Thursday, March 25, 2010

March 25 2010: That's entertainment

Detroit Publishing Co. Dreams are forever 1905
"Dreamland at night, Coney Island, New York"

Ilargi: It’s one thing (and a smart thing, too, in all likelihood) for Germany to invite the IMF into the Greek drama school to play the role of the culprit and bear the brunt of the blame for the stark austerity measures that are inevitable in Hellas. Moreover, with the IMF on board, the costs of the bail-out ($25 to $40 billion) will be shared among all IMF member states, not just those of the EU.

It’s quite another thing, however for the US to try to blame China for a substantial share of its economic troubles. Casting the IMF as scapegoat is an entirely different story than casting China as such. But it looks like the US Congress might actually be foolish enough to declare Beijing a "currency manipulator". According to the New York Times, Senator Lindsey Graham, (R) South Carolina, had this gem to offer:
"China’s mercantilist policies are hurting the rest of the world, not just America. It helped create the global recession that we’re in."

Excuse me, but I can't seem to figure out how China caused the recession. Perhaps a few years ago the Senate building was given a fresh coat of lead-filled Chinese paint that caused all senators to miss the crisis until it was way too late? Graham's Democrat colleague Charles Schumer chimes in with:
"The only thing that will make China move is tough legislation."

Yeah, right. Tough legislation. The same kind, I think he means, that has put all those Wall Street bankers and Washington politicians behind bars for their role in the recession. Come on, guys, what do you think the Chinese feel about the US financial crisis? And about the way it's treated at home? I'd say they must be as amused as they are stunned. But they've seen Goodfellas and Scarface and Don Corleone and Tony Soprano, they understand what drives American civilization, and they're not about to be bullied by the mob. The Times continues:
The two senators pointed to a new study by the Economic Policy Institute, a labor-backed research organization, saying the growing trade deficit between China and the United States resulted in the elimination or displacement of 2.4 million American jobs between 2001 and 2008.

So you're going to blame China for the fact that American pride Wal-Mart is producing most of its crap over there, because it can get it at slave wages? Isn't that the whole point of globalization? Of capitalism, indeed? The idea is that if China raises the exchange rate of the yuan, Sam Walton will graciously bring them jobs back home, and Americans will keep on buying the trinkets at 5 or 10 times the current price?

Unless the two senators are as delusional as Paul Krugman, who calls for a 25% added tax on what you buy at Wal-Mart, I can see only one reason for the hot air, and that's the same reason Germany pursues in its stance vis-avis Greece: bring down your currency.

And even that may backfire: if China lets the yuan float, what would be left of the US dollar down the line? It's absolutely positively possible to bring down your currency too much and too fast. And that is something Angela Merkel has long since figured out. Maybe what holds up the greenback by its suspenders for now is exactly the yuan peg the senators seek to destroy. Perhaps it's the yuan that supports the dollar, not the other way around.

As for Germany and Greece? They're doing just fine, thank you. The Germans are even branching out in their sink the euro attempts. Fitch downgraded Portugal's credit rating, and I can't help thinking about the possibility that they did that at the request of Angela Merkel. Who, by the way, just now announced an agreement with French President Sarkozy for a Greece deal. And needs to look for additional horror stories or the euro will start rising again. Now that’s entertainment.

PS: remember Bill Ackman's rants and bets against Ambac last year, his insistence that the company was not a going concern? Today, the Wisconsin Office of the Commissioner of Insurance ordered the firm to set up "a segregated account for insurance contracts linked to credit-default swaps, residential mortgage- backed securities and other structured finance transactions". Filing for bankruptcy protection might well be next. And, barring ever more intricate added layers of creative accounting, Ambac could still cause an underground explosion strong enough to flatten entire cities (think municipal bonds). Ambac’s share price was once $96. It's now 61 cents.

And that, too, is entertainment.

a police car and a screaming siren
pneumatic drill and ripped up concrete
a baby wailing and a stray dog howling
the screech of brakes and lamplights blinking

thats entertainment

a smash of glass and the rumble of boots
an electric train and a ripped up phone booth
paint splattered walls and the cry of a tom cat
lights going out and a kick in the balls

thats entertainment

days of speed and slow time mondays
pissing down with rain on a boring wednesday
watching the news and not eating your tea
a freezing cold flat with damp on the walls

thats entertainment

waking up at 6 a.m on a cool warm morning
opening the window and breathing in petrol
an amateur band rehearsing in a nearby yard
watching the telly and thinking 'bout your holidays

thats entertainment

waking up from bad dreams and smoking cigarettes
cuddling a warm girl and smelling stale perfume
a hot summers day and sticky black tarmac
feeding ducks in the park and wishing you were far away

thats entertainment

two lovers kissing at the scream of midnight
two lovers missing the tranquility of solitude
getting a cab and travelling on buses
reading the grafitti about slash seats and fares

thats entertainment

China comments add to sovereign debt fears
Growing concerns about sovereign debt found a significant mouthpiece on Thursday, when a senior Chinese central banker warned that the Greek crisis was just the beginning. "We don’t see decisive actions telling the market we can solve this," Zhu Min, a deputy governor of the People’s Bank of China, was reported as saying. His comments caused the euro to dip to a new 10-month low versus the dollar, and encapsulated a nagging worry among investors that high levels of government indebtedness is one of the main risks facing the global economy.

The FTSE All-World equity index rose 0.2 per cent as the rally in stocks continued regardless. The euro later recovered some poise after the european central bank bent its collateral rules to help Greece, but the timing of Mr Zhu’s statement is particularly pertinent and suggests a fiscal focus will dominate markets for the short term. Of immediate concern is the eurozone. A two-day summit of European leaders convenes on Thursday and investors need to hear that they have been able to knit together a safety net for Greece, lest it has trouble rolling over the €20bn of debt maturing over the next couple of months.

A downgrade of Portugal’s debt on Wednesday and the subsequent tumble in the euro should concentrate minds, but traders do not expect a clean and decisive outcome. Indeed, Simon Derrick, chief currency strategist at Bank of New York Mellon, thought that Mr Zhu’s comments "might well signal the point that we stop talking about a "Greek debt crisis" and start talking about a "Eurozone structural crisis" instead".

But there is a potentially more important issue emerging. The poor reception given to the auction of $42bn of US five-year notes on Wednesday points to fatigue among buyers of US government debt. If this continues, yields will rise, but not for the good reason – faster growth – but for the bad reason – too much supply. This could knock the nascent economic recovery and hit asset markets, particularly cycle-peak equities, hard. And who buys most of the US debt? Why, Mr Zhu and his colleagues of course.

The World is Choking on Government Debt
Unprecedented relationships are beginning to form in the global bond markets. For as long as anyone can remember, the US government has enjoyed the lowest cost of borrowing whatever the maturity of the bond, because the US has been deemed the safest credit anywhere in the world. The prospect of default of the United States has been considered so low that academics describe the US Treasury bond as the risk-free bond., from which all other credit instruments are priced. This relationship seems to be breaking down, for the first time in living history. This past week Berkshire Hathaway was able to raise funds at an interest rate lower than that of the US Treasury. Headlines in the financial press stated: “Obama Pays More Than Warren Buffett For Money.” The bonds of DuPont and other stalwart corporate names also yielded less than equivalent maturity Treasuries.

The Treasury Department is now coming routinely to market with bond issues that just two years ago would have been considered preposterously large. All of this is necessary to help the US fund its projected $1.9 trillion budget deficit, up from about $400 billion a few years ago (not counting the issues necessary to fund the Iraq War). Today the Treasury offered $42 billion in 5 year notes, and the auction did not go well. The bid-to-cover ratio, which measures the excess demand for the bond, was disappointingly low. Moreover, indirect bidders took only $16.6 billion of the issue, and this category includes foreign central banks. Lately there has been a category added by the Treasury called “Direct Bidder”, which is not specified, but is assumed by some to be the Federal Reserve.

This means that the one arm of the US government is buying the debt issued by another arm – never a good result because no new cash flows into the Treasury coffers. The rest of the bond issue was taken up by the Primary Dealers, who are required to bid and buy Treasury issues. The problem here is that these Dealers are holding on to more of this paper now that the central banks, especially China, are no longer funding the US deficit. Also, with the collapse of Bear Stearns, Lehman Bros., and Merrill Lynch, there are fewer large Wall Street banks to support the government bond market. This is one of the consequences of concentrating so much power and wealth in what are now six large banks.

China’s disinterest in buying US Treasuries traces back at least to October last year, when the Chinese government indicated it was scaling back on its investments in US securities. While this announcement can be interpreted politically as a rejection of US government policies and its excessive borrowing needs, the Chinese reaction is also mathematically ordained. As Chinese exports have plummeted and government reserves have plateaued, China simply hasn’t the financial resources to continue buying Treasuries, which is unfortunate for the US at a time when its government borrowing needs have quadrupled.

It did not help today that Portugal’s government bonds were downgraded to AA- by the Fitch rating service. This took the European debt crisis to another stage, with the problems with Greece’s debt still unresolved. The German government remains adamant that it will not provide funds to Greece, despite the efforts of France and other countries to organize a pan-European rescue for Greece. Thus there is a talk of a possible Greek default, not because Greece can no longer borrow on the public markets, but because Greece can no longer afford to borrow. The rates being charged by the market – 12% and higher – are typical for a junk debt issuer, but more specifically, the Greek government says it cannot afford to pay interest at such a rate. It simply doesn’t have the cash. The late economist Hyman Minsky would recognize this as a Minsky moment, when a borrower engaged in Ponzi finance (taking on new debt to pay off old debt) realizes it can’t afford even the interest on new debt.

Complicating this picture is the ongoing investigation as to whether Greece cheated in obtaining entry to the euro by hiding debt through maneuvers like the Goldman Sachs swaps. Also, Germany in particular is angry at revelations that a major Greek bank – Hellenic Bank, as well as the Greek government Postal Service bought credit default swaps betting that the Greek government would default. What sort of inside information did they have? As if dealing with all this was not enough, global investors now have to worry about the government debt situation in Portugal. Who is next? The prime candidates for ratings downgrades are Ireland, Italy, and most worrisome, the United Kingdom. The UK’s debt situation is somewhat worse than that of the US, but if the UK is dragged into this mess, can the US be far behind?

Market veterans are beginning to think anything is possible. Clearly, the market is having trouble digesting the huge amounts of debt from the US that are issued weekly, and interest rates on this debt are rising inexorably. There is a point where the pressure on US Treasury prices could cascade lower into a collapse, leading to long bond interest rates of 7.5% vs. the current 4.75%.

It is also possible that we could have another credit crisis among the commercial banks, which would cause a rush to safety by investors. This would be halfway comforting to the Treasury, because investors would once again try to get their hands on government paper at any cost, thus driving down interest rates. But it would have serious consequences for the US economy, more than likely driving it back into recession or something worse. This is the dilemma facing the US – or maybe we should describe it as a trilemma. The third option, cutting back on government spending, is given lip service by the Obama administration because the economic cost of withdrawing all the stimulus in the market at the moment would be as recessionary as another bank crisis.

We can certainly say we live in historic times. It would be unprecedented if this current situation persists, wherein corporations can borrow more cheaply than the US government. But it does seem likely to persist, because the Treasury demand for so much cash is so persistent. Many of us have warned about this very problem, and the inflection point where it becomes obvious that the Obama administration can no longer willy-nilly borrow however much it wants to paper over economic and financial problems. We seem to be at that point. Watch for continuing hints that the US Aaa rating is in jeopardy (Moody’s has already suggested as much), and watch the stock market, which has been on a tear lately, convinced that government will always be able to rescue the economy and any big player who gets into trouble. It is this very assumption which is now under question, and which calls into doubt the whole Dow Jones rally of the past year.

China and U.S. on ‘Collision Course’ Over Yuan, Roubini Says
The U.S. and China are on a "collision course" over the Chinese currency and investors are underestimating the "consequences" for global financial markets, according to Nouriel Roubini. There is a 50 percent chance that the U.S. government will label China a currency manipulator, Roubini, a professor at New York University, wrote in a note to clients.

China Says It Will Not Adjust Policy on the Exchange Rate
Despite mounting pressure in Congress for the Obama administration to declare China a currency manipulator, the Chinese government is giving no indication that it will change its exchange rate policy. After meeting with officials at the Treasury and Commerce Departments on Wednesday, China’s deputy commerce minister, Zhong Shan, told reporters, "The Chinese government will not succumb to foreign pressures to adjust our exchange rate." Mr. Zhong reiterated a statement this month by the Chinese premier, Wen Jiabao, who said he did not believe the currency, the renminbi, was undervalued.

"It is wrong for the United States to jump to the conclusion that China is manipulating currency from the sheer fact that China is enjoying a trade surplus," Mr. Zhong told reporters in a meeting at the Chinese Embassy. "Besides, it’s wrong for the United States to press for the appreciation of the renminbi and threaten to impose punitive tariffs on Chinese experts. This is unacceptable to China." Mr. Zhong said that "the basic stability of the renminbi" was generally beneficial, because "a great surge in the value of the renminbi would hurt the economies of developing countries, especially the least-developed countries."

Mr. Zhong’s visit to Washington comes weeks before an April 15 deadline for the Treasury to deliver its semiannual report on foreign exchange. Many economists believe that China has deliberately undervalued its currency to support its export-oriented economy. China’s position has raised the ire of members of both parties in Congress, who say that the exchange-rate problem is holding back job growth in the United States. Two senators, Lindsey Graham, Republican of South Carolina, and Charles E. Schumer, Democrat of New York, have introduced legislation that would effectively compel the Treasury to cite the Chinese currency for "misalignment."

The Treasury has not found China to be manipulating its currency since 1994, making the argument, among others, that manipulation involves intent. Successive administrations have argued that it would be more fruitful to convince China that its interests would be served by allowing the renminbi to appreciate, a move that could stimulate domestic consumption in China and help wean its economy off a reliance on American consumers. With unemployment near 10 percent in the United States, Congress has seemingly run out of patience with that argument. "We’re fed up," Mr. Graham said on Tuesday. "China’s mercantilist policies are hurting the rest of the world, not just America. It helped create the global recession that we’re in. The Chinese want to be treated as a developing country, but they’re a global giant, the leading exporter in the world."

The Senate bill would let the Commerce Department retaliate against currency misalignment by imposing duties or tariffs. "The only thing that will make China move is tough legislation," Mr. Schumer said. The two senators pointed to a new study by the Economic Policy Institute, a labor-backed research organization, saying the growing trade deficit between China and the United States resulted in the elimination or displacement of 2.4 million American jobs between 2001 and 2008. House leaders have taken a less combative stance. At a Ways and Means Committee hearing Wednesday, its chairman, Representative Sander M. Levin, Democrat of Michigan, said of the currency policy: "Like so many other trade issues, it gets caught up in the polarization that grips trade issues — free trade vs. protectionism — a grip that I have believed harmful and reject."

Similarly, the top Republican on the committee, Representative Dave Camp of Michigan, said it would be better for the United States to work through the Group of 20 meetings and the International Monetary Fund to persuade China to reform its banking and financial sectors, open its markets and improve protection of intellectual property. "Focusing on the currency valuation issue to the exclusion of the others is more likely to lead to collective frustration than to any improvement in the health of the critical U.S.-Chinese economic relationship," Mr. Camp said.

Niall Ferguson, a historian at Harvard, told the committee that the way the renminbi is currently valued held back the economic recovery by artificially raising the price of American exports; contributed to a "dangerous overheating" of China’s economy; risked unleashing a "protectionist backlash"; and made it ever-harder for China to revalue the currency, because the value of its foreign reserves would diminish. But he urged the United States to "pursue currency realignment on a multilateral rather than solely on a bilateral basis."

Ambac Subprime Contracts Taken By Wisconsin Insurance Regulator
Ambac Financial Group Inc.’s bond insurance unit will hand control of subprime mortgage-related contracts to a regulator amid concern the second-largest bond insurer’s collapse would trigger losses for municipal noteholders. Ambac Assurance Corp., which guarantees $696 billion of debt payments, will set up a segregated account for insurance contracts linked to credit-default swaps, residential mortgage- backed securities and other structured finance transactions, the parent company said in a statement.

