Friday, May 14, 2010

May 14 2010: Debt and Dämmerung: Welcome to the Wasteland

Detroit Publishing Co. Roast with Tophats 1905
Chestnut vendor, Baltimore, Maryland

Ilargi: As the US and the world at large are -very- slowly waking up to the reality of the biggest single man made environmental disaster in history (by Three Miles and a half), and in all likelihood the biggest one in the history of the planet, we can see a striking similarity between the way news of the Deepwater Horizon destruction reaches us and how we've been and still are (not!) being force-fed the true scope and impact of the single biggest financial crisis in time immemorial.

Modus operandi: Extend and pretend, lie and deny, cheat, rinse and repeat. We're caught in a self-hand-made trap of never-ending attempts to bend what's real into what's non-offensive to palates shaped by processed food and minds formed by advertisement campaigns aimed exclusively at the sub-conscious. And we can blame all the politicians, spin doctors and marketeers for all we want, but in the end they're just showing us who we really are. If that wasn't true, they'd try another tack to sell us the detergents, trinkets and presidents they have on offer.

As the incomparable Joe Bageant phrases it in Hologram, carry me home,
This great loom of media images, and images of images, is so many layers deep that it has replaced reality. No one can remember the original imprint. If there was one. The hologram is a hermetic snow globe, a self-referential circuitry of images, and a Möbius loop from which there is no logical escape.

Möbius strip

BP, Transocean and Halliburton, the three main players in causing the free-for all mass-murder gusher, aided and abetted by the US government, have nothing left of what could and should have been a common sense of concern and responsibility for the consequences of their failures on the world and its inhabitants. Instead, they spend every dime and minute of their time, money and effort trying to avoid the blame. They no longer show any signs of having a grasp on reality; these have been replaced by a worldview that's squarely focused on their bottom lines.

The egrets, WC Fields’ bottlenose dolphins, Kemp's Ridleys turtles and even fishermen that are left out there on the tar-and-feathered Gulf of Mexico coast don't have the luxury of escaping into a hologram or snow globe. They're just dying. And no matter how many well-meaning dedicated souls lose their sleep trying to clean oil covered feathers, a spill the size of an Exxon-Valdez every few days to a week, with no end in sight, will render their habitat uninhabitable for a very long time to come.

So how does America react? In perfect snow globe fashion, a judge in Alaska rules that Shell can launch its offshore drilling programs in the Arctic. Shell's take: "we spent billions already, and haven't made a dime yet". That's like the BP spin spokesman reacting to reports that the oil leak may spout 70.000 barrels per day instead of BP's 5000 barrel estimate: "We are focused on stopping the leak and not measuring it".

Really, you want me to believe you had no idea how much you were producing there ahead of the explosion, you had no clue of the pressure at all?

Prosecutions of the perpetrators, while sure to be endlessly drawn out public spectacles the likes of which we haven't seen in years, can't undo what's already been done. There, too, lies a glaring similarity with what's going on in the world of finance. The SEC, various Attorney Generals and all the justice departments America has, can file as many criminal cases as they want against Wall Street. The world, the country and its states are still broke. Very broke. We just haven't been told yet, at least not through official channels. Our brains are still stuck on or inside the Möbius loop.

If we glance through the litany of austerity measures voted in and proposed in Greece, Ireland, California, Portugal, New Jersey, Spain and New York State, we should pause for a moment to think about the effect of 5-10-15% salary cuts and of slashed healthcare programs for the poor and elderly, but most of all of what still lies ahead. What will be the result for various GDP numbers from all the pay-cuts. What will happen when the next 10-20% cuts are implemented. And then see that in the light of how all budgets are still based on ever-over-optimistic data about economic growth, recovery and stabilizing real estate prices.

For those reasons, California's recent and bitterly contested budget can be thrown out already. Next up: fund-raising campaigns among the rich (hence: no new taxes) and health cuts for the Golden State poor, whose epitaphs shall read: "The Terminator was Here". Arnold himself, by the way, is also closing his term. He's out of here, and no, "he won't be back". If he’s got any sense left, that is.

And no, it's not just Sacramento or Athens or Lisbon, the torn and frayed denial phase has grown old and weary. They are just the advance-screening theaters of a production more broadly distributed than the best planned Hollywood ad campaign. This feature will not just come to a theater near you, it will come to a street, a home, a family near you. Even if you’re lucky enough to escape the worst of it financially, you still can't escape. And this time you'll be caught up in the matrix, the möbius and the hologram of reality. What if you’re fine, but your family, friends and neighbors are not? What are you going to do? Lock the door and cancel that trip to Florida or Louisiana? Where’s your food going to come from? From the store that just saw 80% of its customers' pay cut by 20%+? You have any idea how narrow the profit margins are in that line of business?

We can't help ourselves, dear fellow hominids. We spend so much time bullshitting other people about who we are and what and how we're doing that we can no longer help but believing our own riveting lying-ass tales. Only, this time around, in the world outside the matrix, the snow globe and the Möbius strip, the economy is no longer growing, and the river doesn't clean itself every 10 miles anymore -as Mark Twain wrote 150-odd years ago-. And as everyone around us will get poorer fast, so will we. By default. You probably never realized it, but you have just entered the wasteland. Enjoy your stay.

Ilargi: Our donations channels are wide open (top left hand column), and we work hard behind the scenes to make TAE what we think it wil need to be come this summer, in the face of all we see around us. And our advertisers are still eager for your clicks and visits, which carry no obligation on your part whatsoever. Who knows what you might find?

California budget woes grow deeper as rosy projections come up short
by Kevin Yamamura

Washington hasn't come to the rescue. Hopes for a tax windfall were dashed last month. As the reality of a $20 billion deficit sets in, California leaders are bracing for another summer of difficult state budget talks. Gov. Arnold Schwarzenegger will kick off serious budget discussions Friday with his May budget revision. The governor is likely to propose reductions in everything from social services to schools to state worker compensation.

"What you can expect generally is no taxes and terrible cuts, absolutely terrible cuts," said Schwarzenegger press secretary Aaron McLear. "We're not going to get through the deficit we have without some really tough decisions and some really terrible cuts." Budget experts do not expect a substantial change in the deficit size when Schwarzenegger releases his revision. But his plan will inflict more pain because he has to replace January solutions, worth several billions of dollars, that fell short due to legislative opposition or his own rosy projections.

For starters, federal officials have indicated they may provide about $3 billion in new help to California – far less than the $6.9 billion Schwarzenegger penciled into his January plan. State Controller John Chiang last week reported that California has collected $1.3 billion less in taxes through April than the governor predicted. And Schwarzenegger has abandoned his idea to raise $118 million for 2010-11 by authorizing new oil drilling off the California coast, citing the environmental consequences in the ongoing Gulf of Mexico spill.

Meanwhile, legislators in both parties rejected a Schwarzenegger idea to install speed cameras at intersections. Republicans opposed a new tax on insurance policies. Democrats vowed not to consider cuts to schools or social services until the governor's May budget proposal. The Legislative Analyst's Office recommended that lawmakers approve cuts to social services and the prisons agency in March that require months of implementation time. But because the Legislature did not do so, they have to find deeper cuts to make up for lost time. "Now you wouldn't start saving money until the fall," said Michael Cohen, deputy legislative analyst with the LAO. "Even if you agree to do the exact same things, you have to add things to mix."

The delays could cost the effort more than $2.5 billion. Schwarzenegger may resort to wholesale cuts he proposed in January as contingencies in case federal money fell short. Those included the elimination of the state's welfare-to-work and in-home health care programs. "It's no more fathomable now than it was (before)," said Frank Mecca, executive director of the County Welfare Directors Association. "You'd still have the problem of a million children starving in the streets. But I don't think we can take anything for granted."

McLear said the governor will not include other contingencies he proposed to suspend $1.8 billion in tax breaks for businesses. "The governor believes those are helping businesses grow, helping create jobs, and he continues to stand by the tax breaks," McLear said. A $20 billion deficit is significant. If no new revenues are raised, the state's general fund spending could end up little more than $80 billion for the year, well below the $103.3 billion spent in 2007-08.

Schwarzenegger and legislative Republicans have vowed to oppose new taxes and want to rely on spending cuts to balance the budget. Democrats believe that slashing social services would hurt the poor and unemployed and cost California billions in federal matching dollars. "The most likely outcome is a stalemate," said J.B. Mitchell, a UCLA professor emeritus of public policy and management. "The magnitude of the problem is large and they have to make some pretty drastic cuts. One way or another, it's going to be a painful episode. It's hard for me to see how you get a two-thirds vote for a tax increase in a gubernatorial (election) year."

GOP members who voted for tax hikes last year suffered political consequences, from loss of leadership positions to recall threats. "Taxes are off the table," said Assembly Republican leader Martin Garrick, R-Solana Beach. "We don't need new taxes on families, senior citizens or businesses in California. It's time to reduce the size of government." Senate President Pro Tem Darrell Steinberg, D-Sacramento, has acknowledged the difficulty of getting Republican votes for taxes this year. In recent weeks, he has proposed suspending corporate tax breaks. He said Californians must decide whether schools and public safety are worth paying for.

"Between the federal partnership and revenue growth, we had hoped that the deficit would be reduced significantly," Steinberg said. "But given the thirty-plus billion dollars in cuts we made last year, there's no question that some form of additional revenue is going to have to be part of a responsible budget solution." Assembly Speaker John A. Pérez, D-Los Angeles, said Tuesday he wants to leave all options open, including higher taxes and suspending the state's Proposition 98 guarantee for school funding. Pérez offered as one example a tax on oil production. But Democrats have floated that idea for several years without success.

Schwarzenegger's revised budget plan is expected to eliminate health programs
by Shane Goldmacher and Evan Halper, Los Angeles Times

Home healthcare for the elderly and disabled and the Healthy Families program for low-income children could be dismantled. Previous efforts at scaling back such programs were overturned.

Gov. Arnold Schwarzenegger is expected to present a revised budget plan Friday that would dismantle some of California's landmark healthcare programs after efforts to scale them back have been reversed by federal courts. The rulings, issued mostly over the last two years, have already forced the state to unwind roughly $2.4 billion in cuts approved by the governor and Legislature and have alarmed other financially strapped states seeking ways to balance their budgets.

Schwarzenegger has lashed out at the federal judges, saying they've been "going absolutely crazy" and accusing them of interfering with the state's ability to get its finances in order. The rulings tie their hands, administration officials say, and they are asking the U.S. Supreme Court to intervene in a petition supported by 22 other states. "We can't make any changes to these programs," said Susan Kennedy, the governor's chief of staff. "Anybody can just walk into a courthouse and freeze them."

Administration officials declined to reveal which specific programs the governor would eliminate. But officials involved in the budget process, who spoke on condition of anonymity because they are not authorized to speak publicly, said they would probably include home healthcare for the elderly and disabled, a nearly $2-billion program that serves 440,000 Californians. Cuts that lawmakers and the governor made to the program in an effort to balance the budget have been blocked by legal rulings over the last year.

The court decisions restrict their ability to make cuts in the programs, officials said, but they don't preclude dismantling them. Abolishing home healthcare services would mean forfeiting the federal Medicaid money that helps fund them. But the money comes with requirements that the courts said California did not meet. The state would not have to follow the requirements if it did away with the program, and thus would no longer risk having its financial plans upended in court.

The Schwarzenegger administration may also propose the dismantling of the Healthy Families program, which uses federal money to help provide health insurance for about 900,000 low-income children. The administration warned in January that it would try to abolish the program if the state's budget situation did not improve – which it has not. The deficit remains swollen at $18.6 billion, or roughly 20% of general fund spending.

The U.S. Government Is About To Get Hit With 'The Perfect Storm' Of Debt
by Chris Wood, Jake Weber, and Vedran Vuk, Casey Research

Hearing President Obama’s economic peptalks, you might be under the impression that the U.S. needs to keep spending for just a little while longer to stimulate the economy – but then will swear off big deficits.

Reinforcing the point, to address concerns stirred by a Congressional Budget Office (CBO) forecast that the U.S. government will accumulate total deficits in excess of $6 trillion over the next decade, in February President Obama issued an executive order to create a bipartisan fiscal commission. The commission’s task is to deliver recommendations to the president by December 1 for limiting future deficits to 3% of GDP. (The FY 2009 deficit approached 10% of GDP. The FY 2010 deficit will probably go even higher.)

It’s our contention that the president’s fiscal commission is mostly for show; the 3% limit is just a hoop for the clowns to jump through. U.S. government finances are now past the point of no return; the U.S. government lacks not just the will but the ability to close the gap between revenue and expenditure.

At The Casey Report, we like to focus on facts. Unfortunately, when it comes to government debt, the facts aren't pretty. They show that the country is already sliding towards financial collapse and hyperinflation in a way not dissimilar to the Weimar Republic.

Let’s first look at recent history to see how reliable CBO forecasts have been. In 1999 the CBO issued its 10-year forecast for 2000-2009 (see charts below). It looked as though we were heading into ten years of prosperity that would rescue us from little worries like the trillions in unfunded liabilities of Social Security and Medicare.

As you can see in the charts titled “CBO Revenue Projections 2000 - 2009” and “CBO Outlay Projections 2000 - 2009,” the CBO expected a budget surplus in every year from 2000 to 2009. And not just that, but that the surpluses would grow at an annual rate of more than 13% and would accumulate to $2.5 trillion over the decade.

Casey Chart

The next charts titled “Actual Federal Government Receipts 2000 - 2009” and “Actual Federal Government Outlays 2000 - 2009” show how wrong the CBO’s forecast was. One reason it went wrong was that the CBO naively assumed that the abnormally rapid rate of economic growth experienced in the 1990s would continue. It didn't.

Casey Chart

A second reason is that the “conservative” Bush administration went on a spending spree – passing Medicare drug coverage and No Child Left Behind, to name two big tickets. While the CBO anticipated ending the past decade with a net budget surplus of $2.6 trillion, the U.S. government actually accumulated the largest deficit ever, a staggering $3.2 trillion. So the difference between the CBO forecast and eventual fact was only $5.8 trillion. (And that's not counting for off-balance sheet unfunded liabilities, such as $60 to $70 trillion for Medicare and Social Security.)

So what does the CBO foresee for the coming decade? And how far from reality is that foresight likely to stray?

In January, the CBO released “The Budget and Economic Outlook: Fiscal Years 2010 to 2020.” This long-term forecast expects the U.S to accumulate an additional $7.4 trillion in deficits during the eleven years beginning with 2010, which reflects an average annual deficit of about $670 billion.

Casey Chart

The picture painted by the CBO is by no means rosy, but we think the facts could prove to be much worse. We have already demonstrated that the CBO's assumptions can be wildly off the mark, and there are many ways for things to go wrong in the years just ahead. Here are three of the big ones.  

The Revenue Landmine

The Congressional Budget Office projects total federal revenue of $2.2 trillion in 2010, a 3.3% increase from 2009, under the assumption that current laws and policies remain in effect.

Because of several tax provisions set to expire in December 2010 and what the CBO sees as a strengthening economic recovery, it projects that revenue will rise substantially after 2010, increasing by about 23% in 2011 and by another 11% in 2012.

According to the CBO’s projections, revenue will continue rising nonstop from 2013 through 2020 and will reach 20.2% of GDP. Almost all of the increase is attributed to expected growth in individual income tax receipts.

This forecast relies on the CBO’s expectation that the unemployment rate will average slightly above 10% in the first half of 2010 and then turn downward in the second half of the year. As the economy expands further, predicts the CBO, the rate of unemployment will then continue declining until, in 2016, it reaches 5%, the level that the CBO considers full employment.

The CBO projects annual government receipts to better than double between 2010 and 2020, growing at an average annual rate of 7.8%.

How do these growth projections compare with actual history?

Actual data from 2000 through 2009 show that over the last decade federal government receipts grew at an average annual rate of 0.9%. And the total increase in government revenue between 2000 and 2009 was only 3.9%. Even if we go back to 2007 and 2008, when tax receipts were at all-time highs, the increase from year 2000 levels was only about 25%.

Given the historical record, are we really supposed to believe government revenue will grow at an average annual clip of nearly 8% from now until 2020?

Comparing data during the first four months of fiscal 2009 to the same period for 2010,  government receipts are down more than $80 billion, or 10.4%, from the same period the year before. And remember, 2009 revenues were about 17% below those in 2007 and 2008.

There are countless plausible reasons that revenue might disappoint and not grow as rapidly as the CBO projects – the main ones being that the economy may not expand as expected and that the employment picture won't be as pretty as predicted.

So what happens to projected deficits if instead of growing more than 100% between now and 2020, government revenues only increase by, say, 50% (still a generous amount given recent history)?

Assuming revenue in 2010 matches 2009 and then grows by a total of 50% over the 10 years that follow, the accumulated deficits for the period would be $17.5 trillion, or about $10 trillion more than projected by the CBO.

The Interest Expense Landmine

Whether you’re an individual, a business, or the government, when you spend more money than you make, there is only one way to close the gap – by taking on debt and paying interest.

Until the end of 2008, the government's cost of funding its debt had been growing steadily, at about 11% per year, as both interest rates and the size of the debt were rising. When the financial crisis hit full throttle in 2008, interest rates headed toward zero and the government's net interest expense for 2009 dropped 26%, even though total debt was still growing.

The CBO projects that gross federal debt will continue to grow in the coming years, eventually topping $25 trillion by 2020 or nearly double where it stood at the end of 2009. And the CBO pins most of its hopes of financing the debt on the public’s savings.

Casey Chart

While the CBO acknowledges that interest rates will have to rise to cover the next decade's $10 trillion deficit, its rate estimates are cheerful in the extreme. The CBO expects the 3-month Treasury bill rate to average 1.9% in 2010, fall to 1.5% in 2011, and then hold steady near 2% for the rest of the decade. The projection for yields on the 10-year Treasury note is 3.9% in 2010, 4.5% in 2011, and then slowly increasing to 5.3% by 2020. 

This paints a rather congenial picture for future interest rates. History, however, provides a much bleaker outlook. The chart below shows that interest rates can go much higher than what the CBO expects, and can go there quickly.

Casey Chart

During the high-inflation 1970s, interest rates were volatile, but the overall trend was up, up, up. From 1971 to 1981, rates on both short-term and long-term debt averaged an increase of about one percentage point per year, to a peak of 15.5% on the 3-month bill and 15.3% on the 10-year note.  

While the CBO does assume that interest rates will rise over the next decade, a few key factors suggest its assumptions are wishful. 

The first issue is debt management. The Treasury will be issuing bills, notes, and bonds in unprecedented quantities. At the same time the administration plans to run trillion-dollar-plus deficits, the glut from past government expenditures is catching up. In the next four years, over $4.8 trillion worth of marketable Treasury debt will mature. As portfolios get packed with U.S. government IOUs, the Treasury will have to offer higher and higher rates to induce investors to accept more IOUs from the same issuer.

In fiscal 2009, the Treasury held over 290 auctions issuing more than $8 trillion in marketable securities. The auctions have been primarily focused on shorter-term maturity debt, which will make it progressively more difficult to roll over debt in the coming years.

The second major issue for the Treasury is foreigners. For decades the U.S. has relied on foreigners to purchase its debt; they now own roughly 50% of the outstanding debt held by the public. We may already be approaching the point at which they say, “Enough!” China’s holdings of Treasuries peaked in May 2009, and they have been buying Treasuries in much smaller doses since then.

In December, Japan reemerged as the top holder of Treasury debt, and the U.K. has been the third-place holder for most of the last decade. Both Japan and the U.K. have been buying more Treasuries, but the rest of the world has followed China in throttling back on purchases. The only way to continue luring foreigners back to U.S. Treasury debt will be with richer compensation, i.e., higher interest rates.

What happens to the CBO budget projections if their interest rate outlook is wrong? What happens if, for example, interest rates rise at the same pace they did in the 1970s? The result would be horrendous.

The blue in the chart below is the actual historical interest expense on all the federal government’s outstanding debt. The green line shows the CBO’s projected interest expense. Even their conservative estimate has total interest expense tripling over the next decade. The red line is our estimate assuming annual increases in interest rates of one percentage point. By our estimate, this would add $3.6 trillion in cumulative interest expenses by 2020.

Casey Chart

And with the higher interest expense, total federal debt would climb to almost $35 trillion in 2020.

The Military Spending Landmine

The CBO views the wars in Iraq and Afghanistan as either guaranteed victories or swift departures. Rather than basing estimates on historical data, the CBO chooses unrepresentative and misleading growth rates for defense spending. Making matters worse, a middle road or a war escalation isn't considered in the budget outlook. CBO estimates fall into three groups: optimistic, rosy, and snake oil.

Optimistic. The first forecast assumes funding will follow the annual growth rate for nominal GDP, estimated to be 4.4% per year.

That rate is highly unlikely. In practice, there is no correlation between defense spending and GDP growth. As wars wax and wane, so does defense spending, regardless of GDP. Since 1985, the ratio of defense spending to GDP has ranged from 3.0% to 6.1%, and since 2001, the trend has been upward, not flat as the CBO predicts.

Rosy. Under this assumption, total defense spending increases at the rate of inflation, which the CBO with a straight face assumes will average 1.1% for the next ten years. 

Snake Oil. The last CBO estimate freezes nominal spending at the 2010 level (with the exception of certain minor programs). Essentially, it would let inflation eat away at total military spending.

The CBO estimates of total military spending from 2010 to 2020 that come out of its three assumptions are:

  • 2010 Spending Frozen Estimate: $7.5 trillion
  • Inflation-Adjusted Estimate at 1.1%: $8.1 trillion
  • Nominal GDP Growth Estimate at 4.4%: $9.0 trillion

We have redone the CBO projections for military spending based on scenarios we consider more realistic. Without assuming any new wars, our most conservative projection still outpaces CBO estimates by nearly 3 trillion dollars. The three scenarios are:

Growing at the 1999-2009 rate. Military outlays grew at 8.5% during this period.

Growing at the 2002-2010 rate. Military outlays grew at 9.4%. 

New War rate. From 2002 to 2004, two wars pumped the growth rate for military spending to 14.06% per year. In this calculation, we assume a new war from 2011 to 2013 raising growth rates to that level; then growth returns to the 1999-2009 rate of 8.5%.

Our estimates of total military spending from 2010 to 2020 in our three scenarios are:

  • Growing at the 1999-2009 8.5% rate: $11.8 trillion
  • Growing at the 2002-2010 9.4% rate: $12.4 trillion
  • Growing at the New War rate: $13.5 trillion

Compared to the CBO’s largest estimate, $9.0 trillion, these projections are $2.8 to $4.5 trillion greater.

So what happens to the CBO’s projected deficits if the only revision we make is to assume military spending growth at the more plausible 2002 – 2010 rate of 9.4%? The U.S. government's average annual deficit over the next eleven years would exceed $1 trillion, and the accumulated deficit would exceed $11.6 trillion.

The Perfect Storm

So what happens if the government hits all three landmines – the revenue landmine, the interest expense landmine, and the military spending landmine?

If (1) federal revenues only increase by 50% from now until 2020, (2) interest rates rise by one percentage point per year, and (3) military spending continues to increase at the same rate as it did from 2002 to 2010, by 2020, the U.S. government would be running a deficit of $4.2 trillion per year.

And with the Perfect Storm's rising deficits, total debt would accumulate at an accelerating pace. In 2020 it would reach $50 trillion – double what the CBO is projecting.

Casey Chart

At $50 trillion, the national debt would be 208% of the CBO’s projected GDP for 2020, and the 2020 deficit would be $4.2 trillion, or 17% of projected GDP. The interest expense on U.S. debt alone would represent 12% of 2020 GDP and 55% of the total federal budget.

And this only takes into account the three potential landmines outlined in this article. There is much more that could materially change the landscape of the federal budget in the next ten years. The most notable factors not accounted for in our analysis are the entitlement programs – Social Security and Medicare – which are likely to make the government's debt problem significantly worse as the baby boomers start to retire. No matter how many times we shake the Magic 8-Ball, it keeps coming back with the same reading: “Outlook not so good.”

New Jersey Headed Toward Government Shutdown
by Steve Adubato

Governor Chris Christie unveiled a plan to cap property taxes as well as salary and benefit increases for police, firefighters and teachers in municipalities across the state. The cap is 2.5% for salaries and benefits, but if a town wants to spend more for its public employees by having the property taxes go up, they can vote on it. That plan makes sense to me.

Yet, the Democrats in the legislature opted to hold a press conference this week and not deal directly with Christie’s proposal. The Democrats knew that Christie’s plan was coming for weeks, but rather introduced their own plan which was clearly intended to curry favor with voters, particularly senior citizens. The Democrats say New Jersey should reinstitute the so-called millionaire’s tax, except this time, the income tax increase would actually be on those who earn a million dollars or more per year. We are talking about less than 1% of the population.

In these incredibly difficulty fiscal times, I happen to agree with the Democrats. Governor Christie has talked extensively about shared sacrifice, and he is right. While libraries, public universities and colleges, state aid to local government and schools, and healthcare services for the working poor are taking a hit, so should those who earn the most. I understand the argument about the wealthiest citizens leaving the state because of our high taxes, and the fact that the wealthiest are those who own the businesses that provide jobs. All that makes sense to me, except it just doesn’t feel right to require that everyone else take a big hit if those who earn a million bucks a year or more get off scot-free.

So, while I have agreed with the governor on virtually everything he’s proposed to get our fiscal house in order, we do have a fundamental disagreement on raising taxes on the wealthiest citizens of the state. Governor Christie has made it crystal clear that he will veto any effort to raise taxes. So, what are the Democrats really doing here? Frankly, they are trying to divert attention away from the fact that something has to be done to reign in the skyrocketing spending of local governments.

