Wednesday, January 13, 2010

January 13 2010: Punch and Judy, Pontius Pilate and the US dollar

Unknown Ashes by now 1865
Ruins of the Cathedral of St. John and St. Finbar, Charleston, South Carolina, after shelling by the Federal Navy and the approach of Sherman's troops

Ilargi: Look, it has made no difference what anybody has said. Wall Street bonuses for 2009 are higher than they ever were before. That is real, that is what counts. The rest is all just words, posing, acting, illusion. The Financial Crisis Inquiry Commission is a theatre piece.

People like Robert Reich may say that Obama should take on the bankers, but Obama is where he is because the bankers have put him in his seat. Legislation like the Glass-Steagall act and initiatives like the Pecora commission are testament not only to the fact that the people involved in them in the 1930’s were much braver and principled than today's politicians, they are also painful reminders of the increase in political power the rich have managed to wrestle from the hands of the people over the past 75 years. One would have to be even braver to try and fight the system in the present time, and there is no one to do it.

Broadly publicized and televised commission hearings like the one taking place today and tomorrow have absolutely nothing on your run of the mill Punch and Judy show, and they are perceived as important only because people are told over and over that they are. There is a feeling somewhere up there that "critical" questions for bankers are a good idea at this point in time, but not because something needs to be done about the problem. Just because, politically, something needs to be done. Like holding a hearing. It’s about poll numbers.

This way everybody can claim afterwards that something was done. And if the anger doesn't subside, or if, God forbid, Obama's numbers keep slipping (another low announced today), a few heads will fall. Geithner, Summers and Bernanke are the big prizes available to satisfy the people's hunger for justice, or at least for something to be done, in Pontius Pilate style showtrials. It will make no difference whatsoever to what has already happened and what is still in the pipeline, because sacrificing one or two individuals does nothing to break the grip of the elites on the government and the laws of the country.

In that light, offering up lists of questions for the bankers, of which there are plenty, becomes an exercise in media futility. If the commission’s inquiry guarantees one thing, it's that the real questions will not be asked. The name Financial Crisis Inquiry Commission is poorly chosen; there's an inquiry crisis that is far more pressing than the financial one. Don't forget that this circus takes place against the backdrop of two recent policy decisions: First, a $4 trillion budget to bail out anything that’s too big to fail, and Second, an unlimited budget to bail out Fannie Mae, Freddie Mac, Ginnie Mae and the FHA. With that sort of firepower put in place in the past few weeks, why would any banker care about answering a question or two? They’re sitting very pretty, and they can take any risk they want, since there is no downside to them in any risk: they can't lose anymore.

The US as a nation, however, has all the more to lose for it, including itself as a nation. And China may volunteer to act as an accelerant in the process.

The Chinese have bought all they could get their hands on in 2009, so much that their trade surplus is plunging. Domestically, record amounts of loans and capital have been thrown seemingly indiscriminately at the economy. And now it looks like Beijing is waking up, or perhaps the moment was chosen long ago to start cutting down on the stimulus and the inventory building.

Tyler Durden has details:
Of course, when the government has trillions in increasingly worthless excess dollar foreign reserves that have to be used up for something, it is no wonder that the Chinese government is buying anything and everything it can stockpile, and that can't be devalued by Tim Geithner, hand over fist. As for exports: courtesy of the dollar peg, which makes China's exports as cheap as the US' (assuming the latter had much of anything to export besides financial innovation), China had no shortage of counterparties to purchase its $1.2 trillion in 2009 exports. Yet despite all this, China's trade surplus plunged a record $100 billion, or 34%, to $196 billion from 2008's $296 billion.

Notably, in December China's crude-oil imports hit a record 21.26 million metric tons, or 5 million barrels per day. It is good that at least for one country the "great recession" never happened. In 2009, China imported 14% more oil than in 2008, for a total of 204 million tons. But the real kicker was in iron-ore imports which was 62.16 million metric tons in December, 22% more than November, and an unbelievable 80% more than a year earlier, and the second highest ever recorded. For all of 2009 628 million tons of iron were imported, 41.6% higher than in 2008. Those empty cities apparently really need more peers. And one wonders why Australia's (5.4% more imports in 2009) and Brazil's (5.3% less) economy are humming: it takes a lot to provide the raw materials to build the biggest bubble in the world.

The simple observation is that instead of having to finance the US consumer's continued spending binge by buying hundreds of billions in Treasuries in 2009, China was let off the hook by the Federal Reserve, which did all of its mandated purchase instead. So with all the excess money China went and stockpiled, stockpiled, stockpiled. [..] As the US consumers are tapped out [..], China better hope its own middle class will use its savings to buy everything the government has already made and built, and counted (hopefully not double or triple) in its GDP calculation.

On the other hand, despite having a savings rate that Americans could only dream of, China is also gripped by gambling fever: who really knows what the domestic balance sheet looks like. Yes, having cash is great, but if the liability side of the consumer balance sheet has 0 equity (or only equity in a massively inflated stock market) and the rest are cheap loans, which the government handed out freely in 2009 to the tune of 11 trillion renminbi, then all bets really are off when the profit taking inevitably begins (as it always does).

The first move for China, announced this week, is higher reserve requirements for the banks. Since these banks were operating under a strong suspicion of books loaded with bad and shaky loans even before last year's lending binge, those requirements may have to be increased quite a bit more if they are to be kept standing upright. And sometime down the line other measures and policies will come floating to the top as well, some of which may be highly detrimental to the US economy.

A -curiously- hardly noticed Reuters article, Dollar has hit bottom, China says, quotes Peng Junming of $300-billion sovereign wealth fund China Investment Corp. as saying that China now "has a say in the exchange rate of the U.S. dollar".

This is where you're supposed to yell: Yikes! Nobody has paid attention to this until now, but you can be sure that it doesn't spell any good. If the value of your currency is in foreign hands, you're in all sorts of trouble. China’s efforts to slow down the free money party at home and the need to either use its stockpiled raw materials in an economic fashion or cut down drastically on accumulating them, will inevitably lead to higher interest rates. And that could be the starting signal for a cascading snowball forcing up interest rates across the globe and across the board, including the US.

It's not that hard to see, for example, what will happen to the US housing market if rates rise a few percentage points (these things can happen virtually overnight), and what the ensuing effect will be on the (your) unlimited funding for Fannie and Freddie. Or what governments may be forced to pay on their debt issues, of which there will be more in 2010 than we dare even contemplate. As Tyler Durden stated a while back, effective 2009 US Treasury issuance -if you subtract Fed purchases- was no more than $200 billion. This year, it will need to be more than $2 trillion.

There is indeed no way this cannot end in tears. Looking at the faces of the bankers during the inquiry, looking at the dollar numbers in the bail-outs they have arranged for themselves, and watching China flex its financial muscle at the very moment its own economy is under threat, there's no way to escape the thought that America is bankrupt in more ways than one. The sole comfort left is that it's not alone in that predicament. Come to think of it, there's another "comfort": we can be confident that Wall Street banks will find a way to make a killing off of it.

Dollar has hit bottom, China says
Sovereign wealth fund strategist also argues gold is too expensive and says China may raise interest rates before U.S. does

An investment strategist at China's $300-billion (U.S.) wealth fund said the world's third-largest economy now had a say in the exchange rate of the U.S. dollar, which it expects to rise while the yen should fall further. The comments by Peng Junming, who works in the asset allocation and strategic research department at China Investment Corp, triggered a rally in the U.S. dollar. “I think the dollar is at its bottom now. There will be very limited space for the dollar to drop further,” he told an academic forum. “The yen is what, I think, has the worst outlook. The yen will continue to drop, unlike the dollar, which will not serve for long as a source of funding carry trades.”

The U.S. dollar rose more than half a yen close to 92.40 yen on the news, then pared gains after Mr. Peng said his speech at the Chinese Academy of Social Sciences reflected personal views. The euro slid against the dollar and gold dropped before rebounding slightly. The market reaction to Mr. Peng's comments shows the sensitivity to clues on how China and its state fund view the markets. “A U.S. government official recently said that the dollar is ours but the problem is China's. But China now has a voice in influencing the dollar's exchange rate and the interest rate on U.S. government debt,” Mr. Peng said. “Although the dollar belongs to the U.S., China has a role to play in determining the dollar's exchange rate.”

Mr. Peng noted that China's stash of dollars enabled it to influence commodities markets. Commodities like oil are priced in dollars and the prices tend to move inversely to the dollar. “We can weigh down or push up the dollar exchange rate, which will have an impact on the global commodity futures market.” Mr. Peng was explicit in his view on gold: “China should have the right attitude about investing in gold. There is no urgent need for China to increase gold buying for now, because prices are high.” He defended U.S. Treasury investments, arguing they had offset losses in stocks and helped swell currency reserves in 2007 and 2008.

About two-thirds of China's reserves, the largest stockpile in the world at $2.27-trillion, are estimated to be invested in dollar assets. Lou Jiwei, CIC's chairman, has been careful not to say much about how the fund invests its money. In October 2009, he said the fund was putting more money into commodities, real estate and infrastructure to hedge against medium- and long-term inflation and a fall in big currencies.

Mansoor Mohi-uddin, currency strategist at UBS in Singapore, said sovereign wealth funds are returning to prominence after losing influence during the financial crisis. However, private sector U.S. portfolio managers have the ultimate say on the dollar, he noted. “The portfolios of both sovereign wealth funds and central banks globally remain dwarfed by U.S. asset managers. It is the latter, as the largest holders of dollars in the world, who will continue to determine the ultimate direction of the greenback,” he said note to clients. Turning to interest rates, Mr. Peng, who previously worked in the New York office of the Chinese central bank, said he expected that both the United States and China would raise rates in the second half of the year.

Many in the market have assumed that China will wait for the United States to raise rates before doing so out of fear that a bigger rate differential will attract speculative capital, adding more money to the Chinese economy already awash with cash. But Mr. Peng said that the People's Bank of China may have to move first to raise rates in order to combat asset bubbles at home. Officials have repeatedly warned that property prices are rising too rapidly, but so far have relied largely on land and tax policies to calm the market.

China Investment Corp. was set up in late 2007 with $200-billion hived off from the foreign exchange stockpile, with a mandate of seeking higher returns than the more cautious reserve management agency. Thanks largely to investments in domestic banks, its assets under management reached $300-billion at the end of 2008. Chinese media have reported that CIC might be in line to receive as much as $200-billion extra from the foreign currency pot. Mr. Peng said he had heard that the government will probably give CIC more money to manage, but that the size of the capital injection was unclear.

China Hits Brakes on Economic Stimulus; Markets Shudder Around the Globe
China, which for more than a year has been pushing its banks to pump out cash to offset the global downturn, abruptly reversed course Tuesday, in the clearest sign yet that Beijing has turned its attention to controlling the repercussions of that credit explosion. The People's Bank of China said it will raise the percentage of deposits that banks must keep in reserve and can't lend, a shift intended to stave off inflation and the asset bubbles that can accompany it. Economists called the central bank's move a significant, sooner-than-expected step away from the giant stimulus effort that began in late 2008.

The central bank's move rattled global markets, sending investors to safer-seeming assets as they worried that China's economy might not be as stable as expected this year. Stock prices around the globe fell in the wake of the announcement, which came after Chinese markets closed. In the U.S., Treasurys rallied as investors shed stocks and commodities in favor of low-risk government debt. Crude prices fell 2.10%, driven down in part by concerns about falling demand from China, the world's No. 2 oil consumer.

Starting Monday, most Chinese commercial banks will be required to put 16% of their deposits on reserve, an increase of a half percentage point. In recent years, the reserve-requirement rate has emerged as a primary tool for the central bank to fine-tune monetary policy. "The reserve requirement often seems to function as a leading indicator, partly because it's a good signaling point to the markets," said Mark Williams, senior China economist at Capital Economics Ltd. in London. "From that perspective, it's a turning point."

The new rate will effectively lock up 300 billion yuan, or around $44 billion, that might otherwise have been lent, according to Tom Orlik, China analyst at Stone & McCarthy Research Associates. Next to the 40 trillion yuan or more in loans outstanding and a 24 trillion yuan stock market, that is a small amount. The move, however, is a "powerful signal" of the central government's determination to tighten monetary policy, Mr. Orlik said. It sets China on a path for other bigger adjustments, including official interest-rate increases later in the year. Such moves were anticipated, just not so soon, raising concerns that Beijing sees reasons to brake harder and earlier to contain the risks of its growth.

Also on Tuesday, for the second time in a week, the central bank raised the yield it pays on its short-term bills. That makes the debt securities more attractive for banks to buy, a move designed to siphon cash out of the financial system. Mr. Orlik said Beijing may have acted earlier because local banks were rushing out loans in the first days of January in anticipation that the government would tighten lending. Chinese banks traditionally make most of their loans in the early part of the year.

Tuesday's changes mark "stage one of China's exit from the emergency policies" of late 2008, said Paul Cavey, a Macquarie analyst. Under the four trillion yuan stimulus program, the Chinese economy has rebounded, with property prices sizzling in major cities, a recovery in exports and recently a rush of inward investment. China's economy is poised to surge past Japan's as the second largest after the U.S. Economists estimate that the Chinese economy grew by close to 10% in the latter part of 2009 and will comfortably exceed Beijing's 8% growth target, which appeared questionable early in the year. The economy is still expected to grow at a rapid pace in 2010.

While China's early recovery underpinned the global economy, the country is facing the fallout from its success earlier than other major economies. Recent news that China overtook Germany as the world's largest exporter has sharpened calls for Beijing to lift the value of its currency, a move that would make its exports more expensive. China also faces mounting protectionist pressures. Meanwhile, Beijing's stimulus policy allowed companies to gorge on easy credit and speculate on properties and stocks -- not necessarily productive investments. Banks could find themselves facing questions about whether loans could become uncollectable.

The easy lending may have also encouraged wasteful spending: The government recently said that over 106,000 officials were punished last year for misconduct, including abuse of economic-stimulus money. In this environment, deflecting inflation has become a growing priority for Beijing. Sensitivity to inflation runs deep in China -- a reminder of how poor the country remains, with the price of pork, for instance, remaining a major consideration in household finances. Chinese political movements, including the Tiananmen Square protests in 1989, often have had their origins in inflation. With an economy that is led largely by investment, China faces a balancing act in bringing down lending without choking off growth. It has also proved easier to spur banks to increase lending than decrease it.

Bankers expect Chinese authorities to target roughly an 18% increase in bank loans this year, slowing from the 30%-plus surge in 2009, with total new lending of around 7.5 trillion yuan compared with more than nine trillion yuan last year. At the end of November, China's banking industry reported total loans outstanding were around 42 trillion yuan. The reserve-requirement increase follows a number of indications that the easy monetary policy was being reconsidered. In recent weeks, China began removing certain incentives for property buyers; in a rare press interview, Premier Wen Jiabao referred to "quickly" rising real-estate prices and fresh inflation expectations; and the central bank permitted yields on its debt instruments to notch higher.

At this point, inflation is under control. The consumer-price index turned positive in November for the first time in almost a year, rising 0.6% from the year earlier. But economists say headline inflation rates in China are likely to rise rapidly in the next few months, as current prices are being compared with the extremely depressed levels of early 2009.

China's 2009 Trade Surplus Falls A Record $100 Billion
by Tyler Durden

After posting a record crude-oil import month in December, as well as the second highest iron-ore import month in history, China's program economy is roaring back to life, even if the imports are actually sitting in full warehouses, used to build empty cities that consume negative electricity, make washing machines that never launder anything except the government's flawed economic statistics, and create cars that somehow use up ever-less gasoline.

Of course, when the government has trillions in increasingly worthless excess dollar foreign reserves that have to be used up for something, it is no wonder that the Chinese government is buying anything and everything it can stockpile, and that can't be devalued by Tim Geithner, hand over fist. As for exports: courtesy of the dollar peg, which makes China's exports as cheap as the US' (assuming the latter had much of anything to export besides financial innovation), China had no shortage of counterparties to purchase its $1.2 trillion in 2009 exports. Yet despite all this, China's trade surplus plunged a record $100 billion, or 34%, to $196 billion from 2008's $296 billion.

Notably, in December China's crude-oil imports hit a record 21.26 million metric tons, or 5 million barrels per day. It is good that at least for one country the "great recession" never happened. In 2009, China imported 14% more oil than in 2008, for a total of 204 million tons. But the real kicker was in iron-ore imports which was 62.16 million metric tons in December, 22% more than November, and an unbelievable 80% more than a year earlier, and the second highest ever recorded. For all of 2009 628 million tons of iron were imported, 41.6% higher than in 2008. Those empty cities apparently really need more peers. And one wonders why Australia's (5.4% more imports in 2009) and Brazil's (5.3% less) economy are humming: it takes a lot to provide the raw materials to build the biggest bubble in the world.

The simple observation is that instead of having to finance the US consumer's continued spending binge by buying hundreds of billions in Treasuries in 2009, China was let off the hook by the Federal Reserve, which did all of its mandated purchase instead. So with all the excess money China went and stockpiled, stockpiled, stockpiled. Now the only question of whether the required end-consumer demand will ever materialize will determine who is correct in the China bubble debate: Chanos or Rogers. As the US consumers are tapped out (save for some Spanish tourists who apparently can't wait to purchase g-strings at A&F), China better hope its own middle class will use its savings to buy everything the government has already made and built, and counted (hopefully not double or triple) in its GDP calculation.

On the other hand, despite having a savings rate that Americans could only dream of, China is also gripped by gambling fever: who really knows what the domestic balance sheet looks like. Yes, having cash is great, but if the liability side of the consumer balance sheet has 0 equity (or only equity in a massively inflated stock market) and the rest are cheap loans, which the government handed out freely in 2009 to the tune of 11 trillion renminbi, then all bets really are off when the profit taking inevitably begins (as it always does).

Here are some more charts that demonstrate why the traditional Chinese model of an export-led economy may be in trouble if the US and EU consumers don't come back (as a reference point, exports to the EU dropped 19.4% or $236 billion, while those targeted at the US sank by $221 billion or 12.5%).

The chart below demonstrates the phenomenal rise in China's trade surplus, which was effectuated primarily on the backs of the US and EU consumers, who had found themselves big spenders in the years after 2003 courtesy of the HELOC piggybank, a surging stock market, and low interest rates.

What is very amusing on the above chart is the massive surge in China's trade balance in the months following the Lehman bankruptcy. Truly with the rest of the world shut down for the subsequent quarter, China was exporting excess billions of "stuff" to somebody. Who that somebody was, would be interesting to find out. Had the export data been normalized for the October-February period, $85 billion in GDP would have been removed from the Chinese economy. Yet what is glaringly obvious is that China will have a very tough time at recreating the same surge in the trade surplus in 2010 and onward, especially if calls for renminbi appreciation continue growing ever louder.

Marc Faber Isn't Sure When China Bubble Will Burst, But It'll Be Bad News for Commodities

Hedge-fund manager Jim Chanos is predicting a crash in China, calling it "Dubai times 1000." China bull -- and frequent Tech Ticker guest -- Jim Rogers naturally disagrees. So whose right? Without a doubt, China is recovering more quickly than the U.S. The mainland has benefited from a large stimulus program, liberal bank lending policy, and broad government support for exports. But excesses are emerging including over supply in some industries.

"Yes I'm worried about it. I'm sure that Jim Chanos will be right about it someday," says our guest Marc Faber, author of the Gloom Boom & Doom Report newsletter and its related site. "It's very difficult to pinpoint a day when China will implode. I don't think it will happen right away," he tells Henry. Bottom line when it does happen, Faber says investors can expect a hit on commodities and emerging markets.

