Saturday, November 20, 2010

November 20 2010: Jeff Rubin, another economist who doesn't get economics

John Vachon Dakota October 1940
"North Dakota landscape, McHenry County"

Stoneleigh: In all the talks I have done, there has been only one person who has been critical to the point of dismissiveness, and that is Jeff Rubin, former chief economist of the CIBC Bank in Canada. When asked at the 2010 ASPO-USA conference in Washington DC about his opinion of my work, he called it (paraphrased) “a bastardized form of monetarism devised by a non-economist”. I did not have a chance to respond at the conference, although I have challenged Mr Rubin to a debate on monetary theory on Jim Puplava's Financial Sense Newshour programme.

My critique of Mr Rubin's statement would begin with his labeling of my position as a form of monetarism. While I do regard the monetary supply as a critical factor, I define it very differently than do monetarists. In my opinion, monetarists disregard the elephant in the room in their dismissal of the vital role of credit in the effective money supply.

In my opinion, they correctly identify the importance of the money supply, and specifically changes to it as a vital driver of prices, but then fail to recognize that the overwhelming percentage of the money supply is composed of credit. As it is the collapse of credit that defines the bursting of a financial bubble, neglecting this element means not understanding where we are going and why. As Ben Barnanke is a monetarist, the implications of this lack of understanding are significant.

Essentially, there are two kinds of inflation. As inflation is defined as an increase in the supply of money and credit relative to available goods and services, one can achieve inflation either by increasing the money component (as in Weimar Germany or modern Zimbabwe) or the credit component. In the former case, one divides the underlying real wealth pie into smaller and smaller pieces. In the latter case, which represents our situation, one does not subdivide the real wealth pie, but instead creates multiple and mutually exclusive claims to the same pieces of pie.

A credit expansion thus creates excess claims to underlying real wealth, and we have just lived through the largest credit expansion in human history. In other words, we are all playing a giant game of musical chairs, only there is perhaps one chair for every hundred people playing the game. You can imagine what will happen when the music stops. The free-for-all grab for an available chair represents the extinguishing of excess claims to underlying real wealth, and is deflation by definition. This will represent the end of extend-and-pretend, and the recognition that there is only so much to go around.

In addition, Mr Rubin took exception to my discussion of the velocity of money as an important factor determining how financial crisis will play out in practice. The velocity of money is in fact a critical factor. It is an expression of how rapidly money circulates in an economy. If very little money is at rest, and most of the effective money supply is in circulation, many transactions will occur, it will be simple to connect buyers and sellers, and the economy will be healthy.

The problem in a depression is that the small number of people who still have access to money (after the collapse of credit) will be hanging on to it for dear life, as they will have no idea when they will earn any more in an era of high unemployment and instability. This means that very little of the small amount of existing cash will be in circulation. Most of it will be at rest, being hoarded by people, and companies and banks.

Money is the lubricant in the economy in the same way that motor oil is the lubricant in our cars. Without sufficient lubricant, the engine will seize up. This is exactly what happened in the 1930s - the economy had a seizure. When this happens, it is almost impossible to connect buyers and sellers for lack of a medium of exchange.

In the 1930s we had plenty of everything - energy, resources, labour etc - except money. Perverse things happen under such circumstances. In the 1930s it was very difficult to connect farmers with a product to sell with the hungry people who wanted that product. Since demand is not what one wants, but what one can pay for, under conditions of little circulating money, there is very little demand. In the 1930s, farmers dumped milk in ditches while people were starving to death down the road. Perverse things happen during an economic seizure. This is where we are headed again, and we need to be aware of the implications in order to prepare for them.

A dramatic fall in the velocity of money will greatly compound the collapse of the money supply due to the evaporation of credit. This is a dynamic that everyone needs to understand.

Mr Rubin, unlike most economists, does understand that resource limitations are real, and hence writes about peak oil. This is an important element of understanding. However, it is equally important to understand that a credit expansion brings forward aggregate demand, borrowing it from the future. Because our access to cheap credit put so much extra purchasing power in our hands, we can purchase many things we could not otherwise have done.

The debt created by this additional purchasing power must be repaid though, and when it is, it will be subtracted from future aggregate demand. This is a critical part of the dynamic leading to economic depression, yet it is a factor that modern economists cannot seem to understand. If we are to understand how the world works, we will have to discard the neo-classical model of economics that comprehensively fails to reflect reality, and has become a religion rather than the science it purports to be.

Debt Delenda Est
by Bill Bonner - Daily Reckoning

The subject is debt; it needs to go away.

Debt was the market's bête noire, this week and last. In Europe, it snatched up the Irish and carried them off. Then it attacked the Portuguese. Everyone knew the periphery states were going broke. Their cost of borrowing soared. Then, when the search parties reached them, the Irish turned them away. Debt has it usefulness, the Irish figured. They held out until Wednesday, apparently negotiating terms of their own rescue.

In America, municipal debt collapsed by nearly 10% over the last two weeks. It became more and more obvious that state and local governments were headed for default too. California might get a bailout...but California, like Ireland, is a sovereign state. It could refuse. Borrowers worried that Californians and the Irish might prefer to default like honest incompetents rather than submit to the rescuers' demands.

Debt is underrated. For one thing, it is more reliable than asset values. The crisis of '07-'09 wiped out about a third of the world's equity and property wealth. And it disappeared 7 million jobs in America alone. But debt survived intact. In terms of the cash flow needed to support it, debt actually grew larger.

Central planners can make a recession appear to go away. With enough hot money, they might warm up asset prices or soothe the swelling unemployment rate. But debt doesn't cooperate. Neither monetary policy nor fiscal policy will make it go away. Debt demands honesty. The debtor has to fess up, admitting that he is a fool or a knave. Either he owns up to his mistake and defaults...or he cheats.

"With all due respect, US policy is clueless," said German Finance Minister Wolfgang Schauble. "It's not that the Americans haven't pumped enough liquidity into the market. Now to say let's pump more into the market is not going to solve their problem."

The English speakers conveniently misunderstand the debt problem. The authorities worked hard not to see the debt crisis coming. They made their careers and reputations by not understanding it. Thousands of them work for governments and central banks...if they caught on to the problem now, they'd probably have to resign.

They pretend that the problem is a lack of "liquidity." Or a failure of capitalism. Or that the regulators dropped the ball. It is none of those things. Each of those problems can be "solved." Short liquidity? The feds can add some; as much as you want. Did capitalism lose its way? No problem again, the authorities will apply more central planning. Not enough regulation? Are you kidding; adding regulation is what they do best.

The real problem is debt. In Ireland, for example, investors, householders and bankers all lost their heads in the bubble era. Your editor bought a house in Ireland in 2006. He knew perfectly well it was overpriced. He had walked the streets of Dublin. He had seen storefronts offering property, not just in Dublin...but in Dubrovnik. He had heard people say that "property never goes down."

Now his house is worth about half what he paid for it - if he could find a buyer. There is no reason to expect that house to ever recover - at least in real terms - to the level it was 3 years ago. That wealth has disappeared. Along with it went the banks' collateral and the value of the debt it backed. It is all dead. It is no more. It has ceased to be. It is past tense. But, rather than let the banks' bondholders take the losses they deserved - in rushed the financial authorities with guarantees and more credit. Ireland's deficit rose to a staggering 30% of GDP. Its national debt will rise from 100% of GDP to 120%.

Meanwhile, California is moving closer to bankruptcy - and borrowing more too. The state is $25 billion in the hole, with no plausible plan to get out. The Milken Institute says unfunded pension liabilities will rise to $10,000 per capita by 2013 - the equivalent of an extra $40,000 mortgage for every household. Like Ireland, California cannot pay the debts it has incurred. The federal government will offer a bailout...but with strings attached.

And soon, the bailers will be in trouble too. According to The Wall Street Journal, a combination of 15 major national governments will have to borrow a total of more than $10 trillion next year, to finance deficits and repay maturing bonds. That's 27% of their total economic output. It also is equal to about twice the entire world's annual savings.

The authorities warn about the risk of "contagion." They sweat to "calm" the markets. But why bother? Debt of this magnitude cannot be repaid. It has gone bad. At least give it a decent burial.

Road map that opens up shadow banking
by Gillian Tett - Financial Times

This week, a senior banker friend gave me a poster that had been created by downloading a chart recently produced by economists at the New York Federal Reserve.* It was shocking stuff. Entitled The Shadow Banking System, the graphic depicts how money goes round the modern world, particularly (but not exclusively) in the US. At the top lies a smart section labelled the “Traditional Banking System”, in which a simple flow of boxes explains how investors’ funds are deposited with traditional commercial banks, which then transform this into long and short-term loans, and equity.

So far, so comprehensible. But most of the poster is dominated by two sections called the “cash” and “synthetic” shadow banking systems, or those “financial intermediaries that conduct maturity, credit and liquid transformation without access to central bank liquidity or public sector credit guarantees”, as the associated NY Fed working paper says. These flows are so extraordinarily complex that hundreds of boxes create a diagram comparable to the circuit board of a high-tech gadget. Even as poster size, it is difficult to decode.

But it should be mandatory reading for bankers, regulators, politicians and investors today. Indeed, they might do well to hang similar posters next to their desks, for at least three reasons. For one thing, this circuit board is a reminder of how clueless most investors, regulators and rating agencies were before 2007 about finance. After all, during the credit boom, there was plenty of research being conducted into the financial world; but I never saw anything remotely comparable to this road map.

That was a striking, terrible omission. The Fed now estimates that in early 2008 shadow banking was $20,000bn in size, dwarfing the $11,000bn traditional banking system. And though this shadow system has now shrunk to a “mere” $16,000bn, this remains bigger than traditional banking, at some $13,000bn. Little wonder, then, that so few people immediately appreciated the significance of the seizing up of shadow banking in 2007.

But secondly, this poster is also a reminder that many things about the modern financial system remain mysterious – even today. On the edges of the circuit board, the NY Fed economists list all the government programmes that have supported the system since 2007 (and, in effect, replaced shadow banks when they suffered runs). This “shadow, shadow bank system” – as it might be called – looks complex and baffling too. And in practical terms, the sheer breadth and complexity of that box makes it hard to know what will happen if – or when – government aid disappears.

Then, there is the current regulatory debate. So far this year, the Financial Stability Board and other international bodies have focused most of their reform attention on issues such as bank capital, and systems of oversight for large, systemically important banks. Next year, though, Mario Draghi, head of the FSB, wants to start discussing the shadow banking world.

Many national regulators are keen to do this too as they recognise the danger of looking at regulation just in terms of institutions. After all, the crisis has shown how risky it is to have $16,000bn worth of maturity transformation without any backstop, or clear rules. This week, for example, Adair Turner, head of the Financial Services Authority, the UK regulator, promised more scrutiny. Earlier this year Paul Tucker, deputy UK central bank governor, suggested that it was time to see which parts of the system were benign – or not.** The US government is now considering whether to extend the regulatory umbrella to large, non-bank institutions such as Citadel or GE Capital.

But whether this desire for a debate turns into sensible reform remains unclear. For getting politicians to focus on the issue may not be easy in 2011. There is already considerable regulatory fatigue. There are also other, more urgent distractions, such as the sovereign debt crises. And shadow banking issues rarely seem “sexy” in political terms, unless they involve hedge funds (which pose less systemic threat than, say, the vast $3,000bn-odd money market fund sector.)

So for my money, the best thing the NY Fed could do right now is print thousands of copies of that poster – and dispatch it across the world. I suspect it would be far more persuasive about the need for debate than any number of pious G20 speeches. After all, a key reason why that circuit board became so complex was that bankers were trying to arbitrage the last two sets of Basel rules. If shadow banking continues to be ignored (ie politicians focus just on the traditional banks) there is every chance Basel III will simply produce another complex labyrinth that will go largely ignored. Until the next crisis.

Just When You Thought You Knew Something About Mortgage Securitizations
by WilliamBanzai7 - Zerohedge

Dan Edstrom is a guy who is in the right place at the right time.

His profession? He performs securitization audits (Reverse Engineering and Failure Analysis) for a company called DTC-Systems.

The typical audit includes numerous diagrams including the following:

  • Transaction Parties and Flow (similar to the chart below, but much easier to understand)
  • Note exchanged for a bond
  • Foreclosure parties
  • Priority of Payments from the Security Instrument (Mortgage, Deed of Trust, Security Deed or Mortgage Deed)
  • Priority of Payments from the Pooling and Servicing Agreement

This diagram shows that they are not following the borrowers instructions in the security instrument.

Source of Payments for Distributions--This diagram is extremely complex and shows that the miscellaneous proceeds specified in the security instrument (and in the SEC Filings) should be applied to the sums secured by the obligation upon the event of a loss in value of the property, whether or not then due, with the remainder, if any, returned to the borrower. This document combines UCC 3-602(a), UCC 9-315, UCC 9-336, UCC 2-609, and UCC 3-501 together with NY Code Section 4545 and the SEC Filings to show that the miscellaneous proceeds can be applied to the borrowers obligation.

The following flow chart reverse engineers the mortgage on the Ekstrom family residence. It took Dan over one year to take it this far and it clearly demonstrates what happens when there are too many lawyers being manufactured. 

Take a look at this chart and then decide how long you think it will take for Barney Frank and Eric Holder to sort everything out. There is a link to an expandable version at the end of this post.


Dan will be lecturing on this subject on December 11, 2010 if you are interested in learning more about who is the holder of your mortgage note. Here is the link to the Seminar: 

Securitization Seminar

and here is a link to a LARGE VERSION of the Chart:


U.S. in Vast Insider Trading Probe
by Susan Pulliam, Michael Rothfeld,Jenny Strasburg and Gregory Zuckerman - Wall Street Journal

Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders and analysts across the nation, according to people familiar with the matter.

The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say. The investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in U.S. financial markets, including new ways non-public information is passed to traders through experts tied to specific industries or companies, federal authorities say.

One focus of the criminal investigation is examining whether nonpublic information was passed along by independent analysts and consultants who work for companies that provide "expert network" services to hedge funds and mutual funds. These companies set up meetings and calls with current and former managers from hundreds of companies for traders seeking an investing edge.

Among the expert networks whose consultants are being examined, the people say, is Primary Global Research LLC, a Mountain View, Calif., firm that connects experts with investors seeking information in the technology, health-care and other industries. "I have no comment on that," said Phani Kumar Saripella, Primary Global's chief operating officer. Primary's chief executive and chief operating officers previously worked at Intel Corp., according to its website.

In another aspect of the probes, prosecutors and regulators are examining whether Goldman Sachs Group Inc. bankers leaked information about transactions, including health-care mergers, in ways that benefited certain investors, the people say. Goldman declined to comment. Independent analysts and research boutiques also are being examined. John Kinnucan, a principal at Broadband Research LLC in Portland, Ore., sent an email on Oct. 26 to roughly 20 hedge-fund and mutual-fund clients telling of a visit by the Federal Bureau of Investigation.

"Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information," the email said. "(They obviously have been recording my cell phone conversations for quite some time, with what motivation I have no idea.) We obviously beg to differ, so have therefore declined the young gentleman's gracious offer to wear a wire and therefore ensnare you in their devious web."

The email, which Mr. Kinnucan confirms writing, was addressed to traders at, among others: hedge-fund firms SAC Capital Advisors LP and Citadel Asset Management, and mutual-fund firms Janus Capital Group, Wellington Management Co. and MFS Investment Management. SAC, Wellington and MFS declined to comment; Janus and Citadel didn't immediately comment. It isn't known whether clients are under investigation for their business with Mr. Kinnucan. The investigations have been conducted by federal prosecutors in New York, the FBI and the Securities and Exchange Commission.

Another aspect of the probe is an examination of whether traders at a number of hedge funds and trading firms, including First New York Securities LLC, improperly gained nonpublic information about pending health-care, technology and other merger deals, according to the people familiar with the matter. Some traders at First New York, a 250-person trading firm, profited by anticipating health-care and other mergers unveiled in 2009, people familiar with the firm say.

A First New York spokesman said: "We are one of more than three dozen firms that have been asked by regulators to provide general information in a widespread inquiry; we have cooperated fully." He added: "We stand behind our traders and our systems and policies in place that ensure full regulatory compliance." Key parts of the probes are at a late stage. A federal grand jury in New York has heard evidence, say people familiar with the matter. But as with all investigations that aren't completed, it's unclear what specific charges, if any, might be brought.

The action is an outgrowth of a focus on insider trading by Preet Bharara, the Manhattan U.S. Attorney. In an October speech, Mr. Bharara said the area is a "top criminal priority" for his office, adding: "Illegal insider trading is rampant and may even be on the rise." Mr. Bharara declined to comment. Expert-network firms hire current or former company employees, as well as doctors and other specialists, to be consultants to funds making investment decisions. More than a third of institutional investment-management firms use expert networks, according to a late-2009 survey by Integrity Research Associates LLC in New York.

The consultants typically earn several hundred dollars an hour for their services, which can include meetings or phone calls with traders to discuss developments in their company or industry. The expert-network companies say internal policies bar their consultants from disclosing confidential information. Generally, inside traders profit by buying stocks of acquisition targets before deals are announced and selling after the targets' shares rise in value. The SEC has been investigating potential leaks on takeover deals going back to at least 2007 amid an explosion of deals leading up to the financial crisis. The SEC sent subpoenas last fall to more than 30 hedge funds and other investors.

Some subpoenas were related to trading in Schering-Plough Corp. stock before its takeover by Merck & Co. in 2009, say people familiar with the matter. Schering-Plough stock rose 8% the trading day before the deal plan was announced and 14% the day of the announcement. Merck said it "has a long-standing practice of fully cooperating with any regulatory inquiries and has explicit policies prohibiting the sharing of confidential information about the company and its potential partners."

Transactions being focused on include MedImmune Inc.'s takeover by AstraZeneca Plc in 2007, the people say. MedImmune shares jumped 18% on Apr. 23, 2007, the day the deal was announced. A spokesman for AstraZeneca and its MedImmune unit declined to comment. Investigators are also examining the role of Goldman bankers in trading in shares of Advanced Medical Optics Inc., which was taken over by Abbott Laboratories in 2009, according to the people familiar with the matter. Advanced Medical Optics's shares jumped 143% on Jan. 12, 2009, the day the deal was announced. Goldman advised MedImmune and Advanced Medical Optics on the deals.

In subpoenas, the SEC has sought information about communications—related to Schering-Plough and other deals—with Ziff Brothers, Jana Partners LLC, TPG-Axon Capital Management, Prudential Financial Inc.'s Jennison Associates asset-management unit, UBS AG's UBS Financial Services Inc. unit, and Deutsche Bank AG, according to subpoenas and the people familiar with the matter.

