Monday, June 28, 2010

June 28 2010: A quiet crisis whispers of impending poverty

Kari Goodnough Devastating beauty June 2010
"Oil off the coast of Alabama"

Ilargi: President Obama said during the G-20 meeting in Toronto, where he was told to take a hike by European leaders, that both he and British prime minister David Cameron
"... are aiming at the same direction, which is long-term sustainable growth that puts people to work..."
Somewhat curious, since his Vice President, Joe Biden, said a few days ago that
"...there's no possibility to restore 8 million jobs lost in the Great Recession."
Looks a lot as if the nonsense now starts to contradict itself. Perhaps we shouldn't expect anything else.

Biden then added that there is
" way to regenerate $3 trillion that was lost. Not misplaced, lost."
Don’t know what the Pennsylvania Avenue spin team thinks of Biden's remarks, but they do sound just about right to me, and a lot less hollow than Obama's empty fluff. Biden made me think of Springsteen's My Hometown (see video below), which has this verse:
Now main street's whitewashed windows and vacant stores
Seems like there ain't nobody wants to come down here no more
They're closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they ain’t coming back
To your hometown, your hometown, your hometown

That sounds to me like a remarkably accurate portrait of much of America in a few years time. And Britain. And the rest of Europe.

The talk in the press has shifted towards debt, debt and more debt. And austerity. Whether Obama and the rest of the Keynes religion like it or not.

Ambrose Evans-Pritchard writes about an RBS note to its clients that warns of money printing by Bernanke. He says:
"America is one twist shy of a debt-deflation trap."
Ambrose is right there. But he's dead wrong in his subsequent remarks:
"There is no doubt that the Fed has the tools to stop this".
Oh, believe me, Ambrose, there's plenty doubt.
"Sufficient injections of money will ultimately always reverse a deflation," said Bernanke.
Bernanke may say what he wants, but that doesn't make him right. We are in the beginning phase of a debt deflation. And if you want to talk about ultimately, then I’ll give you this one: ultimately debt cannot be repaid with more debt. Haven't the past two years of failing policies taught these people anything? The Fed balance sheet stands at record highs, and bloating it even more will solve the problems? What is it with these folks? It's not as if Ambrose doesn't have the data:
"The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era."

The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7% in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40% in a month."
No, the debt deflation must and will run its course, and Bernanke is devastatingly powerless to do anything about it. Not that he will ever admit it, even if he knew. But it's like having your local weatherman believe he controls the climate.

$2,5 trillion hasn't done the trick, and neither will $5 trillion. Money velocity is way down and so is M3 broad money supply. How would Bernanke turn that around? The money simply isn't going anywhere. Except into a deep dark void. It's disappearing faster than Bernanke can print.

Once the deflation has run its ugly course, and it will be horrendous, printing presses may cause inflation, and given the level of ass-clowniness among economists it's highly likely that they’ll pick such a course. They've never seen a crisis they couldn't make worse. But I’ll bet you ten to one that by then Bernanke won't be in office anymore.

I’m going to post an article I happenstanced upon today sort of like an extra intro. I don't often do that, but this piece by Texan journalist Richard Parker struck a special chord. And since it brought Joe Bageant to mind, and Joe just posted a new piece, I’ll close today’s TAE with that.

But first, for those of you who haven't seen it yet, once more the wonderful video from CaptainSheeple, "A Tribute to the Automatic Earth".

Richard Parker: Recession as big as Texas pummels rural parts of America
Wimberley, Texas: The grass in the pasture stands tall. Throughout the spring, bluebonnets, Indian paint brushes and black-eyed Susans waved from the roadside. The Blanco River runs clear and full now, and the tourists return to the town square. A wet winter and cold spring have broken the grip of a two-year drought in Texas. But this plenty camouflages a drought of another sort: the economic one. Texas was slow to be swept up by the Great Recession. But now its pain has come home to big cities and small towns, as the lagging effects of the recession batter the ranchers, storekeepers and families who all withstood — until now.

While Washington's fury is directed toward the Gulf oil pill, it has largely lost sight of the recession. Yet Congress continues to weigh financial reform, and it would do well to remember the human cost of the Great Recession, triggered by the titans of Wall Street but borne heavily by everyday people. Since the crisis began and through the first quarter of this year, more than $2 trillion in mutual funds have been wiped out, 4.5 million homes have gone into foreclosure and 6.8 million jobs have been lost. With its art, eclectic character and natural beauty ours is one of the best little towns in the nation to visit; it says so right in the pages of The New York Times and Travel Holiday Magazine.

But for those of us who live here, a quiet crisis whispers of impending poverty. A merchant confides he can't take another year like the last two. A Mexican stonemason tells me that a single project tided his family through winter. A Realtor relays that all over town, people who never took a mortgage they couldn't afford are looking to give up, sell out and move on. The alternative is tallied and cataloged at the stately 102-year old, brick-and-limestone county courthouse over in San Marcos. Jack Hays, for whom this county was named, was a living legend for his exploits as a Texas Ranger, namely for fighting the Comanche.

Today, people are losing their homes not to raiding parties but to banks. There were 157 up for auction in April alone. For 15 withering months there have been 100 or more, according to the San Marcos Daily Record. It cites George Roddy, whose company dutifully counts all of them: "This foreclosure storm is far from over." The list carries the names of familiar ranches, springs and creeks. Yet the tale of Hays County is, sadly, more emblematic than unique in the vast landscape that stretches westward beyond the Hudson and the Potomac. Up in Austin, $6.5 billion in real estate value has been wiped out as if by a tornado. The resultant cuts in money for teachers, cops and services in the city are likely just around the corner.

In Austin and elsewhere, the conservative cultural boosterism of Texas initially downplayed the recession. Heir to George W. Bush's original political office and many of his finest traditions, Republican Gov. Rick Perry quipped of the recession in 2009, "We're in one?" It was his so-far-overlooked Katrina moment as time proved that bravado as prematurely false as that of his predecessor. "Texas has been hit much harder by the 2008-09 recession than previous ones," according to the Federal Reserve Bank of Dallas. Starting with a 6.1 percent unemployment rate at the beginning of the crisis, the job market fell throughout last year to end 2009 at an 8.2 percent unemployment rate. This year, manufacturing orders picked up, but the job creation rate stood stubbornly at zero in the first quarter.

Today in Texas, one in five people struggle to feed themselves and one in five children live in poverty, according to the Center for Public Policy Priorities in Austin, founded by Benedictine nuns. Perhaps Perry's economic prowess will trail him out of the state like a coyote when he seeks the presidency. However, this is not a Texas story but an American one, told in fiscal crises that stretch from California to Illinois, from Alabama to New York. It is in Washington where the Great Recession will be justly dealt with — or not. Realistically, after all, Congress and the regulators have assiduously polished their reputations as hand-maidens of the banks at least since the repeal of Glass-Steagall in 1999.

It doesn't take an expert to understand that much of the legislation in Congress is mere cover for the politicians and the big banks. It isn't designed to redress the latest crisis or stop the next one. It puts matters in the hands of regulators who consistently failed, to, well, regulate. Regardless of party, the politicians will let the big banks go on gambling with other people's money. The only real solution is to reinstate Glass-Steagall and break up the big banks. Only one senator, Democrat Ted Kaufman of Delaware, railed for that and against something dressed up in the Orwellian costume of "reform."

Back here in Texas, when European settlers first came to the Hill Country they pushed ever deeper, establishing ranches, farms and homesteads because those early wet years made the land lush, green and inviting. When the Comanche came they scared some settlers. But when the droughts came, revealing a harsh, arid landscape clinging to hard-scrabble rock, it forced the hands of far more. I have taken what I have left and squirreled it away in a small Hill Country bank. But I, too, have to face the inevitable: I ask my 16-year old, Olivia, what she thinks about selling our little place high in the oaks and cedars over the Blanco. She looks at her sister, Isabel, and reflects, then replies: "We've made a lot of good memories here." I nod. So we have. So I will wait until, or unless, this drought forces my hand, too.

US Jobs Aren't Coming Back
by Staff - Daily Bell

Biden: We Can't Recover All the Jobs Lost ... Vice President Joe Biden (left) gave a stark assessment of the economy today, telling an audience of supporters, "there's no possibility to restore 8 million jobs lost in the Great Recession." Appearing at a fundraiser with Sen. Russ Feingold (D-Wisc.) in Milwaukee, the vice president remarked that by the time he and President Obama took office in 2008, the gross domestic product had shrunk and hundreds of thousands of jobs had been lost. "We inherited a godawful mess," he said, adding there was "no way to regenerate $3 trillion that was lost. Not misplaced, lost." – AP

Dominant Social Theme: They may not be able to replace every single job but they're trying.

Free-Market Analysis: One of the hoariest dominant social themes or sub themes promoted by the power elite is that government can create jobs. It is possibly a sub theme because the dominant theme is simply that "government can do it all." In fact, the only things government can do with any modicum of efficiency are collect taxes, inflate currency and pass laws that usually have the opposite effect from what is intended. Of course this doesn't stop government pols from claiming they can create jobs when the economy becomes troubled and needs help. Here's some more from the article:

Claims for jobless benefits fell by the largest number in two months last week, but were still high enough to signal weak job growth. Meanwhile, the Senate on Thursday failed to pass an extension of unemployment benefits. Biden said today the economy is improving and noted that in the past four quarters, there has been 4 percent growth in the economy. Over the last five months, more than 500,000 private sector jobs were created. "We know that's not enough," the vice president said.

Last week the White House put out a Recovery and Reinvestment Act update claiming that between 2.2 million and 2.8 million jobs were either saved or created because of the stimulus as of March 2010. In signing the Recovery Act into law on Feb 17, 2009, Mr. Obama said the measure "will create or save 3- and-a-half million jobs over the next two years."

Peer behind the numbers claimed by the Obama administration and the questions multiply, as was pointed out in a recent Wall Street Journal article, "The Media Fall for Phony Jobs Claims." The article explained that one way the Obama administration had been able to make extravagant claims about jobs was by using the "saved or created." The US president used this phrase recently in announcing that the administration, via certain stimulus spending, had saved or created 150,000 American jobs. Obama then claimed that further job-savings programs were in the works to save another 600,000 jobs, but these numbers still pale against promises to save up to four million jobs that were made previously.

Of course, using such vague language makes it impossible to do any substantive fact-checking of claims. And there are no government or even private bureaus that track such statistics apparently. How is it possible to know whether a job has been "saved" or not? The claims are gobbledygook but the administration gets away with it because it has the bully pulpit and the media repeat the claims. Here's some more from the Journal:

If the "saved or created" formula looks brilliant, it's only because Mr. Obama and his team are not being called on their claims. And don't expect much to change. So long as the news continues to repeat the administration's line that the stimulus has already "saved or created" 150,000 jobs over a time period when the U.S. economy suffered an overall job loss 10 times that number, the White House would be insane to give up a formula that allows them to spin job losses into jobs saved.

The real reason for the downturn and loss of jobs have little to do with the Bush administration or even with the current cyclical downturn. It has everything to do with the constant inflationary measures of the mercantilist Federal Reserve and the company-killing graduated income tax that has sent companies large and small away from American shores. The combination of endless asset inflation and punitive taxation has been hollowing out America for at least a century if not longer. Regulatory "free-trade" agreements that are nothing but "managed trade" don't help either.

The American political regime of the past century has truly begun to bankrupt America. The country has lost vast amounts of manufacturing capability and even the chattering classes today speak of America's "service" economy as if this in some sense can compensate for the loss of the vital entrepreneurialism that builds the wealth of nations and individuals. Meanwhile, America's infrastructure degrades, its cities crumble, its vital middle class shrinks and companies that were founded there move offshore to grow.

Conclusion: The reasons for this ruin are clearly evident in the fiscal and monetary policies that the US has adopted over the past 100 years. To claim in any way that the Federal government is able to "save or create" jobs is truly a misleading statement given the policies that the US Federal government implemented in the 20th century. These policies in fact were supported by the larger Anglo-American power elite that has been trying to tear down the American republic since its inception in order to create a seamless US/European governmental authority. The idea that those who create fundamental policy for the US Federal government actually care about American workers, either blue collar or white collar, or want to see them succeed is a promotion, not a credible reality.

Double-dip drama
by The Economist

More than the European debt crisis is keeping American economic policymakers awake at night just now. Despite a year of government effort, a tentative recovery in the housing market appears to be on the verge of stalling. Home prices have now fallen for the past six months, according to the Case-Shiller home-price index, after rising from their nadir for the five months before that. (Another index, from the Federal Housing Finance Agency, has, however, shown a slight uptick in March and April.)

As for sales volumes, last September home sales soared in anticipation of the planned expiry of a government housing-tax credit, only to tumble thereafter, despite the extension of the deadline to April this year. As the new deadline approached sales duly climbed again. But the latest data show that even before the credit window closed, fewer sales were going through (see chart). Sales of new homes fell 33% from April to May, nearly the worst performance since the bust began.

It is not as if the government has not tried. After the housing crash, millions of homeowners—a full quarter of those with mortgages—had loans larger than the value of their homes. Barack Obama hoped to prevent defaults with a plan designed to encourage banks to refinance the mortgages of those unable to pay. On the demand side, the Federal Reserve held down mortgage rates by buying up mortgage-backed securities, while Congress offered a generous tax credit to qualifying buyers.

These programmes have not worked as well as had been hoped. Affordability is no longer the driving factor behind foreclosures; borrowers who took on more debt than they could handle defaulted on their loans long ago. Instead, the problem is negative equity. A borrower deeply underwater on his mortgage may have no choice but to default if he loses his job, since a sale would entail a huge loss. And a growing number of underwater borrowers are opting simply to walk away from mortgages that they can in fact afford.

Banks are balking at rewriting mortgages, despite incentives to do so. Too often borrowers default later on. The latest data on the government’s programme show that 400,000 loans have been renegotiated—far less than the goal of 3m-4m. Neither have government incentives to buy houses helped much. Credits may have done little more than move sales around. The steady drumbeat of foreclosures has continued; they have been running at a rate of over 300,000 filings a month for the past 15 months. By some estimates, it will take more than eight years of normal sales to clear the stock of houses now held by banks. This overhang holds down prices, meaning that the road out of negative equity is a long one.

Yet policy failures can be blamed only so much. A new report from Harvard University’s Joint Centre for Housing Studies notes that, historically, sustained housing recoveries are far more dependent on job growth than on factors like the level of interest rates. So May’s disappointing jobs figures, showing that the private sector added just 41,000 workers, was doubly bad news. With nearly 15m Americans still out of work, a real turnaround could be a long time coming.

RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve
by Ambrose Evans-Pritchard - Telegraph

As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve. Entitled "Deflation: Making Sure It Doesn’t Happen Here", it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy. The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost."

Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE). Investors basking in Wall Street's V-shaped rally had assumed that this bizarre episode was over. So did the Fed, which has been shutting liquidity spigots one by one. But the latest batch of data is disturbing. The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era.

The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7pc in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40pc in a month. This is a volatile index that can be distorted by the supply of new ships, but those who watch it as an early warning signal for China and commodities are nervous. Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)". "We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors.

Roberts said the Fed will shift tack, resorting to the 1940s strategy of capping bond yields around 2pc by force majeure said this is the option "which I personally prefer". A recent paper by the San Francisco Fed argues that interest rates should now be minus 5pc under the bank's "rule of thumb" measure of capacity use and unemployment. The rate is currently minus 2pc when QE is factored in. You could conclude, very crudely, that the Fed must therefore buy another $2 trillion of bonds, and even more if Europe's EMU debacle goes from bad to worse. I suspect that this hints at the Bernanke view, but it is anathema to hardliners at the Kansas, Richmond, Philadephia, and Dallas Feds.

Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. "The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant," he said. Despite the apparent rift with Europe, the US is arguably tightening fiscal policy just as hard. Congress has cut off benefits for those unemployed beyond six months, leaving 1.3m without support. California has to slash $19bn in spending this year, as much as Greece, Portugal, Ireland, Hungary, and Romania combined. The states together must cut $112bn to comply with state laws.

The Congressional Budget Office said federal stimulus from the Obama package peaked in the first quarter. The effect will turn sharply negative by next year as tax rises automatically kick in, a net swing of 4pc of GDP. This is happening as the US housing market tips into a double-dip. New homes sales crashed 33pc to a record low of 300,000 in May after subsidies expired. It is sobering that zero rates, QE a l'outrance, and an $800bn fiscal blitz should should have delivered so little. Just as it is sobering that Club Med bond purchases by the European Central Bank and the creation of the EU's €750bn rescue "shield" have failed to stabilize Europe's debt markets.

Greek default contracts reached an all-time high of 1,125 on Friday even though the €110bn EU-IMF rescue is up and running. Are investors questioning EU solvency itself, or making a judgment on German willingness to back pledges with real money? Clearly we are nearing the end of the "Phoney War", that phase of the global crisis when it seemed as if governments could conjure away the Great Debt. The trauma has merely been displaced from banks, auto makers, and homeowners onto the taxpayer, lifting public debt in the OECD bloc from 70pc of GDP to 100pc by next year. As the Bank for International Settlements warns, sovereign debt crises are nearing "boiling point" in half the world economy.

Fiscal largesse had its place last year. It arrested the downward spiral at a crucial moment, but that moment has passed. There is a time to love and a time to hate, a time for war and a time for peace. The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan. The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes. Some say that the Fed's QE policies have failed. I profoundly disagree. The US property market - and therefore the banks - would have imploded if the Fed had not pulled down mortgage rates so aggressively, but you can never prove a counter-factual.

The case for fresh QE is not to inflate away the debt or default on Chinese creditors by stealth devaluation. It is to prevent deflation. Bernanke warned in that speech eight years ago that "sustained deflation can be highly destructive to a modern economy" because it leads to slow death from a rising real burden of debt. At the time, the broad money supply was growing at 6pc and the Dallas Fed's `trimmed mean' index of core inflation was 2.2pc.

We are much nearer the tipping today. The M3 money supply has contracted by 5.5pc over the last year, and the pace is accelerating: the 'trimmed mean' index is now 0.6pc on a six-month basis, the lowest ever. America is one twist shy of a debt-deflation trap. There is no doubt that the Fed has the tools to stop this. "Sufficient injections of money will ultimately always reverse a deflation," said Bernanke. The question is whether he can muster support for such action in the face of massive popular disgust, a Republican Fronde in Congress, and resistance from the liquidationists at the Kansas, Philadelphia, and Richmond Feds. If he cannot, we are in grave trouble.

Look out for another financial avalanche
by Timothy Garton Ash - Globe and Mail

Our mighty bond markets, feared but also fearful, contribute to the very crises they wish to avert

I felt it was time I got to know the almighty. I mean, of course, the bond markets. For at their call, the governments of this world tremble. Before them, every knee shall bow. To fend off their wrath, Britain’s Chancellor of the Exchequer, George Osborne, has just presented the most draconian budget in living memory – a burnt offering on the altar of this god we call simply "the markets." So, over the past few weeks, I have been talking to traders, strategists and analysts in London’s bond markets. Let me say at once that I am a complete novice and amateur in this field. If you want expertise, read no further; turn instead to the Financial Times. If, however, you will accept me as your ordinary citizen’s emissary to Mount Olympus, read on.

The first thing that struck me was a Wizard of Oz effect. Pull back the curtain and you find, behind that giant figure with his booming, mysterious voice, a little man pushing buttons and pulling levers. Or rather, thousands of men (and a few women). Most of them, far from manifesting Olympian, god-like arrogance, seem even more terrified than the rest of us. Partly, no doubt, this is because they are paid to be nervous, but it is also because they better understand the very dangerous place we are in. And one reason they understand it better is that they know the danger comes also from themselves. For the financial markets are a classic example of what social scientists call a collective-action problem. Thousands of individual traders make decisions that are individually rational, at least in the short term, but collectively irrational.

An essential feature of financial markets is that those involved are simultaneously spectators and actors. George Soros, who has spent half a lifetime trying to explain this phenomenon to a wider world, said last week in London that "markets don’t reflect the facts very well, partly because they create the facts themselves." In what Mr. Soros calls "reflexivity," trends in the real world reinforce a bias in market participants’ minds, which in turn reinforces those trends in "a double feedback, reflexive connection." Realities create expectations, but expectations also create realities, and so on.

One analyst I spoke to developed a compelling metaphor of the bond markets now standing like skiers before the threat of a "sovereign avalanche." A single government defaulting could initiate a chain reaction of further defaults, accelerated by the collapse of banks holding too much of that government’s debt. In short, a "sovereign avalanche." The difference is this: On the slopes of Chamonix, even if a thousand skiers peer nervously up the slopes, their fear will have zero impact on the probability of an avalanche. In the financial markets, it is the skiers’ fear that triggers the avalanche.

Obviously, for such an avalanche danger to exist, there had first to be teetering piles of snow up the mountain. While overheated, overleveraged financial markets did contribute to piling up the snow, they were not primarily responsible for it. Governments, companies and, not least, you and me – in our double role as consumers and voters – were the main pilers of the snow. What the bond-market analysts show you with staggering clarity is, in most (though not all) of the developed world, and especially in many European countries, a ghastly tale of two Ds: debt and demography.

Over the past half-century, we have built up a staggering burden of corporate, household and public debt. Following the financial crisis, the emphasis has shifted from unsustainable private-sector borrowing to unsustainable public-sector borrowing. While the good-time bankers are laughing all the way to their yachts, a private-sector debt crisis has become a sovereign debt crisis. And, by the way, the virtuous, high-saving, exporter nations, such as China and Germany (or "Chermany," as Martin Wolf wittily dubs it), have depended on the credit-fuelled profligacy of others who buy their exports.

Meanwhile, the baby boomers are moving into retirement and the proportion of the population over 65 is soaring. Unless we have massive, successfully integrated youthful immigration, we will all have to work longer – and our welfare states will have to get shockingly leaner and meaner. Mr. Osborne’s axe is but a small taste of things to come. Financial markets are not mainly to blame for this double whammy of debt and demography, but nor are they merely "the messenger." The wizards to whom I spoke all identified some big problems with the way these markets work.

Until recently, it was taken as axiomatic that government bonds were virtually risk-free. Government bond yields were described as "the risk-free rate." Within the euro zone, the markets grossly mispriced the risk on countries like Greece. Yes, the Greek government had to pay a little more than Germany to borrow in the markets, but nothing like as much as it should have. Then there is the problem of chronic and growing short-termism. Asset managers now measure performance on a quarterly or at most a six-monthly time frame, with valuations being done at current market prices. So if there is a bubble, you as a fund manager must jump into it – even if you know the bubble is going to burst. If you don’t jump in, your sober pessimism may be justified in the slightly longer term, but in the meantime you’ll be out of a job, since investors will have taken their money elsewhere.