US must cut spending to save AAA rating, warns Fitch
Fitch Ratings has issued the starkest warning to date that the US will lose its AAA credit rating unless acts to bring the budget deficit under control, citing a spiral in debt service costs and dependence on foreign lenders. Brian Coulton, the agency's head of sovereign ratings, said the US is shielded for now by its pivotal role in global finance and the dollar's status as the key reserve currency, but the picture is deteriorating fast enough to ring alarm bells. "Difficult decisions will have to be made regarding spending and tax to underpin market confidence in the long-run sustainability of public finances. In the absence of measures to reduce the budget deficit over the next three to five years, government indebtedness will approach levels by the latter half of the decade that will bring pressure to bear on the US's 'AAA' status", he said.

Fitch expects the combined state and federal debt to reach 94pc of GDP next year, up from 57pc at the end of 2007. Federal interest costs will reach 13pc of revenues, meaning that an eighth of all taxes will go to service debt. Most fiscal experts view this level as dangerously close to the point of no return for debt dynamics. The rating alert is a reminder that fiscal stimulus and bank rescues across the world have merely shifted private debt on to public shoulders. The bail-outs looked deceptively 'costless' at the time, but the damage to sovereign states may take years to repair. The US Treasury says interest payments as a share of GDP will rise to 3.6pc by 2016, the highest since data began in 1940 – when it was 0.8pc.

Mr Coulton said the US is vulnerable to "potential interest rate shocks" due to its reliance on short-term debt and foreign investors. The average maturity of US government debt has fallen to four years, compared to seven for Europe's AAA club, and 10 for Britain. "The share of three-month bills has risen very sharply as a result of recapitalising banks," he said. This raises the danger of a roll-over crisis. Chinese, Japanese, and Mid-East investors own almost half of the stock of US debt. They are more likely to liquidate holdings than domestic investors, if there were a loss of confidence in Washington or the Federal Reserve. Short maturities mean that any jump in interest rates will be felt quickly.

Stephen Lewis, of Monument Securities, said a US downgrade would rip the anchor from the global system and pose a grave risk to the stability. "This would set off tremors, making all dollar assets less secure. You could argue that the reason why the rating agencies have not already downgraded the US and Britain is that they fear the consequences for the global economy if they pull the trigger," he said. While US debt was higher after World War Two, circumstances were very different. The age structure was healthier. Most bonds were held by Americans. Demobilisation of the troops allowed for drastic budget cuts. America had emerged as the world's strategic and economic Colossus. This time the US cannot rely on exuberant growth to whittle down the debt.

All Hail the Fed
by Bill Bonner

The Fed has a licence to print money. Sometimes... when it can get away with it... it prints a lot of money. And it makes a lot of money. What’s the news? The Dow fell a little – off 36 points. The oil price traded at $80. And the gold price dropped $22, to close at $1,129. Nothing unusual. But poor Mr Obama... He seemed like a nice enough fellow. More and more people seem to be mad at him.

What went wrong? It looks to us that he has been completely captured by America’s two most special interests – Wall Street and the Pentagon. Maybe he was their man from the get-go; we don’t know. Yesterday, he announced that he was going to squeeze $120 billion out of the banks over the next 10 years. Don’t worry about the bankers, dear reader; it’s all for show. The feds pretend to punish the bankers and the bankers pretend to suffer. They’ll whimper and whine... all the way to the bank!

How tough is it to make money when you can borrow money for nothing and lend it back to the lender at 400 basis points more interest? Even bankers can make money under those circumstances. And that’s not all. Don’t forget that the feds are authorised to buy up Wall Street’s mistakes... and to make sure that the bankers don’t have to suffer from their own dumb mistakes.

Yesterday came news that the Fed had a very profitable year. It made more money even than Goldman Sachs – $45 billion. How did it make so much money? The papers report that the Fed cleverly bought up debt that no one wanted... Wall Street’s mistakes. And then, lo and behold... it turned the dross into gold. No kidding. Bad debt became good debt. And then it became great debt... as it became clear that the US government stood behind almost ALL DEBT issued by Wall Street’s major players.

The financial press will spend a few days telling readers how smart the Fed is. Ben Bernanke will stress how the Fed saved the economy. Pundits such as Martin Wolf will claim they saved civilisation. But what is really going on? The Fed has a licence to print money. Sometimes... when it can get away with it... it prints a lot of money. And it makes a lot of money. How cool is that?

And so, we turn to the story of Freddie Mac and Fannie Mae. The twins are double trouble, as far as we can tell. They lent (or guaranteed the loans) to people who couldn’t pay the money back. Then, when the inevitable came to pass they told the feds that if they didn’t help them out America’s entire financial structure would melt down... and almost every family in the country would find itself underwater. In 2006, Fannie Mae set aside $519 million just in case things went bad. Things did go bad. And guess what? The half a billion Fannie had set aside turned out to be laughably inadequate.

Today it has had to come up with ten times that amount... which is still not enough to cover the implied losses at today’s market prices. It needs about twice that amount. So, along come the feds again... in a surprise move on Christmas Eve... with billions more. We try to imagine members of Congress working hard to understand the complications of mortgage finance... giving the matter the solemn attention and fair-minded deliberation it deserves. After all, hundreds of billions of dollar were at stake. But try as we may, we just can’t imagine it.

The pols didn’t really try to figure it out. They didn’t have to.

“You have no idea,” said a source we won’t divulge, “how much control the bankers – especially Goldman Sachs – have on government.

“They have their men in the key positions. And every politician and bureaucrat knows that if he goes along with the game he could one day get a job at Goldman and make millions.

“And I’m not just talking about the US. It’s true of many other countries too. Goldman is international. And they’ve got their men in decisive posts in many countries.”

One source of the bankers’ power is money. The other is ignorance. They have money to throw around. When it comes to money, they seem to know what they are talking about. So, on Christmas Eve, 2009, rather than actually debate and deliberate, Members of Congress deferred to the bankers’ lobbyists. Who’s going to argue with the bankers? They know how money works, don’t they? What politician has the courage... or the knowledge... to stand against them? If they hadn’t gone along with the bailouts, the whole shebang might have gone down the tubes, right?


Gerald Celente: U.S. Postponed the Great Depression, Not Prevented It

A week into the New Year, the consensus among the Wall Street "experts" is the economy and the financial markets will continue to improve in 2010. Unlike last year, when we entered January with so much uncertainty, today pretty much everyone agrees the worst is behind us.

Gerald Celente does not agree. Celente, the director of the Trends Research Institute, who's been tracking trends for 30 years, thinks 2010 brings with it the Great Depression we narrowly avoided last year. Celente's been making this prediction for several years, and as we know was nearly proved right. Extraordinary government intervention helped prove him wrong, something he didn't anticipate. "We never thought we'd be buying companies like AIG, we never thought we'd own parts of General Motors," he tells Aaron in the accompanying clip. "The government's never done these things before."

Celente believes the bailouts have just postponed a depression -- not prevented one: "The hand may change but the game doesn't change." Celente says the recent signs of economic recovery are nothing more than a boost based on "a stimulus economy." Once those measures are pulled back and interest rates rise, the economy will once again tank. It's not all gloom and doom. Eventually, Celente predicts, American ingenuity and innovation will drive a recovery. It's a topic we discuss more in a forthcoming clip.

Survivor, America: "It's Only Going to Get Worse," Gerald Celente Says

"It's only going to get worse," is the sobering forecast of Gerald Celente, director of the Trends Research Institute. As discussed in a prior segment, Celente believes the "bailout bubble" is going to burst and the U.S. economy will slip back into recession, if not worse, in 2010. Like all forecasters, Celente isn't always right but he has predicted a number of major events. So if Celente is right about 2010, what will that mean for the average American? Celente says we're going back to basics, making do with less and adopting the following mantra: "Waste not, want not. Use it up wear it out. Make it due, due without."

On his Website, Celente offers the following predictions, further discussed in the accompanying video:
  • Neo-Survivalism: "In 2010, survivalism will go mainstream," Celente writes. "Unemployed or fearing it, foreclosed or nearing it, pensions lost and savings gone, all sorts of folk who once believed in the system have lost their faith. Motivated not by worst-case scenario fears but by do-or-die necessity, the new non-believers, unwilling to go under or live on the streets, will devise ingenious stratagems to beat the system, get off the grid (as much as possible), and stay under the radar."

  • Depression Uplift: "As times get tougher and money gets scarcer, one of the hottest new money-making, mood-changing, influence-shaping trends of the century will soon be born; we forecast that this will be "Elegance" in its many manifestations," he opines. "The trend will begin with fashion and spread through all the creative arts, as the need for beauty trumps the thrill of the thuggish. A strong, do-it-yourself aspect will make up for reduced discretionary income, as personal effort provides the means for affordable sophistication."

What do you think? Is Celente a crackpot who's on something or a savvy seer who's onto something?

One in eight Americans receives food stamps
Some 37.9 million people -- one in eight Americans -- received food stamps to help buy food at latest count, the government said on Tuesday as enrollment set a record for the ninth month in a row. Food stamps are the primary federal anti-hunger program. It helps poor people buy groceries. The economic stimulus package boosted benefits by $80 a month for a family of four.

Participation has surged since the financial-market turmoil more than a year ago and has set a record each month since December 2008. The Agriculture Department said enrollment reached 37.9 million in October, the latest month for which figures are available, up 746,000 from the previous month.

The average monthly benefit was $133.60 per person in October. The Food Research and Action Center, an anti-hunger group, said enrollment of one in eight Americans "is the highest share of the U.S. population" ever in the program, which was renamed the Supplemental Nutrition Assistance Program in mid-2008.

1 Million UK Borrowers Using Credit Cards for Mortgages
by Diana Golobay

More than 1m borrowers in the United Kingdom are exchanging mortgage debt for plastic, according to a recent poll by housing charity Shelter England. Survey results published Monday revealed 6% of respondents liable for rent or mortgage said they paid by credit card at some point in the last 12 months, indicating a national figure of more than 1m, Shelter said.

“This is a shocking discovery, that over a million households in Britain are in such desperate circumstances that they need to borrow money on credit cards to pay for basic housing costs,” said Shelter’s director of policy and campaigns, Kay Boycott, in a statement. “If people are already struggling to the extent that they fear losing their home, increasing credit card debt cannot be the answer.” One in 12 Londoners are paying their mortgage or rent payments with a credit card. About 8% of working-class professionals testify to the practice, but middle- and upper-class households are also falling victim, with 4% of respondents indicating they pay by card.

It’s a disturbing development, as HousingWire publisher Paul Jackson predicted in October 2007 the practice may only allow distressed consumers to charge up significant debt and push bankruptcy a little farther down the road. Shelter issued a statement warning UK homeowners of the dangers involved with charging mortgage debt to credit cards, as default could trigger repossession in more extreme cases.
“Credit card companies have to recover their debts and are not subject to the same rules as mortgage lenders,” Shelter said in a statement. “Once they obtain a charging order on people’s property, credit card companies can go back to the court for a possession order to force a sale to recover the debt.”

In the US, there is an emerging trend of remaining current on credit cards at the expense of falling behind on mortgage payments — evidence of “the need for groceries,” as one Fitch Ratings source recently told HousingWire. But even in the US, credit card companies are seen as manipulating borrowers’ finances, since a dollar used in purchases by credit card is not really worth a dollar. After fees, for example, a “Visa dollar” is worth more like 99 cents.

A global fiasco is brewing in Japan
by Ambrose Evans-Pritchard

I have felt rather lonely after suggesting in my New Year Predictions that Japan is dangerously close to blowing up on its sovereign debts, with consequences that will be felt across the world. My intended point — overly condensed  — was that 2010 will prove to be the year that Japan flips from deflation to something very different: the beginnings of debt monetization by a terrified central bank that will ultimately spin out of control, perhaps crossing into hyperinflation by the middle of the decade.

So it is nice to have some company: first from PIMCO’s Paul McCulley, who said that the Bank of Japan should buy “unlimited amounts” of long-term government debt (JGBs) to lift the country out of a “deflationary liquidity trap” and raise the souffle again. His point is different from mine, in that he discerns deflation “as far as the eye can see”. But in a sense it is the same point. Once a country embarks on such policies, the game is nearly up. The IMF says Japan’s gross public debt will reach 227pc of GDP this year. This is compounding at ever faster speeds towards 250pc by mid-decade.

The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. “A global fiasco is brewing in Japan.” Japan’s deficits are already within the hyperinflation “red flag” zone identified by historian Peter Bernholz (”Monetary Regimes and Inflation” .. the Bible on this subject). As you can see from the charts below, prices start to spiral into the stratosphere once the deficits as a share of government expenditure rises above a third and stays there for several years.

The Bernholz range for the five hyperinflations of France, Germany, Poland, Brazil, and Bolivia over the centuries is surprisingly wide, from 33pc to 91pc. Japan has been in the that range almost continuously for the last eight years. The US joined the party in 2009. Japan’s Bernholz index will rise above 50pc this year for the first time, meaning that it will have to borrow more from the bond markets than raises in tax revenue. You see the problem.

We all know that Japan has been racking up debt for Two Lost Decades, yet the sky has refused to fall. Borrowing costs have slithered down to 1.36pc on 10-year JGBs and under 1pc on shorter debt, though they are not as low as they were .. nota bene. This seeming defiance of gravity has emboldened the Krugmanites and Keynesian prime-pumpers to call for a repeat in the US, UK, and Europe. There lies a great danger.

Mr Grice said Japan was able to pull off this feat only because its captive saving pool was large enough to cover the short-fall, and because the Japanese people continued to be reassured by the conjurer’s illusion that all was well. This cannot continue. The country tipped into outright demographic decline in 2005. Households have already stopped adding to their stock of JGBs. As the aging crisis accelerates, the elderly are running down their assets. The savings rate will soon crash below zero.

Japan can turn to foreign investors to plug the gap, or course, but at what price? If yields reached UK or US levels of 4pc, debt costs would soak up nearly all the budget, leaving nothing for schools, roads, the police, or salaries for the Ministry of Finance. “I doubt there is any yield that international capital markets can find acceptable that will not bankrupt the Japanese state,” he said. Note too that the Japanese will also have to run down their holdings of US Treasuries, currently $750bn or 10pc of the entire stock of US Treasury debt, as well as selling a lot of Gilts and Belgian bonds.

“This might very well precipitate other government funding crises. At the very least I’d expect it to trigger an international bond market rout scary enough to spook all other asset classes. So maybe we should all be concerned that Japan is in the hyperinflationary range. And if so, maybe we should think a little more carefully about how Western governments consider their debt burdens. Maybe Japan’s will be the crisis that wakes up the rest of the world,” he said. Will it happen, this week, this month, this year, or will Tokyo keep the illusion of solvency going for years longer? Who knows. Japan is an endlessly mystifying society. But as Mr Grice puts it, if you are sitting on a tectonic fault line, expect an earthquake.

US mortgage originations seen plummeting 40% in 2010
U.S. residential mortgage originations will plunge 40 percent this year to the lowest level in a decade as home refinancing demand sinks with rising mortgage rates, the industry's main trade group said. Lenders will underwrite $1.28 trillion in home loans this year, down from $2.11 trillion in 2009, the Mortgage Bankers Association said in its annual forecast on Tuesday. That would be the lowest since $1.14 trillion in 2000. The forecast was downgraded from December, when the MBA predicted originations would fall about 24 percent.

New purchase originations are expected to rise slightly to $776 billion from $742 billion in 2009. Refinance originations, however, are seen plunging to $502 billion this year from $1.372 trillion last year. Interest rates are expected to rise when the Federal Reserve at the end of March stops buying mortgage backed securities. Thirty-year home loan rates averaged 5.09 percent in the week ended Jan. 7, down from 5.14 percent a week earlier and up marginally from 5.01 percent a year ago. The mortgage bankers see 30-year fixed rates rising to 5.8 percent in 2010, 6.2 percent in 2011 and 6.5 percent in 2012.

The forecast decline is worse than what Chase Home Mortgage, one of the largest U.S. lenders, had seen in October. Its chief executive officer, David Lowman, had forecast mortgage originations falling to about $1.5 trillion, saying that a rise in interest rates from record lows would bring mortgage originations "to a pretty hard stop." Despite the rise in rates, the mortgage bankers see increased demand for housing as unemployment falls, economic growth resumes and the financial system stabilizes. Housing starts are seen rising to a seasonally adjusted annual pace of 743,000 from 554,000 in 2009, while total sales of previously owned homes are seen rising to a 5.378 million unit pace from 5.178 million units last year.

Prices, as measured by the Federal Housing Finance Agency Home Price Index, are seen flat in 2010 after falling 4.1 percent last year. Prices in 2011 are seen rising 2.8 percent in 2011 and 5.0 percent in 2012. The mortgage group said it expected the economy to grow 2.7 percent, from fourth quarter to fourth quarter, in 2010, compared to a 0.2 percent expected contraction in 2009. The MBA on Tuesday also said it will encourage creation of a new type of government-guaranteed mortgage security that would be backed by privately owned, government-chartered "mortgage-credit guarantor entities" based off existing U.S. mortgage finance giants Fannie Mae and Freddie Mac.

Fed's Record Profit Does Not Change Anything. US Still "Doomed" says Marc Faber

Wall Street banks aren't the only ones making money in the aftermath of the financial crisis.  The Federal Reserve booked a record profit of $52.1 billion in 2009 --  $46.1 billion of that windfall was thanks to an increase in the value of the securities the Fed bought to rescue the financial system. That money will get turned over to the Treasury Department. In case you've forgotten, the Fed went on a buying spree in the depths of the crisis, most notably snapping up $300 billion worth of government debt and buying another $1.25 trillion in mortgage debt from Fannie Mae and Freddie Mac. The Fed says it also made over $5 billion on assets it bought in the takeover of Bear Stearns and the government's aid package to AIG.

Before we get too excited, the profit only equates to about a 2 percent profit margin, based on the Fed's balance sheet of about $2 trillion last year. And, more importantly, Marc Faber, editor of The Gloom, Boom and Doom Report, says it doesn't change the fundamentals.  Faber tells Henry Blodget in this clip that Uncle Sam is carrying too much debt and leverage.  He calls the situation "beyond repair."

Faber, a long-time critic of U.S. policies, argues the private sector acted rationally after 2008 by deleveraging and increasing its savings.  The government, on the other hand, added more debt and leverage.  They can get away with it for now because interest rates are low.  Eventually, interest rates will rise, causing the public sector debt bubble to burst under the weight of government entitlement programs like Medicare, Medicaid and Social Security.

The only way out is for the government to print more dollars. Of course, that leads to inflation and a weak dollar.  And, even worse, he says, "to distract the attention of ordinary people you go to war." To put it bluntly, Faber says, "we are doomed."

The bonus questions
by Robert Peston

If you and I had the power to hire and fire investment bankers (that would be quite a thing, wouldn't it?), there are a few questions we would probably ask before lavishing bonuses on them.

Hang on a sec. We do, in a way, employ them, since taxpayers own not far off the whole of Royal Bank of Scotland. So here are a few pertinent questions for RBS - which will perhaps be asked on our behalf tomorrow by MPs on the Treasury Select Committee, when they interrogate RBS's chief executive Stephen Hester.

First, what proportion of investment banking profits can be seen as an exceptional windfall, stemming from the unprecedented financial and economic support provided by governments and central banks to lessen a recession that was caused in large part by the recklessness of banks?