Among hedge-fund managers whose trading in takeovers is a focus of the criminal probe is Todd Deutsch, a top Wall Street trader who left Galleon Group in 2008 to go out on his own, the people close to the situation say. Prosecutors also are investigating whether some hedge-fund traders received inside information about Advanced Micro Devices Inc., which figured prominently in the government's insider-trading case last year against Galleon Group hedge fund founder Raj Rajaratnam and 22 other defendants.

Fourteen defendants have pleaded guilty in the Galleon case; Mr. Rajaratnam has pleaded not guilty and is expected to go to trial in early 2011. Among those whose AMD transactions have been scrutinized is hedge-fund manager Richard Grodin. Mr. Grodin, who received a subpoena last fall, didn't return calls. An AMD spokesman declined to comment.

Banks’ Self-Dealing Super-Charged Financial Crisis
by Jake Bernstein and Jesse Eisinger - Pro Publica

Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.

Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses:

They created fake demand.

A ProPublica analysis shows for the first time the extent to which banks -- primarily Merrill Lynch, but also Citigroup, UBS and others -- bought their own products and cranked up an assembly line that otherwise should have flagged. The products they were buying and selling were at the heart of the 2008 meltdown -- collections of mortgage bonds known as collateralized debt obligations, or CDOs.

As the housing boom began to slow in mid-2006, investors became skittish about the riskier parts of those investments. So the banks created -- and ultimately provided most of the money for -- new CDOs. Those new CDOs bought the hard-to-sell pieces of the original CDOs. The result was a daisy chain that solved one problem but created another: Each new CDO had its own risky pieces. Banks created yet other CDOs to buy those.

Individual instances of these questionable trades have been reported before, but ProPublica's investigation, done in partnership with NPR's Planet Money, shows that by late 2006 they became a common industry practice.

Click to see how frequently the banks turned to their best customers -- their own CDOs.

Click to see how frequently the banks turned to their best customers -- their own CDOs.

An analysis by research firm Thetica Systems, commissioned by ProPublica, shows that in the last years of the boom, CDOs had become the dominant purchaser of key, risky parts of other CDOs, largely replacing real investors like pension funds. By 2007, 67 percent of those slices were bought by other CDOs, up from 36 percent just three years earlier. The banks often orchestrated these purchases. In the last two years of the boom, nearly half of all CDOs sponsored by market leader Merrill Lynch bought significant portions of other Merrill CDOs.

ProPublica also found 85 instances during 2006 and 2007 in which two CDOs bought pieces of each other. These trades, which involved $107 billion worth of CDOs, underscore the extent to which the market lacked real buyers. Often the CDOs that swapped purchases closed within days of each other, the analysis shows.

There were supposed to be protections against this sort of abuse. While banks provided the blueprint for the CDOs and marketed them, they typically selected independent managers who chose the specific bonds to go inside them. The managers had a legal obligation to do what was best for the CDO. They were paid by the CDO, not the bank, and were supposed to serve as a bulwark against self-dealing by the banks, which had the fullest understanding of the complex and lightly regulated mortgage bonds.

It rarely worked out that way. The managers were beholden to the banks that sent them the business. On a billion-dollar deal, managers could earn a million dollars in fees, with little risk. Some small firms did several billion dollars of CDOs in a matter of months.

"All these banks for years were spawning trading partners," says a former executive from Financial Guaranty Insurance Company, a major insurer of the CDO market. "You don't have a trading partner? Create one."

The executive, like most of the dozens of people ProPublica spoke with about the inner workings of the market at the time, asked not to be named out of fear of being sucked into ongoing investigations or because they are involved in civil litigation.

Keeping the assembly line going had a wealth of short-term advantages for the banks. Fees rolled in. A typical CDO could net the bank that created it between $5 million and $10 million -- about half of which usually ended up as employee bonuses. Indeed, Wall Street awarded record bonuses in 2006, a hefty chunk of which came from the CDO business.

The self-dealing super-charged the market for CDOs, enticing some less-savvy investors to try their luck. Crucially, such deals maintained the value of mortgage bonds at a time when the lack of buyers should have driven their prices down.

But the strategy of speeding up the assembly line had devastating consequences for homeowners, the banks themselves and, ultimately, the global economy. Because of Wall Street's machinations, more mortgages had been granted to ever-shakier borrowers. The results can now be seen in foreclosed houses across America.

The incestuous trading also made the CDOs more intertwined and thus fragile, accelerating their decline in value that began in the fall of 2007 and deepened over the next year. Most are now worth pennies on the dollar. Nearly half of the nearly trillion dollars in losses to the global banking system came from CDOs, losses ultimately absorbed by taxpayers and investors around the world. The banks' troubles sent the world's economies into a tailspin from which they have yet to recover.

It remains unclear whether any of this violated laws. The SEC has said that it is actively looking at as many as 50 CDO managers as part of its broad examination of the CDO business' role in the financial crisis. In particular, the agency is focusing on the relationship between the banks and the managers. The SEC is exploring how deals were structured, if any quid pro quo arrangements existed, and whether banks pressured managers to take bad assets.

The banks declined to directly address ProPublica's questions. Asked about its relationship with managers and the cross-ownership among its CDOs, Citibank responded with a one-sentence statement:

"It has been widely reported that there are ongoing industry-wide investigations into CDO-related matters and we do not comment on pending investigations."

None of ProPublica's questions had mentioned the SEC or pending investigations.

Posed a similar list of questions, Bank of America, which now owns Merrill Lynch, said:

"These are very specific questions regarding individuals who left Merrill Lynch several years ago and a CDO origination business that, due to market conditions, was discontinued by Merrill before Bank of America acquired the company."

This is the second installment of a ProPublica series about the largely hidden history of the CDO boom and bust. Our first story looked at how one hedge fund helped create at least $40 billion in CDOs as part of a strategy to bet against the market. This story turns the focus on the banks.

Merrill Lynch Pioneers Pervert the Market
By 2004, the housing market was in full swing, and Wall Street bankers flocked to the CDO frenzy. It seemed to be the perfect money machine, and for a time everyone was happy.

Homeowners got easy mortgages. Banks and mortgage companies felt secure lending the money because they could sell the mortgages almost immediately to Wall Street and get back all their cash plus a little extra for their trouble. The investment banks charged massive fees for repackaging the mortgages into fancy financial products. Investors all around the world got to play in the then-phenomenal American housing market.
Click to see how the CDO daisy chain worked.

Click to see how the CDO daisy chain worked.

The mortgages were bundled into bonds, which were in turn combined into CDOs offering varying interest rates and levels of risk.
Investors holding the top tier of a CDO were first in line to get money coming from mortgages. By 2006, some banks often kept this layer, which credit agencies blessed with their highest rating of Triple A.

Buyers of the lower tiers took on more risk and got higher returns. They would be the first to take the hit if homeowners funding the CDO stopped paying their mortgages. (Here's a video explaining how CDOs worked.)

Over time, these risky slices became increasingly hard to sell, posing a problem for the banks. If they remained unsold, the sketchy assets stayed on their books, like rotting inventory. That would require the banks to set aside money to cover any losses. Banks hate doing that because it means the money can't be loaned out or put to other uses.

Being stuck with the risky portions of CDOs would ultimately lower profits and endanger the whole assembly line.

The banks, notably Merrill and Citibank, solved this problem by greatly expanding what had been a common and accepted practice: CDOs buying small pieces of other CDOs.

Architects of CDOs typically included what they called a "bucket" -- which held bits of other CDOs paying higher rates of interest. The idea was to boost overall returns of deals primarily composed of safer assets. In the early days, the bucket was a small portion of an overall CDO.

One pioneer of pushing CDOs to buy CDOs was Merrill Lynch's Chris Ricciardi, who had been brought to the firm in 2003 to take Merrill to the top of the CDO business. According to former colleagues, Ricciardi's team cultivated managers, especially smaller firms.

Merrill exercised its leverage over the managers. A strong relationship with Merrill could be the difference between a business that thrived and one that didn't. The more deals the banks gave a manager, the more money the manager got paid.

As the head of Merrill's CDO business, Ricciardi also wooed managers with golf outings and dinners. One Merrill executive summed up the overall arrangement: "I'm going to make you rich. You just have to be my bitch."

But not all managers went for it.

An executive from Trainer Wortham, a CDO manager, recalls a 2005 conversation with Ricciardi. "I wasn't going to buy other CDOs. Chris said: 'You don't get it. You have got to buy other guys' CDOs to get your deal done. That's how it works.'" When the manager refused, Ricciardi told him, "'That's it. You are not going to get another deal done.'" Trainer Wortham largely withdrew from the market, concerned about the practice and the overheated prices for CDOs.

Ricciardi declined multiple requests to comment.

Merrill CDOs often bought slices of other Merrill deals. This seems to have happened more in the second half of any given year, according to ProPublica's analysis, though the purchases were still a small portion compared to what would come later. Annual bonuses are based on the deals bankers completed by yearend.

Ricciardi left Merrill Lynch in February 2006. But the machine he put into place not only survived his departure, it became a model for competitors.

As Housing Market Wanes, Self-Dealing Takes Off
By mid-2006, the housing market was on the wane. This was particularly true for subprime mortgages, which were given to borrowers with spotty credit at higher interest rates. Subprime lenders began to fold, in what would become a mass extinction. In the first half of the year, the percentage of subprime borrowers who didn't even make the first month's mortgage payment tripled from the previous year.

That made CDO investors like pension funds and insurance companies increasingly nervous. If homeowners couldn't make their mortgage payments, then the stream of cash to CDOs would dry up. Real "buyers began to shrivel and shrivel," says Fiachra O'Driscoll, who co-ran Credit Suisse's CDO business from 2003 to 2008.

Faced with disappearing investor demand, bankers could have wound down the lucrative business and moved on. That's the way a market is supposed to work. Demand disappears; supply follows. But bankers were making lots of money. And they had amassed warehouses full of CDOs and other mortgage-based assets whose value was going down.

Rather than stop, bankers at Merrill, Citi, UBS and elsewhere kept making CDOs.

The question was: Who would buy them?

The top 80 percent, the less risky layers or so-called "super senior," were held by the banks themselves. The beauty of owning that supposedly safe top portion was that it required hardly any money be held in reserve.

That left 20 percent, which the banks did not want to keep because it was riskier and required them to set aside reserves to cover any losses. Banks often sold the bottom, riskiest part to hedge funds. That left the middle layer, known on Wall Street as the "mezzanine," which was sold to new CDOs whose top 80 percent was ultimately owned by ... the banks.

"As we got further into 2006, the mezzanine was going into other CDOs," says Credit Suisse's O'Driscoll.

This was the daisy chain. On paper, the risky stuff was gone, held by new independent CDOs. In reality, however, the banks were buying their own otherwise unsellable assets.

How could something so seemingly short-sighted have happened?

It's one of the great mysteries of the crash. Banks have fleets of risk managers to defend against just such reckless behavior. Top executives have maintained that while they suspected that the housing market was cooling, they never imagined the crash. For those doing the deals, the payoff was immediate. The dangers seemed abstract and remote.

The CDO managers played a crucial role. CDOs were so complex that even buyers had a hard time seeing exactly what was in them -- making a neutral third party that much more essential.

"When you're investing in a CDO you are very much putting your faith in the manager," says Peter Nowell, a former London-based investor for the Royal Bank of Scotland. "The manager is choosing all the bonds that go into the CDO." (RBS suffered mightily in the global financial meltdown, posting the largest loss in United Kingdom history, and was de facto nationalized by the British government.)

Source: Asset-Backed Alert

Source: Asset-Backed Alert

By persuading managers to pick the unsold slices of CDOs, the banks helped keep the market going. "It guaranteed distribution when, quite frankly, there was not a huge market for them," says Nowell.

The counterintuitive result was that even as investors began to vanish, the mortgage CDO market more than doubled from 2005 to 2006, reaching $226 billion, according to the trade publication Asset-Backed Alert.

Citi and Merrill Hand Out Sweetheart Deals
As the CDO market grew, so did the number of CDO management firms, including many small shops that relied on a single bank for most of their business. According to Fitch, the number of CDO managers it rated rose from 89 in July 2006 to 140 in September 2007.

One CDO manager epitomized the devolution of the business, according to numerous industry insiders: a Wall Street veteran named Wing Chau.

Earlier in the decade, Chau had run the CDO department for Maxim Group, a boutique investment firm in New York. Chau had built a profitable business for Maxim based largely on his relationship with Merrill Lynch. In just a few years, Maxim had corralled more than $4 billion worth of assets under management just from Merrill CDOs.

In August 2006, Chau bolted from Maxim to start his own CDO management business, taking several colleagues with him. Chau's departure gave Merrill, the biggest CDO producer, one more avenue for unsold inventory.

Chau named the firm Harding, after the town in New Jersey where he lived. The CDO market was starting its most profitable stretch ever, and Harding would play a big part. In an eleven-month period, ending in August 2007, Harding managed $13 billion of CDOs, including more than $5 billion from Merrill, and another nearly $5 billion from Citigroup. (Chau would later earn a measure of notoriety for a cameo appearance in Michael Lewis' bestseller "The Big Short," where he is depicted as a cheerfully feckless "go-to buyer" for Merrill Lynch's CDO machine.)

Chau had a long-standing friendship with Ken Margolis, who was Merrill's top CDO salesman under Ricciardi. When Ricciardi left Merrill in 2006, Margolis became a co-head of Merrill's CDO group. He carried a genial, let's-just-get-the-deal-done demeanor into his new position. An avid poker player, Margolis told a friend that in a previous job he had stood down a casino owner during a foreclosure negotiation after the owner had threatened to put a fork through his eye.

Chau's close relationship with Merrill continued. In late 2006, Merrill sublet office space to Chau's startup in the Merrill tower in Lower Manhattan's financial district. A Merrill banker, David Moffitt, scheduled visits to Harding for prospective investors in the bank's CDOs. "It was a nice office," overlooking New York Harbor, recalls a CDO buyer. "But it did feel a little weird that it was Merrill's building," he said.

Under Margolis, other small managers with meager track records were also suddenly handling CDOs valued at as much as $2 billion. Margolis declined to answer any questions about his own involvement in these matters.

A Wall Street Journal article ($) from late 2007, one of the first of its kind, described how Margolis worked with one inexperienced CDO manager called NIR on a CDO named Norma, in the spring of that year. The Long Island-based NIR made about $1.5 million a year for managing Norma, a CDO that imploded.

"NIR's collateral management business had arisen from efforts by Merrill Lynch to assemble a stable of captive small firms to manage its CDOs that would be beholden to Merrill Lynch on account of the business it funneled to them," alleged a lawsuit filed in New York state court against Merrill over Norma that was settled quietly after the plaintiffs received internal Merrill documents.

Banks had a variety of ways to influence managers' behavior. Some of the few outside investors remaining in the market believed that the manager would do a better job if he owned a small slice of the CDO he was managing. That way, the manager would have more incentive to manage the investment well, since he, too, was an investor. But small management firms rarely had money to invest. Some banks solved this problem by advancing money to managers such as Harding.

Chau's group managed two Citigroup CDOs -- 888 Tactical Fund and Jupiter High-Grade VII -- in which the bank loaned Harding money to buy risky pieces of the deal. The loans would be paid back out of the fees the managers took from the CDO and its investors. The loans were disclosed to investors in a few sentences among the hundreds of pages of legalese accompanying the deals.

In response to ProPublica's questions, Chau's lawyer said, "Harding Advisory's dealings with investment banks were proper and fully disclosed."

Citigroup made similar deals with other managers. The bank lent money to a manager called Vanderbilt Capital Advisors for its Armitage CDO, completed in March 2007.

Vanderbilt declined to comment. It couldn't be learned how much money Citigroup loaned or whether it was ever repaid.

Yet again banks had masked their true stakes in CDO. Banks were lending money to CDO managers so they could buy the banks' dodgy assets. If the managers couldn't pay the loans back -- and most were thinly capitalized -- the banks were on the hook for even more losses when the CDO business collapsed.

Goldman, Merrill and Others Get Tough
When the housing market deteriorated, banks took advantage of a little-used power they had over managers.

Source: Thetica Systems

Source: Thetica Systems

The way CDOs are put together, there is a brief period when the bonds picked by managers sit on the banks' balance sheets. Because the value of such assets can fall, banks reserved the right to overrule managers' selections.

According to numerous bankers, managers and investors, banks rarely wielded that veto until late 2006, after which it became common. Merrill was in the lead.

"I would go to Merrill and tell them that I wanted to buy, say, a Citi bond," recalls a CDO manager. "They would say 'no.' I would suggest a UBS bond, they would say 'no.' Eventually, you got the joke." Managers could choose assets to put into their CDOs but they had to come from Merrill CDOs. One rival investment banker says Merrill treated CDO managers the way Henry Ford treated his Model T customers: You can have any color you want, as long as it's black.

Once, Merrill's Ken Margolis pushed a manager to buy a CDO slice for a Merrill-produced CDO called Port Jackson that was completed in the beginning of 2007: "'You don't have to buy the deal but you are crazy if you don't because of your business,'" an executive at the management firm recalls Margolis telling him. "'We have a big pipeline and only so many more mandates to give you.' You got the message." In other words: Take our stuff and we'll send you more business. If not, forget it.

"All the managers complained about it," recalls O'Driscoll, the former Credit Suisse banker who competed with other investment banks to put deals together and market them. But "they were indentured slaves." O'Driscoll recalls managers grumbling that Merrill in particular told them "what to buy and when to buy it."

Other big CDO-producing banks quickly adopted the practice.

A little-noticed document released this year during a congressional investigation into Goldman Sachs' CDO business reveals that bank's thinking. The firm wrote a November 2006 internal memorandum about a CDO called Timberwolf, managed by Greywolf, a small manager headed by ex-Goldman bankers. In a section headed "Reasons To Pursue," the authors touted that "Goldman is approving every asset" that will end up in the CDO. What the bank intended to do with that approval power is clear from the memo: "We expect that a significant portion of the portfolio by closing will come from Goldman's offerings."

When asked to comment whether Goldman's memo demonstrates that it had effective control over the asset selection process and that Greywolf was not in fact an independent manager, the bank responded: "Greywolf was an experienced, independent manager and made its own decisions about what reference assets to include. The securities included in Timberwolf were fully disclosed to the professional investors who invested in the transaction."

Greywolf declined to comment. One of the investors, Basis Capital of Australia, filed a civil lawsuit in federal court in Manhattan against Goldman over the deal. The bank maintains the lawsuit is without merit.

By March 2007, the housing market's signals were flashing red. Existing home sales plunged at the fastest rate in almost 20 years. Foreclosures were on the rise. And yet, to CDO buyer Peter Nowell's surprise, banks continued to churn out CDOs.

"We were pulling back. We couldn't find anything safe enough," says Nowell. "We were amazed that April through June they were still printing deals. We thought things were over."

Instead, the CDO machine was in overdrive. Wall Street produced $70 billion in mortgage CDOs in the first quarter of the year.