The Wisconsin Office of the Commissioner of Insurance ordered the handover to "protect policyholders, including investors in thousands of state and local municipal bond issues," according to a separate statement. "While there’s clearly significant uncertainty, the potential outcome of these actions for Ambac Assurance is positive in that it may emerge stronger and without the threat of rehabilitation hanging over it," said Michael Cox, a structured-finance strategist at Chalkhill Partners LLP in London.

Ambac, created in 1971 to insure debt sold by states and municipalities, lost its top credit ratings and 99 percent of its stock-market value after expanding from its main business into guaranteeing bonds backed by riskier assets and collateralized debt obligations. The company said that while it doesn’t consider the regulator’s move to constitute a default, it may consider a "prepackaged bankruptcy." The securities coming under control of the regulator total about $35 billion, the Wall Street Journal reported, without saying where it got the information. The regulator will suspend payments totaling about $120 million for March to holders of the contracts, the newspaper said.

Ambac Assurance has agreed to pay $2.6 billion in cash and $2 billion of surplus notes to settle with counterparties on collateralized debt obligations, the parent company said in today’s statement. CDOs package pools of securities, including those backed by subprime mortgages, and slice them into pieces of varying risk. "I have a concrete plan for rehabilitation, and details will be reviewed in court over the coming weeks," Wisconsin Insurance Commissioner Sean Dilweg said. Ambac Assurance’s exposure to securities that soured amid the deepest financial crisis since the Great Depression "reduced its claims-paying resources," according to the regulator.

Ambac Financial has sufficient liquidity to satisfy its obligations until the end of the second quarter of 2011 and said it may consider a "negotiated restructuring of its debt through a prepackaged bankruptcy proceeding or may seek bankruptcy protection." The New York-based company had stated in a November earnings filing that it may seek bankruptcy protection. Ambac sold the industry’s first insurance policy on municipal debt 39 years ago, for a $650,000 bond of the Greater Juneau Borough Medical Arts Building in Alaska. The business thrived, with a handful of companies obtaining the top AAA credit rating needed to guarantee debt of state and local governments and their agencies that seldom defaulted.

Ambac Assurance was stripped of its top ratings in 2008 and has since seen its grade cut 17 levels to Caa2 by Moody’s Investors Service. Other bond insurers have split off their more troubled structured finance guarantees from their municipal bond obligations. MBIA Inc., the No. 1 bond insurer, said in February 2009 that it would divide its insurance business into two companies following the loss of its top credit ratings. Ambac Financial’s stock plunged 99 percent since May 2007, falling from a peak of $96 to 79.6 cents as of yesterday.

Credit-default swaps on Ambac Assurance were little changed at 60.5 percent upfront, according to CMA DataVision. That means it costs $6.05 million in advance and $500,000 a year to protect $10 million of debt for five years. Contracts on MBIA Insurance Corp. rose 1 percentage point to 51.25 percent upfront. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. Mutual funds holding $20 billion of municipal debt guaranteed by Ambac Assurance hired Hartford, Connecticut-base law firm Bingham McCutchen LLP to represent their interests in a possible restructuring. Ambac Assurance U.K. Ltd. said in a statement that it’s reviewing all its contractual relationships with Ambac Assurance and that it will remain able to meet all its obligations as they fall due.

Initial Claims for Unemployment Insurance Decrease Slightly
by Mark Thoma

According to this morning’s report from the Department of Labor, initial claims for unemployment insurance fell by 14,000:

In the week ending March 20, the advance figure for seasonally adjusted initial claims was 442,000, a decrease of 14,000 from the previous week’s revised figure of 456,000. The 4-week moving average was 453,750, a decrease of 11,000 from the previous week’s revised average of 464,750.

However, while a decline is better news than an increase, there are some qualifications to this number. First, the way in which the number of claims is calculated has changed:

The Labor Department said first-time claims dropped by 14,000 to a seasonally adjusted 442,000. … But most of the drop resulted from a change in the calculations the department makes to seasonally adjust the data, a Labor Department analyst said. Excluding the effect of the adjustments, claims would have fallen by 4,000.

The department updates its seasonal adjustment methods every year, and revises its data for the previous five years.

A change of 4,000, while better than a decrease, is not much. Given the volatility is week to week changes, this could be nothing more than noise in the data (though the four week average, which smooths some of this noise, did drop by a bit). That is, it would be hard to reject the hypothesis that the economy is moving sideways, especially given that claims are about where they were at the beginning of the year

Second, when claims are below 400,000 (approximately), the economy is gaining jobs, and when claims are above this threshold, jobs are being lost. At 442,000 we are still losing jobs.

Third, once we start creating jobs, it’s good to remember how far we have to go to get back to normal labor market conditions. This is the employment to population ratio:

It’s hard to say what normal will be once we get past the recession, but whatever it might be, we aren’t there yet.

US underemployment Hits 20% in Mid-March
Gallup's underemployment measure hit 20.0% on March 15 -- up from 19.7% two weeks earlier and 19.5% at the start of the year. Gallup Daily tracking makes it possible to monitor the underemployment rate throughout the month, rather than just once per month, making it the best and most timely way to measure the U.S. jobs situation.

Underemployment, January-March 2010 (Rolling 30-Day Averages at the Beginning of the Month and at Mid-Month)

The findings underscore why Americans say the most important problem facing the nation today is jobs and unemployment. Gallup's underemployment measure is based on more than 20,000 phone interviews collected over a 30-day period and reported daily. Gallup's results are not seasonally adjusted and tend to be a precursor of government reports by approximately two weeks.

More Part-Time Employees Seeking Full-Time Work

Gallup classifies Americans as underemployed if they are unemployed or working part-time but wanting full-time work. On March 15, Gallup's unemployment rate was 10.3% -- essentially the same as the 10.4% of March 1, but down from 10.8% in mid-February. However, this decline in the percentage of unemployed Americans was more than offset over the past 30 days by an increase in the percentage of those working part-time but wanting full-time work, from 9.0% in mid-February to 9.7% in mid-March.

Underemployment Components, January-March 2010 (Rolling 30-Day Averages at the Beginning of the Month and at Mid-Month)

Gallup's data suggest that while the U.S. unemployment rate has declined over the past month, the employment gains may be largely taking the form of new part-time jobs. Many of those acquiring these new jobs may be Americans who find that, although they would prefer to be working full-time, only part-time work is available.

Focus on Underemployment, Not Unemployment

Even with historic healthcare legislation under consideration, Congress passed and the president signed a new jobs creation bill on March 18. No doubt, national attention will shortly shift to unemployment and anticipation of the government's April 2 report of the March unemployment rate. In this regard, Gallup's mid-March unemployment rate is likely indicative of the not-seasonally adjusted unemployment rate the government will release in April, as is Gallup's broader underemployment rate.

The danger associated with focusing on unemployment is reflected by the recent statement of Morgan Stanley economists suggesting that the U.S. may add as many as 300,000 jobs in March owing to an improvement in the weather, economic growth, and the government's hiring of temporary census workers. If anything close to this number of new jobs is announced by the government in early April, there is likely to be an enthusiastic, possibly even celebratory, response. Government officials are liable to tout the continued benefits of last year's stimulus and the future benefits of the new jobs bill. Many Wall Streeters will likely argue that the surge in jobs is simply another confirmation of the strength of the overall economic recovery.

However, before policymakers celebrate too much, they should note Gallup's recent findings involving its new, more inclusive measure of underemployment. To be sure, there are some benefits associated with the unemployed getting part-time jobs, no matter the source. For example, Gallup's self-reported spending data show that part-time workers who want full-time work spent on average 24% more per day ($51) during the past 30 days than did the unemployed ($41). While this represents an improvement and is good for the economy, it is not nearly as good as the 85% higher daily spending of those having full-time jobs ($76).

It is also often suggested that a growth in part-time jobs may indicate future growth in full-time work -- that companies hire part-time workers before committing to hiring new full-time employees. While this is sometimes the case, it may not be so at this point in the U.S. economy: Gallup data show that one in three part-time employees who are wanting full-time work are currently "hopeful" about finding a full-time job in the next 30 days -- not much of an endorsement of the idea that today's new part-time work will progress to full-time jobs.

Regardless of how one interprets the shifts taking place between part-time and full-time jobs, it is important that policymakers focus on the broader goal of reducing underemployment, not just unemployment. Part-time, temporary jobs like those associated with census-taking are far better than no job and may reduce the unemployment rate, but they do not represent the kind of job creation needed for a sustainable economic recovery.

Treasury planning Citi stake sale
The U.S. Treasury could unveil a preset trading plan next month for the sale of its 27 percent stake in Citigroup Inc , Bloomberg said on Thursday, citing people with direct knowledge of the matter. The Treasury plan will lock the government into a schedule for selling its shares with the aim of eliminating any concerns that the sales are based on non-public information, Bloomberg said. The Treasury would issue instructions on how many shares to sell and at what price, it said. Citigroup has posted more than $100 billion of writedowns and credit losses since late 2007 and the bank's shares have lost 90 percent of their value since late 2006, with the bank requiring three different government rescues in 2008 and 2009. The U.S. Treasury and Citigroup could not be immediately reached for comment by Reuters outside regular U.S. business hours.

Behind Consumer Agency Idea, a Tireless Advocate
Ask Elizabeth Warren, scourge of Wall Street bankers, how they treat consumers, and she will shake her head with indignation. She will talk about morality, about fairness, about what she calls their "let them eat cake" attitude toward taxpayers. If she is riled enough, she might even spit out the Warren version of an expletive. "Dang gummit, somebody has got to stand up on behalf of middle-class families!" she exclaimed in a recent interview in her office here.

Among all the dramatis personae of post-financial crisis Washington, there is no one remotely like Ms. Warren, 60, who has divided the town between those who admire her and those who roll their eyes at her. She is an Oklahoma native, a janitor’s daughter, a bankruptcy expert at Harvard Law School and a former Sunday School teacher who cites John Wesley — the co-founder of Methodism and a public health crusader — as an inspiration. She brims with cheer, yet she is she is such a fearsome interrogator that Bruce Mann, her husband, describes her as a grandmother who can make grown men cry. Back at Harvard, Ms. Warren’s teaching style is "Socratic with a machine gun," as one former student put it. In Washington, she grills bankers and Treasury officials just as relentlessly.

Ms. Warren has two roles here: officially, as head of Congressional oversight for the Troubled Asset Relief Program, and unofficially, as chief conceiver of and booster for a new consumer financial protection agency. Fusing those projects and her academic work, she has become the most prominent consumer advocate in years. In a blitz of television appearances, she offers a story of how 30 years of deregulation has rewarded the financial industry but led to abusive practices and collapses that have hurt ordinary Americans — the same taxpayers who are paying for bank bailouts.

Ms. Warren’s climactic hour begins now: three years after she hatched the idea for the agency, the White House has backed it, the House of Representatives has approved it and it is a top Democratic priority in the Senate.
Many fans, including Representative Barney Frank, Democrat of Massachusetts, hope Ms. Warren will run it. But even if the agency is approved, it might be far weaker than what she envisioned, thanks to fierce opposition from the financial industry.

Critics argue that such an agency, which would regulate mortgages, credit cards and nearly all other loans to consumers, would tighten credit in an already tight market, stifle innovation and hurt small businesses. They have another objection as well: to Ms. Warren herself. As one administration official acknowledged, the prospect of her running the new agency may be an impediment to its creation because of her crusading style, her seemingly visceral loathing of financial services companies and her expansive way of interpreting assignments. " ‘Loose cannon’ would be an appropriate term to apply in her case," said Dean Baker, co-director of the Center for Economic and Policy Research and a Warren supporter.

The defining event of Elizabeth Warren’s life may have taken place before she was born, when a business partner ran off with the money her father had scraped together to start a car dealership. She arrived a few years later, in 1949, another mouth for a strapped family to feed. But she used that mouth to talk her way into a debate scholarship at George Washington University at age 16. She became a speech therapist, then a lawyer — she hung a shingle and did wills and real estate closings — then a part-time law instructor, and finally a leading scholar of bankruptcy. Her research helped change the stereotype of bankrupt people as feckless deadbeats: many, she showed, are middle-class workers upended by divorce or illness.

While Ms. Warren was building her career, her father became a maintenance man and her three older brothers back in Oklahoma worked in construction, car repair and the oil fields. Among them, they have endured all manner of financial crisis, including foreclosure, according to Ms. Warren’s husband. "I learned early on what debt means, how vulnerable it makes people, what the security of owning a home means," Ms. Warren said, her eyes welling. Even today, said Ms. Warren’s daughter, Amelia Warren Tyagi, her mother is so frugal that she eats shriveled grapes out of the fruit bowl.

Six years ago, Ms. Warren was one of the few guests at a Harvard Law School faculty reception for Barack Obama, an alumnus then running for a United States Senate seat in Illinois. He greeted her with two words: "predatory lending," signaling he knew her work. He began to talk about dicey mortgages and abusive credit products and their shattering effect on families, Ms. Warren recalled. Finally, she cut him off. "You had me at ‘predatory lending,’ " she said. A few years later, Mr. Obama was promoting her idea for a consumer agency on the presidential campaign trail.

Meanwhile, in October 2008, Harry Reid, the Senate majority leader, called out of the blue and asked Ms. Warren to head Congressional oversight of the bank bailout. It was a vague job, sketched out in a hurry, but she interpreted her mandate aggressively. Instead of issuing standard monthly reports, she turned them into independent research projects, bulletins and videos asking pointed questions about Treasury’s treatment of the banks. At the same time, banking lobbyists and other business-financed groups threw their weight against the consumer agency proposal — and they complained about Ms. Warren as well. (Wayne Abernathy, a lobbyist for the American Bankers Association, declined to comment for this article but recently asked if the TARP oversight panel had become "the new Warren commission.")

"She comes at the world from the perspective that she knows what’s good for people," said Douglas Baird, from University of Chicago Law School, who said he shared Ms. Warren’s concerns but not always her views. "She starts with a skepticism of markets and a skepticism of the ability of consumers to make sensible choices." The TARP project also complicated Ms. Warren’s ties to the Obama administration. The president lights up when her consumer protection ideas are discussed, according to Diana Farrell, deputy director of the National Economic Council. Likewise, David Axelrod, a White House senior adviser, effused about Ms. Warren in an interview by phone, using the word "passionate" over and over.

Her relationship with Treasury is chillier. In private, she has worked closely with some officials there on regulatory reform. But in her oversight role, she pounds the agency, leading some to accuse her of showboating or breeding cynicism about a program functioning better than many expected. "I’m a thorn in this administration’s side as much as in the last administration’s side," she said. She will not comment on whether she might head the agency, for the same reason administration officials will not.

"What we’re trying to do is build an institution that’s over and above any individual," Ms. Farrell said. Ms. Warren does say that if she and the administration lose on the agency’s passage, she’d like them to lose big — to force lawmakers, as she puts it, to leave "lots of blood and teeth" on the floor. If that happens, Ms. Warren will still have her own platform, starting with her nearly constant stream of television appearances. Hosts and cameramen love her: she has the friendly face of a teacher, the pedigree of a top law professor, the moral force of a preacher and the plain-spoken twang of an Oklahoman.

"This is America’s middle class," she recently said on "The Daily Show With Jon Stewart." "We’ve hacked at it and pulled at it and chipped at it for 30 years now, and now there’s no more to do. We fix this problem going forward, or the game really is over." "When you say it like that and you look at me like that, I know your husband is backstage, I still want to make out with you," Mr. Stewart responded. If no agency or government post materializes, Ms. Warren says she will happily return to Harvard. Others expect her to do more, including Eliot Spitzer, the former New York governor who has come to know her through their shared interest in consumer advocacy. "Plan B is to become Ralph Nader," he said.

What To Do About Fannie And Freddie
The Obama administration doesn't have an exit strategy, and none of the obvious options look good

On Tuesday, Treasury Secretary Timothy Geithner effectively declared lobbying season open for housing finance. Testifying before the House Financial Services Committee, Geithner said the administration plans to open a public comment period next month for stakeholders to weigh in on what to do with the government-controlled mortgage buyers Fannie Mae and Freddie Mac. The administration then plans to work with Congress to come up with a plan to overhaul the companies, sometimes referred to as government-sponsored entities, or GSEs.