This in turn magnifies that inherent feature of markets, the Soros reflexivity effect. Whether you look at government debt, risk management or economic growth itself (which partly depends on how rich people feel, reflecting the current valuation of their assets), you see the same pattern of self-reinforcing upward or downward spirals. In layman’s terms, the ship is inherently unstable. If this analysis is not completely wide of the mark (and I welcome all learned explanations of why it is), then several questions follow. Can markets to some extent correct the way they themselves work, to address the problem of chronic short-termism, for example? If so, how? Can governments, international organizations and the co-ordinated actions of individual states regulate them more effectively? This will be a major subject of this weekend’s G20 meeting in Toronto.

Yet if bond markets have a collective-action problem, so do states. A clear impression I gained from my conversations is that one thing that really impresses the markets is determined, large-scale, "shock and awe," coûte que coûte action by a single, serious sovereign – i.e., a kind of power that the bond markets themselves can never be. Examples include the U.S. in the financial crisis, China and perhaps even (we shall see) little Britain today. One reason they are not yet convinced by the euro zone’s response to its crisis is that it does not have that single, serious, utterly determined sovereign. But if even the relatively tightly knit euro zone does not convince, how can a loose, disparate constellation of 20 states? I hope for the best at the G20 summit this weekend; I hope against hope. But if I were you, wherever you are, I’d prepare for more pain – and watch out for another avalanche.

Timothy Garton Ash is a professor of European studies at Oxford University.

You don’t recover from a debt crisis with more debt
by Gwyn Morgan - Globe and Mail

Hard to imagine a major economy with a greater need to tackle the deficit quickly than the U.S.

The normal format for global gatherings is for the leaders to avoid personal engagement until they arrive, followed by rubber stamping of a communiqué previously worked out by their advance entourages. The Canadian G8/G20 meetings broke sharply from that pattern. And the driving issue behind that change were sharply differing views on public spending.

In the run-up to the gatherings, summit host Prime Minister Stephen Harper sent a letter to G20 leaders calling for a wind down in stimulus spending and a focus on deficit reduction. A letter from U.S. President Barack Obama cautioned that premature "consolidation" (a new euphemism for spending reductions) could cause "renewed economic hardships and recession." European Union leaders, fresh from grappling with a credit and currency crisis that threatens the very survival of the euro zone, declared that the bigger risk is failure to control runaway deficits.

Responding to Mr. Obama’s call for "unity of purpose to provide the policy [spending] support necessary to keep economic growth strong," German Chancellor Angela Merkel stated, "It’s not about growth at any price, it’s about sustainable growth," and unleashed two of her ministers to expand on her government’s position. German Finance Minister Wolfgang Schaeuble told reporters "Nobody can seriously dispute that excessive public debts, not only in Europe, are one of the main causes of the crisis," while Economy Minister Rainer Bruederle said the U.S. must join Europe in "urgently" cutting spending. EU President Herman Van Rompuy said, "Failure to correct unsustainable deficits would ultimately lead to fatal loss of credibility and confidence with lasting economic damage."

British Prime Minister David Cameron noted that "for some countries, such as our own, there is a need to get on and tackle the deficit more quickly." With a national debt topping $13-trillion (U.S.), a deficit expected to be another $1.5-trillion in the 2010-2011 fiscal year, it’s hard to imagine a major economy with a greater need to "tackle the deficit more quickly" than the United States. Mr. Obama’s letter referenced plans to cut the U.S. deficit by half by 2013 and "work to reduce our fiscal deficit to 3 per cent of GDP by 2015," which would mean cutting the current deficit by 70 per cent, or more than $1-trillion.

To say that this seems like dreaming in Technicolor is an understatement. Mr. Obama’s expensive health-care reforms, along with rising Social Security costs, are certain to increase program spending, while interest payments on the national debt will grow substantially. (At the weekend G20 meeting in Toronto, leaders agreed on a plan for advanced countries to cut deficits in half by 2013 and stabilize debt loads by 2016.)

But even the incredible U.S. deficit doesn’t tell the whole story. American states face a combined budget shortfall of some $300-billion and some are in even more financial trouble than the euro zone’s so-called PIGS (Portugal, Italy, Greece and Spain). But in the U.S. case, the member of the union in the most trouble is also the biggest, and its deficit position is worse than that of Greece. The state of California faces a 30-per-cent shortfall on next year’s budget of some $125-billion, or a whopping $37-billion. Obama adviser Warren Buffett has said that a federal bailout of troubled states is "inevitable" if they are to avoid default on state bonds.

A look at countries that have experienced profound economic failure shows a convergence of forces creating an unrecoverable "debt spiral." Huge fiscal deficits, ever-rising interest costs on a mushrooming national debt, and growth capital sucked from the private sector to finance public sector deficits – they all lead financial markets to conclude that a country’s central bank will either default on its debt or resort to printing money, causing catastrophic currency devaluation.

Who could have predicted that this Group of 20 meeting would see the chronically profligate Europeans counselling fiscal prudence, while the world’s traditional economic bedrock and issuer of the global reserve currency spends it way toward disaster? The euro zone crisis demonstrated that financial markets can lose confidence in the bonds and currency of sovereign states in a heartbeat. Remember that the combined deficits of borrowing states must be financed by private investors and countries that are running fiscal surpluses, such as China and Middle Eastern oil producers. A loss of confidence in U.S. federal and state bonds, and in the world’s reserve currency itself, could trigger an economic conflagration that would making the recent global financial crisis seem like a walk in the park.

The U.S. administration is playing an extremely high-risk game that could see Mr. Obama go down as the most damaging president in history. You don’t recover from alcoholism by taking another drink, and you don’t recover from a debt crisis with more debt. It’s past time that John Maynard Keynes’s long-discredited deficit spending theories be tucked back in his grave. Even if they are, it will take decades to repair the damage already done.

The Keynesian Dead End
by WSJ Editorial

Spending our way to prosperity is going out of style.

Today's G-20 meeting has been advertised as a showdown between the U.S. and Europe over more spending "stimulus," and so it is. But the larger story is the end of the neo-Keynesian economic moment, and perhaps the start of a healthier policy turn. For going on three years, the developed world's economic policy has been dominated by the revival of the old idea that vast amounts of public spending could prevent deflation, cure a recession, and ignite a new era of government-led prosperity. It hasn't turned out that way.

Now the political and fiscal bills are coming due even as the U.S. and European economies are merely muddling along. The Europeans have had enough and want to swear off the sauce, while the Obama Administration wants to keep running a bar tab. So this would seem to be a good time to examine recent policy history and assess the results.
Like many bad ideas, the current Keynesian revival began under George W. Bush. Larry Summers, then a private economist, told Congress that a "timely, targeted and temporary" spending program of $150 billion was urgently needed to boost consumer "demand." Democrats who had retaken Congress adopted the idea—they love an excuse to spend—and the politically tapped-out Mr. Bush went along with $168 billion in spending and one-time tax rebates.

The cash did produce a statistical blip in GDP growth in mid-2008, but it didn't stop the financial panic and second phase of recession. So enter Stimulus II, with Mr. Summers again leading the intellectual charge, this time as President Obama's adviser and this time suggesting upwards of $500 billion. When Congress was done two months later, in February 2009, the amount was $862 billion. A pair of White House economists famously promised that this spending would keep the unemployment rate below 8%.

Seventeen months later, and despite historically easy monetary policy for that entire period, the jobless rate is still 9.7%. Yesterday, the Bureau of Economic Analysis once again reduced the GDP estimate for first quarter growth, this time to 2.7%, while economic indicators in the second quarter have been mediocre. As the nearby table shows, this is a far cry from the snappy recovery that typically follows a steep recession, most recently in 1983-84 after the Reagan tax cuts.

The response at the White House and among Congressional leaders has been . . . Stimulus III. While talking about the need for "fiscal discipline" some time in the future, President Obama wants more spending today to again boost "demand." Thirty months after Mr. Summers won his first victory, we are back at the same policy stand. The difference this time is that the Keynesian political consensus is cracking up. In Europe, the bond vigilantes have pulled the credit cards of Greece, Portugal and Spain, with Britain and Italy in their sights.

Policy makers are now making a 180-degree turn from their own stimulus blowouts to cut spending and raise taxes. The austerity budget offered this month by the new British government is typical of Europe's new consensus. To put it another way, Germany's Angela Merkel has won the bet she made in early 2009 by keeping her country's stimulus far more modest. We suspect Mr. Obama will find a political stonewall this weekend in Toronto when he pleads with his fellow leaders to join him again for a spending spree.

Meanwhile, in Congress, even many Democrats are revolting against Stimulus III. The original White House package of jobless benefits and aid to the states had to be watered down several times, and the latest version failed again in the Senate late this week. (See below.) Mr. Obama is having his credit card pulled too—not by the bond markets, but by a voting public that sees the troubles in Europe and is telling pollsters that it doesn't want a Grecian bath.
The larger lesson here is about policy. The original sin—and it was nearly global—was to revive the Keynesian economic model that had last cracked up in the 1970s, while forgetting the lessons of the long prosperity from 1982 through 2007. The Reagan and Clinton-Gingrich booms were fostered by a policy environment for most of that era of lower taxes, spending restraint and sound money. The spending restraint began to end in the late 1990s, sound money vanished earlier this decade, and now Democrats are promising a series of enormous tax increases.

Notice that we aren't saying that spending restraint alone is a miracle economic cure. The spending cuts now in fashion in Europe are essential, but cuts by themselves won't balance annual deficits reaching 10% of GDP. That requires new revenues from faster growth, and there's a danger that the tax increases now sweeping Europe will dampen growth further.

President Obama's tragic mistake was to blow out the U.S. federal balance sheet on spending that has produced little bang for the buck. The fantastical Keynesian notion (the "multiplier") that $1 of spending produces $1.50 in growth was long ago demolished by Harvard's Robert Barro, among others. That $1 in spending has to come from somewhere, which means in taxes or borrowing from productive parts of the private economy. Given that so much of the U.S. stimulus went for transfer payments such as Medicaid and unemployment insurance, the "multiplier" has almost certainly been negative.

With the economy in recession in 2008 and 2009, we argued that some stimulus was justified and an increase in the deficit was understandable and inevitable. However, we also argued that permanent tax cuts aimed at marginal individual and corporate tax rates would have done far more to revive animal spirits, and in our view would have led to a far more robust recovery.
What the world has now reached instead is a Keynesian dead end. We are told to let Congress continue to spend and borrow until the precise moment when Mr. Summers and Mark Zandi and the other architects of our current policy say it is time to raise taxes to reduce the huge deficits and debt that their spending has produced. Meanwhile, individuals and businesses are supposed to be unaffected by the prospect of future tax increases, higher interest rates, and more government control over nearly every area of the economy. Even the CEOs of the Business Roundtable now see the damage this is doing.

A better economic policy will have to await a new Congress, which we hope at a minimum can prevent punishing tax increases. But for now the good news is that voters and markets are telling politicians to stop doing what hasn't worked.

The Pendulum Swings Toward Austerity
by Tyler Cowen - New York Times

"The Road To Serfdom," the critique of socialism written 65 years ago by the Nobel laureate economist Friedrich von Hayek, was recently No. 1 in nonfiction sales at Many people, including the Fox News commentator Glenn Beck, have contended that growth of government power has, indeed, set us on such a road today. But the reality looks different. In many respects, the expansionary phase of big government is coming to an end, and quickly.

In the last few years, we have seen — for better or worse — huge financial bailouts, a $787 billion stimulus plan and legislation for near-universal health insurance coverage. But the policy mood in Washington is now much more modest: no second major stimulus is forthcoming and, in the environmental arena, a cap-and-trade system for greenhouse gas emissions is unlikely to move forward. The financial regulation bill will most likely pass, but it won’t fundamentally restructure the American economy. For instance, there is no longer talk of breaking up the big financial institutions, and Simon Johnson, the M.I.T. economist, has described the legislation as a failure.

To the extent that the bill limits proprietary trading by American banks — through the so-called Volcker amendment, named for the former Federal Reserve chairman — loopholes may enable banks to keep trading through asset management companies. The most extreme outcome would be that more financial market trading is pushed out of banks and into hedge funds and other bank competitors. That would matter a lot for bank profits, but American capital markets would perform essentially the same functions as before. The bill we’re getting may be a mere hodgepodge, and that is after the biggest financial crisis since the Great Depression.

If any financial policy idea is taking a major place on the American and global stages, it is fiscal austerity. It is not that fiscal conservatives have won a grand battle of ideas, but rather that governments realize that the bills are coming due. In the United States, we face rising health care costs and pension problems in state governments, with no clear long-run solution for bringing the books into balance. That makes responsible politicians reluctant to undertake major new commitments. At the very least, they embrace the rhetoric of fiscal conservatism, even when actual progress toward the ideal is slow.

In short, it’s not that ideas of government interventionism and free markets are fighting a titanic intellectual struggle. The reality is more mundane. The ascendancy of one view often creates the conditions for an economic counterreaction. We’ve seen such cyclical trends before. During the 1980s and 1990s, history seemed to be on the side of freer markets. Communism staged a mass retreat, China and India embraced economic growth and a wide range of governments adopted privatization. The United States cut marginal tax rates and the Clinton administration promoted free trade and welfare reform.

Eventually, things started to go wrong, in part because investors developed too much self-confidence and became complacent about systemic risk. Early cracks in the edifice appeared in the 1990s, during the Mexican and Asian financial crises, but the bigger, broader explosion of 2007 revealed a badly overextended world economy, which led to bailouts. The weak economy brought victory for the Democrats in 2008, which in turn enabled passage of a health care overhaul. Now the pendulum is swinging back. The economy will now likely make Congress much more Republican, as voters overreact to whatever is not working at the moment.

The unfolding of the financial crisis has also changed the public’s sense of where change is needed, both in the United States and Europe. The tragedies of 2008 were represented by Bear Stearns and Lehman Brothers — both private-sector institutions. In 2010, the financial crisis has spread to sovereign debt, with Greece as the most obvious example. All of these developments are part of one broader story of overreach and complacency.

Yet the 2008 crises were attached more directly to market institutions, while the 2010 crises are more closely linked to governments. Because politicians and voters are more influenced by the latest developments than by news from two or three years earlier, a cautious attitude toward public-sector spending has been further cemented. While we can expect a larger public sector in America, the cause is mainly the aging of the population, and it will play itself out over the next 30 years with an increase in government transfer payments, mostly through Medicare. Furthermore, even Professor Hayek favored welfare spending and social insurance, so those programs will not alone bring us to serfdom.

Democracies, like markets, have some self-correcting mechanisms, and we are now seeing those at work in the United States and many European countries. (Spain and Britain, for example, are pursuing fiscal austerity aggressively.) The lessons are straightforward. First, to paraphrase the French moralist La Rochefoucauld, things are never as good, or as bad, as they seem. Second, the Obama reforms, like the Reagan revolution, are turning out to be radically incomplete, which should come as no surprise.

Finally, effective political ideas are those that can still do good in half-baked form. We have neglected this insight in designing financial reform, and it remains to be seen if we can apply it successfully to climate change. And when it comes to the budget? Even if our real fiscal problems lie in the more distant future, it’s important to start worrying about them now, because we cannot count on a grand plan later to save the day.

Repent at leisure
by Philip Coggan - The Economist

Borrowing has been the answer to all economic troubles in the past 25 years. Now debt itself has become the problem

Man is born free but is everywhere in debt. In the rich world, getting hold of your first credit card is a rite of passage far more important for your daily life than casting your first vote. Buying your first home normally requires taking on a debt several times the size of your annual income. And even if you shun the temptation of borrowing to indulge yourself, you are still saddled with your portion of the national debt.

Throughout the 1980s and 1990s a rise in debt levels accompanied what economists called the "great moderation", when growth was steady and unemployment and inflation remained low. No longer did Western banks have to raise rates to halt consumer booms. By the early 2000s a vast international scheme of vendor financing had been created. China and the oil exporters amassed current-account surpluses and then lent the money back to the developed world so it could keep buying their goods.

Those who cautioned against rising debt levels were dismissed as doom-mongers; after all, asset prices were rising even faster, so balance-sheets looked healthy. And with the economy buoyant, debtors could afford to meet their interest payments without defaulting. In short, it paid to borrow and it paid to lend. Like alcohol, a debt boom tends to induce euphoria. Traders and investors saw the asset-price rises it brought with it as proof of their brilliance; central banks and governments thought that rising markets and higher tax revenues attested to the soundness of their policies.

The answer to all problems seemed to be more debt. Depressed? Use your credit card for a shopping spree "because you’re worth it". Want to get rich quick? Work for a private-equity or hedge-fund firm, using borrowed money to enhance returns. Looking for faster growth for your company? Borrow money and make an acquisition. And if the economy is in recession, let the government go into deficit to bolster spending. When the European Union countries met in May to deal with the Greek crisis, they proposed a €750 billion ($900 billion) rescue programme largely consisting of even more borrowed money.

Debt increased at every level, from consumers to companies to banks to whole countries. The effect varied from country to country, but a survey by the McKinsey Global Institute found that average total debt (private and public sector combined) in ten mature economies rose from 200% of GDP in 1995 to 300% in 2008 (see chart 1 for a breakdown by country). There were even more startling rises in Iceland and Ireland, where debt-to-GDP ratios reached 1,200% and 700% respectively. The burdens proved too much for those two countries, plunging them into financial crisis. Such turmoil is a sign that debt is not the instant solution it was made out to be. The market cheer that greeted the EU package for Greece lasted just one day before the doubts resurfaced.

From early 2007 onwards there were signs that economies were reaching the limit of their ability to absorb more borrowing. The growth-boosting potential of debt seemed to peter out. According to Leigh Skene of Lombard Street Research, each additional dollar of debt was associated with less and less growth (see chart 2).

Stopping the debt supercycle
The big question is whether this rapid build-up of debt—a phenomenon which Martin Barnes of the Bank Credit Analyst, a research group, has dubbed the "debt supercycle"—has now come to an end. Debt reduction has become a hot political issue. Rioters on the streets of Athens have been protesting against the "junta of the markets" that is imposing austerity on the Greek economy, and tea-party activists in America, angry about trillion-dollar deficits and growing government involvement in the economy, have been upsetting the calculations of both the Democratic and Republican party leaderships.

To understand why debt may have become a burden rather than a boon, it is necessary to go back to first principles. Why do people, companies and countries borrow? One obvious answer is that it is the only way they can maintain their desired level of spending. Another reason is optimism; they believe the return on the borrowed money will be greater than the cost of servicing the debt. Crucially, creditors must believe that debtors’ incomes will rise; otherwise how would they be able to pay the interest and repay the capital?

But in parts of the rich world such optimism may now be misplaced. With ageing populations and shrinking workforces, their economies may grow more slowly than they have done in the past. They may have borrowed from the future, using debt to enjoy a standard of living that is unsustainable. Greece provides a stark example. Standard & Poor’s, a rating agency, estimates that its GDP will not regain its 2008 level until 2017.

Rising government debt is a Ponzi scheme that requires an ever-growing population to assume the burden—unless some deus ex machina, such as a technological breakthrough, can boost growth. As Roland Nash, head of research at Renaissance Capital, an investment bank, puts it: "Can the West, with its regulated industry, uncompetitive labour and large government, afford its borrowing-funded living standards and increasingly expensive public sectors?"

Sovereign default is far from inconceivable. Many people are forecasting that Greece, despite its bail-out package from the EU and the IMF, will be unable to repay its debts in full and on time. Faced with the choice between punishing their populations with austerity programmes and letting down foreign creditors, countries may find it easier to disappoint the foreigners. Defaults have been common in the past, as Carmen Reinhart and Ken Rogoff showed in their book, "This Time is Different". Adam Smith, a founding father of economics, noted in "The Wealth of Nations" that "when national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having being fairly and completely paid."

Governments now face a tricky period when they have to deal with the debt overhang, decide how quickly to cut their deficits (and risk undermining growth), and try to distribute the pain of doing so as equitably as possible. Debt is often treated as a moral issue as well as an economic one. Margaret Atwood, in her book of essays, "Payback: Debt and the Shadow Side of Wealth", notes that the Aramaic words for debt and sin are the same. And some versions of the Lord’s Prayer say "Forgive us our debts" rather than "Forgive us our trespasses".

The Live 8 campaign in 2005 tried to shame developed nations into forgiving the debts of poor countries, particularly in sub-Saharan Africa. Economists have developed the concept of "odious debt" in which citizens should not be forced to repay money borrowed by tyrannical or kleptocratic rulers. Interest payments on debt are often regarded as an onerous burden placed on the poor; interest is seen as an unjustified reward for capital, a concept that goes back to Aristotle and is implicit in the Christian idea of usury. Islam forbids it altogether. The book of Deuteronomy suggested a debt amnesty every seven years, which survived into later Jewish custom.

But conventional morality has not always been on the side of the borrowers. Some regard debt as the road to ruin and the failure to repay as a breach of trust. In the 18th and 19th century debtors in Britain were often thrown into jail (as in Charles Dickens’s "Little Dorrit"), though Samuel Johnson spotted the flaws of the practice: "We have now imprisoned one generation of debtors after another, but we do not find that their numbers lessen. We have now learned that rashness and imprudence will not be deterred from taking credit; let us try whether fraud and avarice may be more easily restrained from giving it."

Movable morals
In the past 100 years the moral battle has moved in favour of the debtors. Bankruptcy is no longer stigmatised but simply regarded as bad luck. When consumers borrow beyond their means, the blame is laid on lax lending practices rather than irresponsible borrowing. Governments have encouraged more people to become homeowners and thus to take on debt. And defaulting on one’s debts has become much less cumbersome; in the current housing slump many American homeowners have resorted to "jingle mail", dropping their keys through the lender’s letterbox and walking away from their property.

In business, a few failed directorships are a sign of entrepreneurship rather than incompetence. America’s Chapter 11 process allows the managers of companies to remain in place and the business to be protected from its creditors. The number of companies with safe AAA credit ratings has collapsed as more have acted on the theory that a debt-laden balance-sheet is more efficient (because interest payments are tax-deductible in most countries). The recent crisis has also diminished belief in the judgment of the financial markets. The role of banks in the credit crunch and the cost of the financial sector bail-out has undermined the idea that the markets assess risk fairly and rationally. Instead, higher borrowing costs are seen as the result of unscrupulous speculation.

The role of sovereign credit-default swaps (CDS), a way of betting on the likelihood of a country’s failure to repay the money it has borrowed, has proved particularly controversial. Southern European nations, which have been at the heart of the recent market turmoil, have been quick to blame an Anglo-Saxon conspiracy, brewed up by hedge funds, credit-rating agencies and even newspapers like this one, for unfairly pushing up their borrowing costs. The German government moved to ban short-selling of government bonds and some CDS transactions last month. As Charles Stanley, a stockbroking firm, cynically puts it, EU nations are saying: "Please fund our lifestyles, but don’t hold us to any commitments."

