Sunday, July 11, 2010

July 11 2010: The greatest con since 1776

Alfred Palmer Pistons February 1942
"Aluminum casting. The heads of these heat-treated pistons must be spotted prior to Brinell hardness testing. Young women are employed for this job by a large Midwest aluminum foundry now converted to war production. Aluminum Industries Inc., Cincinnati, Ohio"

Ilargi: Right. So Fannie and Freddie have now been delisted from the New York and Chicago Stock Exchanges. They’ll still be traded though, in the over-the-counter (OTC) market. If any knows of any valid reasons why government entities should be traded at all, never mind very profoundly bankrupt ones, do pray tell. Buying and selling broke government agencies can only be profitable if the taxpayer gets stuck with the difference, as far as I can make out.

Bruce Krasting has noticed that the Fed has moved $4.4 trillion of F&F’s "assets" onto their respective balance sheets. While the two GSE's have not, so far. What's that rumble I hear in the distance? Yes, the Republicans have called for all these "assets" to be put on the government's balance sheet, and they're right of course, that's where they belong. Bank of America has just confessed that they’ve pulled the same Repo 105 stunts that Lehman had, and the SEC is "going after them". Fine, good, though far too late, but what moral standing does a government have that pulls its own versions, and on a massive scale, of Repo 105s?

”Repos are short-term financing arrangements that allow banks to take bigger risks on securities trades. Classifying the transactions as sales instead of borrowings—as in the Repo 105 strategy—allows a bank to take assets off its balance sheet and thus reduce its reported leverage.”, writes Michael Rapaport in the WSJ.

You tell me how that differs from what the US government is doing with Fannie and Freddie. Sure, there's one main difference with Lehman and Bank of America: the scale of creative accounting/fraud. $4.4 trillion is real money. If Washington would do for itself what it pretends to demand from the financial industry, the US would be -technically- broke. But let’s be honest: is it really such a grand idea to keep alive a government and a banking system that can only keep their heads above water by flouting the laws of the land? Is that truly in the best interest of the citizens of the country, or does it in truth only scam those citizens ever more for the benefit of an elite that isn't even clever enough to not lose bigtime at the nation's crap tables?

Fannie Mae, Freddie Mac Debate Starts as Taxpayer Costs Pass $145 Billion
[..] Setting aside their occasional animosity, industry and consumer advocates say they share certain core goals on mortgage finance. Banks and builders by and large agree with representatives of home buyers that it’s in all of their interests to have the government continue to promote residential lending by encouraging what Fannie and Freddie have done for decades: buy mortgages and bundle them into securities for sale to investors.

Ilargi: Consumer advocates want the Fannie & Freddie boondoggle to continue? The same consumer who is on the hook for every dollar that is lost through the 95% of home loans that reside with F&F, in a climate in which home prices have already plummeted 30%+, and in which pending home sales were down 30% in May? Doesn't sound to me like those advocates are on the side of the people.
To inject more caution into the system, Washington lobbyists working on housing-finance reform say that mortgage lenders who bundle loans into bonds should contribute to an insurance fund that would be available in case of calamity.

Ilargi: Well, at this point in time, that is as obviously useless as it is too late, isn't it? The losses have already been incurred, and no new insurance scheme would make one iota of difference to those losses. If prices keep on dropping for homes that carry past mortgages, Fannie and Freddie will lose trillions of dollars in taxpayer funds, until they simply implode, causing trillions more in said losses. And the best we can come up with in the face of that is years of talks about reforming the system, talks that will undoubtedly largely be dominated by the same clueless clowns that brought down the system in the first place?

If as a nation that's all you got, it might be a better idea to just close the door, hand the key to Putin, and go live somewhere else. For this is not going to be good enough. It will be for some, of course, but for the people it will be a disaster of proportions the likes of which no-one wishes to ponder.

Fannie and Freddie are the main cause why home prices in the US have risen so high that millions of Americans are being evicted from their homes as we speak simply because they can't afford to live in them anymore. Fannie and Freddie (and the FHFA and FHLB and Ginnie Mae) have been used to guarantee any mortgage at any price and at any liar's conditions, and all at the risk of the American people.

Charles Hugh Smith sums it up very well, read it a few times, I'd recommend, though he's got the timeframe wrong. It's not the con of the decade, it's the largest -financial- con ever perpetrated on the American people since 1776:
The Con of the Decade Part I
1. Enable trillions of dollars in mortgages guaranteed to default by packaging unlimited quantities of them into mortgage-backed securities (MBS), creating unlimited demand for fraudulently originated loans.

2. Sell these MBS as "safe" to credulous investors, institutions, town councils in Norway, etc., i.e. "the bezzle" on a global scale.

3. Make huge "side bets" against these doomed mortgages so when they default then the short-side bets generate billions in profits.

4. Leverage each $1 of actual capital into $100 of high-risk bets.

5. Hide the utterly fraudulent bets offshore and/or off-balance sheet (not that the regulators you had muzzled would have noticed anyway).

6. When the longside bets go bad, transfer hundreds of billions of dollars in Federal guarantees, bailouts and backstops into the private hands which made the risky bets, either via direct payments or via proxies like AIG. Enable these private Power Elites to borrow hundreds of billions more from the Treasury/Fed at zero interest.

7. Deposit these funds at the Federal Reserve, where they earn 3-4%. Reap billions in guaranteed income by borrowing Federal money for free and getting paid interest by the Fed.

8. As profits pile up, start buying boatloads of short-term U.S. Treasuries. Now the taxpayers who absorbed the trillions in private losses and who transferred trillions in subsidies, backstops, guarantees, bailouts and loans to private banks and corporations, are now paying interest on the Treasuries their own money purchased for the banks/corporations.

9. Slowly acquire trillions of dollars in Treasuries--not difficult to do as the Federal government is borrowing $1.5 trillion a year.

10. Stop buying Treasuries and dump a boatload onto the market, forcing interest rates to rise as supply of new T-Bills exceeds demand (at least temporarily). Repeat as necessary to double and then triple interest rates paid on Treasuries.

11. Buy hundreds of billions in long-term Treasuries at high rates of interest. As interest rates rise, interest payments dwarf all other Federal spending, forcing extreme cuts in all other government spending.

12. Enjoy the hundreds of billions of dollars in interest payments being paid by taxpayers on Treasuries that were purchased with their money but which are safely in private hands.

Ilargi: There are very few Americans who have any idea how bad the situation is their country is in. With a government that specializes in creative accounting, outright fraud and ties to the financial industry, that shouldn't be a major surprise.

It's still tragic, though.

Fed to GSEs – Put it on the Balance Sheet!
by Bruce Krasting

The June Federal Reserve Quarterly Mortgages Outstanding report contains some interesting information. I’m not quite sure what to make of it. Consider these two slides from the June report on 1st Q mortgage outstandings.

The Federal Reserve has reclassified $4.4 trillion of IOU’s. They have taken them out of the category "Mortgage Pools and Trusts" and put them on the individual Agency’s balance sheet(s). Now consider the March 2010 reports from both Fannie and Freddie. They don’t show the shift in assets from "Guaranteed" to "On the books".

Some thoughts on this.

• This is not a small matter. $4.4 trillion of bookkeeping is involved. This is more than 40% of all individual mortgages. This is a major reclassification.

• In this case I would side with the Fed. All of these dubious assets should be on someone’s balance sheet. But I am stumped as to why the Fed did this without FHFA adjusting its book too.

• The Fed thinks this should be on the Agency’s balance sheets. We all know that Treasury owns the GSEs at this point. That being the case shouldn’t the debts of the Agencies be on the Federal balance sheet? This would put us $3T or so over the debt limit and bankrupt the government on paper. I find it odd that the Fed is pushing this at this time. It works against them.

• This is just an accounting adjustment. But these things do matter. The terms of the Conservatorship require that the GSEs keep their balance sheets below $900 billion. So this accounting adjustment would throw the legal status of the GSEs into question. They would be in material covenant default on the Senior Preferred (Treasury Basura Preff) if this adjustment takes place. Given that all of the other securities of the Agencies are "cross defaulted" this raises the question as to the legal status of all of the publicly traded debt securities of the Agencies. I know Washington did not mean that to happen. But then again, stuff does tend to happen.

• The Fed owns $1.2 Trillion of the former "Trust Securities". Maybe the Fed feels better knowing that these are direct obligations of the GSE’s. I am not sure that makes them more collectible. But in a bankruptcy a senior claim will have a better chance than a subordinated guaranty. In that sense the reclassification puts the Fed in a better creditor position. But really this is all the same pocket, so why would that matter?

• I don’t think that the Fed makes $4 trillion changes in accounting without substantial internal discussion as to the implications. Therefore this is quite deliberate and we should not ignore the significance of it. I’m still wondering what the significance is. I’ll ask the Fed and the FHFA. If they respond, I'll let you know.

Fannie Mae, Freddie Mac Debate Starts as Taxpayer Costs Pass $145 Billion
by Lorraine Woellert and Rich Miller - Bloomberg

As the White House pushed for a Wall Street overhaul this year, Republicans hammered Democrats for ignoring two of the biggest problems in American finance: Fannie Mae and Freddie Mac. The government-backed mortgage giants have cost taxpayers $145 billion and counting. Now, with work on the 2,300-page financial-regulation bill all but complete, the Obama administration will soon turn to revamping the pair of institutions that own more than half of the nation’s $11 trillion in residential mortgages, Bloomberg Businessweek reports in its July 12 issue. The political struggle could be long and bitter.

Some Republicans in Congress contend that killing Fannie and Freddie is the only wise course. President Barack Obama is expected to advocate something closer to the rough consensus for moderate reform that is emerging among Washington lobbyists representing banking, real estate and consumer groups. Fannie and Freddie operated as shareholder-owned corporations that financed home loans with the tacit support of the federal government. When the housing market collapsed, so did Fannie and Freddie. They were formally seized by the Treasury Department in September 2008.

Setting aside their occasional animosity, industry and consumer advocates say they share certain core goals on mortgage finance. Banks and builders by and large agree with representatives of home buyers that it’s in all of their interests to have the government continue to promote residential lending by encouraging what Fannie and Freddie have done for decades: buy mortgages and bundle them into securities for sale to investors.

'Like It Or Not'
When it functions properly, the mortgage-backed securities market generates fresh cash that can be channeled back into additional affordable loans. The challenge is figuring out how to do this without the lax practices and open-ended federal commitment that left taxpayers on the hook for catastrophic losses in 2008. "There will be a government role in the market whether we like it or not," predicts Phillip Swagel, an assistant secretary for economic policy at the Treasury under President George W. Bush.

At the heart of the emerging consensus across industry and consumer lines is the preservation of the 30-year, fixed-rate mortgage. "People regard it as a right as Americans to get a 30-year, fixed-rate loan," says Susan Woodward, former chief economist at the Housing and Urban Development Department and a founder of Sand Hill Econometrics, a research firm in Palo Alto, California.

Insurance Fund
To inject more caution into the system, Washington lobbyists working on housing-finance reform say that mortgage lenders who bundle loans into bonds should contribute to an insurance fund that would be available in case of calamity. The fund could be modeled on the Federal Deposit Insurance Corp., which protects consumers from bank failures with a fund financed by lending institutions.

Another step that would limit taxpayer exposure could be mandating that only the safest loans -- such as those that include a down payment by the borrower and carry private mortgage insurance -- would be bundled into government- guaranteed bonds marketed to investors. It will be important to strike a balance that doesn’t stifle innovation, argues Edward J. DeMarco, acting director of the Federal Housing Finance Agency, which oversees Fannie and Freddie. "We’ve got over 50 million homeowners with mortgages, and they represent all kinds of different financial conditions," DeMarco adds. "We need to be a little bit careful about shoe- horning the entire country into one particular mortgage type."

Clearer Role
The government’s role in the new system ought to be a lot clearer than it was in the past, according to industry and consumer advocates. Federal officials traditionally insisted that they had no legal obligation to stand behind Fannie and Freddie, even though investors assumed they would. When the market imploded, the Treasury stepped in, despite past disclaimers. Executives with the Mortgage Bankers Association and the National Association of Realtors say that mortgage-backed securities that meet government standards should receive an explicit guarantee. Without it, they say, investors will balk at buying mortgage bonds, especially in times of economic distress.

Government Backing
"To have long-term investment in a 30-year fixed mortgage, you have to have some confidence that there is government backing," says Paul Leonard, a lobbyist for the Financial Services Roundtable, whose members include JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp., and BlackRock Inc. These industry-inspired proposals are less radical than some ideas emanating from Congress. During debate over the financial-services overhaul, Republicans offered dozens of amendments to abolish Fannie and Freddie, only to be rebuffed by Democrats.

Led by Senator John McCain of Arizona and Representative Jeb Hensarling of Texas, Republicans say that Fannie’s and Freddie’s competing missions -- to serve shareholders and promote home-ownership among low-income households -- drove the financial institutions to ruin. The Republicans want the government to abandon any role in housing finance. The Obama Administration and Democrats, including House Financial Services Chairman Barney Frank of Massachusetts, insist that the government continue to promote homeownership. "We should not compromise any of our core policy goals in the decisions we make in structuring our housing finance system," Housing and Urban Development Secretary Shaun Donovan told Frank’s committee in April.

One thing is for sure: The White House will not lack for advice on the future of Fannie, Freddie, and the housing market. "Everybody’s telling them, ‘Don’t do anything stupid,’" says Barry Zigas, director of housing policy for the Consumer Federation of America. "It’s easy to forget that this system worked awfully well for 75 years." That is, until it didn’t.

Fannie, Freddie Dropped from New York Stock Exchange
by Diana Golobay - Housingwire

Fannie Mae and Freddie Mac common stock was removed today from the New York Stock Exchange (NYSE). The Federal Housing Finance Agency (FHFA) directed the government-sponsored enterprises (GSEs) in June to de-list from the NYSE and any other national securities exchange. The direction came after the price of their common stock hovered near the minimum average closing price of $1 for more than 30 days for most months since the conservatorship took effect in September 2008.

Both GSEs begin trading in the over-the-counter (OTC) market today. Their ticker symbols on HousingWire's industry tracker were replaced with private mortgage insurers, PMI Mortgage Insurance Co. and Mortgage Guaranty Insurance Corp. . Fannie said its common stock will begin trading on the OTC Bulletin Board — which tracks quote, price and volume information in OTC securities — under the symbol "FNMA".

The NYSE and the Chicago Stock Exchange suspended trading of Fannie's common and preferred stock prior to market open today. Fannie had been listed on the NYSE under the symbol "FNM".
As of today, Fannie will begin trading under new symbols. Freddie said shares of its common stock and the 20 classes of its preferred stock that previously traded on the NYSE also begin trading today on the OTC market. Previously trading under the symbol "FRE", Freddie's common stock will now trade under "FMCC".

The company's preferred stock will also trade under new symbols on the OTC market: "The transition to the OTC market will not affect the company's obligation to file periodic and certain other reports with the SEC under applicable federal securities laws," Freddie said in a statement.

Pending Homes Sales Crash in a Record Fall to a Record Low as Tax Break Expires
by Michael David White

The Index of pending home sales fell a record 30% in May to a record-low reading of 77.6 — two huge pessimistic indicators of future prices nationwide. Yet the combination of two record negatives went barely reported when the stats were announced last week.