Many shareholder lawsuits battling their way through the court system today focus on this period of the CDO market. They allege that the banks were using the sales of CDOs to other CDOs to prop up prices and hide their losses.

"Citi's CDO operations during late 2006 and 2007 functioned largely to sell CDOs to yet newer CDOs created by Citi to house them," charges a pending shareholder lawsuit against the bank that was filed in federal court in Manhattan in February 2009. "Citigroup concocted a scheme whereby it repackaged many of these investments into other freshly-baked vehicles to avoid incurring a loss."

Citigroup described the allegations as "irrational," saying the bank's executives would never knowingly take actions that would lead to "catastrophic losses."

In the Hall of Mirrors, Myopic Rating Agencies
The portion of CDOs owned by other CDOs grew right alongside the market. What had been 5 percent of CDOs (remember the "bucket") now came to constitute as much as 30 or 40 percent of new CDOs. (Wall Street also rolled out CDOs that were almost entirely made up of CDOs, called CDO squareds.)

The ever-expanding bucket provided new opportunities for incestuous trades.

It worked like this: A CDO would buy a piece of another CDO, which then returned the favor. The transactions moved both CDOs closer to completion, when bankers and managers would receive their fees.

Source: Thetica Systems

Source: Thetica Systems

ProPublica's analysis shows that in the final two years of the business, CDOs with cross-ownership amounted to about one-fifth of the market, about $107 billion.

Here's an example from early May 2007:
  • A CDO called Jupiter VI bought a piece of a CDO called Tazlina II.

  • Tazlina II bought a piece of Jupiter VI.

Both Jupiter VI and Tazlina II were created by Merrill and were completed within a week of each other. Both were managed by small firms that did significant business with Merrill: Jupiter by Wing Chau's Harding, and Tazlina by Terwin Advisors. Chau did not respond to questions about this deal. Terwin Advisors could not reached.

Just a few weeks earlier, CDO managers completed a comparable swap between Jupiter VI and another Merrill CDO called Forge 1.

Forge has its own intriguing history. It was the only deal done by a tiny manager of the same name based in Tampa, Fla. The firm was started less than a year earlier by several former Wall Street executives with mortgage experience. It received seed money from Bryan Zwan, who in 2001 settled an SEC civil lawsuit over his company's accounting problems in a federal court in Florida. Zwan and Forge executives didn't respond to requests for comment.

After seemingly coming out of nowhere, Forge won the right to manage a $1.5 billion Merrill CDO. That earned Forge a visit from the rating agency Moody's.

"We just wanted to make sure that they actually existed," says a former Moody's executive. The rating agency saw that the group had an office near the airport and expertise to do the job.

Rating agencies regularly did such research on managers, but failed to ask more fundamental questions. The credit ratings agencies "did heavy, heavy due diligence on managers but they were looking for the wrong things: how you processed a ticket or how your surveillance systems worked," says an executive at a CDO manager. "They didn't check whether you were buying good bonds."

One Forge employee recalled in a recent interview that he was amazed Merrill had been able to find buyers so quickly. "They were able to sell all the tranches" -- slices of the CDO -- "in a fairly rapid period of time," said Rod Jensen, a former research analyst for Forge.

Forge achieved this feat because Merrill sold the slices to other CDOs, many linked to Merrill.

The ProPublica analysis shows that two Merrill CDOs, Maxim II and West Trade III, each bought pieces of Forge. Small managers oversaw both deals.

Forge, in turn, was filled with detritus from Merrill. Eighty-two percent of the CDO bonds owned by Forge came from other Merrill deals.

Citigroup did its own version of the shuffle, as these three CDOs demonstrate:

  • A CDO called Octonion bought some of Adams Square Funding II.

  • Adams Square II bought a piece of Octonion.

  • A third CDO, Class V Funding III, also bought some of Octonion.

  • Octonion, in turn, bought a piece of Class V Funding III.

All of these Citi deals were completed within days of each other. Wing Chau was once again a central player. His firm managed Octonion. The other two were managed by a unit of Credit Suisse. Credit Suisse declined to comment.

Not all cross-ownership deals were consummated.

In spring 2007, Deutsche Bank was creating a CDO and found a manager that wanted to take a piece of it. The manager was overseeing a CDO that Merrill was assembling. Merrill blocked the manager from putting the Deutsche bonds into the Merrill CDO. A former Deutsche Bank banker says that when Deutsche Bank complained to Andy Phelps, a Merrill CDO executive, Phelps offered a quid pro quo: If Deutsche was willing to have the manager of its CDO buy some Merrill bonds, Merrill would stop blocking the purchase. Phelps declined to comment.

The Deutsche banker, who says its managers were independent, recalls being shocked: "We said we don't control what people buy in their deals." The swap didn't happen.

The Missing Regulators and the Aftermath
In September 2007, as the market finally started to catch up with Merrill Lynch, Ken Margolis left the firm to join Wing Chau at Harding.

Chau and Margolis circulated a marketing plan for a new hedge fund to prospective investors touting their expertise in how CDOs were made and what was in them. The fund proposed to buy failed CDOs -- at bargain basement prices. In the end, Margolis and Chau couldn't make the business work and dropped the idea.

Why didn't regulators intervene during the boom to stop the self-dealing that had permeated the CDO market?

No one agency had authority over the whole business. Since the business came and went in just a few years, it may have been too much to expect even assertive regulators to comprehend what was happening in time to stop it.

While the financial regulatory bill passed by Congress in July creates more oversight powers, it's unclear whether regulators have sufficient tools to prevent a replay of the debacle.

In just two years, the CDO market had cut a swath of destruction. Partly because CDOs had bought so many pieces of each other, they collapsed in unison. Merrill Lynch and Citigroup, the biggest perpetrators of the self-dealing, were among the biggest losers. Merrill lost about $26 billion on mortgage CDOs and Citigroup about $34 billion.

Tent Cities, Homelessness And Soul-Crushing Despair: The Legacy Of Decades Of Government Debt And Mismanagement Of The Economy
by Michael Snyder - Economic Collapse

For decades, our politicians have been deeply addicted to government debt, they have stood idly by as millions of our jobs have been shipped overseas and they have passed countless business-crushing regulations and they never thought that it would catch up with us.  Well, it has.  America has been living in the biggest debt bubble in the history of the world, and now that bubble is starting to pop.  There has never been such an extended period of unemployment in the United States since the Great Depression, and millions of Americans are losing their homes.  Homelessness is skyrocketing, tent cities are popping up everywhere and countless numbers of American families are experiencing the soul-crushing despair that comes from desperately trying to hang on for month after month after month.

Now, because of the horrific hole that our politicians have dug for us, we are faced with some heartbreaking choices.  For example, right now the U.S. Congress is deciding whether or not to extend long-term unemployment benefits for the nation's jobless.

Extending those benefits through the end of February would add another $12.5 billion to the U.S. national debt.  But not doing it would cut off the only lifeline that many Americans have just in time for the holidays.

The extension of jobless benefits that was passed last summer expires on December 1st.  If these long-term benefits are not renewed, approximately 2 million unemployed Americans will lose their checks.

But what can the U.S. Congress do?  Just keep going into endless amounts of debt?  As I have written about previously, the United States is never going to see another balanced budget ever again under the current system.  The U.S. government is flat out broke.  Somehow our politicians desperately need to find a way for the federal budget to stop hemorrhaging red ink.

There is no more "extra money" to spend.  The U.S. government has piled up the biggest mountain of debt in the history of the world and we are headed for a complete and total economic disaster because of it.

But what are we going to do?  Are we going to let millions of Americans starve in the streets?

It's not just the rapidly rising number of homeless Americans that is the problem.  Millions of Americans are not going to be able to heat their homes this winter.  Millions of others are going to have to choose between buying medicine and buying food because they will not be able to afford both.

How would you like to be at a point where you could not go to the doctor because you knew that you could not pay the deductible?

How would you like to be at a point where you had to decide whether to buy diabetes medicine or to buy macaroni and cheese to feed your family?

More than 42 million Americans are now on food stamps, and that number keeps going up month after month after month.

Just think about that.

42 million Americans would not be able to eat if the U.S. government did not give them handouts.

The safety net is getting awfully crowded.

If you really want to see some soul-crushing desperation, go check out the flood tunnels under the city of Las Vegas.  But do not do this alone - it is very dangerous down there.  Today, there are hordes of "tunnel people" who call those dark tunnels home.  Nobody knows for sure how many people are down there (some people say that it is well into the thousands), but everyone agrees that the number is rapidly growing.

But in many major U.S. cities there are no flood tunnels to go to.  Instead, in many areas of the United States huge tent cities have sprouted.  The following is a video news report from the BBC about the tent cities that are popping up all over America....

But it is not just "drug addicts" and the "mentally ill" that are going to these tent cities.  One anonymous unemployed woman identified only as "Kaynonymous" is a highly educated professional who figures that she will end up in a tent city soon....

"I'm a 99er too. 53, female, single and once on track with an IT career. No one in their right mind would consider me for an IT position after being gone from the field for over 2 years. I have officially been a 99er since May 2010. In Aug. 2010 all of my savings and retirement funds were finally depleted--not only can I no longer make my mortgage payment, I can no longer afford utilities either. I'm just not sure that the 99ers ever had a voice outside of union organizers and even with them it was too little too late. Guess I'll be seeing ya'll in the soup kitchens and tent cities. I do still have my tent..."

So we should just extend the long-term unemployment benefits, right?  Well, according to a recent poll commissioned by the National Employment Law Project, 73 percent of Americans want Congress to continue paying out extended unemployment benefits.

But it is not just that simple.

America is broke.

The entire financial system is dying.

The U.S. government desperately needs to stop spending so much money.

But how can we turn our backs on people who are desperately hurting?

There are millions of Americans that have just about reached the end of their ropes.  For example, one 43-year-old woman named Jacqueline recently expressed some of the extreme frustration that she is experiencing on her blog....

I am one of the 6 million poor, unemployed middle-aged Americans struggling without any safety net or income other than food stamps. I have resorted to salvaging scrap metal just to survive while keeping up an increasingly hopeless job search. On May 4th, 2010 just three weeks before my 43rd birthday ago I got slapped with a diagnosis of very early stage glaucoma when I had a six year long overdue optical exam for badly needed new glasses. Without treatment — including ophthalmologist’s glaucoma monitoring exams — I will end up blind and permanently disabled. It’s not a matter of “if”, it’s a matter of when.

As a society, we will be judged by how we treat those who are the most vulnerable.  It can seem easy to bash those who have lost everything, but someday you might end up in that position.  In the following video, police in St. Petersburg, Florida are seen using box cutters to slice up the tents that the homeless were sleeping in....

Hopefully you were deeply disturbed by that video.

We have gotten ourselves into a giant mess, and things are only going to get worse.

Unfortunately, some extremely painful decisions are going to have to be made.

The truth is that we are so deeply in debt that the U.S. government just cannot be spending any extra money right now.

However, we also cannot turn our backs on millions of American families that are going to lose their homes and go hungry if we do not help them.

So what do we do?

What hurting Americans need most of all are not handouts - what they really need are good jobs.

But good jobs are being shipped overseas at a breathtaking pace.  The United States has lost approximately 42,400 factories since 2001.  The greatest economic machine in the history of the world is literally having its guts ripped out, and most of you kept voting in jokers who supported all of this deindustrialization.

For decades, our politicians kept telling us how wonderful globalization would be for America.  We didn't listen when Ross Perot warned us about "the great sucking sound" that these "free trade" agreements would bring about.

Well, look how all of that turned out.  In 1985, the U.S. trade deficit with China was 6 million dollars for the entire year.  In the month of August alone, the U.S. trade deficit with China was over 28 billion dollars.

In case you can't figure it out, that means that 28 billion dollars of our national wealth was transferred to China in just one month.

This is happening month after month after month.

And yet Barack Obama continues to get up and tell us how wonderful globalism is.  During his recent trip to India, Barack Obama made the following statement....

"This will keep America on its toes. America is going to have to compete. There is going to be a tug-of-war within the US between those who see globalization as a threat and those who accept we live in a open integrated world, which has challenges and opportunities."

Yes, globalization is a threat.  We should have never merged our economy with the economy of China where workers make less than a tenth of what an American worker makes.

Jobs are flooding out of the U.S. and they are flooding into places like India and China where labor is far, far cheaper.

But without good jobs, how in the world are average Americans going to pay the bills?

The answer is that an increasing number of them are not.  1.41 million Americans filed for personal bankruptcy in 2009 – a 32 percent increase over 2008.

Incomes are going down.  According to the U.S. Census Bureau, median household income in the United States fell from $51,726 in 2008 to $50,221 in 2009.

Things are getting worse instead of getting better.

And things are going to continue to get worse because the U.S. government goes into more debt every single month, most state and local governments go into more debt every single month, and thanks to America's exploding trade deficit, tens of billions of our national wealth gets transferred out of the United States every single month.

The U.S. economy is dying.  There are going to be even more tent cities and even more hungry Americans.  The scale of the economic nightmare that we are facing in the years ahead is going to be unimaginable.

So if you get to enjoy a warm dinner and you get to sleep in a warm bed tonight, please consider yourself to be very fortunate.  Someday soon you also may find those things cruelly stripped away from you.

Few Businesses Sprout, With Even Fewer Jobs
by Justin Lahart and Mark Whitehouse

Fewer new businesses are getting off the ground in the U.S., available data suggest, a development that could cloud the prospects for job growth and innovation. In the early months of the economic recovery, start-ups of job-creating companies have failed to keep pace with closings, and even those concerns that do get launched are hiring less than in the past. The number of companies with at least one employee fell by 100,000, or 2%, in the year that ended March 31, the Labor Department reported Thursday.

That was the second worst performance in 18 years, the worst being the 3.4% drop in the previous year. Newly opened companies created a seasonally adjusted total of 2.6 million jobs in the three quarters ended in March, 15% less than in the first three quarters of the last recovery, when investors and entrepreneurs were still digging their way out of the Internet bust.

Research shows that new businesses are the most important source of jobs and a key driver of the innovation and productivity gains that raise long-term living standards. Without them there would be no net job growth at all, say economists John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the Census Bureau. "Historically, it's the young, small businesses that take off that add lots of jobs," says Mr. Haltiwanger. "That process isn't working very well now."

Ensconced in a strip mall behind a Carpeteria outlet, Derek Smith has been tinkering for two years with a wireless electrical system that he says can help schools and office buildings slash lighting bills. With his financing limited to what he earns as a wireless-technology consultant, he has yet to hire his first employee.

This is a far cry from his last start-up, which he cofounded in 2002. At the two-year mark, that company, which makes radio-tracking gear for hospital equipment, had five employees, about $1 million in funding from angel investors and offices with views of downtown San Diego. "When I started this the plan was to go out and raise a bunch of money," says Mr. Smith, who is 36 years old. That was in late 2008, just as financial markets around the world collapsed. "I quickly discovered I can't do what I did before."

Tough economic times have pushed more Americans into business for themselves, working as consultants or selling wares online. But many are not taking the additional step of forming a company and hiring employees. For people like Mr. Smith, lack of funding seems to be the biggest problem. Two traditional sources of start-up cash—home-equity loans and credit cards—have largely dried up as banks wrangle with massive defaults and a moribund housing market. Venture-capital firms that typically invest in young companies, as well as angel investors that focus on early-stage start-ups, are pulling back as they struggle to sell the companies they already own.

Venture-capital firms invested $25.1 billion in the year that ended in September, up 10% from the same period a year earlier but still down 27% from two years earlier, according to Dow Jones VentureSource. Angel investment amounted to $8.5 billion in the 2010 first half—30% below the average level in the five years leading up to the financial crisis, estimates Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. "I've never seen seed capital so low," says Mr. Sohl. "This is alarming."

Some entrepreneurs say it's not all about financing, though. They express concern about taxes, health-care costs and the impact that wrangling in Washington over the federal budget deficit will have on them. "I can't determine what the cost of providing health care for employees would be," says Kevin Berman, 47, who is starting a local-produce company in Orion Township, Mich., called Harvest Michigan. Starting a company "is harder than it was at any time I can remember."

San Diego has long been one of the nation's entrepreneurial hotbeds, a culture that dates back to the 1960s with the founding of Linkabit Corp., a communications company whose alumni have launched scores of technology companies. A 1970s biotechnology start-up, Hybritech Inc., gave rise to a thriving biotechnology industry. Lately, though, the pace of start-ups securing funding in San Diego has been slowed at the University of California at San Diego center that helps researchers move their work into the commercial sphere. "Investors are moving away from early-stage companies," says Rosibel Ochoa, director of the William J. von Liebig Center. "Nobody wants to touch them."

Scarce funding is putting researchers like Deli Wang in a bind. The 42-year-old engineering professor is an expert on nanowires, thread-like structures with widths less than a thousandth the diameter of an average human hair. He has a plan to make light-emitting diodes using nanowires that, he says, would be far more efficient than existing alternatives. Investors, he says, are interested—if they can see a prototype. Building one would cost Mr. Wang $200,000 that he doesn't have. "We're kind of stuck," he says.

To be sure, some companies are still getting started, particularly in biotechnology, where cash-rich pharmaceutical concerns are eager buyers and investors. In the first half of 2010, health care and biotech accounted for 44% of all angel investments, Mr. Sohl says. And in many cases, entrepreneurs today don't need as much money, or as many people, to start new businesses. Software, communications technology and high-tech equipment are far cheaper and far more powerful than they were a decade ago.

At Mr. Smith's one-man San Diego start-up, Tesla Controls Corp., circuit boards, semiconductor chips and other components litter a plastic folding table he uses as a workbench. "The hardware stuff is all cheaper," he says. "Any of these chips are $5 or less." Much of Mr. Smith's economizing is the result of necessity. With a family to support, he doesn't want to borrow against his house. Angel investors, if interested, would demand a larger stake at a lower price than he can stomach. And the small stake he still has in his earlier start-up, Awarepoint Corp., is only paper wealth.

The lack of funding is slowing him down. And the day a week he spends on consulting takes away from the time that he can devote to his new company. "I would love to be able to hire other people," he says. "But right now I can't."

Prime U.S. Mortgage Foreclosures Hit Record as Unemployment Hurts Finances
by Kathleen M. Howley - Bloomberg

Foreclosures on prime fixed-rate mortgages in the U.S. jumped to a record in the third quarter as unemployment strained household budgets of the most creditworthy borrowers.

The inventory of homes in foreclosure financed by prime fixed-rate loans rose to 2.45 percent from 2.36 percent in the previous three months, the Mortgage Bankers Association said in a report today. New foreclosures rose to 0.93 percent from 0.71 percent. Both numbers were the highest in the 12 years since the Washington-based trade group started tracking the categories.