Why it matters
If a husband borrows money from his wife, the family is no worse off. By extension, just as every debt is a liability for the borrower, it is an asset for the creditor. Since Earth is not borrowing money from Mars, does the debt explosion really matter, or is it just an accounting device? During the credit boom of the early 1990s and 2000s the conventional view was that it did not matter. Not only were asset prices rising even faster than debt but the use of derivatives was spreading risk across the system and, in particular, away from the banks, which had capital ratios well above the regulatory minimum.

The problem with debt, though, is the need to repay it. Not for nothing does the word credit have its roots in the Latin word credere, to believe. If creditors lose faith in their borrowers, they will demand the repayment of existing debt or refuse to renew old loans. If the debt is secured against assets, then the borrower may be forced to sell. A lot of forced sales will cause asset prices to fall and make creditors even less willing to extend loans. If the asset price falls below the value of the loan, then both creditors and borrowers will lose money. This is particularly troublesome if the economy slips into deflation, as happened globally in the 1930s and in Japan in the 1990s.

Debt levels are fixed in nominal terms whereas asset prices can go up or down. So falling prices create a spiral in which assets are sold off to repay debts, triggering further price falls and further sales. Irving Fisher, an economist who worked in the first half of the 20th century, called this the debt deflation trap. Another reason why debt matters is to do with the role of banks in the economy. By their nature, banks borrow short (from depositors or the wholesale markets) and lend long. The business depends on confidence; no bank can survive if its depositors (or its wholesale lenders) all want their money back at once. If banks struggle to meet their own debts, they have no choice but to reduce their lending. If this happens on a large scale, as it did in the 1930s, the ripple effect for the economy as a whole can be devastating.

Both of these effects were seen in the debt crisis of 2007-08. Falling property prices caused defaults and a liquidity crisis in the banking system so severe that the authorities feared the cash machines would stop working. Hence the unprecedented largesse of the bank bail-out.

Hyman Minsky, an American economist who has become more fashionable since his death in 1996, argued that these debt crises were both inherent in the capitalist system and cyclical. Prosperous times encourage individuals and companies to take on more risk, meaning more debt. Initially such speculation is successful and encourages others to follow suit; eventually credit is extended to those who will be able to repay the debt only if asset prices keep rising (a succinct description of the subprime-lending boom). In the end the pyramid collapses.

In the aftermath of the latest collapse it is clear that the distinction between debt in the private and public sector has become blurred. If the private sector suffers, the public sector may be forced to step in and assume, or guarantee, the debt, as happened in 2008. Otherwise the economy may suffer a deep recession which will cut the tax revenues governments need to service their own debt.

If the Western world faces an era of austerity as debts are paid down, how will that affect day-to-day life? Clearly a society built on consumption will have to pay more attention to saving. The idea that using borrowed money to buy assets is the smart road to riches might lose currency, changing attitudes to home ownership as well as to parts of the finance sector such as private equity.

This special report will argue that, for the developed world, the debt-financed model has reached its limit. Most of the options for dealing with the debt overhang are unpalatable. As has already been seen in Greece and Ireland, each government will have to find its own way of reducing the burden. The battle between borrowers and creditors may be the defining struggle of the next generation.

At G-20 Summit Talks, Obama Lacks Strong Hand on Stimulus
by Jackie Calmes and Sewell Chan - New York Times

Despite President Obama’s pitch at the summit meeting for developed nations here for continued stimulus measures to prevent another global economic downturn, the United States will go along with other leaders who are more concerned about rising debt and join in a commitment to cut their governments’ deficits in half by 2013, administration officials said on Saturday.

That goal is the proposal of Stephen Harper, the prime minister of Canada and the host of the two-day Group of 20 summit of developed nations. Mr. Harper wanted it to be part of the communiqué on global economic policy that the group adopts before concluding on Sunday, and he had the support of European leaders, including David Cameron, the new prime minister of Britain, who has proposed the most ambitious austerity plan of spending cuts and tax increases in his country in a half-century.

Mr. Cameron and Mr. Obama, in their first private meeting since Mr. Cameron took office, acknowledged their different approaches toward balancing the need to promote greater economic growth and job creation in the short term with the long-term desire to reduce national debts, which reached dangerous heights during the downturn. But they downplayed those differences. Mr. Obama said the two leaders were bound to have different approaches given their country’s separate budget outlooks; Britain’s debt is bigger than that of the United States, measured against the size of their respective economies. "But we are aiming at the same direction, which is long-term sustainable growth that puts people to work," Mr. Obama said.

Mr. Cameron added, "Those countries that have big deficit problems like ours have to take action in order to keep that level of confidence in the economy which is absolutely vital to growth." He joked that he could not afford to pay for the helicopter ride that Mr. Obama had given him Saturday from the isolated site of the Group of 8 talks to the subsequent G-20 session in Toronto. The separate approaches represented by Mr. Obama and Mr. Cameron reflected the splintering that is occurring within the G-20 as the global economy recovers, if haltingly, amid some fears of another recession. In three previous summit meetings since the financial and economic crisis began in 2008, the Group of 20 has coordinated on stimulus measures, banking regulations and anti-protectionist measures.

The Obama administration did have allies at the summit in opposing rapid moves to withdraw governments’ stimulus measures. The Brazilian finance minister, Guido Mantega, told reporters that the debt-reduction targets could compromise economic growth and would be "too draconian" for certain countries to meet. "It is clear that we need to cut, but at what speed?" he asked. Japan has also taken a position more closely aligned with the United States’.

Treasury Secretary Timothy F. Geithner emphasized the American position again Saturday as he arrived here for the beginning of the G-20 talks. Speaking to reporters, he said that for all the progress the G-20 countries had made since late 2008, "the scars of this crisis are still with us." Trying to bridge the differences among leaders here, he said: "Our challenge, as the G-20, is to act together to strengthen the prospects for growth. This will require different strategies in different countries. We are coming out of the crisis at different speeds."

Mr. Obama came to the summit table this weekend with a strong hand to press his case to foreign leaders for tougher banking regulations, after Congress agreed to a far-reaching overhaul of the American regulatory system. But he was hindered in his effort to persuade other governments to keep stimulating their economies. Even as Congress allowed Mr. Obama to pack the big victory on banking regulation as he left for the Group of 20 summit talks, the Senate separately dealt him a significant setback that no doubt resonated with the foreign leaders here pushing fiscal austerity: Democratic leaders shelved an economic stimulus package of aid for the long-term unemployed and financially squeezed states, along with assorted tax cuts.

The setback underscored the difficulty Mr. Obama has had in making the case for stimulus. At home as abroad, Mr. Obama is confronting the limits of the consensus that took hold after the economic crisis began in 2008, which favored bigger deficits to spur job creation. At stake, as the administration sees it, is continued global recovery or a relapse into another recession. Yet even within Mr. Obama’s administration there are fault lines on how much additional stimulus is desirable.

Some news reports in recent days suggested that Peter R. Orszag, the budget director who recently announced that he would be leaving in late July, was resigning partly out of frustration that he had lost the argument for deeper and quicker reductions in projected deficits. Advisers and associates of Mr. Orszag insist that is not so, however, and Mr. Orszag was moved to address the issue late Friday in his blog on the Web site of the Office of Management and Budget.

Saying that "it was simply time for me to move on," Mr. Orszag recounted the deficit-reduction steps that Mr. Obama has proposed: a three-year freeze after this fiscal year for nonsecurity domestic appropriations, $1 trillion in reductions over the coming decade and a bipartisan fiscal commission — a priority of Mr. Orszag’s — that will try to make recommendations, with a Dec. 1 target, for reducing the debt. "The president has made it clear to his economic team that he is seriously committed to tackling our fiscal problems," Mr. Orszag wrote.

Indeed, Mr. Orszag has complained to associates that the debate over job creation versus deficit reduction is a false one; the only disagreement is over timing. In advance of the G-20, Mr. Geithner, who is closer in his thinking to Mr. Orszag, and Lawrence H. Summers, the director of the White House National Economic Council, and a proponent of more short-term stimulus measures, co-wrote an op-ed column in The Wall Street Journal to project a united front on the issue. "We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth," they wrote. "Without growth now, deficits will rise further and undermine future growth."

European countries generally are running annual deficits of about 6 percent of the size of their economies — twice as large as the limit that the European Union tries to enforce. Even before Mr. Cameron took action in London, Germany’s chancellor, Angela Merkel, and Nicolas Sarkozy, the president of France, had begun turning from stimulus to immediate deficit reductions. Mr. Harper of Canada on Friday praised Mr. Cameron for his austerity initiative, saying it was the sort of fiscal constraint the rest of the G-20 nations should adopt. On Saturday, an adviser said Mr. Harper was lobbying the other leaders to commit to fully implement "existing" stimulus plans — suggesting no additional spending or tax cut measures — and to cut their annual deficits in half by 2013 and put them on a downward trajectory after 2016.

That is a more ambitious and constrictive path than the one Mr. Obama has proposed as the goal of his fiscal commission. He has proposed that the United States cut its annual deficit to 3 percent of the gross domestic product by fiscal year 2015.

Germany Warns US Not to Become 'Addicted to Borrowing'
by Der Spiegel

The US has heavily criticized German austerity measures in recent days. Now, Germany's finance minister has fired back, warning against becoming addicted to deficit spending and noting that history has made the country extremely wary of national debt and inflation. Conflict, it would seem, will be everywhere in Toronto this weekend as world leaders gather for the G-20 summit to discuss possible reforms to the global financial system. Already, new British Prime Minister David Cameron has said that he may end up trying to avoid sitting next to German Chancellor Angela Merkel on Sunday. "I'm not sure if that will be safe. We might get a bit carried away," he said.

Cameron's comments were, of course, tongue in cheek. He was referring to Sunday's World Cup battle between Germany and England in South Africa. Still, there is little doubt that sparks will fly this weekend, particularly when it comes to competing views on fiscal policy between Europe and the United States. Indeed, German Finance Minister Wolfgang Schäuble poured more fuel on the fire in a contribution published Friday in the business daily Handelsblatt. Referring to US demands that Germany abandon austerity in favor of additional economic stimulus measures, Schäuble said that "governments should not become addicted to borrowing as a quick fix to stimulate demand. Deficit spending cannot become a permanent state of affairs."

The Longer View
Schäuble said that he cannot relate to accusations that Germany hasn't done its part to stimulate the economy, pointing out that Berlin passed a massive stimulus package in 2008. "Additionally," he said, "we also have so-called automatic stabilizers (such as high social welfare expenditures) that do not play as big a role in the countries that are now criticizing us." Merkel's finance minister also pointed out that "while US policymakers like to focus on short-term corrective measures, we take the longer view and are, therefore, more preoccupied with the implications of excessive deficits and the dangers of high inflation." Schäuble remarked that, while US economic history has taught the country to be wary of deflation, Germany's history has resulted in widespread fear of deficits and inflation.

Schäuble's remarks were just the latest in a trans-Atlantic back-and-forth that has continued all week. US President Barack Obama's letter to G-20 leaders , in which he wrote, "I am concerned about weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses," kicked off the debate late last week. Most interpreted the line as a warning directed at Berlin. Merkel has since been energetic in her defense of Berlin's focus on debt and deficit reduction, telling German public broadcaster ARD on Thursday that "I don't think we should relent."

'No More Room for Deficit Spending'
Berlin has received support in recent days from European Central Bank President Jean-Claude Trichet. Speaking to the Italian daily La Repubblica on Thursday, he said "with regards to economic growth, it is wrong to believe that the (European) austerity measures will result in stagnation." European Commission President Jose Manuel Barroso also backed up the German chancellor, telling reporters in Toronto that "there is no more room for deficit spending." US Secretary of the Treasury, Timothy Geithner, appeared eager to play down the disagreement on Thursday, telling BBC World News America that "our job is to make sure we're all sitting together, focused on this challenge of growth and confidence because growth and confidence are paramount."

Still, even if Europe and the US agree to disagree when it comes to the austerity versus stimulus debate, there are plenty of other items on the agenda that are likely to result in discord. A European proposal for a global tax on financial transactions appears to be headed for the dustbin in Toronto. Similarly, a worldwide levy on banks to build up a fund for the next crisis is likely to be rejected. China, Australia and host Canada -- all countries that did not have to bail out their banking industry during the financial crisis -- are opposed to the measures.

Orszag exit reveals deficit policy split
by Edward Luce - Financial Times

Peter Orszag, Barack Obama’s budget director, resigned this week partly in frustration over his lack of success in persuading the Obama administration to tackle the fiscal deficit more aggressively, according to sources inside and outside the White House. Mr Orszag, whose publicly stated reasons for leaving were that he was exhausted after years in high pressure jobs and also that he wanted to plan for his wedding in September, is seen as the guardian of fiscal conservatism within the White House.

Other members of Mr Obama’s economic team, notably Lawrence Summers, the head of the National Economic Council, have placed more emphasis on the need for continued short-term spending increases to counteract what increasingly looks like an anaemic economic recovery in the US. Although Mr Orszag agrees with the need to push short-term spending, particularly in the Senate, which again this week failed to pass a measure extending insurance to the unemployed, the budget director has become increasingly frustrated with the administration’s caution on longer-term fiscal restraint.

Mr Orszag, whom Mr Obama has dubbed a "propeller-head" because of his brilliant facility with projections and spreadsheets, has tried but failed to convince his colleagues to "step up the action", according to one insider. In particular, he has collided with the political team, led by Rahm Emanuel, Mr Obama’s chief of staff, over Mr Obama’s 2008 election pledge not to raise taxes on any households earning less than $250,000 a year – a category that covers more than 98 per cent of Americans.

Economists say that would put all the fiscal emphasis on draconian – and highly unrealistic – spending cuts, or else pushing the marginal tax rates on the very rich to confiscatory levels. "Peter feels strongly that this is a pledge that has to be broken if the President is to take a lead on America’s fiscal crisis," says an administration official not authorised to speak on the matter. "He felt that rather than resign in protest in January, when next year’s budget is being prepared, he would rather go amicably now."

Earlier this week, Mr Obama told the weekly cabinet meeting in the White House that he had tried but failed to persuade Mr Orszag to stay on. On Friday Mr Orszag told the FT: "I want to emphasise that it would be inaccurate to say that I have told the president personally that I’m leaving because of concerns about our fiscal policy." In a statement, Mr Orszag said: "The reason I am stepping down as OMB director is that after nearly four years in government service – running CBO and then OMB – it is time for me personally to move on.

"We had historical successes in bringing the economy back from the brink of a potential depression, and in beginning the difficult shift toward a better health care system. It is true that the nation still faces important fiscal challenges over the medium and long term, which was the motivation behind the President’s creation of the fiscal commission. The President has made it clear to the economic team that he is seriously committed to tackling our fiscal problems, and I look forward to continuing to support him and my colleagues in the ongoing effort to put the nation back on a sustainable fiscal course."

On Saturday, Mr Obama [held] his first meeting with David Cameron, the UK’s new prime minister, at the G20 meeting in Toronto. [Last] week the UK announced a strong package of spending cuts and tax increases to tackle its deficit, leaving the US as the only major economy that has yet to unveil such plans.

General Motors plans return to stock market
by Andrew Clark - The Observer

General Motors is gearing up for one of the biggest stock market flotations in US corporate history barely a year after emerging from bankruptcy. It hopes to raise $10bn to $15bn (£6bn to £10bn) and start to pay back government bailout money, giving a political boost to President Obama in time for November's congressional elections. Reinvigorated by a return to profitability, GM has invited Wall Street analysts to a four-hour briefing on Tuesday at its technical centre just outside Detroit. The company is contemplating making an initial regulatory filing on its flotation plans this week, although the formal move could be delayed until July amid signs of a recent softening in US car sales.

Going public will mark an extraordinary turnaround for America's biggest carmaker which, at one point, appeared to be in terminal decline. GM, which owns Chevrolet, Cadillac, Vauxhall and Opel, required $50bn in government aid to stay afloat as it spent 40 days in chapter 11 bankruptcy last summer. The Obama administration is believed to be keen to recoup at least part of the outlay in time for elections in November. "It's a bit early for an IPO but the Democratic party might need it for this fall's election," said John Wolkonowicz, an analyst at IHS Global Insight. "The bailout of the auto companies was not favourably received by most Americans and the administration wants to show it's starting to get paid back."

GM returned to the black with a profit of $1.2bn in the first quarter. And to satisfy demand, the carmaker announced that nine of its 11 US assembly plants will forgo the usual two-week summer shutdown to produce an extra 56,000 vehicles. Analysts believe that GM could be valued at as much as $80bn. The company is being advised by JP Morgan and Morgan Stanley, who are charging lower fees, while the US Treasury has signed up Lazard to advise on the sale of part of its 60.8% stake. The offering is set to be the biggest on Wall Street since Visa's flotation in 2008, which raised $19.7bn. GM's chairman Ed Whitacre, who took day-to-day control after ousting chief executive Fritz Henderson in December, has been pushing hard for a swift recovery in the business.

Craig Fitzgerald, an automotive expert at Plante & Moran in Michigan, said GM's management would be keen to get the government out of the company's books: "They don't have the same control as the management of, say, Ford would – their hands are somewhat tied. And I'm sure their thinking has to be somewhat more short-term than their competitors."

Mortgage Bond Prices Rise to ‘Insane’ Records
by Jody Shenn - Bloomberg

Mortgage securities with U.S.-backed guarantees are trading at record high prices on speculation homeowner refinancing will fail to accelerate and as supply of the bonds remains limited. The average price of $5.2 trillion of bonds guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae climbed to 106.3 cents on the dollar yesterday, according to Bank of America Merrill Lynch’s Mortgage Master Index. That’s up from 104.2 cents on March 31, when the Federal Reserve ended its program purchasing $1.25 trillion of the debt.

"It’s gotten insane," said Scott Simon, the head of mortgage-backed securities at Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund. "This is rarefied air." U.S. existing home sales unexpectedly fell last month and purchases of new houses tumbled to a record low, underscoring how borrowers’ ability to qualify for financing is limited even as rates drop. Bond prices show investors aren’t concerned homeowners will pay back the mortgages underlying the securities at a faster pace, handing them their money back at par and forcing them to reinvest in new debt at lower yields.

Applications for mortgage refinancings are off almost 57 percent from last year’s peak reached in January, according to the Mortgage Bankers Association. The average rate on a typical 30-year home loan fell to a record low of 4.69 percent in the week ended today, down from this year’s high of 5.21 percent in April, McLean, Virginia-based Freddie Mac said today.

Refinancings Suppressed
Refinancings are being suppressed because more than 23 percent of homeowners with mortgages owe more than their houses are worth, according to Seattle-based Borrowers also face tougher underwriting standards at lenders selling debt to Fannie Mae and Freddie Mac, said Tad Rivelle, head of fixed- income investments at Los Angeles-based TCW Group Inc., with $115 billion in assets under management. Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds instead of government debt was unchanged at 194 basis points, or 1.94 percentage point, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Yields averaged 4.002 percent.

Indicators of corporate bond risk in the U.S. and Europe rose. The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, climbed 3.65 basis points to a mid-price of 119.15 basis points as of 11:44 a.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings increased 4.95 to 129.75, Markit prices show.

The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Yields on Washington-based Fannie Mae’s current-coupon mortgage bonds backed by 30-year fixed-rate home loans fell to about 3.85 percent yesterday, the lowest since January 2009, before rising to 3.86 percent as of 11:55 a.m. today in New York, according to data compiled by Bloomberg.

Their yields have fallen to within 76 basis points of 10- year Treasuries from this year’s high of 93 basis points on May 24, after climbing from a record low of 59 reached March 29. Yesterday, Fed officials retained a pledge to keep the benchmark interest rate at a record low for an "extended period" and signaled that Europe’s debt crisis may harm American growth.

The central bank, at a two-day meeting, left the overnight interbank lending rate target unchanged in a range of zero to 0.25 percent, where it’s been since December 2008. High unemployment, low inflation and stable price expectations "are likely to warrant exceptionally low levels of the federal funds rate for an extended period," the Fed said, repeating language from every policy meeting since March 2009.

Bond buyers view so-called agency mortgage securities as a refuge, said Andrew Harding, who oversees $22 billion as the chief investment officer for taxable fixed-income at PNC Capital Advisors LLC in Cleveland. The government is promising to help Fannie Mae and Freddie Mac honor their guarantees. "They’ve become an anchor in portfolios," Harding said. "It’s not Treasuries. It’s got some yield, but it’s not equity- like risk." The market for agency mortgage bonds has shrunk since it peaked at $5.4 trillion in February, partly because Fannie Mae and Freddie Mac decided earlier this year to purchase about $200 billion of delinquent loans out of their securities to reduce their expenses, according to Bank of America data.

Fed Purchases
Many outstanding securities are also no longer trading after the Fed’s unprecedented purchases, which began in January 2009, and the Treasury’s acquisition of an additional $220 billion of the debt in a separate program begun after the U.S. seized Fannie Mae and Freddie Mac in September 2008. The weak housing market will likely limit future issuance, said David Land, a mortgage-bond manager at St. Paul, Minnesota- based Advantus Capital Management Inc., which oversees about $18 billion. Outstanding U.S. home-mortgage debt has dropped in eight straight quarters since the third quarter of 2008, falling 3.6 percent to $10.2 billion, Fed data show.

New-home sales tumbled 33 percent last month to a record low annual pace of 300,000, the Commerce Department said in a report. Sales of previously owned homes unexpectedly fell 2.2 percent in May, the National Association of Realtors said. The median U.S. home sales price slid 29 percent to an almost eight-year low of $164,600 in February from a peak of $230,300 in July 2006, according to the National Association of Realtors in Chicago. Refinancing hasn’t climbed much partly because there are fewer loan brokers competing to earn fees after being blamed for creating more bad loans than direct lenders, Land said. "There’s less of a solicitation effort going on," he said. "If anybody were to figure out a way to refinance people, the mortgage-bond market would be in really bad shape."

Only about 37 percent of 30-year loans are "actually refinanceable" at current mortgage rates, about half of the level suggested by "traditional measures," Credit Suisse Group AG analysts led by Mahesh Swaminathan wrote in a report. Rates would need to decline to about 4.5 percent for refinangings to begin to jump, the analysts and BNP Paribas’ Anish Lohokare wrote today.

Pimco Cuts Holdings
Pimco’s $228 billion Total Return Fund reduced its holdings of mortgage securities to 16 percent last month, down from 83 percent in January 2009, according to disclosures on its website. Even after ending, the Fed’s purchases are helping fuel an imbalance between supply and demand, Simon said. The mismatch has contributed to a jump in unsettled mortgage-bond trades, which remain elevated after soaring to the highest on record last month according to Fed data, and a related drop in the cost of borrowing to invest in certain home- loan securities in the so-called dollar roll market.

