the dollar, what plausible morality says that individuals should not do the same.

perry said...

On Housing:

I know a guy that recently bought a 5 acre place in a small town in the Mid-west with two houses, garage, city water, private working water well, septic system, electricity, fenced and cross-fenced, fertile garden spot and pasture, several out-buildings, fruit trees, fruit bushes and grapes, etc. for less than $10,000.

Numerous other places like this are available for those who look.


Wolf at the Door said...

It always makes you feel all nice and warm inside when you realize that your very own government is openly conspiring against you.

In a hundred little ways every day we are constantly being driven against the rocks of debt slavery....for some reason.

Real patriots say screw em....don't play the game as defined by the cheaters. Play your own game.

pdh1953 said...

Perry -- can you be more specific about location

Starcade said...

Frankly, gpp: I think default has already lost most of it's sting unless debtors' prisons and slavery are (re)started. I mean, isn't what Shittybank has done this week amounted to a global declaration that EVERYONE is being considered in material default now?

And consider: If consumer spending is 70% of GDP/GNP, then how much of an immediate haircut in GDP/GNP are we heading for?

Frank said...

@Perry, can you tell me the state and county? I love New England, but for that kind of price, I'll sell out and come home. (Michigan boy)


perry said...

Minnesota, Iowa, North Dakota, South Dakota, Wyoming, Nebraska, Kansas...


el gallinazo said...

I am in love - with a small valley in South central Costa Rica. It has all the Stoneleigh / Orlov prerequisites for a life boat; very strong community (with surprising acceptance of contributing Gringos to the community), almost no crime, tolerant, happy people, self-sufficient agriculture with wonderful food, great coffee and decent beer, national cheap hydro electric with a powerful white water stream that could produce huge amounts of private electric power, climate that needs no energy input of heating or cooling year round to be comfortable, good security, and last but not least, my compadres seem to be circling overhead constantly with a watchful eye.

Land prices are still high from all the hippy dippies coming in with lots of dollars, but that should change in the near future, and rents can be very moderate. My spot is at 4400 feet elevation, with a high mountain towering over it, and can be almost chilly at times in a rain. After sweating my butt off in the Caribbean for over a decade, having to occasionally wear a light sweater would be a pleasure. I hope eventually to have a pet sloth, which is referred to as a perezoso (which means a lazy), and when I finally buy, my dwelling will probably be named Hacienda Perezosa.

This is admittedly an initial observation, but I intend to rent there shortly to check into it further.

I am now traveling near the capital, San Jose, and without going into details, I find it and the surrounding area totally unsatisfactory. My positive comment is not meant to reflect on Costa Rica in general, but rather a small, semi-isolated valley. I find most of the country much too expensive for a retiree compared to other Latin American countries, and theft and burglary around San Jose is out of control. OTOH, there appears to be a decided lack of poverty in this country compared to Peru or the United Snakes.

Bukko Boomeranger said...

One of the many fascinating things about living in a different country from the one you grew up in is to see how certain things that you just took for granted, really aren't.

For instance, I had always assumed that EVERY country must allow homedebtors to write off on their income taxes the amount of mortgage interest they paid. It's a noble goal of social policy, right? Helps ensure that people become home "owners," and a homeowner is more of a solid citizen than some shifty renter, eh?

When I rocked up here, I was surprised to see that Australia does not have this as part of the tax code. No mortgage interest write-off.

Instead, you can write off your "negative gearing" if you're a "property investor" (i.e. "landlord.") If you buy a house or flat and your mortgage/interest payment is $3,000 a month, but you're only collecting $2,500 a month, your "negative gearing" is $500 a month. And you get a tax break for that.

The system is designed to make people into petty bourgeois rent-collectors rather than "owners." (I put 'air quotes' around "owners" because we're all basically renting from the bank, not "owning.")

I don't know what Australia's social policy goal is for that. To encourage people to "invest" in houses, and give them the class outlook of a landlord, not an individual? It might have the result of keeping rental prices lower, since "owners" won't feel the need to grub the maximum profitable rent from each tenant. It probably helps large corporate landlords.

Anyway, seeing how it's done here also allowed me to see how America's mortgage interest subsidy is a favour to banks. People don't object so much to the vigorish they have to pay to the banks because they can write if off, so it feels like free to them.

Anyway, the Aussie real estate bubble has re-emerged in full puff. The RE section in the Saturday paper is always crowing about the great "clearance rate" on home auctions here. (In my state, about half the houses are sold by public auction on the footpath, after an advertising campaign, of course. It's part of that Aussie love of a good gambling spectacle...) More than 80% of the auctioned places are being sold these days, vs. 60% in the down days a year ago. Average prices are going up, Up, UP! too.

It doesn't seem as frothy here as what I've read about Canada, but the madness is back. (Helped by a $15,000 government grant -- which Aussie economist Steve Keen calls a 'first-time home vendor's' grant, not 'first-time buyers,' -- and temporarily low interest rates.) I've expressed scepticism about how it's another bubble, but people consider me a Donnie Downer.

Compound F said...

this blog is riveting.

Being jobless for quite some time now, I still did make a very modest donation. nonetheless, as requested. Like I said, "Riveting," indispensable. Educational!

So, thanks. Please keep up the fascinating work.

snuffy said...

The more I watch the game,the more convinced I am we are in the terminal spiral now.

I discovered today that some medication I take was subject to a lawsuit.The result is a 1800% increase in what I will have to pay AFTER insurance.WTF?!!!I have suddenly discovered that the "true"price of 1 of the meds I have taken for more than 6 years is nearly 400 a month.A month.

If this level of rape continues in medicine soon I will spend one paycheck for the mortgage,and the other for medicine.Sweet mother of christ,I ask why are the big pharma folks doing this?...and the answer is....because they can.I have just become one of the "radicalized ones" about health care.I am pissed-off beyond words.

Old bird,I am happy you have found a new spot for your perch.Sounds like a good place to rest...

It should accelerate now.All the folks are looking at the home sales,and market spin and BS and thinking "may be I can lighten up a bit".


If I am right ,you will see triggers of several sorts begin to hit the news in the next 2-6 weeks.They will start to beat the war drum soon,and prep the public for the new revelations that Iran is the biggest threat to the USA EVER...and we must act....they are supporting the rebels in Afghanistan,ans Iraq....and MEXICO!!!!! we must attack!!!!

To cover up thew complete and utter collapse of the stock market..and futures...and every equity you ever heard of...

Yes I made the prediction...
Yes,I hope desperately to be
totally wrong...


Josh said...

Cash vs. T-Bills?

Ilargi and Stoneleigh and other web page contributors, I'm looking for recommendations for where to stash my treasure.

My situation:
Wife and I are employed (no kids)
Her income = 90,000
My income = 50,000
Her job is stable, mine is not.
Savings = 260,000
Debt = none
98% of savings invested in 1 month and 3 month T-Bills

Question: Assuming safe places can be found to store physical cash, how much should I hold given the various pros and cons to holding physical cash?

Pros to physical cash: If banks close their doors, I've still got purchasing power (something that I may lose even with my T-Bills when the banks close their doors).

Cons to physical cash: Theft and the risk the government will reissue a new currency and make converting the old one very difficult and costly.

: Joseph j7uy5 said...

I've often thought that the mortgage interest tax deduction was nuts. It might make sense if there were some progressive aspect, that is, if it were to become a smaller percentage as the home price went up. For homes over, say, $250,000, the deduction would disappear entirely. And no deduction at all for anything other than a first mortgage.

This still would have a function of subsidizing the industry, but it would tend to keep prices escalating as badly, and discourage the home ATM phenomenon.

A simpler means to the same end would be to limit the size of the deduction that could be taken each year, and keep the limit roughly commensurate with the mortgage interest for a home at the median price.

Of course, for that to have had an effect, it would have had to have been instituted at least ten years ago. And if it were instituted suddenly, now, a lot more people would face foreclosure sooner, unless they were grandfathered in.