Homeowners are falling behind on their mortgage payments as job cuts make it difficult for them to cover their bills, said Michael Fratantoni, the Mortgage Bankers Association’s vice president of research and economics. The unemployment rate has stayed above 9 percent for 18 consecutive months, the longest stretch since 1983, according to the Bureau of Labor Statistics. “The increase in these plain-vanilla type of loans to the highest numbers ever show us it really is being driven by the economic environment,” Fratantoni said in a telephone interview. “It’s not going to turn around until we get more significant job growth.”

New foreclosures against all types of mortgages, which also include subprime, rose to 1.34 percent, the highest level in a year, according to the report. The overall inventory of loans in foreclosure dropped to 4.39 percent from 4.57 percent as some mortgages were modified by servicers, companies that administer payments. Those modified loans may reappear as foreclosures in future quarters because of redefaults, said Fratantoni.

Defaulting Again
The share of mortgages with overdue payments dropped to 9.13 percent in the third quarter from 9.85 percent in the prior period, the trade group’s report showed. The rate was 9.64 percent a year earlier. The decline was led by mortgages 90 days or more overdue, those most likely to go into foreclosure. That category fell almost half a percentage point from the second quarter to 4.34 percent, which may also be a reflection of the increase in modified loans, Fratantoni said. “The modification programs have helped a number of borrowers, but at the same time we do see redefault rates of around 50 percent at 12 months,” Fratantoni said.

HAMP Modifications
Servicers modified 108,946 mortgages in the second quarter using the Obama administration’s primary anti-foreclosure plan, the Home Affordable Modification Program, or HAMP. That was an 8.7 percent increase from the prior period, according to U.S. Treasury Department data. Using private programs, the companies altered an additional 164,473 home loans, a gain of 25 percent, the data show.

Almost half of the mortgages modified in 2009’s first quarter, before HAMP began in March of that year, were overdue by 90 days or more in this year’s second quarter, according to Treasury Department data. Mortgages overdue by more than three months typically are considered in default, while home loans overdue by fewer days are called delinquent.

Modifications using the HAMP guidelines have a better track rate than non-government programs, the data show. Six months after changing mortgage terms, 11 percent of HAMP modifications were delinquent, compared with 22 percent of loans renegotiated using other means, according to Treasury. HAMP lowers mortgage payments to about a third of borrowers’ income by temporarily reducing interest, lengthening the term of the loan and deferring principal payments.

Foreclosure Freeze
Today’s Mortgage Bankers Association report doesn’t include much data related to foreclosure freezes that began in late September after questions arose about the integrity of court filings, Fratantoni said. Attorneys general in all 50 states are conducting probes into foreclosure practices after allegations surfaced that mortgage industry employees signed legal documents without ensuring their accuracy. “We really don’t know what impact the halt will have, though it certainly will put upward pressure on some of the foreclosure numbers,” Fratantoni said. “We’re looking to the fourth quarter or 2011’s first quarter to see the results.”

U.S. Homeowners Drop Out of Foreclosure Program Amid Record Defaults
by Lorraine Woellert and Clea Benson - Bloomberg

U.S. homeowners are dropping out of the Obama administration’s foreclosure prevention program at a faster rate than they are joining it, according to figures released today by the U.S. Treasury Department.

Borrowers aided by the Home Affordable Modification Program grew to nearly 520,000 in October, up 23,750 from a month earlier, the Treasury said in its monthly report. The increase was less than five percent. A total of 36,300 borrowers have dropped out of the plan for failing to make their payments, an increase of 24 percent from a month earlier.

At a congressional hearing earlier in the day, lawmakers said HAMP, which pays lenders to modify loans and reduce monthly payments for struggling borrowers, isn’t doing enough to help homeowners falling behind on their mortgages amid high unemployment and depressed real estate values. “It’s safe to say that HAMP isn’t meeting its goal of preventing foreclosures,” Representative Maxine Waters, a California Democrat, said at a House Financial Services subcommittee hearing after the Treasury provided a preview of the report.

The Treasury and the Department of Housing and Urban Development issue monthly progress reports on HAMP, a $50 billion program authorized by Congress in 2009. The program was targeted to reach more than 3 million homeowners by paying mortgage servicers $1,000 to rewrite loan terms and $1,000 annually as long as the borrower participates, up to three years.

Foreclosures Outpace Modifications
The 520,000 homeowners helped by the plan since it was launched in March 2009 contrast with high rates of foreclosure, even among the most creditworthy borrowers. Administration officials emphasized the report’s positive news, especially the cumulative number of borrowers who have received loan modifications supported by the program.

At the same time, the officials acknowledged that the program is struggling to slow the tide of foreclosures at a time of economic hardship. Foreclosures on prime fixed-rate mortgages in the U.S. jumped to a 12-year record in the third quarter as unemployment strained household budgets, the Mortgage Bankers Association reported today. “While we cannot stop every foreclosure, we know that more has to be done to reach homeowners in distress and to help unemployed borrowers,” HUD Assistant Secretary Raphael Bostic said in a written statement.

Recipients Default
The program has been faulted by lawmakers and watchdogs including Neil Barofsky, special inspector general for the Troubled Asset Relief Program, for the high number of recipients who default on mortgages after getting the government aid. Banks seized more than 93,000 homes in October, according to Irvine, California-based data seller RealtyTrac Inc. There were nearly 3.3 million foreclosure starts from September 2009 through September 2010, according to LPS Applied Analytics in Jacksonville, Florida.

Mortgage servicers say they are trying to balance the needs of borrowers and the demands of investors who own their loans. “We’ve reached a crossroad between modification efforts now and the reality of foreclosure. Despite our best efforts and numerous programs, for some customers foreclosure will be unavoidable,” said Rebecca Mairone, default servicing executive for Bank of America Corp. home loans, at today’s House hearing.

The Waiting Game on Inflation
by Floyd Norris - New York Times

The core rate of inflation fell to a record low in the United States last month, rekindling fears of deflation and warnings that the Federal Reserve might have to take even more aggressive steps to keep inflation as high as it wants it to be. “In the short run, disinflationary forces in Western economies, especially the U.S., appear too powerful to be overwhelmed by the recent loosening of monetary policy,” said Richard Batty, an investment strategist at Standard Life Investments, a Scottish firm.

Since the collapse of the housing market in the United States and the beginning of the global financial crisis, the Federal Reserve has made avoiding deflation a major priority, recalling the experience of Japan after its bubble burst in the early 1990s. The Fed has set an annual inflation target of 2 percent or a little lower, but is not getting it.

The latest figures, released this week, showed that overall inflation in consumer prices was 1.2 percent in the 12 months through October, while the core inflation rate — excluding food and energy — rose just 0.6 percent. The previous low for that index, of 0.7 percent, came in the 12 months through February 1961, when the economy was in recession.

As the accompanying chart indicates, the core inflation figures are charting a path roughly similar to one shown in Japan 15 years earlier. That has been true despite a much stronger reaction by the American central bank, which was determined not to make the same mistakes the Japanese made.

Deflation is feared for several reasons. If consumers come to expect it, as happened in Japan, there is a strong incentive to delay purchases while waiting for a lower price. That can restrain economic activity and increase unemployment. In addition, deflation places downward pressure on asset prices, worsening the situation of those who are indebted.

The latest announced move by the Fed, called QE2 in the media as a shorthand for the second round of quantitative easing, calls for the central bank to purchase $600 billion of longer-term Treasuries in coming months. While the Fed has traditionally conducted its open market operations using short-term Treasury bills, rates on those are already close to zero, forcing the bank to move out the maturity spectrum if it wants to stimulate the economy.

That move has been denounced overseas as an effort to reduce the value of the dollar, something Fed officials deny, and inside the country as an effort to print money and support big government that would lead to runaway inflation.

This week, a group of Republicans proposed to change the Fed’s dual legal mandate, which calls on it both to keep inflation tame and to fight unemployment. “It’s time to return the Federal Reserve to the singular mission of protecting the fundamental strength and integrity of the dollar,” said Representative Mike Pence of Indiana, a Republican and chief sponsor of the proposal.

There are times when the dual mandate seems contradictory, but this is not one of them, and it is unlikely the Fed would change course if it had a single mandate. The political criticism could make it harder for the Fed to continue acting if the economy remains weak and inflation keeps falling after QE2 is completed. But it might conclude it had no choice.

“To change inflation expectations permanently,” wrote Mr. Batty of Standard Life, “a much larger monetary response would be needed from the U.S. and Western authorities than that already announced. In summary, if central bankers decide that higher inflation must be engineered, then investors should anticipate another phase of extraordinary policy measures through QE3.”

Outraged Yet? What if the Fed Buys Munis?
by John Melloy - CNBC Fast Money

California’s delay of a $10 billion municipal bond sale has only fueled existing chatter on trading floors that the Federal Reserve would take the extraordinary step of buying these securities just as it has with Treasuries. Chairman Ben Bernanke would pursue this unprecedented route, if he thought necessary, even after the vocal criticism he’s received for his second round of quantitative easing, they said.

“Given the recent bond offering by California appears to have been given the cold shoulder by the public, might they turn to the Fed?” asks Art Cashin, director of NYSE floor operations at UBS Financial Services, in his widely-read morning note to clients. Cashin has often referred to a 2002 speech by Bernanke on deflation, where the Chairman hints at buying all kinds of securities as a playbook for the current crisis.

“The Fed has the authority to buy foreign government debt, as well as domestic government debt,” said then-Governor Bernanke, to the National Economists Club in Washington D.C.

“Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects," he added. "For this reason, as I have emphasized, prevention of deflation is preferable to cure. Nevertheless, I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.”

Municipal bonds, funds and ETFs have gotten slammed the last two weeks as states and counties sell more bonds to cover year-end spending. A possible compromise on the Bush dividend and capital gains taxes has also caused some investors to flee this sector since its attractiveness is partly based on its function as a tax shelter.

“The Fed could buy munis and it would be rather like the ECB buying Greek debt,” said Patty Edwards of Trutina Financial. “With the tax cuts being extended, munis won’t have the same demand that they would have if tax rates jumped.  And that could lead to issues for the muni markets.”

Edwards and other money managers have said talk of this move has been around for a while and exists today even with the current backlash against “QE2”. Notable economists wrote an open letter to the Fed last week arguing against the ongoing buying of $600 billion in Treasury securities that the FOMC announced earlier this month. Republican Congressmen, both current and incoming, have been in up in arms about the move, becoming unlikely allies with central banks from China to Brazil, who have accused Bernanke of essentially exporting inflation to their countries.

“With election results, it’s going to aggravate many to bail out states, but I could see it happening,” said Steve Grasso of Stuart Frankel. “My feel is they will have to regardless of political environment.”

The PowerShares Insured Cali Muni Bond Fund is down 6 percent in five days, but only down about a half percent today. The iShares S&P National AMT-Free Municipal Bond Fund has lost five percent of its value this month. “We're a bit away from a crisis feeling in the sector and the recent performance is certainly within the normal boundaries of supply/demand imbalance-driven volatility,” said Ben Thompson, who manages $7 billion for Samson Capital Advisors.

Many investors agree with Thompson that it won’t be needed. Some even question the legality for the central bank to even do so. But we didn’t think the government would one day be the biggest seller in an initial public offering of General Motors either. “If the U.S. economy takes another leg down, Bernanke will buy everything,” said Peter Boockvar, equity strategist at Miller Tabak. “Even things in your attic.”

The Men Who Killed the Economy
by Niall Stanage - Daily Beast

Ireland’s economic troubles threaten the financial health of Europe and even the U.S. At the heart of the multibillion-dollar crisis are two highflying bankers who some say took the country for a ride.

Ireland was hailed as an economic miracle not so long ago. Now, it’s an economic basket-case that threatens the financial health not just of Europe but of the U.S. as well. But the outsize role of two men in this financial meltdown is a little-known story offering a salutary lesson about the dangers of greed, groupthink, and lax regulation as anything that has taken place on this side of the Atlantic.

Sean FitzPatrick was the CEO of Anglo Irish Bank from 1986 to 2005. At that point, he assumed the chairmanship, and David Drumm, his protégé, became the bank’s leader. The two men built the bank from a tiny operation—it had eight employees when FitzPatrick took over—to something that looked like an international powerhouse. Looks were deceptive. The bank would be its nation’s downfall.

During the boom years, Anglo expanded its market share by reckless lending, especially to property developers. More established, conservative Irish banks began to ape some of the same tactics to ward off the new contender. Then, the property bubble popped and the whole house of cards tumbled. The Irish government took control of Anglo in January 2009. It has been hurling taxpayers’ money into an apparently bottomless pit ever since. Irish Finance Minister Brian Lenihan originally estimated the cost of propping up the bank at $6.1 billion. He admitted two months ago that it would actually be between $39.8 billion and $46.7 billion.

The price tag has propelled Ireland’s deficit to hitherto unimaginable levels—and this, in turn, now necessitates international intervention. “The banks are gobbling up the state,” is the verdict of Martina Devlin, an Irish newspaper columnist and the co-author of Banksters, a 2009 book tracing the roots of the collapse. Brian Lucey, a Trinity College, Dublin finance professor, says that the feeling on the streets of the Irish capital is that “the republic has been raped, torn apart” by the bankers and their political friends. At the heart of the rapaciousness, at least in the public mind, are FitzPatrick and Drumm.

FitzPatrick was once one of the heroes of Celtic Tiger Ireland. An ebullient former accountant with a fondness for bowties, he was known as “Seanie Fitz” to his many social acquaintances. For those on the way up, FitzPatrick was someone to whom it was useful to pay obeisance. Devlin recalls seeing the banker’s aura in full effect at a 2007 charity function. “It really was like the parting of the Red Sea,” she tells The Daily Beast. “People actually did step aside for him.”

FitzPatrick knew some things that the general public did not—notably, that he held personal loans amounting to well over $110 million from the bank. He used the money to finance a host of exotic ventures: a share in a Nigerian oil well; an interest in a casino in Macau; a property investment in Budapest. There were even plans to get into the movie-financing business. The eventual discovery of these loans precipitated FitzPatrick’s departure from the company in December 2008. David Drumm followed him out the door the next day.

Prior to becoming CEO, Drumm had made his name at Anglo by expanding its U.S. business. Drumm did not share FitzPatrick’s taste for the limelight but he was just as aggressive about growing the business. The attitude was apparently widespread at Anglo. During a court case in April, an Irish property developer, Michael Daly, described how the company was “extremely anxious” to lend him money during the boom years, in the process allegedly dismissing the need to secure large loans as “a formality.”

The duo’s downfall has had its share of drama. Irish police arrested FitzPatrick in March this year, though he was released without charge soon afterward. In July, a Dublin court took 12 minutes to declare him bankrupt. Around $95 million of the loans he took from the bank have never been repaid. (Calls and emails to a lawyer identified in previous media reports as representing FitzPatrick were not returned.)

Drumm has embarked on a more circuitous path. Anglo says that it is owed around $11.5 million by him. When negotiations over a settlement broke down in Ireland, he filed for bankruptcy in Massachusetts, a move widely seen as an attempt to frustrate the bank.

Drumm has considerable assets in the area, though at least one residence in Wellesley, a tony Boston suburb, is owned by a trust, thus shielding it from repossession. He also owns a home in Chatham on Cape Cod, which is valued at around $3 million. Drumm’s pushback against the bank received a boost this week, when a court-appointed official in charge of overseeing the bankruptcy process claimed that Anglo acted fraudulently in its dealings with him. Still, many Irish people look askance at Drumm’s efforts, which include an attempt to countersue Anglo for causing him mental distress.

“It shows an extraordinarily brass neck,” says Martina Devlin. The imminent international bailout, meanwhile, is a source of real desolation to the citizens of a nation that, not so long ago, seemed to have finally transcended its impoverished history.

Killian Forde, a Dublin city councilman and a member of the opposition Labor Party, described the scene in one quintessential Irish setting on Wednesday evening. “I went to the pub and there were only about 10 or 15 people there, because people don’t have the money to go to the pub anymore,” he said. “But the ones who were there were hopping mad. And behind the anger, there was just this sense of failure—total and utter failure. People kept saying: ‘This is pathetic.’”

Forde is among those who note that every scintilla of blame cannot be put on FitzPatrick and Drumm. He says that the banking crisis has shined a light upon “just how small Ireland is, and how interconnected the bankers are with the politicians.” Brian Lucey, the Trinity College professor, also wonders if part of the anger directed at FitzPatrick is rooted in a kind of national self-disgust about the way avarice took hold in the boom years. “When we hold a mirror up to ourselves, we see Sean FitzPatrick’s face looking back,” he says.

Still, there is no mistaking the depth of public rage. In May, an effigy of FitzPatrick was burned on the streets of Dublin. Forde says he believes that David Drumm is now held in even greater opprobrium—if such a thing is possible—because of his departure to the U.S. “He is just considered a scumbag,” he says. “I would think his life would be in serious danger if he came back here.”

In 2007, Sean FitzPatrick, then seen as a leading captain of industry, complained publicly about governmental interference and “McCarthyism.” “The tide of regulation has gone far enough,” he protested. “Our wealth creators should be rewarded and admired, not subjected to levels of scrutiny which convicted criminals would rightly find intrusive.”

In Ireland, as in the U.S., the debate about who the real criminals are may be only just beginning.

European Central Bank tightens screw on Ireland, Portugal and Spain
by Ambrose Evans-Pritchard - Telegraph

The European Central Bank (ECB) has issued a clear warning that it will press ahead with plans to raise interest rates and withdraw lending support for banks despite the eurozone debt crisis, even if this risks pushing Ireland, Portugal and Spain into deeper trouble.

“The central bank must guard against the danger that the necessary measures in a crisis period evolve into a dependency as conditions normalise,” said Jean-Claude Trichet, the ECB’s president. Luxembourg’s ECB governor, Yves Mersch, echoed the warnings, saying the bank could not continue “cleaning up” in crises. “If rates are low for too long, this leads to a higher risk appetite. We will pay the price if we fail to confront these inevitable dangers,” he said.

More than 98pc of Spanish mortgages are priced off the floating Euribor rate. Any ECB rate rise would be devastating given that there is already a glut of 1.5m homes coming on to the market, according to consultants RR de Acuna.

The ECB warnings came as a troika of officials from the ECB, the Commission, and the International Monetary Fund began a fact-finding mission in Dublin, examining books to determine whether Ireland is strong enough prop up its banking system. Finance minister Brian Lenihan admitted that Dublin was considering “substantial contingency capital” to boost banks, but denied that this would burden the Irish state.

Dublin insists that there is no threat to Ireland’s 12.5pc corporation tax rate but Mary Lou McDonald from Sinn Féin said the country was essentially under foreign occupation. “Officials from the EU and IMF and any other vultures circling around this country should be told to get lost.” Central bank governor Patrick Honohan said a rescue would amount to “tens of billions”. The Irish state is funded until June but this is proving no defence against a run on the banking system.