With dollar rolls, an investor seeking to borrow money enters into contracts to sell mortgage securities one month and then buy similar bonds the next month; a lender would undertake the opposite trades. The implied cost of such financing for Fannie Mae’s 5.5 percent securities, backed by higher-rate loans than the current-coupon bonds that guide mortgage rates, was about negative 1 percent yesterday, according to Barclays Plc’s estimates. That means debt investors are essentially being paid to borrow rather than paying their lenders. Prices for some securities have "benefited substantially" from such "roll specialness," Nicholas Strand, an analyst in New York at Barclays, wrote in a June 18 report. The Fed may "look into helping to facilitate market liquidity" through temporary sales into the roll market, hurting values, he said.

A New Plan for Valuing Pensions
by Mary Williams Walsh - New York Times

The board that writes accounting rules for states and cities has proposed a new approach for pension disclosures that falls far short of what some financial experts hoped, but which would still force many governments to highlight pension shortfalls they have played down. The current standard has come under heavy fire from mainstream economists, who say it makes virtually all government pension benefits look less costly than they really are.

Government officials have granted pensions to teachers, police, judges and other public workers for years, without reflecting the true cost, analysts say. Now the bills are coming due, and in many cases there is not enough money set aside, adding to the fiscal distress across the country. Pensions are a third-rail issue for the Governmental Accounting Standards Board, and it has been working with great deliberation. Its pension project began early in 2006 but is nowhere near completion. Earlier this month, the board issued a "Preliminary Views" statement, summarizing its conclusions so far and requesting public feedback. A new standard is unlikely to take effect until at least 2013.

Fiscal hawks have been urging the accounting board to require states to measure their pension obligations at fair value. Corporations already do this when they report their pension numbers to the Securities and Exchange Commission. But state and local officials have resisted, and the Governmental Accounting Standards Board seems to have taken their objections to heart. Its new proposal would let them keep measuring their pension obligations the same way as before, with one big exception.

The rule makers want to shine a bright light on the states and local governments that routinely fail to put enough money into their pensions — places like Illinois, New Jersey and Pennsylvania — that year after year contribute less than their actuaries tell them they have to contribute to their pension funds. The accounting board wants those places to show the missing amounts on their balance sheets, not hide them in footnotes.

Further, instead of minimizing the shortfalls, those governments would have to calculate the shortfalls in a way that magnifies them. "I think they hope this will be the disciplinary tool that will get everybody funding at the actuarial rate," said Jeremy Gold, an actuary and economist who served on the accounting board’s pension advisory task force but who does not like the proposed new method. "They hope they will be punishing the real laggards." He said the board’s stated purpose was to foster correct financial reporting, not mete out punishment.

Many states and cities will be relieved at least that more far-reaching types of changes have been sidelined. They had feared a shift to fair value accounting in general and especially now, after big investment losses in 2008. Some economists have been trying to strip down pension numbers to present something like fair value anyway. The most recent such study, by Eileen Norcross of the Mercatus Center at George Mason University and Andrew Biggs of the American Enterprise Institute, determined that if New Jersey’s state pension system disclosed its pension numbers at fair value, it would have a shortfall of $170 billion, instead of its reported $46 billion. "This path is not sustainable," Ms. Norcross said.

Governments and their actuaries argue that it is unfair and misleading to show them at their worst — or at any particular point in time. States and cities, after all, are fundamentally different from corporations — they do not do things like acquire each other or file for Chapter 11 bankruptcy protection. In addition, while companies need to bring their pension funds to a standing stop and measure them during such events, governments never engage in such transactions, so they say there is no reason to disclose their financial status at a single time.

"I doubt anybody’s imagination is vivid enough to imagine the merger of states such as Kansas and Missouri, or Ohio and Michigan," said Rick Roeder, an actuary and consultant in San Diego, in testimony submitted to the accounting board. "For a plan sponsor with a 50-plus-year time horizon, today’s market value can be anything but fair."

At the heart of the dispute is the way governments gauge the value of the pensions they owe future retirees in today’s dollars — a commonplace financial calculation known as discounting. It is used to calculate things as diverse as bond prices and mortgages. Discounting is based on an interest rate, which is supposed to reflect the riskiness and other attributes of the underlying asset. Current accounting rules tell governments to use the investment return they expect over the long term. In practice, this means most public pension funds now use about 8 percent.

Many economists criticize this practice, arguing that 8 percent reflects a fairly high degree of risk, though state pensions are guaranteed by law and are therefore virtually risk free. Standard economic theory says they should be measured with a very low discount rate — something much closer to the rate on Treasury bonds than to the higher risk securities in most pension investment portfolios. These days, many economists think the states should be using a rate of about 4.5 percent to measure their pension obligations. The difference — three or four percentage points — translates into hundreds of billions of dollars when applied to pension obligations.

The 50 states together reported pension obligations of $3.3 trillion as of mid-2008, and secured with assets of $2.3 trillion, according to the Pew Center on the States. But Ms. Norcross said that if the states had to report their pension obligations on a fair value basis, the number would have been $5.2 trillion.

The Next Crisis: Public Pension Funds
by Roger Lowenstein - New York Times

Ever since the Wall Street crash, there has been a bull market in Google hits for "public pensions" and "crisis." Horror stories abound, like the one in Yonkers, where policemen in their 40s are retiring on $100,000 pensions (more than their top salaries), or in California, where payments to Calpers, the biggest state pension fund, have soared while financing for higher education has been cut. Then there is New York City, where annual pension contributions (up sixfold in a decade) would be enough to finance entire new police and fire departments.

Chicken Little pension stories have always been a staple of the political right, but in California, David Crane, the special adviser to Gov. Arnold Schwarzenegger, says it is time for liberals to rally to the cause. "I have a special word for my fellow Democrats," Crane told a public hearing. "One cannot both be a progressive and be opposed to pension reform." The budgetary math is irrefutable: generous pensions end up draining money from schools, social services and other programs that progressives naturally applaud.

In California, which is in a $19 billion budget hole, Calpers is forcing hard-pressed localities to cough up an extra $700 million in contributions. New York State, more creatively, has suggested that municipalities simply borrow from the state pension fund the money they owe to that very fund. Such transparent maneuvers will not conceal the obvious: for years, localities and states have been skimping on what they owe. Public pension funds are now massively short of the money to pay future claims — depending on how their liabilities are valued, the deficit ranges from $1 trillion to $3 trillion.

Pension funds subsist on three revenue streams: contributions from employees; contributions from the employer; and investment earnings. But public employers have often contributed less than the actuarially determined share, in effect borrowing against retirement plans to avoid having to cut budgets or raise taxes.

They also assumed, conveniently enough, that they could count on high annual returns, typically 8 percent, on their investments. In the past, many funds did earn that much, but not lately. Thanks to high assumed returns, governments projected that they could afford to both ratchet up benefits and minimize contributions. What a lovely political algorithm: payoffs to powerful, unionized constituents at minimal cost.

Except, of course, returns were not guaranteed. Optimistic benchmarks actually heightened the risk, because they forced fund managers to overreach. At the Massachusetts pension board, the target was 8.25 percent. "That was the starting point for all of our investment decisions," Michael Travaglini, until recently its executive director, says. "There is no way a conservative strategy is going to meet that."

Travaglini put a third of the state’s money into hedge funds, private equity, real estate and timber. In 2008, assets fell 29 percent. New York State’s fund, which is run by the comptroller, Thomas DiNapoli, a former state assemblyman with no previous investment experience, lost $40 billion in 2008. Most funds rebounded when the market turned, but they remain deep in the hole. The Teachers’ Retirement System of Illinois lost 22 percent inthe 2009 fiscal year. Alexandra Harris, a graduate journalism student at Northwestern University who investigated the pension fund, reported that it invested in credit-default swaps on A.I.G., the State of California, Germany, Brazil and "a ton" of subprime-mortgage securities.

The financial crash provoked a few states to lower their assumed returns. This will better reflect reality, but it will not repair the present crisis. Before the crash, retirement systems were underfinanced (they did not have sufficient funds to pay promised benefits), but the day of reckoning was distant. Moreover, the pain was indirect. Taxpayers were not aware that pension debts caused teachers to be laid off — only that schools had fewer teachers.

Postcrash, the horizon has condensed. According to Joshua Rauh of the Kellogg School of Management at Northwestern, assuming states make contributions at recent rates and assuming they do earn 8 percent, 20 state funds will run out of cash by 2025; Illinois, the first, will run dry in 2018.
What might budgets look like then? Pension obligations are a form of off-balance-sheet debt. As funds approach exhaustion, states will be forced to borrow to replenish them. Some have already done so. Thus, pension obligations will be converted into explicit liabilities (think of a family’s obligation to pay for grandma’s retirement being added to its mortgage). According to Rauh, if the unfinanced portion of all public pension obligations were converted to debt, total state indebtedness would soar from $1 trillion to $4.3 trillion.

Such an explosion of debt would threaten desperate governments with bankruptcy. Alternately, states could try to defray pension costs from their operating budgets. Illinois, once its funds were depleted, would be forced to devote a third of its budget to retirees; Ohio, fully half. This would impoverish every social (and other) program; it would invert the basic mission of government, which is, after all, to serve constituents’ needs.

States really have no choice but to further cut spending and raise taxes. They also need to cut pension benefits. About half have made modest trims, but only for future workers. Reforming pensions is painfully slow, because pensions of existing workers are legally protected. There is, of course, no argument for canceling a pension already earned. But public employees benefit from a unique notion that, once they have worked a single day, their pension arrangement going forward can never be altered. No other Americans enjoy such protections. Private companies often negotiate (or force upon their workers) pension adjustments. But in the world of public employment, even discussion of cuts is taboo.

Recently, states have begun to test the legal boundary. Minnesota and Colorado cut cost-of-living adjustments for existing workers’ pensions; each faces a lawsuit. But legislatures need to push the boundaries of reform. That will mean challenging the unions and their political might. The market forced private employers like General Motors to restructure retirement plans or suffer bankruptcy. Government’s greater ability to borrow enables it to defer hard choices but, as Greece discovered, not even governments can borrow forever. The days when state officials may shield their workers while subjecting all other constituents to hardship are fast at an end.

UK public sector pension figures 'were fiddled under Brown'
by Ruth Sunderland - The Observer,

Gordon Brown's Treasury was this weekend accused of dramatically understating the cost of paying public sector pensions. The official bill to taxpayers for future retirement payments is put at £15bn a year, but the actual cost is £30bn, according to John Ralfe, one of the UK's leading pension experts. This means that costs of £120bn to £150bn have gone unrecognised in government accounts since 1997.

The Office for Budget Responsibility put the figure close to Ralfe's, at £26bn, in its report on the UK economy. "Government accounts have been flattered by hiding a £15bn annual cost," Ralfe said. "They fiddled the figures. The Treasury under Gordon Brown moved the goalposts. It had a pernicious effect because if they had come clean on this earlier, there could have been a gradual series of measures to make the cost of public sector pensions more manageable, rather than having to take action all at once."

He added that the real pension benefit for teachers was about 28% of their salary, double the official cost of 14%, and that for civil servants it was 33%, compared with the official figure of 19%. The disparity is a result of a sleight of hand by the Treasury in 2001, when officials fixed the "discount rate" – used to estimate the cost of future yearly pension bills at current prices – at a level that made liabilities appear much smaller. The effect was to disguise the true state of public sector pension costs, with drastic action now required to reduce their claim on the nation's purse.

Pensions are becoming an increasingly contentious issue after Iain Duncan Smith, the work and pensions secretary, last week unveiled a fast-track review of the state retirement age, accelerating plans to raise it to 66 from 2016 for men and from 2020 for women. Many private sector employers have already taken action to cut their exposure by shutting down secure final salary plans and replacing them with higher-risk schemes linked to the stock market.

The government's efforts to slash "gold-plated" public sector pensions are likely to drive it into conflict with the unions. Hundreds of thousands of French workers have been taking to the streets to protest about plans there to raise the retirement age from 60 to 62. A commission on public sector pensions, chaired by the former Labour minister John Hutton, is highly unlikely to suggest that the government attempts to renege on promises it has already made to employees, as such a move would be struck down by the European courts.

But it will come up with ways to reduce the tally in future, which may involve a scaling back of benefits for new entrants to public sector pension schemes, and possibly of benefits for future service in the case of those already employed. Public sector staff may have to pay increased contributions; final salary schemes may close to new members and be replaced by cheaper plans; or they may close to new contributions from existing members. Other measures might include increasing the retirement age and capping pensionable salary.

The government actuary's department put the liability for past pension promises at £770bn at current prices, or just over half of national income. However, experts say that figure is also a huge underestimate. The fund manager Neil Record, who sits on an independent public sector pension commission due to report next week, puts the figure at £1.3tn. The risk management consultants Towers Watson estimate it at £1.2tn. Ralfe said: "We need a transparent debate on public sector pensions." He called on MPs, whose schemes are even more generous than the standard public sector plans, to take the lead by accepting cuts in their own benefits.

Strong Enough for Tough Stains?
by Gretchen Morgenson - New York Times

Our nation’s Congressional machinery was humming last week as legislators reconciled the differences between the labyrinthine financial reforms proposed by the Senate and the House and emerged early Friday morning with a voluminous new law in hand. They christened it the Dodd-Frank bill, after the heads of the Senate Banking and House Financial Services Committees who drove the process toward the finish line.

The bill is awash in so much minutiae that by late Friday its ultimate impact on the financial services industry was still unclear. Certainly, the bill, which the full Congress has yet to approve, is the most comprehensive in decades, touching hedge funds, private equity firms, derivatives and credit cards. But is it the "strong Wall Street reform bill," that Christopher Dodd, the Connecticut Democrat, said it is? For this law to be the groundbreaking remedy its architects claimed, it needed to do three things very well: protect consumers from abusive financial products, curb dangerous risk taking by institutions and cut big and interconnected financial entities down to size. So far, the report card is mixed.

On the final item, the bill fails completely. After President Obama signs it into law, the nation’s financial industry will still be dominated by a handful of institutions that are too large, too interconnected and too politically powerful to be allowed to go bankrupt if they make unwise decisions or make huge wrong-way bets. Speaking of large and politically connected entities, Dodd-Frank does nothing about Fannie Mae and Freddie Mac, the $6.5 trillion mortgage finance behemoths that have been wards of the state for almost two years. That was apparently a bridge too far — not surprising, given the support that Mr. Dodd and Mr. Frank lent to Fannie and Freddie back in the good old days when the companies were growing their balance sheets to the bursting point.

So what does the bill do about abusive financial products and curbing financial firms’ appetites for excessive risk?For consumers and individual investors, Dodd-Frank promises greater scrutiny on financial "innovations," the products that line bankers’ pockets but can harm users. The creation of a Consumer Financial Protection Bureau within the Federal Reserve Board is intended to bring a much-needed consumer focus to a regulatory regime that was nowhere to be seen during the last 20 years. It is good that the bill grants this bureau autonomy by assigning it separate financing and an independent director. But the structure of the bureau could have been stronger.

For example, the bill still lets the Office of the Comptroller of the Currency bar state consumer protections where no federal safeguards exist. This is a problem that was well known during the mortgage mania when the comptroller’s office beat back efforts by state authorities to curtail predatory lending. And Dodd-Frank inexplicably exempts loans provided by auto dealers from the bureau’s oversight. This is as benighted as exempting loans underwritten by mortgage brokers.

Finally, the Financial Stability Oversight Council, the überregulator to be led by the Treasury secretary and made up of top financial regulators, can override the consumer protection bureau’s rules. If the council says a rule threatens the soundness or stability of the financial system, it can be revoked. Given that financial regulators — and the comptroller’s office is not alone in this — often seem to think that threats to bank profitability can destabilize the financial system, the consumer protection bureau may have a tougher time doing its job than many suppose.

One part of the bill that will help consumers and investors is the section exempting high-quality mortgage loans from so-called risk retention requirements. These rules, intended to make mortgage originators more prudent in lending, force them to hold on to 5 percent of a mortgage security that they intend to sell to investors. But Dodd-Frank sensibly removes high-quality mortgages — those made to creditworthy borrowers with low loan-to-value ratios — from the risk retention rule. Requiring that lenders keep a portion of these loans on their books would make loans more expensive for prudent borrowers; it would likely drive smaller lenders out of the business as well, causing further consolidation in an industry that is already dominated by a few powerful players.

"This goes a long way toward realigning incentives for good underwriting and risk retention where it needs to be retained," said Jay Diamond, managing director at Annaly Capital Management. "With qualified mortgages, the risk retention is with the borrower who has skin in the game. It’s in the riskier mortgages, where the borrower doesn’t have as much at stake, that the originator should be keeping the risk." In the interests of curbing institutional risk-taking, Dodd-Frank rightly takes aim at derivatives and proprietary trading, in which banks make bets using their own money. On derivatives, the bill lets banks conduct trades for customers in interest rate swaps, foreign currency swaps, derivatives referencing gold and silver, and high-grade credit-default swaps. Banks will also be allowed to trade derivatives for themselves if hedging existing positions.

But trading in credit-default swaps referencing lower-grade securities, like subprime mortgages, will have to be run out of bank subsidiaries that are separately capitalized. These subsidiaries may have to raise capital from the parent company, diluting the bank’s existing shareholders. Banks did win on the section of the bill restricting their investments in private equity firms and hedge funds to 3 percent of bank capital. That number is large enough so as not to be restrictive, and the bill lets banks continue to sponsor and organize such funds. On proprietary trading, however, the bill gets tough on banks, said Ernest T. Patrikis, a partner at White & Case, by limiting their bets to United States Treasuries, government agency obligations and municipal issues. "Foreign exchange and gold and silver are out," he said. "This is good for foreign banks if it applies to U.S. banks globally."

That’s a big if. Even the Glass-Steagall legislation applied only domestically, he noted. Nevertheless, Mr. Patrikis concluded: "The bill is a win for consumers and bad for banks." Even so, last Friday, investors seemed to view the bill as positive for banks; an index of their stocks rose 2.7 percent on the day. That reaction is a bit of a mystery, given that higher costs, lower returns and capital raises lie ahead for financial institutions under Dodd-Frank. Then again, maybe investors are already counting on the banks doing what they do best: figuring out ways around the new rules and restrictions.

Biggest Banks Dodge Some Bullets at the End
by Randall Smith and Aaron Lucchetti - Wall Street Journal

It could have been worse. After weeks of congressional wrangling, Wall Street's biggest banks appeared to have dodged some of the harshest provisions of the Senate version of the financial regulatory bill adopted in May. Firms including J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley had the most to lose under new limits on risky derivatives and trading with their own funds. But their shares rose by more than 3% apiece Friday as investors were comforted by exceptions to those limits.

"There is no way to view this bill as a positive for the financial sector. Yet it could be much worse," analyst Jaret Seiberg of Concept Capital's Washington research group said in a client note. Proposed rules covering banks' so-called proprietary trading with their own funds and their use of derivatives, which are contracts tied to the value of other assets, were narrowed with the addition of substantial exceptions. The bill was meant to curb banks from making risky investments with their capital.

For big banks like J.P. Morgan and Goldman, the bill's provisions that address how banks invest their own funds, known as the Volcker rule, will impose a cap of 3% on the banks' capital that can be invested in risky hedge funds, private equity and real-estate funds. But the banks will be able to continue to manage the funds, which generate hefty fees. At Goldman, the 3% cap could require the firm to slash its $15.4 billion in total investments in such funds to as little as $2.1 billion, according to one Wall Street official. But the bill allows up to seven years for such investments to be phased out, and longer for illiquid holdings.

Meanwhile, J.P. Morgan owns the Highbridge Capital Management hedge fund, with about $21 billion under management. Bank executives on Wall Street believe J.P. Morgan will be able to keep Highbridge under the new rules, because it contains client money, not bank funds. Morgan Stanley also faces possible sales of investments. Its investments in hedge funds, private equity and real estate totaled about $4.6 billion at the end of the first quarter, or 9% of its $50.1 billion in Tier-1 capital, a measure of a bank's cushion against losses. To get down to the 3% requirement in the latest bill, Morgan would need to sell about $3 billion of its investments.

Both Goldman and Morgan could also look at unwinding their bank-holding company status, though neither bank has said it's considering such a move. Provisions of the Volcker rule barring proprietary trading also include exceptions to allow firms to hold government-backed debt such as Treasurys, as well as to hedge their own exposures and do more customer-related trading. Morgan is likely to need to spin off or sell its proprietary trading business known as PDT, which accounts for about 2% of its total revenue, people familiar with the matter say. It will have several years to do so, and regulators will have some say over what needs to get moved and when. Goldman is also likely to have to reduce its proprietary trading business, which it has estimated at 10% of its revenue.

In one concession to banks before the final agreement early Friday, legislators lifted the ceiling for private-equity and hedge-fund investments to a percentage of Tier-1 capital, a bigger number than "common equity," because it also includes preferred stock. The Senate proposal by Sen. Blanche Lincoln (D., Ark.) could have forced big financial firms to segregate most of their derivatives in a separate subsidiary. But it was watered down to include only an estimated 10% to 20% of those derivatives.

The version adopted by House-Senate conferees early Friday won't require the firms to segregate less risky derivatives, including interest rates and foreign exchange, in separate units requiring more capital. Only the contracts tied to certain riskier commodities, stocks and credit default swaps on non-investment-grade debt will have to reside outside their banking units. The ultimate accord was "better than expected" for big banks, said bank analyst Betsy Grasek of Morgan Stanley, who said that some investors had feared that "most" derivatives could have been affected by the bill.

Timothy Ryan, chief executive of the Securities Industry and Financial Markets Association, a Wall Street trade group, noted that there are more than 200 items in the bill where final details will be left up to regulators. "The bottom line here is that this saga will continue," Mr. Ryan said. Ernie Patrikis, a partner in the banking-advisory practice at White & Case LLP and a former general counsel for the Federal Reserve Bank of New York, said, "I view the legislation as a whole as starting out as being horrendous. Now it's merely very horrible."

New Rules May Hit Every Corner of JPMorgan
by Eric Dash and Andrew Martin - New York Times

Not since the Great Depression, when the mighty House of Morgan was cleaved in two, have Washington lawmakers rewritten the rules for Wall Street as extensively as they did on Friday. And perhaps no institution better illustrates what would — and would not — change under this era’s regulatory overhaul than the figurative heir to that great banking dynasty, JPMorgan Chase & Company.