I’ve written and said it before that, in many ways, you can never pay firemen, cops and teachers enough. What they do is invaluable. But, we just can’t afford it any more. The biggest reasons for our property taxes going through the roof are the ever increasing contracts agreed to for public employees. These salary and benefit packages are just out of whack with the times. The Democrats in the legislature know that, but they argue that they weren’t consulted about the Christie plan to cap property taxes and employee salary and benefit hikes on the local level. That’s a crock. The Democrats knew it was coming, they new Christie was doing it and they knew the amount of the cap. But by saying they didn’t get a golden invitation, they think they can get away with not dealing with this problem head on.

Further, to divert even more attention from Christie’s plan, the Democrats talk about taking any new revenue brought in from the millionaire’s tax and using it to restore property tax rebates for senior citizens and increasing the subsidy for seniors who purchase prescription drugs. Well, who could be against that, right? But, here’s the catch. First, the Democrats know that Christie is never going to sign the millionaire’s tax hike. Second, if Democrats really cared about restoring Governor Christie’s proposed budget cuts, why are they only talking about senior citizens?

It is simple politics and pandering. Seniors vote and are organized. They are more aware than most voters, particularly about things that affect them. The Democrats said nothing about more state money for higher education or to restore proposed cuts in healthcare benefits for the working poor. What a joke. Could it be that the working poor and college students are not particularly well organized and don’t vote in high numbers? Imagine me being so cynical.

The Democrats in the legislature and Governor Christie are headed for an ugly and nasty stalemate. Christie’s not going to budge on any tax hikes and, if he doesn’t, the Democrats are not going to pass a budget or agree to any of the governor’s proposals to cap municipal spending until he capitulates on the millionaire’s tax. So what then? I’d like to be optimistic, but it’s looking more and more like state government in New Jersey is heading for a shut down on the last day of June when, constitutionally, a budget is supposed to be passed into law. At that time, the government will come to a grinding halt. Nothing good’s going to come from that and each side is going to blame the other. So, where does that leave the rest of us? Up a very ugly creek without a paddle or anything that will help us tread water. Isn’t New Jersey great?

Busted Budget For Mayor Bloomberg
by Michael Howard Saul

City spending most directly under New York Mayor Michael Bloomberg's control is forecast to exceed its budget by 18% this year despite his calls for austerity in city government. The budget for the mayoralty for the fiscal year ending June 30 is $83.3 million, as approved by the City Council and signed into law by Mr. Bloomberg. But city budget records show it is forecast to spend $98.5 million, 8% more than the previous year.

The mayor's office attributed the higher spending this fiscal year, in part, to Mr. Bloomberg's decision to award an 8% raise to managers and nonunion employees. The salary hikes covered virtually all of Mr. Bloomberg's staffers at City Hall. First Deputy Mayor Patty Harris's salary rose, for example, to $245,760 from $227,219. The raises, though, did not affect the mayor's salary, which is set by law at $225,000. Mr. Bloomberg, a multibillionaire, accepts $1 a year. "The city has gotten more and more out of the office—including the nation's most comprehensive sustainability plan and efforts that have reduced the number of illegal guns on our streets," said Mark LaVorgna, a spokesman for Mr. Bloomberg.

In recent years, the mayor's office has expanded its scope, contributing to the rise in spending. Between 2004 and 2010 the mayoralty's spending rose 42% as the number of full-time employees increased 16%. Most notably, in April 2007, the mayor released PlanNYC, a comprehensive, and expensive, plan to reduce the city's greenhouse-gas footprint while preparing for a population growth of one million. In addition, during the mayor's second term, he launched a national campaign to curb gun violence, expanded the office that vets city vendors and beefed up the office that cracks down on illegal hotels.

Mr. LaVorgna estimated the salary increases accounted for a third of the higher spending this year. The rest, he said, was the mayoralty using state and federal grant money that became available throughout the year. "When state or federal dollars become available, we put them to use, providing services to the city without spending city tax dollars," Mr. LaVorgna said. He said that when those grants are taken into account, the city-funded portion of the mayoralty's budget went up only 4% from last year. Mr. LaVorgna said the mayoralty today does more with fewer employees and spends less than Mr. Bloomberg's predecessors.

He also noted that two offices—including the Office of Management and Budget and the Office of Labor Relations—are listed as part of the mayoralty. But both have their own agency heads, giving them a bit more autonomy from Mr. Bloomberg. But Mr. Bloomberg's critics said the higher spending is particularly galling, especially given how he lambasted former Public Advocate Betsy Gotbaum this week for overspending her budget during the final six months of her term. On Wednesday, Mr. Bloomberg called Ms. Gotbaum's spending an "outrage." "It's hypocritical," Ms. Gotbaum said in an interview. "What is outrageous is the increase in the size of his budget when we are supposed to be terribly concerned about austerity."

"Everybody criticized Gov. [David] Paterson for the raises," she said, referring to Mr. Paterson rescinding raises he gave to five aides. "What about Mayor Bloomberg? It's ridiculous. I flat out don't get this." This week, Public Advocate Bill de Blasio, the city's watchdog and the first in line to the mayoralty, publicly tangled with Mr. Bloomberg after the mayor proposed cutting the budget to his office 11% on top of a nearly 40% cut the previous year. Mr. de Blasio is lobbying the mayor and the City Council to restore his office's funding. "I don't begrudge other elected officials what it takes to run their offices effectively, but I do believe we should all live by one standard," Mr. de Blasio said.

When it comes to the entire city budget, aides to Mr. Bloomberg pointed out that the $62.9 billion spending plan for the fiscal year beginning July 1 is balanced in large part by $3.3 billion of surplus rolled over from this year. The surplus comes from three years of budget cuts ordered by Mr. Bloomberg, aides said. Doug Turetsky, a spokesman for the nonpartisan Independent Budget Office, said total city spending has grown from 2004 through 2009 by 27% to $60.6 billion. Spending by the mayoralty has grown at roughly the same rate. "When you look at the growth in spending, much of it is in personnel costs, which is likely a key contributor to the overall growth in spending in the mayoralty," he said.

Greece Could Happen Here
by Napoleon Linardatos

Eli Lehrer in a recent post argued that a crisis similar to the one that Greece faces now is unlikely in America because the U.S. has strong fundamentals, much lower debt than Greece, Americans work hard, the Fed can manipulate the dollar and the U.S. government has more political legitimacy.

Of all the points the only one that works in favor of Lehrer’s argument is the ability of the U.S. to manipulate its currency. Being able to devalue the dollar gives America a more politically safe way of managing a debt crisis. Nevertheless such a tool might mitigate a crisis but might not be able to halt many of the negative consequences.

At this point the Greek crisis becomes relevant to the United States. The Greek government is not any less legitimate in the eyes of its citizens than the American one. Greece has been using the parliamentary system for many decades and the public is quite used to it – so much so that the Greeks don’t like the idea of making it more representative. The government is as legitimate as the Clinton presidency was (he never got a majority of Americans voting for him) or the first Bush presidency (which came second in the vote count) or the filibustering U.S. Senate.

Greece used to be very productive as well. In the 50s it was only second to Japan in economic growth and in the 60s and 70s with a fast developing tourism industry it experienced high growth as well. Greece’s debt in 1981 was 31.2% of its GDP, a number that would be desired by even the most responsible nations today.

Greece in the 80s started to do what America commenced in the 2000s under Bush and now the Obama administration: transferring income from future generations to itself with a vengeance. The most destructive effect of debt wasn’t the magnitude of the debt per se but the socioeconomic consequences and the revolution in social norms and expectations. When I was starting primary school in the early eighties young people wanted to open their own business. When I was finishing high school near the mid-nineties young people were dreaming of a government job. It was a change so roundabout but universal that only in retrospect one may realize the rapidity of its progress.

As debt was financing the dependency habits of the general population it was also creating an infantilized political class that was unable to govern and manage any crisis effectively, be it natural, diplomatic or political. Whatever the political costs of a mismanaged crisis, the government always expected to be able to recover by throwing money in some new government handout.

Debt growth had the effect of robbing society of the ability to deal with the consequences of a debt crisis, leaving on the one hand, a society pretty sclerotic in its expectations, and on the other, a political class exceedingly incompetent when it comes to governing.

So yes, Greece is not able to manipulate its currency. This is a major disadvantage. Nevertheless, the situation could have been manageable or at least have had a reasonable hope for success if Greece had not made it so difficult for itself.

As the global sovereign debt bubble gathers more attention by the day, issues like that will become central in European politics. European political classes and societies might find themselves awfully lacking in dealing with a dramatic swift change in expectations about sovereign debt. A revolution in investors’ confidence and perception could expose the ominous contradictions and inadequacies of the European welfare model that has been decades in the making.

The American governing majorities seem very eager to follow the European path while ignoring the consequences of such a choice. Not only will they make America vulnerable to present financial crises but they will also create the conditions for almost certain mismanagement of future ones. If there is no change of the present course the future may look very Greek.

U.S. Home Seizures Reach Record as Recovery Delayed
by Dan Levy

U.S. home foreclosures climbed to a record in April, a sign that government mortgage relief efforts have yet to turn the tide of property seizures, according to a report by RealtyTrac Inc. “Right now it appears that the banks are focusing on processing the loans already in foreclosure, and slowing down the initiation of new foreclosure proceedings as a way of managing inventory levels,” Rick Sharga, RealtyTrac’s executive vice president, said in an e-mail. “We’ll probably see this trend continue for a while.”

Bank repossessions rose to 92,432 in April, up 45 percent from a year earlier, Irvine, California-based RealtyTrac said today in a statement. Foreclosure filings, including default and auction notices, fell 2 percent to 333,837. One out of every 387 households received a filing. Unemployment of 9.9 percent and a rising percentage of homes worth less than the mortgages on them are combining to thwart a housing recovery, according to RealtyTrac. About 5 million delinquent loans will probably end up in the foreclosure process in addition to the 1.2 million homes already taken back by lenders, Sharga said. Defaults may not peak until 2011 depending on how lenders process them, Sharga said. “The underlying conditions -- mostly unemployment and millions of ‘underwater’ loans -- haven’t improved,” he said.

Monthly foreclosure filings will remain “at a very high level that will not drop off in the near future,” James J. Saccacio, RealtyTrac’s chief executive officer, said in the statement. April marked the 14th straight month that foreclosure filings exceeded 300,000. More than a fifth of U.S. mortgage holders owed more than their homes were worth in the first quarter, according to The proportion rose to 23 percent from 21 percent in the previous quarter, the Seattle-based property service said this month. Home prices may fall as much as 5 percent through the first quarter of 2011, according to forecasts from IHS Global Insight of Lexington, Massachusetts. Still, economist Patrick Newport said foreclosures may not get much worse. “The key thing is fewer problem loans are going into the pipeline,” he said.

Default notices went to 103,762 properties, down 27 percent from April 2009 -- the peak month with 142,000 -- and down 12 percent from March, RealtyTrac said. The numbers show fewer properties entering the foreclosure process as those that fell into delinquency earlier in the housing crisis finished the legal cycle. Nevada had the highest foreclosure rate for the 40th straight month. One in every 69 households got a notice, more than five times the national average. Bank seizures rose 57 percent from a year earlier and filings were little changed, RealtyTrac said. Arizona had the second-highest rate, at one in 169 households, or more than twice the U.S. average. Filings fell 1 percent from a year earlier. Florida ranked third, with one in 182 households. Filings there dropped 25 percent. California had the fourth-highest rate, at one in 192 households, and Utah was fifth at one in 221, RealtyTrac said. Idaho, Michigan, Illinois, Georgia and Colorado also ranked among the 10 highest rates.

Five states accounted for more than half the total filings in the U.S., led by California’s 69,725. That was down 28 percent from a year earlier and 25 percent from March. Florida ranked second with 48,384 filings, down 25 percent from April 2009 and 18 percent from March. Michigan was third at 19,173, a 77 percent increase from a year earlier. Illinois had 18,870 filings and Nevada had 16,217. Arizona, Georgia, Texas, Ohio and Virginia rounded out the top 10, RealtyTrac said. The company sells default data collected from more than 2,200 counties representing 90 percent of the U.S. population. U.K. home repossessions declined 7.5 percent in the first quarter as record-low interest rates helped more households meet their payments, according to the Council of Mortgage Lenders.

US faces same problems as Greece, says Bank of England
by Edmund Conway

Mervyn King, Governor of the Bank of England, fears that America shares many of the same fiscal problems currently haunting Europe. He also believes that European Union must become a federalised fiscal union (in other words with central power to tax and spend) if it is to survive. Just two of the nuggets from one of the most extraordinary press conferences I have been to at the Bank.

What with all the excitement yesterday over our new Government, I never had time to remark on the Inflation Report press conference. Most of our attention was on what King said about the Government’s fiscal plans (a ringing endorsement). But, as Jeremy Warner has written in today’s paper, it was as if King had suddenly been unleashed. Bear in mind King is usually one of the most guarded policymakers in both British and central banking circles. Not yesterday.

It isn’t often one has the opportunity to get such a blunt and straightforward insight into the thoughts of one of the world’s leading economic players. Most of this stuff usually stays behind closed doors, so it’s worth taking note of. And I suspect that while George Osborne will have been happy to hear his endorsement of the new Government’s policies, Barack Obama and the European leaders will have been far less pleased with his frank comments on their predicament.

The transcript and video are online at the Bank’s website, but below are the extended highlights, all emphasis mine. Well worth checking out.

America, and many other large economies including the UK, share some of the same problems as Greece with its public finances:

Every country around the world is in a similar position, even the United States; the world’s largest economy has a very large fiscal deficit. And one of the concerns in financial markets is clearly – how will this enormous stock of public debt be reduced over the next few years? And it’s very important that governments, both here and elsewhere, get to grips with this problem, have a clear approach and a very clear and credible approach to reducing the size of those deficits over, in our case, the lifetime of this parliament, in order to convince markets that they should be willing to continue to finance the very large sums of money that will be needed to be raised from financial markets over the next few years, at reasonable interest rates.

On why Europe will have to become a federalised fiscal union:

I do not want to comment on a particular measure by a particular country, but I do want to suggest that within the Euro Area it’s become very clear that there is a need for a fiscal union to make the Monetary Union work. But if that is to happen there needs to be also a mechanism to enable other countries that have lost competitiveness to regain competitiveness. That requires actions, probably structural reforms, changes in wages and prices, in the countries that need to regain competitiveness. But it also needs a solid and expansionary state of domestic demand in the stronger economies in Europe.

On the deficit:

The most important thing now is for the new government to deal with the challenge of the fiscal deficit. It is the single most pressing problem facing the United Kingdom; it will take a full parliament to deal with, and it is very important that measures are taken straight away to demonstrate the seriousness and the credibility of the commitment to dealing with that deficit.

Why it is right that the Government wants to cut spending as soon as this year:

We see the recovery beginning to take place, and we expect that the pace of that recovery will pick up. But we’ve also seen the market response in the past two weeks, where major investors around the world are asking themselves questions about the interest rate at which they are prepared to finance trillions of pounds of money that will need to be raised on financial markets in the next two to three years, to finance government requirements around the world. And that I think has been a sobering reflection of what can happen if you don’t make very clear at the outset – I think markets were not expecting any action before the election. After the election they need and they want a very clear, strong signal and evidence of the determination to make it work.

And I think that it’s quite difficult to make credible a commitment to fiscal consolidation if all the measures are somehow in the future. You need to start and get on with it….

I don’t believe that the scale of those measures, the £6bn cuts, is likely to be such as to dramatically change the outlook for growth this year. And as I said earlier in response to answers, I think it does reduce some of the downside risks by taking away some of the market risk that might have occurred if there’d been a sharp upward movement in yields.

On Greece:

I think the lesson from Greece is that, if the problem had been dealt with three months ago, it would not have become as serious as it subsequently became. And I think the important thing now is that Greece has been dealt with a major IMF and European Union package…

But those measures provide only a window of opportunity. They do not affect the total amount of debt, in themselves which countries around the world have to repay. The markets, which some of our European partners like to describe as speculators causing difficulty, are the very same markets where the public sector is looking to provide trillions of pounds of support to finance public debt around the major countries in the world over the next few years.

What matters is that those investors are prepared to buy government debt at interest rates which make it tolerable for the countries concerned. And that is why it is important for each and every country to demonstrate that they are on top of a programme for their country to reduce the fiscal deficit to a sustainable path.

That has been the big message, but within the international community I think there is a very clear understanding that the package of financial support which was made available at the weekend is not an underlying solution to the problem. It provides a window of opportunity which gives governments the chance to put their house in order; and it gives the international economic community a chance to talk about what I think – and have always said for some considerable time – to be one of the major issues facing us, which is the need to rebalance demand around the world economy.

On how worried international leaders are about the economy and Europe’s fiscal problems:

As you know international conversations proceed very slowly – too slowly usually. In 2008 there was an exception.

I think the mood and manner of the G7 meetings at the IMF in October 2008 was very different, and that people did come together and recognise that, unless they worked together, we would all be facing an extraordinarily serious position. That’s pretty well documented in Hank Paulson’s memoirs of the period.

But I think what I heard on the telephone conversations that I was part of at the weekend, it was slightly reminiscent of that: a recognition that the problems are far too serious for countries not to work together. After all, dealing with a banking crisis was difficult enough, but at least there were public sector balance sheets onto which the problems could be moved.

Once you move into the sphere of concerns about sovereign debt, there is no answer; there’s no backstop. And it is very important therefore that we hit these problems on the head now, put in place credible solutions to prevent the problems becoming worse.

And I detected at the weekend, in the conversations that I spent hours listening to on the telephone, that this sense of the need to work together was there again….

It is absolutely vital, absolutely vital, for governments to get on top of this problem. We cannot afford to allow concerns about sovereign debt to spread into a wider crisis dealing with sovereign debt. Dealing with a banking crisis was bad enough. This would be worse.

Why it’s too early to start raising UK interest rates, but not too early to be worried about inflation:

If you mean a tightening of monetary policy, then at some point it certainly will come. And when it comes it will be very welcome because it will be a sign of the strength of the UK economy, and the fact that we feel we will need to tighten monetary policy because we think the prospect for inflation is that it will not be to fall below the target as a result of so much spare capacity. So I think we would look forward to that time when it will come, because it will be a reflection of strength of the economy.

We’re not at that point now; I don’t know when it will come; that’s something we will judge month by month.

I can assure you the MPC is very concerned about what’s been happening to inflation. I do think that we have seen a sequence of shocks, price level shocks, which have inevitably raised inflation. We have also seen in the past three years two episodes now in which inflation did go up quite significantly and then came down quite sharply. And I think our judgement is that next year we will see a repeat of that. If these effects are not repeated, if we don’t see further increases in indirect taxes, or oil prices, then those shocks will not be there and inflation will start to come back and reflect the extent of spare capacity.

Will The U.K. Be The Next European Nation To Experience A Massive Debt Crisis?
Now that the Greek debt crisis has been "fixed" by a gigantic pile of more debt, many are wondering which European nation will be next to experience a massive debt crisis.  Increasingly, all eyes are turning to the U.K. and their public debt that is spiralling out of control.  The U.K. government's deficit is projected to be approximately 13 percent of GDP in 2010, which is even worse than Greece's 12.5 percent figure. 

Right now the public debt of the U.K. is "only" at 68 percent of GDP, but three years ago it was sitting at about 40 percent, so as you can see the national debt of the U.K. is absolutely exploding in size.  In fact, it is now being projected that the public debt of the U.K. will exceed 100 percent of GDP within the next three years.  Considering the fact that citizens of the U.K. are some of the most highly taxed people in the world already, there just is not much room for raising more revenue. 

So obviously there is a problem. 

A massive, unchecked, out of control problem that threatens to blow out the entire U.K. economy. 

And considering the fact that it took just about everything that Europe could muster to bail out poor little Greece, how in the world is Europe going to be able to bail out the U.K. when their debt crisis violently erupts?

If Greece almost brought down the euro and the financial system of Europe, then what would a financial implosion in the U.K. do? Considering the fact that the Greek economy is approximately 16% the size of the U.K. economy, it is very sobering to think what a "Greek style" debt crisis in the U.K. would mean for the entire world.

But if something is not done rapidly it will happen. Just consider the following charts.... 

Now how in the world do you go from a deficit that is between 2 and 3 percent of GDP in 2007 to one that is above 11 percent in 2009?  That takes some serious financial mismanagement.  Not only that, but as we mentioned earlier, this year the deficit is projected to be approximately 13 percent of GDP.  That is a level that is catastrophic.

Kornelius Purps, the fixed income director of Europe's second largest bank is very open about the fact that he believes that the U.K. is likely the next European nation that will face a very serious debt crisis....

"Britain's AAA-rating is highly at risk. The budget deficit is huge at 13% of GDP and investors are not happy. The outgoing government is inactive due to the election. There will have to be absolute cuts in public salaries or pay, but nobody is talking about that."

In fact, Morgan Stanley has already warned that there is a very strong probability that some of the rating agencies may remove the U.K.'s AAA status before 2010 is over. If that happened, it would make the crisis that we just saw in Greece look like a Sunday picnic.

So what must be done? Well, already world financial authorities are calling for "austerity measures" and deep budget cuts to be implemented in the U.K., but the reality is that those moves will cause deep economic pain.

In fact, Bank of England governor Mervyn King recently warned that public anger over the "austerity measures" that soon must be implemented in the U.K. will be so painful that whichever party is seen as responsible will be out of power for a generation.

The cold, hard reality is that the U.K. is in for economic pain in any event.  Either they cut the budget and implement severe "austerity measures" which will hit people really hard economically, or they continue on the current course and risk a much worse version of what just happened in Greece.

Not that the rest of the world should be gloating about what is going on in the U.K. either.

The financial situation in Japan is even worse than what the U.K. is dealing with, and the United States is going to have the biggest economic downfall of them all one of these days.

As we wrote about yesterday, the sad truth is that the governments of the world are rapidly running out of money and are drowning in debt.  It is a gigantic mess, and the term "sovereign debt crisis" is going to pop up in the news very regularly from now on. 

You see, it is not just the financial systems of the U.S. and the U.K. that are broken.  The entire world financial system is fundamentally flawed and is doomed to failure.

Right now the central banks of the world can do their best to try to hold things together with a tsunami of debt and paper money, but they are not going to be able to keep up this balancing act forever. When it does all start coming apart and the dominoes do start falling, it is going to be a complete and total nightmare.  Paper currencies around the globe will lose value at breathtaking speeds as central banks flood economies with cash in an attempt to stop the madness.

But more debt and more paper never solves anything.  All it does is make the long-term problems even worse. When the tipping point comes, things are going to move fast.  Let's just hope that we all have a good bit more time to prepare before that happens.

Deficit Cuts Promised in Britain
by Julia Werdigier and Landon Thomas Jr.

The task of bringing Britain’s record budget deficit under control is now in the hands of the country’s youngest chancellor of the Exchequer in more than a century. In his first pledge at the helm of the treasury, the chancellor, George Osborne, said Wednesday that he planned to significantly accelerate efforts to reduce spending. Mr. Osborne, 38, and his Conservative Party, led by Prime Minister David Cameron, had to shelve some of their economic proposals, including a plan to raise the threshold for inheritance tax, to be able to form a coalition government with the Liberal Democrats.

Now Mr. Osborne is expected to present within 50 days a summary of emergency policies backed by both coalition parties and identify £6 billion ($8.9 billion) in spending cuts. The governor of the Bank of England, Mervyn King, said Wednesday that he was very pleased to support the measures the government wants to put in place now to deal with the deficit. But the markets sent a more mixed message: stocks gained in London but the pound dropped against major currencies after Mr. King warned that Europe’s sovereign debt crisis could pose a risk to Britain’s fragile recovery.

Mr. Osborne got his first reminder of the size of his task when the Office of National Statistics reported Wednesday that the number of unemployed Britons rose to 2.51 million in the first quarter, the highest level in 16 years. Some investors raised concerns about Mr. Osborne’s ability to repair public finances, citing his lack of experience. He’s very inexperienced, but the good news is that he has a good team around him, said Justin Urquhart Stewart, a founder of Seven Investment Management. One member of that team is Vince Cable, a Liberal Democrat and now secretary of state for business, innovation and skills. His new cabinet post makes him responsible for banks and the financial markets.

The two men make an odd couple. Mr. Cable is 29 years older than Mr. Osborne and a former chief economist at Royal Dutch Shell. He entered politics as a member of the Labour party in the 1970s before moving to the Liberal Democrats. More recently, he won credit among investors for warning about Britain’s growing debt a year before the financial crisis started. Mr. Osborne entered politics in 1994 and became the Conservative Party spokesman for the economy in 2005. While in opposition, he repeatedly criticized Gordon Brown, the former prime minister, for postponing spending cuts until the economy had fully recovered.

Mr. Osborne said Wednesday that he entered the job at a time of enormous economic challenges and that there would be a significant acceleration in the reduction of the budget deficit. He also pledged to modify the tax system while making long-term structural changes to the banking system and to education and welfare. Now is the time to roll up our sleeves and get Britain working, he said.

The government is under pressure to produce results. Standard & Poor’s and other credit rating agencies have said that Britain’s rating hinges on whether the political leaders can present realistic and effective measures to reduce the budget deficit. In a recently released report on sovereign debt, the Bank for International Settlements concluded that, factoring in the rising cost of age-related expenditures like health care and pensions, Britain’s debt as a percentage of gross domestic product would rise to 200 percent by 2020 from the current level of 62 percent if no immediate steps were taken.