The euro recovered against the dollar and Europe’s bourses rallied on hopes that the Irish crisis has been contained, but Fitch Ratings said there was still “considerable uncertainty” about the fate of Irish bank debt and bondholder losses. Credit default swaps on Irish, Greek, Portuguese and Spanish debt continued to hover at high levels yesterday amid confusion over the contagion risk. Any bail-out depletes the EU’s €440bn (£374bn) rescue fund, reducing the safety buffer for other countries.

Each rescue reduces the number of donor states able to support the EU safety net, and tests political patience in Germany. “There is a danger that once Ireland has been dealt with markets will concentrate even more on countries such as Portugal and Spain,” said Ulrich Leuchtmann of Commerzbank. Rescue loans for Ireland – as for Greece – add to the debt load without tackling the core problem of solvency. A view is taking hold in the markets that this policy merely delays the inevitable day of EMU debt restructuring.

Ireland bailout worth 'tens of billions' of euros, says central bank governor
by Julia Kollewe - Guardian.

The Irish central bank governor this morning gave the first official confirmation that a rescue package worth "tens of billions" of euros was being prepared to shore up Ireland's embattled banking sector. Speaking as Ireland prepared to open its books to financial experts from the European Union, European Central Bank and International Monetary Fund, Patrick Honohan said he was expecting a "very substantial loan" from the EU and the IMF.

He told RTE's Morning Ireland: "It's my expectation that will happen, yes … absolutely. It will be a large loan because the purpose of the amount to be advanced or to be made available to be borrowed is to show Ireland has sufficient firepower to deal with any concerns of the market." He added: "The ECB would not send large teams if they didn't believe first of all that they could agree to a package – that there is a programme that is fully acceptable to them that could be designed, and that it is likely to be accept to the Irish government and the Irish people."

Asked how much the loan would be worth, he said: "Tens of billions, yes. I don't know that any precision has been put on it yet." IMF officials are already in Dublin, and formal talks between the Irish government are due to begin tomorrow morning. Britain is still considering whether, and how, to support Ireland. David Cameron told MPs this afternoon that any bilateral loan to Dublin would push up the UK's deficit. "A bilateral loan is money that you have to go out and raise in order to lend it," Cameron explained.

However, if Britain takes part in a rescue through the European Commission's €60bn European financial stability mechanism, this would not count as an additional spending commitment.

Stock markets rally
City analysts believe that any loan from the IMF would be offered at a lower rate than borrowing from the financial markets. David Buik at BGC Partners said: "The facility is rumoured to have a coupon of 5% on it – a hell of a lot cheaper than the bond market, which will metaphorically take the skin off your face."

Irish borrowing costs fell on the news, with the yield – or total rate of return – on 10-year Irish government bonds dropping from 8.3% last night to 8.1%. Stock markets rallied today as investors awaited the outcome of the meetings. The FTSE 100 index climbed over 82 points to 5774 in afternoon trading. In Asia, Japan's Nikkei closed 2.06% higher at 10,013.63 while Hong Kong's Hang Seng was up 1.82% at 23,637.39 and South Korea's benchmark index rose 1.62% to 1927.86.

Giulia Comotti, currency analyst at Barclays Capital, said a decision on the type of financial aid for Ireland is expected to be taken within days. "Key elements to stabilise the financial system should include a full and prompt resolution of non-viable banks, as well as considerably higher capital buffers in viable banks than currently available – such buffers would help reassure depositors and financial markets of the sufficiency of capital to absorb any additional unexpected losses in viable credit institutions. It seems indeed that the rescue package could be delivered fairly quickly," Comotti said.

French economy minister Christine Lagarde also tried to calm fears that the crisis could split the single currency area. "No, there is no risk of [the eurozone] breaking up," Lagarde told France Inter radio this morning.

Officials See Irish Rescue at 50 Billion Euros, at Least
by Matthew Saltmarsh - New York Times

The financial support program being discussed between Ireland and potential donors should amount to at least €50 billion, officials with knowledge of the talks said Friday. The ultimate size would depend on whether Dublin takes the money merely to shore up and restructure its crippled banks, or whether a larger package is offered to take Ireland out of the government borrowing markets for some years, said the officials, who were not permitted to speak publicly.

Ireland admitted Thursday that it was likely to accept international aid, despite reservations about losing control of its purse strings. The government is holding discussions with the International Monetary Fund, the European Commission and European Central Bank in Dublin. The talks are set continue next week.

If the parties agree to a package covering only Ireland’s banking sector, the total could be limited to €50 billion, or $68 billion, the officials said. If the decision is taken to take Ireland out of the sovereign debt market for some years — as was the case with Greece’s €110 billion package this year — then it would rise closer to €100 billion.

Bill Murray, an I.M.F. spokesman in Washington, said it was “too early” to speculate on the outcome or timing of the talks. Typically, I.M.F. financing programs take several days — sometimes longer — to negotiate. Speaking to the French daily Le Monde, a senior European official, Klaus Regling, said that the mission would need around two weeks to identify financing needs in the banking sector and identify reforms. Mr Regling, head of the European Financial Stability Facility, the euro zone's temporary safety net, said there would be no problem raising funds.

Amadeu Altafaj, a spokesman for the European Commission, also declined to comment on the state of the talks. Anticipation of a rescue brought some relief on financial markets. The yield on benchmark 10-year Irish bonds fell 9 basis points to 7.8 percent Friday and the Irish Overall Index of stocks was up 0.9 percent in late trading in Dublin. But analysts cautioned a bailout of Ireland may not necessarily spell an end to the debt crisis in the euro area.

Alfred Steinherr, a former chief economist at the European Investment Bank, said that whatever the outcome of the Dublin talks, the issue of a restructuring of sovereign debt would have to be broached by the wider euro area. “Once we find a solution to Ireland, then we can turn to Portugal,” he said. “How many guarantees will the E.U. be able to provide?”

Such a restructuring — sometimes referred to more starkly as default — would probably involve the negotiated or forced lengthening of government bond maturities and possibly changes to interest rates paid by governments to bondholders, Mr. Steinherr said. European officials have admitted that such issues are forming part of discussions now underway — driven by Berlin — on the creation of a permanent fund to replace the temporary ones, which expire in 2013.

The negotiators in Dublin appear to be focusing on the banks — the winding down of non-viable lenders and, potentially, the restructuring and recapitalization of viable institutions — rather than Dublin’s fiscal position. Any funding package “would likely have fiscal conditions, but we would not expect something similar to the heavy reform agenda set for Greece,” the Barclays Capital analysts Antonio Garcia Pascual and Piero Ghezzi said in a note.

For two years now, “Ireland has been implementing fiscal and financial policy measures broadly in line with what an EU-I.M.F. program would have recommended.” The Irish community minister Pat Carey said Friday that a four-year fiscal plan for making €15 billion in savings from 2011 to 2014 would be published early next week, according to Reuters.

Still, one issue surrounding austerity conditions remains to be resolved: differences between Ireland and its European partners over whether to raise Dublin’s ultra-low corporate tax rate. France and Germany consider this rate to be a distortion, while Dublin remains convinced that is crucial to attracting investment and restarting the growth needed to fill state coffers.

Another issue that will have to addressed — perhaps after any aid agreement — is funding for Ireland’s lenders by the E.C.B., which is expected to wind down extraordinary liquidity support from early next year. Barclays said Irish-domiciled banks are the biggest borrowers at the E.C.B., and have borrowed around €130 billion.

Speaking at the Dublin airport on Friday, embattled Irish Prime Minister Brian Cowen vowed to get the “best possible outcome” for the Irish people in the talks, Reuters reported. Andrew Rowan, an analyst at UBS, said in a recent note that the E.C.B. might compensate weak banks from Ireland and elsewhere with “some form of enhanced liquidity provision at shorter terms throughout 2011, given the dependence of sections of the euro-area banking system on E.C.B. funding.”

Ireland denies 'surrendering sovereignty' over bail-out
by Telegraph

Irish prime minister Brian Cowen has dismissed claims his government had surrendered the country's sovereignty, as International Monetary Fund and European officials pore over its accounts to find a solution to the debt crisis.

Mr Cowen said the economy remains strong and sustainable and that Ireland was working with its euro partners to work out "the best options". "There is no question of loss of sovereignty for Ireland," he said. It will be the sovereign decision of the Irish Government on behalf of the Irish people that will decide what shape any package would be where we can decide that's in our best interests."

Mr Cowen's government has faced a barrage of criticism from the opposition and media at home and abroad after it was confirmed the IMF and EU were beginning meetings with the Government in Dublin. There have also been repeated accusations that ministers tried to cover-up the extent of the negotiations between officials which first took place in Brussels late last week.

Patrick Honohan, Governor of Ireland's Central Bank, brought some clarity early on Thursday when he said he expects the country to get a loan worth "tens of billions" of euros through an IMF-EU rescue package. “It will be a large loan because the purpose of the amount to be made available or to be advanced is to show Ireland has sufficient firepower to deal with any concerns of the market. We’re talking about a substantial loan," Mr Honohan told state broadcaster RTE. “It is my expectation that will happen, absolutely," he said, although he added that a final decision had not been reached.

The yield on the Irish 10-year bond fell seven basis points to 7.55pc after his comments, but remains at crippling levels. Finance Minister Brian Lenihan has said another option being examined would be contingency capital - effectively a multi-billion emergency credit line or overdraft for banks. Mr Cowen repeated that "no formal application" has been made for a bail-out or loans. However, "technical discussions" with the EU were intensifying since the meeting of EU finance ministers in Brussels earlier this week, he said.

Olli Rehn, Europe's economics commissioner, said on Wednesday that Ireland is not strong enough to back-stop a banking system that has been shut out of capital markets and suffered a haemorrhage of bank deposits. "The Irish banking sector has to be made viable and sustainable," he said.

Chancellor George Osborne has said the UK stands ready to play its full part in any rescue. "Ireland is our closest neighbour and it's in Britain's national interest that the Irish economy is successful and we have a stable banking system," he said in Brussels. On Wednesday, Mr Cowen insisted that the Irish state is fully-funded until June and did not need a bail-out. "What we're involved in here is working with colleagues in respect of currency problems and euro issue problems that are affecting Ireland," he said.

Enda Kenny, Fine Gael opposition leader, ridiculed the claim, accusing him of raising the "white flag" and subjecting the country to the "dictates" of foreign masters. Officials from the European Central Bank, the Commission, and the IMF are taking part in the "Troika" mission, which Dublin called a "consultation". French finance minister Christine Lagarde said a package may be agreed within days.

Dublin hopes to dress up any bail-out as aid for banks rather than the state, but the distinction became meaningless when Ireland guaranteed its banks in September 2008. "The two are inextricably merged: it's an omelette that is impossible to unscramble," said Professor Brian Lucey from Trinity College Dublin. He estimates the total cost of rescuing Anglo Irish and absorbing toxic debt through the 'bad bank' NAMA at €85bn.

Analysts say the state may have to inject up to €15bn into Bank of Ireland and Allied Irish (AIB) after the pair lost almost €20bn of deposits in the early autumn. The ECB wants to extricate itself from the role of propping up the Irish banking system - and therefore the state - with loans equal to 80pc of Irish GDP. Any bail-out will be on softer terms than the "Memorandum" imposed on Greece.

The country has already slashed spending and cut public wages by 13pc. Brussels is clearly pushing Ireland into a rescue before it needs one in order to stem contagion to Portugal and Spain, so Dublin can hope to extract guarantees on Irish sovereignty and its 12.5pc corporation tax rate, which that has been crucial in luring Google, Microsoft, Pfizer, and others to Ireland. LCH Clearnet doubled its margin requirement to 30pc for Irish bonds despite the likely rescue.

Julian Callow from Barclays Capital said Ireland faces a "truly daunting task" trying to tackle both its financial and fiscal crises at the same time. "The country still has the highest budget deficit in the eurozone despite austerity cuts. The deficit is 12pc of GDP this year after stripping out bank rescue costs, the same as last year. This is what concerns investors," he said.

Irish showdown over corporate tax
by Peter Spiegel, Gerrit Wiesmann and Ben Hall - Financial Times

French and German officials are pressing Ireland to increase its low corporate tax rate in return for an aid package, setting the stage for a showdown over a policy long resented by Dublin’s European partners. Ireland views the corporate tax rate, set at 12.5 per cent, as the cornerstone of its industrial policy. On Thursday Irish officials reiterated their determination to protect it. “It’s non-negotiable,” Mary Coughlan, the deputy prime minister, told parliament.

French, German and European officials told the Financial Times that the tax rate had emerged as a major point of contention as negotiators from the European Union and International Monetary Fund arrived in Dublin to discuss a potential bail-out. One European official involved in the talks said that the corporate tax increase would be a casus belli with the Irish, and that Dublin’s strident objections could well keep it out of any final package.

Irish officials are convinced there are other measures they can take to rein in the deficit. European officials do not think Dublin has many alternatives. A French official said that the low corporate tax rate was seen by some elsewhere in Europe as “almost predatory”. “They need lots of money and we note they have a corporation tax rate that is very low,” the official said. “Supply must follow demand.” “Without an increase in tax intake, the deficit can’t be reined in,” added a German government official, though he added that the size of any corporate tax increase had yet to be discussed. “That depends on [Ireland’s] financing needs, which are still unclear.”

The standoff demonstrates how politically explosive the negotiations have become, with Ireland fiercely defending its sovereignty and potential lenders seeking concrete assurances that their aid will be repaid. Ireland’s central bank governor said Dublin was “definitely likely” to ask for a loan totalling “tens of billions” of euros. “We’re an island nation in a larger grouping [of nations],” said Danny McCoy, head of IBEC, the Irish business lobby. “We set up our [tax] structures in a way that facilitates our people to do the best for themselves. That’s true sovereignty. And to put pressure on us to change is ill-advised. It will not help us solve the problem. It certainly won’t put the bond markets at ease.”

Olli Rehn, the EU’s top economic official, has implied that he backs a corporate tax rise, saying Ireland should no longer consider itself a low-tax nation. “The IMF, ECB and European Commission must realise that any increase in our corporation tax rate would ultimately make us more economically dependent, not less so on our European Union partners,” said Peter Keegan, Ireland country head for Bank of America Merrill Lynch.

IMF chief Dominique Strauss-Kahn urges leaders to cede more sovereignty to EU
by Philip Aldrick - Telegraph

European nations need to cede more of their sovereignty and hand greater powers to the centre to avoid future crises, the head of the International Monetary Fund has said. In what are likely to prove controversial proposals, Dominique Strauss-Kahn, the IMF managing director, called on the European Union to move responsibility for fiscal discipline and structural reform to a central body that is free from the influences of member states.

In a speech in Frankfurt addressing the sovereign debt crisis engulfing Europe once again, he said: “The wheels of co-operation move too slowly. The centre must seize the initiative in all areas key to reaching the common destiny of the union, especially in financial, economic and social policy. Countries must be willing to cede more authority to the centre.”

Europe is plagued by crisis because member states put too much faith in banks and let their public finances run out of control. Greece has already been bailed out and Ireland is expected to agree a €100bn (£85bn) rescue within days. Portugal is also at risk.

Mr Strauss-Kahn did not name any individual eurozone members, but warned: “The sovereign crisis is not over.” Reform is vital but, he said: “The area’s institutions were simply not up to the task of managing a crisis – even setting up a temporary solution proved to be a drawn-out process. “One [solution] is to shift the main responsibility for enforcement of fiscal discipline and key structural reforms away from the Council. This would minimize the risk of narrow national interests interfering with effective implementation of the common rules.”

Handing greater powers to the centre would lead to a greater loss of sovereignty for each of the eurozone’s member states. Monetary policy is already under the control of the European Central Bank, with national governments holding on to fiscal authority.

In proposals that are likely to play into the hands of eurosceptics in the UK and elsewher, Mr Strauss-Kahn recommended more tax harmonisation and a larger central budget. Reiterating a now common theme, he added that the euro area needs to rebalance – with Germany reducing its dependence on exports and other nations shrinking current account deficits.

To manage and monitor the changes, he argued for a larger central budget – funded by “more transparent EU-wide instruments—such as a European VAT, or carbon taxation and pricing”. Alongside tighter fiscal controls, he said labour market reforms in the euro area need to be centralised. “The euro area cannot achieve its true potential with a bewildering patchwork of segmented labour markets,” he said.

“These barriers exacerbate the diverging economic fortunes that threaten the euro area today. It is time to create a level playing field for European workers, especially in the area of labour taxation, social benefits systems and portability, and employment protection legislation.” He added: “The only answer is more cooperation, and greater integration.”

The Texas Fix Is Unlikely for Ireland
by Floyd Norris - New York Times

Texas may not look much like Ireland. But at different times, each was deemed a model of rapid economic growth, envied and resented by neighbors. During those boom times, each had banks that went crazy, making so many speculative loans that the banking system was doomed when the bubble burst.

The difference was in what happened after the fall. The United States let the Texas banking industry collapse, with out-of-state banks picking up the pieces as the national deposit insurance fund suffered substantial losses. Ireland instead decided to bail out the banks and nurse them back to health as institutions based in Ireland, not controlled in some other country, and there was no European burden-sharing. That decision may end up bankrupting Ireland. It certainly has led to a deep and enduring recession.

Texas banks got into their mess because of the great oil boom prompted by the Iranian revolution in 1979. In 1980 and 1981, Texas grew rapidly while the overall American economy stagnated. The banks piled in and made huge profits. Real estate prices rose, and there was a surge in construction.

When it ended, the banks gradually folded, and tales of excess became legendary. The era was exemplified by Penn Square Bank in Oklahoma, a neighboring oil producer whose economy outpaced even that of Texas in 1980 and 1981. It featured a colorful executive named Bill Patterson who became famous for, among other things, drinking beer out of a cowboy boot. He was also good at making insider loans that were never repaid.

At the time, there was hand-wringing about how Texas could function without banks. Just fine, it turned out.

Texas ended up with a lack of bank headquarters. That may have reduced support for local charities, not to mention demand for Dallas office space, but there was no shortage of banking offices willing to take deposits and make loans. The Texas economy recovered.

Ireland’s economy was the envy of Europe a few years ago. In 2007, when France and Germany were growing at about 2 percent a year, Ireland’s growth was almost 7 percent. It was known as the Celtic Tiger and was widely celebrated for the combination of low tax rates and fast growth. The banks grew rapidly and piled on property loans. In the early part of this decade, home prices grew at rates comparable to those in Phoenix and Las Vegas.

The banker who came to epitomize that era was Sean FitzPatrick, the chief executive of Anglo Irish Bank, which grew faster than the others by focusing on property lending above all else. He is remembered as the man who, in good times, denounced bank regulation as “corporate McCarthyism.” He also turned out to be good at making secret loans to himself that did not work out.