This question can be broken down into two parts.

(1) How much has been earned by what investment bankers style as a "carry trade" with central banks? This is the business of buying assets that yield 5, 6, 7 or 8 percentage points over the official lending rate, and then refinancing those assets with the central bank at that official lending rate. Borrowing at close to zero from the central bank and lending almost risk-free at 6 or 7% is not the most stressful or challenging way to generate bumper profits. Investment bankers tell me this carry trade has been happening on a system-wide scale, in spite of central banks' precautions to prevent it.

(2) How much of the investment banks' profits is the result of a generalised rise in asset prices, caused by the easiest monetary conditions for a century, which has led to a recovery in the price of securities that in the previous year generated spectacular losses for the banks? This gain from marking investments to the market price should not be seen to be the consequence of management genius, since the main reason the banks didn't sell the securities in the previous year is that they were unsellable.

Bankers tell me that a vast proportion of all investment banks' profits stem from these factors. It is visible in the sharp increases in revenues from so-called trading and principal investments - a doubling in some cases - which in turn is the main driver of banks' overall profits growth.

There is an acknowledgement by some bankers that these gains are in effect an unrepeatable jackpot, the consequence of the authorities' bail-out of the economy, and not the result of their great prowess. Or to put it another way, only the generation of losses in these benign market conditions would require a very special talent. Making profits? A suited monkey could do it.

So bank bosses accept that in an ideal world they wouldn't pay bonuses from these windfalls. But my own estimate is that bonuses paid in the coming weeks by the world's main investment banks - from the US, UK, Switzerland, the eurozone and Japan - will be greater than $80bn in total.

How so? Well, it is a classic example of competition leading to a mad outcome. No bank wants to be the only one in the world to pay less than what all the others pay, so they all pay too much. You might argue, of course, that there's a bit of vested interest in play here, in each banks' refusal to take a lead in cutting pay.

Oh, and by the way - as the FT points out this morning - compensation as a proportion of revenues will fall. However, that doesn't mean the banks are being hideously penny-pinching in respect of staff rewards.

At Goldman Sachs, for example, compensation and benefits for employees will be nearer to 40% of net revenues for 2009 than its typical payout ratio of 50%. But with revenues soaring, Goldman will still provide around $20bn in remuneration - including about $10bn in bonuses - or more than $630,000 of remuneration per employee.

Which brings us to question number two for the banks, and for Royal Bank of Scotland in particular. Since bonuses are discretionary, on what basis have they decided to pay record amounts to some executives, just months after more-or-less every bank in the world was minutes from meltdown? At RBS, for example, I am told that executives in its Global Banking and Markets division who have previously never earned more than £1m at the bank have this year been told they'll be pocketing over £5m. And that a small number will be making over £20m.

As I mentioned well over a month ago, in total RBS's management feels it has to pay bonuses worth in aggregate over £1.5bn. I guess with an anxious Treasury breathing down its neck and in the full glare of publicity, RBS's board might scale this back a bit when it signs off the remuneration package in mid February.

But I would still expect it to pay very substantial bonuses. And it'll have the backing of UK Financial Investments, the arm of the Treasury which manages taxpayers' investments in banks, in doing so: UKFI accepts the argument that taxpayers would be worse off if RBS was perceived to be a lousy payer and lost its best investment bankers.

Which brings me to my final question. Are these investment banks as dependent on the skills of "special" individuals as they think that they are?

I am told that a good chunk of Royal Bank's revenues from investment banking - and this is very much to its credit - is in effect an annuity: it is foreign exchange and debt business provided by medium-size companies that are loyal to the firm, not to any particular individual. But if that's the case, there would be less need to provide enormous rewards to the individuals who look after those clients, because the clients would probably stick with RBS, even if the individual bankers defected.

There are, of course, brilliant bankers who have exceptional abilities and can make the difference between a mediocre performance by their organisations and a good one. But do we really think that collectively the investment bankers of the world should be paid bonuses for 2009 equivalent to considerably more than the annual economic output of Slovakia, Morocco or Vietnam?

Why Obama must take on Wall Street
by Robert Reich

It has been more than a year since all hell broke loose on Wall Street and, remarkably, almost nothing has been done to prevent all hell from breaking loose again. In fact, close your eyes and you could be back in the wilds of 2007. Bankers are still making wild bets, still devising new derivatives, still piling on debt. The big banks have access to money almost as cheaply as in 2007, courtesy of the Fed, so bank profits are up and bonuses as generous as at the height of the boom.

The only difference is that now the Street’s biggest banks know they are “too big to fail” and will be bailed out by taxpayers if they get into trouble – which means they have every incentive to make even riskier bets. And, of course, American taxpayers are out some $120bn, while millions have lost their homes, jobs and savings. All could be forgiven if the House and Senate committees with responsibility for coming up with new regulations were about to come down hard on the Street and if the Obama administration were pushing them to. But nothing of the sort is happening.

Last week, Senator Chris Dodd, chairman of the Senate banking committee, announced he would not seek re-election next November, recasting himself as a lame duck who will do whatever the banks want. Mr Dodd’s decision “makes it more likely that regulatory reform will be enacted”, says Edward Yingling, chief executive of the American Bankers Association, because it “frees him from political dynamics that would have made it more difficult for him to compromise”. Translated: Dodd’s committee will report out a bill – Democrats would be embarrassed not to – but it will be weak because voters can no longer penalise Mr Dodd for rolling over for the Street.

The bill that has already emerged from the House is hardly encouraging. Dubbed the “Wall Street Reform and Consumer Protection Act”, it effectively guarantees future Wall Street bail-outs. The bill authorises Fed banks to provide up to $4,000bn in emergency funding the next time the Street crashes. That is more than twice what the Fed pumped into financial markets last year. The bill also enables the government, in a banking crisis, to back financial firms’ debts – a wonderful insurance policy if you are a bondholder. To be sure, the bill authorises the Fed and Treasury to spend these funds only when “there is at least a 99 per cent likelihood that all funds and interest will be paid back,” but predictions about pending economic disasters can be conveniently flexible, especially when it comes to bailing out the Street.

If this were not enough, the House bill creates regulatory loopholes big enough for bankers to drive their Jaguars through. Consider derivatives. Last year, as taxpayers threw money at the Street, congressional leaders promised to put derivative trading on public exchanges. The prices of derivatives could be disclosed and margin requirements imposed, making it more likely that traders would make good on their bets. Yet the House bill exempts nearly half the $600,000bn of outstanding derivatives trades.

The bill also allows – but, notably, does not require – regulators to “prohibit any incentive-based payment arrangement”. This makes fat bonuses the norm unless a regulator has reason to prevent them. And as we witnessed last year, bank regulators tend not to disturb the status quo. The House bill does not even make an attempt to unravel the conflict of interest that led credit ratings agencies to turn a blind eye to the risks the Street was taking on.

To its credit, the House bill does create a Consumer Financial Protection Agency to protect borrowers from predatory lending. Banking regulators have authority to protect consumers but failed to do so, so consolidating these powers in a new agency makes some sense. But Senate Republicans are dead-set against it, and Mr Dodd’s new willingness to compromise may well doom it in that chamber.

What is truly remarkable is what Congress and the administration have shown no interest in doing. Large numbers of Americans have lost their homes to bank foreclosures or are in danger of doing so. Yet American bankruptcy law does not allow homeowners to declare bankruptcy and have their mortgages reorganised. If it did, homeowners would have more bargaining power to renegotiate with banks. But neither Congress nor the administration has pushed to change the bankruptcy laws. Wall Street opposes such change and was instrumental in narrowing the scope of personal bankruptcy in the first place.

Nor have lawmakers shown any enthusiasm for resurrecting the wall that used to exist between commercial and investment banking. The Glass-Steagall Act, passed in the wake of the Great Crash of 1929, separated the two after it became obvious that commercial deposits needed to be insured by government and kept distinct from the betting parlour of investment banking. But Wall Street forced Congress to take down the wall in 1999, enabling financial supermarkets such as Citigroup to use its deposits to make all sorts of bets. Even Obama adviser and former Fed chief Paul Volcker has argued that the two functions should be separated again.

Nor is anyone talking seriously about using antitrust laws to break up the biggest banks – the traditional tonic for any capitalist entity that is “too big to fail”. Five giant Wall Street banks now dominate US finance. If it was in the public’s interest to break up giant oil companies and railroads a century ago, and the mammoth telephone company AT&T, it is not unreasonable to break up the almost infinitely extensive tangles of Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs and Morgan Stanley. No one has offered a clear reason why giant banks are important to the US economy. Logic and experience suggests the reverse. What happened to all the tough talk from Congress and the White House early last year? Why is the financial reform agenda so small, and so late?

Part of the answer is that the American public has moved on. A major tenet of US politics is that if politicians wait long enough, public attention wanders. With the financial crisis appearing to be over, the public is more concerned about jobs. Another 85,000 jobs were lost in December, bringing total losses since the recession began in December 2007 to over 7m. One out of six Americans is unemployed or underemployed. Yet if the president and Congress wanted to, they could help Americans understand the link between widespread job losses and the irresponsibility on Wall Street that plunged America into the Great Recession. They could make tough financial reform part of the answer to sustain-able jobs growth over the long term.

True, financial regulation does not make a powerful bumper sticker. Few Americans know what the denizens of Wall Street do all day. Even fewer know or care about collateralised debt obligations or credit default swaps. To the extent Americans have been paying attention to the details of any public policy, it has been the healthcare reform bill. But that only begs the question of why financial reform has not been higher on the agenda of the president and Democratic leaders.

A larger explanation, I am afraid, is the grip Wall Street has over the American political process. The Street is where the money is and money buys campaign commercials on television. Wall Street firms and executives have been uniquely generous to both parties, emerging as one of the largest benefactors of the Democrats. Between November 2008 and November 2009, Wall Street doled out $42m to lawmakers, mostly to members of the House and Senate banking committees and House and Senate leaders. In the first three quarters of 2009, the industry spent $344m on lobbying – making the Street one of the major powerhouses in the nation’s capital.

Money is powerful. Talk is cheap. Mr Obama recently called the top bankers “fat cats”, and the bankers insisted they were shocked – shocked! – to learn how intransigent their lobbyists had been in opposing financial reform. The bankers even claimed a “disconnect” between their intentions and their lobbyists’ actions. This was all for the cameras, of course. But the widening gulf between Wall Street and Main Street – a big bail-out for the former, unemployment checks for the latter; high profits and giant bonuses for the former, job and wage losses for the latter; buoyant expectations of the former, deep anxiety and cynicism by the latter; ever fancier estates for denizens of the former; mortgage foreclosures for the rest – is dangerous.

Americans went ballistic early last summer when AIG executives got big bonuses after taxpayers had bailed them out. They will not be happy when Wall Street hands out billions in bonuses very soon. Angry populism lurks just beneath the surface of two-party politics in America. Just listen to Sarah Palin or her counterparts on American talk radio and yell television. Over the long term, the political stakes in reforming Wall Street are as high as the economic.

Kill Wall Street Bonuses or Tax 'em to Death, MIT's Simon Johnson Says

Bashing big banks is all the rage this week, with White House officials and New York Attorney General Andrew Cuomo scolding Wall Street fat cats ahead of the Financial Crisis Inquiry Commission, which gets underway Wednesday. At issue is what level of bonuses are appropriate for publicly traded firms that posted record profits in 2009 thanks to the government's largess and after being rescued in 2008. Simon Johnson, professor at MIT's Sloan School of Management and former chief economist of the IMF, says there's a simple solution to this seemingly complex problem: "People working at our largest banks - say over $100 billion in total assets - should get zero bonus for 2009."

Looking back, all the big firms were saved by the various government programs, including  Goldman Sachs and Morgan Stanley were allowed to convert to bank holding company status in 2008, Johnson says. "There were unconditional bailouts for all our big banks - it was a decision made on the fly in the crisis. Let's not second-guess," he says. "But no way that strategy implies, requires, or is consistent with the banks then paying all that money out to their employees."

By contrast, when the government instituted a similar "recapitalization" strategy for banks after the Latin America debt crisis of the early 1980s, the banks retained the money to help rebuild their balance sheets, he recalls. "In this case they're going to pay out 40% [of profits] - that's not good economic policy." But, let's put our selves in the (expensive) shoes of the bankers for a moment.  Henry points out in the accompanying clip, on Wall Street it's a 'bonus' in name only.  Most bonuses are part of a guaranteed pay package negotiated when employee contracts are signed. 

The Wall Street Journal notes limiting bonuses after the fact will create some high class problems.  "Since many people plan their household budgets around bonus expectations, they may need the cash to cover mortgages, school tuition and other expenses." Of course, firms that limit pay always risk the threat of a brain drain. Johnson discounts these arguments wondering, if Goldman Sachs paid no bonuses this year, would employees really leave?  Where would they go?

If the "too big to fail" banks insist on paying bonuses for "retention" purposes or other reasons he deems fallacious, Johnson says they should be subject to a "steeply progressive windfall income tax" -- paid by the employees and not the firms, as is the case with the U.K.'s recently announced 50% bonus tax.

Blankfein Response Was 'Troublesome,' Angelides Says
Lloyd Blankfein, the head of Goldman Sachs Group Inc., failed to own up to his firm’s role in selling mortgage securities that helped trigger the global credit crisis, said the chairman of the panel investigating the financial meltdown. “Mr. Blankfein himself never admitted that there was any responsibility of Goldman Sachs to make sure the products themselves were good products,” Philip Angelides, chairman of the Financial Crisis Inquiry Commission, told reporters after a hearing in Washington today. “That’s very troublesome.”

Blankfein, the New York-based firm’s chairman and chief executive officer, found himself targeted for questioning as the panel opened two days of hearings on the causes of a collapse that led to a $700 billion U.S. government bailout of the nation’s banks. Brian Moynihan, John Mack and Jamie Dimon, who oversee Bank of America Corp., Morgan Stanley and JPMorgan Chase & Co., also appeared today.

Blankfein, 55, said in response to questions from the panel that Goldman Sachs sold securities to the “most sophisticated investors who sought that exposure.” While the firm has a duty to disclose risks to investors, Goldman Sachs couldn’t predict how the securities would perform, he said. “We did not know at any minute what would happen next,” Blankfein said. “There were people in the market who thought it was going down and there were others who thought these prices had gone down so much they were going to bounce up again.”

Goldman Sachs is in the spotlight because the firm has posted record profits and set aside a near-record $16.7 billion to pay employees, less than a year after receiving government support during the worst financial crisis since the Great Depression. “I don’t think the head of Goldman Sachs will ever be a sympathetic character with the public,” James Gattuso, senior fellow in regulatory policy at the Heritage Foundation, told Bloomberg Television. “He did about as well as could be expected, especially considering the proportion of time spent on grilling him in particular.”

Angelides, the former California state treasurer, pressed Blankfein on Goldman Sachs’s sale of mortgage-backed securities and its requests to the credit-rating companies for the highest rating while at the same time betting the securities would later fail. “It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars,” Angelides told Blankfein. “It doesn’t seem to me that that’s a practice that inspires confidence in the markets.”

The Securities and Exchange Commission and brokerage regulators are examining how Wall Street firms bet against mortgage-linked securities to profit as their clients took losses, people familiar with the matter said in late December. “Lloyd drew almost all of the fire” from the commission, said Rob Johnson, director of the Roosevelt Institute Financial Reform Initiative and a former chief economist for the Senate Banking Committee. “The idea that Lloyd is doing something bad that others aren’t doing is a bit of a distortion. I was surprised, in the realm of fairness, that Angelides’s questioners didn’t turn the same question on to others.”

Blankfein also testified today that he was never asked by U.S. regulators to accept a discount on investment contracts his firm had with American International Group Inc. AIG, as part of a bailout orchestrated by the Federal Reserve Bank of New York, paid 100 cents on the dollar on credit-default swaps purchased by bank counterparties including Goldman Sachs. The New York Fed said it had to make the payments after banks refused to accept so-called haircuts, according to a November audit from Neil Barofsky, the special inspector of the U.S. Troubled Asset Relief Program.

“I never got a request myself about taking less; it didn’t come up in any conversation I can recall,” Blankfein said. While an employee said he had received a question on the topic, it “never came up to me,” he said. If that was the case, the Federal Reserve and Treasury may “have some explaining to do,” Johnson said. “The mishandling of that bailout strongly suggests that financial reform will not be complete if we just give discretion to the Fed and the Treasury secretary to go do it again.”

The commission is led by Democrat Angelides and Bill Thomas, a Republican who is a former congressman from California. The CEOs led hearings that include Federal Deposit Insurance Corp. Chairman Sheila Bair, SEC Chairman Mary Schapiro and attorneys general from Colorado and Illinois. The panel has six members appointed by Democrats and four by Republicans and has the power to subpoena witnesses and documents.

Financial Crisis Inquiry Commission: A User’s Guide
This week begins the long-awaited first hearings of the Financial Crisis Inquiry Commission (FCIC). This is a bi-partisan 10-member commission created by Congress to investigate the causes of the financial collapse. It is mandated to create a special report by December 15th, 2010, and will be holding hearings year round. The Commission is expected to have their webpage — - go live today. I’ll be blogging the FCIC live from the hearings through Thursday right here. First, an overview.

The FCIC is modeled in part on the Iraq Study group, and in part on the New Deal’s Pecora Investigation. Pecora, in the testimony he found, uncovered a variety of abuses that mobilized the public to pass the banking regulation that provided the financial sector for the postwar boom in the real economy: Glass-Steagall, the Securities Act, and the Securities Exchange Act. Several members of the FCIC are hoping to have policy recommendations available for Congress in their final report.

As for the committee itself, there are a lot of hopeful signs. Brooksley Born, who was pushed out of her job in the late 1990s by Larry Summers, Robert Rubin and Alan Greenspan for trying to bring Credit Default Swaps (CDS contracts) under the regulatory umbrella, a story well told in the Frontline documentary: The Warning, is on the commission. Keith Hennessey, who in addition to being a blogger, was Director of the National Economic Council for President Bush in 2008 (may want to use subpoena power to learn more about what was being hidden from him by Paulson, Geithner and Bernanke during the crisis), is also on the committee. Phil Angelides has secured the ability to grant whistleblower status to witnesses, a move that may get some surprise testimony.

What will the commission bring?


There are five panels over the two days, three on Wednesday and two on Thursday.   The first panel, “Financial Institution Representatives”, has the CEO/Chairman of each of the major four banks:  Lloyd Blankfein of Goldman Sach, James Dimon of JPMorgan Chase, John Mack of Morgan Stanley, and Brian Moynihan of Bank of America.

If there are going to be headline grabbing revelations at this commission, it will be from this panel.   There are any number of questions to ask these four CEOs, and it is just a matter of having enough time to get through the most important ones.

The next panel, “Financial Market Participants”, will have members of the investment community:  Michael Mayo, a director of Calyon Securities, Kyle Bass of Hayman Advisors, and Peter Solomon of Petere J. Solomon Company.   The presumption is that they’ll give an investor perspective on what was going on in the financial markets over the past decade, and their interactions with both the collateralized markets and the largest banks.

The last panel of Wednesday will be “Financial Crisis on the Economy”, which will give a much needed perspective on the crisis from the point of the real economy and regular people.   There will be C.R. Cloutier, a past chairman of the Independent Community Bankers Assocation, who will likely talk about pressures community banks felt from larger banks their unregulated subprime lending arms.   There will be Dr. Rosen of Berkeley and Dr. Zandi of Moody’s to talk about the impact on the real economy and the real estate market.   And in a heartening sign, Julia Gordon of the Center for Responsible Lending, who will certainly give perspectives from the point of view of individuals who have been run over by the past decade.