"After reform, the GSEs will not exist in the same form as they did in the past," Geithner said in his written testimony. He says the government is swearing off taxpayer-funded bailouts for the mortgage giants, risk taking will be limited, they will have better capital requirements and consumers will have better protection. Sounds good, but the reality is no one in Washington has quite figured out what to do with Fannie and Freddie. The Obama administration doesn't have an exit strategy, and GSE reform isn't included in the Democrats' versions of financial regulatory overhaul legislation.

Fannie and Freddie have been an enormous drain on the government's coffers. Since the government's takeover of the mortgage buyers in September 2008, Uncle Sam has buttressed them with a reported $127 billion in taxpayer money and agreed to absorb all their losses for the next three years. According to the Congressional Budget Office, by 2013 the Treasury will have spent more than $163 billion to support the GSEs since they were placed under government control.

"My fear is that if we don't resolve it and address it in this [financial regulatory reform] bill, it's not going to be resolved," Rep. Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, told Forbes recently. He and other Republicans want to get rid of Fannie and Freddie completely within four years and phase out their mortgage portfolios by 25% a year between now and then.

Privatization would get bureaucrats out of the thorny area of housing finance, but it also creates other concerns. "There is significant reason to question the capacity of private banks to support mortgage markets in times of financial distress ...," says an October 2009 analysis of GSE reform possibilities by the U.S. Government Accountability Office. In addition, privatization wouldn't resolve a hallmark problem of the financial crisis: how the government deals with a firm that's considered too big to fail.

The problem is, the GAO points out, there are legitimate concerns with the other options. Creating a government agency or corporation to oversee housing finance might minimize risk taking if Fannie and Freddie dropped their mortgage portfolios and instead focused only on issuing mortgage-backed securities. But it could also mean that Uncle Sam would have to step in to support the mortgage market during a downturn. The same problem exists if the GSEs were reconfigured as for-profit companies but with tighter limits in areas like risk exposure and executive compensation.

Industry groups already have their solutions outlined. The National Association of Realtors wants the companies to be turned into government-chartered non-profits with an explicit guarantee from the feds. The group proposes to lessen the risk to taxpayers through guarantee fees for mortgage-backed securities and by requiring mortgage insurance where the borrower is financing 80% or more of the loan value.

The Mortgage Bankers Association wants an explicit government guarantee, also financed through fees, on securities backed by a core group of family mortgages. According to incoming MBA Chairman Michael Berman, who also appeared before the House panel Tuesday, Uncle Sam would guarantee only the securities--not the companies backing them. The group also says there should be limits on the GSEs' portfolio sizes and they should have strong capital requirements. How it all turns out is anyone's guess at this point. What to do with Fannie and Freddie is a complex problem that's going to take months, at best, to resolve. Stay tuned--the plot is about to thicken.

February New Home Sales: Worst. Month. Ever.
You already know that February new home sales were a disappointment, but here's a little more perspective courtesy of Calculated Risk. Seasonally adjusted, this was the worst month of all time. Ever. We're talking 6% worse than January of 2009.

new home sales

New Home Prices: More Room to Fall
by Michael Panzner

Over the past 48 hours, the Census Bureau and the National Association of Realtors have announced new and existing home sales, respectively, for February. As expected (at Financial Armageddon, at least) neither set of data points offered any real encouragement for those who keep harping on about a recovery in the sector.

In fact, a comparison of annualized sales and median price trends for both data series reveals an interesting divergence -- one that suggests new home prices will need to fall by 15 percent from where they are now to entice buyers if the historical relationship between the two markets is anything to go by.

How did I arrive at this figure? I took the median differential (going back to 1999) between the monthly median prices for new and existing sales, or $23,000, and subtracted that from the latest reported differential, or $55,400. I divided the net result by February's median price for a new single-family home, or $220,500, and got just under 15 percent.

Of course, my approach might be way off base or overly simplistic, and I might not be taking proper account of structural differences between the two markets, including the possibility that the fallout from burgeoning foreclosures is having a more pronounced effect on the market for older, rather than newer homes.

Nonetheless, the fact that the new home construction industry remains fairly pessimistic about the outlook, as the National Association of Home Builder's confirmed when it announced a worse-than-expected reading for its Market Index earlier this month, lends some weight to the notion that new homes have not yet reached price levels that many in the current pool of prospective buyers find appealing.

Lehman Scandal: Where’s the Follow Up?
by Eliot Spitzer and Josh Rosner

It doesn’t take a rocket scientist — and certainly not an accountant — to deduce one thing from the Lehman scandal. The misleading of regulators, investors and the public did not happen in isolation. Like Enron, WorldCom, Tyco, Wachovia, Washington Mutual, Fannie/Freddie, CDOs, Bear, AIG, bond insurers, GM, Chrysler, CIT, California, Greece and the countless others wrapped up in this crisis, Lehman is symptomatic of a banking system bent on finding ways to hide risk from the investing public and regulatory community. Every time the truth was uncovered, investors fled and new investors demanded returns that compensated them for the new understanding of the known risks and for those that might remain hidden. In some cases, the cost of that new capital broke the firms.

Traditionally, banks and investment banks acted as principals or agents, matching capital in search of economic return with borrowers needing capital to earn a real return on economic activity. Today, they have turned to manufacturing artificial demand for financial products on false pretense. We have seen them act in such a manner on behalf of their debt-issuing clients. And in the case of Lehman, they have done so on their own behalf. We can expect that other firms used this and similar tactics to hide their true financial condition - firms that are still in business and, to varying degrees, massaging or manipulating their numbers.

It should be clear to all that a deeper examination of the relationship between all the audit firms and their clients on the issue of risk-obfuscation is needed. Limiting any inquiry to Lehman alone is inadequate. To start, here are a few simple questions:

1. To the Fed: Where were you? Did you know what Repo 105 was? You claim that you were not the regulator but acknowledge that you were on site for 6 months before Lehman’s failure to make sure you would be repaid on your exposures, so wouldn’t deceptive accounting have reduced your faith in your ability to collect on your exposures?

2. To the SEC: What are you doing to ensure that other banks and investment banks are not using similar techniques to manipulate their books?

3. To federal investigators: Where are the subpoenas?

4. To the remaining post-Arthur Anderson audit firms: Have you signed off on any client transactions whose primary purpose was not driven by economic business decisions but rather to change the appearance of assets or liabilities? Are you aware of any of your client firms using any mechanism to optically reduce the appearance of leverage while actually retaining the risk?

5. To the investment banks and banks: Did you use Repo 105 or any other accounting practices, such as the end-of-quarter parking of assets at unconsolidated but related hedge funds or total return swaps for the primary purpose of shifting income?

6. To shareholders: Shouldn’t you demand to know if the firms in which you have invested have used deceptive accounting practices?

7. To Congress: You have authority to demand answers from virtually all of these entities, and especially the Fed, the SEC and the auditors. What are you waiting for? Why have you not already sought all the email traffic between the FED and Treasury and Lehman, and, as we have argued elsewhere, AIG and the Fed?

In the banking world, there are generally four types of risk; liquidity risk, credit risk, operational risk and reputational risk. Of these, only reputational risk failures threaten the entire value of the business and its goodwill. If our questions remain unanswered, the entire financial system will remain dangerously exposed.

Let Lehman evidence be made public, Anton Valukas urges court
The author of a scathing report into the collapse of Lehman Brothers called yesterday for every piece of evidence he had uncovered to be made public so that the investment bank’s creditors could bring legal action if they wished. Anton Valukas, an examiner appointed by the US Bankruptcy Court, wants to release several thousand documents behind his 2,200-page report, which is expected to be used by creditors seeking evidence of wrongdoing by those involved in Lehman’s failure. The report revealed that Lehman had used an accounting ploy to move $50 billion off its balance sheet in time for its quarterly results. It also said that a private auction of the bank’s derivatives book had resulted in a $1.2 billion loss.

CME Group, the world’s biggest futures and options exchange, which conducted the $2 billion auction, provided evidence to Mr Valukas for his report but has asked that the identity of the six bidders be redacted before it is made public. Mr Valukas found no evidence of wrongdoing by CME. In a filing to the court, lawyers for the examiner said that the public had a right to know the identity of bidders that resulted in a "highly favourable gain" for the winners.
Barclays Bank and the Office of Thift Supervision have also raised informal complaints about some information that Mr Valukas planned to reveal.

In his report, Mr Valukas found that litigants had a chance of proving claims of breach of fiduciary duty against several of Lehman’s senior executives and of professional malpractice against Ernst & Young. E&Y was the bank’s auditor while Lehman was using an accounting tactic called Repo105 to reduce the leverage on its balance sheet. In Britain, E&Y issued a statement this week saying that it was "confident we will prevail should any of the potential claims identified against us be pursued ... Lehman’s bankruptcy was the result of a series of unprecedented adverse events in the financial markets ... It was not caused by accounting issues or disclosure issues."

Gerald Celente says the crisis of 2010 will happen

Social Security to See Payout Exceed Pay-In This Year
by Mary Williams Walsh

The bursting of the real estate bubble and the ensuing recession have hurt jobs, home prices and now Social Security. This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office. Stephen C. Goss, chief actuary of the Social Security Administration, said that while the Congressional projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual. The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.

Analysts have long tried to predict the year when Social Security would pay out more than it took in because they view it as a tipping point — the first step of a long, slow march to insolvency, unless Congress strengthens the program’s finances. "When the level of the trust fund gets to zero, you have to cut benefits," Alan Greenspan, architect of the plan to rescue the Social Security program the last time it got into trouble, in the early 1980s, said on Wednesday. That episode was more dire because the fund could have fallen to zero in a matter of months. But partly because of steps taken in those years, and partly because of many years of robust economic growth, the latest projections show the program will not exhaust its funds until about 2037.

Still, Mr. Greenspan, who later became chairman of the Federal Reserve Board, said: "I think very much the same issue exists today. Because of the size of the contraction in economic activity, unless we get an immediate and sharp recovery, the revenues of the trust fund will be tracking lower for a number of years." The Social Security Administration is expected to issue in a few weeks its own numbers for the current year within the annual report from its board of trustees. The administration has six board members: three from the president’s cabinet, two representatives of the public and the Social Security commissioner.

Though Social Security uses slightly different methods, the official numbers are expected to roughly track the Congressional projections, which were one page of a voluminous analysis of the federal budget proposed by President Obama in January. Mr. Goss said Social Security’s annual report last year projected revenue would more than cover payouts until at least 2016 because economists expected a quicker, stronger recovery from the crisis. Officials foresaw an average unemployment rate of 8.2 percent in 2009 and 8.8 percent this year, though unemployment is hovering at nearly 10 percent.

The trustees did foresee, in late 2008, that the recession would be severe enough to deplete Social Security’s funds more quickly than previously projected. They moved the year of reckoning forward, to 2037 from 2041. Mr. Goss declined to reveal the contents of the forthcoming annual report, but said people should not expect the date to lurch forward again. The long-term costs of Social Security present further problems for politicians, who are already struggling over how to reduce the nation’s debt. The national predicament echoes that of many European governments, which are facing market pressure to re-examine their commitments to generous pensions over extended retirements.

The United States’ soaring debt — propelled by tax cuts, wars and large expenditures to help banks and the housing market — has become a hot issue as Democrats gauge their vulnerability in the coming elections. President Obama has appointed a bipartisan commission to examine the debt problem, including Social Security, and make recommendations on how to trim the nation’s debt by Dec. 1, a few weeks after the midterm Congressional elections.

Although Social Security is often said to have a "trust fund," the term really serves as an accounting device, to track the pay-as-you-go program’s revenue and outlays over time. Its so-called balance is, in fact, a history of its vast cash flows: the sum of all of its revenue in the past, minus all of its outlays. The balance is currently about $2.5 trillion because after the early 1980s the program had surplus revenue, year after year. Now that accumulated revenue will slowly start to shrink, as outlays start to exceed revenue. By law, Social Security cannot pay out more than its balance in any given year. For accounting purposes, the system’s accumulated revenue is placed in Treasury securities. In a year like this, the paper gains from the interest earned on the securities will more than cover the difference between what it takes in and pays out.

Mr. Goss, the actuary, emphasized that even the $29 billion shortfall projected for this year was small, relative to the roughly $700 billion that would flow in and out of the system. The system, he added, has a balance of about $2.5 trillion that will take decades to deplete. Mr. Goss said that large cushion could start to grow again if the economy recovers briskly. Indeed, the Congressional Budget Office’s projection shows the ravages of the recession easing in the next few years, with small surpluses reappearing briefly in 2014 and 2015. After that, demographic forces are expected to overtake the fund, as more and more baby boomers leave the work force, stop paying into the program and start collecting their benefits. At that point, outlays will exceed revenue every year, no matter how well the economy performs.

Mr. Greenspan recalled in an interview that the sour economy of the late 1970s had taken the program close to insolvency when the commission he led set to work in 1982. It had no contingency reserve then, and the group had to work quickly. He said there were only three choices: raise taxes, lower benefits or bail out the program by tapping general revenue. The easiest choice, politically, would have been "solving the problem with the stroke of a pen, by printing the money," Mr. Greenspan said.

But one member of the commission, Claude Pepper, then a House representative, blocked that approach because he feared it would undermine Social Security, changing it from a respected, self-sustaining old-age program into welfare. Mr. Greenspan said that the same three choices exist today — though there is more time now for the painful deliberations. "Even if the trust fund level goes down, there’s no action required, until the level of the trust fund gets to zero," he said. "At that point, you have to cut benefits, because benefits have to equal receipts."

Financial Reform: Will We Even Have A Debate?
by Simon Johnson

The New York Times reports that financial reform is the next top priority for Democrats. Barney Frank, fresh from meeting with the president, sends a promising signal,
"There are going to be death panels enacted by the Congress this year -- but they're death panels for large financial institutions that can't make it," he said. "We're going to put them to death and we're not going to do very much for their heirs. We will do the minimum that's needed to keep this from spiraling into a broader problem."

But there is another, much less positive interpretation regarding what is now developing in the Senate. The indications are that some version of the Dodd bill will be presented to Democrats and Republicans alike as a fait accompli - this is what we are going to do, so are you with us or against us in the final recorded vote? And, whatever you do - they say to the Democrats - don't rock the boat with any strengthening amendments.

Chris Dodd, master of the parliamentary maneuver, and the White House seem to have in mind curtailing debate and moving directly to decision. Republicans, such as Judd Gregg and Bob Corker, may be getting on board with exactly this.

Prominent Democratic Senators have indicated they would like something different. But it's not clear whether and how Senators Cantwell, Merkley, Levin, Brown, Feingold, Kaufman, and perhaps others will stop the Dodd juggernaut (or is it a handcart?) This matters, because there is more than a small problem with the Dodd-White House strategy: the bill makes no sense.

Of course, officials are lining up to solemnly confirm that "too big to fail" will be history once the Dodd bill passes. But this is simply incorrect. Focus on this: How can any approach based on a US resolution authority end the issues around large complex cross-border financial institutions? It cannot.

The resolution authority, you recall, is the ability of the government to apply a form of FDIC-type intervention (or modified bankruptcy procedure) to all financial institutions, rather than just banks with federally-insured deposits as is the case today. The notion is fine for purely US entities, but there is no cross-border agreement on resolution process and procedure - and no prospect of the same in sight.

This is not a left-wing view or a right-wing view, although there are people from both ends of the political spectrum who agree on this point (look at the endorsements for 13 Bankers). This is simply the technocratic assessment - ask your favorite lawyer, financial markets expert, finance professor, economist, or anyone else who has worked on these issues and does not have skin in this particular legislative game.

Why exactly do you think big banks, such as JP Morgan Chase and Goldman Sachs, have been so outspoken in support of a "resolution authority"? They know it would allow them to continue not just at their current size - but actually to get bigger. Nothing could be better for them than this kind of regulatory smokescreen. This is exactly the kind of game that they have played well over the past 20 years - in fact, it's from the same playbook that brought them great power and us great danger in the run-up to 2008.

When a major bank fails, in the years after the Dodd bill passes, we will face the exact same potential chaos as after the collapse of Lehman. And we know what our policy elite will do in such a situation - because Messrs. Paulson, Geithner, Bernanke, and Summers swear up and down there was no alternative, and people like them will always be in power. If you must choose between collapse and rescue, US policymakers will choose rescue every time - and probably they feel compelled again to concede most generous terms "to limit the ultimate cost to the taxpayer" (or words to that effect).