Ireland has now taken over Anglo Irish, and it has bailed out all the other big banks. But it is not clear how much more money will be necessary. That depends on how bad the loans are, and given the record of the banks it is easy to understand why lenders are hesitant to believe their latest numbers. The Irish banks are increasingly dependant on the European Central Bank for funding, something that makes the central bank nervous, and much of this week was spent on negotiations about some sort of European bailout.

When the crisis struck, Ireland was the first country to adopt fiscal austerity, and was widely praised for that. Such cutbacks may have been necessary, but a result has been to worsen the recession and put more downward pressure on property prices, which in turn made the banks suffer even more.

During the boom, there was a similar circle, but then it seemed virtuous. Lending enabled people to buy property at ever increasing prices, and the boom in construction made the economy keep growing. At Allied Irish Banks, the largest of the Irish banks and one that seems to have been no more irresponsible than the rest, the book of loans doubled between 2004 and 2007. More than a third of the loans were for construction or unimproved property, while a quarter were for home mortgages.

By the end of 2007, home prices had been falling for more than a year, but the bank continued to finance new construction projects and boasted that only six-tenths of 1 percent of its loans were impaired. Now, even after dumping many of its worst loans onto a government bailout bank, a tenth of all its loans are impaired.

The bank is still private, and its shares trade as if there is a little value left. The government wants it to remain private and eventually return to being a normal bank, but it is hard to see how the bank can regain the confidence of investors. Earlier this year the bank borrowed money with a government guarantee, but still had to offer to buy back its bonds if the investor wanted. This week it disclosed that some investors did want their money back. The Irish bank bailout now looks more like the first part of a crisis, not the resolution of one.

The European Union likes to compare itself to the United States. The German finance minister, in lecturing the United States a few weeks ago, said the Americans should not worry about their trade deficit with Germany, but look instead to the country’s trade balance with the total euro zone. Nobody worried about Europe’s balance with any particular American state, he noted.

If the euro zone were more like the United States, this problem would be far less severe. At its economic peak, Ireland accounted for only 2.4 percent of euro zone gross domestic product, while Texas provided 8.2 percent of the G.D.P. of the United States when its banks were about to go down. So it should have been less of a problem for banks outside Ireland to step in than it was for non-Texas institutions to move in then.

Perhaps the attractions of the Irish retail market could have persuaded some German or French banks to take over Irish institutions. The cost to the government would still have been great, but not open-ended, and Ireland would now have a functioning banking system.

To be sure, that might not have happened. The Irish crisis came along as the rest of the world also suffered, and there were bailouts in many places. But it would have been more likely with fewer barriers to cross-border transactions. There were European banking systems that escaped relatively unscathed.

In Europe, it is every country’s banking system for itself. Ireland had the misfortune of having a banking system that was relatively large compared to the size of the country, and of having presided over one of the most speculative property booms. The rest of Europe, which still resents Ireland’s earlier apparent success, wants to offer as little help as it can without destroying the euro.

Texas greatly benefited from the fact the American economy was integrated, with a central government that could and would help out. Ireland can only wish Europe could be more like that.

Unemployment benefits to end for 2 million Americans
by Steve Nuñez - KGUN9

The House of Representatives voted down a bill to extend jobless benefits. Republicans blocked the measure arguing it would add to the deficit. Meanwhile, two million people will lose their benefits by the end of the year. And while Arizona's unemployment rate has dropped to 9.5%, competition for jobs is up. At One Stop, Pima County's employment services center, a sign placed near the entrance seems to greet the unemployed with a message of hope. It reads, "A Better Job Awaits."

But 58-year old Guadalupe Ayon is still waiting for that so-called "better job." His wait has lasted two very long years. Tucson's construction industry has dropped 37% over the last two years. This sharp decline forced the company he worked for to shut down. Ayon has been unemployed ever since.

We wanted to know if Ayon really is doing all he can to find a job. 9OYS Reporter Steve Nuñez asked him if he'd say "yes" to any job that comes his way. "Absolutely, that's my philosophy," said Ayon. "We have to grab whatever becomes available."

Right now, Arizona's jobless rate is showing signs of improvement. Unemployment dropped two-tenths of a percentage point from 9.7% to 9.5% in October. Ed Westbrook, an employment specialist, confirmed to 9OYS that companies are, one again, hiring. However, Westbrook said he's also seen another trend that's making it difficult for some people to land a job. He said the unemployed he advises fail to sell their skills. "People don't know how to look for work," said Westbrook. "Believe it or not, when you interview you're marketing yourself and so a lot of people don't have the skills of marketing themselves."

9OYS tested this theory on Ayon. When Nuñez asked why an employer should hire him, Ayon simply stated, "At my age, I'm better responsible." Point proven. In Pima County, the competition is tough. There could be 44,000 unemployed workers competing for the 400 jobs listed at One Stop, alone. Ayon claims he's filling out at least seven applications per week, but he's yet to receive a call back, an interview or a job offer. He denies he'd turn down a job even at a fast food restaurant.

Ayon also denies he's milking the system to live off his $262 weekly government check especially now that benefits could end at the end of this year. "I don't know what's going to happen," said Ayon. "We're going to have to go to bankrupt most of us and still not be able to pay for the very minimum expenses in our homes."

One Stop is concerned that if Congress holds firm and does not extend unemployment benefits it could lead to another economic downturn. That's because the unemployed would not be able to pay for necessities such as electricity, water, gas, and not to mention, food. The employment services center does not believe holiday temp jobs will make much of a difference to the local job market. The seasonal part-time jobs often pay less than unemployment which is about $1,100 per month.

Failure to pass unemployment insurance extension could cost billions
by Alana Semuels - Los Angeles times

Letting the nation's unemployment benefits expire could drain billions from the economy and cost millions of jobs, according to two reports out this week. On Thursday, House Republicans voted to deny an unemployment benefits extension, unhappy with the method planned to fund it.

Ending federal extensions would drain the economy of $80 billion of purchasing power, according to a report by the U.S. Congress Joint Economic Committee. Every dollar spent on benefits increases the gross domestic product by $1.60, the report said. "Workers receiving unemployment insurance payments are typically cash-strapped and will spend their benefits quickly," the report said. They spend about $6.5 billion a month on the local economy to buy essentials such as food, clothing and utilities.

"A failure to extend the unemployment insurance program could hamper the fragile recovery," the report said. It predicts that consumer spending will fall by $50 billion over the next year if benefits are not extended, and that economic growth will be reduced by 0.4 percentage points by February 2011. A similar report from the California Budget Project warns that allowing unemployment benefits to lapse at the end of November could deal a critical blow to the retail sector. That sector provides jobs to one out of nine Californians.

Unemployment benefits put $225 million into the nation's economy every day in 2010, the report said. Some economists worry that if jobless workers keep receiving extensions, they will stop looking for work. But the dearth of jobs in the labor market makes that point moot, the California Budget Project said. "Cutting off federally supported unemployment insurance benefits would make unemployed workers more desperate to find work, but it would not make them more likely to find work, because jobs are scarce," the report said.


Unknown said...


How's that prediction going?

I mean the one you made back in 2009, saying the stock market would top out at 10,000, then sink like a stone.

You're only off by one year and one thousand points.

And now you want us to listen to your opinion of Jeff Rubin?

Don't think so.

Alexander Ac said...

Oh yes, the question then is what would the world look like if economists actually got the economics?

scrofulous said...

Stoneleigh, from this:

"However, it is equally important to understand that a credit expansion brings forward aggregate demand, borrowing it from the future. "

Would you agree that future demand may be accessed legitimately only at the discretion of a party willing to supply the credit necessary to borrow from that future. Any increase in money supply beyond that would be only nominal and as a result of money printing and a partial default on that future demand credit. Meaning, essentially, that one may climb on the shoulders of a willing bearer but one can not lift oneself by one's bootstraps.

Velocity of money could throw all the above into a cocked hat, as, if I am seeing the matter correctly, velocity is influenced more by animal spirits or general optimism than by nominal amounts of money. This I think is the bet that the Bernank is playing his cards for.

BTW There was absolutely no question, of an overdue fine from the library, on my borrowing a copy of Rubin's Opus Magnus :)



On your financial savings you might try this. Open a cash/brokerage account (Credential Direct I find good, $10.00 deposit to open). After that open a High Interest account (you might try Canadian Direct Financial or Ally). That will give you a 2% return instead of .65 for CSB's.

If you feel Armageddon approaching you will be able to transfer your money from the high interest account into the brokerage account and buy Canadian treasuries through them.

If you are afraid we will get a collapse that happens any faster than several business days :) then forget the above and buy gold or better IMO silver as it will do gangbusters in any collapse that is that sudden.

Mr. Kowalski said...

The failure to pass the UE extensions will likely result in millions being forced to look for work.. and thus adding to the official umemployment rate. When this happens.. in combination with the ending of QE2 in spring, we'll see the deflation Mish and this site has always seen.. but not in gas & food prices, which will continue northwards as much of the rest of the world marches onwards and demand continues upward. For us serfs, it's gonna feel like a vice grip clamping down on the family jewels. QE3 ? Will the Chinese and bond markets.. and the new voting members of the FOMC.. allow it ? I doubt it:

VK said...

In other words, we are all playing a giant game of musical chairs, only there is perhaps one chair for every hundred people playing the game.

Looks like I need to buy a chair :O

Unknown said...

I'd like to get some opinions here.
If we accept that QE2 is an asset swap (and not borrowing $600B as it reported widely) that doesn't increase the money supply, then the current misrepresentation in the press that we must all take drastic social cuts because we're having to increase the debt by 600 billion (but not really) seems to be nothing more than a cheap scare tactic. Am I wrong in that thinking?

Mr. Kowalski said...

"The European Central Bank (ECB) has issued a clear warning that it will press ahead with plans to raise interest rates and withdraw lending support for banks despite the eurozone debt crisis, even if this risks pushing Ireland, Portugal and Spain into deeper trouble"

This would immediately doom Ireland, Greece and likely Portugal. The only way these nations' banks are solvent is thru ECB lending. These banks also purchase their own nations' bonds (they are pretty much the only ones who are doing so) and then turn around and repo it to the ECB, If this support is pulled, the End is Nigh for the EU. IMHO, they would'nt dare try this.

Tom Therramus said...

Stay on topic folks.

Rubin is an important thinker. The debate by him and Stoneleigh should not be subsumed by diversion or sympathy for the latter - thoughtful as the lady is.

I am standing by to read with interest.

acomfort said...

"one does not subdivide the real wealth pie, but instead creates multiple and mutually exclusive claims to the same pieces of pie."

Stoneleigh has been great at explaining things but this one I still have trouble picturing. Can someone say it in a different way or add some an explanation?

Phlogiston Água de Beber said...


Nothing better to do on a Saturday night? May I recommend some quiet reading of Yogi Berra with regard to predictions.

As I understand it, Rubin was given the chance to throw the first punch. You are under no obligation to listen to her opinion. You are also not authorized to speak for the rest of US. If you think Rubin will give you better advice, by all means go read him.

Phlogiston Água de Beber said...


The debt monster has the government by the throat. It will continue to incur new debt every month until hell freezes over. QE2 is not purchasing new debt. It is purchasing already purchased debt in the secondary market. The purpose being to drive up the price of those bonds, which reduces their interest rate. That will allow new debt to be issued by the gov at a lower cost. So, it might actually allow some small social program to survive a little longer. Don't count on it though.

Phlogiston Água de Beber said...


I'll try to say it differently. With a little luck it will also be a fairly accurate representation.

If we lived in a cash-based system, you might take a bag full of cash to somebody's house, hand it to them, and sign some paper saying that the house was now yours. The only parties that could ever challenge your right to live there would be the taxing authorities. In Usanistan, very few people live in that system.

What we do is fill out and sign lots of papers that end up saying we can live there, but somebody is going to send us a bill every month. Invisible ink on that bill says, if you don't pay it we're gonna come and throw you outta the house and sell it to somebody else. We are not quite there yet. Those papers we signed were run through a shredder and the slices sold to idiots. Sometimes they have run copies through the shredder and sold those slices too. Each slice buyer thinks they have a claim on the house. I have no doubt there other ways claimants were brought to the party.

When a credit deflation causes us to be unable to make those payments, those claimants discover the new reduced non-bubblicious asset value means some of them won't be paid.

And of course, there are the same tax authorities in that system.

gylangirl said...

Stoneleigh can give as good as she gets; better, even: all Rubin could muster was some namecalling.

Brass ovaries!

Meanwhile over in Dublin:

Cut the protesting, forget the excuses.
We want information. Get up of the floor.

We have the papers we need to arrest him.
You know his movements. We know the law.

Your help in this matter won't go unrewarded.

We'll pay you in silver, cash on the nail.
We just need to know where the soldiers can find him.

With no crowd around him.

Then we can't fail.

I don't want your blood money!

Oh, that doesn't matter, our expenses are good.

I don't need your blood money!

But you might as well take it. We think that you should.

Think of the things you could do with that money,
Choose any charity - give to the poor.
We've noted your motives.
We've noted your feelings.
This isn't blood money - it's a ...

A fee.

A fee nothing more.

On Thursday night you'll find him where you want him.
Far from the crowds, in the Garden of Gethsemane.

Well done Judas. Good old Judas.

Steve From Virginia said...

Jeff Rubin shows how far a haircut can get you in the world of economics.

Pretty far, it seems. Rubin had his moment, predicting peak oil and getting fired and all. Now???

He's never explained satisfactorily how countries full of broke people and ruined business will be able to afford high- priced goods such as $300 oil. Broke people can't afford 30 cent oil, at least that's how things stand in my little corner of the world.

Rubin runs aground at this point and I lose interest in him.

The new economic 'It Gurl' is Chris Whalen. Doncha get tired of seeing CW on teevee? I don't. Whalen and Roubini speaking truth to power @ the American Enterprice Institute w/ passion and fury a few weeks ago was enough to give the destitute such as your's truly some hope.

BTW, Nicole passes the 'Hussman Test' which is the stumbler for most would- be analysts. Hussman's examination of velocity in a zero- interest rate environment mirrors Nicole's.

BTW2, the QE2 is a shell game, a blatant fraud. There is no new money created, simply custody of existing funts shifted from the Fed to another bank (account @ the Fed!)

The past few weeks market activity is just that, market activity. With the Fed promising Moral Hazard - not new money - finansters felt safe to lend enough new funds into existence to ramp commodities and F/X. Markets do move, even in severe recessions. See the M2 ramp.

scandia said...

@Logout, Thanks for the response. I've been looking around on the net to-night for a reliable bullion store in my area. It is looking like buying silver coins from a bank is a pricey route to go.
Someone on Max Keiser comments recommended First Magestic in Vancouver. Have you found a reputable bullion dealer?

scandia said...

Re Rubin's dismissive comments about Stoneleigh, they are unfortunate.I suspect he may regret them as well.
I know if a debate is organized that Stoneleigh wishes only to increase understanding of complex dynamics.It would be wonderful for all trying to make their way through the labyrinth of economic models and distorting spin to include smart people like Stoneleigh and Ilargi in the debate.And there are others, of course.
So far, the degreed economists haven't sorted out the mess we are in.The predicament only grows substantively.
It seems to me that all the solution chatter is attempting to avoid deleveraging. I don't see how this is possible. This is the core TAE message IMO.

theyenguy said...

Citing a sovereign crisis, Philip Aldrick, Economics Editor of The Telegraph in November 19, 2010 article reports IMF Chief Dominique Strauss-Kahn Urges Leaders To Cede More Sovereignty To EU, European nations need to cede more of their sovereignty and hand greater powers to the centre to avoid future crises, the head of the International Monetary Fund has said.

I see this as a call to sacrifice national sovereignty in taxation and in economic governance to a centralised EU body beyond even EU Council control.

In as much as the IMF says we have a sovereign cris, I believe we will soon see a sovereign arise to adress the crisis.

Bible prophecy foretells that a global governor, that is a sovereign, will rise to rule mankind, Revelation 13:5-10.

The world leader will be complemented by the seignior, Revelation 13:11-18, an Old English term meaning top dog banker who takes a cut. He is a also a Spiritual Leader with a unifying Global Vision. Eventually he will direct the 666 credit system, Revelation 13:17-18, where one will be given the charagma, or mark, necessary to conduct commercial activity

acomfort said...

I.M. Nobody
Those papers we signed were run through a shredder and the slices sold to idiots. Sometimes they have run copies through the shredder and sold those slices too.

Thanks for your response, you may be correct and this is what Nicole is saying. Your example looks like fraud and if fraud is what she is saying, then I understand. I assumed (my frequent mistake) that it was legitimate transactions she was talking about.

Draft said...

Is anyone actively withdrawing cash from their account in anticipation of the big bank withdrawal day I've read about scheduled for early December?

That combined with Stoneleigh's advice have led me to withdraw a few hundred dollars every few days from my TBTF bank account. At this rate, I'll be fully cashed out by early December, just in time. (I'm not putting it in a credit union yet, because I don't want them to just turn around and deposit it in one of the big banks.)

Phlogiston Água de Beber said...


There certainly are lots of allegations of fraud relating to what is happening here in the real world. But, I did not intend for my example to be interpreted as fraud being the underlying problem. And the shredder bit was metaphoric.

I was trying to show how a simple credit funded transaction that contractually gives two parties a claim on a piece of pie (the house) can through acts of financial magic grant multiple additional parties claims against that one piece of pie. Maybe I need to hire a ghost writer. :)

I guess it might have worked out if that piece of pie never lost any freshness and there was always somebody ready to pay even more for it. Too bad we don't live in that universe.

A Fall Guy said...

@ Stoneleigh

"a credit expansion brings forward aggregate demand, borrowing it from the future"

This is something the MSM don't understand (or at least don't articulate), but of which I'm sure many with inside knowledge are very aware.

I have an image of a coil spring. At rest, it represents aggregate demand over time. A credit bubble compresses this at one end (the present), stretching the rest of the spring (the future) until it snaps, creating a chasm before "normal levels" of demand could resume (if resources allowed, but that's another facet).

The spring has sprung, and trying to re-stretch it with bungee cords only procrastinates reaching the chasm, but with a cost of making it wider when the next snap occurs.

Phlogiston Água de Beber said...

That combined with Stoneleigh's advice have led me to withdraw a few hundred dollars every few days from my TBTF bank account. At this rate, I'll be fully cashed out by early December, just in time. (I'm not putting it in a credit union yet, because I don't want them to just turn around and deposit it in one of the big banks.)

The above paragraph may just turn out to be a classic. Perhaps somebody will silk screen it onto T-shirts.

First off, I sure hope Stoneleigh isn't going around advocating runs on banks. For all I know that might be a crime. Then there is the comical aspect of hoping to run into insolvency banks that are already insolvent, but still open for business. Begging the question of what part of the phrase, Too Big To Fail, is improperly understood.