Unlike in the 1930s, the modern House of Morgan will remain standing. So will its cousin, Morgan Stanley, which broke off in 1935 after Congress placed a wall between humdrum commercial banking and riskier investment banking. The proposed Dodd-Frank Act, worked out early on Friday morning, stops far short of its Depression-era forerunner. But in ways subtle and profound, it has the potential to change the way big banks like JPMorgan do business for years to come. "It’s a tough bill, and shows the pendulum is swinging toward tighter regulation," said Frederick Cannon, a banking analyst at Keefe, Bruyette & Woods in New York. "This is going to pressure bank earnings well into the future."

Of course, all the big banks would feel some effect. Goldman Sachs, for example, would have to rein in its high-rolling traders. Wells Fargo would be subjected to stricter rules on consumer lending. And many large banks would feel the pinch of lower transaction fees on debit cards. But JPMorgan Chase — forged by a merger of J. P. Morgan & Company with Chase Manhattan in 2001, after the wall came down between commercial and investment banking — and its chief executive, Jamie Dimon, will have to contend with all that and more.

It is the largest player in derivatives, the financial vehicles that have been widely faulted for adding excessive risk to the system. It runs the largest hedge fund in the banking industry, the $21 billon Highbridge Capital unit, and makes billions of dollars’ worth of trades in its own account. And it has a network of retail branches in nearly every corner of the country. "Given its franchise diversity, JPM is impacted by virtually all of the coming regulatory reforms," Keith Horowitz, an analyst at Citigroup who follows big banks like JPMorgan, wrote in a research note last week.

One part of the bill would push much of the buying and selling of derivatives onto clearinghouses, forcing banks to put up collateral against each trade. For JPMorgan, that could tie up billions of dollars that would otherwise have gone toward lending or the bank’s own trading. A smaller portion of trading in derivatives would take place over exchanges, making prices visible to the public and pushing down prices — and profit margins.

Banks would be required to hold more capital in reserve to cover potential trading losses. In some cases they might also be prohibited from using federally insured bank deposits for risky trading. That would hit JPMorgan hard because of its heavy reliance on customer deposits to finance other businesses. Both changes would take even more money out of play and lower profits. JPMorgan has already begun dismantling its so-called proprietary trading operation, to comply with new restrictions on banks making speculative bets using their own capital. Analysts say that will force the bank to give up about 2 percent of its revenue.

Under the proposed bill, the bank would also have to be more careful about separating its money from the money it manages for clients in its private equity and hedge fund units, because of a rule to limit the amount banks can invest in such funds. Still, JPMorgan would be able to hang on to Highbridge and several other investment funds because of a special exemption. It is more difficult to judge how the new rules could affect the Chase side of JPMorgan. A newly created consumer financial protection agency would have broad new authority over financial products like mortgages and credit cards, but it may be years before the agency issues new rules governing such products.

Recent legislation imposing new restrictions on credit cards and overdraft fees has already taken a bite out of bank revenue. The new legislation would add to that drain on revenue by restricting the fees banks can charge for debit card transactions. In his research note, Mr. Horowitz estimated that the legislation would ultimately reduce the bank’s earnings by as much as 14 percent. That estimate could be cut in half or more because several of the most severe measures in the bill have since been dropped or diluted. Of course, these assessments do not take into account all the steps that JPMorgan and other banks could take to mitigate the effect of the legislation, like passing on some costs to customers or seeking exemptions from regulatory agencies.

Indeed, JPMorgan could feel a greater effect from deliberations taking place at the United States Federal Reserve and among central bankers in Switzerland. Both sets of regulators are considering a requirement that banks hold additional capital as a cushion against losses. They also may alter the businesses the banks can invest in, or the regions where they can expand. Indeed, Mr. Dimon has delayed raising the bank’s dividend until international rules are set on capital requirements. Investors seemed to signal relief that the legislation did not turn out to be as tough as it might have been, sending the share prices of most major banks up about 3 percent on Friday.

Charles Geisst, a professor of finance at Manhattan College and a Wall Street historian, said the bill, which is expected to be signed by President Obama before the Fourth of July holiday, was the most comprehensive financial regulation since the Great Depression because it touched on so many different areas. But he said its effects would not be as fundamental as the impact of changes made in the wake of the Depression. "It doesn’t go anywhere near," he said. "It doesn’t change institutional behavior like that did. This is business as usual, with some moderation."

Life Amid the Ruins
by Suzy Hansen - Bloomberg Businessweek

A couple of months ago, around the time Greece passed new austerity measures to ward off economic catastrophe, Nicholas Papandreou, the very tall brother of Greece's Prime Minister, George Papandreou, was riding the Metro in Athens. The Papandreous, now in the third generation of a Socialist political dynasty, live in rented houses, drive Priuses, and, apparently, take the subway, even during times of extraordinary anger toward the government.

"Nick! Why did your brother bring in the IMF?" one passenger called out.

"No choice. It was either that or no one gets paid come July 1st," Papandreou, an economist and novelist, replied.

"Well, I am glad to see you taking public transport," the passenger said, prompting another rider to pipe in, "I always see Nick on the Metro!"

"Excuse me, but what do you do for a living?" Papandreou asked the first man.

"I'm a doctor."

"Did you ever take side money from your patients?"

Everybody was listening. "Yes."

"Are you still taking money on the side?"

"Not anymore."


"Because now, the way things are, I'd be lynched."

"See?" Papandreou said. "That's one good thing George has done so far."

Papandreou tells this story while sitting at a long table at the Andreas G. Papandreou Foundation, a beautiful old house in a slightly run-down part of Athens. A terrace off the back overlooks the city's ancient graveyard. Family photos hang on one wall; Nicholas' books and pamphlets about his father, Andreas, line the other. Papandreou, who grew up in Canada and the U.S., sounds American. He portrays his efforts to help out during the crisis as something any member of a family business would do. Indeed, the past few months have seemed like an all-hands-on-deck situation: Nick the Novelist Brother is not only placating doctors on the Metro but was taking off to Qatar to try to secure foreign investment for his country.

That the intimidation of medical professionals counts as a positive development might indicate just how dysfunctional Greek society has become. It also shows that the Papandreou government's attempts to reform Greece will require nothing less than a societal revolution, affecting everyone from cab drivers who don't give receipts, to tax collectors who bribe lawyers, to college kids who dream of nothing more than a good, solid pension. Greece's "shadow economy," estimated at 20 percent to 30 percent of the country's gross domestic product, depends on the wonderfully named fakelaki,—also known as "little envelopes" or "bribes." (In general, reliable economic data for Greece can be difficult to find.)

It's part of a state of affairs that includes a bloated public sector and a stunted private one, both legacies of a political system prone to patronage and corruption. The cruel result amounts to 300 billion euros in debt—115 percent of the country's GDP or about $27,000 per Greek citizen. The 110-billion-euro bailout from the European Union and the International Monetary Fund includes strict austerity measures intended to shrink the budget deficit from 13.6 percent of GDP to 3 percent in three years. The prospect of that has thrown Greece into chaos.

The Greek people are angry. While young anarchists wielding Molotov cocktails are getting most of the attention, there are far greater numbers of Greeks stewing in their tiny apartments, furious with their leader for capitulating to the markets and the IMF and for saddling the Greek people with a life-changing burden. Experts and average Greeks alike told me that Prime Minister Papandreou and Finance Minister George Papaconstantinou must do things to rescue their country's finances that would normally be tantamount to political suicide.

"They're already dead," says the former Finance Minister, onetime member of the opposition New Democracy Party, and free-market crusader Stefanos Manos, speaking of the government's austerity measures. "They can't die twice. Why not do the right thing?"

Greece is a Teenager
When I first arrived in Athens in May, expecting to see rampaging youths attacking policemen, I marveled at the apparent prosperity and pleasantness of everyday life. The Metro even has one of those fare systems based on trust—like Switzerland! It wasn't long before darker sentiments became palpable. The Greek capital these days exists in a state of shock, suspicion, and bewilderment, not unlike the way New York felt in the fall of 2008 after Lehman Brothers collapsed—a sense that strange forces had created financial scenarios no one could yet understand. Something has gone terribly wrong with the system. For the little nations on the edges of the so-called first world, market-happy modernity can be harder to keep up with and easier to turn against during difficult times. In Greece, the past few months have been a brutal conclusion to what had been a glorious party of admission to Western consumer capitalism.

"The best way to think of it is to think of Greece as a teenager," says Stathis N. Kalyvas, a Yale University political scientist who was in Athens when I visited. "Many Greeks view the state with a combination of a sense of entitlement, mistrust, and dislike similar to that of teenagers vis-à-vis their parents. They expect to be funded without contributing; they often act irresponsibly without care about consequences and expect to be bailed out by the state—but that only increases their sense of dependency, which only increases their feeling of dislike for the state. And, of course, they refuse to grow up. But like every teenager, they will."

The story of Greece recalls a familiar old world/new world tale: a poor country 30 years removed from a devastating communist-royalist civil war and five years from a fascist military dictatorship finds itself, in 1981, in the maternal embrace of European Union membership, flush with all the easy funds that follow. Two decades later come the success of the 2004 Olympics, the arrival of Dolce & Gabbana, the proliferation of credit cards, and an airport as polished as a museum. Life, on the surface, looks good— though the old, unhealthy habits continue: public-sector employment for life, politicians with stuffed pockets, an aversion to foreign investment, snail-like growth, communal life that keeps people happy at the taverna table but stifles individual creativity, a sense that beating the "system" is what the smart people do.

What happened next took an unexpected, Don DeLillo-esque twist: Men in New York and London devise new games to play with the world's money. The world falls into recession. In Greece, the economy sputters, the ruling political party refuses to reduce spending before the 2009 election, and the old habits become harder to conceal—more so because the then-ruling party consisted of, as the young Greek novelist Constantine Abazis puts it, a bunch of "morons." And like the wife of an alcoholic who willfully disregards the vodka bottle stashed in the closet, the EU looks the other way. "Greece has a very cosmopolitan, international elite, and at the same time a rapidly deteriorating quality of the political class," says Loukas Tsoukalis, president of the Athens-based think tank ELIAMEP. "In recent years a number of [European] Commission officials knew that the fiscal situation in Greece was worse than portrayed. The surveillance system has clearly failed."

Stereotypes of Greek people as lazy and sun-stroked may have roots in the public sector: For decades politicians plied poor citizens with cushy jobs and pensions in exchange for votes. The 2004-09 conservative New Democracy government added over 85,000 public-sector jobs in its tenure; the public sector accounts for 40 percent of Greece's GDP and 15 percent of the active workforce. The government isn't even sure how many people it employs. As Jens Bastian, an ELIAMEP economist, explains, "Every Greek has a relative who works as a civil servant in the public sector, excluding the military and police. Reducing employment levels in the public sector immediately becomes a very touchy, family affair."

The Greek crisis reminds us that while Greece is a part of Western Europe, it is also a place where hammers and sickles and "F—- the Police" decorate the city walls; where references to civil wars and world wars and postwar American meddling come up in daily conversation; where immigrants fleeing violence and economic plunder scramble atop the life raft of Greece's fragile European shores, only to fester in homogenous Athens. It is also a country that in some ways still mirrors the lands across the Mediterranean—the countries of North Africa and the Middle East that continue to be strangled by Third World ways and won't simply acclimate to the rules of the West as one might have hoped.

Reform and Punishment
If the Greeks have one thing going for them, it's a deep, proud sense of their country's beauty. Everywhere I went, the average Greek would complain about this or that, and then mention the islands or the countryside, shrug, smile, and say: "But, you know, it's a beautiful country."

"You know, I think these people in America, they are jealous. Because...we have such a beautiful country."

"Everything here is s—-. But it's a beautiful, beautiful country."

On May 20—a beautiful day in the beautiful country's semi-beautiful capital—Greeks launched another general strike and protest. It fizzled. During the previous week's protests, the branch office of a bank in central Athens was firebombed. Three employees, including a pregnant woman, had died of smoke inhalation. More recent protests have been less destructive, perhaps because of the overwhelming presence of riot police with their shields, billy clubs, tear-gas guns, and nine-millimeter pistols.

The police closely tracked the clusters of anarchists, who bore the international uniform of the 21st century's petulant warrior class: black hoodies and boots, backpacks, pale skin, skittish, overloud laughter. The rest of the protesters looked rather upscale as they walked slowly and patiently to the head of Syntagma Square, where the lovely yellow Parliament building overlooks the area from a hill. At sunset, in that truly celestial Athens light, the rest of the square would be in shadow, but the Parliament building glowed. This was where the energetic protesters of Athens spent their days, shaking their fists and trying to break down the doors.

Greeks believe in protest. During a week in Greece, I witnessed four demonstrations, including one rather elegant march through the fancy neighborhood of Kolonaki, the protesters mourning crimes by the Turks in the Black Sea in 1922. Tourism employees protested at the Parthenon; others went on strike at the docks in Piraeus. This was normal. Since the military dictatorship, the leftist ideological consensus has required that Greek people generally ignore, if not tolerate or condone, a certain level of dissident violence in addition to agitation. But that day, the mood among protesters was weary, almost defeated.

After the Greek government accepted the IMF bailout, officials began to impose not only reforms but punishments. Pension plans and wages were cut by 15 percent to 20 percent. Value-added and excise taxes were raised twice. Bank accounts were opened up, and names were named: Those 57 doctors who didn't pay taxes, for example, were identified to the public. Tax-collection directors were replaced, employees were shuffled to new posts, bribery complaints were investigated.

Even some 16,000 rich Athenians who dwell in the magnificent northern neighborhoods of the city found themselves targeted for failing to disclose that they own swimming pools on their tax returns. (It's estimated that a third of economic activity produces no tax revenue whatsoever, an annual tax shortfall of approximately 25 billion euros a year.) The Minister of Tourism resigned after it was revealed that her husband, a beloved pop star, owed millions in back taxes. Bastian, the economist at ELIAMEP, told me that, for the first time, a Greek government was cracking down on a way of life.

It had no choice. But to get the people to change—quickly—the politicians needed to make sacrifices, too. The Finance Ministry made it clear the crackdown would extend to government officials: "According to a preliminary investigation, 70 Finance Ministry employees have real estate holdings ranging from €800,000 to €3 million in value. The average real estate holdings for these employees is valued at €1,228,337, while their average declared income is €50,834. The Finance Ministry is launching investigations into all these cases," although it will have to do much more than that.

Greeks reacted to questions about how the country ended up with so much debt with almost comic confusion. "I was also asking myself this: What were they doing?" says Michalis Chrysochoidis, the Minister of Citizen's Protection. He mentions former Prime Minister Kostas Karamanlis. "[He] created a utopia, an illusion that we can live well without trying to make things better." Many observers described Karamanlis, who was elected in 2004 on an anticorruption platform, as an easygoing manager who didn't control his cabinet.

Then in 2008 and 2009, when the New Democracy party had to run for reelection, the administration completely stopped trying to reduce spending. "The deficit was initially projected at less than 4 percent, and it turned out to be 13.6 percent," ELIAMEP's Tsoukalis says. "Under normal circumstances it might not have been the end of the world. But it happened at a time when everyone had realized that sovereign debt had become the big issue. Faced with the prospect of the 2009 election, the previous government showed negligence. They just let it go."

This partly explains why anti-corporate sentiment is not among the grievances widely aired in Greece. Resentment is reserved not for the rich but for the government. Greek banks didn't engage in reckless financial schemes the way American banks did, showering easy credit on people who couldn't afford to pay it back. It was the government that did most of the borrowing. "Everywhere else in the world the banks brought down the economy and pressured the government," says Gikas Hardouvelis, chief economist at Eurobank. "Here the state finances are pushing down the banks."

I told Hardouvelis a story I had heard about a Greek entrepreneur who couldn't persuade foreign investors to trust Greek banks as his backers anymore. "Investors feel that if the country defaults, Greek banks will be in trouble," he says. "Still, the exposure to Greek bonds is low. Greek bonds are not owned by domestic banks. They're mostly owned by foreign banks." Which is why fear of contagion is so intense.

"That's a big issue, certainly," says Jon Levy, Europe analyst at the political risk consulting firm Eurasia Group. "But there are multiple channels of contagion." For example, contraction in countries that need to cut expenditures would also affect other European countries. A drop in demand in Spain would mean a drop in demand for German cars, triggering declining incomes in Germany and leading to a contraction there. "These channels of contagion are really just beginning to become evident," Levy says.

A Job for Life
Hardouvelis, the Eurobank economist, served in the 1996-2004 government of PASOK, under Prime Minister Costas Simitis, who was a promising leader until his government dissolved in a storm of scandals. Simitis had presided over a period of transformation that coincided with a high point in recent Greek economic history: 2004, the year of the Olympics. In readying itself for the international extravaganza, the nation spent money like a working-class bride on her country club wedding, thinking it the most important day of her life.

"Greece was an under-banked economy for a long time," Hardouvelis says. "Mortgages and consumer loans were effectively prohibited until 1993. When that changed, together with growth, credit expenditures grew faster than nominal economic activity. But as long as there was growth, no one worried." In 2004, Greek GDP growth was a strong 4.6 percent, mainly fueled by the Olympics construction boom. The Games inspired immense pride for the Greeks and served as a coming-out party of sorts, an emblem of security and wealth. "The facilities were maharaja-level luxury," says Stefanos Manos, the former Finance Minister. "Greece had the mentality of the nouveau riche. We borrowed, and we spent." The nation hungered for new status symbols. A 2008 Nielsen report found that, of all the countries in the world, Greece cared most about designer labels, trampling Hong Kong (the runner-up) in its taste for brand names.

Ayis Georgoudas, chairman of Nak, a collection of shoe stores and international label outposts, rode this materialist wave. When I met him at his office at a Bally store, it was a Saturday and he was working. Three young women were helping a wealthy couple trying on shoes that, at Bally, can cost as much as 300 euros. Upstairs in his small office, Georgoudas, 35, had a collage of photos and clippings on the wall: Dostoyevsky and Solzhenitsyn; Michelle and Barack Obama; Jesus Christ.

Georgoudas wore green high-top sneakers with black laces and a white monogrammed button-down shirt. He is from Thessaloniki, in Greece's north, where he worked in his family's shoe stores as a kid. His family did well enough to send him to New York University, where he received bachelor's and master's degrees. Within the past five years he expanded the family business to 20 international brand chains, introducing Bally, Clarks, Naturalizer, and others, to Athens, bringing in 20 million euros a year in sales. "Some private-sector employees feel bitter about their counterparts in the public sector," Georgoudas says. But, he explains, "I just love to work."

Stefanos Manos applauds the recent decisions to cut wages and raise taxes but believes more drastic measures are needed. "The average pay is two and a half times the pay in the private sector," he says. In his view, more must be done to create a competitive environment. "In Greece, you cannot rent a little truck to move your refrigerator," Manos says. "Why? To protect the truckers. You have to hire a trucker. You have to get a parking permit. If you sell your house, both parties have to have a lawyer—by law—to participate in the transaction, and they're guaranteed a percentage of it. If I want to give my house to my son, both he and I have to have lawyers. If Coca-Cola (KO) wants to take out an advertisement during a news program on TV, a percentage of it [20 percent] goes toward a pension fund for journalists. They have so much money in there that journalists don't even know or care how much money they have!"

Then there are the bribes. "Lawyers know that when a tax collector comes, he will ask for a bribe. Doctors, too. But that tax collector has a job for life. A surgeon at the state hospital expects something on the side," Manos says. "Otherwise, you can get your operation in six months or more."

The Oedipus Complex
If ancient Greece is known for Zeus, democracy, and civilization, modern Greece claims Aristotle Onassis and the islands, which is to say, shipping and tourism. The two account for more than a quarter of the country's economy. So far, only one has been affected by the crisis. In June, hotels reported a 30 percent drop in sales, though you wouldn't know it from the number of tourists craning their necks from the Plaka up toward the Acropolis. Hoteliers complained that the overplaying of riots on television had scared off travelers who didn't know that civil unrest in one neighborhood would hardly affect the frappe-drinking café conviviality of the next. The Acropolis and its hill of ancient treasures hover literally above the fray.

There were murmurs of labor strikes at island ports, which Nicos Vernicos, a shipping magnate and president of the International Chamber of Commerce, passionately decried. I interviewed Vernicos across a divan at his luxurious, art-filled home in the waterfront suburb of Glyfada. The house radiated a quirky, restrained air that almost smelled of old money; Vernicos Shipping Group is one of the longest-serving members of a tiny, private club that seems to operate in its own little maritime universe.

Although Greeks don't do much exporting, they do ferry around 15 percent of global goods. So the shipping companies are far less vulnerable to the internal dynamics of the Greek economy than they are to, say, trade between China and all of Europe. Unfortunately for the Greeks, the very thing that keeps the shipping industry based there, as in many countries, is that it does not pay corporate tax. Ship owners pay taxes based on tonnage but not on actual shipping, providing little revenue for the Greek state.

That's because 50 years ago, Greece passed something called Law 89, a massive tax break for ship owners in exchange for pumping money into the economy, according to Clay Maitland, a managing partner of the Marshall Islands ship registry. The deal still provides Greece with a lot of jobs, something it can't afford to lose. "It's kind of like the financial industry in New York," Maitland says. "[The shippers] can move." Manos agrees. "You push them and they'll simply hoist a different flag and move out," he says. "They have an escape clause. Because of this clause, governments have been mostly reasonable."

When I ask Vernicos about the tax issue, he says: "Greek shippers are much-above-average patriots, and they support their country." Later, he proudly displays his collection of Hellenic-themed art, including an Andy Warhol of Alexander the Great. Vernicos' business dates to the mid-19th century, when his family rowed goods across the Bosphorus in Constantinople. His father served as a member of the pre-junta Parliament, and the young Vernicos spent time in jail for activities against the military dictatorship. After the turmoil of the 1970s, he settled down to navigate the rocky seas of the country's fledgling democracy, as well as something unexpected: the European Union.

When Greece joined the European Community in 1981 it was embroiled in conflict with Turkey, an issue that still motivates Greece to spend billions on its military. Greece was admitted to the EU largely because of the credibility of the Prime Minister at the time, Konstantinos Karamanlis (the uncle of former PM Kostas), and Europeans' attraction to all things old and Greek. Karamanlis was soon replaced by Andreas Papandreou (the son of George and the father of the current George), who campaigned on anti-NATO, anti-EU, and anti-American populism, even though he had an American wife.

"People familiar with him knew he didn't mean it," ELIAMEP's Tsoukalis says. "But the adjustment was not always painless." At the time, Papandreou père had to reunite a fractured country, so with generous socialist policies he won support from the lower classes and the countryside. "He brought new people into the Greek political scene, he gave marginalized people their rights. But redistribution was done at the expense of future generations." He also kicked off the addiction to pension plans, many of which went to civil war veterans—something staunchly defended by at least one of my ranting, receipt-hating taxi drivers.