The banks know all this and will act accordingly. You do the math. Once you understand that the resolution authority is an illusion, you begin to understand that the Dodd legislation would achieve nothing on the systemic risk and too big to fail front. On reflection, perhaps this is exactly why the sponsors of this bill are afraid to have any kind of open and serious debate. The emperor simply has no clothes.

Merkel says summit will detail Greece aid
German chancellor Angela Merkel said European Union leaders were set to "specify" what "combination of IMF and bilateral aid could be given in the eurozone" should Greece ask for help. But, addressing the German parliament ahead of an EU summit later on Thursday and Friday, Ms Merkel stressed "no concrete help" would be discussed by heads of state and government. Ms Merkel said Greece’s crisis had revealed shortcomings in the eurozone: without "an orderly process" to deal with debt crises, the stability of the euro could be "damaged". "That’s why I am in addition going to push for the necessary [EU] treaty changes" to toughen monitoring and sanction of government budgets, she told the Bundestag.

In doing so, the German chancellor for the first time outlined Berlin’s willingness to help Greece only if its 26 EU partners agree to what could be a rocky path of rule changes. France said on Wednesday night that no agreement had been reached on holding an emergency summit of eurozone leaders to discuss the Greek crisis. Nicolas Sarkozy, the French president, is no longer excluding IMF intervention, but called for eurozone states to retain control of any rescue deal Ms Merkel was speaking as EU leaders prepared to travel to Brussels for a regular meeting of heads of state and government – one that has been marred by a public row over the agenda.

A number of EU states and EU Commission president José Manuel Barroso have called for a clear decision about a framework to help Greece should it have to ask for help. But Ms Merkel in past days refused to shift from her position that such a move was not necessary, and that Greece should first call on the International Monetary Fund for help. Germany’s resistance means Greek problems – spiralling interest payments could threaten a default – are likely to be discussed informally in Brussels later on Thursday. Germany in past days signalled it would be prepared to back a joint IMF-EU assistance package, but has demanded states support a tough reform of budget rules in return.

Ms Merkel told the Bundestag that she was aware of the "grave risks" the Greek crisis posed, as it could lead to "a chain reaction" that would hit Germany and the EU. She reminded the lower house that EU leaders on February 11 had pledged "decisive" action should Greece need it, but that this also demanded "calm-headed" decisions about the longer term. Any help for Greece had to come with decisions about "the longer-term development of the eurozone", a process that demanded regard for existing EU rules more than speed. While she stressed she was acting in the European interest, she said Germans gave up the Deutschmark as a result of the promise that the euro would be just as strong. She said it was imperative for any German government "that this trust was not breached in any way whatsoever" and that she would act accordingly in Brussels.

Merkel Sees IMF, EU Aid for Greece as Last Resort
German Chancellor Angela Merkel said that she will recommend at a European Union summit that a combination of International Monetary Fund help and bilateral EU aid is offered to Greece as a measure of last resort. In a speech to lawmakers in Berlin today before heading to Brussels for the summit with fellow EU leaders, Merkel chided member states that flaunt EU budget-deficit rules, saying that budget restraint is a requirement for all members of the euro region.

No "trickery" can be allowed to "play with Europe’s future," she said. A "good European" protects euro-region stability. In the case of Greece, Germany favors that, "in an emergency, such aid would have to be provided as a combination of the International Monetary Fund and joint bilateral measures in the euro zone," Merkel said. The "last resort" would be when a euro-area country’s "access to financial markets is exhausted," she said.

Merkel May Emerge Victorious in EU Battle over Greece
For weeks, Merkel has stood mostly alone with her insistence that the International Monetary Fund be seen as a saviour of last resort for Greece. Now, though, she has received support from Paris, and may emerge the winner of the most recent hand of Greece poker. She has been called "Madame Non" -- sometimes "Madame Nyet." The "Iron Chancellor," an allusion to former British Prime Minister Margaret Thatcher, had also become popular. No matter what people called her in recent weeks, however, it had become clear by early this week that Chancellor Angela Merkel's reputation in Europe has suffered recently. She had taken up a lonely position in her fight against demands from the rest of the European Union to promise financial assistance to cash-strapped Greece should the need arise.

But suddenly there is new movement in the ongoing poker game over Greece. And it seems likely that Merkel will emerge as the victor. Shortly before the summit meeting of European heads of state on Thursday and Friday in Brussels, it is seems likely that the EU will accommodate the chancellor on a key issue in the matter of assistance for Greece: The French government says it is open to including the International Monetary Fund (IMF) in an emergency plan for Athens, an idea Merkel had repeatedly brought up recently. Given the prevailing reservations about a euro-zone country turning to the IMF, the chancellor could chalk up Paris's concession as a resounding success.

France and most other EU countries had long rejected the idea of IMF intervention. But now that Merkel apparently has the support of French President Nicolas Sarkozy, as the Süddeutsche Zeitung reports on Wednesday, the rest will likely be easier to convince. Should help for Greece become necessary, some EU countries could contribute bilateral loans in addition to a financial injection from the IMF. In government circles in Berlin, there was cautious optimism about "initial signals from various capitals" that officials there could imagine financial assistance coming from the IMF.

Diplomats are still busy working out the details of a compromise -- it is possible that it will be unveiled before the official summit program begins. A spokesman for European Council President Herman van Rompuy said there could be a separate meeting of the 16 euro zone countries on Thursday, the goal being to achieve the final breakthrough. The proposal stemmed from French President Sarkozy and his Spanish counterpart, Prime Minister Jose Luis Zapatero. This separate summit meeting would also represent an accommodation of the chancellor. She has long been saying that aid for Greece would not be discussed at the EU summit; the extraordinary meeting of euro zone countries would allow her to keep her word. Greece, on the other hand, would receive the public pledge of support it has been asking for to calm financial markets. Indeed, a last minute agreement would avoid what had seemed to be a looming conflict, allowing European leaders to feign routine at the summit and concentrate on the EU's "Europe 2020" economic strategy.

The German government had long balked at discussing Greece at all in Brussels. Athens has not requested aid, and therefore there was no need to discuss it, officials in Berlin said. But the Greek government had little sympathy for this position. "If it is not on the agenda, we will put it on the agenda," Greek Prime Minister Georgios Papandreou warned. Despite a successful bond offering earlier this month, the country is not out of the woods. The country still must refinance €50 billion in debt this year and its poor credit rating means that borrowing money has become very expensive for Athens. The Greek government insists that it doesn't want money from the EU, just a political signal to deter speculators who are betting on a Greek bankruptcy, thereby driving up interest rates.

The Germans, on the other hand, referring to the general statement of solidarity issued by the EU in February, remained strictly opposed to new promises of aid -- for several reasons. First, there is the domestic political calculation. While unpopular in the EU, Merkel's stubbornness is popular at home. Most Germans believe that the Greeks should help themselves, particularly after having deceived the other euro countries for years. Shortly before the important state elections in the country's most populous state, North Rhine-Westphalia, Berlin is unwilling to offer up German taxpayer money for stability in Greece, particularly given the mountain of debt Germany is already facing.

Furthermore, last June, a German high court ruling showed that the court is skeptical of the Lisbon Treaty and the amount of sovereignty it transfers to Brussels. Berlin now fears that the court could step in and put a stop to aid for Athens. For one, the EU prohibits member states from providing direct financial assistance to others. For another, such a move would further blur the boundaries of nation states within the EU. The German Justice and Interior Ministries believe there is considerable risk of a lawsuit.

Instead of aid packages, Merkel has shown a preference for new instruments to ensure compliance with the European Stability and Growth Pact. Those instruments would include a harsh penalty for countries that exceed the euro zone's debt rules, including possible expulsion from the common currency area. That, though, would require amending the Lisbon Treaty. The years of wrangling over the most recent treaty show just how difficult that would be.

Finally, Merkel believes that the only option is to involve the IMF. She feels that Finance Minister Wolfgang Schäuble's proposal for a European Monetary Fund is still a long way off.

By sticking to her concept of IMF involvement, Merkel triggered a new escalation in her struggle against the rest of Europe. Most EU governments -- and her finance minister, Schäuble -- have argued that intervention by the Washington-based IMF would represent a failure on the part of the EU. They want Greece's debt problems to remain in the family. The European Central Bank (ECB) is likewise concerned that, should the IMF gain influence over European budget policy, it could lose some of its independence. Concerns like these prompted European Commission President Jose Manuel Barroso to intervene recently, calling repeatedly for the 27 EU heads of state and government to agree on a mechanism for a Greek bailout at the summit. The current situation, he said, could not simply be allowed to continue. "I am confident that Germany will make a constructive contribution to the solution of the current crisis," he told the German business daily Handelsblatt on Monday.

Such a direct message to Merkel was noteworthy primarily because many see Barroso as being little more than a mouthpiece for Berlin. Indeed, he rarely dares to oppose the chancellor publicly. But by admonishing Berlin, he demonstrated how displeased the EU partners have become over the German government's economic course. Only the Netherlands stood fully behind Merkel, while the rest of the EU, particularly Italy, France and Spain, were more or less against her. Now a solution is in sight. However, it also seems clear that a special Greece summit will not reach a final decision on aid for Athens. Merkel was unwilling to back down from this position on Tuesday. In a meeting of her Christian Democratic Union's parliamentary group, she mentioned the "last resort situation" that would transpire if Greece were unable to drum up fresh funds on the capital market. And in the Frankfurter Allgemeine Zeitung, Finance Minister Schäuble stressed that "the fact that a monetary area is solving the problems of a portion of its monetary zone through the IMF can and must remain an exception."

Fitch Downgrades Portugal's Debt
Fitch Ratings on Wednesday lowered Portugal's sovereign credit rating one notch to AA- and warned of further cuts unless the government changes is fiscal course. The news hit a European currency market already on edge as European leaders discussed a possible financial rescue package for Greece, where the government has trouble raising funds to repay maturing debt. The currency had already fallen to a 10-month low against the dollar in earlier trading, despite a dose of positive economic data. The euro recently stood at $1.3357, after hitting $1.3342 immediately after the ratings downgrade.

Fitch's decision reminded investors that other euro-zone countries are also feeling the strain from ugly debt burdens, adding more pressure to the currency. The ratings agency cut Portugal's long-term foreign and local currency issuer default ratings to AA- from AA, citing significant budget underperformance in 2009. The negative outlook reflects "concern about the potential impact of the global economic crisis on Portugal's economy and public finances over the medium term, given the country's existing structural weaknesses and high indebtedness across all sectors of the economy," Fitch said. The ratings agency said Portugal's government deficit in 2009 hit 9.3% of gross domestic product, much higher than the 6.5% of GDP forecast by Fitch last September, increasing the magnitude of remedial measures needed in the medium term.

The government will now need to implement "sizeable" consolidation measures beginning next year, on top of the reversal of the fiscal stimulus this year, in order to meet the deficit target of 3% of GDP by 2013, the agency said. "Further fiscal and/or economic underperformance in 2010 and 2011 could lead to another downgrade," Fitch said. "This news about Portugal is not going to sit well with the markets," said Phyllis Papadavid, a currencies analyst at French bank Société Générale in London. "The reaction in the euro was not particularly sharp, as some people had expected a downgrade. So it wasn't a huge surprise, but nonetheless, the markets are worried about it."

The cost of insuring Portugal's sovereign debt against default fell despite Fitch's rating cut, indicating that the market had already priced in a downgrade. Portugal's five-year sovereign credit default swap spreads fell to 1.32 percentage points from Tuesday's closing level of 1.34 percentage points, according to CMA DataVision. That means the annual cost of insuring €10 million ($13.5 million) of Portugal's government debt against default for five years has fallen €2,000 since Tuesday to €132,000. However, the spreads have widened 0.17 percentage point since last Wednesday, indicating there was lingering market concern about the Portugal's sovereign debt.

Spain and Italy's five-year CDS also tightened, with Spain 0.02 percentage point tighter at 1.04 percentage points, and Italy also 0.02 point tighter at 1.00 percentage point. Like Portugal, both countries have seen their spreads widen over the past week, with Italy 0.10 point wider and Spain 0.05 point wider over the week.

Portugal downgrade knocks euro as Merkel imposes IMF solution for Greece
by Ambrose Evans-Pritchard

The euro has tumbled to its lowest level in 10 months against the dollar after Fitch Ratings downgraded Portugal to AA- and markets digested the likelihood of an IMF rescue for Greece, a move that reveals a fundamental break-down of Europe’s governing machinery. Fitch said Portugal's austerity plan, while "credible", does not go far enough to control surging debt. Finance minister Teixeira dos Santos said he would do his utmost to ensure that Portugal does not succumb to the same sort of crisis engulfing Greece. "I am worried because we know that markets overshoot sometimes. The risk exists, I cannot ignore that," he said.
There are clearly concerns that the crisis runs deeper than Greece and may set off further North-South tensions in Europe. A report by UBS entitled "How to Break up a Monetary Union" has been circulating like wildfire in financial centres. "It is relatively clear that the euro does not work. That is to say, parts of the Euro area would have been better off (economically) if they had never joined," it said. UBS said Greece should consider default within EMU rather that risk leaving monetary union if matters ever reach that stage. There continued to be confusion over the role of the IMF in any rescue for Greece as briefings from different EU capitals muddy the waters. However, it is clear that France has bowed to German demands, opening the way for the once unthinkable step of IMF policing within Euroland borders.

The Frankfurter Allgemeine called it "game, set, and match" for German Chancellor Angela Merkel, who is to meet fellow EU leaders in Brussels on Thursday. She has imposed stringent conditions, refusing to back EU aid for Greece until the country is on the brink of disaster and cannot raise money from the capital market. There must be treaty changes to enforce discipline on fiscal laggards. Lorenzo Bini-Smaghi, a board member of the European Central Bank, said it would be folly to leave Greece hanging until it a full crisis had already begun. He said recourse to the IMF would take Europe down a perilous path. "Anybody interested in the economic and monetary stability of Europe should be against going to the IMF," he wrote in Die Zeit, denying that EU treaty law prohibits emergency aid.

"If the IMF steps in, the euro would have the image of a currency that can survive only with the help of an international organisation. Market reactions in the last few days have shown that resorting to the IMF can damage the stability of the euro." He said Mrs Merkel had made matters worse by talking of ejecting sinners from the eurozone. Sources in Brussels said Germany had wider support for its proposals that generally realized, with a string of Northern countries open to the IMF plan. One diplomat said Germany cannot sign up to any formula that breaches the German constitution, warning that critics are ready to file lawsuits challenging any bail-out the moment the ink is dry. "The EU has one shot to intervene," he said. If the EU botches it by launching a rescue that is clearly illegal, it will tip the eurozone into an even deeper crisis.

Mrs Merkel is unlikely to yield to ECB criticisms. Berlin is already angry over comments by Vitor Constancio, the ECB’s incoming vice-president, who said this week that loans for Greece would not amount to a rescue, implying that an EU aid package would not breach of the `no bail-out’ clause of Article 125 of the EU Treaties - and therefore not breach Germany’s constitution. "Credit is not a bailout", he said. Commerzbank said the claim that emergency loans are not tantamount to a bail-out is absurd and suggests the ECB is itself has lost the plot. "These comments from a central banker mark the lowest point in the discussions so far. The German Chancellor is well advised to stick to her view," it said.

Mrs Merkel is still balking at the creation of a specific stand-by facility for eurozone states, fearing a slipperly slope towards an EU debt union. She has agreed only to a "general help-mechanism", a vague concept that adds little to a string of accords already reached in recent weeks. BNP Paribas said German terms will drive Greece and other peripheral states in the eurozone into a "deeper deflationary shock". It said Greece has no way to avoid implementation of these harsh conditions "short of declaring bankruptcy and leaving EMU."

Markets are concerned that any recourse to the IMF increases the risk that Greece may ultimately resort to debt restructuring, a technical default. This would have been unthinkable under a full-fledged EU bail-out that effectively guaranteed Greek debt. Spreads on 10-year Greek bonds have widened to 325 basis points over German Bunds since the IMF entered the frame. The euro fell to $1.3330 against the dollar in early trading Wednesday. French president Nicolas Sarkozy said the EU should play the lead role in any joint rescue with the Fund. While some formula is likely to be found that saves face, this will do little to disguise the deeper failure of the Eurogroup to forge its own internal EU package.