Funniest of all is the expressed concern that the credit union probably deposits its deposits up the banking pyramid toward those same banks. I am left to wonder what the credit union is going to do with all that cash, if the runs were allowed to succeed. I doubt it would actually be open in that case.

All I can say is, if the world is going to end this December, instead of two years from now, I think it's time for a good stiff drink. Which reminds me, I need to get to town and stock up on Jameson before Ireland collapses. I have prepared myself to witness the collapse of human civilization, but having to do it sober would be unforgivable.

Anonymous said...

Agreed. It's about time we the readers called out TAE.

The deflationists have been as wrong as the hyperinflationists.

Ilargi and Stoneleigh can take their chances with fiat currency.

I'll buy gold and silver, thank you very much.

A Fall Guy said...

@ Tom Therramus

Rubin does make some good points, but in my view, some of his arguments are weak, and his comments towards Stoneleigh are arrogant.

To contrast his view with TAE, check
Rubin’s view from ASPO

He looks through rose-coloured glasses: "He views [high oil prices] as a positive situation, because he expects this will … make American-made products more competitive." The sustainable future that peak oil entails is not just "around the corner", but might be reached only after some significant hardship. As Richard Heinburg says in The End of Growth: "Economic growth as we have known it is over and done with."

In terms of whether peak oil caused the recession (Rubin: yes; I&S: no), my perspective is it doesn’t matter. What does matter is that the convergence of crises we face isn’t coincidental (nor was it designed – it is a consequence of the system dynamics), and peak oil and peak credit are intertwined. Distinguishing proximal and ultimate causes of the credit bubble and collapse is less important than understanding how things might play out. I&S give a consistent big picture view, while Rubin focus on "the power of prices".

He overlooks physical reality: "triple digit oil prices will turn those far-flung suburbs and exurbs back into the farmland they were, thirty to forty years ago." While it would be great to restore farmland, bulldozing millions of suburban houses begs a few questions such as: Where will those people live? How will the topsoil be recovered?

He suffers from cognitive dissonance: "I don't think we are committed, irrevocably, to suburban sprawl". Yes, stop sprawl. But don’t pretend that 50 years of sprawl can be undone easily. As Jim Kunstler says: "The project of the American suburbs is the greatest misallocation of resources in the history of the world." We can’t get most of those resources back and the debt burden hangs heavy, but we can plan for a low credit, low energy future based on the hard cold reality of our predicament.

Phlogiston Água de Beber said...


Around my territory the threshing is done, but it's always threshing time at TAE. So, yes let us separate the wheat from the chaff.

It is reassuring to learn that all the *flationists are wrong. Nobody likes them anyway.

We here at Amalgamated Gold and Silver are very relieved because we've been terribly worried about what was going to happen to all our fiat currency. There will be a party at the pub tonight.

We are also pleased to learn of your investment decision and wish to you know that although supplies are tight, we have just stocked our shelves with new bars, fresh from the tank. We can have them on the next stagecoach headed in your direction.

We wish to remind you that these are precious metals and would be remiss if we did not remind you to avoid rubbing the bars. You certainly do not want to risk losing even a microgram of your carefully preserved wealth. We fully guarantee the quality of every bar. If you are not completely satisfied, you may keep the bars and our eternal gratitude.

Stoneleigh said...

Mr Kowalski,

we'll see the deflation Mish and this site has always seen.. but not in gas & food prices, which will continue northwards as much of the rest of the world marches onwards and demand continues upward.

I think what we'll see is a bit more complicated than that. IMO all prices are very likely to fall, but as purchasing power falls faster in a deflation, things that are getting less expensive in nominal terms will become sharply more expensive in real terms. Low prices do not equal cheapness or affordability in a deflation.

As I have said before, while this dynamic applies across the board, the essentials should receive relative price support once a much larger percentage of a much smaller money supply starts chasing them. That means that as everything is becoming rapidly and drastically less affordable, the essentials will be the least affordable of all.

Down the line, we are very likely to see increases in the nominal price of essentials, largely due to the demand collapse (as purchasing power plummets) setting up a supply collapse. This is very likely in many sectors, most notably food and energy. For nominal prices to rise in a deflation, real prices must be going through the roof.

I think this is the scenario we will be facing, but not immediately. Initially prices fall on a combination of the reversal of speculation in commodity markets and a subsequent fall in demand. As production is geared to the previous level of demand, we should see a temporary glut. For people with no money, this will be a cruel period were there appears to be plenty, but not for them, as they cannot access it. This will feel like "water, water everywhere, but not a drop to drink". It is part of the economic seizure - the inability to connect buyers and sellers - that results from a collapse of the money supply (ie deflation).

Stoneleigh said...


Feel free to listen to Jeff Rubin. After all, he has a PhD in economics and was chief economist of the CIBC, whereas I am a self-taught financial analyst (among many other things). If you are of the opinion that letters after ones name in a specific field equal predictive ability, then by all means place your credence with him. (I have plenty of letters after my name, but none of them in economics.)

One point I made to Jim Puplava was that considering the job economists have done predicting this crisis, could non-economists possibly do any worse?

Neo-classical economics is founded on a series of patently false assumptions (perfect information, perfect competition, rational utility maximization, efficient markets, indifference curves etc). If you would like to read a devastating critique of the model from someone who does have that vaunted PhD in economics, I thoroughly recommend Steve's Keen's book Debunking Economics. You could also listen to the superb speech he made at the recent Local Futures conference in Grand Rapids MI. The organizer is preparing to put it online shortly.

It's the most rigorous explanation of where we've come from and where we're going that I've come across so far. I was very pleased to have been in the audience at the time, having spoken at the same conference myself the day before.

Market predictions are always probabilistic. No one has an infallible crystal ball, but we can produce very useful models that can limit risk. You need to think in terms of minimizing the consequences of being wrong. If you play the market along with the herd at this point, the upside will be very limited and the risk of losing your shirt will be very significant IMO. You have little to gain and a lot to lose. With sentiment indicators at such extreme levels, there are few left to take the existing trend much further in that direction.

People need to stop thinking in terms of wringing every last ounce of profit out of a system living on borrowed time and start thinking about capital preservation.

Stoneleigh said...


You don't need to buy a chair. Cashing out means quietly taking a chair to the sidelines while the music is still playing. You will be out of the coming melee when the music stops.

People don't need to do this with a view to being predators by the way. Although insider predators will (and indeed are) doing this already, ordinary people can do the same thing, but with a view to looking after as many others as possible with the capital saved, rather than simply saying "I'm alright Jack".

Stoneleigh said...


If we accept that QE2 is an asset swap (and not borrowing $600B as it reported widely) that doesn't increase the money supply, then the current misrepresentation in the press that we must all take drastic social cuts because we're having to increase the debt by 600 billion (but not really) seems to be nothing more than a cheap scare tactic.

We will be taking drastic social cuts anyway, whatever the effect of QE2, because we have already taken on an unprecedented level of debt. Our societies have made us an enormous number of promises that will not be able to be kept. When people realize this, they are going to be very angry. The austerity measures we have seen in various places are nothing compared to what is coming in a depression. For this reason we need to learn to live on very much less than we currently have, and preferably learn to enjoy doing so. Otherwise we are not going to get much pleasure out of our lives going forward.

Brunswickian said...

Rubin, Summers and Greenspin were on the cover of Time Magazine way back in the Nineties.,16641,19990215,00.html

So they are just stupid, greedy, or some piggish combination thereof?

Catherine Austin-Fitts has a different history for you.

Stoneleigh said...

Mr Kowalski,

If this support is pulled, the End is Nigh for the EU. IMHO, they would'nt dare try this.

IMO they are damned if they do and damned if they don't. There are no good choices to make at this point. The cracks are already appearing in the EU, stating with the single currency, which is really more of a glorified currency peg. Speculators will have a field day with it in the not too distant future, no matter what the ECB does.

Stoneleigh said...

Tom Theramus,

Mr Rubin is an improvement over most economists, since he does at least recognize resource limitations. I find him to be too thoroughly emmeshed in other aspects of the fatally-flawed neo-classical model though. In listening to him I detected much less thinking than I was hoping to hear. The difference in information to noise ratio between him and Steve Keen is staggeringly large, and tilted very much in Mr Keen's favour.

Mr Rubin is an entertaining speaker, but skillful speakers can use an ability to make people laugh to also turn off their tendency to think too hard about what they just heard. That way they can make facile conclusions appear to have far more depth than they actually do.

Stoneleigh said...

UR Somebody,

First off, I sure hope Stoneleigh isn't going around advocating runs on banks. For all I know that might be a crime.

Well, do suggest that people cash out, because the banking system is already effectively insolvent. Leaving one's money there places it at risk, FDIC or no FDIC (since the FDIC would be powerless in the face of a systemic banking crisis).

If everyone left their savings there, and no insiders ever gave us price discovery in troubled asset classes, then perhaps the banks would survive. But do we really think it a plausible scenario to trust EVERYONE else not to cash out (remembering that it only takes relatively few to cause a bank run)? If we do not trust everyone else to do that, then the only logical course is to preserve one's savings by cashing out (in small chunks). Those who do can later look after themselves and many others as well.

If we do not do this, then only insiders will cash out and wealth concentration will increase substantially. While there is nothing I can do to extract more underlying wealth from a collapsing system, I can do my best to direct what can be extracted into the hands of the ordinary people who will do something genuinely useful with it. I would like to see more wealth end up at the base of the pyramid. I doubt if anything I can do will have any great effect, but nevertheless it seems worth the effort to me.

bluebird said...

Are Robert Rubin (financial) and Jeffrey Rubin (peak oil) related? I tried the Google, but not able to find anything.

Hombre said...

StoneLady - "People don't need to do this with a view to being predators by the way. Although insider predators will (and indeed are) doing this already, ordinary people can do the same thing, but with a view to looking after as many others as possible with the capital saved, rather than simply saying "I'm alright Jack".

A wise and relevant perspective. IMO, and one that resonates with me. It was/is this predator mindset that has trashed the system in the first place.
I may have to change my handle!
;-) Coyotes are predators after all!

bluebird said...

If we cash out from the bank, and use the money to buy supplies and help others now, what happens to the cash after the dollar is voided, assuming we still have some cash? Would the government exchange the old dollars for whatever new currency is created?

I suppose I need not worry, by then, I'll probably be dead anyway, but perhaps my grandbabies would survive.

Sylvester M. McBean said...

Stoneleigh, First of all congratulations at being dismissed by Jeff Rubin, with the possible exception of BMO’s Sherry Cooper I can think of no economist who is more prone to sticking his foot in his mouth (or head up his ass) than him. I do however have a clarification question to ask and today’s comment seems like an appropriate place to ask it.

Today and a number of times in the past your have used these or similar phrases
“credit expansion thus creates excess claims to underlying real wealth”
“creates multiple and mutually exclusive claims to the same pieces of pie”
and I am wondering how you defining “underlying real wealth”?

I ask this because I’ve heard the term “underlying real wealth” used by many people to mean many different things and while I am profoundly in agreement with you on the vast majority of your points, I don’t believe that credit expansion in and of itself is necessarily a problem. This belief is of course based entirely on MY understanding of the term “underlying real wealth”.

rcg1950 said...

@Stoneleigh said -
"I thoroughly recommend Steve's Keen's book Debunking Economics. You could also listen to the superb speech he made at the recent Local Futures conference in Grand Rapids MI. The organizer is preparing to put it online shortly."

Steve Keen has put his Grand Rapids presentation on his site. It can be streamed or downloaded. Nice 4 minute intro by the moderator in which Nicole is mentioned. Keen's presentation get's technical, he covers a lot of ground very fast (he even admits to this during the 1-1/4 hour presentation). But even if you only get 1/2 of what he says, it's more than worthwhile.

Steve Keen Why credit money fails

4 minute MP3 intro download

1 hour+ Presentation download

@IMNobody said
The purpose being to drive up the price of those bonds, which reduces their interest rate. That will allow new debt to be issued by the gov at a lower cost.

I think the purpose is multi-fold. One effect is that in driving down government yields it forces big investors (banks, hedge funds, pension funds, mutual funds) to chase yields in riskier assets. So, for example, commercial real estate which is a disaster gets to in effect restructure their loans at lower rates and longer maturities, averting that catastrophe for another couple of years. So QE2 is a tool for more extend and pretend (which is just another way of keeping Ponzi schemes going one more round).

rcg1950 said...

@ acomfort asked about the meaning of...
"one does not subdivide the real wealth pie, but instead creates multiple and mutually exclusive claims to the same pieces of pie."

One way to look at it is simply that debt is a claim on future income. If the servicing of the debt is way beyond any conceivable future income to pay it, then some/many of those claims are worthless. "Debt that can't be paid won't be paid."

re potluck - do dickheaded comments deserve a response?

Stoneleigh said...

To expand a bit on excess claims to underlying real wealth, essentially extending credit allows the same money to be counted twice. A borrower ends up with the borrowed money in his account, but the lender can also treat the debt to him as an asset, so he is counting the value also. There is the perception of wealth expansion when in fact there is the same amount of wealth as before.

Credit expansion, especially when it proceeds far beyond the initial interaction and greatly increases leverage, creates virtual wealth through speculation. People simply agree that something should be worth more than it was previously, and they do not care what they pay for it since they think someone else will always pay more (ie there will always be a Greater Fool).

However, interest must be paid, and eventually the debt generated and the interest upon it become an insurmountable burden. At that point the virtual value disappears, and the credit pyramid collapses. People agree that assets are worth less than they were previously, so that the excess value is eliminated. This is deflation by definition.

Phlogiston Água de Beber said...


I completely agree with your assessment of QE2.

Maybe you are that ghost writer I need to hire. :)

re dickheaded comments: No they don't deserve a response, but sometimes I just can't help myself. And what they deserve can't be done through the intertube.

@ Stoneleigh

OK then, since you are clearly not advocating a run on the banks, but rather giving free advice on where to find mattress stuffing materials, I'm onboard.

jal said...

There are a lot of rich people and big fund managers who have filled up ALL of their mattresses.

NOW, they have a problem ...

What are they going to do with All of the rest of their portfolios. Its already tied up in some kind of assets through the stock market and fixed income vehicles.

Their clients want an income stream. Their clients want their money back so that they can make soft mattresses.

If they move their investment to get greater returns to meet the cash flow requirements then they must cash out present investment and invest overseas.

If they cash out their investments to meet the demands of mattress stuffing they will have to take and recognize a loss.

BOTH option will reduce the velocity of money in the USA.

Both options are happening as we speak.
QE2 allows this to happen without J6P and the grey swan from being disturb from their favorite pass time of getting obese as they cheer for their favorite dancing with the star participants.


Draft said...

Stoneleigh -

That Steve Keen talk was great. I did wonder about one thing, though, which is that he implies that because we've had a turnaround in the acceleration of debt since mid/late 2009 in the US, it's possible we're headed for a Japan-style lost decade. You've contended that that's not going to happen.

Does that mean that instead of the downturn being a single pulse with a long stabilization, you argue that instead there are second (or third?) downturns to come, which by his reasoning requires repeated deceleration of debt. I guess I'm trying to figure out how it squares with his model, since he implies we'll return to the old cycle (albeit slowly) now rather than going down more.

scrofulous said...

Scandia ,

You might look at Vancouver Bullion and currency exchange. (ask for their current price as it is changed daily at some time in the morning) If you are watching prices on the New York Spot keep an eye on currency rates of exchange. Usually it doesn't make too much difference and swings in gold/silver price and currency rate changes usually cancel themselves out, just sometimes not:)

Before making any purchase you might read this advice from Jesse.

Tom Therramus said...

A Fall Guy said...

"Distinguishing proximal and ultimate causes of the credit bubble and collapse is less important than understanding how things might play out."

I have sympathy for this line to a degree. Mainly because one foresees that survival may be the first order of business for many in coming years. However, we will get through this debacle at some point (maybe in a generation or so) and the WTF happened question will continue to loom large.

For a human calamity like this, an understanding of ultimate mechanism will assert itself as an imperative, whether we like it or not. This is in the nature of things - the truth struggles sometimes, but usually it come out - as the Czech's like to say.

I have to admit I am suspicious of Stoneleigh's principle theory (as I understand it) that financial "bubbles" have their own dynamics independent of energy inputs.

Maybe it is because the economic great and good discuss "bubbles" as if they were established reality rather than the abstract constructs that they actually are.

Maybe I'm too contrarian for my own good. But I observe that markets go up and markets down. IMO a tiny fraction of this variation means something, but most of its changeability is probably noise. All the same, every blip in the trend of every index seems to be pointed at by a legion of experts and given a name as if it were part of a new terra incognito.

Which is to say that I'm not certain what "bubbles" are and indeed if they exist at all... hence my interest in today's debate.

Stoneleigh ... you are right. A man with an appealing turn of phrase can be a dangerous thing. Folk can be convinced that all sorts of nonsense is true.

carpe diem said...

Nice video at

'Frugal Living is Road to New Prosperity' -

Nothing new but well delivered for the uninitiated or anyone who needs a reminder.


Phlogiston Água de Beber said...

Tom Therramus said...

Stoneleigh ... you are right. A man with an appealing turn of phrase can be a dangerous thing. Folk can be convinced that all sorts of nonsense is true.

And I hold out as a premier example of such a man, one Milton Friedman, PhD. Whose appealing phrases have resulted in death, torture and impoverishment for millions of people all over the world. Even dead he is probably more dangerous than Timur the Lame (Tamerlane) ever was.

Anonymous said...

You've lost the plot, with your meaningless, overgeneralized statements that offer nothing specific beyond "hold cash for 5 years, then buy hard assets." Funny how it's been more than 2 years since you started saying that. You'll still be saying this 10 years from now.

I've always liked TAE, but you and Ilargi need to start to offer people something.

Otherwise, you don't really have my sympathy if you can't get people to purchase your overpriced lectures.

jal said...

carpe diem said...
Nice video at

'Frugal Living is Road to New Prosperity' -

Great! Its getting to some J6P.

This is what is creating changes. The web is the mechanism.


Stoneleigh said...


You've lost the plot, with your meaningless, overgeneralized statements that offer nothing specific beyond "hold cash for 5 years, then buy hard assets." Funny how it's been more than 2 years since you started saying that. You'll still be saying this 10 years from now.

That has been the lowest risk option for the last two years. It will not be in ten years time.

I expect criticism at tops, when the credibility of the message I bring is at its lowest ebb. Nevertheless, I stick by what I see coming. I have put twenty years into knowing what is coming and why. I may not be able to tell you exactly when, but neither can anyone else.

Watching my lecture is entirely voluntary. If you find it not worth the price, then feel free not to watch. It's not like we force it on anyone. Many people have found it more valuable than a Hollywood movie, with which it is comparably priced. For that amount of money you couldn't even feed two people at MacDonalds. It's up to you where you see value.

jal said...