So here’s the news for you now, a week late, but new to the marketplace of ideas. Pending-home sales now stand below the worst numbers we have seen since the housing crash started in 2006. The rubber bands and duct tape are breaking apart. Presume the fix of a fall is in.

Take a look at the three charts below and judge for yourself how important the facts are which the National Association of Realtors (NAR) announced last Thursday (July 1st).

The oversight by major news outlets — snubbing record negatives — is egregious by virtue of its ignorance of the expiration of the free-down-payment program. The pending-home-sales stat gave us our first view of buyer demand for housing without the hugely popular prop from the federal government.


Speculation has run rampant as commentators have wondered about the direction of prices as government support starts to fall away.

The future direction of real estate prices is a major obsession of almost all economy watchers as the monthly bill for shelter overshadows others, as the value of homes is a predominant factor of family wealth, and because the banking sector has huge investments based upon residential property.

"If you’re looking for a silver lining in housing, you aren’t going to find it here," Mike Larson of Weiss Research said. "Demand has fallen off a cliff in the wake of the tax credit expiration, with pending sales falling by the biggest margin ever to the lowest level ever."

It is likely that Mr. Larson’s comment drew attention to the two new record lows. Had he remained silent, these highly relevant facts likely would have gone unreported completely. Of the 15 major outlets we reviewed, four actually did learn about the two record negatives, but they didn’t understand the meaning of it.

The statement by NAR announcing pending-home sales makes no reference to either the record fall or the record new low. If their intention was to hide bad news, they got away with murder. Let’s show you the fools who fell for it.

Among the outlets who failed to uncover either of the two record negative stats are Barrons, Dow Jones, The Financial Times, Fox Business, The Los Angeles Times, and Marketwatch.

I reviewed stories on pending-home sales by 15 leading news outlets – in addition to the flunking students mentioned immediately above, I also read, BBC News, Bloomberg,, CNBC, Investors’ Business Daily, New York Times, Reuters, US News — and the only difference between the outlets was the extent to which they screwed up this critical epicenter-type data set (Please see the graphic nearby depicting the various degrees of incompetence.).

The future direction of housing prices are arguably the most critical factor in the most critical nation in the most critical financial crisis since the Great Depression. The signs are not hunky-dory in this market. The May pending-sale figures may in retrospect serve as a Rosetta Stone: A perfect guide to the true fortunes of residential real estate. Just in case you have forgotten, we are in one hell of a market, and Mom did not tell us this is what would happen when we grow up.

*** estimates current inventory for sale of 3.9 million is 1.2 million units higher than it should be, and not too far away from the record high 4.5 million. Inventory stands at 8.3 months of sales, but it should be at 5.8 months.

Fourteen percent of mortgages are behind on payments — about 7.7 million borrowers or, more starkly, one in seven. A record 4.63 percent of borrowers are in foreclosure. Approximately 13 million homeowners have no equity or negative equity. They would make nothing from the sale of their house if they could sell it. Or they would lose a little or a lot. Thus do we have the phenomena of strategic default — now as common as no-money-down mortgages during the boom.


We are in a pause of a tectonic shift of plates. Prices have been flat since August 2009, but are down 30% from their peak. The fall of 30% was almost completely discounted as impossible prior to its occurrence.

My speculation is that the fate of bubble-mortgage debt remains as our key obstacle blocking recovery (Unbelievers should rent the Godzilla movie "Eating the Lost Decades of Japan" for further enlightenment.). Total mortgage balances remain almost unchanged from the peak of the bubble –$11.68 trillion today versus $11.95 trillion at the peak (see chart below).

The data released last week on pending home sales and the dismal record of reporting on that data proves that breaking news business journalism fails even in surface scratching. The cows just want to feed on the grass in front of them and go on to the next field.

The smart investor is going to look at these charts on pending-home sales and have a real advantage over the common media consumer. Readers of my work know I have found pessimistic facts easy to find. The pending-sales figures are a dramatic concurrence — a record fall and a record low.

So I will give you my opinion: All hell has broken loose all over again in real estate. Don’t buy a home. Sell one.


Borrowers Hit New Home-Loan Hurdles
by James R. Hagerty and Nick Timiraos - Wall Street Journal

Dennis Davis has a nearly perfect credit score, equity in his home, considerable savings and a solid pension plan. But Mr. Davis recently found that his lender didn't want to refinance his mortgage. The problem? Mr. Davis's income-tax return showed he had taken a loss on an investment he made in a small, family-owned business. That was enough to raise doubts about his otherwise strong financial condition.

Three years after the onset of the mortgage crisis, lenders continue to tighten credit standards. The initial moves were a natural reaction for a business badly burned by rising delinquencies and defaults. But conditions are now so tight that lenders are frustrating borrowers who have enviable financial situations but still can't easily satisfy lenders' rigid checklists. "The pendulum may have swung too far the other way," Scott Anderson, a senior economist at Wells Fargo Securities, said in a report last month.

Some analysts thought that by this point in the business cycle, lenders would have started to relax credit conditions slightly after clamping down on the risky bubble-era practices. Instead, the screws are still tightening. That is partly because lenders are taking every precaution to avoid being forced to buy back loans from mortgage investors Fannie Mae and Freddie Mac in the event of default. When a borrower defaults, Fannie and Freddie typically buy the loan out of the mortgage-security pool and pursue a workout or foreclosure. But they can force lenders to repurchase loans when they find flaws in the way they were underwritten. Repurchases were a minor nuisance when defaults were low but have escalated over the past year.

Fannie and Freddie have already tightened their standards: Borrowers with credit scores above 720 accounted for 85% of all loans purchased by Fannie and Freddie last year. But banks are being even more stringent to prevent repurchases and want several years of pay stubs, tax returns and other paperwork from potential borrowers.

During the first quarter of this year, Freddie kicked $1.3 billion in loans back to lenders, up from $800 million during the year-earlier period. At Fannie, repurchase requests jumped to $1.8 billion from $1.1 billion one year earlier. To be sure, the government has taken steps to keep mortgage spigots open. The Federal Housing Administration allows down payments as low as 3.5%. Borrowers who have received standard paychecks and have uncomplicated finances generally aren't getting tripped up. But others face hurdles. Self-employed borrowers, for example, document their incomes with tax returns that include business-related write-offs, which might understate their cash flow.

Such caution is helping to hold down lending despite the lowest interest rates in more than five decades. To revive the economy, "we need the banks back in lending," said Anthony Sanders, a finance professor at George Mason University. "We're just kind of stuck in a rut." Mr. Davis thought he was exactly the kind of customer lenders love. "I've never had a bounced check or a late payment in my life," Mr. Davis said. He hoped to lower his interest rate to less than 5% from the current 6% through a refinancing. But his mortgage broker, Steve Walsh of Scout Mortgage in Scottsdale, Ariz., said SunTrust Banks Inc. turned down the application, citing the investment-related loss, which Mr. Davis saw as a minor setback rather than a threat to his financial health. SunTrust said it doesn't comment on individual borrowers' situations.

Rather than continuing to shop around for a refinancing, Mr. Davis has decided to cash in some of his investments and pay off the mortgage. People with complicated financial situations can still find some willing lenders, but "it takes more persistence than most people want to put forth," said Brian Berg, a loan officer at Priority Financial Network, a Calabasas, Calif., mortgage firm.

Recently, Mr. Berg arranged a refinancing for a borrower with a very high credit score and lots of home equity and debt payments totaling just 19% of pretax income. But Mr. Berg said the lender was worried about a credit report showing a $14 missed payment to a credit-card company in 2001. The lender insisted on proof the money had been paid, which Mr. Berg said was impossible to get. "Who cares?" he said. "It's nine years ago, and it's $14." He appeased the lender by having the borrower write a $14 check, though no one knew where to send it.

Pete Ogilvie, a mortgage broker in Santa Cruz, Calif., hasn't found a bank that will refinance a $250,000 loan on a $1 million property for a borrower with more than $200,000 a year in income and a high credit score. Banks balked because the borrower, a technology executive, was out of work for nearly a year starting in 2008. "We're going to see that for an awful lot of people whose business disappeared unless the banks learn some flexibility," said Mr. Ogilvie.

In June, Fannie put into effect a "loan-quality initiative" that requires more borrower information to ensure that Fannie ends up buying the same loan that it originally agreed to purchase. The effort has led lenders to pull a second credit report before a loan closes, and brokers say consumers should be very careful not to run up credit-card bills before closing on a mortgage. "If there are inquiries on your report that you're shopping for a car, that's something that has to be answered for," said Dan Green, a Cincinnati broker. "It can delay a closing and, in some cases, it'll kill a closing."

US consumer borrowing down sharply in May
by Martin Crutsinger - AP

Consumer borrowing fell again in May, more evidence that Americans remain jittery over their finances and the durability of the economic recovery. The Federal Reserve said Thursday that borrowing dropped by $9.1 billion in May. It also said borrowing declined by $14.9 billion in April, revising an initial estimate that showed a gain of $995 million for the month. Consumer borrowing has fallen in 15 of the past 16 months as households have struggled with uncertain job prospects and battered finances following a deep recession.

In May, consumers borrowed less on their credit cards and took out fewer auto loans. Credit card borrowing has fallen for 20 straight months. Many consumers, confronted by a deep recession and a weak job market, have tried to get their household finances in better shape by reducing their debt levels. In addition, banks during the recession have imposed tighter lending standards in an effort to cope with their rising levels of bad loans.

Analysts said the significant downward revision to April borrowing and May's decline show that consumers remain leery about taking on new debt. "There is simply no way to spin this data, nor the past few months, as anything other than a confirmation that the consumer has not come roaring back," said Dan Greenhaus, chief economic strategist at Miller Tabak in New York. "The consumer remains quite stressed ... with income growth relatively muted and labor improvements few and far between."

For years, economists worried about a low personal savings rate. But now they fear that sustained declines in borrowing could hamper overall economic growth because it will mean less consumer demand. Consumer spending accounts for 70 percent of total economic activity. The drop in consumer credit in May pushed total consumer borrowing down to $2.42 trillion at an annual rate. The Fed's credit report covers credit card debt, auto loans and other debt not secured by real estate. It does not cover home mortgages or home equity lines of credit.

The Con of the Decade Part I
by Charles Hugh Smith - Of two minds

The con of the decade (Part I) involves the transfer of private debt to the public (the marks), who then pays interest forever to the con artists.

I've laid out the Con of the Decade (Part I) in outline form:

1. Enable trillions of dollars in mortgages guaranteed to default by packaging unlimited quantities of them into mortgage-backed securities (MBS), creating umlimited demand for fraudulently originated loans.

2. Sell these MBS as "safe" to credulous investors, institutions, town councils in Norway, etc., i.e. "the bezzle" on a global scale.

3. Make huge "side bets" against these doomed mortgages so when they default then the short-side bets generate billions in profits.

4. Leverage each $1 of actual capital into $100 of high-risk bets.

5. Hide the utterly fraudulent bets offshore and/or off-balance sheet (not that the regulators you had muzzled would have noticed anyway).

6. When the longside bets go bad, transfer hundreds of billions of dollars in Federal guarantees, bailouts and backstops into the private hands which made the risky bets, either via direct payments or via proxies like AIG. Enable these private Power Elites to borrow hundreds of billions more from the Treasury/Fed at zero interest.

7. Deposit these funds at the Federal Reserve, where they earn 3-4%. Reap billions in guaranteed income by borrowing Federal money for free and getting paid interest by the Fed.

8. As profits pile up, start buying boatloads of short-term U.S. Treasuries. Now the taxpayers who absorbed the trillions in private losses and who transferred trillions in subsidies, backstops, guarantees, bailouts and loans to private banks and corporations, are now paying interest on the Treasuries their own money purchased for the banks/corporations.

9. Slowly acquire trillions of dollars in Treasuries--not difficult to do as the Federal government is borrowing $1.5 trillion a year.

10. Stop buying Treasuries and dump a boatload onto the market, forcing interest rates to rise as supply of new T-Bills exceeds demand (at least temporarily). Repeat as necessary to double and then triple interest rates paid on Treasuries.

11. Buy hundreds of billions in long-term Treasuries at high rates of interest. As interest rates rise, interest payments dwarf all other Federal spending, forcing extreme cuts in all other government spending.

12. Enjoy the hundreds of billions of dollars in interest payments being paid by taxpayers on Treasuries that were purchased with their money but which are safely in private hands.

Since the Federal government could potentially inflate away these trillions in Treasuries, buy enough elected officials to force austerity so inflation remains tame. In essence, these private banks and corporations now own the revenue stream of the Federal government and its taxpayers. Neat con, and the marks will never understand how "saving our financial system" led to their servitude to the very interests they bailed out.

The circle is now complete: in "saving our financial system," the public borrowed trillions and transferred the money to private Power Elites, who then buy the public debt with the money swindled out of the taxpayer. Then the taxpayers transfer more wealth every year to the Power Elites/Plutocracy in the form of interest on the Treasury debt. The Power Elites will own the debt that was taken on to bail them out of bad private bets: this is the culmination of privatized gains, socialized risk.

In effect, it's a Third World/colonial scam on a gigantic scale: plunder the public treasury, then buy the debt which was borrowed and transferred to your pockets. You are buying the country with money you borrowed from its taxpayers. No despot could do better.

The Con of the Decade Part I
by Charles Hugh Smith - Of two minds

The con of the decade (Part II) involves sheltering the Power Elites' income while raising taxes on the debt-serfs to pay the interest owed the Power Elites.

The Con of the Decade (Part II) meshes neatly with the first Con of the Decade. Yesterday I described how the financial Plutocracy can transfer ownership of the Federal government's income stream via using the taxpayer's money to buy the debt that the taxpayers borrowed to bail out the Plutocracy.

In order for the con to work, however, the Power Elites and their politico toadies in Congress, the Treasury and the Fed must convince the peasantry that low tax rates on unearned income are not just "free market capitalism at its best" but that they are also "what the country needs to get moving again."

The first step of the con was successfully fobbed off on the peasantry in 2001: lower the taxes paid by the most productive peasants marginally while massively lowering the effective taxes paid by the financial Plutocracy.

One Year Later, No Sign of Improvement in America's Income Inequality Problem:
Income inequality has grown massively since 2000. According to Harvard Magazine, 66% of 2001-2007's income growth went to the top 1% of Americans, while the other 99% of the population got a measly 6% increase. How is this possible? One thing to consider is that in 2001, George W. Bush cut $1.3 trillion in taxes, and 32.6% of the cut went to the top 1%. Another factor is Bush's decision to increase the national debt from $5 trillion to $11 trillion. The combination of increased government spending and lower taxes helped the top 1% considerably.

The second part of the con is to mask much of the Power Elites' income streams behind tax shelters and other gaming-of-the-system so the advertised rate appears high to the peasantry but the effective rate paid on total income is much much lower.

The tax shelters are so numerous and so effective that it takes thousands of pages of tax codes and armies of toadies to pursue them all: family trusts, oil depletion allowances, tax-free bonds and of course special one-off tax breaks arranged by "captured" elected officials.

Step three is to convince the peasantry that $600 in unearned income (capital gains) should be taxed in the same way as $600 million. The entire key to the U.S. tax code is to tax earned income heavily but tax unearned income (the majority of the Plutocracy's income is of course unearned) not at all or very lightly.

In a system which rewarded productive work and provided disincentives to rampant speculation and fraud, the opposite would hold: unearned income would be taxed at much higher rates than earned income, which would be taxed lightly, especially at household incomes below $100,000.