But for Mr. Osborne, the concern is less about what happens in 2020 and more about bringing Britain’s deficit of 12 percent of G.D.P. down to the low single digits in time for the next election, whenever it comes. Is it possible? Yes, it is, but it is going to make him a very unpopular man, said Tim Morgan, the head of research for Tullet Prebon, a British broker. If he is given a fixed term and knows that he has the time to inflict difficult measures now and get the benefits down the road, it is possible, Mr. Morgan said. He certainly has the backbone.
While he may be young, Mr. Osborne is recognized for having a very forceful, if not domineering, personality, as well as a tendency to rub people the wrong way.

Bankers in the City of London, who generally incline toward a Tory world view of the world, have been taken aback by Mr. Osborne’s inclination to turn a discussion about the debt and deficits into one about political tactics. But given his status as Mr. Cameron’s main political adviser, this may not be surprising. And in today’s environment, currying favor with investment bankers will not be a top priority for Mr. Osborne.

Richard Reeves, the head of Demos, a London-based research group where Mr. Osborne is an advisory board member, said that these qualities — in particular his proven ability as a parliamentary tactician and operator — would serve him well in pushing through budget cuts. He is a very good political salesman, Mr. Reeves said.

UK trade deficit widens sharply
by Angela Monaghan

Britain's trade deficit widened more sharply than expected in March, fuelling fears the economy may not be in store for the export-led recovery that has been widely hoped for. The goods deficit rose to £7.5bn from £6.3bn in February, as imports surged but exports barely rose. Economists had predicted a much more modest rise to £6.4bn. The figures, published by the Office for National Statistics (ONS), were a sign that net trade acted as a drag on overall gross domestic product growth in the first quarter.

"It remains very disappointing that net trade is still not contributing to UK growth but detracting from it," said Howard Archer, chief UK economist at IHS Global Insight. "We keep hoping that improving net exports will help the economy rebalance, but it is proving to be a frustrating wait." The disappointing data helped to push the pound down 1.8 cents to close at $1.4678. A £1.4bn or 5.2pc jump in imports was driven largely by car parts and part finished goods, which helps to explain the sharp jump in manufacturing output in March, reported by the ONS on Tuesday.

Exports of British goods lagged however, rising by just £200m or 1pc in March. This will come as a disappointment to the new government as it prepares to wield the axe on public spending, hoping that the private sector will be able to support growth. "It remains hard to see what part of the economy is in a fit enough state to compensate for the looming fiscal squeeze," said Vicky Redwood, senior UK economist at Capital Economics. The British Chambers of Commerce said the data were a reminder that companies urgently needed short-term trade finance support from the government, to allow exporters to get their goods and services out to the global economy, to an extent which would allow meaningful recovery.

Economists said the country's exporters should be benefiting from the weak pound, because it makes British goods cheaper abroad. However, benefits have partly been restrained by subdued growth in the UK's main export markets. "The report highlights again that although the weakness of the pound improves competitiveness, unless this is accompanied by an expansion in overseas demand, then there will be little if any improvement in the performance of exports. With the eurozone the UK's main trading partner, still sluggish exports are unlikely to surge any time soon," said Alan Clarke, economist at BNP Paribas. Ernst & Young ITEM Club said another explanation could be that exporters are using the sterling's weakness to increase their margins rather than capture market share.

UK pensions in deficit as stock market falls hit asset values
by Jamie Dunkley

The UK's largest defined benefit schemes fell back into the red last month as falling equity markets hit the value of pension assets. Research conducted by the Pension Protection Fund showed the aggregate deficit of the UK's largest 7,400 schemes swung to a £2.2bn shortfall from a £300m surplus in March - the first since before the financial crisis in June 2008. The overall deficit was driven by a fall in the value of schemes' assets, which dipped by 0.2pc due to equity market falls and a slight rise in pension liabilities. Overall, 69pc of defined benefit pension schemes now faced a deficit at the end of the month, according to the pensions lifeboat.
Defined benefit pensions, which include final salary schemes, have been in the spotlight in recent months as companies looks to reduce the impact of rising life expectancy and investment volatility on their balance sheets. The lucrative retirement schemes are being replaced with less generous defined contribution schemes, which leave individuals shouldering the risk. Last month, Aviva - one of the UK's largest pensions providers - dealt a heavy blow to almost 8,000 of its employees by announcing plans to close its final salary pension scheme. The fund closed with a deficit of £3bn, according to the insurer.

Five million British home owners unable to afford interest rate rise
by Myra Butterworth

More than five million home owners will be unable to afford a rise in interest rates and will be in danger of being evicted from their homes, charities have warned. Despite repossessions falling slightly at the start of the year, charities and housing experts warned home owners remained vulnerable to a rise in interest rates which would put additional pressure on their finances. Research suggested as many as one third of home owners would not be able to afford a rise in their household budgets.

Campbell Robb, chief executive of Shelter, said: Some 5.4million mortgage holders haven’t even thought about how they will pay their mortgage if interest rates go up. We know for a significant number of people, just keeping on top of their current mortgage repayments is a constant struggle. While repossessions are lower than originally feared, home owners with tracker mortgages will see their monthly repayments rise if interest rates go up. Many borrowers who have come to the end of their original deal have already seen their costs increase. Economists also warned of wage freezes, rising debt levels and tight lending conditions.

Some 9,800 people lost their homes during the three months to the end of March, 8 per cent fewer than the previous quarter and 26 per cent below the figure for the same period a year earlier, according to the latest repossession figures published by the Council of Mortgage Lenders. The number of people in mortgage arrears also dropped, with historically low interest rates helping home owners to keep up with their monthly payments. The Bank of England has kept interest rates at 0.5 per cent for more than a year, but they are widely predicted to rise next year.

Howard Archer, an economist at Global Insight, said: Any rise in interest rates would be liable to send a significant number of financially stretched homeowners over the edge. And Ed Stansfield, chief property economist at Capital Economics, said: In truth, the outlook is finely balanced. Many households are struggling to make ends meet.

Europe faces an age of austerity
by Victor Mallet

Amid cries of outrage and expressions of disbelief, a new age of austerity has arrived in Europe.

As governments across the eurozone impose cuts on a scale unseen in decades, Greece – widely seen as the centre of the crisis – has already seen violent demonstrations and general strikes. Now there is growing concern that such displays of public anger will become more widespread.

Spanish trade unions were on Thursday threatening nationwide walkouts and protests. The shock is palpable in countries which have moved from poverty to prosperity during the decades of almost uninterrupted growth since the second world war and have always enjoyed the material benefits of European Union membership.

Two things are hard to believe: I can get laid-off and that I’ll have to work to 65 to get a pension, says Yannis Adamopoulos, who is a security guard at a state-controlled Greek corporation. Another Greek, Fotis Magriotis, a self-employed civil engineer, has put his sports utility vehicle up for sale. Work is hard to find and taxes on petrol have twice been increased. There’s no alternative to downsizing, he says.

Such statements provoke grim humour in the northern half of Europe, where job insecurity, retirement at 65, small cars and high petrol prices are not unusual.

In the end it was the financial markets, not the austere German paymasters of the eurozone, that exposed the vulnerability of Greece, Spain and Portugal and triggered a €750bn rescue package unveiled at the weekend.

The emergency bail-out, which aims to free up sovereign debt and interbank markets in Europe, came with strings attached by the European Union, the International Monetary Fund and the US: after the two-year fiscal spending binge that followed the financial crisis of 2008 and made life easier during the recession, governments will be obliged to cut their deficits, and cut them hard.

For the first time since EU aid started flowing freely in the 1980s, Greeks face a significant drop in living standards, with the economy set to shrink 4 per cent this year and another 2.6 per cent in 2011.

The new reality being imposed by the Greek socialist government – a 12 per cent wage cut for civil servants, reductions in pensions and looming job losses in public sector corporations – stuns workers in the bloated state sector.

A similar, if less severe, adjustment is being imposed by the socialist government of Spain. José Luis Rodríguez Zapatero, prime minister, is angering former allies in the trade union movement by going back on his promises and cutting civil service pay by 5 per cent from next month as part of a drive to control the deficit.

Orthodox economists, and Mr Zapatero’s conservative opponents, say the government and the Spanish people have been slow to grasp the importance of having a dynamic private sector to pay for the welfare state. The Spanish want to think like Cubans and live like Yankees, says Lorenzo Bernaldo de Quirós, an economist and business consultant.

In the north, the Germans have been living up to their reputation as diligent workers prudently aware of the eternal trade-off between services and taxes. Many voters in the North Rhine-Westphalia state election last Sunday said they would rather pay more taxes than see their local swimming pool or kindergarten close.

Germans are far more in favour of stability and austerity and not for deficit spending, says Jürgen Falter, professor of political science at Mainz university. It is part of the collective memory, going back to the hyperinflation that wiped out their grandparents’ savings in the 1920s.

The north-south divide, however, is not as stark as it first appears.

France straddles north and south and could face mass protests over a three-year government spending freeze. Ireland and the UK in north-west Europe were among the most profligate European nations as bubbles in housing and financial services swelled unsustainably in the heady years before the collapse of Lehman Brothers.

In Dublin at least, the harsh cuts unveiled to restore order to public finances are beginning to bite. Around the corner from Government Buildings, John Myley, a shoe repairer, complains that a lot of his customers are finding it hard to pay. Everyone’s trying to keep up appearances. But at the moment, I tell you, I’ve got 14 pairs of shoes on tick [credit], for people who can’t pay until they’re paid at the end of the month.

The former and the new British governments have proposed sweeping cuts to public expenditure but the issue was not much discussed in the general election campaign and details remain secret. There is no means yet of knowing how well Britain will accept its fate. But even small cuts of £500m to university expenditure this year brought howls of protest.

Nor are southern Europeans necessarily as profligate as some suggest.

Italians feel their belts have been tightened for some time, although the word austerity has not entered Italy’s political vocabulary because Silvio Berlusconi, prime minister, likes to keep the mood upbeat. Over the past five years both centre-left and centre-right governments have kept a fairly tight lid on spending, keeping Italy’s ratio of budget deficit to gross domestic product within manageable limits.

In Portugal, the economically conservative inhabitants are responding to tough austerity measures by saving, prioritising mortgage payments and defending jobs.

As in previous recessions, when thousands worked for months without pay, the country has opted for resilience rather than revolt. Domestic savings are up and defaults on mortgage loans remain low.

After a decade of the lowest economic growth in the eurozone, however, the Portuguese face another four years of belt-tightening with growing frustration.

The same is true of most of western Europe. Each eurozone country is taking the measures it must take or can take – from pursuing tax cheats in Spain and Greece, to reducing child benefits in Ireland and controlling public spending almost everywhere – to reach a budget deficit target of 3 per cent of GDP in the next three or four years.

The danger is that a Europe hounded by market forces has acted too late, and that these sharp doses of austerity will stifle the first stirrings of new economic growth and so worsen budget problems in the future by provoking a relapse into recession.

A lot of Spaniards have realised this week that the money isn’t ours, it’s borrowed from others and we do not have sovereign powers, says one private equity investor in Madrid. What has to be done in Spain is so serious that it makes you panic to think about it.

Volcker Says Debt Crisis Threatens Euro 'Disintegration'
by Simon Clark

Former Federal Reserve Chairman Paul Volcker said he’s concerned that the euro area may break up after the Greek fiscal crisis that sparked an unprecedented bailout by the region’s members. “You have the great problem of a potential disintegration of the euro,” Volcker, 82, said in a speech in London yesterday. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.”

European leaders pledged a rescue package of almost $1 trillion this week to counter a mounting debt crisis and restore confidence in the currency. Former U.S. Treasury Secretary John Snow said this week the euro may need a common fiscal policy to survive, a comment echoed by Norman Lamont, who was U.K. finance minister when Britain opted out from the euro in 1992. “Will economic and financial distress finally be resolved by looking toward more integration in a closely integrated Europe, politically as well as economically?” said Volcker, who chairs President Barack Obama’s Economic Recovery Advisory Board. “I do have my hopes, as a believer in the euro.”

The aid package also involved the European Central Bank, which intervened in debt markets after a rout in bonds across the euro region’s periphery. The European Commission in Brussels said it would “strengthen” its deficit oversight and “align national budget and policy planning” under a system of economic policy coordination. “For the euro to be able to survive long term, fiscal consolidation of some kind -- tax policy consolidation, fiscal policy consolidation -- is probably necessary,” Snow said. Bank of England Governor Mervyn King also commented on the crisis, saying two days ago that it is “very clear” that the currency region needs a fiscal union “to make the monetary union work.”

Soaring bond yields on concern that Greece’s fiscal crisis would spread threatened to shut Spain and Portugal out of debt markets and sparked a weekend of talks with euro-region finance ministers and central bankers. While the resulting 750 billion-euro ($940 billion) financial aid package has calmed bond markets, the euro today broke through the 14-month low reached last week before European leaders unveiled the bailout plan. Deutsche Bank AG Chief Executive Officer Josef Ackermann said in an interview with Germany’s ZDF broadcaster aired late yesterday that Greece may not be able to repay its debt in full, arguing it would require “incredible efforts.”

The extra yield that investors demand to hold 10-year Spanish bonds over German bunds, Europe’s benchmark, has narrowed to 99 basis points from 164 basis points on May 7. Spreads on Portuguese debt have fallen by more than half to 163 points. The Greek spread was 442 basis points yesterday after touching 973 points last week. Volcker expressed hope that the euro will survive. “There is strong opinion to keep it going,” he told journalists after his speech at Mansion House, the residence of the lord mayor of the City, London’s financial district. “That does require, I think, changes in the structure of European economic policy.”

Closer fiscal union is unlikely to be welcomed in some countries. Ireland’s largest opposition political party said this week the commission proposals give the EU a “final veto” over Irish fiscal policy. Prime Minister Brian Cowen rejected the comments and said that there “will never be a threat” to national tax control. Europe has so far been well-served by the euro, Volcker said. “If you didn’t have that common currency in Europe, they would have bigger problems than they have now.” He declined to elaborate on what European governments should do as he left and walked across the street to visit the Bank of England. “That is up to European governments,” he said. “The nature of the problem does not lend itself to one-word sound bites.”

Nicolas Sarkozy threatened to pull France out of the euro
by Giles Tremlett and Richard Wray

French president Nicolas Sarkozy threatened to pull his country out of the euro if other EU countries, especially Germany, did not agree to help rescue debt-laden Greece. The French president made his startling threat at a Brussels summit of EU leaders last Friday, at which the deal to bail out Greece was agreed, according to a report in El País newspaper quoting Spanish Prime Minister José Luis Rodríguez Zapatero.

Zapatero revealed details of the French threat at a closed-doors meeting of leaders from his Spanish socialist party on Wednesday. Sarkozy demanded "a compromise from everyone to support Greece ... or France would reconsider its position in the euro," according to one source cited by El País. "Sarkozy went as far as banging his fist on the table and threatening to leave the euro," said one unnamed Socialist leader who was at the meeting with Zapatero. "That obliged Angela Merkel to bend and reach an agreement."

A different source who was at the meeting with Zapatero told El País that "France, Italy and Spain formed a common front against German and Sarkozy threatened Merkel with a break in the traditional Franco-German axis." El País also quotes Sarkozy as having said, according to another of those who met Zapatero, that "if at time like this, with all that is happening, Europe is not capable of a united response, then the euro makes no sense". Germany has been reluctant to act throughout the Greece crisis. But the meeting in Brussels finally put together a €110bn (£94bn) rescue package.

Germans face bitter round of budget cuts as the price of eurozone bailout
by Kate Conolly

Germans have been urged to face reality today as the full impact of theeuro bailout on Europe's biggest economy was laid bare by politicians and financial experts for the first time. The nation is to be forced to make savings more extensive than at any time since the end of the second world war, with education and family welfare expected to take the largest hits. The sobering figures emerged just after Germany's cabinet gave the go-ahead for Germany to put up €123bn (£105bn) towards the rescue package to stabilise the eurozone. That figure could rise to almost €150bn if needed.

Germans now face several years of belt-tightening, with Roland Koch, the deputy leader of chancellor Angela Merkel's Christian Democratic Union (CDU) party and the minister-president of the state of Hesse, saying that no areas "can be considered taboo". Tax cuts that were promised by Merkel's government when it came into office in October have now been scrapped, the chancellor announced this week. Instead, policymakers are now talking of raising taxes to fill a €10bn fiscal gap. Economists are advising the government to raise reduced VAT levels on items such as books. Friedrich Heinmann from the ZEW institute said: "If the government increased VAT on items that currently enjoy a reduced rate, such as hotels, theatres, books and newspapers, it would glean €8bn; otherwise it will be forced to raise the current VAT rate [of 19.5%]."

Experts are warning that inflation is likely to rise owing to the euro's recent fall in value against other major currencies, which will eat into wage rises and pensions. "We can expect inflation to rise sharply over the next few years," said economist Hans Wolfgang Brachinger. "The euro is losing its value, and consumers will have to dig deeper in their pockets as a result". Municipalities, many of which are already bankrupt or nearing bankruptcy, are also likely to see their budgets slashed. This will lead to the closure of facilities such as swimming pools and a lack of money for road repairs and other infrastructure. Michael Fuchs, the CDU's deputy parliamentary group leader, said: "Every single type of subsidy now has to be examined closely".

News of the cuts has only served to stoke existing anger towards Greece, which many Germans feel is now being rewarded for profligacy. Ulf Henniger, mayor of the town of Gierstädt in the state of Thuringia, which is just one of thousands of municipalities facing budget freezes, said: "It can't possibly be the case that we have been made liable for the irresponsible behaviour of other euro countries such as Greece. This is money that we're very much in need of for other things, like filling in potholes."

Norbert Barthle, the budget policy spokesman of the CDU, said: "Saving measures now have priority and apply to Germany as much to other countries." He called on the labour and family ministries to make the biggest savings. Koch, who is being touted as a possible successor to finance minister Wolfgang Schäuble, who has spent prolonged periods in hospital over recent weeks, has called for a review of a policy that would guarantee kindergarten places to all children under the age of three. This has enraged family rights campaigners, who say such moves would undermine the huge strides that have been made to improve conditions for families in recent years.

Christine Haderthauer, Bavaria's social affairs minister, said even the fact that such cuts were being discussed was sending out dangerous signals about Germany's future. "Anyone who starts talking about such cuts is acting like an arsonist," she told the Passauer Neue Presse, adding: "If we have to take the red marker specifically to the areas of education and family, we're playing the lottery with our future." Merkel continued to face a barrage of criticism for her handling of the Greek crisis, even from within her own ranks. Koch was among those to attack her for her management of the crisis. The past six months of government, he said, had been "unsatisfactory", and characterised by its "lack of decisiveness" and "lack of speed".

Elsewhere in Europe today , Spain announced details of an austerity budget that aims to save billions of euros. Civil service pay will fall by 5%, and cuts are also being made to child welfare and home care for the elderly. Some pensions will also be frozen next year.

Euro remains on the right side of history
by Tommaso Padoa-Schioppa

Ideology and culture matter, and may be decisive in the battle for the euro. Over many months, a mighty army has advanced on the citadel of the European currency with the cry: “It will never work!” The army was quick and single-minded, the citadel slow and divided. The besiegers were thousands, steeled by convictions all the more fervent for their extreme simplicity. Their reasoning was as follows: the euro area is not a political union and can never become one, because Europeans have no appetite for it and nation-states will not relinquish power. The citadel, therefore, is doomed to capitulate and its stubborn resistance merely serves to create profit opportunities for astute traders.

Equally strong and simple was the credo of the defenders, who countered: “It can work!” For years, Europe’s heads of government and central bankers had preached that a currency without a state is a smart invention that can last forever. It accomplishes the miracle of removing monetary and trade tensions, while allowing the nation-state to remain the unique master. The Maastricht treaty of 1992 was the final step in the construction of the European edifice. No other transfer of sovereignty will, nor needs to, occur. The European Union can do without the ordinary fiscal, financial and monetary instruments that all textbooks prescribe.

Enemies as they are, the two camps share the same prime article of faith: that the nation-state is and will continue to be the absolute sovereign within its borders. Both believe that international relations will continue to be based on the twin postulates of internal homogeneity and external independence, a model invented by the Treaty of Westphalia of 1648. For one, fortification of the citadel is impossible; for the other, it is unnecessary. Both fail to see that we already live in a different world, one in which political power can no longer be monopolised by a single holder. Instead, it is distributed along a vertical scale ranging from the municipal, to the national, to the continental, to the global. Both camps seem to ignore that history is a dynamic process driven by contradictions.

The crisis came and the army advanced. Its battalions were thousands of dealing rooms, connected into a global network acting round the clock. Its targets were selected by the intelligence of three rating agencies. Its morale was sustained by an unwavering faith: that we, the market, are those who know best. What they did not understand was that, in our era, the dynamics of history consist precisely of the search – largely unguided, often painful but inexorable – for an optimal distribution of power along the scale of ever-wider human aggregations, which are tied by common interests more than by tribal identity.

The optimality can be gauged with a simple criterion: the consistency between the span of government and the “common good” entrusted to it, be this a public garden in the city, the administration of justice in the state, or climate change on the planet. Seen in this light, the advent of the euro is just an episode – a most significant one – in the building of a post-Westphalian order.

In this battle, the citadel emerged as the winner because it finally set aside hesitation, prejudice and division. But in a deeper sense it lost, too. It was mistaken in its belief that the euro and full national sovereignty are compatible. The attackers saw the incompatibility, but were mistaken in their belief that it was the euro, rather than the Westphalian dogma, that would emerge most damaged. The attackers will return. The outcome will, for sure, be decided by the rivals’ relative strength, but also by the nobility of the cause they fight for.

The army is formidable but it bets on the wrong cause: a return to the old world of flexible exchange rates, where each country deludes itself that it can be insulated from its neighbours and tries to foster growth through competitive devaluations, reneging on debts when it sees fit. This can only produce economic misery, conflict and dangers for global security. The citadel fights for the good cause (saving Europe’s monetary union), but its persistent credo, which has for too long kept it disarmed, still hinders it from going all the way with the necessary reform. At stake in this struggle, ultimately, is the ideology of the omnipotent nation-state.

EU imposes wage cuts on Spanish 'Protectorate', calls for budget primacy over sovereign parliaments
by Ambrose Evans-Pritchard

Spain has followed Ireland and Greece in imposing 1930s-era wage cuts to slash the budget deficit, complying with EU demands for further austerity in exchange for the €720bn `shock and awe’ rescue for eurzone debtors. Premier Jose Luis Zapatero told a stunned nation that public sector pay will be reduced by 5pc this year and frozen in 2011. "We must make an extraordinary effort," he said. Pension rises will be shelved. The country’s €2,500 baby bonus will be cancelled. Aid to the regions will be slashed and infrastructure projects will be put on ice. Mr Zapatero’s own monthly pay will fall 15pc to €6,515. Mariano Rajoy, the conservative opposition leader, said years of ostrich-like denial by the Zapatero team had reduced the country to an EU "protectorate".

Commission president Jose Barroso unveiled plans for EU control over national budgets, including an incendiary demand that Brussels should vet budgets before their first reading in Westminster, the Bundestag, and other parliaments. Current account deficits and credit growth will be monitored. Brussels can imposing sanctions on states that let booms run out of control. "We must get to the root of the problems," he said. Such a plan would greatly improve the working of the EMU system, but it would also entail a drastic erosion of sovereignty. The intrusive surveillance is a wake-up call for states that have tended to view the euro as a free lunch.

Mr Zapatero - who long prided himself on being an "anthropological optimist" - plans to cut the deficit from 11.2pc to 6pc of GDP this year, with further cuts next year. The fresh move is to placate bond vigilantes and to calm German fears that eurozone discipline is breaking. He has already raised income taxes and lifted VAT from 16pc to 18pc. US President Barack Obama played a key role behind the scenes, pleading with Mr Zapatero for "resolute action". The telephone call from the White House is a clear indication that contagion from Greece and Portugal to the much larger debt markets of Spain had become a global systemic threat by late last week.

"The markets were going in for the kill: the eurozone itself was on the brink of collapse," said Jose Garcia Zarate from 4Cast. The austerity package has gained time but investors are eyeing the response of the Spanish people. "Just months ago the government said it would never cut wages, so this is a very humiliating U-turn. There will be protests, but we don’t know yet whether there will be a general strike," he said. Spain’s UGT union federation warned of "social conflict" and vowed to inflict "maximum punishment" on the government. However, the nation as a whole has so far handled a property slump and a rise in unemployment to 20pc with stoicism, befitting the tradition of the Spanish-born Stoic philosopher Seneca.

Javier Perez de Azpillaga from Goldman Sachs said Spain has climbed rapidly up the technology ladder. Its exports have grown faster than those of Italy or France. It has a low public debt of 53pc of GDP, but a "highly leveraged" private sector. Real estate companies have debts of €445bn, or 45pc of GDP. "Banks may not be able to recoup large parts of these loans. These losses will have to be recognized eventually, bringing down many institutions and forcing the government to recapitalize them," he said. The `Cajas’ -- public sector banks -- have assets of €1.3 trillion and account for most mortgage debt. Many are struggling. The saving grace is that the two giants, Santander and BBVA, have global portfolios and are in "excellent shape".

Caixa Catalunya said the stock of unsold homes in Spain reached 926.000 at the end of last year, equivalent to 6.5m in the US. It expects the market to touch bottom this year with real falls of 20pc to 25pc from the peak. Spanish households have been able to draw on a very high savings rate of 17.9pc to absorb the shock . Spain’s wage cuts amount to an "internal devaluation" within EMU. Stephen Lewis from Monument Securities said the EU is pushing a clutch of countries into contractionary policies at the same time. These will feed on each other, creating a deflation bias across the region akin to the 'Gold Bloc’ in the 1930s.