If it applied only to new mortgages, it would cause a temporary rush as people tried to sign the mortgages before the law took effect. But the rush would be in the more modestly priced homes, so the short-term effect would not be as the recent tax credit was.

At this point, though, there likely isn't any cute tweak to the tax code that is going to make any difference. That opportunity is gone.

Nelson said...

Interesting that you should mention Canada, since they've never offered a mortgage interest deduction.

Tristram said...

The line that caught my eye was from the Gillian Tett article:

"In the meantime, it is crystal clear that the longer that money remains ultra cheap, the more traders will have an incentive to gamble (particularly if they privately suspect that today’s boom will be short-lived and want to score big over the next year)."

In other words, the cheap money boom has a year to run. Juicing and extension of the US home purchase tax credit points the same way. Remember that next year is an election year, and the Dems don't want the economy collapsing as they defend their majorities. All stops will be pulled to pour government money in to the economy for the next 12 months.

So what if it's bad policy and will fail in the end. Politics is all about postponing the end. So what if the house purchase subsidy benefits sellers (and their lenders) not buyers. House sellers also vote, as do their neighbors who watch nearby sales to judge their own positions. House owners and sellers tend to be richer and to vote at higher rates than renters or first-time buyers, so it's no surprise that government policy caters to the former group at the expense of the latter.

Soon it will be time to start asking: if the collapse is going to happen much later than the TAE community has assumed, and in different circumstances than envisioned, will it still take the same form that was envisioned?

Erin Winthrope said...

@ Mugabe

IMO, you might be right.

As you know, I&S disagree with you and argue the herd is poised to swing from optimism back to pessimism and fear. Risk assets (stocks, commodities, and real estate) will fall in value while safety assets (sovereign debt) will rise in value.

Who's correct? The next 2 months will tell us a great deal.

If the stock and commodity markets continue to levitate due to growing government giveaways and Fed asset buying, then at some point in the next 6 months or so, interest rates will creep higher. Increasing interest rates will mark the beginning of the end, because servicing $50 trillion in debt in an environment with rising interest rates will become untenable (this dilemma is true all over the world). The government will be forced to reign-in the stimulus, raise taxes, and cut spending. The implosion will commence, but it will be about 6 months to 1 year after I&S predicted.

Both scenarios clearly end badly, but the distinctions between the two scenarios have implications for those TAE readers who, like me, decided to gamble this fall.

I've got money sitting in 30yr Treasury bonds betting that yields will fall in the 1st phase of the equity collapse (The Hugh Hendry Strategy). I certainly don't plan to hold these bonds for the duration (very few of us will still be here in 30 years). I plan to flip them as soon as I can make a decent capital gain. If you are correct, I'm never going to make any money with my strategy. I started buying bonds in August when yields were 4.54%, so I'm ahead by a little right now (up about 4%). If you're right, I should cash-out right now and be happy with what I've got. If I&S are right, I stand to make considerably more in the weeks ahead.

I'm also sitting underwater in shares of SH bought mostly in late August through late September (Avg share price = $58). If your scenario is correct, I'm going to get scalped on this trade. If I&S are right, I stand to reasonable chance of cashing out with a small gain before shorting is made completely illegal.

Erin Winthrope said...


I've been loosely tracking what appears to be a downward social/economic spiral in Mexico. How much of the drug violence we see in the news is a product of a central state that has been weakened by collapsing oil revenue (along with other smaller components of foreign trade)? I recently looked at output from the Cantarell Oil field and it's collapsing at a truly astounding rate. I know this is not news to the regular Peak Oil readers, but I didn't realize that Cantarell had fallen from 2.1 mb/d to 0.8 mb/d. Recent annual decline rates have reached almost 40%. As we slip further into depression and deflation, this loss in oil production combined with the drop in oil prices is going to decimate Mexico's finances. I can't imagine the chaos that will ensue given that the nation already seems to be gradually fragmenting into druglord (i.e. warlord) fiefdoms.

message_in_a_bottle said...

As to the timing of a possible crash:

A theme developed by Daniel Arnold
is the following:

the strength of the economy is closely positively correlated with the size of the "spending age cohort" (age 40-45). The

correlation has been established over a period of 100 years.

The size of this age group is known decades in advance. It will begin to decline in the US in 2012.
Arnold derives from this a conviction that a severe economic contraction is about to take place soon thereafter.

Until 2012 the increasing size of this cohort will be a force pumping up the market. In addition to this the Fed and

Congress are working to postpone days of reckoning. Firms have also been able to extend maturities

a little by accepting less favorable terms ("amend and extend"):

This happy marriage of will and circumstance will probably be

effective in the short term.

Beginning in 2012 the demographics will start working against the market.
Waves of mortgage rate resets coming in 2011, 2012:

Credit card defaults and commercial real estate seem to be a growing problem.
There seems to be a rising tide of evil arraigned against feverish short term activity playing for time.

For me this marks late 2012 as a time where a secular market peak could be reached.

The size of this age group is known decades in advance. It will begin to decline in the US in 2012.
Arnold derives from this a conviction that a severe economic contraction is about to take place soon thereafter.

Until 2012 the increasing size of this cohort will be a force pumping up the market. In addition to this the Fed and Congress are working to postpone days of reckoning. This happy marriage of will and circumstance will pobably be effective in the short term.

Beginning in 2012 the demographics will start working against the market. Firms have also been able to extend maturities a little

Bukko Boomeranger said...

Interesting that you should mention Canada, since they've never offered a mortgage interest deduction.

I hope it didn't appear as though I was talking about Canada, except in context of what I've read recently -- thanks, commenters who insert links here! -- about that country's housing bubble. They seem to be blowing a good one with no interest payment deductions. I'm not claiming to know anything about Canada's tax and home ownership system, although I'll soon find out.

Hombre said...

El Galileo - That sounds like a real find! (great coffee would be high on my list as I am semi-addicted) We look forward to your interesting and entertaining posts! Best of luck to you from this ole dog.

Snuffy - I woke up to the Pharma $$ scam a few years ago when I took my sister to get her meds from Wal Greens -- She is on disability and most of the expense was gov. paid (us) which amounted to over $1000 per month! Three small containers. I have been very fortunate to have good health and company paid Health benefits all my life but have always supported those who wanted a national system.
On the crash, I highly respect your preparations and opinion, but I rather see a moderate slide downward, unless... unless... there is a sudden huge event (either natural or perpetrated) that saps a chunk of resources.

"housing crisis" - A local perspective.
I'm semi-retired, but one of my job hats is apt. manager for an out-of-state owner, including 4 houses with 7 total apts. which he has been trying to sell for about two years now. There are few interested and no takers! Locally (midwest) both renting and buy/selling are way down and foreclosures rampant. I have always lived here and have never seen so many empty, forlorn looking residences and old businesses.

bluebird said...

lord.bacon said "Assuming safe places can be found to store physical cash, how much should I hold given the various pros and cons to holding physical cash?"

I have wondered that too. I had thought enough cash dollars to be able to pay the taxes on this house for 5 years. But taxes will go up, so that is probably not enough.

Then, what if there is a different currency in a couple years and those dollars would need to be converted. Probably still not have enough new currency to continue to pay the property taxes.

Spouse says there is nothing we can do, so don't worry. We'll all be screwed eventually.

peter said...

Melbourne median house prices up 6.7% (25% per year!) over the last quarter. see

This is just plain silly now. Tell me it's no bubble.

Are you in Brisbane/Gold Coast?

el gallinazo said...

Hey Snuffy,

Think that is expensive? Check out this week's "This American Life." It's really expensive to put your hedgehog on anti-psychotics.

message_in_a_bottle said...

There is really no need to take money out of banks. Pracically all banks are guaranteed by the state since a run on deposits would be the end of the current order.

The state can print money and thus
stand good for its promises.

With this you are basically worried only about the following scenario:

(1) The sitution becomes so dire that limits on monthly withdrawings
from bank deposits are decreed.