Eurozone growth surges on back of euro slide
The eurozone’s economic recovery has gained fresh momentum on the back of the lower euro, with German manufacturing leading the unexpected surge this month. Closely watched surveys show German manufacturing expanded in March at the fastest pace since at least the mid-1990s and business confidence in Europe’s largest economy jumping to the highest in almost two years. The results revealed a silver lining to the crisis over Greece’s public finances, which has sent Europe’s single currency sharply lower. Eurozone manufacturers also benefited from the pick-up in global economic activity. But the exceptional strength of Germany’s industrial sector could encourage calls for Berlin to do more to boost the region’s overall prospects.

Earlier this year, worries about the fragility of growth in the 16-country eurozone had risen amid signs that momentum was being lost as governments wound-down emergency stimulus measures. A severe winter and financial markets’ fears about southern European countries’ prospects, added to the region’s woes. But the Munich-based Ifo institute said its German business climate index had risen from 95.2 in February to 98.1 in March, the highest since June 2008. "Spring has also broken out in the economy," said Hans-Werner Sinn, Ifo’s president. Much of the latest rise was driven by a markedly more optimistic assessment by German business of current conditions, as well as by optimism about the next six months. Separately, purchasing managers’ indices added to the evidence that the recovery was proving stronger than previously expected. Germany’s manufacturing index showed the fastest pace of expansion since the survey started in 1996, with export orders also expanding at a record pace.

Across the eurozone, "the combination of rising demand in key export markets and a competitive exchange rate has helped to boost manufacturing growth to a pace seen only once before in the past 10 years", said Chris Williamson, chief economist at Markit, which produces the survey. The eurozone "composite" index, covering services as well as manufacturing, rose from 53.7 in February to 55.5. With a figure above 50 pointing to expansion, that indicated private sector activity had increased for an eighth consecutive month and was expanding at the fastest pace since August 2007. Based on past experience, the latest index readings suggested eurozone gross domestic product had risen by about 0.5 per cent in the first quarter of this year – up from just 0.1 per cent in the final three months of 2009, according to Markit. Official GDP figures will not be released until May. However, a weak spot remained the service sector, especially in France, which almost certainly reflects sluggish domestic demand. With price pressures also remaining weak, the latest data are unlikely to alter the cautious stance taken by the European Central Bank, which is not expected by financial markets to raise its main interest rate from the record low of 1 per cent until next year.

Reasons to be cheerful about Europe
There has been a great deal of gloom about Europe since the Greek debt crisis began. This has diverted attention from good news about the European economy. The clouds over Greece have been obscuring some fundamentally positive developments favouring European financial markets.

1. The euro has been falling rapidly against the dollar because of Greek debt worries – an enormous boost to export-orientated companies across Europe, especially in Germany and the Netherlands but also in hard-pressed peripheral states. The euro’s fall against the renminbi and other dollar-pegged Asian currencies also has a useful side-effect, indirectly helping the campaign of the US Congress for an overall appreciation of the Chinese currency.

2. At last, the euro area has had a crisis – after 10 years of waiting for one to happen. This is just what is needed to galvanise government leaders in countries such as Greece into action to correct disastrous policy shortcomings. Europe always responds best when it is in a tight spot. It is certainly in one now.

3. Germany is basically in charge of Europe. Other countries may not like it, but this underpins the future solidity of the euro and lowers the risk that the Greek imbroglio will turn into a catastrophe. However, Berlin does need to pay attention to its policy presentation skills. The German government’s inability to consult the Bundesbank over its recent recommendations for a "European Monetary Fund" has been somewhat alarming.

4. Emerging economies that are large buyers of European capital goods are recovering more rapidly than expected. This is good news for manufacturing leaders across Europe’s industrial heartlands. Over time, Asia and other developing regions will switch to much greater domestic consumption. There will be less eastern capital market fodder for debt-hungry western governments. But European companies exporting products ranging from escargots to excavators will have a field day.

5. The European Central Bank is highly unlikely to raise interest rates in the near future. A continuation of easy money will be good for equities.

6. The sense of impending doom surrounding Greece has acted as a useful reminder to other European governments of the dangers of Greek-style profligacy. This portends downward pressure on wages and government spending across Europe – great news for the corporate sector.

7. There have been some signs of a pick-up in consumption in Germany, which in Europe acts as a smaller version of China, with bloated savings, a large current account surplus, an ageing population and inadequate domestic demand. That may herald a more balanced European economy.

8. Disputes between Germany and France over running European policies may be less frequent in future. France is pleased that the German government has indicated it may help fund a Greek bail-out, while Germany is pleased that France is backing German-style budgetary and monetary stringency. That consensus may eventually turn out to be an illusion – but it suits nearly everyone for now and may hold for a while.

9. The increasing gap in economic growth between Europe and Asia is starting to make an impression on the public consciousness in the Old Continent. There is now much higher awareness that Europe needs a decisive strategy in areas such as research and development and education to rebuild economic prowess. European companies with strengths in science, technology and engineering can thus expect a more benevolent policy-making environment in the coming years.

10. Germany seems likely to secure the presidency of the European Central Bank next year for Axel Weber, currently head of the Bundesbank – Berlin’s prize for signing a modest number of cheques to help some errant members of the euro club balance their books. With a German at the ECB helm for an eight-year term, Germany will remain a full-hearted member of the single currency at least until 2019 – giving Europe a 10-year-stretch of Bundesbank-style discipline and predictability, from which investors and consumers in Europe will surely benefit.

Container shipping industry in 'fragile' state: Maersk
The global container shipping industry remains in a "very fragile" state due to weak demand and a glut of ships, the world's largest shipping company said Wednesday. Maersk Line, the container arm of Danish shipping giant A.P. Moeller-Maersk, said companies should go slow in bringing back to service hundreds of ships idled during the recession, otherwise the sector will extend losses which totalled 15 billion US dollars in 2009. "The situation remains very, very fragile for the shipping industry," said Hennie van Schoor, Maersk Line's director of business performance, Asia-Pacific. "It is balanced on a knife's edge," he said in a keynote speech at the Asia Pacific Maritime 2010 conference in Singapore.

As global trade slowed down during the global economic crisis last year, freight rates plunged and 11 percent of the world's container shipping fleet, or about 500 vessels, had to be parked. In terms of volume, about 80 percent of world trade is carried by sea. Van Schoor said there are signs of a pickup in global trade, with the United States and Europe importing more from the rest of the world. But indications show this is being driven by companies stocking up on inventories rather than a surge in general demand. He cited data showing that US imports rose 13 percent year-on-year in the fourth quarter of 2009, but retail sales in the same period expanded by only 1.0 percent.

For Europe, the continent's imports were up 3.0 percent, but retail sales climbed a mere 1.0 percent. "What this is telling us is that the underlying demand for growth is not there yet," he said. Van Schoor also cautioned against the idled ships going back into the market, saying it will further upset the imbalance between a glut in capacity and weak demand.

While intra-Asian trade is growing because of the increasing network of free trade agreements in the region, it was still not enough to take up the slack in US and European demand, other speakers at the conference said. Divay Goel, head of Asia operations at Drewry Maritime Services (Asia) Ptd Ltd, noted that unlike the consumption-led economy of the United States, Asia's economic growth is powered largely by production. "Growth is there in inter-Asia (trade), but in terms of absolute numbers it would take some time before the Asian demand for consumer goods will catch up," he said.

Bond vigilantes slam Budget as UK downgrade moves closer
by Ambrose Evans-Pritchard

If Alistair Darling was to convince global investors that Britain deserves to keep its AAA-rating and that its debt is more or less comparable to the bonds of sovereign peers, he needed to tighten the Government’s fiscal belt by a couple of notches at least. Pledging to raise real public spending by 2.2pc over the next year is not what markets had in mind. The world’s largest bond PIMCO warned earlier this year that Britain’s Debt Management Office is sitting on nitroglycerine, and nothing changed its view today. "We at PIMCO are still seeking clarity on the spending plans," said the firm after the Budget. " While we understand that part of this relates to the political cycle, the last years have taught investors not to take guidance on ‘intentions’ as a guarantee of future action."

It is remarkable that a government with a budget deficit of 11.8pc of GDP thinks it can safely expand a state sector already consuming 52pc of GDP, or that it can convince global markets that brisk growth of 3.5pc a year will whittle away the debt. Marc Ostwald, a bond vigilante at Monument Securities, said Labour is still scattering money it does not have to hold the public sector vote. "We are heading for a downgrade because I don’t think this is going to look like a credible plan to Standard & Poor’s or the other rating agencies."

Brian Coulton at Fitch Ratings said Britain faces a beauty contest problem. Eurozone states are cutting their deficits to 3pc of GDP within three years. Britain is cutting to 5.2pc over four years. Whether or not the Europeans are right to enforce a fiscal squeeze of such severity is a debatable point. The difficulty is that Britain already sticks out like a sore thumb. Mr Coulton warned earlier this month that the UK is facing "the most rapid rise in the ratio of public debt to GDP of any AAA-rated country. Why the UK thinks it has more time than other countries , we’re not sure."

The Chancellor did little to reassure him in the Budget today, though it is some comfort that public debt will peak on Treasury estimates at 89.2pc of GDP instead of 91.6pc . "Public debt does not fall materially until after 2014-15. This projected path leaves the public finances vulnerable to shocks," he said. Mr Coulton said the Treasury seems to assume that the economy will rebound at the same brisk pace as it has in past recoveries but this ignores the deeps scars if the global financial crisis and the overhang of debt.

Rival S&P has already placed the UK on "negative outlook". It said tartly today that it was waiting to see "concrete details of the next government’s deficit reduction plan before deciding on any rating action." The Treasury is to issue £187bn in Gilts over the coming year, down from £228bn over the last fiscal year. Yields nudged up six basis points to 3.98pc on the news. Sterling slipped. "The bottom line is that gilt issuance is going to remain very high indeed over the next few years," said David Owen from Jefferies Fixed Income. "There are people out there in the market who refuse to believe that Darling’s plan represents a tightening of fiscal policy." That is the danger.

Explain why you sold Britain's gold, Gordon Brown told
Gordon Brown has been ordered to release information before the general election about his controversial decision to sell Britain's gold reserves. The decision to sell the gold – taken by Mr Brown when he was Chancellor – is regarded as one of the Treasury's worst financial mistakes and has cost taxpayers almost £7 billion. Mr Brown and the Treasury have repeatedly refused to disclose information about the gold sale amid allegations that warnings were ignored.
Following a series of freedom of information requests from The Daily Telegraph over the past four years, the Information Commissioner has ordered the Treasury to release some details. The Treasury must publish the information demanded within 35 calendar days – by the end of April. The sale is expected to be become a major election issue, casting light on Mr Brown's decisions while at the Treasury. Last night, George Osborne, the shadow chancellor, demanded that the information was published immediately. "Gordon Brown's decision to sell off our gold reserves at the bottom of the market cost the British taxpayer billions of pounds," he said. "It was one of the worst economic judgements ever made by a chancellor. "The British public have a right to know what happened and why so much of their money was lost. The documents should be published immediately."

Between 1999 and 2002, Mr Brown ordered the sale of almost 400 tons of the gold reserves when the price was at a 20-year low. Since then, the price has more than quadrupled, meaning the decision cost taxpayers an estimated £7 billion, according to Mike Warburton of the accountants Grant Thornton. It is understood that Mr Brown pushed ahead with the sale despite serious misgivings at the Bank of England. It is not thought that senior Bank experts were even consulted about the decision, which was driven through by a small group of senior Treasury aides close to Mr Brown.

The Treasury has been officially censured by the Information Commissioner over its attempts to block the release of information about the gold sales. The Information Commissioner's decision itself is set to become the subject of criticism. The commissioner has taken four years to rule on the release of the documents, despite intense political and public interest in the sales. Officials have missed a series of their own deadlines to order the information's release, which will now prevent a proper parliamentary analysis of the disclosures.

It can also be disclosed that the commissioner has held a series of private meetings with the Treasury and has agreed for much of the paperwork to remain hidden from the public. The Treasury was allowed to review the decision notice when it was in draft form – and may have been permitted to make numerous changes. In the official notice, the Information Commissioner makes it clear that only a "limited" release of information has been ordered. Ed Balls, who is now the Schools Secretary, Ed Miliband, now the Climate Change Secretary, and Baroness Vadera, another former minister, were all close aides to the chancellor during the relevant period. If the information is not released by the end of April, the Treasury will be in "contempt of court" and will face legal action. A spokesman said last night that the Treasury was not preparing to appeal against the ruling.

  • The price of gold has quadrupled since Gordon Brown sold more than half of Britain’s reserves.
  • The Treasury pre-announced its plans to sell 395 tons of the 715 tons held by the Bank of England, which caused prices to fall.
  • The bullion was sold in 17 auctions between 1999 and 2002, with dealers paying between $256 and $296 an ounce. Since then, the price has increased rapidly. Yesterday, it stood at $1,100 an ounce.
  • The taxpayer lost an estimated £7 billion, twice the amount lost when Britain left the Exchange Rate Mechanism in 1992.
  • The proceeds from the sales were invested in dollars, euros and yen. In recent years, most other countries have begun buying gold again in large quantities

Tight job market is squeezing out young workers
Teens and young adults, short on experience and skills, have been giving up the job search at higher rates than other workers are during this great recession. Frustrated by a lean job market, nearly 1.3 million workers ages 16 to 24 have left the labor force since the recession hit in December 2007. That's about 6 percent of them, and it's nearly three and a half times the exodus rate of workers ages 25 to 54. With a jobless rate of 18.5 percent for 16- to 24-year-olds, some have gone back to school, some are volunteering, some are joining the military and some are just chilling at home until the economy heats up again.

It's anybody's guess when that will happen. Many experts predict that the economy will begin adding jobs this month, after employers cut only 18,000 jobs in February. Unfortunately, much of the new job growth is in temporary workers, while permanent hiring continues to lag. Don't expect much relief from the summer hiring season, either. A new survey of hiring managers by the hourly-job Web site found that seasonal hiring will be at roughly the same depressed levels as it was last year for teens and college students. "Given the year that we've had, 'unchanged' on the summer job front is pretty good news," said Shawn Boyer, the CEO of

Not for young people who are trying to kick-start their careers, move out on their own or pay for school. They're being squeezed out of jobs in favor of older, more experienced workers, including those 55 and older. In fact, the number of workers 55 and older has increased by 9 percent, or 2.5 million people, since the recession began. "That's quite an astonishing rise," said economist Dean Baker, a co-director of the Center for Economic and Policy Research, a nonpartisan economic and social research center in Washington. Some of these seasoned employees are returning to work because of job losses by spouses or the financial problems of other family members. Others are working longer to recoup retirement savings that were lost in the economic downturn.

Their increased presence and the scarcity of new jobs have made it hard for young people to find work. Twenty-nine percent of the hiring managers that SnagAJob surveyed said that older workers would be their younger colleagues' biggest competition for summer jobs. As a result, only 55 percent of 16- to 24-year-olds are working or even looking for work, compared with 59.1 percent when the recession started. Baker said Congress should fund a national youth jobs program that was even larger than the summer youth jobs programs funded by the economic stimulus.

Tom Mroz, an economics professor at Clemson University in South Carolina, said his research had found that six months of unemployment for young workers would depress their earnings by about 2 percent over the course of 10 years. They'll also be more likely to be unemployed again. With youth jobless rates approaching 40 percent in some areas, the unemployment situation for teens and young adults is at a crisis level, Baker said. "I think it's incredible that this hasn't been talked about more seriously," Baker said. "We've got people coming out of school, and there's nothing there for them. What are they going to do, sit around and hang out in the street for two or three years, however long it takes for the economy to recover? Because no one thinks it's going to recover quickly."