"It is not a viable policy. Weakening demand will cause the tax base to shrink. If the population could see light at the end of the tunnel, they might put up with it, but there is no light: it is a long dark passage leading nowhere," he said. The EU cites the Irish austerity plan as a model, but Ireland has an open economy with a dynamic export sector, and may be sui generis. In any case, Ireland’s nominal GDP has fallen 18.6pc, without a commensurate fall in debt. Ireland is not yet safely out of its debt-deflation trap.

Spain announces package of austerity measures to cut budget deficit
by Jane Walker

After months of denying the existence of a financial crisis, Spanish prime minister José Luis Rodríguez Zapatero finally admitted the gravity of the situation and yesterday announced austerity measures. He said his aim was to reduce Spain’s budget deficit, 11 per cent of GDP, to about 6 per cent in 2011. Over four million Spaniards – 20 per cent of the workforce – are unemployed, the highest figure since 1989 and Mr Zapatero has repeatedly said his priority was jobs. But the situation has forced him to change policies and make often-painful cuts.

Starting at the top, Mr Zapatero and his ministers are to take an immediate 15 per cent salary cut, and public sector workers will see their pay cut by 5 per cent. Five million pensioners, some of whom receive just €600 a month, will be hit when their state pensions are frozen and not adjusted to annual inflation rates. The so-called baby cheque, the €2,500 payout to parents of new babies, introduced only last year, has been scrapped. Prescription and non-generic drug prices will also come down.

The autonomous regions will have to make their own sacrifices when regional funding is reduced by €1.2 billion, and development aid will be cut by €600 million. Other measures include a reduction in state investment, particularly in public works like new high-speed rail lines and motorways. In a heated debate in parliament yesterday, Mr Zapatero denied that Spain was following Greece towards bankruptcy. Do not compare Spain with Greece. Spain is strong and solvent, he snapped at Mariano Rajoy, the conservative leader.

Mr Rajoy said the government should have acted 18 months ago, when he had first called for drastic action. The unions have condemned the measures and have warned of demonstrations and massive action if they are approved at next Friday’s cabinet meeting. Former economy minister Pedro Solbes, who resigned his cabinet seat last year when his call for austerity measures was not accepted, yesterday welcomed the proposals.

Spain Is Simply Shifting the Problem
by Bill Jamieson

Another week, another destination crossed off the list for those earnest conferences on the threat of globalization so beloved of Europe's civil servants. Spain has now followed Ireland and Greece in announcing an austerity program. It is designed to stave off a Greek-style crisis in the government bond market. But is this an effective debt-reduction plan that will pass the investigation of the European Union's new fiscal inquisition, or gesture austerity?

The measures announced by Spanish Prime Minister José Luis Rodríguez Zapatero this week include a 5% cut in public-sector pay this year and a pay freeze next year, a shelving of index-linked pension rises, a cancellation of proposals for a €2,500 (about $3,150) "baby bonus" tax break, a cutting back of regional spending budgets and a postponement of infrastructure projects. The headline-grabber was a 15% cut in the pay of cabinet ministers.

The package, following a phone call to the Spanish premier from U.S. President Barack Obama, is part of a program to cut the country's budget deficit to 6% of gross domestic product this year from 11.2% last year.
Persistent fears that Greece's problems may spread across the euro zone prompted a €750 billion European Union "shock and awe" package earlier in the week, underpinned by International Monetary Fund support. It was designed to rally international confidence in the sliding single currency and in euro-zone country bonds.

EU officials called on euro member governments to crack down on debt, demanding tighter oversight to keep the 16 countries that use the euro within tough deficit limits. The European Commission wants to see coordinated budget policies and finance ministers discussing budget plans with other EU countries before putting them to their own parliaments. Mike Shedlock of Global Economic Analysis says that "the problems are too much debt, too much government spending, and a massively unbalanced global economy. None of these actions [taken by the ECB over the weekend] addresses any of the fundamental issues."

The latest proposals seem brutal for Spaniards. All told, they would save about €15 billion. With Spanish unemployment now running at 20% and the economy struggling to get out of recession, they threaten a big deflationary punch in an economy whose construction sector has been devastated and where hundreds of developments have already been cancelled or put on ice. There were even fears that the country's biggest trade unions would call an immediate all-out general strike, portending the street riots and mayhem that engulfed Athens earlier this month.

But Spain has a sizable informal economy linked to tourism. The government has been under fire from Mariano Rajoy, the opposition leader, for years of ostrich-like denial of budget problems. This also is the second "austerity budget" this year, the first one in January having had little evident effect. The pay cuts follow a pay rise for public-sector workers of 4% last year, and the size of the reductions pale before the 15% cuts suffered by government workers in Ireland. And Thursday, shares on the Madrid stock exchange sagged on fears that the package may be delayed.

As for concerns over social cohesion and the prospect of civil unrest, initial reactions don't bear out the worst forebodings. The leader of Spain's largest union has ruled out a general strike. Ignacio Fernández Toxo, the secretary-general of Comisiones Obreras, declared on Punto Radio Thursday that a general strike "is the last thing this country needs at a time like this." However, his union, together with sister organization Unión General de Trabajadores (UGT), plan to stage a one-day public-sector strike for June 2, despite three hours of talks with the prime minister Thursday. This would fall on the day before Madrid's Corpus Christi public holiday, ensuring maximum take-up by public servants in Spain's capital.

Will the new measures work? Markets are still apprehensive over developments in the euro zone. The problem is that the measures announced, however impressive in their size, do not on their own do anything to reduce the totality of debt weighing on euro-zone economies. Rather, they shift the burden from one area to another, as if the transfer of risk were the same as its reduction. EU officials do recognize that to achieve any genuine reduction in market apprehension would require heavily indebted euro-zone governments to cut back on their spending, raise tax revenues, or strike some judicious combination of both. Hence the requirement to impose stiff schedules and oversight on the debt-reduction proposals of those countries requiring assistance.

It is against this backcloth that the Spanish budget-cutting has been announced, and it will be taken as a benchmark for other euro-zone countries with high budget deficits. The questioning of its effectiveness isn't unreasonable given the lax tax and spending practices that have landed Greece and other "Club Med" countries in this mess to begin with. But the concern on the other side is that the squeeze on domestic demand will worsen the very problem the EU is seeking to address: It will weaken the tax base, increase the cost of social transfers and test the social cohesion of these countries to breaking point. The problem with euro-zone countries such as Spain is that they cannot count on currency depreciation to boost their competitiveness, or on an accommodative policy stance by the European Central Bank, unless the emergency is so grave as to threaten the stability of the entire euro zone.

Stephen Lewis, an economist at London-based Monument Securities, says that "fiscal adjustment will shift the burden of insupportable debt back to the private sector and the banks. It will merely reverse the shift that occurred as a consequence of the 2008-09 fiscal stimulus." "It is doubtful whether the banks are in much better condition to support the burden now than they were two years ago. The conditions for sustainable growth will only be restored after prolonged deleveraging, with final demand running below supply, in the debtor-countries," says Mr. Lewis, adding, "we have not cured the disease. Our choice has extended only to which symptoms to suppress." That would seem an apt summary of the EU's response so far to the crisis it is in.

Portugal takes its punishment with fresh taxes
by Ambrose Evans-Pritchard

Portugal is to impose fresh austerity measures to cut the budget deficit and regain the confidence of bond markets, becoming the fourth country on the eurozone periphery to tighten fiscal policy before a durable recovery is underway. Socialist premier Jose Socrates aims to cut the deficit by an extra 1pc of GDP to 7.3pc this year and 4.6pc next year, but has refused to follow yesterday’s move by Spain for broad-based cuts in public wages owing to constitutional constraints. The package relies on revenues, including a rise in VAT to 21pc, higher income tax, and a range of corporate levies. "I ask my countrymen to make this sacrifice to defend Portugal, defend the single currency, and defend Europe," he said.
Paul Portas, leader of the free market conservatives, said the mix of policies amounted to a "fiscal bombardment of the economy" that would crush wealth creation and fail to put the country on a viable path back to recovery. The austerity plan follows a dramatic crisis last week when yields on 10-year Portuguese bonds surged to over 6pc, above the level that led Greece to request an EU-IMF bail-out. Escalating distress in Portugal - and the risk of contagion to Spanish banks that hold €86bn of Portuguese debt - is what forced EU leaders to put together a combined package of €720bn to defend EMU over the weekend. The European Central Bank has been buying Portugal’s bonds on the open market to force down spreads.

The quid pro quo was a pledge by Mr Socrates for further belt-tightening, no easy task for the leader of a minority government. Opposition leader Pedro Cassos Coelho said his party would back the measures since the country faces a "state of emergency". The combined austerity packages in Greece, Ireland, Spain, and Portugal cover a substantial part of the eurozone and may have broader ramifications. Italy is also considering a public sector wage freeze. "This Club Med tightening is deeply worrying," said Charles Dumas from Lombard Street Research. "Some of these economies are going to be contracting at an annualized rate of 4pc by the end of this year and that is going to spill back into Germany."

Southern Europe is having to squeeze fiscal policy without offsetting stimulus from monetary policy or the exchange rate. Deutsche Bank said membership of EMU had deprived these states of all key instruments of economic management This is not what political leaders expected in embracing the euro. There is a risk of populist backlash if citizens start to think that they are powerless, with no clear way out of a deflation trap. Fernando Texeira dos Santos, the finance minister, said he expected "violent episodes" comparable to those in Greece but insisted that there was no other option.

The CGTP trade union federation vowed to mobilize its forces. "Either we come up with a very strong reaction or we will be reduced to bread and water," he said. While Portugal’s public debt is average for EMU states at around 84pc of GDP this year, the private sector is heavily indebted and reliant on external funding. Fresh EU data shows that Portugal’s total debt is 331pc of GDP, compared to 224pc for Greece. The IMF said Portugal’s labour market is the most rigid in Western Europe.

Brian Coulton, director of Fitch Ratings, said the new measures are a great improvement on the "underwhelming" plan put forward earlier this year. The agency has a rating of AA- on Portuguese debt with a negative outlook. "The country has already made substantial progress on spending cuts over the last four years and is replacing every two civil servants who retire with just one, so it make sense to rely on taxes to raise revenue quickly," he said.

Greece: Severe tourism crisis, tax-dodging doctors
A Greek government official says a crisis committee for tourism has been set up. The move came after nearly 20,000 hotel booking cancellations in Athens alone following protests against government austerity measures. Meanwhile, the authorities have published the names of 68 high-earning doctors found guilty of tax evasion, aiming to show that it is serious about changing a culture of tax dodging that has contributed heavily to its debt crisis. The tax hikes and wage cuts imposed to secure an international bail-out have prompted not only violent protests but also loud public demands for a clampdown on tax evasion and corruption.

Economists say the grey or unrecorded economy accounts for about 30% of Greece's GDP. This means that this year's budgeted tax revenues of €54 billion could be €15 billion higher - an amount that would have paid for half the government's latest austerity package. 'Tackling tax evasion is crucial to the effort of rescuing the economy and establishing a fairer and more efficient tax system,' the finance ministry said. 'The battle against tax evasion is a battle for justice.' Audits of more than 150 doctors in the upscale Athens Kolonaki district and elsewhere unearthed 57 cases of large-scale tax dodging. Six doctors were fined a total of €1.9m and four will also face criminal charges, the ministry said.

A dozen orthopaedic doctors had their bank deposits frozen after authorities found that, out of €31m of deposits made in 2001-08, only €12m had been declared as income. Some doctors were declaring smaller net incomes than the average annual rent in the area. The government has introduced legislation giving tax incentives for collecting receipts, a measure it says has already paid off in helping to reduce the central government deficit by 41% in the first four months of the year.

Athens braces itself for more strikes and protests
by Nick Iliev

New protests, more demonstrations and more strikes are planned for May 15 and 20 in the Greek capital, Athens, in relation to the Greek parliament's approval of tough new austerity measures to help curb its soaring debt and deficit, the Bulgarian Foreign Ministry said in a media statement on May 13 2010. Labour unions, public workers and everyone else opposed to the government's stringent austerity measures has been called to attend the rally at the Pedion tou Areos park in central Athens, on Alexandras Avenue and Patission Avenue, the statement said.

The first demonstration against the Pasok-led government will be held on May 15, organised by the Greek communist party KKE and the labour union PAME. Several days later, another 24-hour strike will start with a demonstration at the park's gates at 11am on May 20, while KKE and PAME will stage a simultaneous demonstration at Omonia Square in the centre of Athens, the statement read.

In spite of the criticism, public opposition and discontent and violence, which saw three bank personnel killed in a fire on May 5, the Greek parliament went ahead and voted in favour of the package of tough, new austerity measures, demanded by the European Union and the IMF in exchange for a $145 billion loan deal with the European Union and the International Monetary Fund.

EU finance ministers have agreed to implement emergency measures amounting to a 500-billion euro rescue package in an attempt to thwart the "Greek disease" from spreading to other countries in the euro zone. According to international media reports, 16 members of the euro currency bloc will have access to 440 billion euros of loan guarantees and 60bn euros of emergency European Commission funding, while the International Monetary Fund (IMF) will make available about 250 billion euro.

Backdoor Bank Bailout? Fannie And Freddie May be "Losing Money as a Matter of Policy"
by Peter Gorenstein

The Senate on Tuesday rejected a Republican sponsored measure that would effectively cut off support to Fannie Mae and Freddie Mac in two years.  The government-sponsored enterprises, now in conservatorship, have already cost the government about $145 billion. And there's no limit to how much more they can ask for for the next two years!
Fannie Mae lost $11.5 billion in the first quarter while Freddie Mac lost more than $6.7 billion. After posting those massive losses, they asked for a combined additional sum of nearly $20 billion in government assistance. "Are they losing money as a matter of policy or are they losing it as bad judgment?" asks Dean Baker, co-director of the Center for Economic and Policy Research, who calls the Fannie and Freddie the elephant in the bailout room.

Baker and Fusion IQ's Barry Ritholtz are convinced the government is effectively sponsoring a backdoor bailout of the banks via the GSEs. "This is a conscious, willful decision," says Ritholtz, author of The Big Picture blog and Bailout Nation. "Fannie And Freddie act as a conduit for taking all this junk off the banks' balance sheets." And Congress is along for the ride, says Baker.  "To some extent the wool's been pulled over their eyes but I'd just say it's willingly. They just don't want to deal with it right now," he notes.

The fear is cutting off aid to Fannie and Freddie could kill the housing industry. In the first quarter, the government backed more than 96% of all residential mortgages. Whatever the reason, taxpayers will continue to pay the price.  Ritholtz estimates Freddie and Fannie could easily cost us $400 billion combined; judging by the continued carnage "maybe that's way on the low side?" he concedes.

Senator Kaufman Was Right – Our Financial System Has Become Dangerous And Banks Too Big
by Simon Johnson

Senator Ted Kaufman (D, DE) is best known these days for arguing that, as part of comprehensive financial reform efforts, our biggest banks need to be made smaller.  His advocacy on this issue helped build support around the country and forced a Senate floor vote on the Brown-Kaufman amendment, which was defeated 33-61 last Thursday.

Senator Kaufman has also pushed strongly the idea that in recent years there was a pervasive “arc of fraud” within the mortgage-securitization-derivatives complex.  This thesis also seems to be gaining traction – according to the WSJ today, the criminal probe into this part of the financial sector continues to develop.

But the Senator’s biggest home run has been on a different issue: his warnings about the dangers of high-speed trading, involving “dark pools” of money, appear to have been completely vindicated – ironically enough, also last Thursday.

Think about it this way.  The US stock trading system, long-established and widely thought to be robust, crashed on Thursday afternoon.  Widely held stocks, traded with consistent liquidity, do not fall in value from $40 to 1 cent and then bounce back again – even in emerging markets, let alone in the United States.  It is true that complex systems crash, but given the infrastructure and back-up systems involved here, this is much closer to east coast air traffic control shutting down for 15 minutes than it is to your local cable company having a problem.

And here’s the most remarkable point – after 6 full working days (and top people do sweat this kind of issue on the weekend), we are still no closer to really understanding what happened.  To be sure, there are plenty of theories – and no shortage of proposals for avoiding a recurrence.  But, despite the evident resources thrown at this problem, we do not know what went wrong.

As Senator Kaufman points out, the SEC does not even routinely collect the data it needs to understand the actions and impact of large traders.

The Merkley-Levin amendment would also likely be a step in the right direction, in terms of reducing the socially dangerous casino nature of our financial markets.  But it is far from enough.

The rationale for organizing our financial system as we do is that this leads to a reasonable allocation of capital across the economy.  We can argue the merits of this proposition at various levels – but no one would suggest that the extreme volatility and breakdown of trading last week was anything other than completely dysfunctional.

The SEC is, without question, beginning to get its act together under Mary Shapiro.  But there is also no doubt that it needs to lift its game to a much higher level, if regulation is even to catch up with how markets have developed over the past decade – just look at this timeline of problem identification and policy response.

Senator Kaufman has flagged mortgage-related fraud, high-speed/dark-pool trading, and bank size as pressing issues to address.  He was completely right on trading and, based on what we know so far, also right on fraud.

How long before he is completely proved right on the dangers posed by excessive bank size?

The Big Bank Lobby: Too Big to Bear?
by Robert L. Borosage

240 former legislators, bank committee staffers, and Treasury officials deployed to lobby. $600 million spent in lobbying, trade association activity and political contributions since March 2008. And that is just from the six biggest banks. The entire financial industry is spending an estimated $1.4 million a day, hiring 70 former members of Congress to make their case.

These figures, drawn from a new report released by the Campaign for America's Future (which I co-direct), would be shocking if they weren't so sad and predictable. As the Senate moves towards passing financial reform legislation, it is worth focusing on how the lobby works.

Bailed out by taxpayers, the big banks -- Goldman Sachs, Bank of America, JPMorgan Chase, Citigroup, Morgan Stanley and Well Fargo -- are emerging from the financial crisis larger and more concentrated than ever. Their very size offends market competition. Entities that are too big to fail cannot be disciplined by the market.

Worse, as former IMF economist Simon Johnson has emphasized, their size and wealth also undermine democratic accountability. As the report shows, they exercise immense political power which they use not only to fend off reforms that might curb their excesses, but to sculpt laws and regulations that consolidate their privilege and profits. So despite popular anger at the banks, the Senate last week voted down the Kaufman-Brown amendment that would have put a lid on the size of banks, forcing the break-up of the big six.

The report, written by Kevin Connor of the Public Accountability Initiative and Lil Sis, highlights the corrupting revolving door that Washington insiders view as a sensible career path. The banks heavily rely on hiring retired legislators, former committee staffers and legislative aides. Although these are salad days for Democratic lobbyists, bipartisanship reigns. The banking lobby includes Dick Gephardt, former leader of the House Democrats, Trent Lott, former leader of the Senate Republicans, and former Republican House leader Dick Armey, and putative leader of one branch of the Tea Partiers. Connor names names of the major players of over 240 former government insiders now on the banks' payroll.

Needless to say, former legislators and staffers are masters of the back rooms. They gain easy access to sitting legislators. They help draft legislation. They know how to slip in key amendments and loopholes in dead of night. They know the players and the process.

More corrosively, the players -- the sitting legislators and current staffers -- know that after leaving Congress, they can comfortably make the family fortune by joining the lobbying profession. Not surprisingly, many seek to curry the favor of those who might later employ them. The revolving door doesn't just give special access to the bank lobby; it compromises sitting legislators and staffers looking out for their own futures.

How this backroom influence works is illustrated in the most recent "Financial Services Bulletin" of Concept Capital's Washington Research Group. (Concept Capital bills itself as a "total solutions provider" to hedge funds and other investors).

The bulletin (not available on the web) details amendments still to be considered to the financial reform bill and the timeline for moving to a vote. It highlights for its clients Senate Banking Chair Chris Dodd's "manager's amendment" likely to be unveiled this week.

"This is by far the most important amendment as it represents all of the deals that he has cut to find 60 votes for the bill. This is the most likely spot for many of the small changes to the bill to find their way into law," (emphasis added) including such bank favorites as pre-empting state attorneys general enforcement powers. The deals in the backrooms are getting cut as the debates on the floor drone on.

Ironically, the Washington Post recently reported on the distress of bank lobbyists faced with a financial reform bill that was being debated on the floor of the Senate in the light of day rather than in quiet of the banking committee. Speaking anonymously, they groused at a process that was "out of control," "populist," "irrational." It is "time for grownups to step in," wrote JPMorgan analyst James Glassman. The Post reported that the lobbyists were pinning their hopes on the House-Senate conference process where "adults" could sit together and work things out.

Clearly, the only thing that limits the power of the banking lobby is the rage of American voters that the very banks that drove the economy over the cliff and were bailed out by taxpayers are now spending lavishly to block reforms needed to insure this doesn't happen again. That popular anger makes legislators reluctant to appear in the banks' pockets in public.

That is why National People's Action, SEIU, the AFLCIO and other groups are bringing citizens to a Showdown on K Street on May 17. Citizens from across the country will "visit" with lobbyists in their offices and haunts, exposing them to some of the human pain caused by their clients -- families that have lost their homes, the retired who lost their savings, workers who lost their jobs. And in doing so, they'll help educate Americans about the scope of this lobby.

That is why the Campaign for America's Future will join with dozens of groups to support House Financial Services Chair Barney Frank's call to televise the conference committee between the House and Senate on financial reform, assuming there is one. We can't control what happens in the cloakrooms. But as the banking insiders seek to weaken the legislation in conference, we can at least give Americans a chance to see exactly what side their legislators are on.

That is why legislators should be on notice that they will be held accountable this fall for how they voted on Wall Street reform. Steps will be taken to insure that voters are told the truth.

And that is why the current financial reform legislation should be seen as a first step, not an answer. We'll need a lot more revelations, scandals, prosecutions and investigations. We'll need action to tax financial speculation, curb credit card company fees and interest rates, wage another fight to limit the size of the big banks, and more. The Washington Research Group predicts for investors that the Congress "will enact a moderate financial reform bill that ... will not destroy[read impact] the industry's business model." But changing the industry's business model and breaking up the banks that are too big to fail are vital steps towards the new economy that we build out of the ruins of the old. This fight must go on.

British banks face break-up in just one year
by Philip Aldrick and Louise Armitstead

Britain's giant lenders are facing the threat of extinction after the new coalition Government pledged to establish an independent commission to decide whether to break up the banks. The commission was the centrepiece of the Conservative and Liberal Democrat agreement on banking reform, which included a pledge to introduce an extra tax on the industry and "robust action to tackle unacceptable bonuses". It has been given "an initial time frame of one year to report" on whether separating retail and investment banking will "reduce systemic risk". Both parties have argued for a break-up, but the Tories want to limit the split to the "casino" activities of proprietary trading while the Lib Dems wish to go further and "separate low-risk deposit taking banking from high-risk investment banking".
The structure of the commission has yet to be decided but its terms of reference and the appointments will be overseen by a cabinet committee chaired by the Chancellor, George Osborne, that will include Vince Cable, the Business Secretary. The committee will also decide whether to press ahead with the Conservative manifesto pledge for a competition inquiry into the industry. Analysts warned that uncertainty caused by the inquiries would delay any recovery of the taxpayer's £65.5bn investment in Royal Bank of Scotland and Lloyds Banking Group. "It would be difficult to press ahead with material [share] sales until we have a clearer idea of the future structure of the UK banking market," Jon Peace, Nomura banks analyst, said.

The radical proposals came as it emerged that the Tories had sacrificed one of their flagship reform ideas to forge the agreement. The Financial Services Authority was to be subsumed by the Bank of England but will now survive. To ensure there is never again the regulatory "underlap" that left huge holes in banking supervision, a new financial stability committee comprised of FSA and Bank representatives will be created. However, the Bank will become chief regulator with "control of macro-prudential regulation and oversight of micro-prudential regulation". Much of the detail has yet to be decided. It is unclear whether the new bank taxwill be the Lib Dem proposal of 10pc of profits, to raise £2bn annually, or the Tories' levy on liabilities, to raise £1bn. Although the Lib Dems wanted the tax this year, sources said it is unlikely to come into effect until 2011.

Lib Dem demands for banks to be barred from paying cash bonuses of more than £2,500 are likely to be shelved but more disclosure is expected. RBS and Lloyds also face more stretching lending targets to support small businesses than those currently in place. Angela Knight, chief executive of the British Bankers' Association, said the industry would "play our full part in making the changes agreed" but stressed the City must be protected as it is "a big international centre that brings a lot of jobs to the UK, is a big part of GDP and is a big tax payer as well".

New York AG Cuomo Investigates if 8 Banks Duped Rating Agencies
by Louise Story

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation. The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.

Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities. The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America. The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities. Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is also interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved, said the people with knowledge of the investigation, who were not authorized to discuss it publicly. In response to questions for the Times article in April, a Goldman Sachs spokesman, Samuel Robinson, said: Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned.

Goldman, which is already under investigation by federal prosecutors, has been defending itself against civil fraud accusations made in a complaint last month by the Securities and Exchange Commission. The deal at the heart of that complaint — called Abacus 2007-AC1 — was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005. At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to workers like Mr. Yukawa who had been working at much lower pay at the rating agencies, according to several former workers at the agencies.

Around the same time that Mr. Yukawa left Fitch, three other analysts in his unit also joined financial companies like Deutsche Bank. In some cases, once these workers were at the banks, they had dealings with their former colleagues at the agencies. In the fall of 2007, when banks were hard-pressed to get mortgage deals done, the Fitch analyst on a Goldman deal was a friend of Mr. Yukawa, according to two people with knowledge of the situation.