The two panels on Thursday will interview government officials, at the federal level for the fourth panel and at the state level for the last one.    The questioning of Attorney General Eric Holder will be interesting to see how much the committee wants to push him. State Attorney Generals, including Lisa Madigan of Illinois and John Suthers of Colorado will be testifying.

Who I think will be most interesting to hear from on Thursday is Sheila Bair, Chairman of the FDIC and a hero of financial reform. After a long year of surviving Treasury Secretary Geithner’s efforts to remove her from her office, and preventing the grossest subsidies from taxpayers to banks hidden in the Geithner “PPIP” Plan from going through, she’ll probably have a lot of interesting things to say.

What the Financial Crisis Commission Should Ask
by Andrew Ross Sorkin

Questions anyone?

On Wednesday, the first hearing of the Financial Crisis Inquiry Commission — what many are calling this century’s equivalent of a Pecora-style investigation that scrutinized the market crash of 1929 — will take place in Washington. Wall Street’s top brass are planning to be there (and yes, they are flying down the night before so they don’t miss it): Lloyd C. Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America.

The hearing, of course, will partly be political theater. There will be finger-pointing. But if the committee uses its inquiry for its stated purpose — “hearing testimony on the causes and current state of the crisis” — it may help direct the national conversation and steer the current reform efforts. In the spirit of trying to help start some lively discussions, here are some questions they might consider asking:

Mr. Blankfein, your firm, and others, created and sold bundles of mortgages known as collateralized debt obligations that it simultaneously sold short, or bet against. These C.D.O.’s turned out to be bad investments for the people who bought them, but your short bets paid off for Goldman Sachs. In the process of selling them to institutional investors, however, your firm lobbied ratings agencies to assign them high ratings as solid bets — even as your firm planned on shorting them.

Could you explain how Goldman bet against these C.D.O.’s while simultaneously trying to persuade ratings agencies and investors that they were good investments? Were they designed from the outset to be shorted by Goldman and possibly select clients? And were those clients involved in helping design these transactions? What explicit disclosures did you make to Standard & Poor’s and Moody’s about your plans to short these instruments? And should we continue to allow transactions in which you’re betting against what you’re also selling?

Mr. Dimon, during the final week before Lehman Brothers collapsed, your firm asked Lehman to post billions of dollars in collateral and threatened to stop clearing Lehman’s trades if it didn’t do so. That demand had the effect of depleting Lehman’s capital base, just when it desperately needed that capital to return funds to investors who were asking for their money back.
JPMorgan clearly was trying to protect itself. But could you explain what impact you believe that “collateral call” had on Lehman’s failure and the ensuing market crisis?

This one is for the entire group. All of your firms are involved in some form of proprietary trading, or using your own capital to make financial bets, not unlike hedge funds and other private investors. As the recent crisis has shown, these bets can go catastrophically wrong and endanger the global financial system. Given that the government sent a clear signal in the crisis that it would not let the biggest firms fail, why should taxpayers guarantee this sort of trading? Why should the government backstop what amounts to giant hedge funds inside the walls of your firms? How is such trading helpful to the broader financial system?

A question for all the executives about bonuses: We keep hearing that you plan to pay out billions in bonuses this year. Given that they come out of profits that, to a large degree, seem to be the result of government programs to prop up and stimulate the banking sector, do you think they are deserved, even if they are in stock? And, while we’re on the topic, given the market crisis of 2008, were you all overpaid in 2007?

Again, for the group: Over the last year, your firms have actively used the Federal Reserve’s discount window to exchange various investments (including C.D.O.’s) for cash. You probably have a better idea than most about what those assets now sitting on the Fed’s balance sheet are worth. Given the growing calls for regular audits of the Fed (an idea being resisted by the likes of the chairman, Ben Bernanke), do you think the demands for such audits are warranted?

This question is for Mr. Mack. In November, in a surprisingly candid moment, you publicly declared, “Regulators have to be much more involved.” You then added, “We cannot control ourselves.” Can you elaborate on those comments? Is Wall Street inherently incapable of policing itself — a view contrary to what most of your peers have argued?

Mr. Blankfein. Your firm, like other banks on this panel, was paid in full by the American International Group on various financial contracts, thanks to the government’s bailout. You can understand how this has whipped up no small amount of fury and questions over why A.I.G. and the government did not try to renegotiate those contracts. Because your firm was the largest beneficiary of the government’s decision, did you or any of your employees lobby the Fed, Treasury or any other government agency for this “100 cents on a dollar” payout? If so, enlighten us about those conversations.

This is for Mr. Moynihan. Please explain — and no jargon, please — why your firm believed it didn’t have to disclose mounting losses at Merrill Lynch ahead of a shareholder vote in December 2008. After all, investigations into the matter suggest company executives knew of the $4.5 billion loss Merrill suffered in October before that vote. And why, just a week or so after you became general counsel, did Bank of America decide to tell the government about those same losses that it chose not to tell shareholders about?

To Mr. Dimon and Mr. Moynihan: Your industry has vigorously opposed creating a consumer protection agency. But it’s clear that your millions of retail customers weren’t adequately protected, leading to hardship and heartbreak across the nation. Because you oppose creating such a regulator, what should be done to ensure these problems don’t happen again?

Ask a Banker! Top Ten Questions for the Financial Crisis Inquiry Commission
by Eliot Spitzer, William Black, and Frank Partnoy

The Financial Crisis Inquiry Commission (FCIC) is holding its first public hearings and will hear testimony from the CEOs of some of the largest financial institutions. This is not the hearing at which experienced investigators would produce fireworks. The FCIC has not used subpoena authority or voluntary requests for information to obtain the background information essential in order to hold a real investigative hearing.

In particular, it has not obtained AIG (and Fannie and Freddie’s) emails and other critical internal documents such as their financial models, internal accounting records, and loss reserve data that are readily available and vital to understand what caused the crisis. Any aircraft crash investigator knows how critical it is to find the “black box” that records the information that is typically essential to finding the cause. In the financial context, these AIG, Fannie & Freddie emails and internal accounting and risk records are the “black box” that any competent investigator would demand to review.

FCIC should use this first public hearing for two quiet purposes. The primary goal should be to develop information. The subsidiary goal is to put the CEOs on record as to what went catastrophically wrong, which will allow the FCIC to judge their candor as the facts are developed. The FCIC, and the nation, need the utmost candor. The CEOs must testify under oath, as is the norm now for witnesses testifying before the House Financial Services Committee. Precisely because it is the norm it does not impute any wrongdoing to any witness.

The primary goal is gathering information because that is what the FCIC needs and that is what the CEOs can provide at the hearing and, more importantly, in response to requests for information that the FCIC should make at the hearing. The CEOs have expertise, access to all information on the facts critical to understanding the crisis, the analyses their firms’ have conducted or received on the causes of the Great Recession, and the steps their officers, firms, and other entities took (or failed to take) in response to those analyses.

Those analyses are critical both for what they will reveal directly (what did they know and when did they know it?) but perhaps more importantly what they will reveal that the largest (surviving) financial institutions did not know or understand as the crisis was developing. For example, if the financial institutions did not conduct urgent analyses in response to the FBI’s September 2004 warning that an “epidemic” of mortgage fraud was developing that would cause a financial “crisis” if it were not contained and/or did not act on those analyses to change their operations that non-action would be one of the primary contributors to the Great Recession.

We suggest specific questions below, but our overall recommendation to FCIC for this initial hearing can be stated succinctly: the FCIC should enlist the financial industry as its research assistants. The industry should jump at the chance. Now, we are not naïve and the FCIC must not be naïve. The industry is self-interested. It has performed abysmally, sometimes criminally. It rightly fears that exposure of its emails, data, analyses, and actions (and failures to act) to the public will expose it to criminal prosecutions, administrative enforcement actions, civil suits, and well-deserved ridicule.

The CEOs’ most salient fears are that disclosure of the information will demonstrate that the massive bonuses paid to them and their officers were paid improperly (because they were based on phony accounting) and should be “clawed back” and that many senior officials should be fired. Tough. The only way to reduce the frequency and damage of future crises is to find out what caused this one. So FCIC must insist on total disclosures by these firms — no selective release of analyses that make the senior officers look good or were written to try to justify bonuses or help the lawyers defend the officers.

It all must come out — and it must do so promptly. FCIC, and the nation, need to know now whether the firms are unwilling to provide all the analyses and underlying facts that FCIC needs to fulfill its statutory duty. If they are not willing to do so then the nation needs to know whether FCIC has the guts and integrity to use its subpoena authority immediately to obtain the information.

For the sake of brevity in the questions below we have not repeated each time the critical specific details (who, when, how?) any competent investigator would need to ask in the formal request for information in order to learn the specifics and identify the essential documents.

Here are our top ten questions:

1. AIG: What was your firm’s relationship with AIG? How much exposure did you have to AIG? What information did you publicly disclose about that exposure? Did you think AIG’s CDS strategy was “good business”? Do you think we still would have needed to rescue AIG if its derivatives had been centrally cleared, as some in Congress have proposed?

2. Disclosure: Were your financial statements during 2005-08 accurate? What did your officers disclose to your board about your bank’s exposure to the nonprime mortgage markets before 2008? What specific information did you publicly disclose about your exposure to derivatives and nonprime mortgages? When did officers or employees of your firm recognize that there was a serious risk of a housing bubble? What did they recommend, and what changes did the firm implement, in response to the identification of this risk? Why?

3. Pay: What was your bank’s total compensation for officers for each year from 2001 to the present? What were the components of that compensation? Identify and explain where compensation created perverse incentives in the following contexts: your bank, other banks, executive compensation advisory firms, audit firms, appraisers, rating agencies, loan brokers, loan officers? What aspects of compensation produced these perverse incentives? When did employees of your bank become aware of the literature in economics, criminology, and compensation warning of these perverse incentives? What specific actions did the bank take in response? Which elements of your bank’s compensation system create perverse incentives?

4. Ratings: Why do you think the rating agencies gave AAA ratings to toxic CDOs? Did you think CDO credit ratings accurately reflected their credit worthiness? Did employees of your bank ever express concerns internally/publicly about the judgment of the ratings agencies? If so, when was the first time?

5. Moral hazard: What incentives at your institution helped lead to the financial crisis? What conversations did you have with the Fed regarding your exposure to CDS and other derivatives? What monetary value would you place on the government guarantee of your deposits?

6. Mortgage fraud: Name the three nonprime specialty lenders with the worst reputations for originating fraudulent mortgages. Name the three nonprime specialty lenders with the worst reputations for originating predatory loans. Is there any legitimate business reason why a secured lender would seek to induce appraisers to inflate the value of the secured property? When did employees of your bank become aware that coercion of appraisers to inflate appraised values was becoming common? What action did they take or recommend when they became aware?

7. Warnings: What were the three most significant specific steps your banks took in response to the FBI’s September 2004 warning that the developing “epidemic” of mortgage fraud would produce a crisis if it were not stemmed? Why do you think the spread on nonprime mortgages fell after this warning, and other warnings? Why did bank loss reserves also fall during this time? What were your bank’s analyses of these risks and the adequacy of loss reserves (industry-wide and at your bank) and how did they change as the markets exhibited these perverse patterns? What did your bank’s officers recommend that the bank do in response to these perverse market conditions and what actions did the bank actually take? Were the industry reactions, and your bank’s reactions, to the warnings adequate?

8. Lobbying: How much has your bank spent on lobbying over the last five years? This year? How many additional personnel has your bank hired full-time or as consultants to lobby the federal government?

9. Crimes: How many criminal referrals has your bank made for mortgage-related frauds in each year beginning in 2002? How many named your own officers or employees? Does the FBI have adequate resources to investigate such frauds? Explain how an epidemic of mortgage fraud must lead to widespread accounting and securities fraud if the mortgage paper is to be resold.

10. Regulation: Did the passage of the Commodities Futures Modernization Act of 2000 contribute to the crisis? Did the federal regulators’ efforts to preempt state regulation of predatory mortgage lenders contribute to the crisis? Should the Federal Reserve have used its authority under HOEPA to regulate nonprime lending during the financial bubble? Provide any contemporaneous analyses of the role of regulation, deregulation, and desupervision in contributing to the crisis. Did your bank lobby (directly or indirectly through trade associations) in support of deregulatory efforts that contributed to the crisis?

Anti-Regulators: The Federal Reserve’s War Against Effective Regulation
by William Black

The first decade of this century proved how essential effective regulators are to prevent economic catastrophe and epidemics of fraud. The most severe failure was at the Federal Reserve. The Fed’s failure was the most harmful because it had unique authority to prevent the fraud epidemic and the resulting economic crisis. The Fed refused to exercise that authority despite knowing of the fraud epidemic and potential for crisis.

The Fed’s failures were legion, but five are worthy of particular note.

1. Greenspan believed that the Fed should not regulate v. fraud

2. Bernanke believed that the Fed should rely on self-regulation by “the market”

3. (Former) Federal Reserve Bank of New York President Geithner testified that he had never been a regulator (a true statement, but not one he’s supposed to admit)

4. Bernanke gave the key support to the Chamber of Commerce’s effort to gimmick bank accounting rules to cover up their massive losses — allowing them to report fictional profits and “earn” tens of billions of dollars of bonuses

5. Bernanke recently appointed Dr. Patrick Parkinson as the Fed’s top supervisor. He is an economist that has never examined or supervised. He is known for claiming that credit default swaps (CDS, a.k.a the financial derivatives that destroyed AIG) should be unregulated because fraud was impossible among sophisticated parties.

Each error arises from the intersection of ideology and bad economics.

The Fed’s regulatory failures pose severe risks today. Three of the key failed anti-regulators occupy some of the most important regulatory positions in the world. Each was a serial failure as regulator. Each has failed to take accountability for their failures. Last week, Dr. Bernanke asserted that bad regulation caused the crisis — yet he was one of the most senior bad regulators that failed to respond to the fraud epidemic and prevent the crisis. As Dr. Bernanke’s appointment of Dr. Parkinson as the Fed’s top supervisor demonstrates, the Fed’s senior leadership has failed, despite the Great Recession, to learn from the crisis and abandon their faith in the theories and policies that caused the crisis. Worst of all, the Fed is an imperial anti-regulatory seeking vastly greater regulatory scope at the expense of (modestly) more effective sister regulatory agencies. The Fed’s failed leadership is setting us up for repeated, more severe financial crises.

Dr. Parkinson as Anti-Regulator

This essay focuses on Chairman Bernanke recent appointment of Dr. Parkinson to lead the Fed’s examination and supervision. My central point is that Dr. Bernanke appointed Dr. Parkinson because he shared Dr. Bernanke’s anti-regulatory ideology and has never changed those views, even in the face of the Great Recession. The anti-regulator policies that Bernanke and Parkinson championed were the principal drivers of the fraud epidemic that have produced recurrent, intensifying crises.

Bernanke’s appointment as the Fed’s top supervisor of an individual that had no experience in regulation, in the midst of the greatest crisis of our lifetime, is irresponsible and dangerous on its face. No ideology has proven more disabling in this crisis than neoclassical economics. Dr. Parkinson is a neoclassical economist. The “skills” an economist would purportedly bring to supervision have proven to be disabilities in identifying and understanding fraud and risk.

We need not rely on generalities — Dr. Parkinson has a record relevant to supervision that we can evaluate. The most revealing aspects of that record fall into three categories. First, Dr. Parkinson was a leading proponent of the obscene (and successful) effort to prevent Commodity Futures Trading Commission Chair Brooksley Born from taking regulatory action to prevent destructive credit default swaps (CDS). Second, Dr. Parkinson, like Greenspan and Bernanke, subscribed to the naïve view that fraud was impossible in sophisticated financial markets and that credit rating agencies were reliable. Third, Dr. Parkinson endorsed the international “competition in regulatory laxity” that Dr. Bernanke (belatedly) warned has degraded regulation on a global basis. Here are the key passages from Dr. Parkinson’s congressional testimony:

Professional counterparties to privately negotiated contracts also have demonstrated their ability to protect themselves from losses from counterparty insolvencies and from fraud. In particular, they have insisted that dealers have financial strength sufficient to warrant a credit rating of A or higher. This, in turn, provides substantial protection against losses from fraud.

If this opportunity is lost, the Board is concerned that market participants will abandon hope for regulatory reform in the United States and take critical steps to shift their activity to jurisdictions that provide more appropriate legal and regulatory frameworks.

The “opportunity” Dr. Parkinson feared would be “lost” was to remove the CFTC’s ability to regulate CDS. Anti-regulation would “win” the international competition in laxity. His policies made possible the catastrophe that is AIG. Dr. Bernanke is aware of Dr. Parkinson’s record of anti-regulatory failure. He chose Dr. Parkinson because of that record in order to ensure that the Fed would not take regulatory actions that would upset the biggest banks, particularly the systemically dangerous institutions (SDIs) that are the real governors of the Fed’s anti-regulatory policies.

Banks Brace for Bailout Fee
The Obama administration is aiming to hit banks with a fee to recoup losses associated with the government's bailout of financial firms and the auto industry, administration officials say. The White House hopes the fee will soothe the public's anger at financial firms. Most big banks that received public funds have repaid the government, but the industry is seen by many as having survived thanks to taxpayer support, and is now enjoying a profit rebound as the economy struggles. This month, many large banks will resume paying big bonuses to employees.

Much remains uncertain about how such a fee would work. The administration is wrestling with who should pay, when it should be implemented and what would happen if banks pay more than the government-bailout program ultimately loses. Auto makers aren't currently targets of the fee idea. Even though the proposal is still under discussion, it is expected to be included in the White House's budget, due next month, if only conceptually. It's expected to cost large banks billions of dollars and could also affect bank customers if firms pass along the cost.

One option under consideration involves placing a fee on a bank's liabilities, a number that theoretically represents the amount of risk a bank takes on, according to officials familiar with the matter. That approach would also have the effect of tamping down banks' risky behavior, another administration goal. Another option would be to target bank profits, these people said. It's unclear precisely who would be subject to the fee. A person familiar with the matter said it's unlikely for now to target auto companies or American International Group Inc., all of which are still struggling. Homeowners who benefited from government-funded housing help also wouldn't pay the fee.

A person familiar with the matter said it would make little sense to impose a fee on auto makers or AIG right now: The government owns such a large chunk of them, it would essentially result in the government paying itself. Some within the administration believe targeting banks is justified because they benefited the most from the overall financial rescue and should bear the brunt of helping the government recoup the cost. The proposal comes as the White House and many banks are locked in a feud about whether financial companies are doing enough to revitalize the economy.

The fee would likely be designed to avoid hitting certain segments of the financial industry, such as community banks, many of which are still struggling. The administration is trying to structure the fee so that it can't be passed along to bank customers already struggling in the weak economy, but officials concede that's hard to do. In other areas, such as overdraft fees and credit cards, banks already are passing costs of new legislation on to their customers. "In our industry, costs are typically passed along to institutions and individual investors, so the burden will likely fall on them," said Timothy Ryan, president of the Securities Industry and Financial Markets Association. Major banks declined to comment.

The administration has been talking for months about recouping government funds likely lost through the $700 billion Troubled Asset Relief Program, as it is required to do under the legislation that created the program. The Treasury Department estimates losses from the program at $120 billion, though administration officials believe the ultimate cost will be much lower. The fee, which would require congressional approval, could hit big banks that have already repaid their TARP funds with interest. The money would be used to compensate for losses in other areas, such as loans to Detroit's auto makers and funds used to prop up the housing sector and giant insurer AIG.