Last year, applications for the Job Corps, a federal job-training program for low-income teens and young adults, jumped 8 percent as the recession deepened. Kevin Epperson of Philadelphia and Amber Langlois of Waynesboro, Pa., enrolled at the Potomac Job Corps Center in Washington last year when they couldn't find work. After she graduated high school in 2005, Langlois, who's 23, bounced from job to job as a convenience store clerk, supermarket cashier and bank teller before she was fired from a book distribution factory for tardiness last March. She enrolled in Job Corps in June. "I couldn't find any work whatsoever. It got to the point where I was just sitting at the house basically doing nothing and just feeding off other people. And that wasn't where I wanted to be."

Epperson, 24, has an associate degree in applied sciences. He's studying residential and commercial electrical wiring at Job Corps because he couldn't find work. "I got to the second interview on two jobs, but that's as far as it went," Epperson said of his employment searches. He hopes to become an apprentice union electrician later this year. Within five years, he wants to earn his journeyman's license and work toward bachelor's and master's degrees in electrical engineering. Epperson said he was confident that the job market would pick up, so that he could work his way toward those goals. "There's always going to be a need for electricians," he said.

Langlois recently finished her business technical training at Job Corps and is working toward an associate's degree at a nearby community college under an arrangement that allows her to continue to live on the Job Corps campus. She's also confident that the employment situation will improve, but she remains skeptical nonetheless. "My one friend, she graduated with a degree in graphic design and she's working at Dunkin' Donuts," Langlois said.

Ross Eisenbrey, the vice president of the Economic Policy Institute, a liberal policy-research group, said Congress should consider temporarily lowering the eligibility age for full Social Security retirement benefits by one year. Doing so for a period of two years would entice more people to retire — particularly those in physically demanding jobs — and open up more positions for young people, he reasoned. "It's something we think ought to be explored," Eisenbrey said. "Freeing up jobs currently held by people that want to retire, but would be penalized if they did, would be of benefit to young people." Baker's not so sure. He said that most people didn't have enough savings to retire and those who did so prematurely could end up in financial hardship in a few years.

Retirement Health Care: Average US Couple Needs To Save $250,000
Relief to seniors facing high prescription drug costs is one of the first changes to come under the new health care overhaul. But ultimately that won't offset the relentless increase in retirees' medical expenses. A couple retiring this year will need a quarter of a million dollars, on average, to cover medical expenses in retirement, according to a study to be released Thursday by Fidelity Investments. The estimate is up 4.2 percent from Fidelity's projection last year. The Boston-based financial services company has updated its estimate annually since 2002 as part of its business helping employers design workplace benefits programs.

The study is based on projections for a couple of 65-year-olds retiring this year with Medicare coverage. The estimate factors in the federal program's premiums, co-payments and deductibles, as well as out-of-pocket prescription costs. The study assumes no employer provided insurance in retirement, and a life expectancy of 85 for women and 82 for men. The estimate has risen 56 percent from Fidelity's initial $160,000 projection in 2002. The average annual increase has been 5.7 percent, so this year's 4.2 percent rise – from $240,000 last year to $250,000 – is modest.

But with broader inflation now near zero amid a recession, health care costs continue to rise faster than other expenses, said Sunit Patel, a senior vice president at Fidelity. The findings illustrate the importance of factoring in health care alongside housing, food and other expenses in retirement planning. "It turns out to be a surprise for many, and one of the largest expenses in retirement," Patel said. The increase in this year's estimate was relatively small because a surge in patent expirations for brand-name drugs meant many cheaper generic versions reached the market, Patel said. That helped limit out-of-pocket prescription costs.

Fidelity's estimate doesn't factor in most dental services, or long-term care, such as costs from living in a nursing home. A 2008 study by Fidelity estimated a 65-year-old couple would need $85,000 on average to cover insurance costs for long-term care in retirement. Thursday's study also didn't account for the health care overhaul that President Barack Obama signed into law Tuesday. Fidelity was updating its 2010 estimate before legislative details were clear, Patel said.

The law's focus is expanding access to people under age 65. But it also would benefit many retirees by gradually closing what's known as the "doughnut hole" coverage gap in the Medicare drug benefit. Seniors fall into that hole once they spend $2,830 per year. The legislation would begin narrowing the gap by providing a $250 rebate this year. The gap would be fully closed by 2020, when seniors would still be responsible for 25 percent of the cost of their medications until Medicare's catastrophic coverage kicks in. Patel said the gap's closure is likely to yield only a "very modest" reduction to Fidelity's $250,000 overall cost estimate.

Fidelity's estimate is a projection of what an average couple would need. Actual costs will vary widely, depending on a couple's medical needs and how long they live. The Employee Benefit Research Institute, an independent nonprofit, conducts similar research but, unlike Fidelity, doesn't focus on an average. That's because there are so many variables that many retirees' costs will end up far lower or higher than any average, said Paul Fronstin, EBRI's director of health research and education. For example, EBRI estimated last year that a retired couple would need $416,000 for health care costs if their drug costs were far higher than average, in the 90th percentile. If that same couple lives longer than three-quarters of retirees, the estimate rises to $614,000.

The Canadian Banking Fallacy
by Peter Boone and Simon Johnson

As a serious financial reform debate heats up in the Senate, defenders of the new banking status quo in the United States today – more highly concentrated than before 2008, with six megabanks implicitly deemed "too big to fail" – often lead with the argument, "Canada has only five big banks and there was no crisis."  The implication is clear: We should embrace concentrated megabanks and even go further down the route; if the Canadians can do it safely, so can we.

It is true that during 2008 four of all Canada’s major banks managed to earn a profit, all five were profitable in 2009, and none required an explicit taxpayer bailout.  In fact, there were no bank collapses in Canada even during the Great Depression, and in recent years there have only been two small bank failures in the entire country. 

Advocates for a Canadian-type banking system argue this success is the outcome of industry structure and strong regulation.  The CEOs of Canada’s five banks work literally within a few hundred meters of each other in downtown Toronto.  This makes it easy to monitor banks.  They also have smart-sounding requirements imposed by the government:  if you take out a loan over 80% of a home’s value, then you must take out mortgage insurance.  The banks were required to keep at least 7% tier one capital, and they had a leverage restriction so that total assets relative to equity (and capital) was limited.

But is it really true that such constraints necessarily make banks safer, even in Canada? 

Despite supposedly tougher regulation and similar leverage limits on paper, Canadian banks were actually significantly more leveraged – and therefore more risky – than well-run American commercial banks.  For example JP Morgan was 13 times leveraged at the end of 2008, and Wells Fargo was 11 times leveraged.  Canada’s five largest banks averaged 19 times leveraged, with the largest bank, Royal Bank of Canada, 23 times leveraged.   It is a similar story for tier one capital (with a higher number being safer):  JP Morgan had 10.9% percent at end 2008 while Royal Bank of Canada had just 9% percent.  JP Morgan and other US banks also typically had more tangible common equity – another measure of the buffer against losses – than did Canadian Banks. 

If Canadian banks were more leveraged and less capitalized, did something else make their assets safer?  The answer is yes – guarantees provided by the government of Canada.  Today over half of Canadian mortgages are effectively guaranteed by the government, with banks paying a low price to insure the mortgages.  Virtually all mortgages where the loan to value ratio is greater than 80% are guaranteed indirectly or directly by the Canadian Mortgage and Housing Corporation (i.e., the government takes the risk of the riskiest assets – nice deal if you can get it).  The system works well for banks; they originate mortgages, then pass on the risk to government agencies.  The US, of course, had Fannie Mae and Freddie Mac, but lending standards slipped and those agencies could not resist a plunge into assets more risky than prime mortgages.  Let’s see how long Canada resists that temptation.

The other systemic strength of the Canadian system is camaraderie between the regulators, the Bank of Canada, and the individual banks.  This oligopoly means banks can make profits in rough times – they can charge higher prices to customers and can raise funds more cheaply, in part due to the knowledge that no politician would dare bankrupt them.  During the height of the crisis in February 2009, the CEO of Toronto Dominion Bank brazenly pitched investors: "Maybe not explicitly, but what are the chances that TD Bank is not going to be bailed out if it did something stupid?"  In other words:  don’t bother looking at how dumb or smart we are, the Canadian government is there to make sure creditors never lose a cent. With such ready access to taxpayer bailouts, Canadian banks need little capital, they naturally make large profit margins, and they can raise money even if they act badly.    

Proposing a Canadian-type model to create stability in the U.S. is, to be blunt, nonsense.  We would need to merge our banks into even fewer banking giants, and then re-inflate Fannie Mae and Freddie Mac to guarantee some of the riskiest parts of the bank’s portfolios.  With our handful of new "hyper megabanks", we’d have to count on our political system to prevent our banks from going wild; Canada may be able to do this (in our view, the jury is still out), but what are the odds this would work in Washington?  This would require an enormous leap of faith in our regulatory system immediately after it managed to fail repeatedly and spectacularly over thirty years (see 13 Bankers, out next week, for the awful details).  Who can be confident our powerful corporate lobbies, hired politicians, and captured regulators can become so Canadian so soon?

The stakes would be even greater with these mega banks. When such large banks collapse they can take down the finances of entire nations.  We don’t need to look far to see how "Canadian-type systems" eventually fail.  Britain’s largest bank, the Royal Bank of Scotland, grew to control assets equal to around 1.7 times British GDP before it spectacularly fell apart and required near complete nationalization in 2008-09.  In Ireland the three largest banks’ assets combined reached roughly 2.5 times GDP before they collapsed.  Today all the major Canadian banks have ambitious international expansion plans – let’s see how long their historically safe system survives the new hubris of its managers.

There’s no doubt that during the coming months many people will advocate some form of a Canadian banking system in America.  Our largest banks and their lobbyists on Capitol Hill will love the idea.  For some desperate politicians it may become a miracle drug:  a new "safer" system that will lend to homeowners and provide financing to Washington, while permitting politicians and regulators to avoid tough steps.  Let’s hope this elixir doesn’t gain traction; smaller banks with a lot more capital – and able to fail when they act stupid – are what U.S. citizens and taxpayers really need.

Japan, Struggling With Debt, Approves a $1 Trillion Budget
The Japanese government on Wednesday pushed a record 92.3 trillion yen ($1 trillion) budget through Parliament aimed at stimulating growth in the long-stagnant economy. It means another round of spending and adding to Tokyo’s already substantial public debt. Also on Wednesday, the government said it would retain a significant stake in the country’s extensive postal banking system, reversing the course of privatization efforts of previous administrations.

The nation’s fiscal largess has long been supported by Japan Post, the country’s biggest customer for Japanese government bonds. A de facto government guarantee on deposits made at the postal bank has attracted huge amounts: about 300 trillion yen, or more than the annual gross domestic output of France. Recent data shows the Japanese economy, the world’s largest after the United States, is slowly emerging from its worst recession since World War II, as a global recovery sets off a rebound in exports, production and employment. But some economists worry about runaway government spending in Japan, which is already saddled with a public debt twice the size of its economy — the worst ratio among industrialized countries.

The government said it would issue a record 44 trillion yen in bonds to finance the budget for next year and cover for a sharp shortfall in tax revenue. The budget passed for the fiscal year starting in April would pay for Prime Minister Yukio Hatoyama’s ambitious stimulus agenda, including cash handouts to households with young children and income support for farmers. Mr. Hatoyama, who heads the Democratic Party, is looking to bolster both Japan’s economy, which has been hit by deflation, and his slumping popularity before important elections this summer. "Creating a virtuous circle in which a growth strategy spurs employment and demand will help combat deflation," Mr. Hatoyama said.

In January, the ratings agency Standard & Poor’s cut its outlook for Japan’s sovereign rating, saying that Mr. Hatoyama appeared to have no plan to start containing the country’s spiraling debt. Japan’s fiscal spending is often doled out to pork-barrel public works projects, like dams on virtually every major river and mountainous roads to nowhere. Trying to remedy the unhealthy flow of finances, the former prime minister, Junichiro Koizumi, started a privatization drive for Japan Post last decade. Under the plan, Japan Post’s financial units were to be freed from government control by 2017, a centerpiece of structural changes meant to forge a more market-oriented economy in Japan.

Though Mr. Koizumi’s plans appeared to enjoy public support at the time, disastrous terms in office for his successors — marked by recession and the global economic crisis — have largely discredited his privatization agenda. In August, Mr. Hatoyama cast Mr. Koizumi’s Liberal Democrats from power in a landmark election that ended a half-century of almost uninterrupted governance in Japan. The new administration soon began a review of the postal privatization process. Some within Mr. Hatoyama’s administration have argued that privatizing Japan Post would lead to cutbacks in the financial services available in rural areas. For residents of some far-flung villages and tiny islands, the local post office provides the only access to banking services.

But the move has also raised concerns that the huge state-affiliated entity could crowd out business at private banks. "Reversing postal privatization means grave distortions will remain in the Japanese economy," said Satoru Matsubara, a professor of economic policy at Toyo University. "The state will now be able to continue offloading bonds to Japan Post, and that will encourage reckless government spending." "Private banks will also suffer from unfair competition," he said.

Dubai unveils debt restructuring
Dubai announced a restructuring proposal for troubled conglomerate Dubai World on Thursday, including a commitment to pump $9.5bn into the company and Nakheel, its development arm. The government, which said the plan would take several months to implement through talks with creditors, will fund the new business plan with the $5.7bn left over from the $10bn bail-out loans from Abu Dhabi last year, and the remainder from internal government resources.

A government spokesman said there were no plans to raise additional debt to fund the plan, but sales of non-core assets remained part of the group’s strategy. "The holding company has a number of assets which were acquired with a view to be sold over time when value is good for Dubai World," said one government adviser. "There will be no firesales." Dubai World will receive a $1.5bn cash injection from the government to cover working capital and interest payments, with the $8.9bn of government funding and claims turning into equity in the government-owned business, thereby subordinating the debt to other creditors.

Non-government creditors will receive 100 per cent of their claims – which the company said amounted to $14.2bn at the end of last year – through the issuance of two new tranches of debt with five and eight-year maturities.
One person close to the talks said the level of interest to be paid to Dubai World’s bank creditors is to remain under negotiation. "It’s as good as it’s going to get in the circumstances," one banker said of the package. "The acid test will be whether they can sell it to the other 90-odd creditors. The question is: what if some of the other creditors say no?"

Initial market reaction was however positive. The Dubai Financial Market closed up 4.3 per cent while the Abu Dhabi bourse rose 1.1 per cent, according to Zawya, a data provider. "It’s fantastic news," said another senior international banker based in Dubai. "The banks will fall in line with this, as Dubai has clearly communicated that this is the final offer." "Dubai’s credibility will remain under question, as they could have handled it a lot better, but attitudes to Gulf credit will get a lot better now," the banker said. Nakheel bonds due later this year rallied from 70 cents in the dollar before the announcement to 92 cents.

The government will inject $8bn into Nakheel, which was hit hard by over-expansion ahead of the real estate crash in 2008. The outstanding Nakheel 2010 and 2011 sukuks, or Islamic bonds, would be repaid as long as the proposal is agreed. Nakheel said it would pay off all creditors over time and focus on completing near term projects, which would be communicated to customers. This would "have a significant direct impact on the construction and real estate sectors, and the wider economy", the statement said. The government’s $1.2bn claim on Nakheel will also be converted into equity, allowing creditors to rank ahead of the government. But secured financial creditors will have their loans and interest rolled over, while unsecured creditors will receive a new debt facility.

The Dubai World Tribunal remains in place to protect the companies, shareholders and stakeholders, the government warned, adding that it remained willing to use the tribunal to push through the plan if only a minority of creditors disagreed. The tribunal, based at the Dubai International Financial Centre courts, was set up to implement a restructuring plan and, in a worst case scenario, oversee a liquidation. Trade creditors will receive 40 per cent of their agreed claims in cash with the remainder in a publicly traded security, which the company says it believes will meet full repayment over five years. All creditors will receive a Dh500,000 ($136,000) payment soon, which will meet half of existing contractors, the government said. Customers who have invested in Nakheel’s developments that have not been completed will be given the option of transferring their current payments to projects closer to completion at market rates.

Short Sellers Do Work of Cops on Doughnut Break
by Susan Antilla

Don’t worry. There are lots of people watching out to be sure the financial markets are running right. They just aren’t the regulators employed by the government. If last fall’s 477-page "Investigation of Failure of the SEC" to nail Ponzimeister Bernie Madoff didn’t convince you that the securities cops have been on a long doughnut break, the more recent tome by the examiner in the Lehman Brothers bankruptcy proceedings should have put you over the edge. In that case, the blundering Securities and Exchange Commission was camped out in Lehman’s offices while the brokerage firm was listing toward oblivion. The document makes Bernie-gate look like petty shoplifting.