(2) The state is printing so much money that inflation becomes a problem.

(1) will only come to pass if a run on deposits takes shape which can be averted by blanket government guarantees (already in place in much of Europe, don't know about the US).

The state has no interest in fostering hyperinflation since this would also man the end of the current order. Instead it is aiming for "managed inflation"
which you can counteract proportionally.

On the other hand you can expect surveillance of business activities to become much more invasive. In the not too distant future you may be asked where your money came from. If you then say it came from the PVC pipe I sealed it in 5 years ago and buried you will come under suspician of money laundering.

Hombre said...

Lord.Bacon - Others here, especially the hosts, are certainly better able than I to offer you financial advice.
But I noticed you had 0 (zero) precious metals. I would recommend you have a small stash of 90% silver coinage, say $1000 worth (for major crisis fund) and a modest, say 5% of savings, in PM's.

The rest of your $$ position looked about ten times better than most people are in these days!

dryki said...

Sooner or later the hamster WILL get tired. And even if not, the hamster will reach terminal velocity or some sort of Relativity wall.

We borrow gazillions of dollars now that has to be paid back but we won't have any way to pay it back. Not enough fish in the sea, not enough trees in the forest, not enough soil to mine into hamburg. The big banks know that and are willing to take assets (with your money) at pennies on the dollar.

The debt grows exponentially - maybe even at a second order now that we can't pay it back - and the resource base shrinks.

Ilargi said...


1) In the US, the state cannot print money, only the Fed can. In Europe, that role is for the ECB.

And even if the state (or a country) can convince the Fed or ECB to print,
2) It's a fairy tale that any government can print at will in unlimited quantities. And inflation is surely not the only risk in place, or the most important.

Hyperinflation in today's circumstances is but an old wife's tale.

Your "advice" is certainly not the summit of smart.

Having a few months of cash stashed away is not by any means a foolish thing to do.

JP said...

Here is an interesting article in the NY Times on biophysical economics.
Link here

@Bukko: Unlike the USA, Canada does not permit tax write-offs for mortgage interest payments. On the other hand, we pay no capital gains tax on the proceeds from the sale of one's primary residence. Unfortunately, I would argue that these two policies (together with low rates) have incentivised a strong "flip-this-house" mentality which will only go away when the punch bowl leaves the room. If you are interested in Canadian real estate, I strongly recommend reading some of the recent books by Garth Turner, a former minister of parliament who has been sounding the warning on Canadian real estate for at least the last two years. You can also visit his web site at

bluebird said...

gpp and others - Ohio history from 1985...

March 15, 1985 - Ohio Governor Richard Celeste temporarily halted business at all of state's ailing thrifts;

March 21, 1985 - allowed to reopen on with $750 cap on withdrawals (designed to prevent all-out assault on deposits)

Anonymous said...

Lord.bacon said:

"Question: Assuming safe places can be found to store physical cash, how much should I hold given the various pros and cons to holding physical cash?"

All if it! There are safety risks to one degree or another whether you keep all your physical cash close to you in a creative place or keep it in a bank (the worst option, IMO) or keep it in treasury bills. However, if you keep your cash close to you, you might derive comfort knowing that your cash is not being used by the ruling elites in funding wars, etc. (via treasury bills) or casino gambling of banks, for example. Not participating as much as possible in the corrupt system is liberating.

Nelson said...

What the heck is the downside to keeping a stash of cash? Not collecting one percent per year on it?

A friend told me about her father's "biggest mistake" of his life, which was putting the family savings into a single small bank in Baltimore. It failed - and he got his money back - a year later.

This time 'round it's more likely to look like Argentina (IMO), where your totally insured, fully protected cash will remain locked up, as you are limited to withdraw only a token amount per week.

Anonymous said...

El G,

Good to hear from you...

Buena suerte con la Hacienda Perezosa! Me gusta el nombre. :)

Tristram said...

@Ed --

I wouldn't claim to know anything, but I always had a different gut feel from I&S -- that the whole mess will play out longer than expected, and end with inflation and a system reboot rather than deflation. Long-time readers have heard that before and learned to tune me out.

One odd thing about TAE thinking -- it assumes certain aspects of the bad old order will remain rock solid even as society goes to Mad Max. They seem to assume a policy envelope beyond which TPTB won't go because it's irrational and bad policy; and when they hit the envelope they will bow their heads, fold their hands, and accept deflation. Reading about Nancy Pelosi and expansion of the house buyer credit makes me groan and think -- there is no envelope.

A good example is Ilargi's comment from earlier: "In the US, the state cannot print money, only the Fed can." Therefore bank depositors can't be saved with printed money. But Congress created the Fed. They can un-create the Fed, or recreate it. If all their constituents back home are facing loss of their insured deposits, Congress will either print the money, or slip over the border to Canada. They certainly won't go home without that money.

Ilargi has noted many times (with a hint of impatience) that deflationary collapse has only been forestalled by the throwing of umpty-four trillion dollars at Wall Street. But that is just the warm-up. Who didn't expect it? To say the state can't do this or can't do that when the alternative is Mad Max is strange and I never understood that line of thinking.

The paradox is, a policy envelope based on prudence and discipline assumes some optimism about the future. Once hope is lost, the government can do any ridiculous thing, who cares. Nothing left to lose. That is the circus environment in which we must plan our futures. Good luck guessing right.

Hombre said...

Nelson - "What the heck is the downside to keeping a stash of cash? Not collecting one percent per year on it?"

Basically it makes good sense all around, unless your stash is very substantial. This may be a given, but I would never stash all of one's savings. Security enters the picture and you have to factor in some realistic possibilities, especially in and around major cities.

After all, if a stash is stolen it is lost! 100%

bluebird said...

For those who keep cash, and don't do banks nor credit unions, nor electronic deposits nor payments...

How is it done? With payments, cash can be used to get a money order to pay bills. But how do you cash a paycheck or S.S check or unemployment check?

It seems that at this time, some things still need a financial institution, unless earnings are paid in cash (and I don't believe there are many employers who will pay in cash).

Tristram said...

Nelson --

The downside to keeping a big stash of cash is the guys cutting off your fingers one by one until you had it over. Or the guys who have your child and want to make a trade. If there is enough civilization left to keep your cash safe, there will be enough to get your cash out of the bank, even if slowly.

OK, maybe if you live in some pocket of Norman Rockwell America, where you don't need to lock your doors, holding a chunk of cash is a good idea. Where is that place? Or if you live in an armed compound and only the adults ever set foot outside, in groups, armed.

To get an interesting view of life prior to banks, I would suggest renting Andrei Rublev by Tarkovsky, but don't wait until the internet collapses or it will be too late.

Ilargi said...


Since I can tell that you can read, I have no clue how you can write here that we have ever said that "the whole mess" will end with deflation. That is the exact opposite of what we have said all along for a long time now. If you read so carelessly or inattentively, any serious discussion looks impossible.

It puts everything else you say in a strange light. You claim to know all kinds of things about what we see, but what is to say you have managed to read the particulars there correctly, unlike the example above?

As for the Fed, yes, as I have said, Congress can abolish it. But even if that would happen, which is not at all in the cards at present, it would take many years, and be far too late to have any realistic impact.

EconomicDisconnect said...

That Sheila Bair video may have been the most unsettling thing I have seen since "The Exorcist".

The legal mess (covered ny Naked Capitalism) involving mortgages is attcking the very foundation of contract law and who owns what.

I am sure this all ends well.

Starcade said...

Snuffy: They've been doing that for Iran already.

The big thing is that I think a lot of the stuff like what you are seeing from Denninger regarding the end of consumer credit completely (and, yes, I think it will be the effective end of consumer credit by the time this is all done, with all that means) sparking an all out debtor/consumer revolt surrounding the Christmas season, and we will have a "crimson Christmas", as others have also predicted.