If the goal were to encourage "investing" while reining in the sort of speculations which "earn" hedge fund managers $600 million each (no typo, that was the average of the top 10 hedgies' personal take of their funds gains), then all unearned income (interest, dividends, capital gains, rents from property, oil wells, etc.) up to $6,000 a year would be free--no tax. Unearned income between $6,000 and $60,000 would be taxed at 20%, roughly half the top rate for earned income. This would leave 95% of U.S. households properly encouraged to invest via low tax rates.

Above $60,000, then unearned income would be taxed the same as earned income, and above $1 million (the top 1/10 of 1% of households) then it would be taxed at 50%. Above $10 million, it would be taxed at 60%. Such a system would offer disincentives to the speculative hauls made by the top 1/10 of 1% while encouraging investing in the lower 99%.

Could such a system actually be passed into law and enforced by a captured, toady bureaucracy and Congress? Of course not. But it is still a worthy exercise to take apart the rationalizations being offered to justify rampant speculative looting, collusion, corruption and fraud.

The last step of the con is to raise taxes on the productive peasantry to provide the revenues needed to pay the Plutocracy its interest on Treasuries. If the "Bush tax cuts" are repealed, the actual effective rates paid on unearned income will remain half (20%) of the rates on earned income (wages, salaries, profits earned from small business, etc.) which are roughly 40% at higher income levels.

The financial Plutocracy will champion the need to rein in Federal debt, now that they have raised the debt via plundering the public coffers and extended ownership over that debt.

Now the con boils down to insuring the peasantry pay enough taxes to pay the interest on the Federal debt--interest which is sure to rise considerably. The 1% T-Bill rates were just part of the con to convince the peasantry that trillions of dollars could be borrowed "with no consequences."Those rates will steadily rise once the financial Power Elites own enough of the Treasury debt. Then the game plan will be to lock in handsome returns on long-term Treasuries, and command the toady politicos to support "austerity."

The austerity will not extend to the financial Elites, of course. That's the whole purpose of the con. "Some are more equal than others," indeed.

Prechter says Dow could fall to 1,000
by John Parry - Reuters

Longtime technical analyst Robert Prechter said on Tuesday he expects that as the U.S. economy sinks into a deflationary depression stocks will plunge. The Dow Jones industrial average .DJI stock index could fall to between about 1,000 and 3,000 points over the next five to seven years, he said in a telephone interview. The Dow was trading at 9,754 in early afternoon on Tuesday. "It is very clear there is substantial stock market risk," said Prechter, who urges investors to put their money in cash proxies such as safe-haven U.S. Treasury bills instead.

Prechter is known for his very bearish views on the economy and also for forecasting a big bull market in stocks in 1982 and for getting out before the 1987 market crash. Over the near term, the dollar will remain under pressure against the euro and against the safe-haven Swiss franc, he said.

In early June, Prechter said the euro was about to embark on a near-term rebound of about 10 percent over two or three months because technical indicators showed that amid the euro zone sovereign debt crisis, investors had become overly bearish on that currency. Prechter reiterated that forecast on Tuesday, saying that the euro will continue firming for about another two months, until it has gained about 10 percent. In the past month, the euro has gained about 6 percent against the dollar.

But because Prechter expects that both the euro-zone and the U.S. economies will experience deflation, he prefers investing in the classic safe-haven currency, the Swiss franc. He forecast that the dollar could weaken to parity against the Swiss franc over the next few months. On Tuesday, the dollar was buying 1.0579 Swiss francs. "If you are betting against the dollar, the Swiss franc is a better place to go (than the euro)," Prechter said.

Recent data have shown the pace of U.S. economic growth is decelerating, with housing turning especially weak. "U.S. house prices are about half way down in their bear market," said Prechter, adding that on aggregate, U.S. house prices have fallen about 40 percent from the peak.

Prechter, the president of research company Elliott Wave International in Gainesville, Georgia, is also known for his 2002 book, "Conquer the Crash," which warned about the huge credit bubble that burst a few years later. As companies struggle in an economy that Prechter expects to become increasingly gloomy, he expects junk bond yields to continue widening over Treasuries. High-yield corporate bond spreads have widened to more than 700 basis points now from about 550 basis points in late April, according to Bank of America Merrill Lynch data.

"We think we are back in a widening spread trend between reliable debt and risky debt," he said. "That's a safer bet than forecasting interest rates per se," Prechter added. The bear market in crude oil, which started after prices hit a record $147 per barrel in summer 2008, is not over, Prechter said. Oil should fall below its December 2008 lows of about $32 per barrel, he added.

Illinois Readies $900 Million Debt Sale Amid Fiscal Woes
by Kelly Nolan - Wall Street Journal

Illinois is expected to sell $900 million in taxable municipal bonds in the coming week, just days after its comptroller said the state finished its fiscal year on June 30 in the worst cash position in its nearly 200-year history. The state is scheduled to sell the debt on Wednesday, having moved the date back a few weeks to let potential investors absorb the state's approved general-fund budget for fiscal 2011. The $24.9 billion state budget, which Gov. Pat Quinn signed on July 1, includes about $1.4 billion in cuts. It relies in part on borrowing to help cover what Comptroller Daniel Hynes estimates to be as much as $6 billion in unpaid bills from the past fiscal year. Illinois will also shuffle funds among departments to whittle down outstanding bills.

"We're going to have to put a tremendous focus on paying last year's obligations over the next six months with some exceptions," Mr. Hynes said in an interview. One exception is debt service, 2011 obligations that he described as "our top [spending] priority." Mr. Hynes said Illinois's new budget doesn't solve the state's financial problems. "It really just defers the problems and tries to allow the state to survive," he said. Illinois capital-markets director John Sinsheimer said the fiscal 2011 budget reflects the condition of the state, and potential investors should view it as a step in the right direction. "What I have told investors is that it took 15 years to create these problems," he said in an interview. "It's going to take three or four years to ... correct them."

Mr. Sinsheimer said there should be room for the market to absorb next week's $900 million sale of Build America Bonds, as well as nearly $3 billion in additional debt that the state plans to sell later this year through two separate sales. Pending legislative approval, Illinois may also issue a $3.7 billion pension bond late in the year, he said. Illinois has already issued about $7.8 billion in debt in 2010, most of it taxable, according to Thomson Reuters. Build America Bonds pay more interest than traditional municipal bonds, but unlike munis the returns on BABs are taxable. The higher payout makes BABs more attractive to investors who don't pay U.S. taxes, such as foreign investors and domestic nonprofits like university endowments.

Mr. Sinsheimer said European and Asian investors reacted positively to a marketing road show last month. Foreign investors have bought some Illinois debt in the past, and the state is looking to develop and enhance that relationship, Mr. Sinsheimer said. "They understand and appreciate the efforts being made to address the challenges" Illinois faces, he said. Some potential domestic investors, however, didn't seem as enthusiastic about Illinois's coming Build America Bonds sale, on which Citigroup is the lead book runner. They say they would shy away from the deal. given the state's financial woes.

Richard Saperstein, managing director and principal of Treasury Partners, a division of HighTower Securities in New York, said Illinois needs "a permanent solution" to its budget problems. "Without a permanent increase in revenues and a meaningful reduction in expenditures," Mr. Saperstein said, "they are not going to eliminate their ongoing financial problems." It is likely that Illinois may have to pay a premium on its Build America Bond sale, said Judy Wesalo Temel, principal and director of credit research at Samson Capital Advisors in New York. In addition to budgetary woes, investors also fret over the state's significantly underfunded pension, she said.

The state's relatively lower credit ratings mightn't help either. Along with California, Illinois is one of the lowest-rated U.S. states. Moody's Investors Service and Standard & Poor's give it the fifth-highest of 10 investment-grade ratings, at A1 and A-plus, respectively, while Fitch rates it a notch lower, at single-A. Price whispers on the coming BAB sale have the longest maturity in 2035 potentially going for around 3.40 percentage points, give or take 0.10 percentage point in either direction, over the 4.625% Treasury maturing in February 2040.

40,000 Illinois State Workers To Get 14% Payraises
by Mike Flannery, FOX Chicago News

More than 40,000 unionized state workers got a pay raise last Thursday, bringing to 7 percent the amount they're gotten since last year. These same state employees are in line for another 7 percent by next July 1, all at a cost of a half-billion tax dollars a year. It's more than the virtually bankrupt state can afford, and some Republican lawmakers say the raises need to be rolled back. "I'm outraged," said State Senate Minority Leader Christine Radogno. "It's very difficult to buy this rhetoric that, 'We need to borrow, we need increased revenue,' when these kind of poor management decisions are going on."

For his part, Governor Quinn said the 14 percent pay raise deal was cut by then-Governor Rod Blagojevich in 2008. Quinn did persuade the AFSCME union last year to postpone 2 percent of the pay raise until 2011, the first time AFSCME had ever consented to even a temporary deferment of a pay raise. Quinn and the union also agreed to find $70 million in savings in health care costs. Employees agreed to pay higher health insurance premiums and higher co-pays for health care. "For two years that I've been governor, preparing a budget, the General Assembly doesn't want to do anything very challenging on this area," said Quinn. "They defer everything to the governor. My job is to get the job done for the public. I think we've done that, in as positive a way as possible, under the circumstance."

AFSCME said it's outrageous that Republicans like Radogno have "done nothing to help solve the state's financial problems." The union argues that the state needs to raise taxes. AFSCME's chief negotiator in Illinois, Union International Vice President Henry L. Bayer, responded to Radogno. "I'm outraged Sen. Radogno and her fellow Republicans have done nothing to help solve the state's financial problem," Bayer said. " Where would she cut $9 billion? It can't be done with just cuts. We need more revenue." Bayer and other union leaders strongly support tax increases.

A spokesman for AFSCME said Fox Chicago News and critics of the wage increases had taken them out of context. He noted that the wage increases, which because of compounding are actually larger than 14 percent, come over the life of a four-year union contract. "Fox neglected to mention that Illinois has the nation's fewest state employees per capita. Manufactured controversies like this misinform the public and insult the men and women of state government who care for the disabled, aid the unemployed, prevent child abuse, analyze crime-scene evidence, keep our prisons safe, and perform all the other essential services Illinois residents rely on every day," the AFSCME spokesman said.

The contractual raises are now legally locked in. Any roll back could come only with the union's agreement. Bayer has said that would require a vote of the rank and file state workers AFSCME represents. A threat of massive layoffs would be the most likely source of leverage for any future state official wanting to re-open the union contract.

Texas Budget Mess Now as Bad as California's
by Dave Mann - Texas Observer

It’s come to this: The Texas budget outlook has become so bleak that we’re comparing rather favorably to the one state where balanced budgeting goes to die. People, our budget deficit is now as bad as California’s. Yes, the over-spending, over-regulated capital of hippiedom now has a state fiscal outlook on par with the Lone Star State.

That fact may not sit well with some people—especially in the governor’s office, which loves to bash California and never misses an opportunity to point out how Texas’ low-tax, business-friendly model has led to a more robust economy and sound state finances. When California faced a $60 billion deficit last year—a shortfall that was bigger than the entire budget of most states—you could almost hear the chortling from the Texas governor’s office. It seemed a handy example of what happens when you put big-spending liberals in charge.

It wasn’t that simple, though. The causes of California’s problems—and Texas’ lack thereof—were varied and complex. And now the states’ budget deficits are looking very similar.

Texas: $18 billion shortfall (estimated) or about 20 percent of state spending.

California: $19.1 billion shortfall (official estimate) or about 20 percent of state spending.

The numbers match up pretty neatly.

A couple of caveats: Texas—as you probably know—budgets in two-year cycles. If the budget gap does turn out to be $18 billion (and we won’t have an official number until early next year), that would represent about 20 percent of the $87 billion in state funds that Texas allocated for 2010-2011. California budgets one year at time. But the state spends about double what Texas does. So a $19.1 billion budget gap represents about 20 percent of the roughly $83 billion California will spend this year from its general fund.

Another caveat: I found several different figures for California’s state spending (not counting federal funds). The governor’s office budget proposal seems to show $123 billion in state spending. But the Wall Street Journal and Los Angeles Times both reported about $83 billion, so I’m going with that number.

It’s also worth noting that even though Texas’ budget deficit is very similar to California’s, the Lone Star State is still in a better fiscal position. Texas has better credit ratings and nearly $9 billion banked in the Rainy Day Fund. We also haven’t yet sliced our budget by about a quarter, as California did last year. (And California is losing $52 million a day because state leaders missed their deadline to pass a budget and still can’t agree.)

But if our budget deficits persist, we could very well end up in the same position. The days when Texas leaders could mock California—or at least its budget mess—appear to be over.

Bank of America Admits Hiding Debt
by Michael Rapoport - Wall Street Journal

Bank of America Corp. admitted to making six transactions that incorrectly hid from view billions of dollars of debt, following a bid to cut the size of a unit's balance sheet and meet internal financial targets. The disclosure, made in a letter to the Securities and Exchange Commission, comes as the agency prepares to unveil the results of an inquiry into banks' accounting for borrowing deals known as repurchase agreements, or "repos."

BofA's letter was sent in April in response to the inquiry, but this is the first time the details of the six trades in question have been disclosed. The bank had acknowledged in its last quarterly report that its accounting for the transactions, made at the ends of quarters from 2007 to 2009, was incorrect. The bank's disclosure also suggests the trades may be an example of end-of-quarter "window dressing" on Wall Street, in which banks temporarily shed debt just before reporting their finances to the public. The practice, which The Wall Street Journal has uncovered in a series of articles, suggests the banks are carrying more risk most of the time than their investors or customers can easily see, and then juggling it during quarter-end reporting of financials.

Window dressing isn't illegal in itself. But intentionally masking debt to deceive investors violates regulatory guidelines. BofA said its incorrect accounting wasn't intentional. Apart from requiring more disclosure about the bank's repo accounting, the SEC hasn't taken any action against BofA over the matter. The fact that the letter was released suggests the SEC has concluded its review. Though much smaller in scope, Bank of America's accounting of the six trades is similar to what a bankruptcy-court examiner said Lehman Brothers Holdings Inc. did to make its balance sheet look better before it filed for bankruptcy in 2008. Lehman used a strategy dubbed "Repo 105" that helped the Wall Street firm move $50 billion in assets off its balance sheet, the examiner said in March.

Following the Lehman examiner's report and the Journal disclosures, the SEC said it is considering stricter disclosure and a clearer rationale from firms about quarter-end borrowing activities. The SEC review on repo activity could be released as early as this coming week. A spokesman said Friday that the SEC will release the banks' responses after the agency completes its review.

In its letter to the SEC, which has been posted as a regulatory filing, BofA disclosed details of how it erroneously classified some short-term repos as sales when they should have been classified as borrowings over the past few years. Repos are short-term financing arrangements that allow banks to take bigger risks on securities trades. Classifying the transactions as sales instead of borrowings—as in the Repo 105 strategy—allows a bank to take assets off its balance sheet and thus reduce its reported leverage. In the letter, the bank said its incorrect accounting for the six trades wasn't intentional. "We do not deliberately structure transactions that are economically disadvantageous simply for the purpose of recording a sale or reducing recorded liabilities."

The bank also said, "We believe that our efforts to manage the size of our balance sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements." The intent of the transactions, it said, "was to reduce the specific business unit's balance sheet to meet [the bank's] internal quarter-end limits for balance sheet capacity." The classifications involved as much as $10.7 billion in repos, a relatively small amount for the bank, which has $2.3 trillion in total assets.