Bankers view the proposal as the latest assault on an industry still recovering from the financial meltdown. Although revenue at some big banks has returned to pre-crisis levels, the industry more broadly remains troubled, with many more banks expected to fail. "To impose yet another burden on the industry would obviously decrease their ability to lend," said Edward Yingling, president of the American Bankers Association, a trade group. Bankers say they've already contributed through sums they paid to escape TARP and fees levied by the Federal Deposit Insurance Corp. to build up its deposit-insurance fund.

House Financial Services Committee Chairman Barney Frank (D., Mass.) said legislation that created TARP mandated that the government recoup its costs by 2013. Since the program is winding down faster than expected, a levy now would be appropriate. "Given the mood of the country," he said, "it is essential that we do it. That was part of the deal." He declined to get into specifics about such a levy.

He said it would be unfair to make banks subsidize money given to auto companies, which could eventually account for the lion's share of lost bailout funds. It would be "premature" to force repayment from General Motors Co. and Chrysler LLC, he said, but some repayment mechanism for the auto companies should be considered. White House spokesman Robert Gibbs on Monday declined to say whether the budget will include a new fee on banks. He did say President Barack Obama wants to make sure taxpayers are repaid for the financial-sector bailout.

Building a case against Geithner

SEC order helps maintain AIG bailout mystery
It could take until November 2018 to get the full story behind the U.S. bailout of insurance giant American International Group because of an action taken last year by the Securities and Exchange Commission. In May, the SEC approved a request by AIG to keep secret an exhibit to a year-old regulatory filing that includes some of the details on the most controversial aspect of the AIG bailout: the funneling of tens of billions of dollars to big banks like Societe Generale, Goldman Sachs, Deutsche Bank and Merrill Lynch.

The SEC's Division of Corporation Finance, in granting AIG's request for confidential treatment, said the "excluded information" will not be made public until Nov. 25, 2018, according to a copy of the agency's May 22 order. The SEC said the insurer had demonstrated the information in the exhibit, called Schedule A, "qualifies as confidential commercial or financial information." The expiration date for the SEC order falls on the 10th anniversary of Federal Reserve of New York's decision to provide emergency financing to an entity set up to specifically acquire some $60 billion in collateralized debt obligations from 16 banks in the United States and Europe.

All the banks that got money from the Fed-sponsored entity -- Maiden Lane III -- had purchased insurance contracts, or credit default swaps, on those mortgage-related securities from AIG. The SEC's decision to approve AIG's request for confidential treatment got scant attention at the time. But it could spark controversy now following the release last week of 14-month-old emails that reveal that some at the New York Fed had discussions with AIG officials about how much information should be disclosed to the public about the Maiden Lane III transaction.

The New York Fed, then led by Treasury Secretary Timothy Geithner, plays a critical role in the world of finance given its close dealings with all the major Wall Street banks, many of which were counterparties of AIG. SEC spokesman John Nestor declined to comment on the reasons for granting AIG's request to treat the exhibit as confidential. In a typical year, the SEC receives 1,500 requests from U.S. companies for confidential treatment for portions of regulatory filing, said Nestor. The agency grants those requests, "all or in part," 95 percent of the time, he said.

It's not clear what information is in the exhibit beyond a listing of the 16 banks that were beneficiaries of the Maiden Lane transaction. Last March, under pressure from Congress, AIG released the names of the banks that sold CDOs to Maiden Lane and how much money the banks got in the process. When AIG filed the Schedule A exhibit with the SEC, it redacted the information it wanted to keep confidential, in anticipation regulators would approve its request.

The Fed's bailout of AIG long has been controversial because the banks that sold CDOs to Maiden Lane III were paid 100 percent of face value, even though many of the securities were worth substantially less at the time of the government bailout. Last Thursday the furor over the Maiden Lane transaction was reignited after Rep. Darrell Issa, a California Republican, released copies of emails detailing discussions between the New York Fed and AIG over how much information to disclose.

The emails have provided fresh ammunition for critics of Geithner. New York Fed General Counsel Thomas Baxter Jr. said in a letter to Issa's office that Geithner "played no role in, and had no knowledge of" the emails. Issa, the highest-ranking Republican on the House Committee on Oversight and Government Reform, said the panel will soon hold hearings about how information was disclosed to the public about the Maiden Lane deal. Issa's spokesman Kurt Bardella declined to comment on the SEC's handling of the AIG's confidentiality request.

But Issa, in a prepared statement, said "as much information as possible should be made available to Congress to review the details and decisions" regarding the payments. The batch of emails released by Issa discussed the SEC's requests for more information about the exhibit that AIG wanted to keep secret. But the emails did not mention the SEC's decision to grant AIG's request for confidential treatment.

House Panel Subpoenas N.Y. Fed's AIG Documents
A U.S. House panel issued a subpoena for Federal Reserve Bank of New York documents related to American International Group Inc., as the political pressure surrounding one of the more controversial events of the financial crisis continued to grow. Rep. Edolphus Towns (D., N.Y.), who chairs the House Committee on Oversight and Government Reform, said he was issuing a subpoena for documents that would "shed light on how and why taxpayer dollars were used for a backdoor bailout." At issue is the government-orchestrated decision to make whole AIG's counterparties on some $62 billion in bets on soured mortgage securities. "We will work with the committee to provide relevant information as appropriate," said a spokeswoman for the New York Fed.

The payments to the insurer's counterparties has been a source of simmering controversy that reached a boil over the last week. Rep. Darrell Issa of California, the ranking Republican on the Oversight panel, recently released documents showing that officials at the New York Fed told AIG not to disclose key details of their agreements with counterparties in late 2008. The names of the counterparties and the details of the transactions were eventually released, but the new debate over disclosure has thrust the discussion over the government's actions with AIG back into the political arena. Mr. Issa on Tuesday accused Fed officials of blocking attempts to gain access to documents, circulating a letter he received from Neil Barofsky, the special inspector general for the Troubled Asset Relief Program.

The Fed, Mr. Barofsky said in the letter, "has directed us not to provide you with the documents that it has provided to us, and that it will instead respond to your request directly." People familiar with the matter said the Fed's decision was in line with its standard policy, but Mr. Issa said the New York Fed was trying to "prevent this committee's oversight … for as long as possible."

Republicans have also sought to tie the issue to Treasury Secretary Timothy Geithner, who was president of the New York Fed when decisions over the counterparty payments were being made. The Treasury has insisted that Mr. Geithner had no role in the disclosure discussions with AIG, an argument backed by New York Fed General Counsel Thomas Baxter Jr. Mr. Baxter, in a letter sent to Mr. Issa last week, said that Mr. Geithner "played no role in, and had no knowledge of, the disclosure deliberations and communications referenced in those e-mails." Both Mr. Geithner and Mr. Baxter have been invited to appear later this month before the Oversight panel at a hearing on the AIG matter.

Greenberg wants U.S. stake in AIG below 20 percent
Former American International Group Inc's chief Maurice "Hank" Greenberg has called for slashing the U.S. government's stake in the insurer to less than 20 percent as part of a larger plan to restructure the recipient of $180 billion of taxpayer funds, a source with direct knowledge of the situation said on Monday. Greenberg, who is the largest private shareholder of AIG shares, has been discussing the plan with members of Congress as well as investors since the fall, with the idea of creating a structure for AIG that would yield a full recovery for U.S. taxpayers, the source said.

Greenberg has put together the plan as an alternative to the terms of the government's $180 billion support package for the insurer after it nearly collapsed in September 2008. The government now owns nearly 80 percent of the company, once the world's largest insurer by market value. Greenberg's plan has not found traction with the government so far, the source said, declining to be named because the talks are not public. Greenberg and AIG Chief Executive Robert Benmosche have been in regular dialogue, the source said.

Other elements of the plan include extending the term of the government's debt facility by more than 10 years and halving the rate on the government preferred stock to 5 percent, the source said. The idea behind such a structure is to give AIG sufficient time to service its debt and operate its way through the debt maturities, the source said. The plan also calls for recapturing the money that AIG paid to certain banking institutions and investing it back into the insurer, the source said.

AIG funneled billions of dollars of taxpayer funds to various U.S. and European counterparties after its bailout, including to Goldman Sachs Group Inc, Societe Generale and Deutsche Bank. Greenberg's plan also calls for the company getting a piece of any gains from the so-called Maiden Lane vehicle that the U.S. Federal Reserve created to rid the insurer of its problem assets, the source said.

Greenberg, who built AIG into the world's largest insurer over nearly four decades, has no designs on running the insurer or being on its board, the source said. The insurer could attract new capital from sources such as Asian sovereign wealth funds and large U.S. public pension funds if the government were to cut its stake, the source said. AIG declined to comment, while Greenberg could not be reached immediately for comment. AIG's shares closed up 29 cents, or 1 percent, at $29.63 on the New York Stock Exchange.

Insider Selling/Buying Ratio At 62.3x To Start Off 2010; Insiders Can't Thank The Fed Enough For Inflated Stock Prices
by Tyler Durden

2010 has started off with a bang. Insiders purchased $4.5 million worth of stock (and yes, this does not include the end year transaction by such individuals as Nelson Peltz who acquired nearly 10 million shares of Legg Mason on the last day of 2009, to validate his recent board seat standstill), in the period from January 4.

It should, however, comes as no surprise that in the same period selling did not moderate, and insiders offloaded $281 million in shares (yes, this accounts for the double counting of trades between various ultimately identical corporate entities, which seems to have been missed by some of our peers). Net result: an insider selling to buying of 62x to kick off 2010. And still the quants are chasing momentum ever higher. There is no way this will end in anything but tears.

California Creditors Dread IOUs With Aid Plea Failing
California’s hopes are fading for federal help in closing a projected $19.9 billion deficit that has caused the lowest-rated state’s borrowing costs to rise 24 percent in three months. “We recognize they have enormous problems,” David Axelrod, senior adviser to President Barack Obama, said in an interview. “But we can’t solve all of those problems from Washington.”

Investors are growing more concerned that California, the world’s eighth-largest economy, will repeat last year’s fiscal crisis that forced it to use IOUs to pay bills. With Governor Arnold Schwarzenegger seeking $6.9 billion in federal assistance to narrow the deficit, the extra yield paid on the state’s 10- year bonds over AAA-rated municipal securities rose to 1.31 percentage points yesterday from 1.06 points in three months, according to Bloomberg fair market value index data.

Schwarzenegger’s plea for help may become a test case for Obama, who last year called the 62-year-old Republican governor “an outstanding partner with our administration.” Dozens of states face budget shortfalls amid the worst recession since the Great Depression, and at least 36 have already reduced fiscal 2010 expenditures, according to the National Association of State Budget Officers. “There’s a huge amount of concern about California,” said Howard Cure, who helps handle municipal-bond investments for Evercore Wealth Management in New York, which oversees $1.5 billion. “There’s a relatively large reliance on hoping that the federal government will send extra money their way. It’s going to be very politically difficult for that to happen.”

Schwarzenegger wants the Democratic president to reduce required programs, waive rules and provide additional funding. In recent days, the governor has stepped up his campaign for “fairness,” focusing much of his Jan. 6 state of the state address and Jan. 8 budget address on an appeal for a greater share of federal money. “It is unfair the way the money is being distributed right now,” he said on NBC’s “Meet the Press” on Jan. 10.

“The federal government is forcing us to spend money we don’t have,” Schwarzenegger said in the Jan. 8 speech outlining his $82.9 billion spending plan for the fiscal year beginning July 1, speaking of education requirements and costs associated with detaining undocumented immigrants.

California, whose economic output is greater than that of Russia, may be in the greatest need of any state. It recorded the nation’s third-highest rate of home foreclosures in November, behind Nevada and Florida. November’s unemployment rate in California was 12.3 percent; the national average is 10 percent. The Golden State’s general-obligation debt rating from Moody’s Investors Service is Baa1, the eighth-highest investment grade, and A from Standard & Poor’s, the sixth-highest. Greece, the poorest rated member of the 16-nation Euro region, is ranked two steps higher at A2 by Moody’s and two lower at BBB+ by S&P.

An S&P/Investortools index of California state and local debt returned 13.2 percent in 2009, 1.4 percentage points less than the national average. Mounting deficits are forcing California taxpayers to pay higher interest. The state’s 10-year bonds yielded 4.6 percent on Jan. 11, up from 4 percent on Sept. 30, according to Bloomberg indexes. Average 10-year municipal tax-exempt security yields were 81 percent of those on U.S. Treasuries of comparable maturity on Jan. 11, according to a Municipal Market Advisors index. California’s obligations yielded about 0.9 percentage points more than the federal debt.

Schwarzenegger’s budget “relies on a substantial amount of federal funding that is unlikely to come,” said David Blair, municipal bond analyst at Pacific Investment Management Co. in Newport Beach, California, which oversees $24 billion in local- government debt. “This budget isn’t anywhere near providing a solution.” California has recently received federal assistance. Its current budget, approved in July, includes about $8 billion in federal stimulus money.

The state also has benefited from Build America Bonds, a form of debt that was part of the economic-stimulus package passed by Congress almost a year ago that give issuers a 35 percent interest-rate subsidy. Local and state governments in California sold $15.5 billion of the debt since April, almost a quarter of the nationwide total, Bloomberg data show. Still, lawmakers in California, which accounts for 13 percent of U.S. gross domestic product, have slashed $32 billion in spending, cutting funding for schools, universities and welfare programs. They also have raised taxes by $12.5 billion during the past year.

In his state of the state address, Schwarzenegger called health-care legislation pending in Congress, Obama’s top domestic priority, a looming threat. “While I enthusiastically support health-care reform, it is not reform to push more costs onto states that are already struggling,” he said. Speaking of special Medicaid payments Senator Ben Nelson obtained for his state as a condition for supporting health-care legislation, Schwarzenegger said Nebraska “got the corn and we got the husk.”

Schwarzenegger urged his state’s congressional delegation to vote against the final bill because it is “a disaster for California” and “a trough of bribes, deals and loopholes.” “In Hollywood, they use very vivid language,” Axelrod said of the speech. “He’s advocating for his state and that is much of what is motivating that.” Obama and his party are unlikely to spark a voter backlash in California if the administration turns down the state’s appeal for financial dispensation, said Gary Jacobson, a political scientist at the University of California in San Diego.

California is “a pretty blue state, and his popularity remains high,” Jacobson said. “I don’t think the legislature or the governor can foist blame off on the Feds very effectively.” Schwarzenegger, who leaves office a year from now because of term limits, declined an interview request. While Susan Kennedy, the governor’s chief of staff, said he has a “great” relationship with the president, she said she wasn’t aware of any off-camera time the two men have spent together. She said her boss calls Obama “visionary.”

Axelrod, 54, described the relationship between Obama and Schwarzenegger as “pretty good” while saying that uniform standards for federal aid must be applied to all states. Schwarzenegger’s relationship is more complicated than what is typical between a governor and president of different parties. California’s first lady, Maria Shriver, is the niece of the late Senator Edward M. Kennedy, a Massachusetts Democrat. Like her uncle, she endorsed Obama, 48, early in the presidential campaign.

Her husband, a former professional bodybuilder, made fun of Obama’s “skinny legs” and “scrawny little arms” as he campaigned with the Republican presidential candidate, Senator John McCain of Arizona. Schwarzenegger and Obama started mending their relationship after the election. Since then, they’ve publicly praised each other. Any disagreements they now have are over policy, Kennedy said. “He clearly separates the president himself -- whom he has tremendous admiration for and whom he likes personally and has a good relationship with -- from the policy,” she said.

While Kennedy said Obama has challenged Schwarzenegger to a basketball game, she said she doubts it will ever be played. “I’m not sure that Arnold can jump,” she said. Schwarzenegger attended Obama’s inauguration in January 2009 and a meeting between governors and administration officials at the White House in February. He met again with the president in March to discuss infrastructure issues. That same month, Schwarzenegger introduced Obama before a town-hall event in Los Angeles, calling him a “fantastic partner” for California. The president said the governor had “turned out to be just an outstanding partner with our administration.”

Schwarzenegger won early friendship from the new administration when he backed Obama’s $787 billion stimulus bill, joining three Republican governors to sign a letter of support. He also worked with the administration to establish the Governors’ Energy and Climate Coalition to back a comprehensive energy bill. Such efforts may not be enough to persuade the president to provide much of the help Schwarzenegger seeks, Mac Taylor, California’s legislative analyst, said in a report yesterday. He estimated the state shouldn’t expect more than $3 billion if federal aid is approved. “We believe that the likelihood of Washington agreeing to all of the governor’s requests is almost non-existent,” Taylor said.

Germany suffers record slump in 2009
Contraction of 5% is deepest since Second World War as plunge in exports, investment hit economy

The German economy contracted by a record 5 per cent last year due to a slump in its key export sector, but the government is poised to raise slightly its forecast for modest growth in 2010. The 2009 slump, deepened by a dip back down to around zero growth in the fourth quarter, was more than five times more severe than the previous post-war nadir in Europe's largest economy. The contraction was also worse than Reuters' consensus forecast for gross domestic product (GDP) to shrink by 4.8 per cent.

A Federal Statistics Office official said the economy stagnated in the final three months of the year, deflating hopes of a rebound fired by modest quarter-on-quarter growth earlier in the year. That reflected broader concerns about the sustainability of the recovery amid weak manufacturing output data from Italy and Britain. German exports declined by 14.7 per cent on the year in 2009, outweighing a drop of 8.9 per cent in imports, the Statistics Office said, adding it looked as though China overtook Germany last year as the world's biggest exporter of goods.

Economists expect exports to lead the recovery in Germany, which is heavily dependent on foreign trade for growth. “The recovery is mainly export-driven, while private consumption except for stimulus-driven car sales remains an untapped source of growth,” said Carsten Brzeski, economist at ING Financial Markets. Germany will raise its 2010 growth forecast to about 1.5 per cent from 1.2 per cent, government sources told Reuters on Tuesday. Finance Minister Wolfgang Schaeuble already last month described the 1.2 per cent projection as “very cautious“.

An official at the Statistics Office said GDP stagnated in the fourth quarter compared with the previous three months “so the change is about 0 per cent.” Germany's economy grew by 0.7 per cent quarter on quarter in the third quarter of 2009 and by 0.4 per cent in the second. Uwe Angenendt, economist at BHF-Bank said “the starting conditions for the new year aren't as good as we'd initially hoped for. But we still think the economic situation will continue to stabilize.”

The likelihood of a subdued fourth quarter for Italy's economy increased after seasonally adjusted industrial output grew 0.2 per cent in November, a slightly weaker gain than expected, official statistics agency ISTAT reported on Wednesday. “It's already clear that fourth quarter industrial output will be decidedly weak ... We expect a similar picture for gross domestic product, which should be flat in the last quarter of 2009,” said Marco Valli at Unicredit MIB.

In Britain, industrial output rose slightly faster than expected in November, helped by a jump in oil and gas extraction, but manufacturing unexpectedly stagnated for a second month, official data showed on Wednesday. “At face value headline industrial production is not a bad number, but it is disconcerting that manufacturing went sideways,” said Alan Clarke, economist at BNP Paribas.

In Germany, unusually harsh winter weather that has hit construction and transport could end up robbing the country of most of its economic growth in the first quarter, a leading industry group said on Monday. A sluggish recovery could hit Germany's labour market this year which could create a political headache for Chancellor Angela Merkel. German consumer sentiment declined going into January as worries over unemployment weighed on households' readiness to spend, a survey released last month showed.