Wall Street played a crucial role in the mortgage market’s path to collapse. Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them. Banks were put on notice last summer that investigators of all sorts were looking into their mortgage operations, when requests for information were sent out to all of the big Wall Street firms. The topics of interest included the way mortgage securities were created, marketed and rated and some banks’ own trading against the mortgage market.

The S.E.C.’s civil case against Goldman is the most prominent action so far. But other actions could be taken by the Justice Department, the F.B.I. or the Financial Crisis Inquiry Commission — all of which are looking into the financial crisis. Criminal cases carry a higher burden of proof than civil cases. Under a New York state law, Mr. Cuomo can bring a criminal or civil case. His office scrutinized the rating agencies back in 2008, just as the financial crisis was beginning. In a settlement, the agencies agreed to demand more information on mortgage bonds from banks.

Mr. Cuomo was also concerned about the agencies’ fee arrangements, which allowed banks to shop their deals among the agencies for the best rating. To end that inquiry, the agencies agreed to change their models so they would be paid for any work they did for banks, even if those banks did not select them to rate a given deal. Mr. Cuomo’s current focus is on information the investment banks provided to the rating agencies and whether the bankers knew the ratings were overly positive, the people who know of the investigation said.

A Senate subcommittee found last month that Wall Street workers had been intimately involved in the rating process. In one series of e-mail messages the committee released, for instance, a Goldman worker tried to persuade Standard & Poor’s to allow Goldman to handle a deal in a way that the analyst found questionable. The S.& P. employee, Chris Meyer, expressed his frustration in an e-mail message to a colleague in which he wrote, I can’t tell you how upset I have been in reviewing these trades. They’ve done something like 15 of these trades, all without a hitch. You can understand why they’d be upset, Mr. Meyer added, to have me come along and say they will need to make fundamental adjustments to the program.

At Goldman, there was even a phrase for the way bankers put together mortgage securities. The practice was known as ratings arbitrage, according to former workers. The idea was to find ways to put the very worst bonds into a deal for a given rating. The cheaper the bonds, the greater the profit to the bank. The rating agencies may have facilitated the banks’ actions by publishing their rating models on their corporate Web sites. The agencies argued that being open about their models offered transparency to investors.

But several former agency workers said the practice put too much power in the bankers’ hands. The models were posted for bankers who develop C.D.O.’s to be able to reverse engineer C.D.O.’s to a certain rating, one former rating agency employee said in an interview, referring to collateralized debt obligations. A central concern of investors in these securities was the diversification of the deals’ loans. If a C.D.O. was based on mostly similar bonds — like those holding mortgages from one region — investors would view it as riskier than an instrument made up of more diversified assets. Mr. Cuomo’s office plans to investigate whether the bankers accurately portrayed the diversification of the mortgage loans to the rating agencies.

Elizabeth Warren Slams Obama's Small Business Plans
by Shahien Nasiripour

A federal oversight panel criticized the Obama administration's attempts to boost small business lending, expressing doubts on everything from the plan's promised success to whether the administration is taking the right approach.

The administration has proposed a host of programs fuel small business loans, which have nosedived over the last 20 months. However, the bulk of the money is centered on a TARP-like program that would invest up to $30 billion in taxpayer money into banks. The cost of the funds would decrease as banks increase their lending to small businesses.

"[S]mall business credit remains severely constricted," according to the Thursday report issued by the Congressional Oversight Panel, the bailout watchdog. Lending "plummeted during the 2008 financial crisis and remained sharply restricted throughout 2009." With Wall Street banks cutting lending and smaller banks "strained by their exposure to commercial real estate and other liabilities," many small businesses "have had to shut their doors, and some of the survivors are still struggling to find adequate financing."

"Small businesses have long been an engine of economic growth and job creation in America," the report states. "More than 99 percent of American businesses employ 500 or fewer employees, and together these companies employ half of the private workforce and create two out of every three new jobs. If the Troubled Asset Relief Program (TARP) is to meet its Congressional mandate to promote growth and create jobs, then it clearly must address the needs of small businesses.

"If credit is unavailable, small businesses may be unable to meet current business demands or to take advantage of opportunities for growth, potentially choking off any incipient economic recovery," the report states.

But the administration's approach may be based on a flawed diagnosis of the program, the report notes.There are open questions as to whether the reason for the decline in credit available to small businesses is due to demand or supply, according to the report.

There is less demand for loans, the report states, and the creditworthiness of borrowers also has declined -- a consequence of the worst economic downturn since the Great Depression. "[O]ur community banks [that have sufficient capital] clearly want to lend, but the demand is not there from the creditworthy borrowers," Stan Ivie, the San Francisco regional director of the Federal Deposit Insurance Corporation, told the Panel last month. "It seems like the healthy borrowers who could borrow are not interested in borrowing at this time."

There's also a lack of supply. Banks, predictably, are more risk-averse, chastened by losses on loans stemming from years of lax underwriting and the toll of the recession. Lending slid as banks sought to rebuild their depleted capital levels. Small businesses receive more than 90 percent of their funding from banks, according to the Panel's report.

But while community banks focus much of their lending on businesses, particularly small businesses, they're not the biggest source of small business loans, the Panel's report notes. Large banks, defined as those with more than $100 billion in assets, are the biggest providers of small business loans. But they're also the banks that cut their lending -- particularly commercial loans -- the most, federal banking data show. (See Chart)

*Source: Congressional Oversight Panel

Despite the supply-or-demand debate, the administration is intent on providing a supply-based solution, the report notes.

"TARP had focused in its early months on bailing out Wall Street," the Panel's chair Elizabeth Warren said during a Wednesday evening conference call with reporters. Late last year the Treasury Department announced a change. "And now [Treasury Secretary Timothy Geithner] said it was time to focus on Main Street. Now that Treasury has made small business a priority, how well is it doing?" she asked rhetorically. "The results are not encouraging," Warren answered.

According to her panel's report:
  • "The largest TARP program, the Capital Purchase Program (CPP), provided hundreds of billions of dollars in new capital to banks, but Treasury did not require recipients to use the money to improve credit access. In fact, after receiving the money, most recipients decreased their lending."

  • "The Term Asset-Backed Securities Loan Facility helped to restore liquidity to the securitized lending market, but because relatively few small business loans are securitized, the program had little impact on small business lending."

  • "[T]he Public-Private Investment Partnership program remains in its early stages, it has not targeted and will likely not target the smaller financial institutions that often serve small businesses."

  • "Two programs, the Community Development Capital Initiative (CDCI) and the Small Business Administration Securities Purchase Program, are proceeding under Treasury?s existing TARP authority, but their effects are likely to be limited. The CDCI will serve only a limited number of very small institutions, while the Securities Purchase Program would affect only loans guaranteed by the Small Business Administration, which make up a small percentage of the small business lending market."

And the proposed $30 billion fund, which first needs the approval of Congress, "may not be fully operational for some time. It could arrive too late to contribute meaningfully to economic recovery," the report notes. "Moreover, banks may shun the program for fear of being stigmatized by its association with the TARP, or they may wish to avoid taking on...liabilities at a time when their existing assets, such as commercial real estate, remain in jeopardy."

Also, the Panel states, the fund "raises questions about whether, in light of [TARP's] poor performance in improving credit access, any capital infusion program can successfully jump-start small business lending. "Supply-side solutions that rely on bank balance sheets...may not increase lending," the report notes.

The Treasury Department counters that the fund forms a key component in its arsenal of programs to increase the flow of credit and create jobs. Jobs can't be created without increasing credit. Treasury notes that the fund focuses on smaller banks because they nearly maintained pre-crisis lending levels, in comparison to their much-larger competitors.

*Source: Congressional Oversight Panel

"[O]ur proposal focuses on the lenders that did the most to maintain lending to small businesses during the crisis," Gene Sperling, a top adviser to Geithner, wrote in an e-mailed statement. The fund "is targeted only to smaller and community banks, with incentives targeted only to those that are increasing their lending to the small businesses our economy needs to expand and create jobs."

"The [$30 billion fund] will help prevent viable community banks that are worried about their commercial real estate portfolios from responding by cutting back on lending to the small businesses we need to support job creation and a strong recovery," Sperling wrote. He added that the program, "created completely outside of and separate from TARP," will help community banks "feel more comfortable" participating in the program. The Independent Community Bankers of America, community banks' main lobby, supported the proposal when it was announced.

Finally, Sperling added that the fund is one part of its overall response, noting that the administration is also proposing "small business tax relief, expansions of SBA programs and new lending initiatives." The oversight panel, knowing the administration's response, was unmoved.

"Because small businesses play such a critical role in the American economy, there is little doubt that they must be a part of any sustainable recovery," it noted in its report. "It remains unclear, however, whether Treasury's programs can or will play a major role in putting small businesses on the path to growth."

The New Sheriffs of Wall Street
by Michael Scherer

A few weeks back, at an event to celebrate the role of women in finance, Treasury Secretary Timothy Geithner tried to get things started with a joke. He said he had recently come across a headline that asked, "What If Women Ran Wall Street?" "Now that's an excellent question, but it's kind of a low bar," Geithner continued, deadpan amid rising laughter. "How, you might ask, could women not have done better?"

It is rarely noted that the financial wreckage littering our world is the creation, almost exclusively, of men, not women. And no wonder: to this day, each of the large banks, from Citigroup to Goldman Sachs, employs fewer than a handful of women in senior positions, and only 3% of Fortune 500 companies have a woman as CEO. Embarrassing tales of a testosterone-filled trading culture tumbled out of the what-went-wrong probes as the Great Recession took hold.

In itself, Geithner's joke was not extraordinary for Washington, where self-deprecating fare is the norm. But what happened next drove home a deeper point: the lectern in the marbled hall at the U.S. Treasury known as the Cash Room was cleared away so that a panel of women could take their seats. Among them was Sheila Bair, the chair of the Federal Deposit Insurance Corporation (FDIC) and one of the first federal regulators to publicly sound the alarm about the collapse three years ago.

She sat next to Securities and Exchange Commission (SEC) chair Mary Schapiro, the first woman to hold that post and the deciding vote to initiate the agency's recent lawsuit against Goldman Sachs. Across the stage sat Elizabeth Warren, chair of the panel bird-dogging the Troubled Asset Relief Program (TARP) bank bailout and the chief advocate for new consumer-finance regulations that banks and their allies have spent millions to oppose. Suddenly, something else became clear: these women may not run Wall Street, but in this new era, they are telling Wall Street how to clean up its act.

The same is true all over Washington: three of the five SEC commissioners are women; the head of the White House Council of Economic Advisers is a mother of three; and in the Senate, women have been leading the charge for tougher regulations. Arkansas Senator Blanche Lincoln stunned the banks in April with tough derivatives regulations that she announced in a letter to a small group of mostly female Senators, who fought beside her to include the language in a final bill.

Unlike many of the men they oversee, the new sheriffs of Wall Street never aspired to eight-figure compensation packages or corporate suites. Bair, Schapiro and Warren all made their careers far from Manhattan, taking on new jobs during pregnancies and outhustling the men around them. But it is their willingness to break ranks and challenge the status quo that makes these increasingly powerful women different from their predecessors. As Washington gets down to the hard work of putting laws into place that are designed to prevent another crisis, they are shaping the way government will protect investors and consumers for the next generation.

Under financial regulatory reform, which all three women support, both the SEC and the FDIC stand to win powerful new authority to limit and dismantle offenders. The Consumer Financial Protection Agency, a proposed body now working its way through the Senate, is the brainchild of Warren and is envisioned as a bulwark against what she calls the "tricks and traps" that banks hide in credit-card agreements and mortgages.

"Let's face it, women in the financial-services industry are outsiders," explains Warren when asked what unites her with Schapiro and Bair. "You see the world from a different point of view." Bair agrees. "There is a tendency — with some, not all — to value us less, whether it's our opinion or our work product," she says.

That's an attitude Wall Street's traders and their bosses would be wise to start shorting — and fast.

The Bank Examiner

Sheila Bair's Washington office overlooks Barack Obama's new White House basketball court, but her agency's roots reach back more than 70 years, to Franklin Roosevelt's days. The FDIC was created by Congress over the objections of the nation's biggest bankers in the 1930s so that the government would have the power to take over poorly run banks and safeguard the nest eggs of depositors. Banks have been delighted to slap that recognizable gold-and-black FDIC guarantee on their branch doors ever since, as long as the little New Deal agency doesn't meddle too much in their business.

Bair had hardly been named to the FDIC post by George W. Bush in 2006 when aides alerted her to a dangerous disintegration of lending standards across the banking industry — loans with hidden fees, poor documentation and explosive adjustable rates. Even though the regulation of these standards was the primary responsibility of the Federal Reserve, Bair authorized her staff to purchase a large industry database to confirm their suspicions. "It was just amazing to us what we saw," she says.

She began meeting with the banks, urging them privately in the spring of 2007 to renegotiate entire categories of loans to avoid massive foreclosures that could erode home values. The banks balked, so Bair went public. "We have a huge problem on our hands," she told bankers at a conference on Oct. 4 of that year. The response was hostile. "They were shocked and horrified," she says now. "I thought they were going to throw tomatoes at me."

Of course, Bair was right about the coming crisis: by the end of 2008, 25 banks had become insolvent and were taken over by the FDIC, including Washington Mutual, the largest bank to collapse in U.S. history. By the end of 2009, 140 more banks had failed. In private meetings with other regulators, Bair continued to hold a more populist line.

She pushed her own plan for foreclosure prevention, resisted a proposal for the FDIC to backstop all bank debt and effectively bail out unsecured bondholders and clashed regularly with colleagues who held closer Wall Street ties, including then Treasury Secretary Henry Paulson and Geithner, who was running the New York Federal Reserve. Bair says now that much of the tension could have been avoided. "We generally worked well together, but there were times when I felt the guys kind of got in a room and made a decision and then called me in," she explains. "And when I would ask questions or push back, I was being 'difficult.'"

The ugly days of late 2008 were strewn with moments when Bair was criticized both privately and in the press for saying what others would not. On Sept. 9, Bair decided that she had to call the CEO of Washington Mutual to warn him of a disagreement over the bank's ratings. When John Reich, the head of that bank's primary regulator, the Office of Thrift Supervision, found out about the call, he e-mailed one of his male colleagues, writing, "I cannot believe the continuing audacity of this woman."

For Bair, such challenges are nothing new. She was born in Independence, Kans., the daughter of a Depression-era surgeon and a nurse who always shunned debt. In 1981 she went to Washington to work for Republican Senator Bob Dole, who became her most important mentor. "She was available 24/7," Dole says, with a clear sense of pride. "As my wife will tell you, more is expected of women." In 1990, Dole encouraged Bair to run for an open House seat in Kansas. She ran as a pro-choice Republican and lost narrowly. "Senator Dole told me the reason I lost was because I was a woman and I was unmarried," Bair recounted in May 2009, on accepting an award at Harvard University. "That made me all the more determined to take on new challenges."

That she has done. This year Bair's agency has quietly taken over 68 more banks, though she believes the wave of failures will peak in 2010. She is pushing Congress to place her agency in charge of liquidating nonbank financial firms like insurance companies, which proved to be the source of huge systemic dangers during the collapse. If she succeeds, she says she would be happy to leave when her term expires in 2011. The author of two children's books, she has already begun to think about her memoirs. "When I write my book, that should be the title," she quips. "The Audacity of This Woman."

The Consumer Activist

Like Bair, Elizabeth Warren comes from the central plains. She was born and raised in Norman, Okla., with three older brothers and a fierce competitive streak to match. She was the state's top debater at 16; at 19, she was married; at 22, she had her first child. She enrolled in law school at Rutgers and two years later went to work as one of two female summer associates at the oldest continuing law firm on Wall Street. She says, "I still remember one of the partners taking me aside and saying, 'You know, being a summer associate is all well and good, but take a deep breath. Try to figure out if you think these guys are ever going to make a woman partner.'"

Just as she remembers his words, she remembers the brushback stirring her competitive juices. "It made me think, I can do that." But her career led elsewhere, into bankruptcy law. In 1978, Congress passed a revamped bankruptcy code, making it easier for businesses and individuals to start anew. Warren was teaching law at the time in Houston and decided to investigate, initially expecting to find that the system was filled with sleazy debtors. She found instead that most bankruptcies resulted from job loss or illness at home, a situation made worse by banks that were increasingly learning to trap people in costly debt cycles.

How? Partly by just confusing them. "For Bank of America's credit card in 1980, the agreement was 700 words long," she says. "The average credit-card agreement by the mid-2000s was 30 pages long, and it was loaded with 'double-cycle billing' and 'LIBOR-linked' — terms no one understood." The effect, Warren concluded, was akin to predation, not just for those with bad credit but for the entire middle class, which she felt was being hollowed out by agreements many of its members didn't understand. Over time, her academic work began to spill over into activism. She appeared on Dr. Phil, giving financial advice to young families; met with bank executives; and with her daughter Amelia wrote a nonacademic book called The Two-Income Trap, which Barack Obama cited before his run for President.

A couple of months after Lehman Brothers collapsed in 2008, she was preparing a barbecue for her students at Harvard Law when the phone rang. "He's saying, 'This is Harry Reid,' " Warren remembers. "Who?" As part of the final wheeling and dealing that led to the passage of the $700?billion TARP, Congress demanded an oversight board. Reid asked Warren to skipper it.

Since then, Warren has wielded her clout like a cudgel, releasing monthly reports demanding more information from Treasury, better investment returns from the banks and greater efforts to help borrowers. Warren's relations with Treasury officials and the banks have often been strained, sometimes by the harshness of her panel's critiques. She remembers talking in early 2009 with an official on Capitol Hill — she won't say whom — who told her point-blank, "That's not what reports are supposed to look like." She asked, "Why not?" The reply: "The language is far too direct."

At about the same time, President Obama decided to adopt another of Warren's ideas, from a 2007 academic article: a new Consumer Financial Protection Agency that would be devoted to protecting customers from tricky financial products. Bair and Schapiro voiced their support for the agency, even as the U.S. Chamber of Commerce promptly announced a willingness to spend "whatever it takes" to defeat the proposal. At least $3 million in advertising later, the chamber's effort has had only marginal success, though the fight continues in the Senate.

In the meantime, Warren has become something of a public intellectual, always game for interviews with Jon Stewart, Charlie Rose and Bill Maher. Her rising fame has come with added pressure. "It gets me deeply anxious," she says. "Here's this one brief minute, just like the one minute on Dr. Phil. Will I say the thing that needs to be said? Will I get it right? Will Congress make the changes they need to make?" The longer the odds, it seems, the more determined she is to succeed.

The Turnaround Artist

Taped to the door of Mary Schapiro's office on the top floor of the SEC building is a piece of paper that reads, "How Does It Help Investors?" The maxim is meant not just as a lodestar for her agency but also as a repudiation of its recent past.

Schapiro was appointed to a first stint at the SEC in 1988, to fill what she said was called its "woman's seat." When President Obama picked her as the commission's chair in 2009, the agency was on its heels, stung for missing Bernie Madoff's Ponzi scheme and embarrassed by news reports that senior officials had used their work computers to view pornography. "The world really changed around the SEC, and I think the SEC didn't change with it," she says now, somewhat diplomatically. When she arrived at the agency, she was far more direct. "I've been called the Muammar Gaddafi of regulation," she told a reporter.

In her first year, Schapiro has added staff, restarted an in-house think tank to mine data for systemic risk and initiated rulemaking to rein in arcane trading practices that had given large institutions advantages over individual investors. She did away with a rule that forced SEC investigators to get commission approval before proceeding with a case or negotiating settlements. Enforcement actions are up, as are fine collections, and in April she cast the deciding vote to bring charges against Goldman Sachs for alleged fraud — charges that have shaken the entire banking industry. To top off her first year, she also put out word to her staff: Anyone caught viewing porn at work would be "subject to termination." "You could call her a turnaround artist," says Elisse Walter, an SEC commissioner.

Born to a college librarian and an antiques dealer near Long Island's Great South Bay, Schapiro played three sports in high school and several more in college. Her academic focus at Franklin and Marshall College was the native culture of the Trobriand Islands off New Guinea. She started working as a lawyer at the Commodity Futures Trading Commission in 1980, just after the Hunt brothers had illegally tried to corner the global silver market. "I think it was the anthropologist in me that was fascinated by this idea that people thought they could control a world commodity," she recalls. "Here they were, causing extraordinary pain to lots of people."

In 1994, Robert Rubin, then President Clinton's economic czar, tapped Schapiro, then nine months pregnant, to take over the CFTC. Upon arriving, Schapiro promptly refused a request by Chicago traders to be exempted from federal regulations. Tom Donovan, then the head of the Chicago Board of Trade, struck back, announcing that he would not be "intimidated by some blond, 5-ft. 2-in. girl." Schapiro responded by telling a reporter, "I'm 5 ft. 5."

Sisterhood Is Powerful

In the mid-1990s, Schapiro was invited to Chicago to address a convention of commodities-and-derivatives traders. "Talk about a male-dominated industry," she recalls. "And standing up there, giving my maiden speech and searching the audience for just one or two women I could focus on, thinking there would be some empathy for the position I was in." The face she lighted on belonged to Bair, a fellow regulator and colleague who knew exactly what she was going through. "My favorite is when you are at a meeting and you say something, and it's just dead silence," Bair says. "Fifteen minutes later, some guy says exactly the same thing, and everybody is nodding their head."

All three women know these experiences, but they all have also noticed something else. "There are lots more women at the table now," Schapiro says. And the women have learned how to work together better. Around Washington, women call this "amplification," the extra juice that comes when powerful figures join forces to speak up against entrenched interests. As chairs of their commissions, both Bair and Schapiro have independently consulted with Warren in recent months for advice on consumer rights.

They have largely spoken with a united voice on financial reform, and when they gathered in late April for a TIME photo shoot, they promptly huddled to strategize on arguments to head off bank lobbyists' efforts against the new derivatives regulation moving through the Senate. The measure, believed to be dead a few months ago, now looks likely to pass by the end of the month. The only question is whether it will have the teeth to prevent a repeat of the crisis of 2008. "Do you know how many little changes could be made in that statute to just cut the legs out from underneath it?" Warren asks.

There is something else that all three share, an experience that can happen on the street, in line at the airport, in the supermarket. Women will approach them, even though they don't have famous faces, to shake their hands, to thank them, to ask if they will take a photograph with young daughters or sons. "That's a powerful thing," says Schapiro. "I've had people lean out of car windows and yell, 'Keep it up, Elizabeth,' " adds Warren. "I can't go out in my sweats anymore," says Bair.

Weekly jobless claims fall 4,000 to 444,000
by Jeffry Bartash

The number of people applying for unemployment benefits essentially held steady at 444,000 in the latest week, a reflection of a frail U.S. job market. Claims fell by 4,000 in the week ended May 8, but the data was revised up by 4,000 for the prior week to a seasonally adjusted 448,000, according to the Labor Department. The net effect: no change from last week's headline number. Economists surveyed by MarketWatch predicted initial claims would dip to a seasonally adjusted 440,000.

The four-week average of initial claims -- a better gauge of employment trends than the volatile weekly number -- dropped by 9,000 to 450,500. Initial claims have fallen just 2.2% since the beginning of the year, but they are 29% lower compared with a year ago. A slow downward trend in weekly claims over the past month, taken together with other employment data, suggests companies are firing fewer workers and that hiring is on the rise. Last week, the government reported that 290,000 jobs were created in April, the biggest gain in four years.

Yet it's far from clear whether recent hiring trends are sustainable given a fragile economy recovery. Many consumers are still saddled with large debts and the jolt from the massive federal stimulus program could wear off later this year. Businesses are reluctant to hire in a big way until they see demand for their goods and services pick up. Economists generally believe weekly claims have to fall below 400,000 to signify accelerating job growth. And they say monthly job growth has to average 300,000 to 400,000 to make a big dent in the nation's 9.9% unemployment rate. More than 8 million people lost their jobs during the height of the recession in 2008 and 2009.

The number of people who continue to get regular unemployment checks, meanwhile, rose by 12,000 to a seasonally adjusted 4.63 million in the week ended May 1. That's the most recent data available. The number of workers receiving extended federal benefits declined by almost 217,000 to 5.14 million in the week ended April 24, not seasonally adjusted. Extended benefits kick in after a recipient exhausts eligibility for state unemployment compensation, usually after 26 weeks. Lawmakers have extended benefits for up to 99 weeks to workers in the states hit hardest by the recession. Altogether, 10.07 million people were collecting some type of unemployment benefits in the week ended April 24, down 332,264. The numbers are not seasonally adjusted.

Soaring Health Insurance Profits Fuel Push To Limit Rate Hikes
by < Dan Froomkin

The nation's five biggest for-profit health insurance companies didn't curb their appetites as Congress closed the deal on health care reform. Far from it. Despite growing political pressure and tough economic times, the companies cashed in on double-digit rate hikes to report profits of $3.2 billion in the first three months of 2010, up 31 percent from the same period last year, according to a new report by Health Care for America Now, an advocacy group.

"How do they do it? They do it through greed," HCAN executive director Ethan Rome said in a call with reporters. "By covering fewer people, offering worse benefits, providing less care and charging consumers and employers more." Indeed, premiums have been growing faster than medical costs, and four of the five companies further reduced the percentage of premium dollars they spent on actual health services, according to the report. Meanwhile, higher premiums and out-of-pocket costs evidently drove many families to give up their plans altogether. The new study finds 2.8 million people, or over 3 percent of those companies' clients, abandoned ship during 2009 and the first three months of 2010.