The six transactions are known as "dollar roll" trades, executed by Bank of America's investment-banking and capital-markets unit with an unidentified trading partner at the ends of fiscal quarters from 2007 to 2009. Dollar rolls are deals in which mortgage-backed securities are transferred to a trading partner with a simultaneous agreement to repurchase similar securities from the same partner soon thereafter. The practice amounts to a bank renting out its balance sheet for short periods; the bank gets fees, and the client on the other end of the trade gets short-term cash.

BofA says it designed the trades so that the securities coming back to BofA would be similar to but not "substantially the same" as those it transferred out. That would require the trades to be treated as sales that would remove assets from the unit's balance sheet. But the securities that came back to Bank of America were in fact "substantially the same"—the same type, for instance, with the same guarantor and coupon. That means they should have been accounted for not as sales, but as borrowings that wouldn't have reduced the unit's balance sheet. BofA said the accounting error was immaterial to its financial results and had no effect on its earnings.

BofA says it hasn't entered into such trades since early 2009. The errors in accounting for the trades resulted from a deficiency in internal controls, according to a separate letter the bank sent the SEC. The bank says it since has strengthened its controls and re-emphasized to its staff the need to "escalate" consideration of any unusual balance-sheet changes, in particular if they result from "non-normal" transactions near the end of a quarter.

The SEC sent letters in March to 19 large financial institutions asking about their repo accounting. SEC Chief Accountant James Kroeker said in May that the inquiry hadn't found any widespread inappropriate practices. But Mr. Kroeker said the SEC had asked several companies to provide more disclosure about their repo accounting in their securities filings. At least three banks, including BofA, already have done so.

Regulators Close Four More Banks
by AP

Regulators shut down banks in Maryland, Oklahoma and New York on Friday, lifting to 90 the number of bank failures this year. The Federal Deposit Insurance Corporation said it was appointed receiver of Bay National Bank and Ideal Federal Savings Bank, both based in Baltimore. Bay National Bank had $282.2 million in assets and $276.1 million in deposits as of March 31. Ideal Federal Savings Bank had $6.3 million in assets and $5.8 million in deposits. The agency also took over Home National Bank in Blackwell, Okla., with $644.5 million in assets and $560.7 million in deposits, and USA Bank in Port Chester, N.Y., with $193.3 million in assets and $189.9 million in deposits.

Bay National Bank’s deposits will be assumed by Bay Bank, FSB, based in Lutherville, Md., the F.D.I.C. said. Its branches will reopen Monday. The F.D.I.C. approved the payout of the insured deposits of Ideal Federal Savings Bank after failing to find another institution to take over its operations. RCB Bank in Claremore, Okla., will assume Home National Bank’s deposits, the F.D.I.C. said, while Enterprise Bank and Trust agreed to buy $260.8 million of the bank’s assets. New Century Bank in Phoenixville, Pa., agreed to assume USA Bank’s deposits and most of its assets.

America: Optimism on hold
by Alan Beattie and Robin Harding - Financial Times

A month ago, it all seemed to be going so well. Growth in the US economy was picking up. The financial system was, mainly, functioning. The risk of contagion from Europe had diminished after an unprecedented €110bn ($139bn, £91bn) bail-out from the European Union and the International Monetary Fund. Things were creeping back towards normality.

Then in early June, as Alan Greenspan, former Federal Reserve chairman, put it, the economy hit "an invisible wall". The US had a run of bad news – disappointing job growth; unexpectedly low employment; indices suggesting manufacturing and services losing momentum; renewed jitters from Europe’s sovereign debt markets and its banks. While most economists think it unlikely this heralds the famous double-dip recession feared by policymakers, it does come at a time when America’s monetary and fiscal authorities are struggling for room to manoeuvre.

In truth, there was always a risk that growth would hiccup at this point. Fiscal stimulus and companies rebuilding inventories have given the recovery a strong push start. But those are one-off effects; the recovery must now switch to power from its internal engine. "We haven’t entered into that self-sustaining stage yet," says Gus Faucher of Moody’s Analytics, who estimates the chance of a dip back into recession at 25 per cent.

A self-sustaining recovery needs a steady rise in jobs, wages and profits that will allow a steady rise in consumption and investment, feeding back into jobs, wages and profits. So it is worrying that private payrolls rose by only 33,000 in May and 83,000 in June – not fast enough to support a rapid rise in consumption – and both average wages and hours worked have dipped a little.

Business investment has boosted the recovery in the past few quarters but some surveys suggest it is slowing. June’s purchasing managers index for manufacturing fell from 59.7 to 56.2 – implying still rapid but slowing expansion. Nor is the housing market a roaring source of growth. Home sales and housing starts fell in May after the expiry of a tax credit. Prices appear to have stabilised but the IMF recently noted that "the backlog of foreclosures and high levels of negative equity, combined with elevated unemployment, pose risks of a double dip in housing".

All this sounds bad. But as Neal Soss of Credit Suisse in New York points out, there is a big difference between a slowdown in growth and actual falls in economic activity. "The economy is still growing and there’s every reason to think it will keep growing," he says. Like many economists, Mr Soss has always thought the recovery would be slow as households have heavy debts and banks need to repair their balance sheets. One consequence, however, may be recurring alarm about a double dip. "You’ll have some speed-up scares and some slowdown scares," he says. "But if you’re starting from a high level of unemployment, then slowdown scares are more likely to get attached to words like ‘recession’ instead of ‘deceleration’."

The US could really do with a helping hand. Sadly, that seems elusive. If Europe thought the Greek crisis had been solved by the EU-IMF rescue package, it had succumbed to an early bout of World Cup euphoria. It may have eliminated Athens’ immediate financing needs but it did not end speculation that Portugal or Spain would follow. Nor did it quiet fears about the amount of Greek and Spanish debt held by eurozone banks. In the past month, a familiar pattern of risk aversion has re-emerged. Credit spreads of indebted countries widened as investors fretted about the solvency of governments; equities dropped; the dollar and US Treasury bond prices rose as investors sought safe havens. This is not all bad news: higher bond prices equal lower long-term interest rates.

But more than America needs cheaper money, it needs businesses and consumers to be optimistic. "The net effect of the past month on the US has been slightly negative. The purely economic factors cancel each other out but the uncertainty, on top of a poor jobs picture, has not done any good," says Professor Eswar Prasad of New York’s Cornell University. Seeking to rebalance its lopsided economy, the US is embarking on a drive to double exports and thereby create 2m jobs. But plans announced this week by President Barack Obama – a ragbag of bureaucratic shake-ups and trade missions – are regarded by many economists as inadequate. Far more importantly, the global environment for demand looks unpropitious.

With a strong dollar, even higher demand growth in emerging markets is unlikely to give US net trade much of a boost. The flexibility in the Chinese exchange rate announced in June was symbolically important. But the small rises allowed so far will not suck in many US exports. Net trade boosted US gross domestic product by 1.2 percentage points in 2009 but largely because weak consumer spending caused a huge drop in imports. The Organisation for Economic Co-operation and Development, the Paris-based think tank, predicts that imports will grow faster than exports, subtracting from economic growth by 0.3 percentage points this year and 0.4 percentage points in 2011.

Worryingly, a combination of economic and political factors constrains US authorities. Thus any hit to confidence from events such as the Greek crisis are likely to be magnified. On the monetary policy front, Federal Reserve officials are, as yet, not particularly concerned about the health of the recovery. They still think that the most likely outcome is steady growth over the next couple of years. But they do think the downside risks to growth and inflation have risen in recent months, and probably outweigh upside risks such as a surge in bottled-up consumer demand.

So one measure Fed officials will watch is inflation expectations, especially if inflation is very low later this year, which could become a self-fulfilling process. The risk of a slide into outright deflation could prompt easier monetary policy from the Fed. The central bank thinks it has tools available for the unlikely eventuality that it is forced to act. One is buying more long-term assets such as Treasury bonds and mortgage-backed securities. Another is cutting the interest rate paid to banks that deposit money with it. That would increase their incentive to lend money out instead.

But no amount of monetary easing will help if banks do not extend credit because consumers do not want to spend nor companies to invest. And the weapons governments tend to use in such circumstances – spending rises and tax cuts – pose prob?lems more political than economic. On the economic side, bond market investors do not seem worried about the effect of current deficits on US solvency or expecting Washington to inflate its way out of debt. Yields on 10-year Treasury bonds have sunk to very low levels, about 3 per cent, and expected inflation derived from the prices of index-linked bonds remains about 2 per cent.

Less happily for those in the administration who believe in continued stimulus, political support for public spending is eroding. Although recent primary elections ahead of November’s midterms have produced mixed results, some seemed to punish candidates for favouring Big Government.

Administration officials insist that the damage is mainly to candidates who supported the troubled asset relief programme, the federal financial bail-out, rather than government spending in general. But even continuing current stimulus is a struggle. Proposals to extend unemployment benefits and prolong aid to states are snarled in Congress. One senior administration official reports an interlocutor saying: "There are only three Keynesians left in America, and they all work in the administration."

Alec Phillips of Goldman Sachs says: "The potential expiration of stimulus measures appears to be an increasingly important risk to growth." As Treasury secretary Tim Geithner is fond of pointing out, for all the accusations that the US is a fiscal profligate, its deficit is due to fall more sharply in the near future than that of almost any other leading economy, from 10.6 per cent of GDP in 2010 to 5.1 per cent in 2013, compared with a fall from 5.5 per cent to just under 3 per cent in supposedly self-flagellating Germany.

Mr Phillips calculates that if the stimulus bill enacted last year is allowed to expire, including unemployment benefits, aid to states and a special personal tax credit, the effect could be to subtract 2 percentage points of GDP growth – more than half the US trend growth rate – at about the middle of next year. Even a more plausible scenario, in which the unemployment payments and tax credits are extended, would take at least a percentage point off growth throughout next year.

The US economy is not yet in severe trouble. Rises in equity prices over the past few days have comforted optimists that confidence is returning. But the economy’s sputter over the past month indicates just how fragile the recovery is and how dependent America is on generating its own demand. And if it starts to turn down rather than simply to decelerate, policymakers turning to their arsenal will find it dangerously depleted.

IMF issues broad call for U.S. financial prudence
by Howard Schneider - Washington Post

Cut Social Security. Ditch the deduction for interest on home mortgages. Tax gasoline.

The United States recently opened itself to the most intense scrutiny yet by the International Monetary Fund, and on Thursday was offered a bitter pill when the agency criticized some well-defended aspects of American culture -- cheap fuel, subsidized housing, and a government retirement check. In a broad call for U.S. financial prudence, the agency also said the Obama administration was overestimating U.S. economic growth and needed to trim government deficits by hundreds of billions of additional dollars if its announced budget targets are to be met.

The recovery is going reasonably well in the United States, the IMF said, but some of the tougher decisions remain to keep it on track. "The risks are tilted to the downside," David Robinson, deputy director of the IMF's Western Hemisphere department, said as he presented both the IMF's annual assessment of the U.S. economy and its first-ever review of the country's financial sector.

Combined, the reports will feed into a larger effort by the Group of 20 major nations to use peer pressure as a tool in repairing the damage from the recent financial crisis, with the IMF dishing out advice and the other members of the organization poised in judgment of one another's follow-through. The United States and China only recently agreed to let the IMF go beyond the broad economic survey performed annually on all members of the fund and undertake a more detailed review under the fund's Financial Sector Assessment Program. The two countries had been among the most notable of the fund's 187 members to refuse to participate in the financial sector study.

The analysis of China's financial sector is ongoing, and a date for the results has not been announced. The U.S. reports outline a number of problems facing the American economy as it emerges from its worst economic downturn since the Great Depression -- lingering unemployment, a likely permanent loss of output, an expected wave of defaults on commercial real estate deals that could damage local and regional banks -- and include a long list of recommendations for U.S. officials and regulators.

The document did not go over well with the Obama administration, which has made a strong commitment to coordinate global economic policy within the G-20 and agreed with the other members at the recent meeting in Toronto to allow country-by-country "name and shame" reports to be submitted by the IMF when the group gathers for periodic summits. Though the Federal Reserve and other U.S. analysts have started worrying themselves about the strength of the country's economic recovery, Obama said in a Midwest tour on Thursday: "What is absolutely clear is we're moving in the right direction; we're headed in the right direction." An administration official said the IMF's conclusions were too harsh.

"Their economic projections over the next decade are overly pessimistic" and below what many independent analysts forecast, said a U.S. official who was not authorized to speak for the record. The Obama administration's budget for next year, for example, assumes economic growth of close to 4 percent, with growth above 4 percent in the years that follow. The IMF forecast U.S. growth of 2.9 percent in 2011 and slightly slower growth in subsequent years. The agency also assumes that the United States will have to pay slightly higher interest to borrow money in the future.

That's enough to make the difference between a public debt load that gradually stabilizes at about 70 percent of gross domestic product by 2015, and one that under the IMF's scenario would continue piling up and approach 100 percent of GDP by the end of the decade, a level many economists consider unsustainable. To combat that possibility, the agency argues that the United States needs to move more aggressively to both cut spending and raise revenue, to the tune of $350 billion or more above what the administration now plans.

Its recommendations are similar to those made for other highly indebted nations in Europe -- countries such as France, Greece and Britain are all moving to reduce entitlement costs by increasing their national retirement age, for example -- but in a U.S. context may prove politically untenable. Allowing homeowners to deduct their mortgage interest payments from their income taxes, for example, is a staple of U.S. housing policy, considered a way to make homeownership more affordable.

The IMF came out harshly against the deduction, saying that it was part of a homeownership system that was "costly, inefficient and complex," did not demonstrably increase ownership rates compared with similar countries without the same tax incentives, and mostly benefited "the better-off." "Each country is going to have to find the policies that work for that particular country and its values in finding the right fiscal path," said the administration official. "That is something the president's economics advisers are working on daily."

IMF tells Europe to inject more stimulus
by Ambrose Evans-Pritchard - Telegraph

The International Monetary Fund has called on the European Central Bank to prepare fresh emergency action to stabilise debt markets, throwing its weight behind calls for renewed monetary stimulus to offset budget cuts. "Markets are not yet convinced of the central bank's commitment to scaling up purchases if necessary to prevent a further deterioration in market functioning," said the IMF's Global Financial Stability Report.

The IMF called on Europe's authorities to make their €500bn (£420bn) rescue fund is "fully operational" and to explain how they intend to shore up banks that fail stress tests. "Test results will need to be complemented by a plan that specifies how capital-deficient institutions would be handled. Bank reporting and disclosure standards, in general, need to be improved," it said. Credit Suisse said Deutsche Postbank, Italy's Monte Dei Paschi, Greece's Piraeus, ATE, and Helenic Postbank, as well as a clutch of Spanish cajas and German Landesbanken, are likely to fail a rigorous test and will need fresh capital.

The Swiss bank said the real value of the probe is to test whether authorities themselves are ready to rescue any bank in trouble. The backstop funds include Germany's SoFFin with €50bn left, the FROB fund in Spain which has nearly exhausted its €12bn pre-funding, Italy's "Tremonti" fund with €8bn left, as well as the EU's huge Stability Facility "in extremis". While the IMF stopped short of calling for the ECB to launch full quantitative easing (QE), it is clearly worried that the bank's passive policies have allowed credit to wilt and led to fresh strains in interbank lending markets and sovereign debt.