"The crisis did not happen overnight. We've been overspending for the last 25 years," says Manos. "It was accepted political wisdom that if you gave out jobs for life, this would guarantee the votes of entire families. I think it turned out to be correct."

The father-son conflict at the heart of the Greek political crisis makes sense in a country dominated by family dynasties. Papandreou the son, who is bookish and quiet, now must clean up the mess made by Papandreou the father, who is flamboyant and charismatic—or so the story goes. "Like most children, Papandreou wants to avoid the negative aspects of his parents," Vernicos says. "He knows better than all of us the weaknesses of his father and wants to be different."

Even so, the PASOK government was slow to recognize just how bad the situation was. "Everything changed after Davos," Vernicos says, referring to last winter's Davos Economic Forum. "When the bankers and politicians meet each other in Davos, you have Bill Clinton and Bill Gates wearing ski anoraks, and they all speak the truth," he says. "After Papandreou went in February, he realized the scale of the danger. He changed completely after he came back from Davos."

"Who is educating the Greek government and the Greek people and European leaders?" Vernicos continues. "The markets. If you see what Euro leaders were saying a few months ago and now, there's a world of difference in [German Chancellor Angela] Merkel and the others. The markets are the harshest tutors."

Suddenly, the good socialists of PASOK must transform themselves. While I was in Athens, the party was courting a Chinese shipping company, Cosco, which made a deal to take control of Athens' main container dock in its Piraeus port and was eyeing land for a logistics center in an environmentally beleaguered area called Thriasio. Although the labor class regarded Cosco as a threat, the political elite rejoiced; even Greek socialists are pouring ouzo for the smiling Chinese communist-capitalists.

"All these guys are now running after Mr. Cosco," Vernicos says. "They're having to lick where they spat." But he is optimistic. "For the first time we have a team managing Greece that doesn't care about political gain, they just want to do the best for their country," he says. "They really don't care about being reelected."

The Human Strain
For all the hardship visited upon Greece, extreme poverty keeps a low profile in Athens. In recent decades the country has seen an influx of Albanian workers who more or less look Greek and work very hard. They speak the language and have secured a place in society. But the hundreds of thousands of other immigrants in Athens—the Africans and the Pakistanis, the Bangladeshis and the Afghans, the Kurds, the Iraqis, the Somalis, the Moroccans and the Nigerians—are different. Greece is the entry point for refugees and migrants hoping to make their way to the rest of Europe. They arrive in tiny boats, aspiring to smuggle themselves deeper into Europe. If they get caught en route, according to EU law, they can be thrown back into the dumping grounds of Greece, the first country they entered. "We are the guardians of Europe," Minister Chrysochoidis says. "This is a huge and terrible problem, a human problem. We need an independent authority of asylum, so refugees are protected and traffickers are punished. Ten percent migrants for a small country is a lot."

One evening, I went to see where the immigrants lived, in an area referred to as Sofokleous, which is close to the center of town. It was Sunday, and very quiet. Iason Athanasiadis, a journalist who has reported from Iran and Afghanistan, tells me to leave my handbag at home and to dress down in the hopes that we'll look like drug addicts in search of a fix.

Suddenly we turn a corner and the streets are crowded with human misery. Some people seem healthy, selling socks off the sidewalk, screaming at each other. Others are bloodied and battered, their clothes half ripped off, shoes missing. You could look to your left and see three men sticking needles into their ankles; to your right, a woman sidles up to a man for some drugs. She looks as if she has been beaten, and her flesh seems to be melting off.

We turn up a side street and spot a man inside a taverna called Klimataria, which opened in 1927. It's a happy-looking place. It's also empty. Business has dwindled 70 percent, and soon the restaurant will be moving. The immigrants sometimes attack each other in the street "with swords," according to the owner, Pericles Spiridou. Any tourists who come near the restaurant flee in fear. Only three years ago, this had been a fashionable part of town. Then the police decided to clear the main squares of several Athens neighborhoods, essentially corralling the migrants into these back streets. In a country with little industry and few jobs, there wasn't much for these foreigners to do but sell whatever they could on the street—handbags, trinkets, drugs, themselves.

Spiridou is a liberal-minded person. He doesn't disparage the immigrants. Instead, like many other Greeks, he speaks of the state. Where is the regulation? Where are the police? Forty-nine years old, with thick, wavy white hair, Spiridou also has existential concerns. "We've lived through many things," he says. "Civil war, a dictatorship, the fall of communism. Now what I hope is that I live to see the fall of capitalism. That's my dream. And I will see it." He glances toward the streets outside, where Greece is anything but beautiful.

Long, Hot Summer
Two weeks after I returned from Greece, the Finance Minister, a well-regarded figure who drives a battered Subaru, announced that the country was on track to meet its 2010 deficit targets, boasting an almost 40 percent reduction in the deficit in the year's first five months. Spending was down 10 percent; revenue was up 8 percent. He dismissed rumors of bankruptcy as "absurd" and "terror-mongering" and urged the Greek people "not to bite the bait in groundless hysteria." Bastian, the economist from ELIAMEP, describes the Finance Minister this way: "When you meet him, you feel as though, if I have to trust a politician in Greece, this is the one I trust." Prime Minister Papandreou, meanwhile, was taking to the road, courting Libyans as potential investors, a possible lifeline along with the Chinese. Rumors of a cabinet reshuffling circulated. As of May, about half of all Greeks said they supported the Papandreou government's bailout measures.

Meanwhile, bad news continues to mount. Moody's (MCO) downgraded the country's debt four notches, to junk status, and private investment remains weak. The next tax increases kick in on July 1. Metro employees went on strike because 285 temporary employment contracts were not renewed.

The arrival of summer brings respite, at least insofar as escaping the feverish temperature becomes the major preoccupation and Greeks of all stripes decamp to the islands. When they return in the fall, the IMF will issue a formal progress report in advance of the next round of loans, and it will start to become clear whether there is hope for a new Greece. "Until then," says Bastian, "it will be too hot to realize what it all means."

Vancouver's Real Estate Bubble Trouble
by Bryant Urstadt - Bloomberg Business Week

Brokers are rock stars, cabbies flip condos, and shacks are going for $1 million

The Olympics are over, and the Village is for sale. The complex in Vancouver, British Columbia, that housed the athletes during the 2010 Winter Olympics has been converted into 1,100 luxury condos. About 450 have been pre-sold, and the sales of the remainder may well render a verdict on a mystery that looms over this city like Grouse Mountain: Did Canada prudently steer its way clear of the worst of the financial crisis only to be rewarded with a massive housing bubble of its own?

On a bright, warm Saturday in late June, couples and families wandered through the empty village, which has been renamed Millenium Water. It opened for public tours last month and draws about 100 people a day. Millenium Water is a city of the future, built with enviro-touches like green roofs and automatic shades that moderate the temperature inside the apartments. An 815-square-foot, one-bedroom apartment is on sale for C$879,000, which works out to C$1,078 per square foot, or $12 higher than the average price in Manhattan, according to The Corcoran Report. (A Canadian dollar is currently worth about U.S. 96 cents.)

Millenium Water isn't in downtown Manhattan, of course. It's not even in downtown Vancouver, which is across an inlet known as False Creek. It isn't really even in a neighborhood; the nearest establishment is the sales office for another condo development. If all this is starting to sound a little irrationally exuberant, especially given the shaky international outlook, well, that's Vancouver for you.

"Real estate is like a sport here," says Tracie McTavish, president of Rennie Marketing Systems, which is overseeing the sale of Millenium Water. In the last 12 months alone, the average home price has risen 14%, to around C$1 million. One can look at charts to understand how long and intense the climb in prices has been, with inflation-adjusted prices of an average home in Vancouver doubling in the last 35 years, but it is much more fun to watch The Vancouver Real Estate Market Roller Coaster, a video posted by the anonymous owner of the website Vancouver Condo Info.

Using software called NoLimits, the programmer turned that graph of inflation-adjusted home prices into a high-definition roller-coaster ride. Starting with a warning, "Please fasten your safety belt. Keep arms and assets inside ride at all times," the years float by like mileposts during the ride: 1979, 1980, a long climb up to 1981, and then a harrowing drop down to 1983. But it is the ride up from 2000 to 2010 that is the steepest, and that, except for a brief drop in 2008, seems to go on forever. The video ends with an imagined plunge into the ocean.

To a visitor, it can seem as if Vancouver's main industry is real estate, like it used to seem in Las Vegas or Orange County. A newcomer, emerging from the gate for international arrivals, is greeted with three separate backlit billboards, all offering architects' renderings of planned communities. Aspac Developments promises that they're "building a legacy of excellence." Concord Pacific describes each of its multiple developments as "a master planned world unto itself with park, schools, daycares, shops, restaurants, and resort-style amenities." Polygon calls itself "Vancouver's Builder of Choice," and offers contact information in English and Chinese. Driving out of the airport and up Vancouver's main thoroughfare, Granville Street, one notices billboards for brokers and advertisements on the backs of buses for Realtors and developments.

"Some of the brokers in Vancouver think they're rock stars," says Grant Connell, a broker with Sotheby's. According to Connell, they are getting paid like them, too. "Many have made $500,000 or $1 million this year," he says. Connell, a former professional tennis player who spent years on tour, is among Sotheby's top-producing brokers. As of June of this year, he had amassed 52 "ends," as he calls a completed sale.

The market in Vancouver wasn't entirely unscathed by the financial crisis. Like the rest of the world, it took a hit. But prices rebounded, and the average home in the city is now about 10 percent above the pre-crash peak. On a driving tour, winding up a twisted knot of roads in the West Vancouver neighborhood, which stretches up a slope with a view of the bay and the mountains, Connell slows down by two similar homes. "I sold the first for $4 million right when it came on," he says. "The second was a little later to market. It took a long time to sell for $3 million. There's your 25 percent 2008 correction right there."

As Canada headed into 2009, Canadians jumped back into buying homes. Home prices in Canada have been strong from coast to coast, especially relative to the U.S. Vancouver prices, however, have run with special gusto. In the second half of 2009, says Connell, "it was just spastic." He points to a narrow lot right on the beach, a vacant slot between two nice homes. "That was a $5.2 million sale last year," he says. "They tore down the home but never built anything." In Vancouver, new developments are pre-sold via "assignment letters," or commitments to buy. Throughout 2009, say Connell and others, assignment letters were being flipped. "The minute I actually heard a taxi driver talking about flipping assignments," says Connell, "I knew something had to give."

Canada was supposed to have been safe from flippers, teardowns, bidding wars, and the other markers of the bubble that covered the States. Its banking system was voted the soundest by the World Economic Forum's most recent Global Competitiveness Report, and even President Obama has praised the country for being "a pretty good manager of the financial system and the economy in ways that we haven't always been." The mortgage default rate in Canada is less than half a percent, compared to 3.73 percent in the U.S., and its first quarter 2010 gross domestic product growth was a robust 6.1 percent. Reflecting its strength, Canada has been among the first of the developed nations to raise interest rates, pushing them up a quarter of a point on June 1, officially declaring its recession over.

"It could be that investors see Canada entering a renaissance," says David Rosenberg, chief economist at Toronto-based portfolio manager Gluskin Sheff. "As the old saying goes, in the land of the blind, the one-eyed man is King." Or as James Grant, editor of Grant's Interest Rate Observer, put it in a recent newsletter: "Such nice people, the Canadians—and solvent, too." Canada's banking system is healthy in part because it went through a reform after a crisis in the early '90s. Though Canadian banks are among the largest in the world, and appear similar to the big American ones, they are much more tightly regulated—in ways that keep loan quality high and increase banks' incentives to hold those loans.

Terms are largely dictated by the Bank of Canada; borrowers putting less than 20 percent down, for example, are required to purchase insurance from providers like Genworth or the Canadian Mortgage & Housing Corporation. Unlike in the U.S., the big Canadian banks write the majority of those loans. Lastly, the majority of Canadian loans are recourse, meaning that lenders can go after a borrower's earnings and assets; walking away is a very unattractive option. All this has made Canadian home loans sound and banks stable.

All that safety and stability has come with a price. It may have overinflated prices. At least that's how some doubters see it. One Vancouver wag has actually been affixing "certified bubble pricing" stickers to Realtors' signs. Also among the skeptics is Petr Pospisil, a teacher in Vancouver who created a website called "Crack Shack or Mansion," in which the visitor attempts to guess whether a pictured bungalow is a bombed-out home of little value or a real Vancouver listing with a price of over a million Canadian dollars. Pospisil, alternately concerned and amused by what he saw as an irrational mania for real estate, got 30,000 views on the first day he put up the site. Within five days, 200,000 had played the game.

"Canadians defend their bubbles, especially here in Vancouver," says Pospisil. "People get angry when you tell them it's a bubble. They say it's different here, that this is such a beautiful place and everything is different. Everywhere there is a bubble, they say it's different." Professionals like Robert Hogue, a senior economist at RBC Royal Bank, use less exciting language but fundamentally agree. "The type of price increases that we've seen in Vancouver are unlikely to be sustained," says Hogue. "There might be some downside risk to that market."

Some, like Garth Turner, a financial writer and former member of Parliament, see Canada going all the way down the road the U.S. took. "My basic view," he says, "is that we have a Canadian version of the U.S. real estate bubble. Not exactly the same, but close enough. We've relaxed lending standards, we have high unemployment, and we've reached a point of unsustainability in the housing market. I see real estate values falling shockingly."

Rosenberg notes three factors that have spurred home sales in recent months. First, as in the U.S., near-zero interest rates have kept mortgage prices at historic lows, sustaining demand for housing. Until June 1, the overnight rate target set by the Bank of Canada was one-quarter of a percent. It is now half a percent and expected to rise. Second, the Canadian Mortgage & Housing Corporation, Canada's hybrid version of the Housing & Urban Development Dept. and Fannie Mae, announced in February that in April it would be moderately tightening its standards for loans, decreasing the maximum length of loans from 40 years to 35 and increasing minimum down payments for certain types of loans. Third, a sales tax on services in Ontario and British Columbia goes into effect on July 1. The imminence of all three together has likely pushed some buyers to jump into the market, especially in Ontario and B.C.

Cameron Muir, chief economist for the British Columbia Real Estate Assn., argues for Vancouver's special situation, as do many in the trade. "Vancouver has had the highest prices in Canada for some time," says Muir. "The geography is constrained. You've got the Pacific on the West, the mountains to the north, the U.S. border to the south, and land reserves to the east. That puts tremendous upward pressure on land prices. We also have solid population growth with a sizeable proportion of immigrants." Vancouver is a city of just over 2 million, and Muir expects 40,000 immigrants this year. On top of that, says Muir, there are "high-net-worth Asian purchasers buying as investments, as second homes, or for satellite families."

Mainland China buyers are a fixture in conversations about Vancouver real estate, though reliable data on their numbers is elusive. "I'd say over half our high-end listings go to China buyers," says Connell. "Yesterday we did an open house for a $3.5 million home, and six groups came through. They were all Chinese." Broker Andrew Hasman sees 70 to 80 percent of his high-end listings go to mainland Chinese. He oversaw an open house recently for a $1.8 million home. Of 100 visitors, 91 were from China. Spend enough time speaking with Rosenberg, Hasman, Muir, and others, and prices in Canada seem to make a kind of sense, a rational response to market forces that just so happens to have pushed prices way above the norm.

Like many brokers, Connell acknowledges that things are overheated. "I see it more stalling than anything. Units are starting to sit," he says, opening the door to a $3.8 million four-bedroom penthouse in Vancouver's downtown, in the seven-year-old Classico building. Decks on two sides look out over the tankers moored in English Bay, and Grouse Mountain beyond. It is a second home, full of stainless steel, granite, and floor-to-ceiling windows. At $1,688 a square foot, it is well over Manhattan's average. "This would have been snapped up just a couple of weeks ago," says Connell. But he's not overly concerned. "Everybody always has a take on Vancouver," he adds, "and nobody ever seems to be right."

BP Bankruptcy in U.K. Is Obama’s Worst Nightmare
by Caroline Baum - Bloomberg

It would be a "horror," a "disaster," according to lawyer Kenneth Feinberg, who was appointed by President Barack Obama to administer BP Plc’s $20 billion compensation fund for victims of the Gulf oil spill. "That is not an option." Feinberg was talking about a bankruptcy filing by BP in a Fox News interview. "Bankruptcy absolutely is an option, and the U.S. needs to recognize that," said Peter Kaufman, president and head of restructuring and distressed M&A at the Gordian Group, an investment bank in New York. Which is it?

No company has the ability to pay unlimited claims, even one that earned $16.6 billion last year and more than $20 billion annually in the prior four years. At the same time, no one has any idea how big BP’s damages will be. That hasn’t stopped Wall Street analysts from churning out estimates that move up in lockstep with the number of barrels thought to be leaking from the collapsed well each day.

How many companies are willing to face unlimited civil claims, the prospect of criminal prosecution and daily excoriation by the U.S. government before going on the offensive? That’s Kaufman’s argument for why BP should consider filing for Chapter 11 bankruptcy. (And the U.S. should consider the implications of such an outcome.) In the U.S., unlike in most countries, "you can file for bankruptcy even if you are perfectly solvent," said Jay Westbrook, professor of law and a bankruptcy specialist at the University of Texas, Austin.

Bigger Boot
Don’t try pulling a fast one to avoid paying the bills. The courts have developed a "doctrine of good faith," Westbrook said. "If you are abusing the bankruptcy code, they will throw it out." If BP’s damages, or even "reasonably probable damages," exceed the value of the company, or if it faces a liquidity crisis, bankruptcy would be a way to organize the claims into a "sensible, orderly, fair process," he said.

U.S. Interior Secretary Ken Salazar may think keeping the "boot on the neck" of BP is a good strategy, but he should understand that BP has a stiff boot of its own. What if the company were to utilize its considerable financial and legal resources and the insolvency laws of the U.S. or Great Britain "to make it extremely difficult and time consuming for legitimate claimants to get succor?" Kaufman said. (It wouldn’t be a first for an oil company.)

‘Egregious Willful’
BP is already the most reviled company in America. Two of its refineries accounted for 97 percent of the violations (a total of 862, of which 760 were "egregious willful") in the refining industry over the last three years, according to the Center for Public Integrity. It holds the record for the largest fine ($87 million) ever levied by the Occupational Safety and Health Administration. Its public relations couldn’t be worse if it disbanded its PR department. In the court of public opinion, BP is already about as low as it can go. So why shouldn’t it try, as a matter of business, to limit its liability?

The government isn’t the only one with leverage. If BP were to file for bankruptcy, who would compensate Gulf residents whose livelihood and sole means of support were destroyed by the spill? The U.S. taxpayer. To avoid being seen as someone who bailed out Wall Street and abandoned Main Street, Obama would probably ask Congress for money to compensate victims and line up to be paid with other creditors.

No Exit
What if BP chose to file for bankruptcy in the U.K., something that’s well within its rights? No doubt London courts would deliver an outcome more favorable to BP. And they’re apt to be less generous when it comes to paying damages to folks three times removed from directly affected claimants. No wonder Congress wants to shut down that option. House Judiciary Chairman John Conyers, Democrat of Michigan, introduced a bill that would, among other things, prevent BP from seeking bankruptcy protection in the U.K.

If the goal is to get relief as quickly as possible to the legitimate victims of the oil spill, then using BP as a pinata isn’t a great idea, Kaufman said. (Nor was sending Attorney General Eric Holder to New Orleans to threaten BP with criminal prosecution a way to foster an environment of cooperation on the clean-up.) No one knows whether BP agreed in writing to the $20 billion escrow fund or to Feinberg’s power of attorney. Jon Pack, a London-based BP spokesman, couldn’t comment.

Tilting at Windmills
BP has huge assets and tremendous earning capability, at least until we figure out how to power our cars with wind. While Kaufman is right in theory that BP should consider the bankruptcy option, in practice it would make life hard for the company. Why? Energy is already a highly regulated industry -- at least that’s what everyone says. And it’s bound to become more highly regulated following the BP spill.

The next time BP applied for a drilling permit, it might find that regulators had found religion. While a company can’t be denied a permit solely on account of bankruptcy, according to Westbrook, I bet regulators could find enough "egregious willful" violations to prevent BP from expanding its U.S. business.

BP oil spill bill hits $100 million a day
by Julia Kollewe - Guardian

BP is now spending $100m (£66m) a day on efforts to contain and clean up the massive oil spill in the Gulf of Mexico, bringing its total bill to $2.65bn so far. BP said this morning it had spent $300m on containing the oil spill in the past three days. Its total bill is up from Friday's figure of $2.35bn. That includes the cost of trying to cap the well, clean up the environmental damage caused by the leak and pay compensation to those affected. BP has paid out more than $128m to fishermen and others.

BP shares clawed back some of Friday's steep losses, on hopes that the oil giant will be able to plug the oil leak in the Gulf of Mexico earlier than thought. The shares climbed 4.6p, or 1.5%, to 309.2p in early trading, making the company the second-largest riser on the FTSE 100, after crashing to a 14-year low of 298p on Friday, down 6.4%. More than £60bn has been wiped off the company's market value since the rig explosion on 20 April. BP said this morning it remained on track to complete its relief well, which is designed to kill the leaking well, within the three months envisaged in May. But according to reports, the company is now hoping to seal the well by mid-July, rather than early August.

There was more good news as the US National Hurricane Centre in Miami said that tropical storm Alex, which has pounded parts of Central America and is heading towards Mexico's Caribbean coast, was likely to strike well away from the area where BP is trying to stop the oil leak. Barack Obama and David Cameron said that the oil giant should "remain a strong and stable company" after meeting to discuss the environmental disaster on the sidelines of the G20 summit in Toronto.

Could 'toxic storm' make beach towns uninhabitable?
by Patrik Jonsson - Christian Science Monitor

Residents fear mass relocations should a hurricane kick the Gulf oil spill onto resort towns. ‘Hazmat cards’ are a hot commodity among residents, since they could be the key to return.

Ron Greve expects the worst is yet to come in the oil spill drama that is haranguing beach towns all along the US Gulf Coast. So, like a growing number of residents, the Pensacola Beach solar-cell salesman took a hazardous materials class and received a "hazmat card" upon graduation. Those cards, says Mr. Greve, could become critical in coming weeks and months. In the case of a hurricane hitting the 250-mile wide slick and pushing it over sand dunes and into beach towns, residents fear they’ll face not only mass evacuations, but potential permanent relocation.

Storm-wizened locals know that it can take days, even weeks, for roads to open and authorities to allow residents to return to inspect the damage and start to rebuild after a hurricane moves through. In the case of a "toxic storm," only residents with hazmat cards would be allowed to cross bridges to return home, Greve says, since toxicity risks would be too high for untrained residents. "You’d have to have these cards to be able to return," says Mr. Greve. "In these classes, they basically tell you that swallowing even a small amount of the oil or getting some on your hands and then having a smoke could be deadly."