Mugabe: The longer the collapse waits, the more sudden it is. It is becoming apparent that it will be like that piece of machinery which literally flies off, cause the whole machine to fly apart and kill anyone who is in the way of the shrapnel...

... except we are ALL in the way of this "shrapnel".

Ed Gorey: I know you are speaking comparatively and in the present vernacular, but I would think sovereign debt is no longer a "safety asset".

As a result, I don't think anything else (even cash) is.

I'd just keep in mind that, when TSHTF, if you do take the advice and have a lot of cash and stuff squirreled away, you better be armed _and_ willing to _KILL_.

Otherwise, you're not making your stash. You're making "mine" (as in someone else's).

Re: Mexico. Two things:

1) I'm shocked Mexico still _has_ a central government and has not fallen completely to the warlords.

2) That's our future too.

Frank said...

@Ilargi see US Notes at the treasury site.

Ilargi said...

For what, Frank?

Frank said...

Because it specifically says that the state can print (in the literal sense) and only ceased doing so in 1971 .

The stated reason is that there was a slight cost and no benefit to having treasury notes and Fed notes in parallel circulation.

FWIW, if you ever see a US bill with a red (rather than green) seal, that is a treasury note.

snuffy said...

With a reduction in "incoming" funds as has happened in Mexico,strains in the social fabric must be being felt....witness the reluctance of those with semi-secure jobs here in the USA reluctance to return.There has been no bloodshed ...yet... there is also the desperate attempts to restart the FIRE economy.

Several nights ago I discussed these issue with a brother of mine.At some point,and no one knows when,a temper will snap,some guy who has lost it all...except a few weapons and a dark attitude,will decide to drag a few of those he considers responsible to hell with him.As the way of the media is "if it bleeds ,it leads"the act will be shoved down the throats of millions...over and over.

Then the ones near to the edge will think....""I can do it too".

What happens when some clown takes a few sticks of boom-boom to the local bank,or credit union...or picks a Wall street icon...headquarters of Merill lynch or Gold-in-sacks

When the wealthy get scared,then comes the police state....Haven't we seen "tours"of the ultra wealthy excesses become a popular pastime for those who look...and burn with hate....

Its going to get weird...real soon now.


Hombre said...

I keep seeing this quote, at Jesse's Cafe and Mish's, etc. -

“The recovery is off to a decent but unspectacular start,” said Joe Brusuelas, a director at Moody’s in West Chester, Pennsylvania. “While another large drawdown in inventories will be a drag on third-quarter growth, it sets the stage for a longer and stronger upturn in manufacturing.”

What manufacturing? All we make are caterpillars and Cadillacs! (well, and hamburgers)
What "longer and stronger" upturn? The cash for clunkers is over! The first-time-buyer advantage perked housing a tidbit, now what!

Where is the green revolution? mass transit? weaning from crude to alternatives? Where is the retreat from wasteful warmaking? Where is the education and implementation of a leaner, cleaner, closer to the earth pathway to the future?

In short, where is the change people were supposed to believe in? Does anybody know where it can be found?

Do any of these folks, re: Joe Brusuelas ever get out of their high rise suites and take a look at Pittsburgh, Birmingham, Indy, or Des Moines?

Gravity said...

The deficit is expanding to meet
the needs of the expanding deficit.

Hombre said...

Here is a link to Jay hanson's latest article. Not much new to TAE "veterans" but still of interest, and a must read for newcomers.

Stoneleigh said...

El G,

I'm really glad you found somewhere so nice.

Me gusta tambien el nombre :)

Stoneleigh said...

Lord Bacon,

Question: Assuming safe places can be found to store physical cash, how much should I hold given the various pros and cons to holding physical cash?

It depends on how much you have. For people who have lots, holding it all as physical cash would be impractical. If there was ever a currency conversion (as there was in Russia), it may be difficult to convert very large amounts. For them there are short-term T-bills. As another option, one can apparently buy T-bills through treasury direct, not roll them over, but still leave the money in the account. That amounts to using the treasury as your bank.

I would say you should have at least several months worth of cash, and preferably a years worth if you can manage it. If you have plenty, then you might want to consider several years worth of property taxes, bearing in mind that those will increase.

Gravity said...

Continuously increasing housing prices are surely the sign of a deficient economy.

Any system which requires such an abberation to function is surely doomed to failure.
When prices seem to go up, rest assured, everything else has simply gone down.

Gravity said...

Everything in life is somewhere else, and you get there in a mortgage or a coffin.

The great masses of the people... will more easily fall victim to a big bailout than to a small one.

Ilargi said...


US notes are an interesting story for sure, but not more than a relic in reality. I think they were limited to $300 million by Congress?!

Kennedy's Exec. Order 11110 United States Notes could be more relevant, the order never seems to have been revoked, but they too died in silence.

Physical notes are such a tiny part of the money supply, and alternative notes like the two mentioned above are again such a tiny part of that tiny part, that even if someone would try to face up to the Fed, it wouldn't make any difference.

Bigelow said...

“Another excuse given is that oil is following the equity market, but that's not how it's supposed to work. The futures market for oil is supposed to be governed by supply and demand, not react sympathetically to speculative moves in equities. In any case, it's been reported widely this year, starting with Der Spiegel's article on July 28, that the excess liquidity put into the system by central banks worldwide, money that was supposed to be put into consumer and business loans, has once again been used for speculation and quick paper profits in stocks and commodities, including oil.

As Washington irony goes, this is a new high-water mark: They've printed money to save our financial institutions, claiming it's there to stimulate a recovery. Yet much of that newly minted money is being used against consumers and small business owners. The money that's supposed to save them in new loans is instead increasing their energy costs through speculation, to the point of devaluing corporate earnings and personal incomes and prohibiting other purchases.”
How Wall Street Will Kill the Recovery

VK said...

Oct 26th is the big date set by Cliff at halfpasthuman for a big global event.

Lets see what occurs!

bluebird said...

Big Berkey water filter - Is it better to get a system with 2 filters or a system containing 4 filters for faster filtering of the water?

el gallinazo said...


"Kennedy's Exec. Order 11110 United States Notes could be more relevant, the order never seems to have been revoked, but they too died in silence."

And Kennedy died with four very loud bangs in a crossfire. He was showing just how unnecessary the Fed was, and that the Constitution was written that only the Federal government may mint money. There are those that think that the death of treasury notes and JFK were not unrelated. But that kind of stuff only happen in Germany, Russia, and Canada.

ccpo said...

Re: Money exchange Q previously: Thanks.

Re: Costa Rica: Lots to recommend. Sadly, the food isn't one of them, for the most part. Too much like Spanish (as in Spain) quisine; largely bland. Ceviche is a nice exception.

Strangely, the lack of a military might be a problem as things go further south, and the need for one, if the region goes more rogue, will kill the happy stability there now.

And keep in mind: lots of legal and illegal immigrants from neighboring countries.

Were my wife of a mind, I might go back there.


Edgy said...

Ilargi... does the $8K home buyer credit apply to purchases where the seller carries the mortgage?

el gallinazo said...


When I was writing about great food here, I was writing about the "raw materials" - not the restaurants. I did have my best meal in years my first night here near Arenal Volcano, so the cooking is not universally bad. I would describe it in detail, but Ahimsa might blow lunch :-)

I found a two bedroom house on the flank of Mt. Chirripo, the highest peak in Central America, for $150 a month. I was able to peek in a little through a window on Saturday. Tomorrow I will check it out in detail. I have to walk a couple of hundred meters up a steep path - this fat bird may shed a few kilos. There is a Gringa nearby referred to as the "goat woman," who makes a goat cheese which the Ticas rave about. Her husband sells internet satellite dishes. I was told the hardware would cost me USD 650 but the service was about Franklin a month. But I am willing to pay it. I can Skype to my friends around the world for free and Skype to phones in CR for 6 cents a minute. BTW Skyping to US 800 numbers is free.