"Downside risks to the recovery have risen sharply. Bank funding pressures may accelerate the ongoing deleveraging process. It is too early to tell if actual bank lending growth will worsen in the euro area, after recently stabilising at barely positive year-on-year rates," it said "In spite of a recent rebound in June, issuance from European firms was especially anaemic, and smaller than in the period surrounding the Lehman bankruptcy. If these tighter conditions continue, they could begin to have a significant impact on the availability of credit to corporates."

The ECB has so far purchased €59bn of Greek, Portuguese, Spanish, and Irish bonds, but has sought to drain any stimulus through "sterilisation" operations. Jean-Claude Trichet, the ECB's president said yesterday that the need for fresh purchases was "progressively diminishing" but pledged that the bank would continue to provide lenders with unlimited liquidity for the time being. With German industry was booming, he said there is no risk of double-dip recession. "I see perhaps a tendency from the outside to be excessively pessimistic. The numbers we have are not confirming this pessimism," he said.

The IMF's implicit criticism comes amid press reports that the US Federal Reserve is drawing up plans for fresh monetary stimulus in case recovery stalls, including more bond purchases. The news story has been widely seen as "kite-flying" by doves on the Fed Board to test the response to a fresh burst of QE.

ECB set for rethink on bond purchases
by Ralph Atkins - Financial Times

The European Central Bank has given the clearest hint yet that its controversial government bond purchases could end as financial market tensions ease and economic prospects improve. Government bond buying by the ECB started at the height of the eurozone debt crisis in early May, when liquidity conditions deteriorated sharply for several countries’ bonds and almost dried up for Greece. Jürgen Stark, an executive board member, said on Friday the declining scale of the ECB’s purchases since then showed how the market environment was better. "If the situation improves further, then there is no need to continue," Mr Stark said.

His comments put the ECB on a collision course with International Monetary Fund, which this week urged it to continue to support bond markets, which it said were "not yet convinced of the central bank’s commitment to scaling up purchases if necessary to prevent a further deterioration in market functioning". The ECB has argued its programme is different from US or UK "quantitative easing", which is aimed at pumping liquidity into the economy. The ECB has "sterilised" the inflationary effects of its purchases by reabsorbing an equivalent amount from the financial system.

Ending the programme would be a relief to some ECB policymakers. Axel Weber, the Bundesbank president and ECB governing council member, had warned of risks to inflation. Mr Stark, a former Bundesbank vice-president, has previously said he shared such concerns. In mid May the ECB bought bonds worth €16.5bn ($21bn, £13.7bn) but that had fallen to €4bn by last week. This week’s purchases, to be revealed on Monday, could be substantially lower. No details have been given but the ECB is thought to have focused on Greek, Portuguese and Irish government bonds.

Tensions remain in European financial markets but at the same conference in Frankfurt where Mr Stark spoke, Jean-Claude Trichet, ECB president, hinted the programme’s aim had been simply to avert a disaster. Asked how the ECB would rate its success, Mr Trichet asked his audience "to reflect on?.?.?.whatwould have happened to the [monetary policy] transmission mechanism if we had not decided what we decided". Mr Stark added that the strength of the eurozone’s recovery had not yet been fully appreciated. "The IMF has not caught up with the reality in Europe," he said. Earlier this week the fund revised down its forecasts for 2011 eurozone growth to 1.3 per cent as a result of "turbulence" in the region.

Eurozone governments had recognised the seriousness of the debt crisis and responded with economic reforms, Mr Stark said. In a clear reference to the US, he warned that other "leading economies" still favoured expansive fiscal policies that would "turn out not to be sustainable". The ECB’s optimism followed data this week that showed German exports had soared 9.2 per cent and industrial production 2.6 per cent in May compared with the previous month.

Europe's Bank Stress Tests May Be Too Little Too Late
by Simon Nixon - Wall Street Journal

The European Union desperately hopes that its bank stress tests will restore confidence in the battered regional financial system. Policy makers are hoping that by demonstrating that the banks are healthy—and recapitalizing those that aren't—they can persuade foreign investors to reopen vital funding markets, restoring liquidity to the system. But what if this exercise comes just too late? What if the problem now goes beyond simply mistrust of Europe's banks, or even the ability of individual sovereigns to meet their obligations? What if foreign investors have simply lost confidence in Europe itself?

The present situation is certainly serious. Dollar funding markets at maturities beyond three months effectively have been closed to European banks since at least April, reflecting the refusal of U.S. investors to lend money to Europe. U.S. banks also are refusing to lend to European banks on the interbank market. A banker who recently returned from Asia said the first question from every banker he met there concerned European counterparty risk. Even within Europe, the repo market is shut to banks from Greece and Portugal regardless of their collateral, according to someone familiar with the situation.

The result is that parts of the European financial system remain heavily dependent on the European Central Bank, which three years into the financial crisis continues to provide unlimited liquidity to the markets at ultra-low rates. Without this liquidity, European funding costs would go through the roof, most likely triggering a financial meltdown across the continent. The ECB can in theory carry on funding the banks like this for years, but as long as the euro-zone banking system remains on life support and private markets remain closed, euro-zone economies will remain vulnerable. The snag is that the sheer scale of the damage to confidence caused by the euro crisis is beyond the capacity of a mere bank stress test—no matter how rigorous—to repair.

For years, global capital flows have been growing, with Europe attracting a large share of the funds. But much of the flow of capital into Europe was predicated on the belief that euro-zone markets were essentially fungible, reflected in the almost complete convergence of sovereign and bank credit spreads. That belief has been dealt a mortal blow. Suddenly, investors have discovered that many of the old reasons that made them steer clear of certain European markets—different political and legal systems, different languages and different regulators—remain in 2010. The euro zone's inadequate governance, widely acknowledged when the euro was created but subsequently forgotten during the boom, has been laid bare.

The restatement of Greece's national accounts damaged the credibility of the entire continent. The slow, uncoordinated response to the subsequent sovereign-debt crisis has left a lasting impression on investors that will take years to repair. The risk that this loss of confidence in European assets might prove lasting was one the Bank of England identified in its latest Financial Stability Report. It warned that European markets risked being squeezed between a flight to safety on the one hand and a flight East and West on the other, with investors increasingly looking to emerging markets in Asia, Latin America and the U.S. for their foreign exposures.

Such a redistribution of risk capital would weigh on prospects for growth in Europe, since funding costs would remain at current high levels, despite the liquidity provided by the ECB. Several European government, for example, are paying substantial yield premiums over German bonds, which increases the pressure on their fiscal position. Longer term, a shift in capital allocations away from Europe toward emerging markets risks causing an overheating of some economies. Some emerging-market central banks already are facing a dilemma, balancing the need for interest-rate hikes to cool domestic conditions versus the risk that higher rates will attract further capital, creating unsustainable bubbles, and exacerbating the global imbalances that lie at the heart of the crisis.

The world needs Europe to tackle its credibility deficit so that it can attract global capital flows once again. But that's probably going to take a lot more than just a bank stress test.

Ingenious solution
Buried away in the new European bank-bonus directive is a clause saying that banks can choose to pay bonuses in contingent capital rather than straight equity. This is unlikely to have been included by accident and is potentially very significant. Contingent capital, bonds that convert into equity on hitting a preset trigger, are potentially a very useful tool to help prevent a repeat of the problems that emerged in the financial crisis, when banks turned out not to have sufficient loss-bearing capital. But the snag until now has been working out who will buy these bonds. Insurers, typically among the biggest buyers of bank bonds, are reluctant to buy anything that risks turning into equity and at the very least are likely to demand a very high price for their support.

But allowing banks to issue them to their employees is a potentially neat solution. The bank gets a cheap source of substantial funding, removing the need to go out and sell bonds in the market. That would enable it to reduce its cost of capital and boost its return on equity, to the benefit of both shareholders and employees who could expect higher bonuses in future. At the same time, the threat of conversion into equity should act as a major incentive to employees not to blow up the bank. Ingenious.

Millions in UK to see private sector pensions reduced
by Myra Butterworth - Telegraph

Millions of people with private sector retirement schemes are likely to see their pensions reduced by as much as 25 per cent after the Government announced plans to change the way they are calculated. Pensions minister Steve Webb said there were plans to link pension payments to a lower measure of inflation. The existing system links pension increases to the Retail Prices Index which includes housing costs such as mortgage interest payments. But the Government plans to link it to the Consumer Prices Index instead, which is typically lower.
The move would reduce the burden on pension schemes and is expected to be introduced next year. It would be applied to all final salary pensions, as well as payments made by the Pension Protection Fund – a lifeboat fund for workers who have lost their pensions – and the Financial Assistance Scheme, a Government compensation scheme. It follows the Chancellor’s announcement in the emergency Budget that most public sector pensions would be linked to CPI, which will also potentially save the Government millions of pounds.

Mr Webb said the same should be applied to occupational pension schemes. "The Government believes the CPI provides a more appropriate measure of pension recipients’ inflation experiences and is also consistent with the measure of inflation used by the Bank of England," he explained. Pensions experts described the move as "crafty", suggesting that millions of people will lose out. Ros Altmann, a governor of the London School of Economics, said: "It is a crafty move and hugely significant. It will mean that British pensioners will end up with less money than they would have been expecting."

Laith Khalaf, a pensions expert at financial firm Hargreaves Lansdown, said: "Final salary schemes just got a break, but at the expense of their members. Millions will be out of pocket as a result of this change. The government is conducting a delicate balancing act between easing pressure on these schemes and protecting the interests of their members." If a person starts drawing a pension at 60 and lives until they are 80, they would receive 25 per cent less in the weeks before they died, according to Mr Khalaf. He calculated that – based on current levels of RPI at 5.1 per cent and CPI at 3.4 per cent - the average occupational pension of £1,600 a year would be worth £4,043 after 20 years if uprated in line with RPI and only £3,020 if uprated in line with CPI. It means that the pensioners would have lost out on £8,120 worth of income.

Mike Smedley, a pension’s partner at accountants KPMG, said: "It will mean that pensions will increase more slowly which from an individual perspective is not a good thing." However, he added: "This looks like a sensible change which will align public and private sector pensions and generally reduce the burden on pension schemes. But we urge the government to make the legislation apply equally to all schemes and avoid a small print lottery for schemes and their members depending on technicalities and details of the Scheme’s legal documents." "We estimate that at a stroke this could reduce the collective pensions deficits of the FTSE350’s defined benefit schemes by around £50 billon."

Patrick Bloomfield, a partner at pensions consultancy Hymans Robertson, said: "The move to enable pension schemes to link future payments to CPI rather than RPI is a ray of sunshine for companies in an otherwise gloomy couple of decades of regulation. "While moving to CPI will result in pensioners receiving less money in their pocket, in the current climate, where businesses are grappling with substantial deficits, the change is sensible and measured."

School is out, but does the final bell toll for London?
by Gillian Tett

On Thursday in London, a clutch of private schools beloved by bankers and hedge fund players broke up for the summer holidays. Some parents were probably wondering if the final farewells could soon follow. During the past three years, there has been endless debate about whether financiers would leave London as a result of the bank turmoil and the ensuing regulatory clampdown. But, until quite recently, there has been little evidence of any real stampede. Most bankers and hedge fund players have tended to assume banking activity would rebound. Most also thought any future regulatory clampdown would be relatively restrained; or, at least, not draconian enough to justify the upheaval of moving away from London, and away from all those prised schools.

But judging from debates that I have recently participated in with financiers and regulators, a mood shift is now under way. For some financial players, the costs of operating in London are finally starting to outweigh those "lifestyle" issues. And while it is hard to track this shift of sentiment with any precision (expect from noting that some high-profile hedge fund players such as Mike Platt have left London for Geneva), there is a good chance this sense of malaise will only grow.

Tax is part of the story. Last year’s one-off banker bonus tax in the UK offered one irritation. The recent rise of the top income tax rate to 50 per cent was another, more important, flash point. And the bitter fight about a rise in capital gains tax last month simply fuelled the sense of grievance – notwithstanding the fact that these rates have "only" been raised to 28 per cent, less than the 40 or 50 per cent that was feared.

However, it should be stressed that the malaise is not just about tax. After all, tax rates in New York, say, are not that much lower than those in London. What is really prompting some financiers to rethink their UK attachment is a more subtle set of doubts about the British government’s commitment to championing the cause of finance within the European Union as a whole, and maintaining the type of pro-market values that Americans, say, tend to take for granted.

The essential issue at stake might be dubbed – somewhat irreverently – the "widget-cheese-finance" debate. Until a year or so ago, it was widely presumed among key global financial players that the British government was operating with an unspoken deal inside the EU. Under this, Germany and France let London operate as Europe’s dominant financial centre, run with pro-market rules; the quid pro quo was that countries such as Germany or France were allowed to keep supporting (if not protecting) their industry and agriculture. Thus, the French kept control of their cheese, the Germans produced impressive widgets – and hedge funds, private equity bodies and investment bankers kept dancing in London, ring-fenced from any anti-market rhetoric emanating from Paris or Frankfurt. Or so the argument went.

But these days, financiers’ faith in this "widget-cheese-finance" pact is crumbling. It is now increasingly clear that Paris is determined to grab more eurozone financial business from London, and less willing to accept the idea that London is "naturally" pre-eminent forever. German politicians seem less willing to tolerate the vagaries of Anglo-Saxon financiers too.

Meanwhile, the UK government itself seems increasingly ambivalent about whether it wants to fight aggressively for London’s role as Europe’s dominant financial centre; and, more importantly, maintain a climate that is explicitly friendly to banks and hedge funds. After all, these days there are not many British politicians eager to defend financiers – even (or especially) in the national interest. The bureaucrats at the Financial Services Authority are also often too distracted or demoralised to fight.

It is little wonder that hedge funds and bankers complain Britain is not thumping the tables hard enough in Brussels about issues that really worry the financial community, such as the latest EU hedge fund directive. Nor is there much trust that London will fend off this week’s bonus rules from the EU parliament. "We just don’t think you have the stomach for a fight," a senior hedge fund player recently told a harassed-looking British diplomat.

This could yet change; some City grandees hope that George Osborne, UK chancellor, will start fighting back against the hedge funds directive this autumn. There are still plenty of financiers in London who want to give the new government the benefit of the doubt, not least because the regulatory environment of other financial centres looks uncertain too. But if this sense of doubt continues, London’s attractiveness will almost certainly ebb, particularly given so much business is already shifting east. When those posh London schools re-open this autumn, most of those hedge funds kids will still be there. In five years’ time, their like may not.

Football Dream Distracts from the Crisis
by Anne Seith - Der Spiegel

Spain is in the grips of football fever -- a welcome distraction from the dire economic reality facing the country. The euphoria can do little to mitigate the appalling consequences of a real estate collapse that has many families facing financial ruin. The celebrations continued well into night on Wednesday, with fireworks, flags, and a lot of beer, noise and excitement. The chorus of horns on the streets went on for hours. And the next day the newspapers only had room for one story on the front pages: the brilliant victory of the Spanish national team over the Germans. "The best in the world," was one headline above a photograph of the Spanish footballers leaping into each others arms with joy.