If there's a silver lining here, said Rep. Jan Schakowsky (D-Ill.), it is that news like this adds urgency to the need for a bill to rein in outrageous rate hikes. Shakowsky and Sen. Dianne Feinstein (D-Calif.) have proposed legislation in their respective chambers that would give the federal government the authority to deny or modify rate increases found to be unreasonable, particularly in the 26 states that currently don't have that ability. "The companies themselves have been very helpful in moving this bill along, if you know what I mean," Schakowsky said in the call with reporters. She singled out Wellpoint as "the poster-child for unbridled greed."

Last month, Anthem Blue Cross, a subsidiary of Wellpoint, withdrew plans for rate hikes across California averaging about 25 percent after the state's insurance commissioner determined through an independent audit that its justification for the increases was full of mathematical errors and double counting of data. A day before that, Wellpoint announced that its first-quarter profits were up a whopping 51 percent. And the company is also on the defensive against allegations made in a Reuters article by Murray Waas that it systematically dropped coverage for women diagnosed with breast cancer. Wellpoint's response was that it doesn't target breast cancer victims, it actually systematically drops coverage for men and women diagnosed with lots of different diseases.

The health reform legislation passed in March will limit how much of every premium dollar can go to administrative costs, executive pay and profits. But companies are already shifting costs to minimize the impact and are hard at work manipulating how the final regulations are written. There is no explicit limit on continued increases in premiums. "There's nothing in health reform that would stop this from happening," said Feinstein. The industry could continue rate hikes even beyond 2014, when health care "exchanges", ostensibly increasing competition, come online. That's because a few huge companies "increasingly control market share, which gives them the opportunity to raise rates at will," Feinstein said.

Schakowsky and Feinstein said their measure has broad support but was not included in the final reform legislation because of technical issues related to the Senate's passage of the bill through a procedure that precluded a filibuster. Schakowsky described herself as "very optimistic" about the bill's passage. But Feinstein acknowledged that the provision may not get 60 votes in the Senate. "This is hard, and candidly I'm not sure at this point," she said, adding cryptically -- and petulantly -- that "someone who I won't mention who I thought was for it is not." "We will not have every Democrat," she said. "I doubt very much whether Sen. Ben Nelson (D-Neb.) would support this. So the problem is, we would need to pick up some Republicans."

Greece and the New Colonialism
by Anne Applebaum

Who knew the European Union had so much power over its member states?

For the time being, the markets have been pacified. For the moment, the riots in Athens have subsided. Only " hundreds" of demonstrators came out over the weekend, fewer than the 50,000 who killed three people during a violent petrol-bomb attack on a bank. But this temporary truce in Greece has been bought at a high price—by which I don't just mean that it was expensive.

Here in front of me, I have a draft version of the Council of the European Union's most recent "decision" on Greece. It isn't a classified document. Bits of it have been in the newspapers; the Greek parliament has already voted to pass some of its provisions; and a similar, though less comprehensive, decision was published in February. But although it's not secret, no one is yet talking much about its political significance. For this is no ordinary piece of Euro-bureaucracy: This is the kind of thing a surrendering field marshal signs in a railway car in the forest at the end of a bloody war.

The European Union and the IMF will rescue Greece, spending billions of euros to do so. And in exchange, Greece will agree not merely to reduce its vast public deficit but will adopt, by June 2010, no less than 17 specific legal and budgetary changes. Among other things, the council declares that Greece "shall" reduce the "Easter, summer and Christmas bonuses" of civil servants and pensioners; increase taxes on fuel, tobacco, and alcohol; reduce the operating costs of local government; and pass a law to simplify the rules for new business start-ups.

Once that is all out of the way, Greece "shall," by September 2010, fulfill another nine requirements, among them a pension reform that raises the retirement age to 65, up from a current average of 61. By December 2010, Greece "shall" adopt another 12 measures, among them one mandating the use of generic drugs in the state health care system. There are further deadlines in March 2011, June 2011, and September 2011. If the Greek government wants to continue receiving the cash it needs to function, it will have to pass all this legislation, piece by piece.

I have no doubt that all these measures are necessary, even long overdue. Probably there was no other way to persuade a Greek parliament to pass them. Violent riots have become an acceptable way of expressing political opinion in Greece, and bitter partisanship means that each government undoes the work of its predecessor. This is not a political culture in which any government would find it easy to raise the retirement age by four years or to eliminate Christmas bonuses for civil servants.

Nevertheless, this decision does represent something new. Though the European Union has always required a partial surrender of sovereignty from its member states, Greece no longer has much sovereignty at all. IMF agreements also impose conditions, but the language is somewhat different: The indebted country requests help, the IMF responds. In this case, the EU has decided what Greece "shall" do. I don't believe anybody knew that the EU had so much power over its member states, least of all the Greeks.

Maintaining this intense legislative schedule will not be a simple matter, whatever promises have been made. Modern Greece has a history of foreign occupation—by the Ottoman Empire, by Nazi Germany—and some Greeks are already calling on their countrymen to resist the new occupation forces of the EU and the IMF. Resistance could take forms more subtle than rioting. Athens, after all, is a city in which 364 people told tax authorities they owned swimming pools—and in which satellite photographs reveal the existence of 16,974 swimming pools. If a tax or legal reform is perceived as a foreign imposition, will Greeks abide by it?

Though no one is saying so, this visible imposition of EU power on Greece will also serve as a warning to others who want to enter the Eurozone in future. Yes, if you play by the rules, being part of Europe means being part of the world's largest and most prosperous economy. But if you don't play by the rules, you risk coming under foreign financial occupation. We might not yet have a name for this phenomenon—neo-Euro-colonialism?—but, without anyone noticing, it has arrived.

Argentina warns Greek bail-out will fail
by Jude Webber

The Greek rescue package will fail, according to Cristina Fernández, Argentina’s president, whose country suffered the world’s biggest debt default in 2001. She said the bail-out repeated the same recipes they applied to us, which provoked [what happened in] 2001. Argentina, as an IMF member, voted for the Greek bail-out, but critically, Ms Fernández said, adding the enforced austerity will have terrible consequences on the economy. They are repeating prescriptions whereby what they are trying to do is rescue the financial system. We believe these policies are condemned to failure and that is why we don’t apply them in our country.

In the 1990s, Argentina was a devotee of the pro-market Washington Consensus and pegged the peso to the dollar. But it racked up debt and its economy crashed. Argentina savagely devalued its currency and became a pariah on international financial markets. The government has never forgiven the IMF for what it considers were reckless policy prescriptions. It paid off its $10bn debt to the lender in full in 2006 and still refuses to submit to IMF reviews of its accounts.

Speaking at an event on Monday night to refinance debt for Argentina’s provinces, Ms Fernández defended the demand-driven economic model, which has delivered several years of high growth, championed by her husband, Néstor Kirchner, in his 2003-07 government and which she has continued since. Since 2003 we have been applying a totally different model that has permitted a very strong and very sustained reduction in the nation’s debt, she said.

Ironically, Argentina is now seeking to issue new debt as part of a debt swap designed to mop up nearly $20bn unpaid since the 2001 default. The Greek rescue plan initially cheered markets, boosting Argentine bonds and giving a fillip to the swap prospects. But the uncertain outlook may well force Argentina to postpone the plans to raise $1bn in new money, which was to have been launched in tandem to the swap.

Free at last, Bank of England Governor King speaks his mind
by Jeremy Warner

In Europe, there's international rescue, while here in Britain there's a sudden outbreak of peace, harmony and mutual understanding between previously warring political parties, and in our imaginings at least, a degree of political stability has returned.

Both in Europe and the UK, there's a sense that we've retreated from the brink. Yet beyond the reassuring positives of immediate events, a harsh reality awaits – a fiscal squeeze, here in Britain and throughout much of the rest of Europe, of unprecedented ferocity.

The urgency of imposing this squeeze was laid bare by Mervyn King, Governor of the Bank of England, at his Inflation Report press conference yesterday. His unequivocal advice to the new government was that time is of the essence. Recent events in Europe have highlighted the need for immediate action in addressing the deficit. The pain must begin now. He's never been so explicit.

Since I cannot express Mr King's anxieties any better than he did himself, I'll let him speak for himself. It is "absolutely vital", he said, "for governments to get on top of the problem. We cannot allow concerns about sovereign debt [in the eurozone] to spread to a wider environment. Dealing with the banking crisis was bad enough, this would be worse".

So what does this squeeze entail? An immediate start will be made with £6bn of spending cuts this year. At just 0.4 per cent of output, this is unlikely to make much difference to growth one way or the other, and if you believe that failure to show willing would have driven market interest rates higher, then the effect could be seen as mildly positive.

Beyond that there is a commitment from the new government to an accelerated plan of deficit reduction. We'll have to await the emergency Budget – promised within 50 days – to know exactly what this means. Under the previous Government's plans, it would have taken eight years to return to balanced budgets. The new Government will want substantially to eliminate the structural deficit in just one parliament. In round numbers, that means around £80bn in spending cuts and tax rises – roughly equivalent to Britain's entire education budget for this year.

The coalition's resolve will be tested to breaking point. As on nuclear power, defence and so much else, the present love-in on deficit reduction is going to be tough to impossible to sustain.

I thought I had died and woken up in Brussels on hearing David Cameron, in true eurocrat style, say that political compromise was not a sign of weakness but of national strength. That must indeed have been quite a lecture on the merits of coalition government he had had over night from Angela Merkel, the German Chancellor.

There was a rather better sense of reality across town behind the fortress walls of the Bank of England. It's not just the UK deficit that so concerns Mr King. He also worries about Europe, where as with the UK fiscal policy the Governor has found his tongue as never before. The emergency measures, he said, provided but a brief window of opportunity for distress nations to put their houses in order. There would also need to be fiscal union within the euro area to make the monetary union work.

As it happens, that's precisely what the emergency measures seem to amount to. It is impossible to see them as anything other than a giant leap towards shared fiscal responsibility in the eurozone. As if to hammer home the point, the European Commission yesterday announced plans to vet national plans for consolidation before even national parliaments get to hear about them. The centre is progressively imposing its will. It is also what the euro's founding fathers always knew would happen. A cynic might say it was even planned that way by Europe's political elite.

They knew you couldn't have monetary without full scale fiscal and economic union, but the project was sold to citizens on the basis that you could. They also knew there would eventually be a crisis that would push Europe, whether voters liked it or not, towards the necessary fiscal union.

And so it has proved. In just a single weekend, the dam has been breached and Germans, forced by the demands of their own self imposed fiscal discipline to accept a pensionable age of 67, find themselves paying for Greeks who up until now have been retiring at 52.

Unfortunately, Britain cannot remain immune to Europe's travails. Having our own monetary policy provides only limited insulation. To rebalance in the manner desired – from debt to savings, and from consumption to investment and exports -– Britain needs the backdrop of a prosperous Europe.

Trouble is, it looks ever less likely we'll get it. All of a sudden, Europe seems to be catching the German habit en masse, with ever more ambitious plans for fiscal austerity. Donning the hair shirt may be just what the doctor ordered, but if everyone does it all at the same time, it's going to kill the recovery.

To counter the extreme fiscal consolidation going on in the Club Med nations, you ideally need Germany, which is not as fiscally constrained as elsewhere, to be taking countervailing measures to stimulate German domestic demand so that trade imbalances within the eurozone can be reduced.

Yet actually, Germany is going the other way. Electoral setbacks in North-Rhine Westphalia have finally put paid to the Merkel government's plans for tax cuts. Germany's culturally ingrained aversion to debt and inflation is reasserting itself with a vengeance. About the only country in Europe right now which is capable of expanding its deficit to support demand is in fact as determined on balanced budgets as everywhere else.

The irony in all this is that relative to the rest of Europe, sterling assets are beginning to look attractive again. UK growth is generally better than elsewhere in Europe, and the pound is almost certainly oversold. Yet a strengthening pound is just what the economy doesn't need to pull off the desired rebalancing.

Britain has little option but to join the crowd, hunker down and address the deficit. If the new coalition government is as good as its word, it means that monetary policy can remain accommodative for longer. There could even be more QE. That in itself ought to take some of the upward pressure off sterling. But without growth in Europe, the fiscal adjustment is going to feel even more painful than already prescribed.

Gulf of Mexico Oil Spill Threatens Endangered Sea Turtles
by Tammy Rose

Sea turtles may be the Gulf of Mexico oil spills biggest victims. Already 25 turtles have been found washed up on Mississippi’s shorelines. Autopsies are being done to confirm whether or not their deaths are linked to the oil spill. If it is determined that the oil spill is the cause of death in the turtles the oil could have harmed the turtles in many different ways. Experts say that contaminants, such as oil, can lead to changes in a sea turtles immune system. Contaminants can also cause liver damage and lead to changes in the turtle’s protein and carbohydrate regulation. Experts report that hydrocarbons released by oil can trigger pneumonia, if these chemicals enter the lungs. Red blood cells can also be damaged.

One particular sea turtle, the Kemp's Ridleys turtles in the Gulf of Mexico are of particular concern in this disaster as they are listed on the Endangered Species List. "I have great concern for the environmental impact the spill will have on our fragile coast." Dr. Andre Landry, Jr. of Texas A&M University's Sea Turtle and Fisheries Ecology Research Lab said Friday. "We are entering the prime time within the Ridley nesting season in which adult females will be in near shore waters nesting three to four times every 14 to 21 days." "I am particularly concerned about potential damage to sea turtle assemblages that forage and nest along the Louisiana coast," he said, "especially within Breton Sound, the Chandeleur Islands and eastward toward other barrier island beaches and their wetland fringes that extend to the Florida Panhandle and areas such as Cedar Key."

The oil slick has reached the Chandeleur Islands. There are five species of endangered and threatened sea turtles in the gulf, this area is one of the Kemp's Ridley's only foraging and migration routes to their last remaining nesting beaches in Texas and Mexico. Berms and booms have been put in place to deflect and catch oil in the Brenton National Wildlife Refuge in Louisiana, and also along 220,000 feet of coastline, the majority of the gulf coastal areas remain unprotected from the impending environmental devastation.

As the spill continues to move east toward Florida beaches, it will most likely impact nesting habitats of Loggerhead and green sea turtles. This area has the largest nesting area for Loggerheads, who are proposed to be put back on the Endangered Species List. Green sea turtles are already listed as endangered and take up to 20 years to reach sexual maturity and begin nesting. Because the Kemp Ridleys are the smallest of the sea turtles they are drawing the most concern from scientists and experts.

"This spill could not have come at a worse time for migrating and nesting Kemp's Ridleys. I am outraged that shrimp trawling has increased in Louisiana in anticipation of an oil closure, their careless actions kill hundreds of endangered turtles each year," says Carole Allen, Gulf of Mexico director of the Sea Turtle Restoration Project and founder of the non-profit Help Endangered Animals Ridley Turtles.

Panel reveals litany of failures on oil spill
by Anna Fifield

A litany of failures led to the catastrophic spill from BP’s Gulf of Mexico well, a powerful US Congressional investigations panel revealed on Wednesday, suggesting officials from numerous companies overlooked many warning signs. The revelations, gleaned from 100,000 pages of documents from the companies involved, including Transocean, the operator, also showed that the BP well had failed a key pressure test only a few hours before a gas surge led to the explosion.

With efforts to contain the spill and protect the Gulf environment continuing with little success, the claims have the potential further to damage the reputations of the companies involved. The more I learn about this accident, the more concerned I become, Henry Waxman, chairman of the House energy committee, told a hearing of the oversight and investigations subcommittee, which had requested the documents. This catastrophe appears to have been caused by a calamitous series of equipment and operational failures.

Executives from BP, which owns the well; Transocean, which operated the rig; Halliburton, which cemented around the well equipment; and Cameron, which made the blow-out preventer, sat solemn-faced. Bart Stupak, head of the subcommittee, said he uncovered at least four significant problems with the blow-out preventer on the rig, which was meant to shut off the well in an emergency. These included a leak in a hydraulic system, which was supposed to provide emergency power to the shear rams that would cut through the drill pipe and seal the well.

There was also insufficient power in the blow-out preventer to propel the shear rams through the drill pipe. Furthermore, the blow-out preventer had been extensively modified, something that BP did not realise for at least a day after trying to activate an underwater control panel. Also, at least one of the batteries in the deadman switch that was supposed to provide the final back-up was flat. The safety of its entire operations rested on the performance of a leaking and apparently defective blow-out preventer, Mr Stupak said.

The documents also revealed that the well failed several pressure tests on the day of the explosion, but that at 8pm – two hours before the disaster – BP decided operations could resume, with Transocean apparently disagreeing. BP said in a statement on Thursday that the total costs of the spilll now totalled about $450m, having said on Monday that it had spent $350m. It said more than 13,000 personnel from BP, other companies and government agencies were currently involved in the response to the incident, and it had seen 6,700 claims filed, of which about 1,000 had already been paid.

Criminal charges likely from Gulf oil spill, legal experts say
by Marisa Taylor

Federal investigators are likely to file criminal charges against at least one of the companies involved in the Gulf of Mexico spill, raising the prospects of significantly higher penalties than a current $75 million cap on civil liability, legal experts say. The inquiry by the Homeland Security and Interior Departments into how the spill occurred is still in its early stages and authorities have not confirmed whether a criminal investigation has been launched. But environmental law experts say it's just a matter of time until the Justice Department steps in - if it hasn't already - to initiate a criminal inquiry and take punitive action.

"There is no question there'll be an enforcement action," said David M. Uhlmann, who headed the Justice Department's environmental crimes section for seven years during the Clinton and Bush administrations. "And, it's very likely that there will be at least some criminal charges brought." Such a likelihood has broad legal implications for BP and the two other companies involved — not the least of which is the amount of money any responsible party could be required to pay. The White House is asking Congress to lift the current $75 million cap on liability under the Oil Pollution Act of 1990, but there's no cap on criminal penalties. In fact, prosecutors in such cases can seek twice the cost of environmental and economic damages resulting from the spill.

While Attorney General Eric Holder has confirmed that Justice Department lawyers are helping the agencies involved in the oil spill inquiry with legal questions, department officials have refused to detail what their role entails. But Uhlmann and other experts said it's likely prosecutors are already poring over evidence from the spill because under the Clean Water and Air Acts and other federal laws aimed at protecting migratory birds, an accidental oil spill of this magnitude could at least result in misdemeanor negligence charges.

And under the migratory bird regulations, prosecutors have very broad discretion. "If it happens, then you can charge it," said William Carter, a former federal prosecutor of 14 years who headed the environmental crimes section for the Los Angeles U.S. attorney's office. "There's no intent required." He added that he agreed with Uhlmann, saying, "I would be shocked if there were no criminal charges filed in this case. There are so many things that went wrong out there."

In testimony on the Hill this week, all three companies involved in the spill — BP, Halliburton, and Transocean — denied culpability for the spill and have instead blamed each other. BP did not respond to requests for comment. Halliburton and Transocean declined to answer questions, saying it would be "inappropriate" to comment on any possible litigation or investigations. "At the moment, Transocean is concentrating its efforts on assisting BP and federal and state agencies on the clean-up effort," the company said in a statement.

One of the numerous factors in determining whether to file criminal charges is the adequacy of civil damages, which would provide an additional reason for prosecutors to pursue a criminal case in connection with the Gulf spill, experts said. Prosecutors also look at the history of violations, which could also persuade them to file charges. BP, for example, has already agreed to pay millions in criminal penalties for several major incidents, including for a fatal explosion at a Texas refinery in March 2005.

BP and several of its subsidiaries agreed to pay a total of $373 million in fines for the Texas explosion, leaks of crude oil from pipelines in Alaska, and for fraud for conspiring to corner the market and manipulate the price of propane carried through Texas pipelines. While the government will probably only bring criminal charges if there is some sort of negligence — "that's not a very high bar," Uhlmann said. In 1999, the Ninth U.S. Circuit Court of Appeals upheld the misdemeanor conviction under the Clean Water Act of a supervisor at a rock quarry project that accidentally ruptured an oil pipeline, causing a spill. For a felony, prosecutors have to demonstrate companies "knowingly" violated the regulations.

Tracy Hester, the director of the Environment, Energy and Natural Resources Center at the University of Houston, said prosecutors would be looking for "any possible concealment of the risks, a failure to respond to any known risks, and a failure to report a dangerous situation." "Knowing is a slippery term," Hester said. "But knowing doesn't necessarily mean that you knew it was a violation of the law. You just have to be aware that what you were doing fell into what is regulated." But Oliver Houck, a professor with Tulane University who specializes in environmental law, predicted that prosecutors are not going to want to pursue minor charges for such a catastrophic spill.

Meanwhile, the companies themselves have already started pointing fingers. In testimony this week, BP pointed to questions about the blowout preventer — and made it clear that Transocean owned it. Transocean, however, denied the blowout preventer caused the accident and hinted that the cementing and casing did not properly control the pressure. Halliburton, the cementing sub-contractor, pointed to BP as the well owner.

"This has been a series of 'Oh my god' revelations, 'They did what?'' Houck said. "But those revelations are the grits and grease of standard civil claims." "To get into criminal land, you would have to prove that they knew that the short cuts they were taking brought a high probability of serious risk," he said. "I don't think the government has that yet. That's what grand juries are for." Houck added that some of the strongest environmental criminal cases have come out of civil cases, which means that prosecutors may not determine whether any of the companies have criminal liability for months, if not years. "The beauty part of civil trials is the competing companies," he said. "As a prosecutor this is the most delightful scenario: All the defendants proving each others' guilt."

Where's The Oil? Your Government Doesn't Really Know
by Dan Froomkin

For more than three weeks now, crude oil has been erupting out of a pipe a mile underneath the surface of the Gulf of Mexico. A new analysis of seafloor video indicates that nearly 70,000 barrels are gushing out every day, NPR reports. That is at least 10 times the U.S. Coast Guard's original estimate of the flow, and "the equivalent of one Exxon Valdez tanker every four days."

And nobody really knows where it is, or where it's headed. Federal officials are carefully tracking the trajectory of the oil that's made it to the water's surface and, increasingly, on shore. They even put out a daily map. But there's never been an oil spill this big and this deep before. Nor have authorities ever used chemical dispersants so widely.

As a result, some scientists suspect that a lot, if not most, of the oil is lurking below the surface rather than on it, in a gigantic underwater plume the size and trajectory of which remain largely a mystery. Oil on the surface can be fairly easily spotted by helicopter and satellite. But tracking an underwater plume is a much more complicated task, which thus far appears confined to one lonely improvising research vessel whose crew had been planning to hunt shipwrecks.

Rick Steiner, a University of Alaska marine conservationist who recently spent more than a week on the Gulf Coast, said the National Oceanic and Atmospheric Administration [NOAA] risks wildly underestimating the damage caused by the massive spill. "If you don't look, you won't find, and they're not looking in the right places," Steiner told the Huffington Post.

Most major oil spills occur right at the surface, he explained. This one is entirely different. With a spill this deep, the oil starts off extremely dense and under pressure. Some of it breaks up or dissolves into the water on the way up, and some of it makes it all the way to the surface. But some will "stabilize in the water column" maybe as low as 200 to 300 meters off the seabed, Steiner said. "Then it starts drifting with the current."

"I'm virtually certain that a lot of this oil hasn't even surfaced yet," he said. "What we don't know is the trajectory and direction of this subsurface toxic plume." That's critically important information, both in order to assess what sorts of habitats the oil may be wiping out, and because "this stuff can pop up in surprising places, weeks if not months from now," he said.

Another aspect of this spill that's unusual is the widespread use of chemical dispersants, applied both at the source and on the surface. Oil sprayed with dispersants on the surface, for instance, breaks into small droplets -- which could then remain suspended in the water column, Steiner said.

Doug Helton, an emergency response coordinator in Seattle who is NOAA's trajectory expert, told HuffPost on Thursday that measuring and tracking the oil beneath the surface is beyond NOAA's abilities at this point. "We have some ideas of how it's working," he said.

"We think that for the most part the oil is surfacing," he added. And referring to a video that shows oil billowing out and up from the pipe, he noted that "you can see it's not staying there." But tracking oil underwater "is a harder problem because you can't just fly out with a helicopter to look at it or see it from a satellite," he said. "It's not a simple answer."

"We have models of how oil behaves when it releases from the sea floor," he said. The models suggest that the oil from this spill is spreading out in a huge cone, a mile high and about two miles across, initially. Then, he said "we can look at currents." But the currents are not uniform at different depths. "We have some testing that's trying to understand what the fate of that oil is, subsurface, but that's a problem," he said. "It's a lot easier problem to model the stuff that's on the surface.

As it happens, Science journalist Mark Schrope is aboard the National Institute for Undersea Science and Technology research vessel Pelican, which is spending the week taking water samples in the Gulf. "As far as we know, this is the only research ship working in the region, Schrope wrote on Monday.
The mission, evolving on the fly, is a daunting one for the team. Most of the scientists are doing work outside their normal bounds, and they're preparing to deploy equipment that in some cases they've never seen before. They'll be doing their best to fill a growing list of requests from colleagues for samples and data, all aimed at better understanding the spill and what it's long-term impacts might be.

On Tuesday, Schrope described finding "countless small dead jellyfishes known as by-the-wind sailors, or Velella vellela, and known to be susceptible to oil. Normally these animals, about the size of two fingers together, are blue and float on the surface with a triangular sail rising above the water. But those we see here are transparent and floating upside down, many stained with oil."

"So where is the oil now? " Schrope asked on Wednesday. "That's really the guiding question of the whole expedition. The team will not be able to say for sure this week what's happening."