The house has electricity and I could see that the kitchen was tiled and there was a modern electric clothes washer there. My friends were looking at a nearby finca. The neighboring property was owned by a brother and he was crushing sugarcane with a horse attached to an 8 foot pole that trotted in circles. The speed of the horse was simply adjusted by the farmer clicking his tongue. Four very handsome kids sat watching. The cane juice went into a pot which was kept boiling by corn cobs. The farmer offered us a glass of cane juice which was quite delicious.

I caught glimpses of some giant rodents that look like big guinea pigs but I don't have them figured out yet.

I can get a residency visa simply by transferring my SS check to a CR bank and holding the account in colones. They call it a pensioner visa. I cannot work as an employee I put I am encouraged to start a business and be self-employed and hire others. But the last time I was an employed was 15 years ago in my aborted public school science teaching career so that won't hamper my gait much. After I get my pensioners residency, then I can sign up for the very inexpensive single payer health care insurance. Yup - change I can believe in.

As to CR being invaded by it's neighboring countries, the Nicaraguans are here in mass because they work very cheaply. They are treated poorly on the Pacific coast and regarded as a ostracized minority group. I have seen no beggars. I think they all sell lottery tickets and are well dressed. In the last two hours on the street I was asked to buy tickets at least 20 times. But it beats kids with filthy faces and snot running down.

And as GW said, beware the standing army. The USA beat the Blimeys and threw then out of the country in 1814 without one. They did burn down DC though. Kind of hoping they might do it again.

As to wives not wanting to move, I have to see the local priest to find out who the patron saint of divorced men is and light a candle to her. Speaking of priests, the churches are of such bizarre modern architecture here, that it would make a Californian blush.

Unknown said...

As we know the gov't is hiring. Here's a good job: Bank Review Specialist failed banks). Multiple duty locations available.

Additional Duty Location Info: Washington DC Metro Area, DC; Hudson County, NJ; Boston Metro Area, MA; Pittsburgh Metro Area, PA; Atlanta, GA; Tampa, FL; Chicago , IL; Cincinnati Metro Area, OH; Cleveland Metro Area, OH; Columbus Metro Area, OH; Indianapolis Metro Area, IN; Lincoln Area, NE; Milwaukee Metro Area, WI; Dallas, TX; San Francisco County, CA; Los Angeles County, CA; Seattle, WA

ogardener said...

Organic farming methods, GM crops and GW.

From the comments section:

"I was a dairy farmer, small herd and organic until just weeks ago. I still haven’t sold all my cows, just most of them, dumping the remaining milk now, as I haul a trailer full to the sale barn each passing week. They are going for slaughter, for dimes on the dollar. I loved these cows! When I was 22 years old, I embarked up0n the path which leaves where I am today, worn out and in utter poverty, angry and still owing money and no way of paying it.

Back then, at 22, I had read authors like Wendell Berry and Sir Albert Howard and I thought to myself: This is the way to go. People will re-awaken and most will understand the necessity of family farms and independent holdings and life will be good for farmers like me.

I was wrong.

I couldn’t have been more wrong if I tried. I HATE YOU, AMERIKA."

The main article can be found here

I trust everyone is busily preparing for winter. It may be one of discontent.

Greenpa said...

El G- is this your super pig?

Greenpa said...

ogardner: while I have a lot of sympathy for the writer of that bit, I do have to say that getting into the bovine dairy business has been a uniformly bad idea for many many years- decades, really. Incredibly high upfront investment, unbelievable work hours, and a historically unstable market with periodic collapse. Even cotton might be better.

Dr J said...

el g said: "They did burn down DC though."

Yeah, that was us. I am in DC today. It must have been a long freakin march. This idea that the country will fall to pieces without cheap oil and the transportation systems, etc etc seems challenged by the fact that they could project power like that in times when a horse was the most advanced form of transport next to a steam engine.

Craig Morris said...

October 29th is the 80th anniversary of the 1929 crash. The big crash + 4 turnings. Hmmm....

deflationista said...

The order was never directly reversed, but on September 9, 1987, Executive Order 12608 revoked the section that Executive Order 11110 had added to Executive Order 10289,[2] essentially nullifying the order.

Farmerod said...

Hey, I thought the date was supposed to be the 24th. WTF?! OK, let's go with the 29th then. No. Now I remember, remember. The 5th of November.

Shamba said...

Could this be part of the event and following process that Clif has referred to on Oct 25th

Lender Capmark Financial Group Files for Bankruptcy

I have no idea what this means except that its important in the commercial real estate market.


Farmerod said...


Are you sure there's a model that only has two ports? I got the stainless steel Big Berkey which has 4 ports but you only have to use 1, technically. I've only been using mine for a couple of months and have only been using two filters. I'd say it filters about a gallon per day per filter. I should say that I'm using the black charcoal filters; the standard ones may be different. And the filtration rate probably depends on what you're filtering. We're on stinky heavily-chlorinated lake water hence the filtering for taste (and chlorine extraction). One note: I'd definitely consider getting the Berkey light if I had to do it over, just so that I could see how much water is in the bottom. If the bottom is full, any remaining water in the top will overflow. But if the bottom isn't fairly full, the flow out the spigot can be a little slow. I find myself lifting the top off to check the bottom frequently to keep it full, but not overflowing.

Farmerod said...

Could this be part of the event and following process that Clif has referred to on Oct 25th

The futures market says no, for now.


Ilargi said...


I'm sorry, but I got something on the 5th. Could we make it some other day? I'm pretty flexible.

: Joseph j7uy5 said...

@ Bluebird

We have a big Berkey and use two filter modules, with two spares kept in a box. With two filters, it easily produces enough water for drinking and for cooking for three people per day. We don't use the water to wash dishes, but if we did, we would might need to use all four filters.

If you run very dirty water through it, I assume the filters will work more slowly.

In order to figure out how many filters to install, you need to know how many people you are trying to support, and have an idea of how much water per day would be absolutely necessary.

In a pinch, we could filter the water through something else, then sterilize it in a solar oven. That is a good backup, I figure.

YD said...


I think you are too late on the debtor's revolt. It is happening and there is less and less stigma. Less and less action too. 15 years ago I had late payments on a credit card and an unpaid medical bill and the debt was sold to the vultures right away and I was hounded. This time my default is orders of magnitude greater and all I hear is crickets. Must be part of not wanting to realize the loss on the part of my creditors.

Mellowg said...

El G...

Welcome home...

Been living here in the boon docks for the last 22 years. To me it is still really a charm, you could not pry me away.

But mind you, be careful, no matter how nice the locals treat you, you will never be part of the community. you will always be a stranger, a gringo.

But i guess this is the same everywhere you move to.


Those agoutis are little @#$%$. They love whatever you grow, especially the coconuts. My dog has declared war on 'em...


Bigelow said...

@VK & Shamba

Cliff produced an Emotional Tension Trends chart in one of the publications. The trough ended yesterday and that point is labeled ‘Fiscal Economic Social meltdown begins’. An intermediate peak in tension occurs Dec. 29th, declining again and then increasing to a plateau July-November 2010. The death of the dollar scenario roughly covers that period too if I remember right. We live in interesting times.

Hombre said...

Bluebird - I can echo what Joseph12345 said,

We have the standard "big berkey" with 2 filters and have 2 for backup. After about 6 months I cleaned the filters (directions included) and they are still fine.

It's been about a year now, with 2 people using this unit for drinking water, tea, coffee etc.
Not for dishes or anything else. You get into the habit of adding water equal to what you use, etc.

Stoneleigh said...


Is it better to get a system with 2 filters or a system containing 4 filters for faster filtering of the water?

I use 4 filter elements, but then there are 6 of us here. If you have fewer people at home you may be able to get away with fewer. By the way, new elements filter very slowly, so don't be alarmed about slow filtering at first. The speed will improve quite quickly.

bluebird said...

Yes, the Big Berkey has options
Big Berkey with 2 or 4 filters

There is quite a lot of info at that link. It filters twice as fast using 4 filters compared to 2, but there are only 2 of us. And the Berkey would only be used when our water supply became contaminated.