Fernando Herrero has had little time to celebrate the semifinal victory. The lean 35-year-old with the dark blond hair and hunched shoulders is too busy dealing with billions of euros of debt. Herrero is the general secretary of the Banks and Insurance Consumers' Association of Spain (ADICAE). The consumer protection group has had to step in to help heavily indebted homeowners ever since the real estate sector collapsed. And that means an incredible amount of work. Hundreds of thousands of Spaniards can no longer afford to pay their mortgages, Herrero says. The association fears that this year could see more than 200,000 evictions. In 2008 there were 50,000. The economist, who has been working for the organization since 1998, sits in a bar in Madrid, one like countless others in the city, with simple wooden furniture, and a long glass counter on the bar full of tortillas, Spanish potato salad and other tapas.

Little Chance of a World Cup Boost
Herrero doesn't even glance at the small plate of sausages that comes with his beer. And the football victory doesn't cheer him up much either. "That is a temporary relief for the people," he says, while he checks his Blackberry for the third or fourth time for messages. But the many people who don't know if their money is going to see them through to the end of the month are not going to be saved even by a historic victory in the final on Sunday. The football dream that is currently gripping Spain may well be a distraction but it doesn't change much about the uncertainty in the country. Even during half-time on Wednesday evening this German reporter was asked if Spain was soon to be pushed out of the euro zone.

And when it comes to the question of whether a win on Sunday could give a boost to the economy, Madrid analyst Jorge Lage of CM Capital Markets is rather skeptical: "Only on the very short term, at the most." The euphoria will only continue for a few days, other experts believe. Then the country is going to have to get back to dealing with its problems. In Germany the wild rumors about Spain having to avail itself of a European Union rescue package may have subsided but in Spain itself the politicians and bankers are still struggling with the crisis. Unemployment is now over 20 percent and is affecting young people most of all, while banks are facing significant write downs due to the bad mortgage loans. And so far no one has come up with any answers to the question of how to get out of this mess.

'We Lived Beyond Our Means'
First and foremost, the difficult legacy of the immediate past has to be worked through. Ever since the property bubble burst and houses and apartments rapidly lost value, millions of property owners have been fighting for their very existence. Between six and eight million Spaniards have gone into debt to buy property, ADICAE calculates -- about 20 percent of the population. And there is no possibility of declaring private bankruptcy in Spain. "We lived beyond our means," says Herrero soberly. The entire country indulged in unbridled consumerism for years. "As soon as a new iPhone or the latest PlayStation was available, people would get in line." And many consumers paid no attention to how they were supposed to finance this lifestyle, "because the banks were completely irresponsible when handing out loans," Herrero says. Money was simply thrown at the Spanish people. With the blessing of the politicians.

The seemingly endless generosity of the financial industry took on absurd forms: customers were sent credit cards without requesting them. Some of them came with a credit limit of several thousand euros. Loans for new cars could be spread out over decades. Things got truly wild when it came to financing real estate purchases. Huge sums were handed over with practically no security. "We had a 21-year-old student come to us who had been given a loan of 180,000 for her apartment," says Herrero. "A young woman with no income whatsoever. Absurd." There was of course a catch. "Ninety-five percent of loans had variable interest rates attached."

Banks Turn Off Tap
For awhile, everything went well. But once the real estate bubble burst, the country's construction industry collapsed and economic growth came to a screeching halt. Furthermore, many highly-indebted homeowners lost their jobs. It was a perfect storm of debt. Indeed, enormous private debt is now perhaps the country's biggest problem. In addition, many construction firms were also involved in mega construction projects -- schemes which have since proven to be terrible investments. And then the banks simply turned off the money tap. With sometimes bizarre results.

Fran Ameijeiras, 35, is one of those who should be regarded as a beacon of hope for the crisis-ridden country. He runs a chic bar with his British wife Ellie Baker, 29, in the hip Almirante Street. The bar has plush red furniture, black leather chairs, and a new "Churchill Lounge," where dark green wood paneling lines the wall. The menu includes specialities like kangaroo meat and several types of gin. Ameijeiras used to have a solid bank job. Now, he and his wife often work in the bar day and night, particularly during the World Cup, leaving little time for their two-year-old son. But the business is doing well, says Ameijeiras, who hails from Galicia.

The Bristol Bar's clientele is upscale and have been largely unaffected by the crisis. As a result, the young couple recently began thinking of opening a second bar. "We asked six banks," he says. Three didn't even reply, while two rejected the request immediately. In the end the project died. Ameijeiras looks resigned. When he and his wife started out four years ago, after coming up with a dream to produce their own gin, "they practically gave me the money." Back then he didn't even have to produce any documents. This month, though, Ameijeiras is content to profit from the football frenzy. Even if the euphoria only lasts a short while, it means a few more days of people bellying up to the bar -- and philosophizing about the wondrous feats of their national football team.

The Submarine Deals That Helped Sink Greece
by Christopher Rhoads - Wall Street Journal

As Greece slashes spending to avoid default, it hasn't moved to skimp on one area: defense. The deeply indebted Mediterranean nation, whose financial crisis roiled the global financial system this year, is spending more than a billion euros on two submarines from Germany. It's also looking to spend big on six frigates and 15 search-and-rescue helicopters from France. In recent years, Greece has bought more than two dozen F16 fighter jets from the U.S. at a cost of more than €1.5 billion.

Much of the equipment comes from Germany, the country that has had to shoulder most of the burden of bailing out Greece and has been loudest in condemning Athens for living beyond its means. German Chancellor Angela Merkel has admonished the Greek government "to do its homework" on debt reduction. The military deals illustrate how Germany and other creditors have in some ways benefited from Greece's profligacy, and how that is coming back to haunt them.

Greece, with a population of just 11 million, is the largest importer of conventional weapons in Europe—and ranks fifth in the world behind China, India, the United Arab Emirates and South Korea. Its military spending is the highest in the European Union as a percentage of gross domestic product. That spending was one of the factors behind Greece's stratospheric national debt. The German submarine deal in particular, announced in March as the country lurched toward bankruptcy, has cast a spotlight on the Greek military budget and on the foreign vendors supplying the hardware. The deal includes a total of six subs in a complicated transaction that began a decade ago with German firms.

The arms sales are drawing heat from Turkey, Greece's neighbor and arch-rival. "Even those countries trying to help Greece at this time of difficulty are offering to sell them new military equipment," said Egemen Bagis, Turkey's top European Union negotiator, shortly after the sub deal was announced. "Greece doesn't need new tanks or missiles or submarines or fighter planes, neither does Turkey." Greece's deputy prime minister, Theodore Pangalos, said during an Athens visit in May by Turkish Prime Minister Recep Tayyip Erdogan that he felt "forced to buy weapons we do not need," and that the deals made him feel "national shame."

Other European officials have charged France and Germany with making their military dealings with Greece a condition of their participation in the country's huge financial rescue. French and German officials deny the accusations. A spokesman for German Chancellor Merkel says the submarine transaction was the culmination of an old contract signed long before Greece's debt crisis. In May, France's defense ministry said Greek authorities have confirmed their willingness to pursue talks on several arm-procurement deals.

In May, Greece's economic crimes unit began investigating all weapons deals of the past decade—totaling about €16 billion—to determine if Greece overpaid or bought unnecessary hardware. German prosecutors are investigating whether millions of euros in bribes were paid to Greek officials in connection with the sub deal. In May, the chief executive of one of the German companies helping to build the submarines, called Ferrostaal AG, resigned amid the probe.

For some prominent Greeks, the latest submarine deal was the last straw. In late April, Stelios Fenekos, a 52-year-old vice admiral of the 22,000-person strong Greek Navy, resigned his position, bringing a three-decade Navy career to an end. He says he did so to protest the Greek defense minister's decision to purchase the subs, as well as other decisions taken in recent months that Mr. Fenekos considers "politically motivated."

"How can you say to people we are buying more subs at the same time we want you to cut your salaries and pensions?" says Adm. Fenekos, in his first interview with a reporter. He was referring to the government's 5% cut in most pensions and even deeper slashes to public-sector wages enacted in response to the crisis. The Greek Navy, he says, cannot afford to maintain the additional submarines. It currently has eight subs. A spokesman for the Greek Ministry of Defense said Mr. Fenekos' resignation was accepted. In stepping down, "Mr. Fenekos did not refer to the submarine deal," he said.

Greece became the first battleground in the Cold War, with the U.S. backing anti-Communists in the Greek civil war in the late-1940s against Communist insurgents. The conflict led U.S. President Harry Truman, in 1947, to pledge unlimited military support for nations under Communist threat, known as the Truman Doctrine. While the rest of Western Europe used U.S. aid to rebuild its economy from the second World War, in Greece, the emphasis was on building up the military. "Greece became the front line in the Cold War, and that began, right then and there, the Greek economic crisis of today," says Andre Gerolymatos, a professor of Hellenic studies at Simon Fraser University in Vancouver.

By the mid-1950s, the U.S. pulled back aid, much of which had been in the form of military hardware, shifting much of the burden for Greek military spending to Athens By this time, Greece's worsening relations with Turkey led to yet more arms spending. Despite being fellow members of the North Atlantic Treaty Organization, the two nations are bitter rivals. The discovery of oil in the northern Aegean Sea and disagreements over territorial waters and airspace became the source of numerous—and expensive—altercations between the two countries.

An incident in 1996, involving a Turkish ship running aground on a rocky, uninhabited Greek islet, almost led to war. Greece later that year announced a 10-year modernization program of its armed services, costing nearly $17 billion. The U.S. over the years catered to the two NATO members under a 7:10 ratio, meaning for every $7 million dollars of equipment it sold to Greece it sold $10 million to the more populous Turkey.
It was in that environment that Greece in 1998 went shopping for submarines. It decided on three German-built class-214 submarines, a state-of-the-art diesel-electric powered vessel, with the option of buying a fourth—for a total of €1.8 billion. The first was to be built at the Kiel headquarters of Howaldtswerke-Deutsche Werft GmbH, with the others built at the affiliated Hellenic Shipyards SA, in Skaramangas, Greece.

The arrangement, called the Archimedes Program, would preserve thousands of jobs at the Greek shipyard. Greek officials in 2002 expanded it to include the modernization of three older class-209 submarines—work to be done at the Skaramangas shipyard using materials and help from the Germans. The increase would cost another €985 million. The German side consisted of a company owned by German truckmaker MAN SE, called Ferrostaal, and Howaldtswerke-Deutsche Werft, now owned by ThyssenKrupp Marine Systems AG. (MAN has since reduced its stake in Ferrostaal to 30%.) The total cost of the new and renovated subs: €2.84 billion.

As the military expenditures rose, Greece's two main political parties used them as a political football, each trying to make the budget deficit figures look worse when the other was in charge. When the Socialist government first bought the submarines, it post-dated the accounting for them to the day when the vessels were to be delivered, rather than when they were purchased. The government at the time was struggling to meet budget criteria for entry into the euro zone, which it joined a year behind other members in 2001. Pushing back the expenses saddled the bill with the Socialists' successors, the conservative New Democracy party, which came to power in March 2004.

 The New Democracy government that year then used a similar tactic, by retroactively accounting for the expenditures on the date of purchase. That inflated the budget deficits of the previous government—while making it easier for the New Democracy government to meet its own deficit goals. Both accounting methods at the time were allowed by the European Union. The resulting massive deficit revisions made in 2004 for the previous years—4.6% of gross domestic product versus 1.7% for 2003—triggered an investigation in 2004 by Eurostat, the European Union's statistics agency, to understand what caused the revisions. The findings did not result in any sanctions.

Military spending accounted for nearly a quarter of the difference in the 2003 figures, and even more in revisions made on the deficits for preceding years. After the Socialist party, PASOK, returned to power in October 2009, it made a similar maneuver: It announced the federal deficit was much worse than the outgoing government had let on, mainly due to public hospital debts, setting in motion the financial crisis.

Meanwhile, not one of the subs had been delivered. When Greek officials traveled to Kiel to test the first sub, called the Papanikolis, they said that they found that in certain sea conditions the submarine listed to the right. "The Navy said we cannot accept this sub," said Mr. Fenekos, the admiral who recently resigned. "But the politicians did not want to stop it because they needed the production for the workers in the shipyard here." ThyssenKrupp Marine Systems said the criticism was baseless and was made to delay payment. By last fall, Greece had paid €2.032 billion, about 70% of the total owed. With the deal at an impasse, the German companies cancelled the contract.

Finally, in March, the two sides announced they had begun negotiating a new deal. Instead of having three older subs modernized, just one would be modernized, and Greece would buy two additional new ones, bringing the total to six new submarines—costing a total of €1.3 billion. Abu Dhabi MAR LLC, a shipbuilding company in Abu Dhabi, would buy 75.1% of the Greek shipyard, with the expanded submarine deal a condition of the sale. The Greek government finally accepted the sub, with the understanding it would immediately resell it. No deal has been finalized.

Greece's defense minister, Evangelos Venizelos, speaking to the Greek parliament in March, explained that the deal was an attempt to end the mess, to "sever the Gordian knot" that the new government had inherited. With 1,200 shipyard jobs at stake, Germany demanding concessions on the complex deal, and Greece having already paid two billion euros without receiving a single sub, the new arrangement was necessary, he said.

But in February, just as a solution appeared to be at hand, German prosecutors in Munich began turning up evidence of unsavory dealings, according to records of their investigation. Ferrostaal executives authorized payments worth millions of euros to politicians to win the initial deal in 2000, through a Greek company called Marine Industrial Enterprises, according to the Munich prosecutor's records. To do this, Ferrostaal used sham consulting contracts, according to the records. That company then distributed payments to "officials and decision-makers" in Greece, according to the records. The investigation is ongoing. No charges have been filed.

Adamos Seraphides, chairman of MIE Group Limited, a successor company to a division of Marine Industrial Enterprises, said he doesn't believe that the company's prior leadership was involved in bribery. In March, police searched Ferrostaal offices, in Essen, seeking evidence of bribe payments. In May, several executives stepped down. "Ferrostaal will continue to pursue the intensive dialogue with the state prosecutor's office in Munich and has pledged full and comprehensive support and cooperation," says a Ferrostaal spokesman. A ThyssenKrupp spokesperson says the company got into the business only in 2005, when it bought Howaldtswerke-Deutsche Werft.

Despite the tortuous, decade-long journey of the submarine deal—and Greece's precarious financial standing—Germany stands ready for more business. Guido Westerwelle, the German foreign minister, in February told a Greek newspaper that Germany doesn't want to force Greece to buy anything. But "whenever it comes to the point when it's ready to buy fighter planes," a European fighter-plane consortium, which Germany represents in Greece, "wants to be considered in the decision." A spokesman for Mr. Westerwelle says the minister didn't discuss fighter sales with the Greek government during the visit.

Scientists urge U.S. to move quickly to study Gulf oil spill
by Renee Schoof - McClatchy Newspapers

Frustrated with limited data on the BP oil gusher, a group of independent scientists has proposed a large experiment that would give a clearer understanding of where the oil and gas are going and where they'll do the most damage. The scientists say their mission must be undertaken immediately, before BP kills the runaway well. They propose using what's probably the world's worst oil accident to learn how crude oil and natural gas move through water when they're released at high volumes from the deep sea.

The scientists also want to see how the oil breaks down into toxic and safer components in different ocean conditions, information that would help predict which ocean species are most at risk. The experiment also could provide data that would help in dealing with any future spills. "Without this understanding, we're no better off when the next one occurs," said Ira Leifer, a researcher at the Marine Science Institute of the University of California at Santa Barbara who's leading the team that's proposed the experiment.