Fears about ecological damage have dominated concerns around the spill, which began when the Deepwater Horizon rig, leased by BP, exploded on April 20, killing 11 people. The rig sank two days later and oil began rushing into the open Gulf. But if a Gulf hurricane whips the toxic rusty mousse hovering offshore onto land, the impact on human communities and health could become a focal point. At the very least, return for residents could take much longer, potentially forcing dissolution, residents fear, of entire island, bay and river communities along the densely populated Gulf Coast.

That scenario is part of what’s driving frustration among many local officials on the Gulf, who want a more concerted and ramped-up skimming effort by the BP-Coast Guard Unified Command in New Orleans. A super-tanker skimmer known as the A Whale, capable of collecting 500,000 barrels of oily water a day, is en route to the Gulf, but its owners have not been assured that it can join the surface clean-up effort. Some members of Congress have criticized the administration for not moving faster to ask for international skimming fleets to help corral more of the slick.

On Friday, the Coast Guard announced it would start moving boats and rigs away from the Deepwater Horizon geyser site 120 hours before a hurricane’s approach, at that point ending all collection efforts and delaying the drilling of relief wells, which are now on track to plug the well by late August – the height of the hurricane season. The geyser blowing at full tilt without a containment cap could spew between 35,000 and 60,000 barrels of oil a day, possibly more.

Moreover, scientists have predicted one of the busiest Gulf hurricane seasons in years, expecting between 14 and 23 named storms and 14 hurricanes this summer – compared to a long-term average of 11 named storms per season. Tropical Storm Alex formed in the western Caribbean on Saturday, and forecasters said it was unclear if it would hit the massive oil spill in the Gulf of Mexico, the Associated Press reported. Forecasters at the National Hurricane Center in Miami said early Saturday that the storm has maximum sustained winds of about 40 mph.

Most storm models show Alex traveling over the Yucatan Peninsula of Mexico over the weekend, hurricane forecaster Jack Bevens said. Bevens noted it’s too soon to say with certainty if the storm will pass over the oiled Gulf, though for now it’s not expected to hit the spill. If it does, says Greve, "That’d be a real mess."

Mississippi officials slam Coast Guard as BP oil hits shores
by Anita Lee and Margaret Baker - Biloxi Sun Herald

What South Mississippi officials had been fearing for weeks came true Sunday when large, gooey globs of weathered oil, chocolate-colored oil patties and tar balls washed ashore in quantity along the Mississippi Coast. Emergency managers scrambled to win approval for stronger protection of inland waterways, more skimming equipment in Mississippi waters and installation of absorbent material, also to keep oil out of inland waterways. Local officials were livid that the oil had made it ashore.

Connie Moran, the mayor of Ocean Springs, Miss., said the city would consider taking further action itself to protect the sensitive marshes and beaches of Jackson County, whose coastline runs from Biloxi to the border with Alabama. She blamed the organization that combines the Coast Guard and BP into a so-called unified command for allowing the oil to drift into the beaches. "The unified command’s failure to skim the oil north of Horn Island yesterday is inept and inexcusable," Moran said. "Had they deployed those resources, the impact to Jackson County would’ve been far less today."

She said she had asked the Coast Guard to assign skimmers and support vessels to monitor the Mississippi Sound at the mouth of the Biloxi Bay. "There’s still stuff out there that we can’t even see because of all the dispersant," she said. "This is just outrageous and unacceptable." Mississippi had largely escaped the onslaught of the Deepwater Horizon oil slick, even as shoreline in Louisiana, Alabama and Florida was washed by both thick gooey crude or thousands of tar balls.

But on Sunday, that respite ended. "The amount of oil moving into Mississippi waters has greatly increased in the last several days, and the prevailing winds that cause the oil and its residue to move in our direction are predicted to continue, at least until the middle of the week," Gov. Haley Barbour said in a statement. "We continue to press the federal Unified Command and BP to increase the amount of resources available to attack the oil beginning as far south as possible, through the passes, into the sound, and in the mouths of the bays"

Barbour, who once confidently predicted that the oil would skirt Mississippi, rushed back to the state on Friday from a fundraising tour he was making on behalf of Republican candidates. Sunday said the state was prepared to move alone if the federal government couldn't provide more resources. "While command and control of on-water resources has improved, it must get much better, and the amount of resources to attack the oil offshore must be greatly increased," he said. "Under the circumstances, we are taking some of that into our own hands." The state is having skimmers built that the Mississippi Department of Environmental Quality hopes to put in the water by July 5.

Meanwhile, U.S. Rep. Gene Taylor, D-Miss., continued to press into service an Environmental Protection Agency plane with infrared equipment that has not been cleared yet by Unified Command in Mobile, Ala., to spot oil in Mississippi waters. The plane flew out Saturday and Sunday to calibrate equipment, zeroing in on masses and streams of oil while crisscrossing Mississippi waters for more than two hours. Satellite equipment on the plane, the only one of its kind in the nation, can immediately provide the location of oil to the Coast Guard to coordinate response. Without such equipment, Taylor’s office said, cleanup vessels have basically been playing Marco Polo with the oil.

The airplane's equipment detected large patches and streams of oil Sunday morning from Pascagoula to Biloxi, anywhere from five to 11 miles off shore. Scientists responsible for the equipment and data interpretation from the airplane put the images gathered on Google Earth, where they can be viewed by the public. The scientific team has been working with the Coast Guard in Louisiana through Region VI of EPA, which includes that state.

They said the airplane was initially brought in to monitor airborne chemicals, but infrared equipment on-board has proved exceptionally good at detecting and differentiating between heavy oil, oil mixed with water and even weathered oil. "The real issue is getting these skimmers in the right location," said chemist Bob Kroutil, a member of EPA’s Airborne Spectral Photometric Environmental Collection Technology team.

Rupert Lacy, the emergency manger in Harrison County, said the Mississippi Coast is still waiting for more skimming power to suck up oil that is being corralled near shore. Harrison County is the most populous of the three coastal counties in Mississippi that border the Mississippi Sound. "We’re going to have oil on the beach this week," Lacy said. "Some of this they have not captured, we will see showing up. Until they can get the well capped and capture the oil offshore, we will have little splotches that will come to the sand and we’ll get it cleaned up."

Oil also was massing between Horn and Ship Islands, two barrier islands in the federally protected Gulf Islands National Seashore chain that stretches from Florida to Mississippi. Ocean Springs Mayor Moran said BP contractors had no skimmers in the water Saturday to sucj up the oil before it reached the shoreline, bays and inlets. "They promised us they would be fighting oil at the passes," she said, "and they were not there."

The oil was taking a toll on shore birds. An oiled pelican also was found Saturday near the Lake Mars Landing pier and was taken away by state marine, wildlife and fisheries officials for rehab. On Sunday, pelicans flew over the beached oil patches and mullet could be seen swimming around the shallow waters. Three boats with skimming equipment arrived after abut three hours to try to collect the weather oil, patties and tar balls that had reached the areas around Belle Fontaine beach and Lake Mars Landing. Other weathered oil was found Sunday on both sides of Deer Island, officials confirmed.

Moran and a couple of city aldermen — John Gill and Fred "Chic" Cody — met at Harbor Landing Yacht Club on Sunday afternoon along with a state environmental official, the Coast Guard and others the city had hired for their own cleanup to discuss immediate ways to fight the oil. Ocean Springs already has installed protective fencing in some areas and other oil absorbent materials to protect estuaries and marshes, but Mayor Moran, Gill and Cody said more needs to be done.

Moran said she’s tired of getting the same old response from BP officials about there being "more oil out there than we can handle." She added, "Now that they are so unclear about who’s in charge, we want to know what we can do to clean it up ourselves." Alderman Gill later asked Coast Guard Lt. Mike St. Jeanos whether the city could "count on Unified Command to have assets" for the city. In response, St. Jeanos said, "My answer to that is we don’t know. Unfortunately, ... That is probably an honest answer. If I had control of it, I’d have a boat skimming off Horn Island."

St. Jeanos later said that the chain of command does work and that the Coast Guard is ultimately in control, but Gill said the city’s moving forward with their own efforts. "We are not waiting on BP and the Coast Guard," he said. "We are ready to move." Brandon James, a resident of Gulf Park Estates, brought his two nephews and one of their friends to Lake Mars Landing on Sunday. He said he wanted to show the children first-hand what’s happening in the Mississippi waters where he’s spent many years fishing and boating.

"It’s really sad," James said. "I just had a baby girl. She’s 9 months old, and she’s not going to be able to play in her younger years in the water. That’s what hurts me most. I’ve lived here and I’ve worked here. We don’t know how long this is going to last, and you just don’t know what it’s going to do to people." Added his nephew, Damon James: "I know we won’t be able to go fishing out here anymore. We won’t be able to go swimming on the beaches anymore. That’s scary."

No skimmers in sight as oil floods into Mississippi waters
by Karen Nelson - Biloxi Sun Herald

A morning flight over the Mississippi Sound showed long, wide ribbons of orange-colored oil for as far as the eye could see and acres of both heavy and light sheen moving into the Sound between the barrier islands. What was missing was any sign of skimming operations from Horn Island to Pass Christian. U.S. Rep. Gene Taylor got off the flight angry. "It’s criminal what’s going on out there," Taylor said minutes later. "This doesn’t have to happen."

A scientist onboard, Mike Carron with the Northern Gulf Institute, said with this scenario, there will be oil on the beaches of the mainland. "There’s oil in the Sound and there was no skimming," Carron said. "No coordinated effort." Taylor said it was a good thing he didn’t have a mic in the helicopter, because he might have said some things he didn’t want his children to hear. "They’re paying all these boats to run around like headless chickens," Taylor said, as reporters gathered to hear his assessment of the Sound.

There has been hope among state officials the islands would stop a lot of the oil and skimmers could take care of the passes or breaks between the islands. Horn Island was doing its part Saturday, observers pointed out. The wiggly lines of sheen were coming straight at it from the south, headed for the island’s southern beaches. The island had boom in place to protect the inlets and sensitive wetlands along its northern shore, the side that faces the mainland. Even the Pascagoula River was doing its part.

Carron pointed out the line where the river’s fresh water met the Sound’s salt water near Horn Island. All along the line was the orange oil caught between the two types of water and held at bay. But where the failure came was in the human effort. There were dozens of boats of all sizes running around, some leaving trails through the sheen. Two boats among a group near Ship Island were pulling boom in a line, but not using it to round up oil. That was at 10 a.m.

Taylor slipped a note to a fellow passenger. It said: "I’m having a Katrina flashback. I haven’t seen this much stupidity, wasted effort, money and wasted resources, since then." Back on land in Gulfport, Taylor let loose. "A lot of people are getting paid to say, ‘Look! There’s oil’ and not doing anything about it," Taylor said. "There shouldn’t be a drop of oil in the Sound. There are enough boats running around. "Nobody’s in charge," Taylor said. "Everybody’s in charge, so no one’s in charge. "If the president can’t find anyone who can do this job," he said, "let me do it."

Taylor and U.S. Sen. Roger Wicker, R-Miss., took the morning flight on a National Guard helicopter with representatives of the state DEQ and BP. After the flight Wicker said he feels it’s not too late for President Barack Obama to accept help from other countries that have offered the services of their large oil-skimming boats. Wicker blamed bureaucracy and the president, but said, "Mississippi has been a champ from the beginning of this." He also said he noticed BP has been slow to accept prevention plans from local governments.

Taylor was ready for action. Katrina wasn’t preventable, he said, but the disaster of oil reaching Mississippi beaches is preventable. He had said earlier that if organized right, he believed a lot of small boats, working hard and working together, could contain the floating oil. Instead, the vessels of opportunity seem to have no game plan. There should be some light aircraft spotting for and guiding them, said Carron, who was also puzzled by the response. "I don’t really understand it all."

Before he took the flight, Taylor said, he had submitted a detailed plan of action to BP and the Coast Guard commander. He was on the Coast on Saturday to see if any of it was being carried out — it addressed ways to solve the lack-of-communication issues between spotters and skimmers. He was scheduled to go aboard a boat in the Sound to see the situation from that perspective as well. Taylor was concerned Coast Guard Cmdr. Jason Merriweather, assigned to Mississippi, doesn’t have the authority to act independently; that he reports to the Unified Command in Mobile; and that all his decision are filtered through that group.

Carron said he was just as concerned with whether there’s submerged oil coming in with the orange floating bands. And all the while the NOAA trajectories for where the oil is heading get progressively grim for Mississippi. Saturday’s briefing projected oil would be on the beaches of the barrier islands, the Chandeleurs, in Alabama and the Florida Panhandle. For Sunday the projection of beached oil showed thicker lines as the bulk of the oil body moved closer. For Monday the projection was more of the same, except it included a red X at Bay St. Louis, meaning the forecast is oil will reach the mainland there.

Cleanup Hiring Feeds Frustration in Fishing Town
by John Leland - New York Times

Bayou La Batre, Ala. — Nine weeks into the disaster in the Gulf of Mexico, there is more money in this small, hardscrabble fishing town than there has been in decades, residents say. There are more high-paying workdays, more traffic accidents, more reports of domestic violence, more drug and alcohol use, more resentment, more rumors, more hunger, more worry.

On a recent afternoon, Delane Seaman scowled at a procession of boats starting to come in to the town dock, each owner or captain with a promise of a day’s pay of more than $1,400, each mate with around $200, all courtesy of a BP program created to employ boats to help with the oil spill cleanup. The program, called Vessels of Opportunity, has been a lifeline for hundreds in this town of 2,300 at the mouth of Mobile Bay, paying several times more than they could make fishing. But for others, like Mr. Seaman and his brother, Bruce, whose oyster-processing business has been closed since May, it has been a target for frustration.

"These folks you see right here, they shouldn’t be hired on," Mr. Seaman said, pointing to a group of sport-fishing boats from Florida. "We heard BP was going to be hiring the people directly affected by the oil spill. But we can’t get hired, and they’re hiring all these people who quit their jobs to come here. We’ve had our application in for two months." From a hamlet of independent fishermen and seafood handlers, many second or third generation, Bayou La Batre has become something close to a one-employer town, with BP acting as both the destroyer of livelihoods and the main source of income, through cleanup programs and compensation for lost business.

As the money flows in, many residents say it is not reaching them. In early June, commercial fishermen blockaded Mississippi Sound to protest BP’s hiring of recreational boats for the cleanup. A fisherman was led away in handcuffs. The company is trying to hire more commercial fishermen and has cut the share of recreational boats working in Alabama to 13 percent, from 23 percent a week ago, said Andrew Cassels, director of the Vessels of Opportunity program at the Mobile Incident Command Post. A week ago, the company began consulting local officials on all hires, Mr. Cassels said. "We’re restructuring our fleet to take the commercial fishermen," Mr. Cassels said.

But those who are not working say this still has not happened. And for everybody, there is fear that the money will run out, BP will declare bankruptcy or end Vessels of Opportunity. There are 915 vessels in the Alabama program, 262 of them working from Bayou La Batre. "Everyone’s worried to death," said Kendall Stork, owner of the Lighthouse restaurant, where business is still good. "Unless they got a building as big as the Empire State Building filled with $100 bills, it’s going to run out. There’ll be some killing around here."

Signs outside Bayou La Batre declare it the seafood capital of Alabama, and for the people here — whose median household income is $24,539, 28 percent below the state median, according to the 2000 census — fishing is a passion and a cross to bear. Business owners were just starting to recover from Hurricane Katrina, which flattened many shops, including the Seamans’. Residents here said that in the past they always knew they would not starve because they could get their food from the gulf; now that security is gone.

At Dominick’s Seafood, a shrimp processor operating at 60 percent below its normal volume — boats can shrimp only off parts of Florida and western Louisiana — Dominick Ficarino spoke lovingly about every aspect of the business. Then he said he did not want his daughters or their boyfriends to come near the plant. "I don’t want nobody to have this miserable life," he said. Now, many here say, even this misery will be taken from them.

Het Le, 30, who came from Vietnam when he was 11, has been shucking oysters since he was 16. Since the government closed the oyster beds in May, Mr. Le has been out of work, as have his eight siblings. Though he got a check from BP for $1,000 for lost income, he has had to rely on a food bank to feed his family. "Lots of families are having arguments because of money," he said. "My wife, she’s good. But with money, she blames on me, I blame on her. It makes your life more of a struggle."

Bayou La Batre’s population is one-third Asian, mostly Vietnamese, and many have a hard time getting social services or training to work for BP because of the language barrier, said David Pham, a counselor at Boat People SOS, a nonprofit group. Many older residents are neither fit enough for beach cleanup jobs nor eligible for Social Security because they are not citizens, he said. "In most families the mother, father, children and grandparents are all out of work," he said. "People come in here edgy, angry and scared. They’ll come to the office and argue in front of me, or say, ‘My husband is acting more angry now.’ Usually Asians try to keep private problems at home." He added that many hesitate to use the food bank, even though they need the support. "They say, ‘I don’t want to beg for food,’ " Mr. Pham said. "One woman told me, ‘I haven’t seen powdered milk since the refugee camps.’ "

Mayor Stanley Wright said he had repeatedly fought with BP to hire more local fishermen, and got grants of $7.5 million and $1 million from the state’s BP grant to put residents to work, at about half the rate BP pays. This money, however, has run out. "How we got out of this without a murder, it’s a miracle," he said. Calls to the police and accidents were up 50 percent since late April, said the police chief, John Joyner. Even his officers were working off-duty for BP, Chief Joyner said.

At the Bayou Clinic, started by Regina M. Benjamin, now the United States surgeon general, 20 percent more patients are asking for free health care. Most people here say they have received some compensation from BP, but not enough to cover their losses. And many who have put in claims will never be repaid because much of their business was cash and they do not have proof of income, said Linda Fisher, an accountant who worked for 12 shops but is now mostly out of work herself. "I’ve had guys call me and want 1099s for previous years," Ms. Fisher said. "I can’t do that."

Ms. Fisher said that after four trips to the BP claim center, the company has compensated her $2,000 for lost income, less than half of her monthly earnings. For Delane Seaman, there is the feeling that "BP took our life away," only to replace it with a form of dependency that he and his brother went into business to avoid. "All our lives we’ve made decisions for ourselves," he said. "Now BP is telling us what we can and can’t do. You have no mediator. BP has the final yes or no because they’re holding the purse strings." He looked across his empty workplace, where 40 stainless steel shucking stations sat empty. After Hurricane Katrina, he said, people in town learned not to expect anything from government programs. "We pulled ourselves up by our bootstraps," he said. "Now BP took away our boots."

Brent Coon: tough-talking lawyer going after BP on his Harley
by Tim Webb - The Observer

Brent Coon, the Harley-Davidson-riding Texan lawyer – and BP's nemesis in the US courts – has some much-needed good news for the Mimosa Dancing Club, a strip club in a run-down district of New Orleans. Last weekend the Observer reported that the club's owners had made a compensation claim against BP over the Gulf of Mexico disaster because local fishermen are now out of work and can no longer afford to frequent the club.

The Mimosa became an unofficial – and seemingly reluctant – test case for lawyers and the myriad would-be claimants desperately seeking answers over who qualifies for BP payouts. Last week Ken Feinberg, the lawyer appointed by the White House to run the new $20bn claims fund, was asked live on television about the Observer report and whether the club's claim was valid. "I'm very dubious," he told ABC News.

Coon says lawyers may look unfavourably on the claim because of the nature of the club. "But I would love to represent the club knowing what I know about BP," he told me, joking that BP employees are not immune to letting their hair down in such establishments. When it comes to anything related to the explosion of BP's Deepwater Horizon rig – which killed 11 workers and has caused by far the worst environmental disaster in US history – he does not beat around the bush. "I'm not going to rest until some people go to jail," he warns.

Going after BP is a serious business for Coon. And it's something he's good at. He led the successful civil litigation against BP over an explosion at its Texas City refinery in 2005, which killed 14 workers and injured more than 100. He forced BP to release hundreds of internal documents detailing cost-cutting at the plant in the years before the accident, which regulators later ruled were a factor in its cause. Not being your average pin-striped lawyer helps when you're taking on Big Oil. The son of an electrician, Coon started his practice in Port Arthur, Texas, an industrial town where rock and roll singer Janis Joplin grew up. In his first cases he represented refinery workers exposed to asbestos, many of whom he already knew locally.

He claims that BP, once run by Lord Browne, and with close diplomatic ties to the UK government, is a relic of the British imperial past. "It's the primary reason why we had the American revolution – because of the attitude of the monarchy," he says. He remains scathing about BP's safety record in the US. Last week he met officials from the Department of Justice who are considering legal action against BP after safety regulators said BP has a "systemic safety problem" at its refineries. Having helped depose Browne after the Texas City fire, Coon is even more determined to topple his heir, Tony Hayward, after the Gulf spill.

BP faces potentially limitless claims across five states for an undefined period. If, as has been reported is likely, the leaked oil gets into the Gulf Stream and reaches the Atlantic, or hits Mexico or the Caribbean, the possibility of further untold liabilities opens up. "Until BP stops the oil, the damages are ongoing," Coon says. "We don't know how long it's going to take to get wherever it ends up. We don't know how many businesses will be impacted, how hard and for how long."

Lawyers in New Orleans say that the closest comparison to the legal storm brewing in the Gulf today is the $246bn compensation settlement made by the whole tobacco industry a decade ago for sick smokers. But in this case BP is faced with shouldering the bulk – and possibly all – of these damages alone.

Ten days ago, the White House appointed Feinberg, who administered the 9/11 victims' compensation fund, to run a new claims process, independent of BP but funded by the company. BP has pledged to contribute $20bn initially. But no one knows how it will work or who will qualify for relief, because Feinberg hasn't decided yet. The result is even more confusion and uncertainty for thousands of people facing bankruptcy in the next two months, a critical time for the tourism and fishing industries, the hardest hit by the disaster. "We do not know how many people are sitting at home because they do not know what to do," Coon says.

Feinberg has said that claimants wanting small amounts of money from the fund to keep them going will still be able to pursue BP in the courts for further damages in the future. But he is planning to offer lump sums in about three months in return for recipients waiving their right to seek claims in court, a move which predictably has angered some lawyers chasing juicy fees. "People are saying he's going to put us out of business," one told me.

The lawyers do not know whether claimants will receive more from an immediate payout from the fund, or from lengthy and uncertain litigation in the courts. Coon alleges that some BP officials are telling applicants that their claims will be easier to process if they do not have a lawyer: "No company wants anyone with a claim to have a lawyer, because then they know the cost of doing business is going to go up."