Somewhere else where I was reading said that if pond water is used, then it should be pre-strained using cloth diapers to remove bits of debris, tadpoles, etc.

Farmerod - Thanks for the tip about the Berkey Light being able to see the level of water. I also might like to have the optional base with LED lights to glow thru the water with optional solar charger for charging the batteries.

Berkey base with LED lights

bluebird said...

Tonight on PBS, or watch via computer anytime

PBS Documentary The Crash of 1929

This is a 55 minute video, or watch Monday evening 10/26/09 on TV (Check your PBS local listing for time). It contains many 'first person' stories and interesting tidbits not normally covered in standard documentaries. The music and contemporaneous movie clips create a wonderful sense of the atmosphere of the times. The insights into some of the great personalities from that era like Jesse Livermore and Charlie Mitchell are unique. It is remarkable how, despite the technology and the sophistication, the basic schemes and pitfalls of Wall Street have changed so little in their substance over these many years.

Stoneleigh said...


I'm very sorry to hear about the increase in the price of your medicine. That must be a real hardship, and there are so many people who are or will be in that position.

I just hope my sister's remission lasts, because her husband's company is bankrupt, so if the cancer comes back she might not be able to afford some of the things that made the treatment bearable this time (eg really good anti-nausea medication that costs an arm and a leg for some reason). Further down the line if the government has to cut programmes drastically, there may not even be a chemo option. It frightening. She apparently has an 80% chance of still being with in 5 years (up from 50% a few months ago), so we'll be keeping our fingers crossed.

VK said...

Looks like the markets have taken no notice of Oct 26th and are flying high (so far).

Oh well, maybe if someone has a good astrologer we can use their advice to time the markets :)

bluebird said...

Upcoming Monday PBS American Experience programs (Check your PBS local listing for time)

Browse the entire PBS American Experience series featuring over 200 films.
Watch PBS films online

Jim R said...

More bricks drop from the facade of empire as seen on Alternet:
"We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all," says one Goldman Sachs adviser. But tell that to the people of Samson, Ala.

scandia said...

@Farmerod, Looks like I am the last ( wo )man standing with my Nov.5th date. Whoops didn't someone mention Oct.26th? VK, I think...

Lal said...

Bluebird, Stoneleigh, et al

Please checkout this novel water filter that can purify ultra-dirty water quickly:

You can buy from Amazon for $160:


el gallinazo said...


That Agouti looks like the varmint. I checked your link and went to "diet" but I didn't see any recipes :-)

Cuy, guinea pigs, are a favorite food item in Peru, to the point that they have specialty restaurants for them called cuyerias. They bone them somehow and press them flat. They look like and taste like pieces of beige inner tube.

I also saw a very strange looking raccoon who was looking for hand outs at fruit stand. There was a normal looking raccoon working his beat with him. He had a longer snout than a normal raccoon and his coloring was quite different. He was different enough, that I didn't realize that he was a raccoon at first.

Tristram said...

Snuffy --

If you are not insured for your medication (sounds like not), you should inquire about the patient assistance program of the manufacturer. The game of big pharma is "price discrimination" -- charge huge prices to Americans with health insurance, but less in other countries. And to avoid criticism, they let some meds leak out at low cost to uninsured patients via the patient assistance program. It might not work, but it's worth a try.

Joseph j7uy5 said...


Back when I used to live near Canada, I had patients who would go there for medication. Now that I live near the Mexico border, I see the same thing. Sometimes you can get deals on the Internet, but of course there are tons of scams.

Sometimes you can get help from the drug company; in some cases, you can get the medication for free. Go to to find out. (I find the URL to be off-putting and condescending, but money is money) It usually involves getting forms, printing them out, filling out as much as you can, then trying to persuade someone at the doctor's office to fill out the rest, and to get the doctor's signature.

The other thing is that sometimes you can switch to generics. This is a very tricky thing, though. Sometimes you can save hundreds of dollars with no downside risk, but other times you have to accept some risk in order to save the money, and sometimes it is just plain impossible.

Jim R said...

el sawzall,
It might be a Coati. There are lots of examples of exotic tropical cousins of the familiar critters of north America. The lowly spanish moss has colorful cousins in the showy epiphytic bromeliads bedecking trees in the tropics.

Unknown said...

Don't give up yet, VK. The markets just hit a spot of diarrhea at noon. Where's my popcorn?

Anonymous said...

It's an interesting concept, to attempt to tap into the collective unconscious via the internets and some (don't know how they're chosen) algorithms, but halfpasthuman doesn't have a great track record on predictions.

Chaos said...

Well, since we're talking about Berkey water filters (or some of us are), what do you guys think about using one white ceramic filter with one black one? Would that be effective, do you think? (The flow rate is not particularly important).

TAE Summary said...

* If declining house prices are bad then rising house prices must be good; Fear of the stigma of foreclosure is all that holds back the deluge; The fear is less that 15 years ago; Debtor prisons may make fear popular again

* Five acres and independence costs $10K in the mid-west; El Gallinazo comes home to Costa Rico; My heros have always been gringos

* Not all countries let you deduct interest paid on homes; Home interest tax deduction should be graduated

* We are in a death sprial; Meds are way to expensive; Big pharma giveth, big pharma taketh away, blessed be the name of big pharama

* There may be a trigger in the next two weeks; Two months from now we will know a lot more about the next two months; Things will definitely go south when the Pepsi generation turns to Geritol; Maybe we'll skid to a stop and not crash

* Cheap money boom may last another year; The longer the collapse takes in coming the harder it will be; If TEOTWAWKI is a year late will you recognize it, or mistake if for Armageddon?

* Ohio banks were closed and then withdrawals were limited during S&L crisis; Now banks are perfectly safe thanks to the FDIC, especially Bear Stearns; Only possible problem is over-printing causing hyper-inflation

* The minor downsides to having cash at home: it might burn up, it might be eaten by rodents, someone else might want it bad enough to cut off your fingers one at a time; Soon you will have to prove that your cash belongs to you

* There are too few trees in the forest; There are too few fish in the sea ; Sooner or later hamsters reach terminal velocity; Vultures are less assertive than 15 years ago

* TAE is riveting; US only manufactures heavy equipment, cadillacs and burgers; Someday tempers will snap and the shooting will begin; Yesterday Sheila Bair's head spun around and green vomit poured from her mouth

* If there is nothing you can do about your situation, by all means do it; Crimson is coming, the goose is getting fat; Things will be weird soon

* October 26 is the big one (Note: that's today); October 29 is 4 turnings from the big crash; November 5th is also appealing but inconvenient for Ilargi; Have a nice day unless you had other plans

* Market Crash predictions from TAE, Sept. 21, 2009

- Coy Ote - September 29, 2:36 PM
- Snuffy - October 15
- David - October 16
- Bigelow - October 25
- El G - October 24-29
- Bob (Your Uncle) - Early November

Sorry David, Snuffy, Bigelow and Coy Ote: The grand-prize lounge-suite will not be yours

el gallinazo said...


It definitely was a coati. I have seen several of them so far. However, I like the name in Wikipedia of snookum bears better.

Also, when I was east of Cartago a couple of days ago, I was walking through this really upscale resort with a lot of antiques, and one of them was a ceramic housing filter called a Berkefeld Filter. Wikipedia has a short article on them. It is a British filter which was started to be made in 1891. It is designed kind of like a Berkey and I assume there is a connection. The name similarity cannot be chance.

Hey Scandia,

I and my cat, Slim, have this whole week blocked out in honor of 1929.

Bigelow said...

And I really wanted that prize lounge-suite.

Gravity said...

Scientists have announced that the mayan calendar has been misinterpreted, all four versions in fact; short count, intermediate, discount and long count, so the end of the world won't occur until the year 2208 or 2220, although the age of pisces remains scheduled to switch into aquarius at the appointed date for maximally shiftable spirituality, discounting precession.