And on Thursday, Schrope wrote about how the scientists were developing a hypothesis: That there's a layer of dispersed oil about two thirds of a mile down. "This could be coming straight from the... gushing well, where the response team is now adding dispersants directly, and prevented from surfacing by the ocean's complex interplay of currents, density differences, and other factors," Schrope wrote. He continued:
Eventually the team found that farther away from ground zero the layer was lower... This might show the oil, likely aggregated with plankton and other organic material, is settling out over time....

The team is now on a quest to define the bounds of this strange plume. NIUST chief scientist Arne Diercks compares the effort to hunting shipwrecks, which is one of the things the group would have been doing on this expedition if they had not been diverted to oil research.

Defining the plume will only tell a small piece of what's going on here, though. As for the larger questions of what will happen to the plume, how far it will drift, and what effect it might have on life in the deep, assuming it is in fact oil? "I don't know," says [Vernon Asper, an oceanographer with the NIUST team], "I just don't know. But that's why we're here."

US Congressman to launch inquiry on how much oil is gushing into Gulf
by CNN Wire Staff, Ed Lavandera

A U.S. congressman said he will launch a formal inquiry Friday into how much oil is gushing into the Gulf of Mexico after learning of independent estimates that are significantly higher than the amount BP officials have provided. Rep. Edward Markey, a Democrat from Massachusetts, said he will send a letter to BP and ask for more details from federal agencies about the methods they are using to analyze the oil leak. Markey, who chairs a congressional subcommittee on energy and the environment, said miscalculating the spill's volume may be hampering efforts to stop it.

"I am concerned that an underestimation of the oil spill's flow may be impeding the ability to solve the leak and handle the management of the disaster," he said in a statement Thursday. "If you don't understand the scope of the problem, the capacity to find the answer is severely compromised." BP officials have said 5,000 barrels per day of crude, or 210,000 gallons, have been leaking for the past three weeks. But a researcher at Purdue University has predicted that about 70,000 barrels of oil per day are gushing into the Gulf after analyzing videos of the spill.

Associate professor Steve Wereley said he arrived at that number after spending two hours Thursday analyzing video of a spill using a technique called particle image velocimetry. He said there is a 20 percent margin of error, which means between 56,000 and 84,000 barrels could be leaking daily. "You can't say with precision, but you can see there's definitely more coming out of that pipe than people thought. It's definitely not 5,000 barrels a day," Wereley said. He said he reached his estimate of 70,000 barrels per day by calculating how far and how fast oil particles were moving in the video.

Markey's statement said that officials from BP, Transocean and Halliburton estimated a worst-case-scenario maximum flow at 60,000 barrels a day during congressional testimony Tuesday. More than 260,000 barrels of oil spilled during the 1989 wreck of the supertanker Exxon Valdez in Alaska's Prince William Sound. BP spokesman Mark Proegler said that the company stands by its 5,000 barrels per day estimate. He said the company reached that number using data, satellite images and consultation with the Coast Guard and the National Oceanic and Atmospheric Administration. But there is no way to calculate a definite amount, he said. "We are focused on stopping the leak and not measuring it," he said.

Oil has been gushing into the gulf since April, when an explosion sank the Deepwater Horizon drill rig. The blast left 11 workers lost at sea. BP said Thursday that it would attempt to insert a new section of pipe into the riser of its damaged undersea well to capture the leaking oil. A previous effort to cap the gusher with a four-story containment dome failed when natural gas crystals collected inside the structure, plugging an outlet at the top.

BP, the Coast Guard, and state and local authorities have scrambled to keep the oil from reaching shore or the ecologically delicate coastal wetlands off Louisiana. They have burned off patches of the slick, deployed more than 280 miles of protective booms, skimmed as much as 4 million gallons of oily water off the surface of the Gulf and pumped more than 400,000 gallons of chemical dispersants onto the oil.

Investigators are still trying to determine what caused the April 20 explosion aboard the Deepwater Horizon. BP has blamed drilling contractor Transocean Ltd., which owned the rig. Transocean says BP was responsible for the wellhead's design and that oilfield services contractor Halliburton was responsible for cementing the well shut once drilled. And Halliburton says its workers were just following BP's orders, but that Transocean was responsible for maintaining the rig's blowout preventer.

Dick Cheney 'Needs To Testify' About BP Oil Spill, Says Chris Matthews

Former Vice President and one-time Halliburton CEO Dick Cheney should be called to testify about the gulf oil spill, according to Chris Matthews. Matthews argues that because Cheney held secret meetings with big oil to develop the Bush administration's energy policy, it's impossible to know who was responsible for the oil spill in the Gulf of Mexico. Matthews elaborates:
You see, in the cozy world of oil and those charged by public oath with regulating it, these are leaks that can be prevented. Halliburton is now saying it`s not to blame for what happened in the Gulf of Mexico. How on Earth are we to know who was responsible for this in this incredibly incestuous little set up?

We have the vice president of our country, fresh from his job as CEO of the oil company, holding secret meetings with oil companies in the White House. From top to bottom, the government President Obama inherited was stocked with Halliburton people, supposedly looking at Halliburton, while the whole thing looks like they were looking out for Halliburton. Don`t you think?


jal said...

You have quoted a large list of people/bloggers that expect the calvary to come to the rescue.

Yes, "the rescuers" are coming! ... They are called republicans.

They will use their cutting swords even more.


zander said...

Ilargi, you've done some great posts since my time here, this might or might not be the best but it sure is the hardest hitting, a perfect mix of brutal truth and justified rant not unlike old Joe himself.
Great stuff, keep it comin' man.


Rumor said...

Oh sweet jesus, that Bagaent piece is excellent.

I kept thinking of the stand alone complex, for you japanese cartoon watchers.

Anonymous said...

Oh there will be cutting, Jal. The Republicans simply have no clue. Most people have no clue. Try starting with The Book of Eli and let your imagination run wild from there. The "new normal" is not going to look anything like what 99.9% of humans expect.

Anonymous said...

@Greyzone - If I may be so bold as to propose, I would suggest the new normal may look a lot like Illinois.

In this version of reality outside the hallogram, no one, not Rs and/or Ds, actually make any cuts. Rather, bills simply aren't paid.

Now, how is that any different from how individuals behave? Everyone continues to go through the motions: coffee is made, "work" is performed, bills are set aside.

Ah, now the badgering phone calls begin. Oh, someone is at the door, asking for payment. We say we have no money. But what choice do the tradesmen have? If they discontinue services, it's the same thing as not being paid: they still don't have any money.

So everyone continues the charade. That is, until someone who actually has something of real value (eg oil, food, metal) declines to part with their core wealth.

Then the slow collapse begins. But still, what do people do? They sit and watch TV, eat some more chips and fret.

Watch Arnie's Calif budget presser this afternoon. There will be no mention of suspending Prop 98 (guaranteed school funding). Rather, empty promises & platitudes will be uttered to a few scattered murmurs of support.

But we will know reality has finally intruded when Prop 98 is suspended. It takes a 2/3 vote; my prediction is this will happen before the year is out.

As Papa famously wrote, "a man goes broke slowly, then all at once.”

We are just tip-toeing up to the "all at once" phase.

lautturi said...

Ah, Rumor - good mate, another anime fan I seen. Spending 2 years in Japan opened my eyes big time for so many things (PO 1st in that hype rintensive society. Furthermore, there really is something in those kawaii cartoons and animations one can find over there.

I have saved one excellent small "exercise" flash-movie on my site here, just click the 1st small picture. I guarantee you will smile with that one :-)

EconomicDisconnect said...

Awesome post. I wonder myself how things have come to this all the time.

Related material;
The concept of Simulacra and Simulation:
1.The first stage is a faithful image/copy, a "reflection of a profound reality" (pg 6), this is a good appearance, in "the sacramental order".
2.The second stage is perversion of reality, this is an unfaithful copy, which "masks and denatures" reality as an "evil appearance-it is of the order of maleficence".
3.The third order masks the absence of a profound reality, this pretends to be a faithful copy, but it is a copy with no original.
4.The fourth order is pure simulacra, in which it has no relationship to any reality whatsoever.
More here:

We are at the 4th stage I should think.

Kevin Depew did a wonderful job working this into today's framework here:

Unknown said...


Who do you think got us into this mess? Let me remind you - Republicans! And when did Republicans become small spenders? Gov't spending ballooned under many Republican administrations, they just like to spend it on the Military and other conservative programs.

andrew said...

As I read the first paragraph of this posting Ilargi, I was determined to leave a link to Joe Bageant's latest blog posting in the comments section. You quickly relieved me of that task.

Bageant is now socked away in Mexico somewhere trying to stay in touch with as much of his humanity as he can and watching the collapse as it unfolds. So I'm curious Ilarge what keeps you banging away with TAE at this fetid system that is so deep into its death throes?

What keeps you from joining Bageant in a Mexican cantina?

el gallinazo said...

Ilargi: As the US and the world at large are -very- slowly waking up to the reality of the biggest single man made environmental disaster in history (by Three Miles and a half), and in all likelihood the biggest one in the history of the planet,

Biggest man made ecological disaster for sure, but biggest in the history of the planet? Greenpa - youse gonna let that one ride? Mother Earth has played some tough love with her multicellular children.

We have that little spitball at the K-T boundary that also ironically located itself in the Gulf of Mexico a bit down and left of the current catastrophe. And then we have the wonderful Permian extinction which wiped out over 85% of know multicellular species planet wide, but its cause is still a head scratch.

But don't let me quibble. A strong post right to the jugular.


Thanks for the link. I particularly liked the hypnotic regression animation.

el gallinazo said...

"andrew said...

What keeps you from joining Bageant in a Mexican cantina?"

Dutch beer is far superior to Mexican. Just because we are headed into Armageddon doesn't mean we have to loose sight of the essentials.

EconomicDisconnect said...

What El G said about beer essentials! What is this, the dark ages?

Phlogiston Água de Beber said...

buzzard of the pampas,

That seemed rather an uncalled for slam on the brewing arts in Mexico. As is well known here, I am something of a Dos Equis partisan. A very fine lager with the following pedigree courtesy of wikipedia.

Dos Equis is a pale lager that was originally brewed by the German-born Mexican brewer Wilhelm Hasse in 1897.

I happen to know why Ilargi has re-settled himself in The Netherlands and it has nothing to do with beverages. I might add that irrespective of his motivations for maintaining this blog, Ilargi the Illustrious is a good son.

Steve From Virginia said...


I don't even want to read through the thouands of thousands of words. I know what they all say.

I have a comic book and a bottle of wine. Leave me alone.



Without cheap energy we cannot finance ourselves. Thre is little (and declining) commerce. We are living beyond our credit AND energy means.

The pundits (including Ilargi) are ALL wrong! The common view is BACKWARD! Energy shortages make the dollar a hard currency. Only by buying dollars can a humanoid anywhere on Planet Earth buy fuel.

I'm not making this up, I bought some fuel yesterday!

So did a billion other people! Every one of them (eventually) used dollars.

There goes the euro, there goes China, there goes Japan ... welcome to 1931. I've used that line so many time I'm sick of it. Welcome to 1933, when all the banks were in the process of failing.

They'll all fail this time, there is no going off oil.

The punditry of Planet Earth is a cumulative bunch of imbeciles. I simply cannot believe it.

I also cannot believe my good fortune, I get to watch the entire human race go down the toilet!

The solution to this crisis is so simple it boggles the mind. Energy conservation and de- industrialization.

Never happen, humans are too stupid.

Stoneleigh said...

Steve from Virginia,

The great depression happened at a time when there was plenty of everything except money. It was a finance crisis - a self-limiting credit expansion just like we are about to experience again. Energy is a key driver of expansion, although not the only one. Finance is the key driver on the way down, because the time over which financial implosion unfolds is faster than for anything else. Energy will be the limiting factor again in a few short years, but it is not the limiting factor now or in the near term. In fact there may temporarily appear to be a glut of oil once demand destruction gets underway. That will not revive the cedit expansion.

You do not need dollars to buy energy, you simply need an equivalent amount in another currency, adding currency risk to price risk for those who do not pay in dollars.

Starcade said...

He won't close his term.

If his budget goes through, all welfare goes bye-bye October 1.

If that happens, there's no November election in California, because the cities will be burned.

I may join in said burning.

It's either that or flee once my roommate dies.

Phlogiston Água de Beber said...

Steve from Virginia,

I used to visit your blog regularly and often admired your posts. I am a little disappointed in your effort here on TAE this evening. I know that you can do much better.

If indeed we have before us the prospect of watching the human race swirl down the toilet, I respectfully suggest we try to do it with as much dignity and panache as we can possibly muster. We cannot know when we might slip into the bowl ourselves.

We are already conserving, not necessarily by choice. That actually exacerbates the finance problem. Within cannon range of where I sit, there are two idle power plants that are laying off staff. De-industrializing guarantees a Tidy Bowl moment as well.

The human race has finally managed to manufacture more simultaneous crises than it can possibly resolve. Flushing will occur and nothing can prevent it. No one can guarantee that following their advice will keep one out of the bowl, but I think Stoneleigh's thoughts on the matter are as good as anyone's. There is more than enough oil being spread on troubled waters right now. What is needed as the darkness approaches is a calm determination to do whatever one can in the face of the adversity that is surely coming.

Fuser said...


Best to drop the two party political viewpoints. For most people political parties has become a religion not worthy of following. After realizing the debt crisis and PO there is hardly a point to either party.

Stoneleigh - Here's to you or Ilargi visiting Ohio. I will take care of transportation, food, sleeping, and mild -but enjoyable, entertainment.

Steve From Virginia said...

Stoneleigh! No!

I can't believe you don't get it! It right in front of you.

In 1933 there was a shortage of everything. Commerce had been dead for enough years - killed by gold- buggery - that there was shortages except for crops that were rotting in the fields (and petroleum that was wasted, accordeing to Jeffery Brown, who I believe.) No money meant no production = shortages = no commerce = no new money in the system in a self- reinforcing cycle.

Roosevelt broke the spell by going off gold, defaulting and killing the gold clause.

Didn't really work as citizens hoarded paper dollars as they had hoarded specie. Paper dollars were still worth more than (pauperish) 1930'a oommerce.

1933 = Diff'rent times, less people, less demand and less production in (all)aggregates.

If we have $20 oil there is be no crisis, guaranteed. $20 oil and we have lotsa credit/money expansion. Multipliers working and inflation/growth. We would have commerce. We would all be buying shit from (low- wage/cheap coal) China.

Happy days were here then ... in an alternate universe!

Oil shortages (relative to credit- fueled demand) forces an allocation regime on a 'super- size me' economic model of 'all of the above, please!'

The world has been living with the threat of oil shortages since the USA closed the gold window in 1971. The Reagan Revolution/Thatch- Baby- Thatch(erism), credit bubbbbbles, ZIRP, deregulation and the euro/zeuro are ALL HEDGES agains rising ENERGY INPUT COSTS. I'm old, I remember all this nonsense!


Look around you ... everything you see, that you will see tomorrow and the next day ... what you eat and wear and sleep under ... the computer you write on ... is a product of cheap oil. Where would finance be without it?

Where it is now, head first into the abyss! The so- called 'obvious' finance connections derived from the mass media are misleading.

Maybe I'm wrong and maybe I'm an idiot but the confluence between you and I is where the US dollar becomes a proxy for crude oil rather than the proxy for commerce/business that was once upon a time leveraged from it. I feel privileged since I have lived the deflatinary life and can recognize the mileposts that line the highway to oblvion.

Nobody seems to have any idea what the hard dollar is going to do to them, their families, loved ones, dogs, goldfish, etc. Almot nobody alive has ever experienced hard currency. The deflatinary power of the hard dollar is going to hit this country like the hammer of Thor. It's cnservation by the back door.

Conservation ISN'T AN ISSUE UNLESS THERE IS SOMETHING VITAL THAT NEEDS CONSERVING! Ot's not finance, Stoneleigh ... there is no limit to finance that is credit- based. There are only limits to finite natural capital! Hello!

The divergence is between imaginary/fantasy credit dreams and thermodynamic reality.

C'mon babe! Credit/banks/establishment CANNOT fix itself. Take away finance and there is still an energy shortage. The volcano of gas/oil under the Gulf of Mexico is evidence, there is nothing more needed. If cheap, accessible oil was available (still) it would be drilled, no?

Take away oil and we have what we have ... a finance world without anything to leverage but rioting Greeks.

Anonymous said...

Snerfling, that's not the new normal. It's just a step down the road. Already it's beginning to collapse. Illinois legislators are getting eviction notices from the legislative offices because the state has not paid the rent. The state troopers and the prisons system can neither one get bullets unless they pay cash in advance. There's no pretend left in Illinois; there's no "there" there. It's over.

carpe diem said...

DONATE your hair to help in the oil spill - seriously - every little bit helps - check out this websight.

VK said...

@ Steve From Virginia

I'll have what you're having, just make it a double.

Ps - There is a natural limit to credit growth, the limit is known as the Minsky moment, when the debt load can no longer be sufficiently serviced by incoming cash flow.

Stoneleigh said...

Steve from Virginia,

My reply to you got too long, so we're working on turning it into an intro. Watch this space.

Stoneleigh said...

I am wondering what kind of interest there might be in a talk in Brussels on June 20th. That is when I will be passing by on my way between Holland and France.

One reader has said he might be able to organize something, but would like to gauge other interest in the area first. Please let me know if you are interested at StoneleighTravels(at)gmail(dot)com.

Stoneleigh said...

For those who may be wondering about my current view of the markets, I think we have seen the end of the rally and are now into the next phase of the decline. I think it will be dramatic, as declines are typically marked by tremendous volatility.

I don't think the enoromous move we saw recently was an aberration or a simple glitch, and I think similar moves await as we go forward from here. Beware if you have your money in equities right now. Remember that in a ponzi scheme, only those who get in early and get out early enough make any money. Everyone else becomes an empty bag holder. Caveat emptor.

IMO we are looking at the beginning of a very large move to the downside that will last for a long time, measured in years, albeit with periodic rallies as always, because no market ever moves entirely in one direction.
Where finance leads, the real economy will follow, after a time lag.

The reasonsbly good news and hopeful MSM commentary of recent times may last a little longer, but will then disappear in favour of fear-laden messages. Just I suggeted that people not get caught up in the false optimism, I also suggest they resis the impluse towards the mindless fear that will be so 'catching'.

I'm definitely not saying there is nothing to be afraid of, only that if you can keep your head while all around you are losing theirs, you will likely do very much better than others because you will be able to maintain a constructive mentality. Forewarned is forearmed, especially psychologically.

Top Hat Cat said...

Just though I'd toss this out, a trivia question. I've been working with hand tools a lot lately. Carpentry and garden tools mostly.

I have a growing set of stainless steel garden tools, shovels, forks, trowels, etc. Beautifully made and a joy to use. I imagine if I buried one in the ground, it could be dug up in a thousand years and except for the handle, it would be good as new.

What caused me to muse on this was the modern plague of 'planned obsolescence'. The same shovel could have been made out of very poor quality steel, on purpose, to only last 5 years, thus forcing the purchase of another shovel at regular intervals.

Is the 'planned obsolescence' of essential tools part and parcel of Ponzi schemes?

Kind of like hooking you on crack so you have to come back?

Each time you come back for a new crappy 5 year shovel, the price compounds until you can only afford a crappy 3 year shovel.....until you end up digging with a stick like a caveman.

Is 'planned obsolescence' a vital and necessary ingredient in the financial ponzi expansion on the way up?

And if so, is the opposite of 'planned obsolescence', i.e. a stainless steel shovel that lasts forever, a good thing on the way down the deflationary slope.

Tools that last and last (like SS garden tools) seem like something a local community would cherish in a New Dark Age.

They are not a long term solution because the infrastructure needed to produce stainless steel is very high tech and very unsustainable in the long run. But having a local community equipped with extremely well made, long lasting tools seems like it could be a 'bridge' strategy until a more sustainable long term system of tool manufacturing could be pieced together.

A friend who does fancy wielding said he would like to help make a stainless steel wheel barrow to replace the crappy 'planned obsolescence' plastic/cheap steel ones.

Do really well made tools make survival sense or is endlessly mickey mousing and improvising 'just getting by' tools seem the way to go.

Any thoughts?

bluebird said...

@Fuser - Thank you for setting up Stoneleigh's visit when she comes to Ohio. Spouse and I will be there. :)

jal said...

@ Stoneleigh
I think we have seen the end of the rally and are now into the next phase of the decline.
... Forewarned is forearmed, especially psychologically.”

I agree, something is about to change our future.
Last time, (heheh, Xmas got saved), this time, I cannot see what or how Xmas can be saved.

As it has been noted many time, Xmas did not come for many areas and will not come for many more years, if ever.

Being prepared, I think that my area will see another Xmas.

Those of you who read regularly know that eventually, there will be Xmas for the only the wealthy. Therefore, (pick a number), 70% of the western world will eventually end up with no Xmas over the next 5 years.

zander said...


I think yes, absolutely, the plan of many manufacturers covering a huge range of depreciables was to make sure their market was kept alive going into the future ensuring a race to the bottom and resulting in the utter crappiness of many of the functional (for one week only) tools etc. that we have to put up with now.
Car bodies are an A1 example of this where it was known decades ago that alloying the the most quickly degrading part of the cars would add god knows how long on to the aesthetic value of the car thus delaying the onset of the need for a materialistic "fix" as you so rightly put it.
As for your SS tools, I can hardly think of a better purchase.
And with that I'm off for my usual sat night guinness fix, slightly earlier than usual which means a more gruesome hangover tomorrow, still, we are a long time dead.


Greenpa said...

El Galliwacko- am I going to let Ilargi's comments on disaster magnitudes pass? Why yes, I am. :-)

2 primary factors operating- Ilargi is abundantly informed regarding the various planetary disasters, including the geological ones. He is also known to indulge in the occasional poetically licensed hyperbole.

Stevie: "We have an ENERGY CRISIS NOT A FINANCE CRISIS !!!!!!"

lol. Gosh, has anyone here ever discussed this before?

I wish to suggest an alternative outlook, which encompasses all the other crises.

To wit: the several Cultural Superorganism components of Homo populations around the world have reached the point of apoptosis in their current evolution.

This includes the drastic changes in availabilty in a myriad of resources, most brought about by excessively rapid population growth; which has simultaneously caused an increasing breakdown in all internal Superorganism functions- internal and external communications; internal metabolisms, and superorganismic decision making. All busted, and beginning autolysis.

There ya go. That's the real problem- all you guys keep insisting your part of the elephant is really it; but you're just tangled up in subsets.


Greenpa said...

Top Felid: "A friend who does fancy wielding said he would like to help make a stainless steel wheel barrow"

:-) Fascinating. I have a vision of a troop of high school kids- parading on the 4th of July between the bands, illustrating their fancy wielding of wheelbarrows...

Greenpa said...

"Sea turtles may be the Gulf of Mexico oil spills biggest victims. Already 25 turtles have been found washed up"

old numbers. Last number I saw was "over 100" Kemps'.

Greenpa said...

topcat- "the infrastructure needed to produce stainless steel is very high tech and very unsustainable in the long run"

well- there is more than one way to ken a scat.

Eric Sloane cites a cold chisel he found in an old stone wall (I think). Had to have been there, in the elements, for at least 80 years; possibly 150, or so.

Unrusted; still quite sharp. He started using it, and became fascinated about what the hell it might be made of. It did NOT look like our concept of stainless.

His ultimate guess- probably made very locally, during a time when they were smelting iron with charcoal, using the local bog-iron nodules.

Which, it turns out, were just oddly high in manganese.

Lo-tech; you just have to know what you've got, and how to use it.

Anonymous said...

My comment about increases in retail sales got too long so I posted it on my blog as More Mainstream Media Lies. I suggest reading it if you want some insight into what is really happening.

Redbriars said...

Re: stainless steel tools

I am a small scale manufacturer, although in the food industry, not the tool industry. I don't think that anyone intends to set up planned obsolescence for their products as much as they are manufacturing for a price point where they can sell their goods and make a profit on the transaction. A well-known Scandinavian furniture manufacturer is said to design to price, meaning that they want to have for sale a particular piece of furniture (a bed, for example) at a particular price, and they design the furniture to meet that price. The manufacturer of the steel shovel knows that he can achieve a certain volume of sales through a particular jobber at a particular price so he buys steel and handles and fittings appropriate for a shovel that he can move at the set price. There is no larger, soul-destroying, planned-for-obsolescence motive here; he just wants to sell a boatload of shovels at $3. In my toolshed I have several Asian shovels of varying quality and I have shovels made in England from heavy cast steel with handles designed to last my lifetime. Both were designed to sell at a particular price point, and both sold.

My challenge here, as a consumer, is to be sure that I shop at a store where price signals quality. That is, I need to shop where I can be sure that a $50 shovel is that much better quality than a $15 shovel. Anyone who has shopped for mattresses or furniture knows that comparing features is almost impossible (and in the case of mattresses is said to purposely have been made impossible) and so the only way to compare quality is to compare price. Which means that you have to trust your merchant. In the days of small towns and merchants who were also your neighbours, this was much easier.

Mu suggestion would be that rather than worrying about stockpiling stainless steel tools, why don't you learn to fashion shovels from old automobile bonnets? That might be much more practical, and the skill might be a legacy for your children, better even than one indestructible shovel, easily stolen.

el gallinazo said...

As an ex salt water sailer, an older salt once said to me, "They call stainless steel stainless because it stains less. When I can afford it, I buy bronze." Stainless steel is not known for its hardness or ability to keep an edge, though I have to admit that my Leathermen (is that the proper plural of a Leatherman? And I use the plural because I keep loosing them over the years :-( has kept a remarkable edge with SS on its knife blades. They use to wield a carbide tip onto the Phillips but they stopped on my last one. Probably to expensive a process.