Since the Deepwater Horizon drilling rig exploded and sank into the Gulf of Mexico in late April, more than 200 million gallons of oil have gushed from the blown well. McClatchy reported last Friday, however, that many experts say the overall scientific evaluation of the spill is surprisingly uncoordinated, and that federal officials and BP have failed to mount a speedy, focused inquiry to understand its impact. The plan calls for about two weeks of experiments with two research vessels and robotic vehicles at a cost of $8.4 million. The scientist would use monitoring equipment and sampling to conduct experiments at various levels in the water column.

Leifer said BP should pay for it, or the federal government should pay and send BP the bill. The choice is really up to BP, he said. "You can either let science happen and everyone wins, or you're going to find yourself torpedoing that. It's going to look bad in the history books when people look at it, and maybe in court," Leifer said.

Scientists from universities, oceanic institutions and the National Oceanic and Atmospheric Administration have been tracking the layers of partly dissolved oil. NOAA has six research vessels in the Gulf working on assessing the damage from the spill. Leifer said that while those researchers were looking for where the oil was, a larger experiment was necessary to test hypotheses and learn how to make better estimates. It's not clear whether any federal agency agrees. The Department of Energy hasn't been approached about the project, spokeswoman Stephanie Mueller said.

Leifer has prepared an 88-page technical report, and he said he could get the experiment under way quickly. It's not clear, however, whether any funding proposal could clear the necessary scientific review in time. Leifer said he hoped that BP would see it as in its own interest to fund the study. BP didn't respond to queries.

Rep. Edward Markey, D-Mass., wrote to BP on June 10 asking for funding for a simpler, earlier version of Leifer's plan. Markey said through a spokesman that it "could help answer some of the fundamental questions about this catastrophe and help us prepare should there be a next one. It is worth serious consideration by BP." Leifer's team is made up of 15 experts on oil and gas in the ocean. He and some of the others also worked on the federal government's Flow Rate Technical Group, which was formed to get a better estimate of the size of the disaster. Leifer said the group did the best it could with limited data provided by BP. The latest official estimate is that 35,000 to 60,000 barrels a day are flowing from the runaway well.

Leifer's proposed experiment could help improve the estimate, but because the flow amount can change over time, it would still be impossible to come up with an accurate amount, he said. "We're trying to figure out not just how much is coming out, but where it's going," Leifer said. "The question is where is it going, why is it going there and what is it killing?" The information also will help scientists predict what will happen when conditions change; for example, when the loop current shifts and temperatures rise. McClatchy reported last Friday that many experts say the overall scientific evaluation of the spill is surprisingly uncoordinated, as federal officials and BP have failed to mount a speedy, focused inquiry to understand its impact.

Leifer has dubbed the new proposal "Deep Spill 2." The first Project Deep Spill was an experiment off Norway in 2000 in which mixtures of crude oil, diesel oil and natural gas were released half a mile below the surface of the ocean to simulate a blowout. The study was a joint project by the U.S. Minerals Management Service and 23 oil companies. Leifer was part of a Department of Energy-funded experiment last summer on a natural oil seep near the Deepwater Horizon site. The earlier experiment looked at the effects of methane seeping into the atmosphere. "We want to repeat the effort much more thoroughly, because the stakes are much higher with the oil spill," he said. "It would be inexcusable not to learn from this."


Gravity said...

Suddenly, swaps!
Thousands of them!

Suddenly, Gravity's a recursive algorithm! Thousands of them!

lautturi said...

Yep, we are indeed stretching what could be called fraud, cheating etc.

I found this article recently and it gave me a bit of a smile: US isn't number 1. Of course as a Finn the biggest laugh was about Finland as a country with no corruption.

Our good leaders use the words way of the country (maan tapa) with issues like election related money transfers etc. I'm sure Orwell would be proud of them/us. And the dance goes on... kudos to Mr Bageant.

z0rs said...

go Holland!


walker said...

Perhaps it's not intended, but the preceding discussion seems to treat the Government's actions with F&F's balance sheets as somehow separate from every other bit of shenanigans with the financial "industry" at large. Surely the nonsense with F&F is done for and largely at the behest of the big financial institutions that appear to call the shots in DC. So, I applaud the Republicans for going part way - but why don't they call for the same for ALL the toxic crap hidden in the vaults of big finance institutions? Just more political BS and grandstanding for suckers, that's why.

EconomicDisconnect said...

Wow, from the picture those pistons are huge! Maybe they were for plane engines? Tanks? Who knows.

The Charles Smith essay was very strong.

rks said...

Money is different between the government and the people. People/organizations can move real wealth into the future by the following trick. First you take some money and put it in the money box. This reduces the amount of money in circulation chasing the same number of goods. So it creates a tiny bit of deflation: moving the real wealth into all the other money circulating. When you take the money out of the money box this increases the amount of money chasing the same number of goods. It causes a tiny bit of inflation that transfers real wealth from the money that was circulating into the money taken out of the money box. This obviously can't transfer a fixed amount of wealth: it depends on the real wealth and money circulation issues at the time you take the money out of the money box. Most importantly: Governments can't do this. Governments can't move real wealth into the future through money. Governments move real wealth into the future by stockpiling durable commodities and building productive infrastructure. Everything governments do with money should be designed to make the economy work as well and fairly as possible. Talking as if the governments monetary dealings are the same, or even remotely similar, to the dealings of people and organizations is incorrect.

NZSanctuary said...

Linda said...
Steve: I too struggle with the Buddhist "No attachments, No Expectations, No Desires..." The Gulf Oil Spill is painful in the extreme for millions of us, no matter where we live. Cannot reconcile my individual life with All That IS and be complacent.

Acceptance and non-attachment does NOT mean complacency (nor lack of love, or any of the other silly things attributed to non-attachment).

Acceptance means not lying to yourself, and is really only achievable when as much bias and illusion is stripped away as possible. When you accept something for what it is, then you can act. If you fail to accept something for what it is how could you possible act appropriately? Your actions would merely be reactions to your own bias, false premises and so on.

Non-attachment means being able to let go. Most importantly this has to do with your own beliefs/biases, but also "things". Clinging to something is a lie. A loved one, a freehold house, a clean beach, an unpolluted world... as these things die/are destroyed, we cannot cling to what we think should be. We must accept what is, or else live in a dream constructed of our own lies. Acceptance/non-attachment does not preclude fighting to eliminate further pollution, or to clean up the beach, or to change monetary systems or the founding structures of society. In fact, without acceptance, you cannot deal with these things properly.

No expectations/desires is simply another way of saying we cannot comprehend the full complexity of reality. We cannot know how a relationship will unfold, or a day, or a conversation. Instead we should steer the ship of life where we wish to head and then enjoy the ride. Enjoy experience. Actually experience experience. Don't predefine what you expect to happen, because invariably things will turn out a little different, and perhaps a lot different. If you cling to your expectations you will be frustrated. You can still be dogged – you can still strive to achieve something – it is not a mutually exclusive deal.

Unhappiness is the product of illusion – clinging to expectations/desires. Useless action is the product of not being able to accept the world the way it is now.

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


Sent a e-mail to that apiary.If they have what I need,You have done a good thing[big smile]thanks.

I have been checking other forums I lurk at...There is so very many crisis ready to pop,from war with Iran,to the gulf,to the Ongoing "disaster capitalist United States of chaos"my head is spinning.I continue to work on the life raft,but so many unknowns...

Staying busy is good medicine for the high-proof doom filling the airwaves...It would be good for my digestion if things would quiet down,just for a bit.It keeps looking as if the whole world is walking on a razor blade...slip either way,slip either way and we will lose some "essential"hardware..
Bee good or,
bee careful


ben said...

since we're on the topic, here is a brief article by the post-Zen Toni Packer of the Springwater Center. She is heavily influenced, (Ahimsa), by J Krishnamurti.

perhaps a retreat would be in order before the bond dislocation.

scandia said...

@ lautturi and Tero...I do not want to hear about corruption in Finland!
The meme of being an " Honest Finn " has been so strong I never considered I had a choice to be any other way.
I am quite upset to learn that some in the " old country " are letting the side down!
Is corruption part of the public discourse these days in Finlnd? Or, as here in the " new " world ,are there different rules/rewards for corporations and citizens?
Oh please tell me no...
I may have already told this story in TAE but when I was a child enjoying an entirely Finnish community at the lake a neighbour stole toilet paper from an outhouse. She was ostracized as a result. My unbending Finnish grandmother never spoke to the thief again although they had been life long friends. Nor did my grandmother attend her funeral.
Being an alert child I learned to never steal. My grandmother did not teach forgiveness.

Bigelow said...

“Currency wars. Well at least a Phony War for now. See, nothing has happened. All is well. Move along. Nothing to see here. Status quo intact.

The US sovereign debt gets a stiff downgrade, cut down from number one in the world, to a distant thirteenth place. Governments like China do not take actions like this randomly, and their quasi-state organizations do not march to the beat of their own drummer. It will be interesting to watch this develop, and calculate the strategy, to figure out the next steps.”
China Ratings Agency Downgrades US Debt From Moody's, S&P's, and Fitch's AAA Rating

bluebird said...

Ilargi said "There are very few Americans who have any idea how bad the situation is their country is in."

Spouse told me this morning that I talk like armageddon is coming. He is totally in denial, that no way could things get that bad in this country. Never happen.

Unknown said...
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Biologique Earl said...

A Quick Primer On Why Everyone Thinks The Economy Is Headed Into The Toilet Again - Business Insider:

Worth reading.



Top Hat Cat said...

The Scam U.S. "Rating Agencies" (cough,gag,cough), Moody's, S&P's, and Fitch's should have been drawn and quartered long ago. A real national MSM with integrity would have ripped them apart like a pack of wild dogs, but alias, 'Merika only has a six pack of streetwalker's mini-poodles.

And because the average American 'investor' (mark) thinks that they actually know how to think, well, the criminal fraud of the "rating agencies" Con just Keeps on Trucking.

It's amazing how both 'professional' and self styled 'shrewd' investor's can keep buying the same Dead Parrot from the "rating agencies", again and again and again. A Bottomless Pit of lame excuses for doing the Wrong Thing.

The whole upper echelon of all of the Big Three flim flammers have should have all been indicted under Racketeer Influenced and Corrupt Organizations Act statues by now.

Moody, S&P, and Fitch are guiltyguiltyguilty.

String'em up. Hang'em high. Let the axe fall.

Not a whisper from our fearless OB-1's "Justice Department" (cough,gag,cough).

Que pasa?

China's dropkick to the groin on rating agency integrity will be predictably propagandized over by The Owner's® bicycle-seat sniffing lackeys in the MSM Brothel.

The only AAA left in 'Merika is the car club.

Buckle up kids.

Drive safely.

btraven said...

@ NZSanctuary - I appreciate your clarifications on Buddhism for Linda. It seems many people seriously misunderstand the essence.

This is how I sum it up for myself:

"High involvement, and low attachment to outcomes."

zander said...

@ Scandia

I'm either ENTJ or INTJ, scored equal on the intro/extro question.
I do think however that whatever the result of this test is, (and I read 'em all), the description of each category is a broad generalization of any given individual's M.O. and felt numerous outcomes applied to me in one way or another, akin to the math equation used by charlatan clairvoyants to eke out a correct prediction on the balance of probability. Good fun though.

And on the WCF. Since we all bang on here about denial, theres no point beating about the bush, the best team won easily, Holland were simply woeful. Cruyff must have been cringing.


lautturi said...

Scandia, my dear friend - honesty is for "little" (less important, economically not so savvy, whatever) people only. And yes, little people in general are still pretty honest. Youngsters - well - TV, internet, ponr, more TV, Armorica-worshipping etc. has certainly wrecked havoc.

Depression in early 1990s started many problems as Miltoniets had a field day with 20% unemployment. 40% depreciation of old currency and Nokia allowed our fearless leaders to ride gallantly boasting about our economic miracle (collecting high positions with good pensions, supporting insiders - you know the drill).

Funny thing about that depression - happened only 20 years ago and no leader believes it can return. Not many sub-40s either, judging from house prices. Just last week small people got suggestions to go into debt to buy stocks! No new Nokias to rescue this time either... Things will get interesting with Europe's top oil usage, too LOL

One issue I've found disturbing is how 20 years ago my grandma had only a broom locking door... Anybody could come and go (and did), usually enjoying a cup of coffee on the house, too. Nowadays that would be unimaginable.

No wonder our overlords tried pushing emergency law last year (allowing shut-down of pretty much everything, use your imagination). That didn't fly very well but new parliament next summer will undoubtedly have that one waiting.

For what it's worth I've often told others that in sh!t appears to float no matter what. Some understand that pretty quickly, others...

Ellen said...

Ilargi said "There are very few Americans who have any idea how bad the situation is their country is in."

That's because so very many Americans are so pathetically ignorant. How can they know how bad the situation is, when they don't understand it in the first place?

Just watch this. To the end. Jay Leno asking questions on the 4th of July.

Ruben said...

Will the Chinese downgrade of US debt affect the flight to safety in the US dollar? Or are there enough people for whom the US dollar is the--ahem--gold standard.

snuffy said...


they are not selling queens or bees at this time..

oh well
Bee good or
Bee careful


Anonymous said...

~J~ said... (yesterday)

this isn't really rain per se, but like Ahimsa said, single droplets.
Is that the same as what you experienced?
July 11, 2010 12:38 PM

The intermittent "rain" appears to have no water or moisture -- alcohol or other chemical, perhaps, as Gravity suggests in comments of July 8. What happens is that I see the drop fall in my field of vision, it lands on my arm or shoulder (once in my eye while I looked up!), I look at the spot where I felt it land and there is no trace of moisture or wetness on my skin. It makes one think that one is delusional, but it is not the case. My husband experienced the same thing while on our daily walk. I guess one has to be outside and sleeveless for an extended period of time to experience this so-called rain.

@ I.M. Nobody

I have lived in both southeast and southwest Florida almost all my life (I'm 59) and I've never experienced this sort of rain. I'm acquainted with the mostly steady light sprinkle on a fairly clear day in south Florida, no lightning. Such a rain is delightful, especially if one is wading at the seashore. But, the intermittent "rain" we have witnessed since around mid-May -- a drop might fall now, the next drop in 40 seconds and the next one in 4 minutes -- is totally different.

Anonymous said...

NZSanctuary @10:21 PM

Thank you for saying so well.

Archie said...


I have vacillated over time between INTJ and ENTJ.

FWIW, according to Wikipedia that puts us in the 2-4% that are either "masterminds" or "field marshalls". Wouldn't be surprised to find that Vicente del Bosque is in our group as well.

bluebird said...

@samsara - I am appalled of the ignorance of these Americans of basic questions about their country.
As Joe Bageant writes (from a few days ago), most people are too clueless to be in denial. Sad, Sad, Sad. As my mom would say, We are in for a rude awakening.

Gravity said...

From what you've said so far about the physical effects that seem to be caused by exposure to these droplets, slight irritation on skin contact, I would suggest you try and avoid extended periods of outside sleevelessness as long as this phenomenon is occuring, it could be a manifestation of that toxic rain people were warning about.
You seem to enjoy outside time, so it would be a bother, and I'm not trying to fearmonger, it could be unrelated and completely harmless, but as this seems to suspiciously coincide with the disaster some precautions may be prudent. If possible, try and obtain a sample, the instant disappearance of these droplets might pose a problem, perhaps an absorbent sheet of cloth may be able to catch them, then some groups of independently concerned toxicologists should be willing to pay for analysis. Hopefully nothing especially bad turns up and your fears can be alleviated.

ccpo said...