The dark rift galactic plane is also severly overhyped, they say, despite the unhealthy amounts of radiation clearly emanating from it.
This cosmic junction won't affect anything when we drift through it in the next few years, especially not the global electric grid or satellite networks, nor will relentless radiative bomardment trigger massive solar flares or a geo-magnetic polarity shift, thus full exposure to cosmic rays or high-energy proton streams is not to be expected.

Because radiation is slightly subject to gravity, it would naturally be bundled in the dark rift. That's okay, though, because none of our systems are affected by radiation, which isn't even there, since the whole thing is apparently nonsense.

Syn said...


You were one of the first to call this a political crisis and with each passing day this becomes more evident. The level of corruption has dragged us into official Banana Republic territory. The MSM is sickeningly complicit. This is from today’s Yahoo news:

"This week, the most important report is Thursday's GDP release...which is expected to show one of the more robust readings we have seen in the last few years and will give rise to the notion statistically speaking that the Great Recession has ended," Flanagan said.

Gravity said...

€49,99 €399,99 €699,99

Why does this even work? One cent could not make any rational difference, so these prices are meant to elicit an emotional discounting, indicating that the price-mechanism itself is not a rational function, or that people are not rational actors when it comes to price. Sometimes I wonder about these things.

VK said...

@ Gravity

So no end of the world in 2012? But I thought they're making a movie on it? :)

Phlogiston Água de Beber said...


The end of the world has been cancelled for lack of interest.

Farmerod said...

Sorry David, Snuffy, Bigelow and Coy Ote: The grand-prize lounge-suite will not be yours

Dunno about that. The recent peak, as far as I can tell, was the 19th, so Bigelow looks like the winner so far (El G picked an earlier date but only as part of a range).

Which, of course, begs the question as to how long one has to be "right", or how right one has to be to win the bet. For example, we could see a 50% decline tomorrow morning followed by a 150% gain in a month. When is the winner declared? And which index? And why do I care anyway?

VK said...

@ I.M. Nobody

Well as they say in showbiz, 'the show must go on' regardless of anyone's interest in the end of the world.

ps - your pseudonym is cool!

Hombre said...

"Sorry David, Snuffy, Bigelow and Coy Ote: The grand-prize lounge-suite will not be yours"

Oh well, there's always the motel 6

Interesting post/response over at I.S. blog.
Saturday at the International Shipping blogsite in response to a prediction that the recession would be over in a year or two, I posted this:

Coy Ote - "And after a year or two, what is it that is going to end the recession? Increased worldwide production? Increased world trade of what kind of goods?
With the real or approaching depletion of most raw materials what is the "new economy" going to be built on?

Int. Shipg. - "In my humble opinion, the future is China.
As much as we hate to admit it, they are the future super power.
They have a controlled economy. They are investing in solar power, amongst other things.
Their population is huge.
This recession will end somewhat as it did in the 80's. New technology.
Solar power. Hybrid cars.
The U.S. consumerism will not be the driving factor.

thethirdcoast said...

Well, I just wrapped up my onsite interview, and I'm happy to say that my Obama-approved HSM suit looked quite smashing. The firm also seemed like a great place to work, employees seemed happy and everything was spotless and well-organized.

Unfortunately, my fears that I've been pushing red tape so long that my engineering skills have seriously decayed were realized in the technical interviews.

Guess I reviewed the wrong topics in my 2 week long cram session. Back to the drawing board I suppose.

scandia said...

@El G, Your cat is with you? Amazing! Hedging your bet by picking a week wasn't fair!
@ TAE Summary, " lounge suite " is language I last heard in England. Are you in the British Isles? That would perhaps explain your sharp wit.
@ blow my mind! So many worlds in one head!

I did try to watch the Sheila Blair video. It really was scary, like she was " on something ".
On reflection I wondered if her style of speaking carefully and slowly to a roomfull of idiots was not in fact a perfect match with the functioning I.Q of the audience she is addressing( Joe and Jane Sixpack ). This administration understands the art of communication very well. They understand that communication begins with the receiver.
The pace was so lulling,hypnotic....whoops! Now where was I?

Phlogiston Água de Beber said...

VK Said...

ps - your pseudonym is cool!

Hubba hubba, a compliment from one of the coolest posters on the board.

EconomicDisconnect said...

Sorry way off topic, but just finished W.P. Blatty's "Legion" and a chilling tale.

"Jesus asked the man his name and he answered, "Legion, for we are many." Mark 5:9

redboat said...

Excellent post, Ilargi. Worth the fall drive in full.
Just watched "American Experience" on the Crash of 10/29/29. William Durant - General Motors founder and then Wall Street's biggest operator - saved the day in March of that year by offering $25 million in credit to those being crushed by margin calls. The hero.
This so inflated his delusion of omnipotence that when the final crash came that October he sunk everything in (with the Rockefellers)thinking he could stand against the Niagra of sells. All his net worth came down to the $250 suit he wore on his back.
I can't help but feel our Government is today's version of W. Durant. More so because of the mortgage gambit than even the obscene and direct play with bailouts and preferred share ownership in financials. Durant's situation involved panic, of course, but hasn't the panic in asset values been replaced with disorientation? The market has been decoupled from panic but only to become unhinged from reality. And we stand in the place of W. Durant while Wall Street Banks recover as they did from '29.
If anyone's wondering the Market had a dead cat bounce of 67% ending in April of '30. We are now at 66% as of today. 10/26/09.

ccpo said...


I live near the Canadian border.Come visit.



Submit your advice said...

Agouti is my favourite meat, used to eat it in Africa all the time, also known as "grass cutter" and "bush meat." Very similar to the nutria, btw, which is found in southern Louisiana.

Anyway, my question is for Stoneleigh.

One side effect or unintended consequence of the "preparedness" one advocates around here: survivor guilt, and how to handle it.

I saw this crisis coming years ago and made plans. These were so effective that not only am I protected as much as can be from fallout, as things get worse and worse, I get better and better off. I suppose I can "console myself" that as society really gets worse my condition will diminish. But for the moment, my condition continues to improve as millions get worse off all the time. I suppose I could make myself worse off somehow, but what is the point or benefit in that? I'm not profiting off of the suffering of others, merely taking advantage of opportunities which are there no matter whether I take them or not. e.g. just closed a very profitable short in an oil stock today, only held the position for a week. And it was just like a short I cashed in on just a couple of weeks prior, a few days short, big strike. I'm pretty sure this won't be the last, but it is likely to happen again and again.

On the other hand, why should I feel guilt if I have told the truth to anyone who would listen, for years, and still would and do? There's no secret to what I have done. It was the simplest thing in the world: credit bubble about to pop, as it always has throughout history, end of story. Even a moron could have seen it.

So, in amongst concern for the suffering, and those getting worse and worse off, what of those who get better and better off? I'm serious. I've run out of things to buy. There is nothing on the planet that I want to buy at this point. I'm not even sure I need or want to make more money at this point, only that I can.

What to do?

Just try to help others, I guess. Not easy. People are very hard to help.

You have any luck with that?

Insania said...

What a fantastic read, Ilargi, what I consider to be one of the best posts yet on TAE. Fall drive is in the works...

Bigelow said...

“On the auction block in Detroit: almost 9,000 homes and lots in various states of abandonment and decay from the tidy owner-occupied to the burned-out shell claimed by squatters.

Taken together, the properties seized by tax collectors for arrears and put up for sale last week represented an area the size of New York's Central Park. Total vacant land in Detroit now occupies an area almost the size of Boston, according to a Detroit Free Press estimate.

The tax foreclosure auction by Wayne County authorities also stood as one of the most ambitious one-stop attempts to sell off urban property since the real-estate market collapse.

Despite a minimum bid of $500, less than a fifth of the Detroit land was sold after four days.

The county had no estimate of how much was raised by the auction, a second attempt to sell property that had failed to find buyers for the full amount of back taxes in September.”
Detroit house auction flops for urban wasteland

scandia said...