Industrial companies like Siemens have profited in foreign markets from Germany's reputation as a maker of high quality engineering goods. Siemens' chief executive officer said last month it would take some time before the global economy returns to precrisis levels, citing Dubai's debt problems as a sign that the financial crisis was far from over. In 2009, investment in equipment fell by 20 per cent, the Office said.

Germany Expects Economic Upturn
Germany's economic outlook continued to brighten, with data and surveys pointing to a modest but extended recovery, while the U.K. trade deficit narrowed slightly in November as exports edged higher.
The BGA Association of German Exporters and Wholesalers said it expects the economy to grow as much as 3% this year -- well above what many forecasters expect and well ahead of the government's expectation of a 1.2% expansion of gross domestic product. The German economy -- the euro zone's largest -- emerged from recession in the 2009 second quarter, and grew again in the third. Britain, however, remained stuck in recession during the third quarter, and is now hoping for a rebound in the fourth.

BGA President Anton Boerner said the group's forecasts for 2010 assumed a rebound of 7.5% to 10% in exports -- the traditional driver of German growth. Still, other analysts called that optimistic because of the difficulties of sustaining domestic demand. German exports collapsed at the end of 2008 after the failure of U.S. investment bank Lehman Brothers Inc., and the ensuing outbreak of doubt deterred businesses from investing in big-ticket capital goods in which Germany specializes.

However, things have been getting gradually less bad for German industry over the past nine months. Exports, which were down nearly 29% in April from the year-earlier month, were off 16.4% in October, according to the Federal Statistics Office, Destatis. And despite a blip in October, incoming orders to manufacturers have risen for eight of the past nine months. German Economics Minister Rainer Brüderle also said Tuesday that the economy likely recorded "modest" growth in the fourth quarter. Official figures will be released Feb. 12.

Meanwhile, in the U.K. the debate is much more focused on when the economy will emerge from recession, and how vibrant it will be when it gets there. The U.K.'s Office for National Statistics said Britain's global trade deficit narrowed to £6.8 billion ($10.96 billion) in November, from a revised deficit of £7 billion in October, as exports rose slightly but imports fell. Analysts said the weaker pound hasn't affected the results as much as expected because it hasn't translated into a large increase in exports.

Vicky Redwood, U.K. economist for Capital Economics, said she still thinks the lower pound will boost trade eventually. "But there remains a big question mark over whether this happens quickly enough to offset the looming fiscal squeeze," she said. Chancellor of the Exchequer Alistair Darling has laid out plans to cut public spending and introduce other cost efficiencies to cut the deficit in half over the next four years. Also in the U.K., the Treasury said it will move to relax the strong hold of banks on lending to midsize companies, but acknowledged that there are no quick fixes to broadening their funding. The Treasury's efforts come as the credit crisis has raised the cost of bank loans for many small and midsize firms. By contrast, larger top-rated U.K. companies have been able to tap corporate-debt markets on a record scale in recent months.

On Tuesday, the Treasury said there are a range of factors limiting midsize U.K. firms' access to nonbank lending and suggested a number of issues that could relax banks' grip on business lending. It questions whether the lack of transparency in pricing of loan packages by banks is preventing midsize firms from looking elsewhere. It suggests a certain degree of "inertia" has dissuaded firms from seeking nonbank lending. And it says authorities should look at ways to reduce the disclosure burden on midsize firms seeking capital-market funding.

Euro Straining Under Debt/Deficit Pressure
The European single currency is facing its toughest test since inception in 1999 as the public finances of some of its 16 member nations slide deeper into crisis. The euro itself has slipped off recent highs, but isn't showing any signs of a rout. Since hitting a high of $1.51 against the dollar in early December, the euro as of Wednesday was trading just over $1.45. Even as euro members such as Greece and Ireland face more ratings downgrades on their sovereign debt, currency markets don't seriously believe in the likelihood of a national default. Nor do investors see a realistic chance that a row over bailouts could cause the common-currency project to fail.

"Too much political capital has been spent in the past half-century to allow an outright breakage of the euro zone," said Stephen Jen, chief currencies investor at hedge fund BlueGold Capital in London. "I expect to see stress fractures, but not outright breakup of the euro zone this year," Mr. Jen said. "Some of the structural flaws of this monetary union will be exposed in the years ahead." In particular, Mr. Jen said he expects inflation rates in the weaker and stronger euro-zone nations increasingly to head in separate directions, making it tough to knit them into a single monetary policy. Portugal, Italy, Ireland, Greece and Spain are likely to see deflation, while core countries Germany and France see inflation, Mr. Jen said.

Ratings agency Moody's warned in a survey of euro-zone public finances released Wednesday that Greece and Portugal face a high risk of an economic "slow death" as a result of their low competitiveness and high budget deficits. Both the European Commission in Brussels and the European Central Bank have said that any of its members would have to fix their own problems. Direct assistance is barred under the euro club's rules. But few doubt that some kind of rescue would be forthcoming as a last resort. Moody's also said it doubts that the euro zone would deny struggling members a "helping hand." Some kind of indirect assistance, such as liquidity lines or loans, could be possible, the agency said.

This might contradict the spirit of the treaties underlying the currency, but it wouldn't be a violation of the letter of the law, and would therefore be a possible solution of very last resort, Moody's wrote. The current bout of nerves over the structure of the euro kicked off last month, when key ratings agencies drew a clear line between the currency bloc's strongest and weakest members by downgrading Greek sovereign debt. "The fall in the euro at the end of last year was predominantly down to Greece, and there's always scaremongering," said Monica Fan, a currencies portfolio manager at State Street Global Advisors in London. Moody's intensified the gloom this week by warning that Portugal could face a similar fate unless it acts quickly to cut its budget deficit.

All the same, the common currency has even come back from recent lows under $1.43 on Dec. 23, as investors back away from earlier expectations that the U.S. Federal Reserve might start raising interest rates from the middle of this year to support the dollar. "But the reality is that small countries can't afford to pull out of the euro. Their cost of credit would skyrocket," said Fan at State Street Global Advisors. The euro has taken some knocks before. In 2005, the currency wobbled as some European Union members rejected the European Constitution. Comments from right-wing politicians in Italy at the time, calling for the country to abandon the euro, triggered periods of euro selling.

All the same, the euro's current challenge is judged to be severe. Late last year, the European Commission said that half of the 16 euro-zone countries are deemed to be at "high risk" in terms of the sustainability of their long-term public finances. A real sticking point could come if a much larger economy -- Italy is often cited -- were to need central financial assistance. Italy, which has borrowed quite a lot more, is seen as too big to bail out. Helping Greece, or even Portugal, could therefore set an unsustainable precedent.

Greece condemned for falsifying data
Greece was condemned by the European Commission on Tuesday for deliberately falsifying data about its public finances and allowing political pressures to obstruct the collection of accurate statistics. In a damning report published as the eurozone grapples with its worst fiscal crisis since the euro’s launch in 1999, the Commission said Greece’s figures were so unreliable that its budget deficit and public debt might be even higher than the government had claimed last October. At that time Greece estimated its 2009 deficit would be 12.5 per cent of gross domestic product, far above 3.7 per cent predicted in April. It revised its 2008 deficit up to 7.7 per cent from 5 per cent.

The data shocked and angered Greece’s 15 eurozone partners and prompted swift downgrades of Greek debt as well as an increase in the premium demanded by financial markets to buy Greek bonds. Greece’s socialist government is promising to slash its deficit to 3 per cent or less by 2012, but financial markets question whether it can introduce the drastic austerity measures implied by such a target without sparking labour unrest and social disorder. On Tuesday a Greek finance ministry spokesperson said the Commission report reflected the approach of previous Greek governments, not the current one. “We’re in the process of changing the way statistics are collected and analysed,” she said.

Parliament is expected to approve this month a new law making the statistical service independent. “The technical know-how is there’s but it’s a question of political will,” she said. The Commission, which is responsible for upholding the eurozone’s fiscal rules, made clear in its report that it had next to no faith in Greek statistics. “The current set-up does not guarantee the independence, integrity and accountability of the national statistical authorities,” it said. The Commission denounced “poor co-operation and lack of clear responsibilities between several Greek institutions and services ... diffuse personal responsibilities, ambiguous empowerment of officials, absence of written instruction and documentation, which leave the quality of fiscal statistics subject to political pressures and electoral cycles”.

The report listed several categories in which, it said, Greece had deliberately misreported fiscal data last year, including revenues from abolished extra-budgetary accounts, swaps write-offs, adjustment for interest payments, European Union financial grants and hospital liabilities. Hundreds of millions of euros were involved in each case. In the case of hospitals, the Commission said: “Beyond the misreporting by the statistical reporting authorities, it emerges that the liabilities of hospital expenditure are not properly recorded by the hospital themselves, casting severe doubts on the capacity of the Greek authorities to respect accounting rules.”

George Papandreou, Greece’s prime minister, sought at a December summit to regain the confidence of his EU colleagues, acknowledging that corruption was a national disease and vowing to make the statistics agency politically independent. However, other EU countries have not forgotten that Greece massaged its public finance data to ensure that the country qualified for eurozone entry in 2001. According to the Commission report, Greece overstated the surplus of its social security sector by €2.8bn between 2001 and 2003.

The Commission warned of more trouble ahead, saying that Eurostat, the EU’s statistics office, had not yet validated the data Greece submitted in October. “A substantial number of unanswered questions and pending issues still remain in some key areas, such as social security funds, hospital arrears, and transactions between government and public enterprises,” it said. “These questions will need to be resolved, and it cannot be excluded that this will lead to further revisions of Greek government deficit and debt data, particularly for 2008, but possibly also for previous years.” The Commission said EU fiscal data were generally of high quality and Greece represented a one-off problem. However, it cautioned that it lacked audit powers and so relied heavily on the goodwill and integrity of member-states to supply accurate data.

Why Greece will have to leave the eurozone
Having spent a career studying emerging market economies at the International Monetary Fund and on Wall Street, I have seen more than my share of supposedly immutable fixed exchange rate arrangements come unstuck. I have also observed at close quarters the rather well-defined and predictable stages through which countries go as their currency regimes unravel. This experience informs me that, much like Argentina a decade ago, Greece is approaching the final stages of its currency arrangement. There is every prospect that within two to three years, after much official money is thrown its way, Greece’s euro membership will end with a bang.

The first stage on the road to a currency crisis occurs when a country, motivated by the desire to import policy discipline from abroad, adopts a fixed exchange rate to which its economy is patently ill-suited. A serially defaulting Argentina did so in 1991, when it adopted a convertibility plan that rigidly pegged the peso to the dollar in the vain hope of ending its tendency towards hyperinflation. After failing to meet the criteria for euro membership at the currency’s 1999 launch, a chronically profligate Greece managed to qualify in January 2001 by engaging in creative budget accounting. Going an important step further than Argentina, Greece abandoned its currency in favour of the euro. It joined a club whose very founding envisions no exit option for any of its member countries.

The next stage on the road to ruin occurs when the country pursues domestic policies that are inconsistent with its new currency arrangement. In recent years Athens has thrown any notion of budget discipline to the wind. Euro membership supposedly obliges a country to abide by the Maastricht criteria of keeping its budget deficit below 3 per cent of gross domestic product and its public debt-to-GDP ratio below 60 per cent. Greece’s budget deficit has widened to 12.7 per cent of GDP, while its debt-to-GDP ratio is projected to reach 120 per cent in 2010.A ballooning budget deficit, coupled with inappropriately low interest rates imported from abroad, sets the stage for the end-game. It does so not simply by putting the country’s public finances on an unsustainable path but also by eroding its international competitiveness, which gives rise to a massive external imbalance. In this department as well, Greece has managed to outdo the Argentina of old by losing over 30 per cent in competitiveness through consistently higher wage and price inflation than its European partners.

As market doubts surface as to the sustainability of the currency arrangement, the country’s external official sponsors ride to its rescue. In Argentina’s case, the sponsor was a US-backed IMF. For Greece, it has been the European Central Bank. The fly in the ointment, however, is that the official sponsor understandably bridles at the prospect of providing unconditional or unlimited funding. Rather, it insists that the country adopts hair-shirt adjustment policies. In Argentina’s case, conditional IMF support staved off the inevitable for a couple of years before the proposed adjustment measures led to rioting in the streets and it became clear to the IMF that it was dealing with a solvency rather than a liquidity problem. It is difficult to see how Greece’s present crisis can end on a happier note. Any attempt to bring the budget deficit down to the Maastricht target would only deepen the recession. Attempting to restore Greek competitiveness through wage cuts would lead to years of painful and politically unacceptable deflation.

The omens do not look good for retrenchment: budget cut announcements have already sparked widespread labour market unrest. Nor is there much prospect of indefinite ECB funding. Rating agencies have downgraded Greece to below A-, while Jürgen Stark, an ECB official, recently said that the EU would not help bail out Greece were the need to arise. If there is anything that the Greek authorities might learn from Argentina, it is the folly of attempting to fight the inevitable. Not only does this saddle a country with a mountain of official debt that cannot be rescheduled; it also deepens and prolongs the recession from which any post-devaluation recovery might begin. Athens should leave the eurozone sooner rather than later. However, that is not the way that Greek tragedies play out.

Moody’s Says Greece, Portugal May Face ‘Slow Death’
The Portuguese and Greek economies may face a “slow death” as they dedicate a higher proportion of wealth to paying off debt and investors demand a premium to hold their bonds, Moody’s Investors Service said. While the two countries can still avoid such a scenario, their window of opportunity ”will not be open indefinitely,” Moody’s said in a report today from London. Portugal, with a negative outlook on its Aa2 rating, has more time “to reverse this trend” while Greece “has significantly less time.” Moody’s cut Greece’s rating to A2 from A1 on Dec. 22.

The premium that investors demand to hold Greek debt instead of German equivalents is six times more than it was two years ago, and the spread has doubled since 2008 in the case of Portugal. Greece had the largest budget deficit in the euro region last year, more than four times the European Union limit of 3 percent of gross domestic product. Portugal’s debt load will account for 85 percent of GDP this year, according to the European Commission.

Greece’s Prime Minister George Papandreou said in Athens today he was committed to implementing an economic plan that would bring the country’s shortfall down to less than the 3 percent required by the European Union from 12.7 percent last year. He dismissed talk Greece would leave the euro-area or seek help from the International Monetary Fund, as a team from the Washington-based organization began meeting with Greek officials to provide assistance on tax and spending issues. “There is no case of us leaving the euro or seeking help from the IMF,” Papandreou told a news conference in Athens. “We don’t need it and we haven’t requested it.”

The risk of “sudden death” in the form of a balance-of- payments crisis was “negligible,” the ratings company said in the report. Still, the two countries face “downward ratings pressure now that they must implement politically difficult fiscal retrenchment, if they are to avoid an inexorable decline in their debt metrics.” Concern about the Greek government’s worsening finances prompted Fitch Ratings, Moody’s Investors Service and Standard & Poor’s to all cut the country’s creditworthiness in December and fueled investor concern about a possible debt default.

The yield on the 10-year Greek bond jumped 21 basis points to 5.87 percent as of 5 p.m. in London, pushing the spread to 258 basis points, the most since Dec. 21. The yield on Portugal’s benchmark 10-year bond rose 6 basis points to 4.04 percent, leaving the spread with Germany to 74 basis points. A basis point is 0.01 percentage point. The cost of insuring against default by the Greek government surged to a record. Credit-default swaps on the nation’s debt rose 46.5 basis points to 326.5, the biggest one- day rise ever, according to CMA DataVision prices at 3:45 p.m. in London.

The Greek and Portuguese governments may be forced to raise taxes, hurting investment and prompting emigration, according to the report. Greece’s government said today it will hold off on a plan to raise the prices of alcohol and tobacco products and property transfers to allow a public debate on the measure. In Athens, Papandreou, who is due to present his country’s three-year budget plan by the end of the week, said he knew he had to take tough measures and would submit a “responsible, credible” plan. Still, stronger euro-region countries would probably help weaker ones that run into trouble. “We find it hard to believe that member states facing extreme liquidity conditions would be denied the helping hand” that European banks and corporations benefited from during the global financial crisis, Moody’s said in the report.

In 2010, European ratings “will likely be scrutinized even more closely than usual” amid uncertainty over how governments move to dial back stimulus measures and spur growth. European governments with Aaa ratings “seem secure at the moment, with all having stable outlooks,” according to the report. The euro-area economy returned to growth in the third quarter, emerging from the worst recession in six decades, after governments spent billions of euros to rescue banks and boost demand. The region’s debt burden as a proportion of GDP will swell to 84 percent this year from 66 percent before the crisis, the European Commission forecasts, and governments have yet to clarify plans for paying that down.

Governments that implement successful strategies to rein in stimulus measures will have more “secure” ratings than those that don’t, Moody’s said. The ratings of countries that “stay the course of reform” even though it’s painful and takes time, will also be safer. Another risk to ratings could be posed by higher interest rates, Moody’s said. The European Central Bank cut its benchmark rate to a record low of 1 percent while the Bank of England slashed its rate to 0.5 percent and is buying as much as 200 billion pounds ($325 billion) of bonds to stimulate lending.

If concerns about inflation prompted market rates to rise significantly, higher debt costs may mean “more highly indebted countries could find their ratings tested,” Moody’s said. The U.K.’s debt burden will amount to 80 percent of GDP this year, Italy’s will rise to 117 percent and Greece’s will be 125 percent, according to the commission’s forecasts.

Albert Edwards Takes On Payrolls, P/E Expectation Divergence And The "Barrage" Of M&A Deals Just Around The Corner
Albert Edwards is back and spreading realism as usual. First, the SocGen strategist takes on the increasingly growing divergence between the NFP payroll and household surveys.

The 85,000 decline in December?s non-farm payrolls jolted (briefly) the markets back to reality. For it had almost been forgotten in the post-November payroll euphoria that we remain in the midst of a long-lasting balance sheet recession. Yet surprisingly weak though the December payrolls were, this disappointment pales into insignificance compared with the massive 589,000 decline in employment as measured by the Household Survey (the monthly Employment Report contains surveys of both Households and Company Establishments each month). Typically the employment measure preferred by the markets is the payroll data collected from the Establishment Survey, as it tends to be less volatile on a monthly basis (but the unemployment rate data is derived from the alternative Household Survey).

Although the household measure of jobs is typically more volatile on a month-on-month basis, it is notable how it has seen a far more marginal improvement on a trend basis when compared to the payroll series (see chart below), and just how bad December?s outturn was.

Which of these indicators should one be following?

Typically, at turning points, the Household Survey measure of employment growth tends to be a leading indicator of the payroll data. Payrolls often get revised much later to fall into line with the Household Survey measure. One key difference between the two surveys is the difficulty the Establishment Survey measure of employment has in picking up what is going on in the smaller company sector. These diverging trends appear to be particularly wide at present (see chart below).

Some thoughts on why the ongoing weakness in the US economy continues being in the now forgotten small and medium business sector:

If you look at the ISM you would imagine that all is now well with the US company sector: indeed the December measure of new orders, standing above 65, is particularly strong. But like the Establishment Survey of non-farm payrolls, there is a bias towards larger companies. The evidence from the National Federation of Independent Businesses (NFIB) is that the situation for the smaller company sector is far gloomier, and to focus on the payroll survey is to miss the pain that is evident throughout the wider corporate sector in the US.