Yesterday, SEC Inspector General David Kotz gave further confirmation that investors are on their own. In a report detailing the handling of the agency’s kid-gloves investigation of the business-development company Allied Capital, one staffer told Kotz "it’s almost like they didn’t want to find something." But never fear. In the new Wild West of Wall Street, you just have to know where to look to uncover the players who have a role in exposing the bad guys and pushing for financial justice. With regulators taking a refreshing two-decade snooze, it’s now up to judges, plaintiffs’ attorneys, short sellers, bloggers and detectives to fill in for the somnolent stock cops.

Take the Lehman report. At 2,200 pages, it is the definitive work on who-told-what-to-whom in the executive suites of the out-of-control brokerage firm. We learn, for example, that board members were fed pablum about the firm’s toxic subprime-loan holdings because Lehman’s president deemed them "not sophisticated" about such things. By this point, it should come as no surprise that it takes a private lawyer (Anton Valukas) appointed by a judge in a non- SEC case (the Lehman bankruptcy) to produce an exhaustive investigation of the nauseating rule-breaking that went on at Lehman.

Regulators these days, in fact, have to be slapped around by courts that catch them siding with the bad guys. I’ll bet U.S. District Court Judge William H. Pauley III had one of those "did I read that right?" moments when he was reviewing a request by a group of 12 brokerage firms that wanted to scale back restrictions placed on them in the wake of the 2003 research analyst scandals. Not only were the firms asking to break down the firewalls that were put up to keep analysts from undue influence by investment bankers. They were making that request in cahoots with the SEC. To do that would be "contrary to the public interest," the judge said. At least the courts are watching out for investors.

U.S. District Judge Jed S. Rakoff is another jurist who has done his part to get the SEC to act like a regulator, rather than a Wall Street co-conspirator. In September, he told the SEC and Bank of America Corp. that their proposal to settle a case involving misleading statements made in connection with Bank of America’s acquisition of Merrill Lynch was an attempt to display a "facade of enforcement." Short sellers who place bets on stocks that they expect to fall are another important contributor to keeping markets honest, yet regulators and whiny corporate executives often think the wise way to deal with shorts is to investigate them -- not the public companies they target for incompetence or cheating.

When hedge fund manager David Einhorn told an audience of investors in 2002 that he recommended shorting Allied, the SEC investigated him before they bothered to probe the company. The lukewarm probe the SEC wound up doing didn’t even include a visit to Allied headquarters two blocks from the SEC. Ultimately, the SEC’s documents on Allied were mysteriously deleted from the agency’s computers, the new Kotz report says. In a classic SEC farce, the agency has acknowledged the shorts’ important role in balancing the boundless swamp of financial hype by slapping new curbs on them on Feb. 24.

No less an expert on white-collar crime than onetime jailbird Sam Antar, whose Web page says he masterminded "one of the largest securities frauds of its time" when he was chief financial officer of Crazy Eddie Inc. in the 1980s, says the way to counter market hype is to make it easier to research short- sale ideas and sue fraudsters. And trust me, Antar should know. "There is nothing worse for a criminal to deal with than an adversary with a profit motive," he told me in a telephone interview.

Bloggers are doing their part to fill in where the regulators fail, too. Blogger Barry Ritholtz said on June 3, 2008, that it was time to sell Lehman Brothers at $30.61. Less than four months later, and after interminable carrying on by Lehman and others about short sellers telling unfair tales, the firm filed for bankruptcy. Randy Shain, executive vice president at New York’s First Advantage Investigative Services, says he has been getting business from types of customers he’d never signed up before. Small funds of funds and endowments that used to consider his services too expensive now find they can’t afford to sit back and assume a regulator is watching out for them. Shain’s competitors told me similar stories.

So it takes a village -- of private investigators, judges, short sellers, bloggers and court-ordered examiners -- to get any financial regulating done these days. Here’s an idea for making things right for investors: How about shutting down the dysfunctional SEC and giving taxpayers a regulatory voucher in a new privatized world of financial policing? They can use the money to hire from the expanding list of private investigators before they pick a mutual fund, sign on with a hedge fund, or decide on the merits of their 401(k) plan. And there no longer would be any pretense that their tax dollars were paying for regulation that actually protected them.


Phlogiston Água de Beber said...


This in response to your comments on previous Post.

It has been my experience, that the nuclear industry prefers to think of the public as mushrooms. I would imagine the pressing question at Entergy HQ would be, which disloyal serf leaked the information about the leak?

Have you heard about the apparently rather large plume of radioactive waste inching its way inexorably toward the Columbia River from the Hanford Reservation? It's not entirely unknown, but I don't recall it getting much press. Nuclear secrets covers a lot more territory than just how to make bombs.

Oh, and your prediction for what I like to call the breaking of the next seal, seems remarkably precise. We'll have to keep an eye on that.

VK said...

The Americans and Europeans transferred their productive capacity to China. Using up land, water, cheap labour and getting huge tax benefits and bigger bonuses.

The Chinese used this to get a transfer of technology and education. Many Chinese have benefited from this move but many have suffered terribly as well - from the pollution. The environmental consequences have been devastating on China.

Think of all the indirect consumption that came as a result of all the energy and carbon emissions that came as a result of manufacturing in China.

As Celente said, China is ranked 104th in terms of GDP per capita and this too on fraudulent statistics. China is both strong and very weak at the same time. Strong in the sense that they've accumulated a lot of wealth and built up relations around the world of late. Weak in the sense that their people have been promised much and if that delivery fails, the country could fall into civil war.

The problems China faces are manifold

1) The huge discrepancy between young adult male population and the female popn.

2) Huge water shortages.

3) Massive environmental pollution and it's associated costs - higher mortality rate, increased disability and healthcare costs.

4) Limited arable land. Much of the country is too dry for farming. Green revolution was really an oil revolution.

5) Massive credit bubble, resulting in stratospheric rises in housing and CRE while official vacancy rates are around 20-30% in most major cities. Credit has been used for speculation, in stocks and accumulating natural resources like copper.

6) Social shocks resulting from rapid urbanization. Living in grey concrete jungles isn't exactly conducive to mental health.

VK said...

Oops had to add this,

7) A rapidly ageing population - gentrification. Soon the younger generation will have to support the older generation but there are simply not enough young people to do so. A problem Europe faces as well!

8) Wealth is illusory. Factories, cities, trade, commerce are all dependent on functioning credit systems and access to surplus energy. Without these, breakdowns will occur, wealth will evaporate instantly.

el gallinazo said...

March 25 (Bloomberg) -- Saks Inc. and Neiman Marcus Group Inc.’s high-yield, high-risk debt is soaring as demand for luxury goods in the U.S. returns following the worst economic recession since the 1930s.

I owe myself a Prada jockstrap. If not now - when?

Hombre said...

Ilargi - Yes! Spot on!
Your entro about the "blame China" frenzy going in and around Washington reflects my sentiments as well!
It's always so easy to point fingers when times get tough, which, by diverting attention away from the real source of the problem, OUR OWN WASTEFUL AND EXTRAVAGANT LIFESTYLE, among other things. And this whining tactic makes it impossible to properly deal with our predicament.
Biggest bunch of crybabys and fingerpointers in my memory! (and I am quite gray haired)

el gallinazo said...


Not to worry. Tritium only has a half life of about 12 years. That's why we have to keep refurbishing our H-bombs. Short warranty on them

Honest John said...

Paul Weller wrote "that's entertainment" in an hour after coming home from the pub...brilliant song...thanks!

Mike said...

SS the next great Ponzi to take down..

Not so shocking that the NY Times failed to mention any of the "IOU's" raided from that $2.5 trillion SS Fund:

Some fodder from The Nation on the Looting of SS:

Some Discussion of The Nation Article at Daily Kos:

Seems right on Script.. Health Care Money Grab... done.. next item on the List on the NY Times... SS takedown.

This is a bad predictable script..

They were also sure to mention Greenspan twice in the Article repeating the phrase from him: "you have to cut benefits"
including the final words.

Time to Prep the masses for the next takedown.

Love the Fixx Tune.. btw, I find that the Kt Tunstall track:
"I Don't Wnat You Now" to be a direct Riff ripoff of "That's Entertainment":

Ilargi said...

I’m not sure I'd want to be too complacent about this.

American politics turns violent

In the immediate wake of the passage of health care reform, opponents reacted with dignity and maturity by calling for a fatwa on socialist windowpanes. The call went out from some "militia leader" named Mike Vanderboegh, who said: "“We can break their windows...Break them NOW. And if we do a proper job, if we break the windows of hundreds, thousands, of Democrat party headquarters across this country, we might just wake up enough of them to make defending ourselves at the muzzle of a rifle unnecessary.”

The good news is that this is how the local window repair economy got stimulated, by Keynesians. The bad news is that Vanderboegh is telling people that "rifles are being cleaned."


Rumor said...


My thanks for posting that critical look at the Canadian banking system from Baseline Scenario. It's really quite bizarre to stop and think that, on an objective standard, the Canadian system is terrible, hallmarked by oligopoly, regulatory capture and moral hazard. Obviously it's ludicrous to say that the system is sound or a model for anyone, but it still makes one marvel that we haven't come off the wheels yet.

zander said...

I for one am rather disturbed at the US seemingly going down the route of beginning to scapegoat for the financial crisis, this is just what the jingoist lynchmob have been praying for,..christ knows who the UK are going to point fingers at!!


brilliant clip from Weller and Gallagher, are you a fan of either? or was it post-relative?


el gallinazo said...

Social Security has been moved to Jimmy Cagney's old cell at Sing Sing awaiting the chair. Ever since the so-called reform, under St. Ronald's mantle, it was nothing more than a thinly disguised ploy to put a huge, regressive tax on the working poor and fictitiously middle class. As long as it ran a profit (that is they would take the money and buy Humvees and Blackwater thugs with it and mail off an IOU to Arlington Virginia) it was permitted to live. But now it is no longer running a profit. And the gangstas running the show want to shoot the geezers in the head and take those IOU's and shove them up the soon to be cold wazoos of the geezer class. So long, it's been nice to know you. Typical gangland hit.

scrofulous said...


" As I mentioned the other day, Obama's health care plan has served its purpose and now the market players will want to weaken him before the mid term elections."

... and as I mentioned before I am not a USA political football fan but I thought that was what Geithner, Summers and that Obama retreaded Ben Bernanke were for - to run market interference for him?

Anonymous said...

el gallinazo said...
I owe myself a Prada jockstrap.
Prada isn't sold in any SAKS or
Neiman Marcus. sorry†

el gallinazo said...

kathy said...
el gallinazo said...
I owe myself a Prada jockstrap.
Prada isn't sold in any SAKS or
Neiman Marcus. sorry†

Saks lists $925 Christian Louboutin sandals and a $2,395 Prada tote bag as among its best selling items last week, according to its Web site.

I was just kidding anyway. Buzzards can't use jockstraps.

Ilargi said...


brilliant clip from Weller and Gallagher, are you a fan of either? or was it post-relative?


and both


jal said...

“Perhaps it's the yuan that supports the dollar, not the other way around.”
LOL So true!


@ Rumor said...

“... If the policemen, code inspectors or civil engineers were doing their jobs properly, then the pirates wouldn't have many opportunities, would they? ...”
They do not have the 2+2 = 4 math training of the economic reality.
Neither does J6P.
The wolf is in the hen house dressed like a cock and his advances are interpreted as a bout of sexual ecstasies.
I would like to have a positive impact and influence on the following ...
Closing date: April 30, 2010
Who may respond: 
These consultations are open to anybody interested in participating.
Submissions can be emailed to
Written submissions to this consultation are invited and should be forwarded by April 30, 2010, to:
Chris Forbes
Federal-Provincial Relations and Social Policy Branch
Department of Finance
L'Esplanade Laurier 
15th Floor, East Tower
140 O'Connor Street
Ottawa, Canada K1A 0G5
Once received by the Department of Finance, all submissions will be subject to the Access to Information Act and may be disclosed in accordance with its provisions. Should you express an intention that your submission be considered confidential, the Department will make all efforts to protect this information within the requirements of the law.

Would this “community” of expert thinkers and writers like to do a cooperative presentation?

The CPP (Canada Pension Plan) relies on two ponzi mechanism to be sustainable. (Which means that it cannot be sustainable)
1. an exponential growth of contributors to increase contribution
2. An exponential growth of capital to generate increasing interest/profit distribution to offset the shortfall of contributions

Lets use a simple example to make the point:

CPP must payout an average of $500.00/month for every new retiree
It requires 10 new workers contributing $50.00 per month so that the retiree can get his $500.00/month
(Where are those 10 people going to get a job? There was only one job opening created when he retired)


It requires $100,000.00 of capital with 6% interest to generate the retiree’s $500.00/month pension
(It is impossible to achieve this ponzi kind of growth or this kind of return on investment in the stock market or in any kind of market.)
Would someone like to suggest reducing the pensions or reducing the number of pensioners to make the system sustainable?

Bigelow said...


Not complacent at all.

Why isn't Sara Palin in jail for inciting ("RELOAD") violence? Well, because when here soft minded followers kill enough of their intended targets it will be easy to push through further police state measures --directed as always at commoners not the elite.

Welcome to the 1930s. Your papers!

Hombre said...

From AP news minutes ago...

Eurozone agrees on bailout plan for Greece!

"The joint eurozone and IMF bailout program comes with strict conditions and makes no money available right now.
It could be tapped only if Greece or other financially troubled eurozone members cannot raise funds from financial markets. It would require the unanimous agreement of the 16 eurozone countries to release the loan funds."

Anonymous said...

el gallinazo said...
well, i was wrong.

i only buy prada when it is on sale anyway, you should too¿

Frank said...

@All Go check out Iceland's Facebook page. They're seriously going for grassroots support before telling the the UK, the Netherlands and the IMF where to shove it.

I don't know if it will work, but it's a brilliant try.

Linda said...

From the trenches, about banking reform. I remarked last post that I'm closing on 10 acres next week. For closing, I'd assumed I'd get a cashier's check from the bank, per the last 4-5 closings of my adult life. I was told I'd be required to wire the money. New regs as of January this year say money over 50 large has to be wired, no bank checks. What's up with that? They can't reform wall street, but they can my my life more complicated?

@Frank--Iceland has a FB page?

Phlogiston Água de Beber said...

Hey el buzzardo,

I should think you could use a Prada bag to carry home some leftovers, for your late evening snacking pleasure. You could loop the handles around your neck. :)

mikel paul said...


It's going around don't you know.
It 's called jumpin' through the moolah hoop. Jump Linda jump.
They're protecting you from the so called untrustworthy folks. They're protecting you (the trustworthy) by not trusting you, for your own good of course.
Complicating your life? Throw in manipulative, expensive, condesending, disrespectful, illegal and constitutionally questionable and you have the makings of quite a stew.
I just keep wondering why we're still at the trough.


Rumor said...

I want emphasise something said in a commment late today by Numerian near the bottom of the Agonist article (The World is Choking on Government Debt) linked in today's Rattle:

I noticed in Bernanke's testimony today he acknowledged the tens of billions of dollars of profit he is earning on his trillion dollar + mortgage security portfolio. He said he is earning over 3% on these securities and his cost of funds is close to zero. All this profit is sent to the Treasury, and it helps also the inevitable losses they will take on defaulting securities.

How interesting. Who sets his cost of funds? Bernanke himself. His conflict of interest here is enormous, because he can unilaterally define his profitability by where he sets short term rates. For the first time, the Fed has its own personal profit motive influencing its monetary policy, despite anything it says to the contrary and its best efforts to ignore this profit. This is yet another reason for him to keep interest rates at zero for "an extended period" - until his portfolio of mortgage-backed instruments is reduced and/or the losses on the portfolio are recouped.

So yes, this bubble can go on for quite some time. The crack-up, however, which is inevitable, will be something to behold.

Erin Winthrope said...

Martin Wolf sounds more like Ilargi every day.