@submit your advice...I can, in my dreamtime,relate to your " problem " as in when I win the lottery what will I do with all that weath?
I heard a wealthy man once say that if you die with excess money in the bank you haven't managed your financial affairs well.
I do have one idea for you. Contact S$I re what they might need to support TAE- upgrade equipment? Hire some alternative writers on occasion? Give a few speaking engagements?
There was also a brilliant idea awhile back about starting an alternative university. I think it was Greenpa or Snuffy who said they know so many professors who would drop everything, even move to participate in such a project, for the chance to really teach again.
I very much appreciate your question as it demonstrates the continuum that exists say between Starcade and yourself, between myself and my neighbour.
Assessing guilt/blame is like burning good rubber. Assessing right action for oneself is a more interesting,compelling question.
I look forward to Stoneleigh's response....

bluebird said...

I also watched the PBS program about the Crash of 1929. Many parallels in the 20s as compared to today. If you missed it, check PBS for another broadcast, or watch via computer.

After the 1929 Crash PBS program, our station had a program about Herbert Hoover. Check your local PBS schedule, as it will be replayed again today and tomorrow.

About the Hoover program...
"Recalling the 31st president (1874-1964), an Iowa native who had the misfortune to be in White House when the stock market crashed in 1929, and presided over the Great Depression's early years before losing his reelection bid to FDR in 1932. An engineer by profession, Hoover directed WWI-era humanitarian aid to Europe, and served as Secretary of Commerce under Harding and Coolidge."

Bukko Boomeranger said...

Submit, here's a suggestion: Scope out where the poor, desperate people in your area hang out. Cook a good, healthy meal once a week, whatever number of portions you can deal with. Divide it up into individual containers, drive down to where the homeless people are, (never hurts to have some people along as backup) and give the meals away. Then talk to the people. They'll have ideas for you.

Hombre said...

Submit your advice - Do it here... and often! It would be appreciated by so many, even the things we would not necessarily agree with.

1 - Write an article about your present thoughts, economic and political perspectives, etc. and send it to TAE for the hosts to review and (possibly) run soon. Nothing lost if they don't!

2 - Support and/or initiate anything connected with realistic, earth cognizant, EDUCATION, some call "alternative." (See Scandia above)

3 - Provide some insight as to things one should NOT do, or should not plan to do.

Hombre said...

Bluebird - I watched them both. Actually I learned a few things about Hoover that I was unaware of, and one thought that came to me was that Mr. Obama is likely to be this generation's Hoover.

With time I am thinking more that Obama is, despite his Harvard and Columbia degrees, kind of like a deer caught in the headlights (like many of us) when it comes to our complex and corrupt economic predicament.

His wrong-headed policies don't smell so much like some coniving conspiratorial evil as they do just an evident incompetence and lack of comprehension.

It's only the last couple of years that I paid any attention to economic structures and cause/effects. I know lots of folks very competent in their field who know nothing about such things as, how money enters the system, fiat currency, debt based growth, and especially the dire predicament of resource (energy) depletion.

I wonder, will our tent cities be "Obamavilles"?

Anonymous said...

Thanks so much for this detailed and clear analysis of what is going on by our government on the housing market.

You're so right that it won't last. Eventually the hamster is going to stop spinning the wheel. And we'll be lucky if he didn't have a coronary.

dragonfly said...

Submit your advise - I would recommend the Nature Conservatory as a great way to put something away for future generations of both people and animals.

Greenpa said...

El Gal - "beige inner tube" - :-)

"I also saw a very strange looking raccoon who was looking for hand outs at fruit stand. There was a normal looking raccoon working his beat with him. He had a longer snout than a normal raccoon and his coloring was quite different. He was different enough, that I didn't realize that he was a raccoon at first."

Not a raccoon, it's a coati, or coatimundi (same animal) - my favorite common name is hog-nosed-coon. And there are indeed plain old coons there too.

Beware the cute kinkajou!
Cuddly as a koala-
But with teeth.

Greenpa said...

Gravity: "Why does this even work? One cent could not make any rational difference, so these prices are meant to elicit an emotional discounting, indicating that the price-mechanism itself is not a rational function, or that people are not rational actors when it comes to price."

Marketing 101: What you personally believe to be rational has no bearing whatsoever on whether a product will sell.


My favorite example, actual experiment: they took dry spaghetti out of the regular pasta section, put it in the refrigerated stuff section, and marked it up a couple of bucks. It was soon outselling the old dry stuff dramatically.

We are left with two choices; become misanthropes, despising humans as fools; or laugh along with Willy; ah, what fools we mortals be.

Mike W said...

You say:
"At 3.5% down, an $8000 tax credit potentially (and yes, I know this is a simplified version of reality) increases the amount a buyer can spend on a home by over $200,000."

This is nonsense. The buyer still has to qualify for the loan. If he doesn't have the income, he does not qualify. He can't get the loan. We are not in the land of "no-doc" loans anymore. Think out the process before you make these crazy statements.

Phlogiston Água de Beber said...

Greenpa & Gravity,

That reminds me of two things I heard long ago.

A former colleague once worked part-time at a Radio Shack store. They had a discontinued el cheapo stereo on the shelf that wouldn't sell even though they marked the price lower every week. One day my friend hung a tag on it for about twice the original price and it sold that day.

Another former colleague in the company sales department once observed to several of us field service types that costing was a science and pricing was an art.

Greenpa said...

Submit: "Agouti is my favourite meat, used to eat it in Africa all the time"

I'd be quite astonished if you were eating agouti in Africa- not that it's utterly impossible, but the entire Sub Order of rodents they belong to is strictly New World.

Which makes me wonder what you were actually eating.

Greenpa said...

Submit: "Just try to help others, I guess. Not easy. People are very hard to help."

That's extremely astute. Which may give you a leg up on actually doing some good.

Stoneleigh said...

Coy Ote,

Actually I learned a few things about Hoover that I was unaware of, and one thought that came to me was that Mr. Obama is likely to be this generation's Hoover.

Exactly. Hoover was one of the best qualified people ever to be president, yet he went down in history as an abject failure because he happened to preside over a horrible period about which he could do nothing.

With time I am thinking more that Obama is, despite his Harvard and Columbia degrees, kind of like a deer caught in the headlights (like many of us) when it comes to our complex and corrupt economic predicament.

His wrong-headed policies don't smell so much like some coniving conspiratorial evil as they do just an evident incompetence and lack of comprehension.

I agree. I don't think he understands much of this. If he did I think he'd be very afraid rather than confident about America's economic prospects. I think he believes his own propaganda, which is helpful when it comes to delivering a hopeful message (relatively) sincerely. It bodes ill for his future though. He's let himself be put on a pedestal and deliberately built up expectations that he can handle this situation. He can't, but that will only become obvious when we see some serious momentum build up to the next phase of the decline.

It's only the last couple of years that I paid any attention to economic structures and cause/effects. I know lots of folks very competent in their field who know nothing about such things as, how money enters the system, fiat currency, debt based growth, and especially the dire predicament of resource (energy) depletion.

I know. For instance, my brother in law is a phenomenally intelligent guy, but has no clue about any of this and thinks I'm a lunatic. His eyes glaze over and he stops listening if I mention a word about finance or peak oil or anything else remotely alarming. It's very sad. Some people just cannot bring themselves to question the soundness of the fundamental assumptions upon which their lives are based.

Bigelow said...


That article says it all:
"But an analysis of the so-called shadow market done for The Miami Herald suggests the number of homes and condos in the pipeline to come on the market in South Florida is nearly five times larger than all residential properties currently listed for sale by Realtors."

Submit your advice said...

Looks like the south american animal called agouti is a dasyprocta leporina and what I was eating in Africa widely known as an agouti is actually a thryonomys swinderianus. I think. The american one looks smaller, and the African one looks more like a groundhog, though it is known as a cane rat or bush rat, as well as grasscutter or just plain "bush meat" or "viande de la brousse" although they can be raised in captivity.