Why the birth/death model, which assumed 59,000 were created in December, is skewing data, and why the payroll survey can be effectively cast away as the latest data series indicator in the government's increasingly misleading and muddy representation of economic status:

One source of overstatement in the payroll survey occurs because the Bureau of Labor Statistics (BLS) makes assumptions about the birth/death of companies and the creation of new jobs - link. In December, for example, the BLS assumed 59,000 jobs were created (seasonally unadjusted). It is generally recognized that this model tends to overstate job creation in a cyclical downturn. It is also likely that, with the smaller company sector currently in so much pain, the payroll estimate of employment growth is overestimating jobs growth and that the wider ranging Household Survey may be a better indicator of current trends.

Some more on why the ignored small company sector is where the bulk of the action likely is, and why it continues being largely ignored by the BLS:

For it is quite clear looking at NFIB Survey that small companies are still having a terrible time. Nominal sales are poor and companies remain ?credit crunched?. In every month last year small companies planned to increase prices, whereas they actually had to slash prices. No surprise then that plans to hire and expand are still so very dismal.

Those working in the markets often forget just how important the unlisted corporate sector is to the economy overall. US companies with less than 500 employees make up half of all private sector employment, for example. The continued problems for the US smaller company sector might explain why the Chicago Fed?s measure of National Activity remains insipid. This monthly survey aggregates 85 of the key nationwide indicators and is thought by many to be a good monthly reading of the heartbeat of the national economy. A three-month moving average of around -0.7 is consistent with recession while a reading around zero is consistent with trend growth.

The latest reading in November is consistent with the economy only just beginning to emerge from recession. Yet already some of the leading indicators we monitor closely have begun to top out (e.g. ECRI and Conference Board). Furthermore the wonderfully named Philly Fed?s Aruoba-Diebold-Scotti high frequency measure of business conditions index already seems to be on the slide.

Yet where Edwards shines is in his observations of the divergence between the run up in forward P/Es and still all time low expectations of long-term EPS growth.

This means the equity market is far more reliant on the expectations for strong 2010 earnings growth being fulfilled (a near term eps disappointment can be shrugged off if valuations are dependent on high long-term earnings expectations). The 27% year-ahead expectation for global non-financial eps growth is a near record and particularly challenging when margins are at such high levels. The tentative evidence that the cyclical upturn may already be stalling out would leave an expensive equity market ready to complete the Ice Age secular de-rating.

Lastly, in debunking yet another rose-colored glasses myth, Edwards takes on the misperceptions surrounding the "surging" corporate cash flow and the barrage of M&A deals "just around the corner."

I hear much talk abound that the US corporate sector is throwing off unprecedented surplus cash and that it is only a matter of time before this triggers a major recovery of investment and/or M&A. Indeed both the household and corporate sector?s financial position seems to have been transformed from their noughties low of 4% deficits, with both sectors now running healthy surpluses of 3%

The national income accounts (NIA) definition though should be seen besides the Fed?s Flow of Funds (FoF) calculation of the very same surplus. On a slightly different definition this shows a more moderate surplus of only 1% of GDP. And when one assumes a neutral contribution from inventories (which will almost certainly be the case in Q4), the surplus drops away to 0% (see chart below). This is indeed certainly much better than a few years back, but not though compelling evidence that an investment/M&A boom will be imminent this year.

At the end of the day, nothing matters: fundamentals have long been pushed away to the scrapheap of relevant data. As Rosie keeps harping: "good news is good news and bad news is good news." What else is there to say? Maybe a few things. Our analysis on the upcoming Minsky moment will be published shortly.

Giving corporations an outsized voice in elections
by Monica Youn

Corporations are pitching a bizarre product -- a radical vision of the 1st Amendment. It would give corporations rather than voters a central role in our electoral process by treating corporate political spending as protected speech. If this vision becomes reality, businesses and other big-money players will spend billions either hyping their preferred candidates or running attack ads against elected officials who don't support their preferred agenda. Voters will be forced into a couch-potato role, mere viewers of the electoral spectacle bought and paid for by wealthy companies.

The Supreme Court's decision in the hotly anticipated campaign finance reform case Citizens United vs. Federal Election Commission -- which may be announced as early as Tuesday -- will show whether a majority of the Roberts court is buying their argument.

The case may be the turning point in a concerted, decades-long ideological campaign -- the "corporate free speech movement," as Robert L. Kerr and other scholars have chronicled. As far back as 1971, Lewis F. Powell Jr. (whom President Nixon would shortly nominate to the Supreme Court) sent a confidential memorandum to his friend Eugene Sydnor Jr. at the U.S. Chamber of Commerce arguing that corporate interests needed to take advantage of a "neglected opportunity in the courts." Because "the judiciary may be the most important instrument for social, economic and political change," the memo said, the chamber and other corporate interests should develop a cadre of constitutional lawyers to file lawsuits and amicus briefs to push a corporate-friendly legal agenda in the Supreme Court.

Corporations heeded this call to arms, generously funding the chamber's litigation arm and founding other think tanks. In hundreds of lawsuits and briefs, the chamber and corporations such as Exxon-Mobil and Nike have drilled in the pro-business party line that 1st Amendment protection should extend to corporate political spending -- such as the corporate-funded movie about Hillary Rodham Clinton that is at issue in Citizens United. The case, which began on narrow grounds (did restrictions on corporate campaign ads apply to this film?) has become a test of whether restrictions on political speech by corporations should be ended altogether.

Only five years after Powell sent his memo, the Supreme Court in Buckley vs. Valeo struck down campaign spending limits on 1st Amendment grounds, with the rationale that such limits "impose direct and substantial restraints on the quantity of political speech." Two years later, in First National Bank of Boston vs. Bellotti, the court held -- for the first time -- that the 1st Amendment extends to corporate political spending, striking down a law that had prevented business corporations from spending shareholder funds to influence the outcome of state ballot measures. By then Powell was on the court, and he wrote the controlling opinion in Bellotti and was in the majority in both cases.

As 1st Amendment expert Linda Berger has pointed out, the Buckley and Bellotti cases planted the seeds of three new metaphors in election law: that money is speech; that corporations are people; and that elections are marketplaces. To equate corporate campaign spending with 1st Amendment-protected speech, you must accept all three. Each, however, is problematic.

First, although spending money may, in some circumstances, have some expressive value (such as clicking a web link to give $10 to a candidate), it does not follow that money is speech or that the 1st Amendment should shield such spending from regulation. After all, I can drive my car in a way that conveys a message -- disapproval of a tailgating fellow driver, for example -- but that doesn't mean that driving is speech, nor that the 1st Amendment renders traffic laws unconstitutional. When corporations and other monied interests spend vast sums to influence the outcome of an election, they're not trying to communicate an idea but simply to wield economic power and to bid for influence.

Second, as Justice Ruth Bader Ginsburg pointed out at the Citizens United oral argument, a corporation "is not endowed by its creator with inalienable rights." After all, corporations are legal entities created for doing business and given special advantages that aren't available to individuals or even other business entities, including limited liability and favorable tax treatment.

Thus, although corporations have certain economic rights -- to enable them to conduct business -- a corporation has no claim to the fundamental constitutional rights held by "We the People." Corporations already have ample means to express their "viewpoints" -- by lobbying, testifying in Congress and conducting public education on issues -- and those corporate employees who wish to advance the corporation's political agenda can contribute to the corporation's political action committee.

Third, and finally, one should not simply import economic free-market principles wholesale into the "free market of ideas." The operating assumption of free-market theory is that, in the long term, buyers' preferences will steer money to the best outcomes, so that those firms that offer the best goods and services will be rewarded with the greatest market success. However, this "invisible hand" assumption -- that money follows or represents merit -- has no application to elections, especially when corporations are involved. The amount of money a corporation can spend lacks even a theoretical connection to the intrinsic worth -- or popular support -- of its political agenda.

For decades, the Supreme Court stopped short of fully endorsing any of the three metaphors, heeding former Chief Justice William H. Rehnquist's warning that to treat corporate spending as the 1st Amendment equivalent of individual free speech is "to confuse metaphor with reality." Instead, as campaign finance law developed, the court struck a balance between the rights of campaigners -- candidates, parties, PACs and corporations -- on the one hand and the rights of the electorate to a representative, participatory and accountable government on the other.

But since Chief Justice John G. Roberts Jr. and Justice Samuel Alito have replaced Rehnquist and Justice Sandra Day O'Connor on the court, concern for the 1st Amendment interests of the electorate seems to have been jettisoned. Since they joined the court, it has struck down campaign finance regulations in each of the three relevant cases it has heard, championing a 1st Amendment right to spend money freely in political campaigns without regard to the voter's right to a meaningful role in the electoral process.

With Citizens United due to be decided as campaigns for this year's elections get off the ground, political players are keenly aware that the court could open the floodgates to corporate cash. "We the People" can only hope the court steps back from the brink and instead recognizes that in a democracy, voters, not corporations, should be at the center of the political process.


jal said...

Ilargi said ...
“China went and stockpiled, stockpiled, stockpiled....

... China’s efforts to slow down the free money party at home and the need to either use its stockpiled raw materials in an economic fashion or cut down drastically on accumulating them, will inevitably lead to higher interest rates....”
Sounds like a smart move to me.
They did it without going into debt.
They are gong to need those stockpiles in the near future.
Its sounds like they are building their doomstead.
I would be more fearful of armed americans with guns then chinese armed with pitchforks.

Nelson said...

I wonder how much water they can stockpile.

"China’s Xiaowan Dam, upper reaches of the Mekong in Yunnan province, is the world’s tallest at 958 feet"

Ruben said...

Strategies such as China is employing I like to call, "Playing the Stockpile Market."

snuffy said...

I see no hope now for the folks here in the USA.It is becoming clearer that no attempt to rein in "big money"will be made in the slightest.The bonuses will be paid. J.Q.public will continue to seethe with goes on.

We, the public are going
to have the pleasure of knowing there exists a club,that we have no chance of joining...but will spend the rest of our lives paying for.
This new aristocracy that has formed here has the advantage of the latest socio-economic control methods,but has a few pesky problems like the net,and activists,and such like. Through cute legislation like the patriot act,and other abortions, the congress,and .gov will seek to put Orwell's dark writings as a guide to our future.

That "goveners"exc order I want to see.I cannot find a hard link with a #and the specifics of it.If true,they are getting their ducks in a row.I have only seen that order referenced in a couple of sites.No hard links.If not,the paranoia is getting deep enough to float a log...

I think mostly due to a lot of teabaggers finding out they are a wholly-owned subsidiary of the right-wing noise machine.One brother of mine actually drove to the Washington event {from Ore},came back huffing and puffing....and went ballistic when I pointed out how some of their hard earned[collected] monies were spent...on republican lobbyist 1600$dinners.....[Thought his head was going to explode]....
That little gem as well as a few more examples of who payed for them to play has caused a major split in the right...The same kind of split O-man has with the progressives in this country ,whom he has well and truly screwed.

This kind of total alienation of people who in their heart truly care for the same country I love shows me a very hard fact.There exists in this country One Hell of a lot of people who are completely fed up with the current game being played,both on the left and the right.
All it will take is a few more years of people getting screwed,loosing homes,and businesses, and jobs...when they get to the point of not caring,not having that last bit of hope for a better life,when they see their kids hungrey and selling them self on the street,....You will see a radicalization of the former- middle-class that will shake this country to its core.It will make the 60s look like crowd at Walmart,and give a whole new meaning to "civil disobedience"

Or pehaps not...maybe the 1 in 5 that takes prescription drugs,the newly-militarized police and the daily grind of TV propaganda will numb the minds enough to enslave the best and brightest....

I honestly don't know.

But I see movement,I see currents and emotions and feeling of outrage I have never seen before..and it is growing and growing.We are a funny people,we Americans.Sometimes the damn-est thing will trigger us to actions rational folks would never have suspected...Our history is full of triggers...that have swept away the current paradigm and installed a new one in the blink of a eye.

I just don't know what may trigger the next shift in the perception of our shared reality....But I see the whole picture becoming more and more unstable every day... dreams please


ric2 said...

hahahaha. hehehehe. *best Beavis and Butthead imitation*

he said "pile"

Unknown said...
This comment has been removed by the author.
bosuncookie said...

Snuffy wrote:

We, the public are going
to have the pleasure of knowing there exists a club,that we have no chance of joining...but will spend the rest of our lives paying for.

Isn't this is what the third world has been doing relative to the US for over a century?

What goes around comes around. Karma's a bitch.

scandia said...

In a recent article I read that the cost of the Obama campaign was 1 Billion. And of that amount I recall that the grass roots came up with a lot of money in small donations. Does anyone recall how much was donated by ordinary folks at coffee party /living room get togethers?
Anyway my point is the Obama regime raised 1B which is chicken feed compared to the gains made by Wall St and other power suits. A stunning return on investment!Little did we know back then where our hope and generosity would lead, that the herd financed their own destruction.
The boyz are so-o ruthless....

Archie said...


Here is the link to a pdf of Obama's executive order. I'm sure it seems innocuous to most, and that is why it has largely flown under the radar. It sure seems ominous to me though.

bluebird said...

Frank - Somewhere, during Bush's term, I read that it was Bush who originally came up with that executive order. I am unsure if Bush signed it, or left it for the next President to sign. It is not Obama's original idea.

el gallinazo said...

Thanks, Frank.

I find the following most threatening:

"(d) synchronization and integration of State and Federal military activities in the United States; and"

When TSHTF, el Pimpidente will demand that Congress repeal the Posse Comitatus Act of 1878, the whores in Congress will cave faster than they did to Hankenstein's demands, and then NORTHCOM will be unleashed upon the Usaco citizenry (or should I write the consumeriat)?

Bringing in the state governors is just a political smoke screen for activating the regular army and marines against the "homeland."

More shock doctrine.

The end days are approaching.

el gallinazo said...

bluebird said...
"Frank - Somewhere, during Bush's term, I read that it was Bush who originally came up with that executive order. I am unsure if Bush signed it, or left it for the next President to sign. It is not Obama's original idea."

Guess that just demonstrates that great minds think alike.

Stoneleigh said...

Here's another satirical piece from The Onion that shows the comedians have a better grasp on reality (and absurditity) than the mainsteam media.

Anonymous said...

Stoneleigh said... (yesterday)


Indeed our hearts should go out to them, and yet there are those who would blame them for their own plight. That stomach-churning story is the sort of thing we can sadly expect a lot more of in years to come. It's all about dehumanizing people who are different and there are many who will fall for it.

It's all about sin and spin, which can be very effective propaganda tools. We should all be very vigilant about spurious justifications to sway us against another group of people. It's a divide and rule tactic.

Yes, the Christian Right with its distorted view of sin and peculiar spin (they've even made a warrior out of Jesus!) divides and conquers. The full establishment of a totalitarian regime in the USA will be assisted by patriotism and the pages of the Bible.

Chris Hedges' book, "American Fascists: The Christian Right and the War on America" is very insightful.

Anonymous said...

Snuffy said:

...maybe the 1 in 5 that takes prescription drugs,the newly-militarized police and the daily grind of TV propaganda will numb the minds enough to enslave the best and brightest....

May I add the influence of the Christian Right? Let's also remember that Germans under Hitler were the "best and brightest."

But I see movement,I see currents and emotions and feeling of outrage I have never seen before..and it is growing and growing.

Maybe you see it because you live in Portland, on the Left Coast. Hey, I wish I was there! I mostly see right-wing, Christian fascists around me. :)

We are a funny people,we Americans.Sometimes the damn-est thing will trigger us to actions rational folks would never have suspected...Our history is full of triggers...that have swept away the current paradigm and installed a new one in the blink of a eye.

"Americans" are not different from other people throughout history who resided in the belly of the beast, an imperial power.

"We need to refute the idea that our nation is different from, morally superior to the other imperial powers of world history. We need to assert our allegiance to the human race, and not to any nation." ~ HOWARD ZINN

Anonymous said...

Celente is right. I see it right here in my own neighborhood, and where I work.

There's a trickle, sure to become a flood, of people from California who have come to Arizona because their benefits in CA have been cut off.

I'm not the totally weird one at work anymore, people actually come to me for gardening and preserving advice. Several people are getting chickens, a few are getting rabbits as well.

And then there are those who are completely oblivious.

Admittedly, I live in a state where living off the land isn't as foreign as it might be in say, New York, but the term 'urban survivalist' isn't a fringe thing anymore. Nearly everyone knows what it means.

Phlogiston Água de Beber said...


I see we are in tune as regards the true role of comedians. Here is a good piece on the reality of the labor situation from The Onion.

Phlogiston Água de Beber said...

This Onion piece is not what I would call funny. It is, however, a remarkably good description of the way things are. It is titled The Cauldron Of History

Phlogiston Água de Beber said...


The Onion even managed to shine some light on the plutocrats opinions about the inhabitants of desperately poor countries in this piece about Socialites without Borders

Bukko Boomeranger said...

The "financial responsibility" hearings put me in mind of the 9/11 Commission hearings. The latter was seen as a tough attempt to ferret out who f@cked up on the day of the terrattacks. I was so impressed by its truthy goodness that I went out and bought the book. Even read large parts of it. Only later did we find out that Robert Zoellick was feeding details of the inquiry's direction directly to realPresident Cheney, and how many threads of questioning were quashed.

It's all another sham, these latest hearings. Only a collapse will bring out the truth. But when we're starving and in pain, will we even care about the truth of the mass financial games?

Phlogiston Água de Beber said...

OK, this is my final Onion submission for today. To me it stands as a fitting rebuke to the likes of Pat Robertson, Jerry Falwell, et al.

Sumerians Look On In Confusion As God Creates World

Stoneleigh said...

IM Nobody,

LOL! I love The Onion, and John Stewart's Daily Show. Truly the comedians are the ones casting the most light in dark places these days. Being able to see the humour even in dark times is a gift.

Ammond said...

Atlanta bank officer pleads guilty to fraud.

Stoneleigh said...

IMO we are very close to the anticipated turn in the markets (ie at or near another high risk juncture when the balance of probabilities favours a downturn). A constellation of factors has been rolling over during the last couple of months (eg metals topping and the dollar bottoming), and equities are set to follow suit.

As in 1929 and the years thereafter, when the setback at the dawn of the American Century plunged Europe into chaos, this depression, which could be interpreted as the setback at the dawn of the Chinese Century, could do the same to the United States.

China's reining-in of liquidity, which I think will also happen here in due course, is likely to have the appearance of being far more 'successful' than anyone anticipates. By 'successful' I mean far more effective at removing liquidity from the system than one would expect, because it will coincide with a change in mood that will manifest as a crisis of confidence. Confidence IS liquidity. Of course being 'successful' in this regard would actually be disastrous for the global economy.

We need to watch what is happening in China, and also in Japan, which, as the article in today's post points out, is quite close to hitting a wall. I think it quite possible that Asia could blow up (financially) before the US and Europe, but I wouldn't expect it to take long for the contagion to spread.

Alfred said...

@ Stoneleigh,

Will the herd's mood darken, or will China's liquidity tightening darken the mood. Which came first, the chicken or the egg? As you know, I think that under most circumstances government policy dictates market behavior, and social mood follows behind. I know you don't believe that, but entertain the following thought experiment. What if tomorrow, rather than tightening liquidity, China reversed its policy and opened the monetary floodgates to unleash even more liquidity. Would a nascent negative social mood still pull the markets lower, or would the extra liquidity push risk assets even higher? Can there really be any debate about what would happen? Of course risk assets would go higher, thus proving my point. Too bad we can't do the actual experiment.

EconomicDisconnect said...