"....The crisis marks the end of an epoch, economically and politically. The big parties are at a loss over how to respond. But – apart from recognising and reacting to the crisis, which could, under plausible assumptions about future economic growth, require still more radical decisions on the public finances than anybody wants to contemplate – their leaders have to find something more inspiring than an offer of years of austerity and disillusion."

zander said...

@ Ilargi....both
and both

Well in that case your grasp of macro economics is obviuosly matched by your handle on contemporary music,
mind you i often wonder as I sit through champagne supernova why I give a shit about any of this stuff at all.


Brunswickian said...

I think the current situation is like the "Survivor" ""reality"" shows, where the contestants continously bemoan the treachery of their "teammates" when treachery is the way to win!

To me, these games are strongly reminiscent of the dance marathons of the 30s.

Linda said...


There's an ad on your post today fo travel b-ball tournament with Google Earth. The pic is of a stadium with Edward Jones on the roof. Does Edward Jones advertise with you or is that serendipitous? I'd really like to know.

Ilargi said...


The ads are generated by Google according to the reader's own personal location and surf-behavior, as well as the -word- content of the site. So the ads you see have quite likely more to do with you than with us, and what you see is not necessarily what someone else sees.

Also: for now, we have no specific advertisers, and hence no link to any specific companies you see advertised.


Wyote said...

I haven't had time to read much of the TAE post today yet but I keep coming back to Ilargi's statement that this is foremost a political crisis. And then this in Thom Hartman's post:

Thom's blog
"Seems like we've got a new fad: faxing pictures of nooses and gallows to congressmen's offices. Rep. Jim Clyburn (D-SC), the House Majority Whip, got one. And Rep. Stupak (D-MI) got one too. "At least 10 House Democrats" have reported being subjected to death threats, harassment, or vandalism at their district offices over the past week. Asked whether members are endangered, House Majority Leader Steny Hoyer (D-MD) said, "Yes. [There are] very serious incidents that have occurred." With House Republican leader John Boner referring to one Democrat as a "dead man" if he votes for health care reform, and right-wing bloggers calling for people to "break all their windows" - leading to incidents nationwide of broken windows in Democratic offices, this is beginning to bear an eerie resemblance to the hate speech of the 1960s that led to the assassinations of John and Robert Kennedy and Martin Luther King. And the "break their windows" rhetoric is eerily reminiscent of Kristalnacht, when a political party in Germany led a campaign to shatter the windows of the people they'd singled out as their enemies. And that crowd that was spitting on African American members of the House of Representatives on the steps of the Capitol? Later in the day they were congratulated and cheered on by a group of Republican lawmakers, led by Michelle Bachmann. And those right wingers who disrupted the proceedings of the House during the health care debate? A dozen Republican members of the House stood up and applauded them, a breach of protocol that Congressman Barney Frank says he's never seen before in his 29 years in Congress. It's time for us all to call out these Republicans and demand that they repudiate violence and threats, and that they stop encouraging the right-wing crazies in their base, before something really bad happens."

The roil is increasing.
ATB, Wyote

Jim R said...

For what it's worth, I have text ads near the top of the page for tax-free munis, derivatives, MBS strategy tools, and government bonds. At the very bottom of the page is a graphic ad for Goldline International.

I haven't patronized any of those advertisers, but Google does a fairly good job of triangulating my interests. The Evony ads have gone into hiding, for now.

Jim R said...

Followup about the advertisers -- I clicked on some of them to see where they go. My suspicions were confirmed, they're selling stuff. Snake oil, mostly.

But it's financial snake oil. Strategery tools, you know.

Maybe I could modify my old Mandelbrot generator to do a DIYer's analysis and sell it alongside the others ;-)

scandia said...

@Ed Gorey...I read FT's Martin Wolf this morning as well. He is a thoughtful man whose social conscience has developed and been quietly expressed over the past year. He is asking the right questions, I think.
Regretably he has not been able to guide the pirates commanding the British Ship of State. No one has been able to so far.
It will be another cycle of smoke and mirrors as the mob will destroy anyone who says, " Hey, we're stone broke."
I see Chaplin in my mind's eye- that posture of him standing with one leg crossed over the other, with his pockets turned inside out, empty...
What is the difference between a Pope condoning the rape of innocence and the State stealing the food from the mouths of future babies? To both institutions there is something far more important that the well being of their respective flocks.

Lukas said...

What goes up, must go down, the law of gravity is out of question. But obviously, it is impossible to tell the timing. Do you really consider it so surprising? The deterministic chaos has always been here and the system has only been made even harder to predict recently.
I see no reason to be angry about the rally and I see certainly no reason for the doom cheerleading. I suggest anyone to enjoy this spring. Such a calm spring of 2010, who expected that?

Unknown said...

Stoneleigh: Yesterday I posted a link to David Korowicz's (of FEASTA) paper entitled "Tipping Point".

I was of the opinion that his piece was better than Tainter (and today I'm thinking it even surpasses Homer Simpson). To be honest, I haven't read anything that good in many years.

Please have a look at it. You might want to think of visiting FEASTA on your roadshow this summer.

I met these FEASTA folks at a conference in Newcastle in 2008. They really know their stuff.

M said...

Looks like Denninger Cap Lock Syndrome has infected a good portion of the TAE posts--for those really super important points.

But when it comes to finding a dark lining on a silver cloud, TAE stands above the rest.

The Q said...

Stoneleigh said yesterday regarding the mis-reported hyperinflation risk:

"Questions came up at my Guelph talk about how long I thought it would take for deflation to unfold and how long one should stay in cash. The answer to those questions is 2-5 years. Depression will outlast deflation, as the real economy lags finance. For a period of time however, deflation and depression will be mutually reinforcing, and that dynamic could be quite persistent."

Might I be so bold as to suggest that the March 22 intro be updated to correct this accidental mis-reporting? This is important. Many readers will not see the correction in the comment section.

There is a great danger that those fearing imminent hyperinflation will sacrifice too much liquidity stockpiling solar panels or other "hard-goods", only to lose everything to fire, theft, forced-relocation, etc. Flexibility and the APPEARANCE of modest "poverty" would seem a better strategy than hoarding in anticipation of hyperinflation. A friend of a friend of an in-law of a friend in Texas made a fool of herself hoarding ammo and chocolate bars for Y2K. (There was a real Y2K threat, but the infotainment biz were hoping for planes falling out of the sky)

(I have several solar panels myself, but only as many as I can currently use. A few spares might be useful though, just in case)

Stoneleigh said...


I would very much like to touch base with the FEASTA people while I am in Europe this summer. They are in Ireland I believe. I'll have to see if I can find contact details for them. And I'll definitely read that paper.

Anonymous said...

"There is a great danger [of sacrificing] too much liquidity stockpiling ... "hard-goods", only to lose everything to fire, theft, forced-relocation, etc."

Those dangers certainly exist, but there are known strategies to use, to prevent total loss in those scenarios. (And hopefully anyone stockpiling will be mindful to consider such dangers while storing their plunder - including animal or insect infestation.)

But what strikes me as a danger that we haven't had to consider for some time, as a society, is the danger of partial or total loss of savings due to bank failure. In the U.S., the FDIC is already tapped out, and if there's an event or sequence of events that causes a tsunami of bank failures, or if one or more huge banks fail, then that could severely impact one's ability to withdraw money from banks.

Of course the U.S. Congress and the Treasury will maneuver, and reassure the public that all will be well, but even during the boom times customers of failed banks were sometimes limited in the amounts and times of withdrawal. So we could see an announcement like "your money is perfectly safe, and everyone will get back everything that they had on deposit - but you can't withdraw more than $200 a week."

Well, if things are collapsing rapidly, then money delayed is money denied.

So leaving one's money in the bank is a lot riskier than we're used to it being, over the past generation. Depending on bank insurance has become a sucker bet.

And if one is going to have a lot of actual cash on hand, to avoid "bank holidays", then it seems to me that stockpiling hard goods is actually a prudent hedge against the dangers that could befall one who has most of their money in physical form, whether that's paper bills or precious metals.

Bottom line, IMO the dangers of the "unknown unknowns" of this era outweigh the dangers of the "known unknowns", e.g. confiscation, forced relocation, etc.

But I'm a hard-goods stockpiler myself, so I do have a bias.

Stoneleigh said...


I agree that the extra time we have been given to prepare is a gift. No one should be wanting to hasten the day our system comes apart at the seems.

I still think this rally is in a very late stage, as all the contrarian warning signals are quite evident.

Anonymous said...

1. Democrats - Hypocrisy Becomes You.

2. Mish recently covered why a Chinese revaluation of the yuan won't hurt them at all but will hammer us. Why was the US never hurt horribly by currency revaluations back when the US was a creditor nation? Figure that out and you'll start to understand why China doesn't necessarily give a rat's ass about the US Congress and its imbecilic threats.

Stoneleigh said...

I wanted to update readers on my travel schedule. The email address for asking any questions is StoneleighTravels(at)gmail(dot)com

I will be in upstate NY for a week from April 17th-24th. There is a talk scheduled at Hartwick College in Oneonta on Tuesday April 20th. There may be others talks arranged for that week while I'm there, and I'll be visiting various people as well. On my way home, I'll be speaking in Brockville on Sunday April 25th.

In mid-May I'll be traveling to New England and doing talks in VT and NH.

In June I'll be heading for Europe, starting with the UK. I'll probably be in the area until mid-July. I have tentative arrangements so far in the UK, the Netherlands, Belgium, France, Italy and Finland (if I can work out sensible travel arrangements). I remember various people had asked for other destinations. If you would like me to come, please drop me a line at the address above.

Later in the summer I am planning to head for the mid-west of the US. I'll be driving I think, making a road trip of it with one or two teenagers in tow. So far there are requests there for Ohio, Wisconsin, Minnesota, Iowa, Kansas and Missouri if memory serves.

There are other possibilities that would involve flying somewhere for a day or two. San Antonio and San Fransico come to mind off the top of my head. Those could be fitted in whatever pockets of time are available.

Various people have floated the idea of organizing TAE retreats, which sounds like great fun to me. If there would be any interest in getting together for a few days in an informal setting somewhere, please let me know. The Pacific northwest had been mentioned as a potential location.

Greenpa said...

from the previous post (simultaneous with the new one going up)-

VK- "DOW 11,000 soon it seems. In defiance of all logic, reason, prudence and justice."

Not in defiance of MY logic! I predicted it in January, I think.

Specific prediction, here on TAE, for the prediction freaks, was that the Vermin of Wall Street had now found the idiocy out there so durable that instead of bailing out at +10,000, they were now shooting for running the IP up to 11,000, before pulling the plug. (that would be Imaginary Ponzi- a step up from a mere ponzi).

The benfit being, that all those sitting on the sidelines still would be highly likely (rationality free) to consider that 11 means it's all real; and jump back in at that point. Then the Vermin could sell everything, and the brand new optimists would ride the crash all the way to the bottom; buying it all, because - "It has turned around!".

See? Logic.

At this point- it's all going so well they might just let it keep riding up- maybe to $11,500? The higher the better, for them. It's a matter of gauging the idiocy out there; and it's quite obviously still very high.

Greenpa said...

and, likewise-

Polka Dot Gallows!

"NEW YORK ( -- Budget and tax experts are a despondent bunch these days. In fact, some have even described themselves to CNNMoney as "depressed."

Unless Eli Lilly manages to gin up a little fiscal Prozac, the only thing that will make them feel better is forward motion by Congress on the U.S. debt situation. That involves nothing less than laying the groundwork for comprehensive tax reform, budget reform, and Social Security and Medicare reform."


yessir, reform them taxes, fix the budget, and fix Social Security!

Nevermind about Total Unemployment- and an entire economy geared to produce vibrators, of one kind or another- and nothing else, really.

tax base? what's that?

Ilargi said...

"Looks like Denninger Cap Lock Syndrome has infected a good portion of the TAE posts--for those really super important points.

But when it comes to finding a dark lining on a silver cloud, TAE stands above the rest."

Haven't read Karl in ages, and therefore (?1) have no clue what you mean.

jal said...

Greenpa said...
“tax base? what's that?”

What a wonderful concept!

Borrow like mad at zero interest, from those that have surpluses, and redistribute through grandiose projects, programs.

Maybe an updated, modern version of how to build pyramids.

Greece is leading the way.

Watch out for the USA ... they are on the path of doing an improved version of borrow and spend without using taxes.

Anonymous said...


@ All

Following up on Stoneleigh's travel schedule, I though I would mention that I will be travelling to the U.K. for a training course on Transition Town techniques in Totnes (Devon), from 16 to 21 April. Travel will take me through London. If anyone is interested in attempting to meet during that time, let me know, particularly if you are in the South-west part of the country.


RobertM said...

I like how you're adding music lyrics to your posts. It reminds me of the new, liberal anthem post from driftglass

Greenpa said...


"the day our system comes apart at the seems."

I like it! :-) The picture it gives me is fuzzy- but tantalizing.

Anonymous said...


@ Greenpa

Ouf. I am relieved to see that I am not the only one who is fascinated by misused homonyms.


Stoneleigh said...

Sorry about my spelling. Sometimes when I'm in a hurry my fingers and brain are not on the same page, so to speak. I'm glad it gave cause for amusement though ;)

Phlogiston Água de Beber said...


Doncha just hatit that speling palease ar evrywear?

el gallinazo said...


I thought it was an intentional double entendre :-)

Gravity said...

Anccirodg to rarecseh at Ciabrdmge Unvitirsey, it dseon't metatr in waht oredr the letetrs in a wrod are. The olny impartont thnig is taht the frist and lsat lteter be in the rgiht pcale.

The rset can be a ttoal mses and you can slitl raed it wiuotht peolrbm. Tihs is becasue the hmaun mnid deos not raed eevry letetr by iltsef, but the wrod as a wlohe.

Greenpa said...

jal- "Maybe an updated, modern version of how to build pyramids."

somewhere back there I started calling this the "IP" economy.

It's really NOT a ponzi scheme- it's an IMAGINARY ponzi scheme; with billions already invested, and more daily.

Lots of fun to watch!

Greenpa said...

Well, now I'm amused again, to have mostly derailed the conversation here from doom to humor/brain function. :-)

El Gal- I thought there was a good chance it was intentional, too- but ...

Gravity- I was aware of that fascinating research. I strongly suspect the brain works in bigger chunks than just one word, too. Several times in my life, when working extremely intensively on a project, I've been startled to find that if the key word (a non-common one, in all cases) appeared ANYWHERE on a full page of text- including stuff like page 2 of the New York Times- after a half second scan of the page, my eye would instantly leap to my key word. No matter where on the page it was.

Anybody else have that experience?

Phlogiston Água de Beber said...


That's good to know. :)

BTW, was that intentional or the result of a rogue gravity wave passing thruogh?

Anonymous said...

Stoneleigh, my kids tell me it's great fun to catch those in authority making "mistakes." :)

Gravity said...


I attended a transition town meeting the other day, and was not entirely disappointed. Certain initiatives such as the relocalisation of food production and solar electrification seem constructive enough while operating from a ecologically conscious context of cooperative sustainability, though more specific knowledge concerning the anticipated effects of resource constraints, energy contraction and deflationary depression would not actually be required to motivate the people involved there, as they seem content to focus on various sustainability themes purely from an environmental perspective.

Such initiatives should help when yielding appropriate results in terms of localised energy conservation and enhanced food access, yet seem somewhat naive and misguided when accounting for the continued capitalisation of projects derived from this format, still being largely based on disposable income of loosely bound cooperatives comprising mostly middle-class ecosinners with a somewhat lacking sense of urgency.

Ilargi said...

New post up.

Some people are too far gone


Phlogiston Água de Beber said...

Yeah Greenpa, yous otta be ashamed of yersef fer derailin this here doomy conversayshun. Weuns ain't got no time fer nun of this here funny biznus. But leas yous ain't out there derailin trayns agin. :)

Kansascrude said...

Stoneleigh, Would be interested in the summer trip progression into Kansas. Please keep us informed if you stop in KC or Wichita areas.

Have room, inground pool, quiet, kitchen skills, and decent wine cellar. If you make it this far into the flyover zone.

Probably will have a 19 year old home for summer other starting med school late July. Our church could be available if you would need a place to speak(Derby,Ks.,Wichita.) I have no way of gauging interest level in this area.