In response, a BP spokesman points to a statement on its website which says the company "pledges to treat claimants represented by attorneys the same as claimants proceeding without the assistance of an attorney" – although it goes on to say that the company cannot communicate directly with these claimants without the authorisation of their lawyers. Coon says that claimants, many of whom are not highly educated, find the whole legal process bewildering.

The vast majority of people who have already received damages from BP (to a total of about $125m) work in the fishing industry. But applicants from businesses indirectly affected – restaurants, plumbers and people like the owners of Mimosa Dancing Club – are having less luck: thousands of claims are in abeyance while BP decides what to do with them. According to a report from a House of Representatives committee this month, only 12% of claims have been paid. BP's figures show that the bulk of its compensation cheques are for $5,000 or less.

BP officials stick to the company line that it will pay all "legitimate" claims. "That sounds good, but what's a legitimate claim?" says Coon. I asked Darryl Willis, the man BP put in charge of its claims process, this question: where BP chooses to draw the line appears to be arbitrary. Willis says a boat mechanic would probably qualify, but a car mechanic who works in a fishing village may not.

It makes sense from a financial – and public relations – perspective for BP to decide to voluntarily pay all direct fishing industry claims. There are about 4,000 shrimpers in the Gulf and they do not earn very much, so the cost is not massive. But as the scale of the disaster and the resulting economic damage has mounted, BP has not made any commitment to pay groups indirectly affected for fear of setting a prohibitively expensive precedent.

Willis himself is a good example of BP's PR effort in full swing. It is running television adverts in Louisiana to explain its claims operation. They are narrated by Willis, who tells the camera he was "born and raised" in Louisiana. He also recently testified before Congress that his mother lost her home because of Hurricane Katrina, further underscoring his, and by implication BP's, connection to the region. Coon says BP – referred to as "British Petroleum" by US critics, although the company dropped that appellation some time ago – knows that the more it is perceived as a foreign company, the bigger the fallout from the crisis will be: "Willis is the person BP wants to be the public image of the BP claims process."

BP executives met Feinberg and his team last week to discuss how the claims operation will be run. It is not clear what influence, if any, BP has over the process, although clearly it will want to limit the size of the eventual payout. For many people in the US, BP's name will be mud for years, possibly forever; executives may at some point decide that the time for goodwill gestures, like voluntarily paying compensation, is over.

Coon says BP's attention may soon switch to fighting the ruinous liability claims it is facing: "At some point it doesn't matter how much money you pay to make public relations better and protect your brand name. They might think 'our image is so shot' that they just decide to circle the wagons and protect the company."

BP Amasses Cash as Oil-Spill Costs Mount
by Guy Chazan and Dana Cimilluca - Wall Street Journal

BP PLC has taken new steps to bolster its cash and available credit, adding $5 billion to its oil-spill war chest amid deepening concerns about the escalating costs of the Gulf of Mexico disaster. A person familiar with the matter said BP had arranged more than $3 billion in new unsecured bank credit lines in the past week and had picked up $2 billion in cash borrowed against BP's stake in OAO Rosneft, the state-controlled Russian oil firm, and other assets.

BP's total cash and available credit now tops $20 billion, up from the $15 billion that BP said it had on June 16. BP has lost roughly $100 billion in market value since a drilling rig it had been leasing, the Deepwater Horizon, exploded in the Gulf of Mexico in late April, unleashing what could prove to be the worst oil spill in U.S. history. Credit-rating agencies have downgraded its debt to near junk status. Details of the additional funding were reported online Friday by The Wall Street Journal as BP's share price fell to its lowest level in 14 years. The shares were off 6%, or $1.72, at $27.02 in 4 p.m. trading on the New York Stock Exchange.

Fears have been escalating that the cost of the spill will be greater than expected, and some analysts have speculated the toll could lead to a bankruptcy filing. BP dismisses such speculation and says it has ample resources to ride out the crisis. It has boosted the bill for its response so far to $2.35 billion, including the cost of the clean-up, containment, drilling of relief wells, grants to U.S. states and compensation claims paid. It is unclear what the ultimate cost of the spill will be for BP and whether the steps the company has already taken to shore up its balance sheet will be enough.

Market jitters were reinforced by concerns Friday that a potential tropical storm in the Caribbean Sea may head towards the Gulf, potentially hampering BP's effort to contain the spill. There are some 30,000 people, more than 4,500 ships and some 100 aircraft involved in the clean-up and logistics. BP has several options for asset sales, said bankers familiar with the matter. High on its list would be its 60% stake in Argentine oil and gas producer Pan American Energy, and assets in Colombia and Venezuela. Or BP may reduce its stakes in U.S. fields operated by partners, such as the Gulf field Mars, operated by Royal Dutch Shell PLC.

Energy analysts believe that with the Deepwater Horizon disaster harming its brand in America, BP could be keen to sell U.S. assets. "BP needs to downsize its exposure to the U.S. due to the political risk they face there now," said Jason Kenney, an analyst at ING Bank. He expects BP will seek to reduce its position in U.S. onshore natural gas or in mature oil fields outside of Alaska.

One possibility that doesn't appear imminent is a takeover of the whole company. Though speculation has swirled in recent weeks that a rival such as Exxon Mobil Corp. could swoop in and take advantage of BP's weakened state, several bankers say such a move is unlikely at least until the extent of its spill-related liabilities become clear. A person familiar with the matter said BP has received no takeover approaches in the wake of the spill.

Last week, BP acceded to White House demands to set up a $20 billion escrow account for compensating victims of the oil disaster. It said it would offset the cost of the remediation fund by canceling its dividend for three quarters, raising $10 billion from asset sales and cutting capital spending. "As we announced last week, our board considers it appropriate in the circumstances to maintain a very conservative financial position, with a focus on conserving cash," BP spokesman Andrew Gowers said. Yields on the company's bonds soared Friday, as did the cost of insuring its debt. The cost of protecting $10 million-worth of BP bonds against default rose by $44,000 a year to $580,000.

Investors' fears were stoked by a report by Nomura Holdings Inc. in London saying BP may need to sell shares to assure trading partners it has the financial wherewithal to absorb costs related to the spill. Nomura analyst Alastair Syme said while BP has enough liquidity to deal with the clean-up costs and the phased funding of the escrow account, it may struggle if liabilities from the spill were to rise, for example due to hurricane damage, or if oil prices fall. He said BP's options are constrained because issuing debt has become expensive and selling off assets takes time.

Mr. Syme said BP has an estimated "$2 billion to $2.5 billion of one-year commercial paper to roll over, needed to fund day-to-day trading activities and working capital, which will likely be much harder (and more expensive) to do in this environment." BP said it doesn't comment on its financial arrangements. BP and its advisers had been considering a large bond sale to shore up the company's finances, but have shelved the plan for now, other people familiar with the matter said.

Nomura's Mr. Syme wrote that BP could raise equity-linked financing in the near term, perhaps from a Sovereign Wealth Fund. However, doing so at its depressed share price might make current shareholders uneasy, since they could face large dilution. One of those people familiar with the matter said BP has no imminent plans for an equity or bond deal. In the last week or so, BP has arranged a so-called cap-and-collar deal with Credit Suisse Group, enabling the oil company to borrow funds backed by the Rosneft stake. One of those people said that the proceeds from the Rosneft deal were less than $1 billion but that the company had struck other, similar deals.

Live from Planet Norte
by Joe Bageant

Starting with the Homeland Security probe at Washington's Reagan Airport, arrival back in the United States resembles an alien abduction to a planet of bright lights, strange beings and incomprehensible behavior. The featureless mysophobic landscape of DC's Virginia suburbs seems to indicate that homogeneity and sterility are the native religions. Especially after spending eight months in Mexico's pungent atmosphere of funky, sensual open air markets, rotting vegetation, smoking street food grills, sweat, agave nectar and ghost orchids.

The uniformity on Planet Norte is striking. Each person is a unit, installed in life support boxes in the suburbs and cities; all are fed, clothed by the same closed-loop corporate industrial system. Everywhere you look, inhabitants are plugged in at the brainstem to screens downloading their state approved daily consciousness updates. iPods, Blackberries, notebook computers, monitors in cubicles, and the ubiquitous TV screens in lobbies, bars, waiting rooms, even in taxicabs, mentally knead the public brain and condition its reactions to non-Americaness. Which may be defined as anything that does not come from of Washington, DC, Microsoft or Wal-Mart.

For such a big country, the "American experience" is extremely narrow and provincial, leaving its people with approximately the same comprehension of the outside world as an oyster bed. Yet there is that relentless busyness of Nortenians. That sort of constant movement that indicates all parties are busy-busy-busy, but offers no clue as to just what they are busy at.

We can be sure however, that it has to do with consuming. Everything in America has to do with consuming. So much so that we find not the slightest embarrassment in calling ourselves "the consumer society." Which is probably just as well, since calling ourselves something such as "the just society" might have been aiming a bit too high? Especially for a nation that never did find enough popular support to pass any of the 200 anti-lynching bills brought before its Congress (even Franklin Roosevelt refused to back them).

On the other hand, there is no disputing that we do reduce all things to consumption. Or acquiring money for consumption. Or paying on the debt for past consumption. It keeps things simple, and stamps them as authentically American.

For example, now faced with what may be the biggest ecological disaster in human history, I'm hearing average Americans up here talk of the Gulf oil "spill" (when they speak of it at all -- TV gives the illusion those outside the Gulf region give a shit), in terms of its effect on: (A) the price of seafood; and (B) jobs in tourism and fishing. Only trolls stunted by generations of inbred American style capitalism could do such a thing: reduce a massive ocean dead zone to the cost of a shrimp cocktail or a car payment.

Meanwhile, even as capitalism shows every sign of collapsing upon them under the weight of its sheer non-sustainability, Norteamericanos wait like patient, not-too-bright children for its "recovery." Recovery, of course, is that time when they can once again run through the malls and outlet stores, the car lots and the fried chicken palaces eating, grabbing and consuming. No doubt, something resembling a recovery will be staged for their benefit, thereby goosing their pocketbooks at least one more time before the rest of the world forecloses on the country.

Let 'er rip! There's plenty more where that came from
On Planet Norte nothing is finite. Not even money, which, under the flag of the consumer society, you can keep borrowing forever. Equally limitless is oil, infinite quantities of which are being hidden from us by a consortium of energy companies. Several people here in the States have told me that the size of the Gulf oil spill is proof that there is plenty of oil in still in the ground, and that this "peak oil stuff" is a scare tactic, an excuse to keep the price up. They were dead serious.

Considering the inexhaustibility of Planet Norte, it's no surprise its inhabitants have never doubted the "American Dream," the promise that every generation of Americans can be fatter, richer and burn up more resources than the previous one, ad infinitum.

All of which makes folks like me, and probably you too, want to run pulling out our hair and screaming, "What the fuck has happened to these people? From the start, it was clear that Americans were never going to win any prizes for insight. But this is ridiculous. Is it the hormones in the meat? Pollution? A brain eating fungus? How on God's (once) green earth can a nation so frigging 'out of it' manage to survive each day -- much less constitute an ongoing threat to the rest of the world?"

However, you must hand it to us that, so far, we have managed to sustain this culture of "I want it all, everything, the whole shebang, and I want it right now!" Except for the liberal and leftie websites and organizations, few seriously question it. When your designated role as a citizen is to live out a round-the-clock materialistic wet dream, why would anybody want to question it? Besides, seeing is believing. So reality is a titty tuck or a Dodge truck, and Ruby Tuesday delivering "falling off the bone tender" manna 24/7. Thank God It's Friday and go ahead, do it, put another trip to Cancun on the plastic. It's a limitless world, baby!

In my little casita back in Mexico, limits are very real. Because price per unit escalates with increased usage, we have to pay serious attention to electricity. So does government. Our municipality is so conscious of every kilowatt that traffic lights have no green or orange phase -- which saves on expensive bulbs too -- and it seems to work out just fine. You get one streetlight per block. Water is available to our village's neighborhoods only every other day, so it has to be stored in rooftop tanks. Once in the tank, gravity eliminates the need for further electric pumps. Every single plastic bag, large or small, is used for household trash, then hung on the front gate to be collected. You accept limits every day in Mexico and live within them.

But for that twenty percent or so of the planet living in the (over) developed western nations -- thanks to colonial plundering for resources, and later, world banking scams -- the limits of the natural world have never sunk in. Not really. Oh, ecological limits can be intellectually real to us, and we can have discussions about them. And being comparatively rich, we can build wind turbines and solar panels, and tell ourselves smug lies about "sustainable energy" and "green solutions." However, in our daily world, the affective one that governs our behavior, the one that tells us what we honestly need to deal with and what we do not, there are no apparent limits or potential end of anything. For example, if you wanted a glass of ice water right now, you could walk over to a refrigerator and get it. Most of the world cannot.

We assume much. We assume that when we get up every morning the coffee maker will come on and the car will start. We assume that everything imaginable is available for a price, even if we cannot come up with that price. But we never really worry about having food or clothing, other than its style and type. Our biggest concerns turn on such things as who will win the World Cup or be eliminated from American Idol. The social and political environment assures us to believe we can afford to be consumed by these trivialities. The world of Americans has been like that for generations. So how could it possibly come to an end? Lest one have doubts, every voice of authority tells us that no matter how bad things may seem at times, they always "return to normal."

This theme of engorgement and spectacle endures, thrives really, year after year, despite even the slowly unfolding world economic collapse. But it is Americans in particular who become stupider by any historical measure of intelligence. Millions pay money to visit Branson, Missouri. Or Holy Land Christian Theme Park, in Orlando, where you can have the improbable experience of "fun with the world's most popular Biblical characters" (Hmmmm, maybe Mary Magdalene) and watch Jesus get crucified daily. And just when you think you've seen every possible insult to the democratic process a degraded society can vomit up, some new one comes hurtling in your direction. Like those fat women in pink sweatpants leering from our TV screens, dangling teabags and vowing revenge for they know not what.

For a thinking person, a low-grade depression settles in, alongside an unspoken fatalism about the future of the human race, particularly the American portion. That's the point I reached a year or so ago. I would probably be ashamed to admit it, if I did not receive hundreds of emails from readers who feel the same way.

If nothing else though, in the process of building our own gilded rat cage, we have proven that old saw about democracy eventually leading to mediocrity to be true. Especially if you keep dumbing down all the rats. After all, Dan Quayle, Donald Trump and George W. Bush hold advanced degrees from top universities in law, finance and business. The head rats, our "leaders," (if it is even possible to lead anybody anywhere inside a cage), have proven to be as mediocre and clueless as anyone else. Which is sort of proof we are a democracy, if we want to look at it that way. While it is a myth that virtually anybody can grow up to be president, we have demonstrated that nitwits have more than a fighting chance. During my 40 years writing media ass-wipe for the public, I have interviewed many of "The best of my generation", and believe me; most of them were not much.

Naturally, they believe they are far superior by virtue of having made it to an elevated point in the gilded cage, closer to the feed, water and sex. Because they believe it, and the media echoes their belief, hovering and quoting them, discussing their every brain fart, we tend to believe it too. Nothing shakes our belief, not even staring directly into the face of a congenital liar and nitwit like Sarah Palin, or a careening set of brainless balls like Donald Trump or a retarded jackal like George W. Bush. Americans are unable to explain why such people "rise to the top" in our country. We just accept that they do, and assume that America's process of natural selection -- survival of the wealthiest -- is at work. These people are rich; therefore, they should run the country. God said so. It's a uniquely American principal of governance, which in itself, makes the case for our stupidity.

If it's control you want
Yet, despite such intellectual and moral torpor, some of the numbest bozos are beginning to suspect that the wheels are coming off their "have everything" society. One clue is that every time they check, they have less than before. "There's other signs too," concludes our bozo. "You gotcher radical Muslims blowing shit up, or plotting to. China holds the mortgage on our asses. Who wuudda ever thunk it? The bodies of our fallen heroes are being tossed out of the revered Arlington Cemetery into the landfill. You got yer freshwater fish with three eyes, obese high school kids droppin dead of heart attacks, meth epidemics out in the boondocks and wild coyotes moving into big cities. It's all just too godamned much!" And so, right in the middle of the morning commute, our bozo pulls over onto the roadside berm, puts his hands up against the windshield and screams. "AAAAAAAGH! Is anybody in control here, for Christ sake?"

Control huh? Nothing could be easier to obtain. Just sit back allow those who want total control of the government to have it. The GOP is sure to come up a candidate willing to pistol whip this country into shape. And that solution looks more attractive by the day. As violent competition for survival increases and resources diminish, the public demands more government control. Control of borders, drug lords with entire armies of their own, pillaging by banks. Who else but the government is capable of beating all those sociopathic freaks out there into submission?

No less a personage than Thomas Jefferson pointed out that, whether for good or evil, controlling the people is the main thing all governments do best. Both Jefferson and Stalin understood this. They also understood that government control is a one-way street -- it never voluntarily contracts, never shrinks. Government grows incrementally in the best of times, and balloons exponentially during the worst. When the people are anxious or fearful, when the have-nots are coming out of the woodwork for their share and there is genuine risk of losing something, the citizens always demand more government control. Given enough time, all government control, regardless of type or stripe, metastasizes -- whether it be into the religious control of a theocratic state, or the democratic totalitarianism of the United States.

Although totalitarian democracy is well solidified in the U.S., it is difficult, if not impossible, for its citizens or the outside world to name the beast, due to the outward appearance of freedom. Petty liberties are left intact. The process of orderly elections is maintained, thus retaining the world's general respect as a free country. After all, the people do "exercise their will" by voting.

Beyond that, the people have no further participation in, or effect upon the government's decision-making process regarding the public's will. From that point onward, an economic, political, and military élite interpret the general will as what best fits their own interests. A media elite then sells their decisions, such as war or destruction of the social safety net as the people's choice. Wars are packaged and marketed as "Operation Iraqi Freedom," fought by "our heroes." Policies kicking the slats from under the old, the poor and the weak are sold as "eliminating wasteful, unfair entitlements," such as elder care and child nutrition. Everybody knows that words such as entitlements, elder care and child nutrition are code words in capitalism speak. Elder care wastes money on worn-out old fuckers who can no longer work and pay their own way. Child nutrition is just a nigger/wetback feeding program that causes them to multiply even more, draining off valuable funds the already rich could have put to better use.

Liberty nonetheless abounds in a totalitarian democracy. Open elections verify majority rule. The slaves are free to elect their masters, and that is enough to satisfy most folks in the land of the free. That, along with 100-plus cable channels to keep us entertained inside the cage. We know we are powerless, but better the devil you know than evil socialism, where you are not allowed to take out a second mortgage on your cage.

What's a little totalitarian oppression, anyway?
In the big picture however, the hardening of our totalitarian state is a piffle, compared to what drives the people to accept such a state. That driver is the escalating social pressures of six billion humans, and the ecocide caused by our disastrous hydrocarbon culture. Would that the state and its media allow the public enough information to make the connection between things like global warming, peak oil, desertification and the state's wars we pay for and die in.

From the dawn of agriculture, human civilization has been a net subtraction from the environment on which we depend for life. Consider what once existed, and what little of it is left. Consider the burgeoning hordes everywhere burning, smelting, polluting, and generally devouring what remains. Where is that leading us?

You don't need to call the Harvard's environmental science department for the answer (even though the profs and scientists there maintain the charade that we do, to protect their rackets). Despite the rule of scientism and the fashionable modern disdain for human intuition, common sense is still a viable option. Does common sense and experience tell you that all six billion of us are suddenly going to come to Jesus and save the planet? Suddenly be seized by the spirit of universal cooperation and pagan love for Gaia? Are those billions going to quit doing what our species has done for 15,000 years -- attacking nature first with the stone axe, then the plow, and later with atomic energy?

Call me a grim old fatalist, but I just do not see the human race turning things around. Not because humans are inherently evil (although pimping Gaia to death comes close), but because we are what we are. In any case, we are not going to stop eating, shitting, burning up stuff to stay warm, or following the genetic imperative to breed. How can we solve the problem when we are the problem, other than by self-extinction?

So here it is, top of the ninth round, and Gaia is on the ropes with cuts over both eyes, and no referee on the mat. Homo sapiens are moving in for the killer punch. It's been an ugly fight. But the truth is that there will be no winner. Certainly not man, considering that his triumph results in the specter of human self-extinction, dieback or die-off, or at least by massive die-back.

Turn off your mind, relax and float down stream
Informed and globally conscious people are sickened, heartbroken by the spectral truth. But to use the same Neal Cassady quote for the second time this year: "To have seen a specter is not everything."

In fact, it even has a good side. Transformation. Once you honestly accept what you have seen, you are changed, released from the previous stress and fear. Like so many feared experiences, it is its own psychodynamic, and is about "coming out the other side" of the experience. Accepting such a truth -- especially for pathologically optimistic, cheer stressed Americans -- shatters many painfully held illusions. The chief one is that we are the animating force behind all significant change, and that the massive damage we do is "progress"). In their place grows a new inner awareness. Although it does not conform to any popular definition as such, the easiest way to describe it is "spiritual," Who in these times, you may ask, believes in the spirit as an animating force of mankind? My answer is: Those who can be still enough to see that spirit moving.

With it comes the awareness and acceptance of forces far more powerful than our puny anthropocentric illusions of planetary authority. We can arrive at this understanding by way of thinking, logic and reason. The mind is a cumbersome and inefficient way to go about escaping traps you build with your mind, but yes, it can be done. Most educated people in this science worshipping age prefer the convoluted path of logic and rational exercise, over calmly opening one's eyes and heart to the world before us, as wiser men have done for thousands of years.

I can see why. Pay the money and put in enough university time, and it's relatively easy to end up certified, acceptable, and equipped with the professional jargon necessary to impress yourself and others that you are an expert of some sort. One of society's answer guys, the kind universities and corporations pay good money to own. But it's downright hard to be calm, to maintain inner stillness. Beyond that, inner stillness does not much impress or frighten others in the rat fight for a good spot at the feeder. Worse yet, it's free. No money it.

But stillness of mind opens onto the fathomless void, where we are dwarfed into utter insignificance. It makes clear how little we comprehend -- how much we do not know and never will, and that the greater the fire we build, the more darkness is revealed.

Edwin Arnold reminds us that when it comes to sinking the string of thought into that fathomless void, "Who asks doth err, Who answers, errs more," because, as any searcher by way of mortal mind discovers:
Veil after veil will lift -- but there must be
Veil upon veil behind.

Either way, there never was any guarantee that we would like the universal truth. And the truth is that the universe is busy enough hurling toward its destiny, and does not give a rat's ass what we do or do not like. Or whether a smear of biology on a speck of cosmic dust manages to poison itself to death.

So stay strong. Transcend. Find reasons to love.

Nobody ever gets out of this world alive, anyway.