Some articles say it all: half the economy choked off from credit, and it's the part that is real and not just a bunch of paper magically turned into a loaves and fishes for all.

Very healthy, if you ask me.

When I'm drunk sitting on a bar stool talking to a dolphin in an alternate universe, eh, Zaphod?

scandia said...

@ Zander...your scores help explain the ease of communication I feel with you as we are the same type. After a couple of years in a Gestalt group my extreme T score became a mid range F. I was pleased about that.

@Tero & Lautturi...ouch response to that little people comment. Yes, I relate to the little people.
I am one of that class.
Honesty,honour,integrity,accountability are qualities that don't scale up successfully. They are so human and personal. Hard to systemize virtue.
All that said Finland has an opportunity to pull back from the debt machine as I think there is still that distaste for indebtedness in the Finnish heart. I'm counting on you!
One can't join my concept of a masterclass if one has debt.One is already compromised.

VK said...

Question for the regular commenter's and the peanut gallery;

Today's article on Robert Prechter, saying that the Swiss Franc is a safe haven? I just don't get that. This is a country with two hugely overleveraged banks - UBS and Credit Suisse with Assets that are 9x Swiss GDP. As the asset price collapse continues, there is no way that the Swiss Govt. can bailout the two entities. So why again is the swiss franc a safe haven?


scandia said...

@ Ben, thanks for the post on awareness...a helpful reminder to take time to sit, to be still.
I have also been exposed to this teaching through my cat, her unflinching, non judgemental gaze...

Phlogiston Água de Beber said...

@ ~J~ and Ahimsa

The rain I wrote about in Northern Florida almost 50 years ago, was a nice steady shower that would get you good and wet and sometimes lasted for a few minutes. It fell from an absolutely cloudless sky. Perhaps it was something unique to that microclimate.

A raindrop that instantly evaporates either contains something that is not water or the relative humidity is vanishingly low, which seems pretty unlikely where you folks are.

I think I would start to worry just a little bit more.

scandia said...

@VK...I have been wondering the same thing although I didn't read Prechter. I concluded that the search for safety found a match in reputation for safety that a Swiss bank account still carries.
Many have been upset that the IRS has demanded and rec'd access to Swiss bank accounts, Swiss banking records etc.
Seems people with money are looking for a safe place outside the prying eyes of the law, outside the grab for cash by bankrupt gov'ts and Switzerland did oblige in previous historical crises such as war.
No different in impulse to " the little people " looking for a safe place to bury " the stash ".
We all need such a place in times of corrupt governance.

Phlogiston Água de Beber said...

@ VK

You ask one of those very reasonable questions. To which, I would respond that, if your business is giving investment advice, then even if you're a standup kind of guy like Prechter, you have to hand out some kind of hopium to your clients.

I'm not an investments kind of guy, but I imagine that to those who are, the Swiss Franc probably sounds good. Who knows more about money than the Gnomes? ;)

VK said...

It is my humble opinion that humanities greatest cultural flaw is to see the bright side of things. On a personal level one must be an optimist but at a society wide level, this inability to garner even basic facts about the precarious nature of our financial system or the perilous state of our energy supplies or the coming smackdown of climate change is surreal to say the least.

I mean how hard is it to convey the following on finance;

1) Our monetary system is debt based.

2) It requires infinite growth on a finite planet.

3) We have reached the limits of debt and ecology.

4) Thus we will collapse as the marginal productivity of debt is now subtracting from GDP.

It's just mathematics and logic really. All Ponzi scheme dynamics end with collapse, why would this time be different?

Seriously I have spent many an hour thinking what future generations will make of us? Idiots is the word that comes to mind, yet today millions upon millions of people have wonderful sounding degrees from nice sounding Universities to sustain the inherently unsustainable. An impossible, thankless task to keep the global debt gulag rolling along.

Baaaah! Where's my drink?

Top Hat Cat said...

"So why again is the swiss franc a safe haven?"

It's where the Germans stashed all the gold they took from Greece. ;>)


Phlogiston Água de Beber said...

@ VK

If you have a glass in your hand, here's a clink headed in your direction. Baaah, indeed!

Fuser said...


"It is my humble opinion that humanities greatest cultural flaw is to see the bright side of things. "

I agree. I've been thinking for a while that everyday optimism is going to play heavy into our destruction.

Any plans on coming to the States soon? Cleveland has been looking for you.

scandia said...

@Top Hat Cat...just got to that interview with Max/Damon Vrabel that you posted previously.
Excellent synopsis of our condition and the task at hand.

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ben said...

My friends and I have always enjoyed the Enneagram. To this day we
relate to each other as numbers with wings. It's great fun and capable of providing neutral insights into a personality. I am a 9. 'The Peacemaker' is one title ascribed to the number. I don't have a dominant wing on either side of me. Briefly, I like group harmony and making connections. I am indolent. My friend Nick is the enneagram guru and people get a kick out of being correctly typed by him before they have typed themselves. As a 4 with a 5 wing, this talent suits him well. :-)

Top Hat Cat said...


"...It is my humble opinion that humanities greatest cultural flaw is to see the bright side of things."

Years ago while reading Jared Diamond, he posed the question of what was going through the mind of the guy who cut down the last tree on Easter Island.

I wondered about that myself and tried to conjure up a movie scene like mental image of it happening.

Well, I don't have to wonder anymore.

It's happening right in front of my eyes.

I'm sure that back on Easter Island when the Fatal Deed was done, some variation of a Free Market Fundamentalism Cult was in full swing.

"The community (government) shouldn't interfere with a Rugged Individual Tree Harvesting Entrepreneur from realizing his God Given Right® to cut the very last tree down on the island.

The Hidden Handjob® of the Marketplace is All Wise and will infallibly restore balance and harmony to the System, Amen

Something like that but without the Limousine Libertarians and their leather bound gold leafed editions of Atlas Shrugged and narcissistic personality disorder Ayn Rand quotes

jal said...

All the smart accountants and tax lawyers know that you can reduce your tax payable by using losses from previous years.

I’m sure that the bankers know how to do some market to market and generate a loss that will reduce the taxes that they would normally pay.

The governments are going to find out how little they can collect because of the great ways that the lawmakers have made it possible to avoid paying taxes.

Here is a good example.

BP Oil Spill Costs Estimated To Cut Tax Bill By $10 Billion

Biologique Earl said...

Hija de Pappi: My wife and I spent 7 weeks this year traveling by local bus through southern Mexico and later Guatemala and Honduras.

Our impression of Mexico matches yours. The Mexican people were the warmest most caring people we have encountered in the many countries we have visited in South America and Asia.

AND the food was fabulous!

Next time we get down there we will let you know and maybe contact.



Anonymous said...


Perhaps he thinks that the Swiss Franc (which is controlled by the Swiss government) is sufficiently independent of Swiss banks to ensure that regardless of what happens to those two Swiss banks, the Swiss government will not bail them out?

While the financial industry exerts large amounts of control over governments in many countries (especially the US and Britain), it does not follow that this must be true everywhere else.

If the above is true, then the fate of the Swiss Franc would not be directly tied to the fate of those two Swiss banks.

Unknown said...
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Mike said...

Some more disturbing Oil Disaster Pics:


scandia said...

Since Tero said that the rules are not " fair" I have been thinking about fairness, about how many scoff at the idea.
Just stumbled upon this article about fairness-

BP getting a 10B tax break as an outcome for the GofM disaster IS NOT FAIR!

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Anonymous said...

Samsara said:

"That's because so very many Americans are so pathetically ignorant. How can they know how bad the situation is, when they don't understand it in the first place?"

Yes, mainstream "Americans" (BTW, also Latinos who have lived here long enough and assimilated the culture are included) are pathetically ignorant. But, more importantly, they are pathetically arrogant and refuse to be enlightened. Perhaps such arrogance comes from embracing the decadence which only an Empire allows, reaping its spoils on a daily basis.

Anonymous said...


Thank you for your thoughtful response. I started wearing a shirt with sleeves and a wide rim hat when outdoors.

We'll be contacting a local marine biologist (retired) who's been a local activist.

Punxsutawney said...

Hija de Pappi, Robert,

My wife and a girl friend travelled alone through Mexico by public bus circa 1990 and didn’t have a single problem anywhere. This was two young women travelling alone. My wife is of blonde Norwegian ancestry and tall so she would never pass for a native. Both spoke passable Spanish which helped I’m sure. Near the end of their trip they ended up in Acapulco and somehow met up with a local business man (Mafia?) that took them out on the town, diving etc., with nothing expected in return other than their company. This sure didn’t jive with my apparently false at the time impression of the dangers of traveling south of the border.

Bigelow said...

@hija de papi

"So I wrote a comment on that. The comment showed up. The Margolis post stayed on my "Wall" but will not appear in the news feed I share with family there (most of why I even bother with the silly FB thing - to keep up to date on them).

Anybody else have this happen?"

I'd like to think my posts to the FaceB news feed don't show because I posted them and they are not news to me. But they only show if someone comments on them. Maybe commenting on your own posts would suffice; I haven't checked.

I only post to annoy relatives on there who are Reagan worshipers and Tea Party Nincompoops.

Ka said...


One possibility (re: supposed safe havens) is that pension-fund managers and the like know that the game is up, but to earn their salaries they have to keep pretending (ditto politicians and investment advisors). Hence a "safe haven" is a place that will implode later than other implosions.

@hija de papi
The Navajo describe someone who is acting badly as "he acts like he has no relatives."

mistah charley, ph.d. said...

@hija de papi

You write Began brushing up on certain philosophical undercurrents of industrialized society, examining the foundations of "modernism" and "rationalism" and sure enough... if you can't reduce it to math, it doesn't exist, to paraphrase a lot of what is taught.

This reminds me of John Ralston Saul, q.v. at Wikipedia and Wikiquote. I haven't read him much, but he's a favorite of Jonathan Schwarz, host at the blog A Tiny Revolution.

Anonymous said...


1990 is not 2010. Mexico is not the same as it was 20 years ago. A co-worker of mine whose family immigrated to the US 30+ years ago regularly goes south to visit family and friends. He says it is much more dangerous now.

And it is dangerous because of the drug trade which has created millionaires and even billionaires in the drug market. That drug market is fueled by US demand, which the US government foolishly refuses to recognize. Making it illegal is just like prohibition and has had the same (but worse) results.

Mexico has lost 5 times more people to their internal drug war than the US has lost in Iraq since we invaded Iraq over the same time period. It's sad and we can shut it down just by legalizing several drugs. But it's not legalized because that would deprive politicians of money, money which was recently proven to be laundered through Wachovia, Wells Fargo, Bank of America, and other major US banks.

When I once posted that this is what the US banks did to Argentina 10 years ago, people laughed and claimed that must be false. Yet now it is testified under oath in US courts (with Obama not lifting a finger to prosecute despite such testimony) and people are surprised?

Mexico also suffers from a totalitarian lock by the wealthiest few thousand families. They are the nobility and everyone else is somewhere else down the scale. Mexico relies on exporting its political problems and population pressures to the US rather than face its own internal institutional issues.

The drug war and the internal institutional issues will eventually topple Mexico's existing government. Will it be tomorrow, a decade from now, or even longer, no one can really say. But the internal pressures are there and building, making Mexico a dangerous place, not because it is Mexico, but because it sits in the shadow of the Empire itself - the US.

I feel sorry for the people of Mexico whom I have met over the years. Their lot (and our lot as well) will not be an easy one as this entire ball of wax melts around us.

Ric said...

Hija de Pappi
I tell you, there is hope outside of the "rational" industrialized, highly-financed societies. There are still good people out there.

I here ya.

It is my humble opinion that humanities greatest cultural flaw is to see the bright side of

I'd phrase this, "It is my humble opinion that humanity's greatest cultural flaw is to only see their bright side of things."

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One other thing: let's compare the 2,000+/year shootings in Mexico with stats in the US:

Each year, there are 34,000 gun-related deaths in the U.S. How many of those dead are children, and has that number increased in the last few years? Here are the facts...


A report released today by the Children's Defense Fund (CDF,) and based upon data collected by the Center for Disease Control (CDC) finds that more children and teens died as a result of gun violence in 2003 than American fighting men and women killed in hostile action in the first three years of the Iraq war combined.

In all, 2,827 kids and teens were killed in the United States during the calendar year that marked the US invasion of Iraq. At last count, the Department of Defense reports 2,497 US soldiers killed in Iraq.

The idea of driving through major cities in the US sounds scarier than getting lost in Mexico City, frankly speaking. And like most Mexicans we speak with, we wouldn't go to Mexico City on a bet.

Mr. Kowalski said...

The current system is designed by, and thus benefits, the lawyers, banksters and politicians. Rolling Stone's "vampire squid upon the face of humanity" was right on. It's more than simply Goldman Sachs, though it must be said they are the epitome of what's wrong.

This system will fail.
But.. what shall replace it ??

Here's my suggestions on the new financial system:

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Biologique Earl said...

Punxsutawney, I like your comments about your wife and girl friend traveling alone in Mexico.

My wife (who had polio and can not do strenuous walking) and I (nearly 70) have traveled extensively, alone, without guide, in foreign countries using local transport for years.

We have traveled in Andean countries(Ecuador, Peru, Bolivia), China, Thailand, Laos, Cambodia, Indonesia, India, Burma and last year for the first time Mexico and parts of Central America.

Dear readers if you look at the warnings put out by the US, Canada and other countries about foreign travel you would not find many places off track that are "safe" to travel in.

We have noted in our travels that there are very few Americans traveling off track. They stick to very popular spots that are supposedly safe. They tend to stick to the trendy, partying, beach destinations.

Let me tell you (agreeing with Hija de Pappi) America IS one of the most dangerous countries I have traveled in. Plenty of statistics are available to support that statement and HDP has already stated some of them.

Americans have been so terrorized by their own government they feel unsafe outside their own country. I think part of this terrorism is done by the US government to keep their citizens under control and to limit their travel to their own country to keep the "economy" going.

Greyzone's comments unfortunately mirror the image many Americans have about other countries. But can you really fault them? Hardly, they are constantly propagandized by their own government from birth about how America is the best, the greatest and the safest. Could you expect different behavior.

In China people, in less visited regions, call out "Nihao" (hello) to the foreigner, in Mexico "permiso" (please, can I help you) and on and on.

We have taken buses in Ecuador with connections in the countryside. The bus drive instructed passengers getting off at the same place as us to stick with us until we get on the other bus because that particular area was not overly safe.

We have found this kind of friendliness in so many places we have visited. In China we would often ask police men about finding places or where to find the bus we want. Many times they would stop what they were doing and take us to the place we seek. Likewise, children on the street would be so helpful. In a remote town in western china I asked a high school student where to find a hotel (town not listed in guide books). In minutes we were surrounded by a half dozen youths who took us to different small hotels. When we found one that was acceptable, they apologized because they "must get back to school". One girl said "I am so friendly, yes?". They were so concerned about our impression of their country. This took place well before the Olympics there.

In China it is not unusual in cities to see children playing in the streets after dark without fear(It was winter with short days). No the parents are not negligent, the fact is it IS safe to do so. Can you say that about many cities in North America?

@hija de papi
The Navajo describe someone who is acting badly as "he acts like he has no relatives."

I like that quote very much.



Ilargi said...

New post up.

Is it time to storm the Bastille again?