In sum, I think ss tools are a really good idea for Doomsville. Since eventually money will be worthless, might as well get quality hardware.

ogardener said...

Whoa Ilargi! Best intro yet in my humble opinion.

Top Hat Cat said...

thanks for all the stainless steel tool input. I realize that not all 'stainless' is created equal. I suppose the invention of various steel alloys probably have an element of chance in their discovery, like using bog-iron nodules garnished with sprinkles of manganese.

The chisel in the wall was probably a one in a million smelting fluke that never got a follow through.

el gallinazo

When I think of the oil rupture in the Gulf, and how little thought was apparently given by BP (after drilling down 30,000 feet in violation of it's drilling permit depth) to the pressures it would encounter tapping into that pocket of gas and oil, I remember your sawzall story and wondered if you would have cut into a 15,000psi 'honey dew' line servicing a sewage lagoon with several hundred million gallons of secret sauce?

Just asking :)

Fuser said...


Nothing is set yet, but I will accommodate at her leisure.

Greenpa said...

RedBriars: "better even than one indestructible shovel, easily stolen."

Odd you should mention that. For 28 years, I've owned what we call "The Sacred Shovel". Cost me $75 28 years ago; fully forged by someone who knew what they were doing.

We've also bought many $5 and $20 dollar shovels in that time; all of which are now discarded. The Sacred Shovel is untouched by the passage of time, and by seriously heavy use.

It was stolen; 2 falls ago; in the back of our utility pickup truck when the truck was stolen. We lost eveything that was in the truck; except the upper-range Stihl chainsaw, and The Sacred Shovel.

Because both were immediately put to use by the meth-head thieves, to help them get out of their foggy troubles. The Stihl was dropped after cutting some fenceposts; the shovel was broken by working it too hard. Then dropped. The handle broke- not the shovel; so we had to replace it; the 3rd handle it's had in 28 years.

My own opinion- the time and aggravation associated with jobs not done and stopping to go buy a new cheap tool are vastly more expensive than the extra few bucks for the truly superior tool.

And apparently; even when stolen- they're easier to recover. 2 data points! :-)

Redbriars said...

re: manganese steel

I had long heard that most of the modern steel-making alloys were in fact known at the laboratory bench level in the 1840's, prior to the invention of cheap steel through the Bessemer process in the 1850's. It was known then that adding the mineral wolfram made very hard steel; we now know it as tungsten steel. Manganese was also known as an alloy that would produce steel with superior wearing characteristics. Once the Bessemer process (and the blast furnace) enabled the batch production of many tons of mild steel the development of many tons of alloy steel (including precisely constituted carbon steel)very rapidly followed.

In my neighbourhood we always knew that low-carbon manganese steel was the best for bobsled runners as it wore much longer than mild steel.

I would not be surprised if the blacksmith who made Eric Sloan's chisel knew exactly what he was doing and why.

NZSanctuary said...

The one fiscal union piece on the EU sounds like a step towards a proper one-world bank... what are the chances this step will take place? Would it help kick the can down the road a little longer?

Meh, the whole game is ridiculous now...

el gallinazo said...

Top Cat

Just asking :)

Probably yes. I guess I am just as stupid as BP :-)

scandia said...

The EU bailout of Greece has impacted me in a surprising( to me ) way.
Until that fateful decision I was retired, living simply on my pension, no thought, no desire to work again....Well, its all changed. I think it would be prudent to get a job. Get my foot into a door before the coming competition.

EBrown said...

I don't know how much stainless tools cost but I set up a cheap sand bucket with some non-toxic oil (linseed and mineral) that I plunge the heads of my non-stainless tools into after each use. Depending on the chore the tools may or may not require a quick scrub with a wire brush prior to the sand-oil bucket treatment. The working ends of my garden tools are nice and shiny. I expect the better made tools to last teh rest of my life with their current treatment, the crappy ones will be replaced with better contemporaries soon. Good garden tools are invaluable. I don't know whether stainless is worth it or not...

NZSanctuary said...

Top Cat...

I have spent the last couple of years trying to find the best quality tools I can.

Even though stainless steel tools will not rust, I find they are usually not as robust as other good quality non-stainless steel tools... I still have my grandad's spade that is about 50 years old, and even though it is rusty, it works just fine (the wooden handle could do with replacing, but even that still holds its own), and is much more robust than a high quality stainless steel one I bought a while back. I'm not sure what he did to take care of his tools (I was too young to be interested/take much notice), but I suspect non-stainless steel tools just require more care - cleaning and oiling.

Having said that, I do think that the majority of tools out there are relatively poorly made - and I suspect that is a consequence of our throw away culture - not much lasts.

I take my time trying to find good quality tools - the kind tradesmen/farmers are willing to pay more for... I am hoping we are moving back to a world where quality counts. Our livelihoods, and in some cases our lives, may depend on having good quality, long lasting tools.

Erin Winthrope said...

@ Stoneleigh

Question: What will happen to Japanese Yen?

Japan's public debt is 200% of GDP. Almost all of this debt is financed by domestic savers rather than the global debt market. Japan faces three problems with this domestic financing model.

1) Public debt continues to grow to maintain government stimulus and thereby prevent a rise in unemployment and social instability
2) The domestic savings rate continues to decline due to near zero interest rates and very slowly rising unemployment.
3) An aging population will cause growing numbers of retired Japanese to liquidate their bonds in order to raise cash for living expenses.

As the domestically financed ponzi scheme begins to unravel, the only buyer for Japanese sovereign bonds at near zero interest rates will be the Bank of Japan (BOJ). One would normally expect the constant debt monetization by BOJ to cause a crash in the value of the Yen.

However, Stoneleigh has argued that the unwinding of the global carry trade will cause the Yen to appreciate dramatically, as banks and hedge funds etc. that have borrowed in Yen are forced to unwind their trades and buy back Yen.

So we have two countervailing forces: downward Yen value pressure created by BOJ debt monetization, and upward Yen value pressure created by unwinding the global carry trade. Stoneleigh, am I correct in assuming that you think the carry trade unwind will win this struggle at first, resulting in a rapid appreciation of the the Yen? Wouldn't the rapid appreciation of the yen then allow the BOJ to continue financing Japan's sovereign debt bubble for longer into the future than most other nations? I guess this same logic applies to the US as well.

Ilargi said...

Scientists Find Giant Plumes of Oil Forming Under the Gulf

Scientists are finding enormous oil plumes in the deep waters of the Gulf of Mexico, including one as large as 10 miles long, 3 miles wide and 300 feet thick. The discovery is fresh evidence that the leak from the broken undersea well could be substantially worse than estimates that the government and BP have given.

“There’s a shocking amount of oil in the deep water, relative to what you see in the surface water,” said Samantha Joye, a researcher at the University of Georgia who is involved in one of the first scientific missions to gather details about what is happening in the gulf. “There’s a tremendous amount of oil in multiple layers, three or four or five layers deep in the water column.”

The plumes are depleting the oxygen dissolved in the gulf, worrying scientists, who fear that the oxygen level could eventually fall so low as to kill off much of the sea life near the plumes. Dr. Joye said the oxygen had already dropped 30 percent near some of the plumes in the month that the broken oil well had been flowing. “If you keep those kinds of rates up, you could draw the oxygen down to very low levels that are dangerous to animals in a couple of months,” she said Saturday. “That is alarming.”

The plumes were discovered by scientists from several universities working aboard the research vessel Pelican, which sailed from Cocodrie, La., on May 3 and appears to be the first scientific expedition to gather extensive samples and information about the disaster in the gulf.

Scientists studying video of the gushing oil well have tentatively calculated that it could be flowing at a rate of 25,000 to 80,000 barrels of oil a day. But the government, working from satellite images of the ocean surface, has calculated a flow rate of only 5,000 barrels a day. The undersea plumes may go a long way toward explaining the discrepancy, suggesting that much of the oil emerging from the well could be lingering far below the sea surface.

Top Hat Cat said...

"...working aboard the research vessel Pelican, which sailed from Cocodrie, La., on May 3 and appears to be the first scientific expedition to gather extensive samples and information about the disaster in the gulf...."

First off, I find it utterly astonishing that the whole monitoring capacity of the Mighty United States of America rests on one lonely university research ship.

A cocky, swaggering, insufferably arrogant, jingoist Imperial Power like the U.S.A. only has the Pelican to launch against what is shaping up to be the largest man-made disaster ever?

If Green Peace had sent a single boat to protest the oil drilling in the first place, Fatherland Security (and Karl D in tow) would have mobilized a carrier group to 'contain the threat.'

Wow, shock and awe by the world's remaining Uberpower.

And BP, this is it, their Plan 'B' for first response damage control monitoring?

The Pelican?

More like plan "P".

Geez Louise, we are so doomed here kids.

It's like BP only had the professor from Gilligan's Island on retainer, so the Pelican will have to do all the heavy lifting for now.

The Plume is like the Shadow Banking System.

(And the Shadow Banking System and it's Hand Maiden, the Derivatives, is every bit as dark and scary as this blowout.)

Outta sight, outta mind for now. What you can't see can't hurt you!

I can just hear the Dr Strangeloves that still infest the Pentagon pitching the idea that we could detonate the plumes with tactical nukes or something. So what if it produces massive tidal waves, 360° around the Gulf, they are just itching to roll out that "Mission Accomplished " banner one more time.


$$$Dollar$$$ said...


What specifically is leading to make the call that the rally is over? We have been here before and it was a wrong call.

anon10 said...

Email From Canada: It's Different Up Here - It Really Is!

Eric Lilius said...

For the past three years,I have been using 2 non stainless heavy hoes with 5 foot handles. They were purchased from Nothing better for trenching, creating garden beds, cutting sod.

In the UK there's Get Digging

I often think that a case of hoe heads might be a good thing to squirrel away. The handles are growing all around me. Some drawknife work and your in business.

I have a Salvadoran style machete purchased in a hardware store in Punta Gorda, Belize that is a wonderful piece of non stainless. It rings when I cut through a branch. Now that I have used it in the Canadian bush it has replaced any axe for bush work.

Bukko Boomeranger said...

Kudos for reprinting something by Dan Froomkin, who was one of the best and most prolific at calling the Bush Administration -- AND Obama's -- on their bullshit. The day the Washington Post game him the sack was the day I stopped reading that paper (online). 'Tis but a pale shadow of the newsorgan that drove the uber-evil Nixon from power.

And L. Gallon-nose: I had thought about the asteroid that hit 65 million years ago in what is now the Gulf of Mexico. I wonder how much of the oil that's under the soil there was formed as a result of that impact? By tapping into it, opening Pandora's Box with a driller's pipe, are we silly monkeys re-releasing the Deathpower of that Celestial Object of Doom? If the oil-volcano wipes out so much sealife in the coming years that it changes the oceans' oxygen-generating abilities, can we say it is returning to kill again, like a 65-million-year-old Freddy Kreuger?

In any case, you lived in the warm waters long enough to become familiar with red tides, eh? I predict that red tides, and black tides, will be the signature feature of Gulf beaches for generations of humans. And every new hurricane that churns the waters will stir up more of those subsurface plumes. They will be the death that keeps on giving.

Anonymous said...

"But the government, working from satellite images of the ocean surface, has calculated a flow rate of only 5,000 barrels a day."

Perhaps this is an example of why a top-down perspective is not helpful in every circumstance and can even be misleading when trying to calculate risks or measure the impact of policies.

Afterall, people have long wondered why there is such discrepancy between the perceptions of those at the upper levels of a society and the realities of those at the lower ones. Sometimes real muck-rakers are necessary to expose the misery that is generated.

Since Top Cat linked the topics, I gotta say I really appreciate the article by Michael Scherer, 'The New Sheriffs of Wall Street.'

Every time I hear Ms. Warren talking, I find myself cheering out loud. Good to know I am not only woman in America who responds that way. It's also really nice to learn more about her, Ms.Schapiro and Ms. Bair.

If the latter does write her book, "The Audacity of This Woman," I would likely splurge on the opportunity to hear what she has to say.

Even if it isn't popular to say in Doomerama, what a wonderful world.

Top Hat Cat said...

The only reason I mentioned stainless steel for garden tools is in the larger context of a deflated Brave New World.

Sure, from the wreckage of today's oil soaked edifice of so called 'human culture', there will be a lot of scrap metal and salvage material surviving to reshape into a low energy-world made by hand tools kinda thing.

But smelting any metal is very high energy. The U.S. colonials chopped down unbelievable amounts of forest to make charcoal to make steel before the Coal Nightmare took over.

In a spent, scarce low energy world, metal smelting for raw ore will be very expensive.

Then there is the forging or shape/fabricating of the smelted ore ingots. Also very high energy input. Beating, casting, machining or whacking metal into shape is hard work. Machining metal is energy intensive and polluting. The computer guided milling machines will not be around. Manual milling machines were discarded and destroyed in many places. Precision metal work takes energy too.

Even re-melting scrap takes a lot of BTU's. I suppose someone might design a solar furnace to do the job but a can't imagine the total output being more than a fraction of today's production.

So it seems to me that taking the extra time and energy up front to make either stainless steel or "Sacred Shovel" steel tools is the only way to minimize future energy expenditures making tools.

Energy will be very hard to come by in the not too distant future. It seems sensible to make a good tool once with a bit more time, energy and skill so it can be passed down the ages like a Totem of Practicality to those who survive instead of a symbol of a toss away BLM (Bic Lighter Mentality).

I even like the concept of Sacred Shovel® steel (kudos Greenpa). It has spiritual overtones but with the registered trademark symbol anyone can tell it is well grounded in sound business model prototyping and salesmanship.

Stoneleigh said...


Market timing is probabilistic. There are junctures that are high-risk for a trend change. Not every one of those becomes a trend change, as corrections can morph into a number of complex patterns and combinations of patterns.

On balance of probability, I think we have see a trend change.

Erin Winthrope said...

Re: Paul Krugman's mind-numbing logic

from the Krugman blog:

"[The IMF report] says that the financial crisis has made us permanently poorer, which among other things reduces revenue, and governments have to tighten their belts to make up for that loss.
The first thing we might ask is, do we really believe that a financial crisis permanently depresses the trend line of economic growth? Yes, I know that the IMF has statistical analyses that seem to say that; but it’s not clear what the mechanism is, it’s not what standard growth models would say, so we might at least wonder how sure a thing it is."

I'm simply stunned by the stupidity on display in these sentences.
Paul asks what's the mechanism for permanently depressed growth????
It's called debt, Paul. The historical pattern of growth was an illusion fueled by unsustainable debt expansion. No more debt expansion, no more growth. It really couldn't be any more obvious.

Stoneleigh said...

Ed Gorey,

I think the unwinding of the yen carry trade will win, at least for a time, and the yen will appreciate significantly. This could well allow Japan's finances to avoid hitting a wall quite so soon. I still think Japan is in an awful position in the longer term though. Being granted the time to dig oneself into an even deeper hole is not really a good thing.

I think the US will have longer than one might imagine for similar reasons, as you suggest, although the longer term position there is hardly rosy either (but better than Japan IMO). A knee-jerk flight to safety should help America's position relative to other parties for a period of time.

I think things will get difficult in Europe sooner, as the vultures are already circling around the eurozone. Speculators love to exploit regional disparities (both economic and social/cultural) and take down currency pegs. At first the arrangements are defended, but that defence typically gets more and more expensive until it ceases to be possible (for instance, look at Argentina's efforts to defend the dollar peg).

IMO in terms of unity there is a big difference between amalgamations of peer polities depending on whether the components self-identify as part of the larger group first and foremost, or primarily as part of their own sub-group. In (most parts of) the US, one is first and foremost an American. It is very much easier to handle regional disparities under those circumstances.

In Europe one is generally French or German or Dutch or British etc first and European second. In combination with a long history of regional conflict, which will flare up in contractionary times, that will make regional disparities far more of an issue. Hard times drive wedges between people and magnify perceived unfairness. In some places this is easier than others, depending on history and cultural memory. Pre-existing divisions, however well papered-over, lead to a worse outcome in a shorter space of time.

The lack of cultural memory in the New World has two sides. On the one hand much of value is lost, but on the other hand many former divisions have been largely forgotten.

Stoneleigh said...

Eric Lilius,

I second your recommendation of It's run by a TOD poster by the handle of Greg in MO. I have many of his products and have been very happy with them.

Stoneleigh said...


Mish's take on that cmment from Canada was right on. It is not different up here. We just haven't seen our bubble burst yet. When we do, the consequences will be awful. Vancouver has the largest bubble on the continent.

I'm not at all sure that Canada will even remain a single country over the next couple of decades. For starters, if the government in Ottawa attempts to re-introduce a national energy program like Trudeau's, the anger that will unleash in the west will be tremendous. They still haven't forgotten the last time. I actually think that might be a fault line that would crack sooner than the one between Quebec and the rest of the country. Newfoundland also has a strong sessessionist movement (my brother lives there and I hear all about it).

Stoneleigh said...


Thanks for volunteering to organize something in Ohio - much appreciated :)

I'll let you know when I'd be able to come. It would most likely be fall.

scandia said...

@ Stoneleigh and $$$
I was going to jump in with a response to $$$'s question as to why now, why a trend change this time?
My thoughts are not original. The info that is a game changer for me is the EU bailout because the eurozone has an incestual debt burden where they owe each other. I see how an IMF rescue will lead to enslavement to foreign power, will lead to political upheaval, to war. That is definitely a game changer.

Stoneleigh said, " corrections can morph into a number of complex patterns and combinations of patterns". Indeed! Just look at the big issues on the table- all the tinkering causing unexpected consequences. And all those tinkers working in the dark without transparency. Is not emergency response an admission of a failed system?
Yet again I use this apt quote, " Oh the tangled web we weave when out intent is to deceive."
A further question about looks to me like there is no problem regulating the citizen, the individual. Is regulation possible only at a particular/limited scale?

@rumour...I've been thinking about the law, about ignorance is no defense. Seems like an unjust position in the face of rule diversity and manipulation in the shadows. I am wondering whether the curriculum at law school has adapted, what precedents are being set without any public awareness of same and what bodes for the justice system in the future. Two tiered? Three tiered?
Or simply a retreat to rule by redaction and might?

el gallinazo said...

I actually bought one of Paul Krugman's books about four years ago when I first started to become interested in economics. Fortunately, it was used and on the cheap. I now think of Krugman the way I think of my former marriage which ended almost 30 years ago, with a little voice in my head asking myself, "How could I have been so stupid."

Speaking of an academic economist who should win a Faux Nobel but never will, Steve Keen just had a long Skype interview with Mad Max Keiser. Max could well be the world's worst interviewer. Every sentence he mumbles is drenched in his huge, needy ego. However, a couple of Steve's nuggets still manage to get through the egoblitz.

el gallinazo said...


"I think things will get difficult in Europe sooner, as the vultures are already circling around the eurozone."

Et tu Stoneleigh?

el gallinazo said...

People often lose sight of the incredible binding power of a common language, relating to countries and übercountries. If every country in Latin America spoke a different language, the "continent" (starting with the Rio Grande southward and excluding Brazil) would be much different than it is politically and culturally.

el gallinazo said...

Can anyone give me an example of hyperinflation caused by a central bank over extending credit as opposed to the actual printing of huge amounts or denominations of fiat paper? If one uses the Weimar Republic, the image we all have is of the people burning the fiat paper in their stoves to keep warm or bringing it to the bakers' in wheelbarrows. (Fortunately the culture in those days was too discreet to record images of the other primary and hygienic use.) So if you use Weimar, please prove in detail that the hyperinflation preceded the actual printing of currency.

scandia said...

Something I read recently( can't recall where) is nagging at the back of my mind. It was that the the trillion dollars put up by the European taxpayers, by contributing citizens to the IMF, to bailout the eurozone is not first in line of creditors to be repaid. Hello! If this is true how can the public ever expect to be repaid? And how far down the line of creditors are they? Who gets the first pieces of pie? Please don't tell me Goldman!
As a citizen being put under austerity measures I'd want to know when my loan will be repaid?

g-minor said...

@ scandia

how can the public ever expect to be repaid? And how far down the line of creditors are they? Who gets the first pieces of pie? Please don't tell me Goldman!

Goldman and the rest of the banks. That's who bailouts are for.


el gallinazo said...

Too bad about Mish. He used to be a rather valuable source of analysis. Maybe a little Stelazine would help. Maybe he and Karl could save money with a joint purchase.

scandia said...

@ g-minor...Well then folks should say no! Alas the State has enough power to force indenture. Gr-r-r....

Stoneleigh said...


Goldman and the rest of the banks. That's who bailouts are for.

Absolutely. Bailouts are never for the little guy, always for well-connected insiders. Even baiouts that look liie they are for ordinary people never are in reality. Cash for clunkers or a home purchase grant are only inducements to take on extra unrepayable debt. They're like the witch waving a lollipop at Hansel and Gretel in order to entice them into her gingerbread house.

rcg1950 said...

question for el gallinazo -
re Keen & Krugman.

In the Keiser interview (Keiser is awful, but not yet in the same league as the stomach turning Charley Rose) Keen pointed out that fiat money as a percent of credit money is dropping - seriously deflationary and at least by implication in need of correcting - and that decreasing public spending in the face of private deleveraging is something one really doesn't want to do in a recession.

While I like Keen a lot more than the totally establishment and arrogant Krugman, in terms of a basic a Keynsian position, aren't the two of them (Keen & Krugman) pretty close?

silly after thought:
[Keiser, Keynes, Krugman, Keen -- all these K's -- what does it all mean?]

Bigelow said...

From Martin Armstrong:

“What made the Great Depression so great was NOT the decline in the stock market. It was the wiping out of capital in the huge global debt crisis. This is what we are now facing. It is why the stocks came back today for in the end, I would be long stocks and short government bonds.

At this time, the US debt and dollar will rally with gold because we are dealing with a flight to quality internationally. That means capital will flee European debt and flock into US debt. It is the safest only for the immediate moment, the US crisis will hit LAST! This is due to the plain fact that the US is still the largest economy for awhile, but it also has most of the nukes.”
Greek Debt Crisis: The Preview of What Is To Come

“The fact that we have seen a WATERFALL EVENT intraday, warns that this pattern is going to manifest itself in higher levels of economic activity. Capital will at first rush into America for it can absorb it. This will swing the treasury bears who see only domestic inflation into losing positions. As they are forced into becoming bullish, then the capital flows will reverse once more and then we will see an outflow.

This is an international crisis and that means we MUST pay attention to currency. But it is ALSO a PUBLIC v PRIVATE DEBT CRISIS and that means we will see private assets such as gold and stocks, rise in value just as they did into 1980 and from the 1932 lows. The greatest danger is the destruction of capital formation caused by sovereign debt defaults on state, local, federal and international level.”
Closing at 10520.32, Down 3.2%

jal said...

"Goldman and the rest of the banks. That's who bailouts are for."

I disagree ... the bailout are to put "cash" back into the pension funds, etc. that have been scammed to almost zero.

Banks have no money. Its someone elses' money that they lost and have been milking over and over for fees and commisions.

el gallinazo said...


"I disagree ... the bailout are to put "cash" back into the pension funds, etc. that have been scammed to almost zero."

Give us a sign that you are joking .........please! Maybe some sort of a sardonic mark?


Yeah, I remember taking a bit of a heads up about that. I will have to review it again before I comment.

Asmita said...


I find that Martin Armstrong piece totally incomprehensible. He expects stocks to do well? What? The flight to safety will initially benefit govt. bonds at the expense of the equity markets. The equity market is only a few months away from vaporization. The bond market will follow after some undetermined time lag, but equities are going up in smoke first. Why on earth would anyone expect stocks to do well here?

Stoneleigh said...


Martin Armstrong: That means capital will flee European debt and flock into US debt. It is the safest only for the immediate moment, the US crisis will hit LAST!

I agree with this, but not his assessment for US stocks. I agree that the US government debt crisis will be delayed by others falling over first. Europe is the current focus of the debt crisis, and may continue to be so for some time. We should indeed see money flee to relative safety in the US, especially government bonds. There's no escape for the US in the end, in that I think default is inevitable, but for the time being short term US treasuries are among the safest options in an unsafe world.

Martin Armstrong: This is an international crisis and that means we MUST pay attention to currency. But it is ALSO a PUBLIC v PRIVATE DEBT CRISIS and that means we will see private assets such as gold and stocks, rise in value just as they did into 1980 and from the 1932 lows.

I don't see this time as at all equivalent to the previous lows Mr Armstrong cites. We are at a recovery high right now. I do agree with him that the recent waterfall event will be repeated at higher levels though. In fact it wuldn't surprise me if it was repeated fairly seen. The herd is nervous, and nervous herds are prone to flinging themselves off cliffs en masse.

Ilargi said...

New post up.

Oil, credit and the velocity of money revisited


el gallinazo said...

Zero Hedge posted an article today and link to the following hour long video, Meltup, with accolades from TD, stating (probably true) that the video is going viral.

Despite the probability that it will give I&S dyspepsia by opening up the In/De debate, I recommend that people here do watch it.

FYI, this was my brief comment on ZH.

Interesting video - 80% uncontestable fact and 20% vicious Libertarian sewage propaganda, ground, mixed, and packaged in a slick, NaturalLamb skin, fully lubricated. BTW, I am a huge fan of Gerarld Celente.

Curious to see if the deflationistas here can find what I regard as the unmentioned elephant in the living room of their reasoning? By the way, I have had no takers on my hyperinflation question earlier in this thread. Hint -the last two sentences are quite connected.