I have been faked out by the "China to remove liquidity" move too many times. If by next Tuesday some top China official has not come out to say "just kidding!" maybe I will feel different but that has been the pattern so far.

Phlogiston Água de Beber said...

According to this Ticker that KD posted this morning, the plutos apparently tried to send a message via the CME. If only we could understand their language. It brings to mind the confusion brought on the Japanese people, when Emperor Hirohito broadcast a radio message telling them his government would accept the Allies surrender terms, because he spoke an ancient dialect none of them had ever heard.

It would also be interesting to know who, in general, were the intended recipients. When the Big Dogs bark that loud something must be going on.

Phlogiston Água de Beber said...

Oops! forgot to insert link.

Oh SEC!...

Ilargi said...

If it were true that "government policy dictates market behavior, and social mood follows behind", wouldn't that imply that election campaigns could be a lot cheaper?

el gallinazo said...


The members of the commission's staff included:
Philip D. Zelikow, Executive Director/Chair
Christopher Kojm, Deputy Executive Director


Germany Unified and Europe Transformed: A Study in Statecraft by Philip D. Zelikow and Condoleezza Rice (Paperback - April 25, 1997)
Buy new: $28.50 $25.65

25 new from $22.6227 used from $1.08

Alfred said...

Ilargi asks,
"If it were true that "government policy dictates market behavior, and social mood follows behind", wouldn't that imply that election campaigns could be a lot cheaper?"
The 2008 election amounted to pocket change. As you've explained, there's no need to spend big when the outcome is irrelevant.

From Politico:
"The 2008 campaign was the costliest in history, with a record-shattering $5.3 billion in spending by candidates, political parties and interest groups on the congressional and presidential races."

My reply: $5 billion? That's two weeks in Iraq. The government hands over $5 billion to GMAC every other month, and the story doesn't even make the front page anymore. I doubt many people even know what GMAC is or that it's been bailed out 3x and counting.

Phlogiston Água de Beber said...

I see the cafeteria has re-opened :)

Government policy, market behavior, social mood, chickens and eggs. So much cud to chew, so little time before the damn dog comes back.

Out here where the buffalo roam and the forecast is for dark clouds from here to eternity, the stories they used to tell about GD V1.0 was that the herd was all flappin and jitterbuggin until one day the market behaved like a southern belle with the vapors. Next thing they knew, much of the herd was wandering around muttering "hey mister, can you spare a dime" and then government policy started pitching and yawing like the Leaking Lena in a hurricane.

So, where the hell is that noted biologist to splain about chickens and eggs? Because, apparently that is the key to it all.

And finally, where the hell is VK? It's been a long time since New Years Eve.

Alfred said...

The Absurdity of the Media:

The media spends 2 years intensly discussing and dissecting which political team has better uniforms and louder chearleaders - a drawn out Punch and Judy show that costs a grand total of $5 billion (pocket change).

Then, in the dead of night on Christmas Eve, with virtually no media coverage, the government decides a $6 trillion issue so momentous for our nation's future, it should have been reported, analyzed, and debated every day and for past 20 years. And even now, two weeks after the fateful event, probably less than 5% of the population even knows it happened or what it implies about the future.

EconomicDisconnect said...

I would disagree with both Cheryl and Stoneleigh. If there is a "nascent negative social mood" as it pertains to risk I have not seen it, nor has the VIX.

Case in point;
the same store sales numbers last week were ok and this caused a pump in the markets. Today the hard data came out showing that sales in aggregate were terrible, but due to store closings the same store sales were ok looking. Where was the sell off due to a faulty data point that has been proven false? You missed it too huh?

I call this The Gordon Gartrelle Replica Economy and if you know the Cosby Show you know what I mean.

EconomicDisconnect said...

Fannie and Freddie bailouts will cost more than Iraq and Afghanistan combined. Cogitate on that.

gylangirl said...

I have long suspected that the pols are only allowed to strut and 'ask the tough questions' as long as they limit it to just posturing.

Yawn. Still not getting my vote.

Ventriloquist said...

Comment on ZH that is appropriate here:

I guess the reason we hold on to beliefs of a future socio-economic armageddon is that each and every new crisis brings the fact that the fundamentals of the economy seen in a "traditional" sense become more abhorrent. We keep asking the question "When the hell is this stack of cards going to collapse???" We see the charts, indicators, and have wonderful forums of information sharing and debate on such sites as ZH... and it's natural/logical to assume that this ponzi scheme of an economic structure must at some point come to an end.

I guess the more appropriate question would be "Is the deck stacked for a systematic collapse, or just an incremental deterioration of the middle/working class and all hopes of a future free-market economy?" A better question for us peons would be "Do we play survival mode and try and profit at each up/downturn .... or do we take the fight to the Agent Smiths?"

thethirdcoast said...

This Wiki quote sums up exactly why Zelikow was chosen for his posts by the people who run society:

"In writing about the importance of beliefs about history, Zelikow has called attention to what he has called "'searing' or 'molding' events [that] take on 'transcendent' importance and, therefore, retain their power even as the experiencing generation passes from the scene. In the United States, beliefs about the formation of the nation and the Constitution remain powerful today, as do beliefs about slavery and the Civil War. World War II, Vietnam, and the civil rights struggle are more recent examples." He has noted that "a history’s narrative power is typically linked to how readers relate to the actions of individuals in the history; if readers cannot make a connection to their own lives, then a history may fail to engage them at all.""

You can read for yourself in his scary little treatise, "Thinking About Political History," written in 1999.

Nothing to see here folks, go back to sleep America, your government has everything under control...

Phlogiston Água de Beber said...

Joe Bageant is back and badder than ever. Bass Boats and Queer Marriage may just be his magnum opus and the finest commentary on Usanistan I have ever seen.

Taking Tea with the Lizards tells us what nobody wants to hear about our politics.

Joe's comments about what freedom is reminded me of a lonely July 4th listening to Travis T. Hipp on KFAT. He was lamenting the fact that in California the folks that Bageant calls Lizards had at some time past decided that ordinary folk should not be allowed to use fireworks to celebrate their freedom unless they could obtain a permit. What he said was, "if you have to ask permission, you ain't free".

$$$Dollar$$$ said...

Stoneleigh - What do you think a "Chinese century" would look like??

jal said...

Everyone is watching what is happening in Haiti.

I hope that those who want smaller governments can see what they are asking for ...

Every man for himself ... untold indescribable suffering.

If world government did not step in to help ... your imagination is not sufficient or capable of understanding the consequences

WARNING! What you are about to see contains graphic images not suitable for US mass consumption!


M said...

I’ll never forget a man named Adam Hsu telling me ‘always working very hard, that’s the Chinese way.’ I wonder if most Americans really understand the ingrained proclivity for tolerating hardship and toil that Chinese culture has instilled over the centuries.

One of these days we’ll see who is left eating rocks and dirt, and who is waving around the real Stuff

snuffy said...

Why in gods name is it necessary to "synchronize"military forces in the united states!!!

Say WTF!!

Chill is a good is gut-sick.This is the kind of action that makes me go cold...notice it is 10 "Hand picked" members of 2 guess is it is the ones who Believe in use of military force in the conus against Terrorist",who now can be anyone who opposes the political order,and organizes to oppose it.This board,could be considered such,should a nutcake in authority get a does happens.

I think there will be a whole lot of things start happening soon that will begin to spook the herd.This is the reason for setting up the "council

"What do they see coming down the road to require co-ordination of military resources"?

$64000.00 question
I would love to be a fly on the wall for the discussions going on now about "the council"Grrrr...


[Note:for those of us in stumptown and surrounding area e-mail is out for the meetups.Bring goodies]

snuffy said...


I cannot remember who it was whom echoed your sentiment with the phrase"I tremble at the actions of America when I know my god is just".

I lost my faith in country whan I really looked at what we have done for the last 100 years.You know some of the stories,and so do I.That said,I have had a lot of that faith restored when I have looked into the heart of many of my fellow men and women I have slept,worked,fought,and played with.

I have come to the conclusion that those who seek political power are the worst ones to allow to receive it

That police officers should be banned from working longer than 10 years due to the psychological stress imposed on the...the job is toxic.

That .gov is as G.Washington stated..government is force,fire and destruction of liberty

and real sleepy now...


Unknown said...
This comment has been removed by the author.
Gravity said...

Solvency is not statistical.

Jim R said...

@IM Nobody, here may be the answer to KD's "Oh, SEC" question:

Phlogiston Água de Beber said...


Thanks, for the bloomberg link. That is probably a piece of the puzzle, but might there not be something much scarier slouching toward Wall & Broad?

Unknown said...

Hey, it OK to be paranoid:

Glenn Greenwald on cognitive infiltration of online groups by government shills:

The more things "change" the more they remain the same.

There was a local case in upstate NY where racist comments posted at a newspaper's website about a raid targeting immigrant farm workers were traced to Dept of Homeland Security computers.

Ilargi said...


Thanks, but a) it's too long for the comments section, and b) it's in the next post.

VK said...

@IM Nobody,

Greetings, still here, just lurking. My brain has switched off and turned to mash like gravy since the New Year so I really don't know what to comment about regularly any more. I am in the process of reviving it though.

You can always contact me directly at or (I think or something like that). I update those little side shows on a daily basis.

Interesting day in the markets today, the road to DOW Zero or something around there could've have begun. Intel reported strong profits yesterday and JP Morgan reported 3.3Bn in profits, yes loan loss provisions rose but sentiment, as Stoneleigh has so often said can change on a dime. Some technicians are looking for a close below 1,333 on the S&P to possibly confirm a downward trend.

I know I've had foot in mouth disease before in trying to time the market but I suppose even a broken record can get it right once in 6 months :) So am expecting market peakiness within the next two weeks. I've still got egg splattered on my face from my November peakiness call, so my eyes are not clear, but why not make a friendly wager eh!?

Bada bing, bada boom.

Mike said...


I just signed up for Twitter recently, your TAE twitter posts are outstanding.

Thank you


Phlogiston Água de Beber said...


Geez, mashed brain is hardly an adequate excuse for making me wonder if you were dead, in jail or being tortured by Africom. You are one of my favorite personalities here. Not every post need be full of pith. If you can't think of anything else, jump in and propose a toast. I'll raise a glass in your general direction.

That's not egg on your face. I think it might be a little ectoplasm left by the ghosts of prophets past who also made the mistake of excessively precise prediction.

I have been predicting awfulness for I think it has been about 40 years now. These things can take time, but we have been getting steadily closer every day. It will get here and noone should be in any hurry for it.

z said...

Marty Armstrong: The Fate of the Dollar - 2010 & Beyond

Anonymous said...


Thank you for the link. A must-read for sure.

Greenpa said...

Snuffy: "I have come to the conclusion that those who seek political power are the worst ones to allow to receive it"

Way back there I remember reading a scifi novel, future USA, where the first criterion for office holders was that they NOT want the job. Because obviously; anyone who WANTED all those headaches had to be up to something.

Made and makes perfect sense to me.

I've been nudging slowly for the creation of a new political party in the US- which will only put forward candidates who really do not want the job.

Would be interesting, anyway.

Zaphod said...

Au contraire, the situation in Haiti illustrate just why you cannot put your trust in any gov't. Same lesson as learned in N.O. during Katrina. In a crisis, you and your neighbors are your only assets, and your resources are only what you have pre-positioned or can beg, borrow, or steal. No matter what, the first week "is on you".

More money (beyond emergency assistance) won't help Haiti much. It's already exported a moderate fraction of its population, yet it's woefully overpopulated. The only thing tha would help is to reduce population to a sustainable level, and as with everywhere else, that isn't happening.

I think what you see in Haiti is much like what you'll likely see in decaying cities everywhere before too long. And a big gov't won't help -- it'll just help itself to what little you had.

g-minor said...

In ancient Athens, all offices except military commanders were filled by lottery. If chosen, you had to close your shop - or whatever - and serve for a year. The system lasted 200 years until Athens set out to acquire an empire and turned the management of the state over to generals.


snuffy said...


I remember that story too.Its odd how much scifi has shown us over the years.
What will be , will be...
The various scenarios that have been put forth as "our future"in some ways give us a chance to reflect on how we are shaping today,as well as tommorow.I fear some of those tales ,such as "The Road" have captured some of the darkness that many feel is our collective destiny.[I took your advice and skipped seeing it]

Where now? With the turning of the year my guess is a countdown begins.How long will the administration hold together the wet cardboard box that is our economy is anyone's guess.My best guess is that it will be events outside the USA that trigger the phase-change.There exists to many balancing acts that can trigger other cascading failures that have formed for the current state of affairs to continue much longer.[As in any prediction,your milage my vary.]

I intend to keep planning meeting,talking,prepping,and not letting "the Apocalypse" prevent me from living a full and meaningful life[grin]It was said the last evil let loose when Pandora's box was opened was hope...Here's to whatever comes our way[big grin]


Phlogiston Água de Beber said...


No offices for people who want them has been my position for years. During last year's hoopla some comedian, I can't remember who (maybe Jon Stewart), proposed that the president be selected by a blind dart throw at the map to pick a town. Then a monkey (or maybe it was a chimp) would be parachuted into that town. The first person it touched would be the president. Maybe it's just my love of comedians, but it sounded to me like a workable idea.

Bukko Boomeranger said...

thethirdcoast said...

"In writing about the importance of beliefs about history, Zelikow has called attention to what he has called "'searing' or 'molding' events [that] take on 'transcendent' importance and, therefore, retain their power even as the experiencing generation passes from the scene. In the United States, beliefs about the formation of the nation and the Constitution remain powerful today, as do beliefs about slavery and the Civil War. World War II, Vietnam, and the civil rights struggle are more recent examples." He has noted that "a history’s narrative power is typically linked to how readers relate to the actions of individuals in the history; if readers cannot make a connection to their own lives, then a history may fail to engage them at all.""

George Orwell summed it up more pithily in "1984" when O'Brien voiced IngSoc philosophy: "He who controls the Past, controls the future. And he who controls the present controls the Past." Sick, isn't it, how TPTB have taken "1984" and used it as an instruction manual.

And ElGal, thanks for the correction on Zelikow's name. Too many crooked Zeds. Zoellick is the free-trader who sold out the U.S. working class with NAFTA, isn't he? I'd Google, but I'm tired from working midnight shifts so I can't be bothered.

Phlogiston Água de Beber said...


TPTB's have been remodeling the Past since long before Orwell was born. George was just letting us herdlings in on the secret. It is unfortunate that we haven't found any way to use the information.

Ruben said...

My mother has long proposed governement elected by lottery. I see now she was Athenian.

VK said...

@ Bukko, IM Nobody

I wouldn't necessarily construe transcendence of the nation state and it's founders and triumphs to near God-like status as anything too Orwellian.

This is actually a vital and essential part of civilization. The Egyptians worshipped the sun god and built a 3,000+ year civilization around him and the Pharaohs were accorded god like status. Same thing with Rome, the legend of Remus and Romulus and seeing the emperor as divine and the phrase, "All Roads lead to Rome".

Status and hierarchy are vital to the complex civilizations that we have. The creation of legends and myth is vital in creating that hierarchy. No one wants Joe 6 Pack to be a King, we have an impression of who deserves to be King, someone of higher, regal status, almost god-like.

Hence the creation of so many gods in all civilizations and the ruler being declared near god like. Choose an ancient empire or a modern one you'll find the same pattern.

The foundation of America is built on the ideas of life, liberty and the pursuit of happiness. The origins of America are shrouded in glorious myths - how smart, wise and just the founding fathers were - never mind they had and possessed slaves, that women weren't allowed to vote till the 20th century or that if you were white and poor you were not allowed to vote either. I believe it was landowners only.

In the Congress there is the Apotheosis of Washington, a very large fresco painted by Italian artist Constantino Brumidi in 1865 and visible through the oculus of the dome in the rotunda of the United States Capitol Building. (That's what wikipedia says). In it George Washington is seen transforming into a God.

What the purpose of this is twofold

1) Create a sense of tribal loyalty to the nation. So that people work together to better the nation state.

2) In times of war, such feelings can be used by the elite to propagate their own agendas for eg "You're going to Iraq to fight for Freedom, Democracy and the American way of life". The elites don't have to say, "You're going there to wage war for oil so we can make profits".

In a sense such use of imagery and allegory are vital to the survival of the nation state. Serving as a tool for cohesion and self preservation and also as a means of offence and grabbing resources through the basic notion that "We are good, they are bad."

el gallinazo said...


Zelikow's role went far beyond just leaking back to Cheney. He ran the whole show - totally controlled it. Kane and Grampa Simpson where just window manikins. Only thing that I find interesting was that Zelikow was Rice's made man, yet Cheney trusted him not to let the show spin out of control. Cheney must have had somethng really juicy on him. Could be a sequel to the Sopranos.

ben said...

if this is pertinent, a few days ago my dad left london, from gatwick, for firenze. he did me proud.

"Was settling down with a cappuccino and croissant in
Pret a Manger in the departure lounge at LGW and the fire alarms started ringing
with the public address system telling everyone to evacuate immediately. I was
not entirely convinced that it was a real alert... and continued to enjoy my
breakfast....However, all the stores and kiosks were closing and the staff
leaving so I had to move...took my beverage out to the general seating area and
met a Jamaican man who was complaining that he could not evacuate as he was not
very mobile and had already been troubled sufficiently getting to the eatery
area armed with his generous packages of duty free goods (2 litres of Black
Label and other stuff) and walking stick. We chatted and joked whilst everybody
else evacuated. An occasional invalid in a wheelchair with carer would pass by
looking for a wheel chair friendly emergency exit and would pass by again
several times still looking...The 'emergency' continued for about 15-20 minutes
accompanied by the alarm bells and recorded announcements and eventually the
whole departure area was empty, save for one elderly Jamaican gentleman (whose
flight to Kingston was delayed by 4.5 hours!) and yours truly!
An odd security official with hi-viz jacket wandered around but at no time did
anyone approach us to advise us to evacuate!
There was no fire and presumably no terror alert and eventually everyone started
re-emerging, presumably having to pass through security again, losing their
liquid purchases on the way..."

el gallinazo said...

Any fan of Joe Bageant who wants to hear him ramble on for a couple of hours, here's a link. The interview is a couple of years old, but I just found it. I recommend it to Snuffy in particular.

Phlogiston Água de Beber said...


I have no quibble with what you said about the nature of imperial civilizations, though that does not circumscribe the whole of human civilization. But, I'm afraid you might be romanticizing a shade too much. People far less worthy than Joe Six-pack have more than once been handed an imperial sceptre.

As for whether we should be glad that TPTB have such effective tools to command unquestioning military loyalty, I offer this link to the testimony of a young man named Evan Knappenberger who has apparently "been to the other side of the hill and seen the elephant", to quote the late Colonel Jeff Cooper.

Bryan McNett said...

VK said...

"Status and hierarchy are vital to the complex civilizations that we have. The creation of legends and myth is vital in creating that hierarchy."

Yours is a great comment - myth is obviously an adaptive trait for civilizations. An army whose soldiers believe in heaven will sacrifice more individuals to meet their objectives.

Objective reality merits discussion too. This website, in fact, discusses the reality obscured by myths about politics and the economy.

These myths you bust are required to keep the economy going, if only for a little longer. If everyone understood reality, they would have a strong incentive to cash out, which would cause the crash you predict.

So, you don't expect or desire wide readership? If you got it, you'd bust the sacred myth that keeps the tribe together - if only a little longer.

Ilargi said...

New post up.

Of Trojan thoroughbreds