The answer is to OVER COOPERATE!






Phlogiston Água de Beber said...

A usable link.
'Frugal Living is Road to New Prosperity'

There will be frugal living. I don't think that road ends at New Prosperity and I have serious doubts about enchantment. I do think we can accept this Morton's Fork choice between austerity and frugality as yet another gift bequeathed by Uncle Milton.

carpe diem said...


I thought it was certainly worthwhile mentioning. Thanks for giving the link details.
Maybe Ilargi will post it.....should he deem it worthy!


Wolf at the Door said...

"I expect criticism at tops, when the credibility of the message I bring is at its lowest ebb. Nevertheless, I stick by what I see coming. I have put twenty years into knowing what is coming and why. I may not be able to tell you exactly when, but neither can anyone else."

This is funny since TAE has been calling the "top" for almost two years now. Eventually they will be right. And by then it won't even be important. Everybody here treats TAE as the product of some breed of genuis when all they have ever said, essentially, is that if one borrows too much money for too long eventually there will be a day of reckoning.....a truth that does not take a genuius of any sort to see. Indeed, any reasonably intelligent 8th grader knows that.

It is the act of couching this plain as day truth in language such as "...excess claims to underlying real wealth (blah blah blah)..." that makes a very simple proposition sound like something a lot more complex than it really is.

The fact is that TAE has no real insights to offer to anybody who understands the basic dynamic of overborrowing (or credit expansion if you prefer) and it's consequences. For all that understand the predicament we are in and what is coming your time is better spent in real actual preparations rather than circle jerking on a financial blog. (If I was not bored to tears laid up with the flu that is exactly what I would be doing now.)
You only have so much mindspace or bandwidth. Your conciousness can only be directed in so many places at once. Direct it wisely. To real preparation mental, physical, financial, ect...not circle jerking. I know I sound like an asshole (and I don't care) but I speak the truth.
(And I'm not selling anything).

Unknown said...

I guess my view of Rubin is that he is still in the early stages of acceptance of what Peak Oil really means. I have said that understanding PO is like peeling back the layers of an onion. You start on the outside with the basic geologic problem of oil production and at each level you have to understand and accept that it will happen.

Once you have accepted each layer, then it is possible to consider what the implications of it all are. For example, once you have accepted the problem of conventional oil peaking, you have to understand and accept that the alternatives that are talked about in the news aren't going to be able to take the place of conventional oil. And once you accept that, there are still many layers to go until you get down to the very core.

Unfortunately in order to get to a spot where most of the rest of us are, you kind of have to prove a negative in the sense that you have to prove that none of the alternatives will work to preserve BAU. And yet there is the theoretical possibility of some other relevant technological development, and how do you argue that something that hasn't even been developed isn't going to work?

It seems to be common that many people in the early stages of POA (peak-oil awareness) are still of the opinion that some form of BAU is still possible by one means or another. Usually the techno-fairy is called upon to deliver some technological solution to the problem. In Rubin's case, he seems to be saying that by localizing a bit that we will still be able to maintain some sort of BAU-lite.

Rubin also suffers from the problem that his training as an economist leave him in a position where he simply cannot comprehend a situation where growth must end. The consequences of this to him are so horrific that they are unimaginable, and thus we must do anything and everything that we can think of in order to maintain some form of growth.

Finally it is unfortunate that Rubin chose to be dickish in his responses. He could have just started out by saying that he didn't really agree with her conclusions, and that he would need to read more about what she has written to be able to say more. Or he could have just said that he missed most of her talk so he couldn't really comment. Instead he chose to take a few cheap shots.

Unknown said...

Its not just economists. I have discussions with people who get the traditional view on inflation being a monetary phenomenon but who really, really can't get their heads around the idea of credit/debt being multiple future claims on production, assets or income.

So when I start into the implications of the absolute necessity of extinguishing those claims and its deflationary effects (thanks for the education Nicole BTW) I'm already way behind the 8 ball.

And still, nobody who proposes that all this "money creation" is inflationary can tell me how that money is going to get into circulation so it can drive up prices.

Even some of Bill Bonner's colleagues don't get it, and you quote him.

I guess we just wait for the empirical process to provide the necessary education.

Unknown said...

IM Nobodys reply to acomfort.

I don't see it that way.

What she is saying that through the creation of credit "out of thin air" banks have created demands on future production and income.

ie, you borrow money from me now and you promise that you will pay me back the same plus interest in the future, so you give me a claim on your future wealth at a defined point.

However, so many people have been doing this that the total value of all such claims now exceeds by several orders of magnitude the possible future wealth of the total number of people in debt.

Part of the problem is that we have reached peak oil and, since wealth is created using energy, if there is a falling supply of energy the total amount of future wealth that can be created using it shrinks.

Lets say that at some specified date, Jan 1 2020 for example, the possible present value of all wealth in the system, allowing for PO and other resource depletions, is 20 Trillion.

If, as of today, 25 trillion in debts fall due on that date, then there are 2 claims on 5 trillion worth of real assets and income on that date.

But they can't all be satisfied by transfer of assets to claims to 5 trillion has to be extinguished through bankruptcy, haircuts and other money destruction means.

BUT, we don't have a 25% over claim on that future wealth, we have a 500%, or more, over-claim on that wealth. Every $ of real wealth has 5 people with the money to claim ownership, and they can't all be satisfied.

All money is just a claim on future production etc but the substance of that claim is not specified by the note. The $10 in my hand can be used to buy food, booze, a movie ticket, anything I like from the general economy.

If I pay off a debt with it the new owner can use the money to buy something else and keep the economy going. But if I can't create the wealth to pay that debt, I have to repudiate the debt and the owner of the debt has to destroy the "money" that is represented by that debt.

But if there are multiple such claims and the scale is huge, then the ability of the economy to function is called into question. That is where we are now or very soon.

Phlogiston Água de Beber said...


My crystal ball says the money is not intended to circulate and no suitable pathway currently exists for it to enter circulation with any volume and velocity. That would probably be on purpose.

The ball also says that prices will continue to increase. Supply chain management has come a long way baby. Instead of the old fire sale mantra of "losing a little on every sale, but making it up in volume." We will have losing a little volume every period, but making it up in margin. The looting will continue as long as possible. And them we will know what is truly meant by Frugal Living, and Frugal Dying.

Everybody has to be somewhere. The audience has voted and decided that those of us who insist on describing what our finest crystal is telling us, belong in the camp directly behind the 8 ball.

Phlogiston Água de Beber said...


I like your explanation of debt facilitated expansion of claims on real wealth. I don't see how it invalidates my rather primitive attempt to cast it in a microeconomic light. I thought it might help to show how a common transaction many of us have engaged in over one piece of real wealth, a house, can be financialized into many additional claims on it.

I think we both agree that it goes blooey when the real wealth does not increase in value enough to satisfy those claims.

One thing nagging at my mind is a suspicion that many of those excess claims will not go quietly. The ball is being rather evasive about this question.

Nassim said...

Its not just economists. I have discussions with people who get the traditional view on inflation being a monetary phenomenon but who really, really can't get their heads around the idea of credit/debt being multiple future claims on production, assets or income.


When we moved to Australia, we bought for cash one good, dependable, second-hand car for one-third of the price of a new car. We also moved into a comfortable rented house. A receptionist of 20 at my wife's workplace has just bought, on credit, a more upmarket brand-new car. she earns a fraction of what the professionals do at this location. This single and unattached receptionist also has a mortgage on a new house that is big enough for a family of 5. I would hate to think how many parties possibly have an interest in this young lady having an income for the next 20 years and are buying and selling bits of paper based on that premise.

Here are a couple of links that should give you an idea of what a mountain of paper is built on presumed future incomes in the USA:

Dan and Teri's Mortgage Reverse Engineered

NY Fed's Understanding of the Shadow Banking System (see page 3)
This is from "Road map that opens up shadow banking" by Gillian Tett - Financial Times

The idea that all these claims will eventually neatly cancel one another out and that things will continue like before is plainly beyond the ridiculous.

el gallinazo said...

Sorry that I am about two days behind the curve, but from the last thread, I regard the two biggest questions that may be debated within the readership here is the deflation / hyperinflation question including timing, and how much the MotU have foreseen and engineered the current meltdown. The first question has very practical implications and the very survival of many readers of this blog depends on getting it right. The second question is more of intellectual and emotional interest, emotional as to how much we might choose to hate these people.

I lean more strongly toward the planned position. This is not the place to build a structured argument, but I might point to the statement that the CEO of the MotU (MFofU?), David Rockefeller made in the early 90's when he still had a pulse and immortalized at the end of Money as Debt.

Is it too hard to believe that if the paid servants of these people can soft land a rover or two on Mars, they might also be able to project the trajectory of a global economy?

Anyone with 5 functioning synapses and an analytical mind knows that lone deranged gunmen didn't kill JFK, RFK, or MLK. The evidence in the case JFK is so overwhelming that it makes the official Warren report a comedy, in that the whole report rest on the violation of the most fundamental principle in physics, the conservation of momentum. Einstein in 1905 was forced to choose between conserving energy or momentum; he chose the latter, and came up with Special Relativity. I wouldn't even touch 9/11 and nanothermite.

Usakistanis have been conditioned to scoff at unofficial "conspiracy theories" for many decades now. This has allowed the shadow government to eliminate its puppets who get out of line (JFK & RFK) or reformers who interfere with their profitable wars (MLK) while allowing the sheeple to still believe that they have some form or representative democracy.

The Mad Scientist said...

Maybe you are the one out of your mind.
What Jeff Rubin is calling for is higher prices over the long run. Whether the US can afford to pay for it or not, there are many other new consumers showing up.
Potluck, I think regarding the stock market, we may be close to a peak, although I doubt we will go down as low as Stoneleigh thinks (hopes) we will.
BTW Stoneleigh, saying something is going to happen and putting your money where your mouth is, are 2 different things.
If you were so sure what is going to happen, to what extent and when, then you could make some serious money and not be asking for donations to run your site.

Phlogiston Água de Beber said...

el gallinazo said...

Is it too hard to believe that if the paid servants of these people can soft land a rover or two on Mars, they might also be able to project the trajectory of a global economy?

I'm pretty sure you know that landing a rover is just physics and good computer programming. When they got the programming wrong, it crashed.

There is indeed a plan for the global economy. The problem is that only part of the plan ever works. The victimized population is left to deal with the consequences of the parts that never work.

Certain kinds of people do seem to die rather unusual deaths, don't they? Could there be a pattern?

And welcome in from the hinterlands. It's always good to see comments from you.

Dan said...

3 things:

1. Because fraud is being exposed at every level of government and finance and regulation, trust in the system is dying.

2. Fiat currencies always fail when trust in the system and in the currency disappears.

3. All credit expansions end in busts, and this is by leaps and bounds and tens of trillions of dollars the greatest credit expansion in history.

In my opinion, best prepare now for decades of struggle.

Linda said...

Wolf at the Door said

This is funny since TAE has been calling the "top" for almost two years now. Eventually they will be right. And by then it won't even be important. Everybody here treats TAE as the product of some breed of genuis when all they have ever said, essentially, is that if one borrows too much money for too long eventually there will be a day of reckoning.....a truth that does not take a genuius of any sort to see. Indeed, any reasonably intelligent 8th grader knows that.

You had 2 chances to spell genius correctly and failed. Any eighth grader... And yes, everybody knows one ought not spend more money than one has...yet it is done. Stoneleigh's oft repeated words help me. Actually it's incredibly complicated--the debt as money, the FED, the derivitives. It's important to understand the grift.

el gallinazo said...

Regarding silver:

The Spanish word for silver is plata. It also means money. The more exact word for money is dinero. I have noticed that in casual conversations in many countries, the usage of plata for money is many multiples of dinero. I have never heard oro (gold) used as a generic term for money. I was listening to a Radiolab article the other day where a school of psychologists put forth the claim that humans literal cannot think without language. I don't think that I agree with this, but one should never underestimate the power of language to shape behavior. Even before 1962, I don't think Usakistanis ever used silver as a generic term for money. May have something to do with William Jennings Bryan being crucified on a cross of gold in 1896. I think the point of my rambling is that silver will be very strong as a transactional tool after the collapse south of the Rio Grande largely due to linguistic factors.

el gallinazo said...

I listened to Jeff Rubin's FSN interview where he criticized Stoneleigh. I do not wish to listen to it again, but as a rather failing memory serves me, he would counter Stoneleigh's argument of falling nominal crude prices by maintaining that economic collapse will be limited to the "West," and demand will increase in Asia. I believe that he is dead wrong in this respect. If the entire planet participates, more or less, in the collapse, then where is the demand for oil going to come from to keep the nominal prices in triple digits? And, of course, demand is defined as the desire for a good and the ability to pay for it.

Phlogiston Água de Beber said...

el g,

I asked the ball and it said, oh yeah, whole world joins party wearing their best hobo clothes.

For way too many, the price of oil will be entirely irrelevant. Shoe leather is another matter.

What beats the hell out of me is why anybody pays any attention to economists. If I had been anywhere near as good at what I used to do as any economist has been, I would have starved to death in early adulthood. I'm entertaining a theory that they are all aliens from an alternate universe where the strings must vibrate at a frequency that allows their cockamamie ideas to describe local reality.

jal said...

re.: problems with MBS

Its not news. You have not been paying attention to the news. Here are some old news items.

Crisis Leftovers: Fannie, Freddie Force More Mortgage Buybacks

March 6, 2010

Fannie Mae and Freddie Mac are forcing the nation’s biggest lenders to buy back more of the badly-written mortgages that served as a trigger for the financial crisis, and a dash for cash has ensued.

The government-controlled mortgage finance giants Fannie and Freddie could force some of the top lenders – including Bank of America, JPMorgan Chase, Wells Fargo and Citigroup – to buy back $21 billion of home loans this year as part of its housecleaning of souring mortgages.

Fannie Mae and Freddie Mac are among firms seeking to force banks to take back defective mortgages, especially those written during the peak of the housing boom, after defaults helped push the two federally backed firms and some insurers to the brink of collapse.

Fannie and Freddie forced the four largest U.S. banks with buybacks in 2009 amounting to about $5 billion in losses, according to recent company filings.


BofA May Owe $20 Billion in Mortgage Buybacks, Insurers Say

By Hugh Son - Sep 13, 2010

Unknown said...

The second to the last article (11-20-10 issue) on unemployment compensation extension by by Steve Nuñez - KGUN9 has a large conspicuous error. It notes the House of Representatives voted down an extension of unemployment benefits, and then tried to make it sound like the Evil Republicans were to blame. Seems the author and whoever decided to post this article overlooked that the Democrats still control the House of Representatives with an almost super majority, thus the Demos could have passed this easily without any help of hinderance from the Evil Republicans..... so why didn't the Demos pass it? That should have been the topic of the article.... more MSM yellow journalism.

Legendary Armor Rōnin said...

"The deflationists have been as wrong as the hyperinflationists."

Patience, Grasshopper, patience.

"Ilargi and Stoneleigh can take their chances with fiat currency.

"I'll buy gold and silver, thank you very much."

I too will buy gold and silver - but with my saved fiat currency, at half or less of today's prices, when many of today's PM-holders are forced to sell to cover their other obligations.

If one reads the details of legendary hyperinflations, such as Germany's Weimar Republic or Argentina, it can be seen that fiat currency generally doesn't become worthless overnight - there's a transition period, in which one can go bargain hunting.

Which is exactly TAE's advice: Hold fiat for the medium term, then buy hard goods for the long term. Thus the "hold cash for 5 years, then buy hard assets."

Speaking of which: "Funny how it's been more than 2 years since you started saying that."

Since 2 < 5, only an imbecile would believe that to be significant.

"...if one borrows too much money for too long eventually there will be a day of reckoning.....a truth that does not take a genius of any sort to see. Indeed, any reasonably intelligent 8th grader knows that."

No, they don't. In fact, most reasonably intelligent college graduates don't seem to know that.

If they did, then e.g. the American Social Security and Medicare system would be fiscally-sound, with the blessing of the electorate, and the FIRE bubble would have short-circuited circa 2004. And college grads wouldn't start their working lives with $10K in credit card debt and $100K in student loans.

So the assertion that "everyone knows" the core insights written about at TAE is simply a fantasy, unsupported by all of reality. (Although it would really nice if everyone did know that, as we wouldn't be in this pickle if they did - and we could ride unicorns too!)

Legendary Armor Rōnin said...

"One thing nagging at my mind is a suspicion that many of those excess claims will not go quietly. The [crystal ball] is being rather evasive about this question."

Maybe the ball is evasive because the answer is both unpleasant and obvious. History and human nature tell us everything we need to know about how smooth and ordered is the process of extinguishing excess claims.

"What Jeff Rubin is calling for is higher prices over the long run. Whether the US can afford to pay for it or not, there are many other new consumers showing up."

Um, no.

The U.S. make up about 25% of the entire world's monetary-based economy. Additionally, most of these "new customers" are directly reliant upon U.S. customers.

If American consumption continues to slow, not only will that directly affect oil demand, but it will also result in a drop in demand by "new customers", as their revenues fall.

If the U.S. can't afford it, nobody else can either.

"I think regarding the stock market, we may be close to a peak, although I doubt we will go down as low as Stoneleigh thinks (hopes) we will."

Yeah, that's what they thought in 1930, too. Virtually nobody conceived that stock prices could drop by 90% - but that's what happened.

"BTW Stoneleigh, saying something is going to happen and putting your money where your mouth is, are 2 different things."

What could demonstrate MORE conviction than giving up a life of comfort and status, to dedicate oneself to enlightening and saving fellow humans?

It brings to mind Saint Francis of Assisi.

Putting mere money where one's mouth is seems a shallow half-measure, compared to what she's actually doing.

Phlogiston Água de Beber said...


Really! You think the MSM has failed us because it didn't make the Demos being Evil the point of their story. That's the most telling fault you can find with our Yellow Journalists? In a story about how our wholly owned legislature has most probably condemned millions of people to homelessness and possibly sometimes starvation, that the story should have focused on Demos being Evil.

I'd say the MSM did their job, which isn't what you think it is, quite well. They successfully got you to focus on something that doesn't matter (both parties are Evil) and totally ignoring the tragedy that does matter. It is meaningless to accuse the MSM of failing us. It hasn't been their job to serve us since... Heck, maybe that was never their job.

Douglas, I think it is people like you that are failing us. If yours is the most serious complaint TPTB are gonna hear, they are gonna shear us and lead us to the abattoir. Baa Baa.

jal said...

AND I thought that the grey swans were not paying attention...!

Dying with debt: A dirty little retirement secret
Comments: (887)

Nearly 40% of retired Americans said they've accumulated credit-card debt in their twilight years — and aren't worried about paying it off in their lifetime, according to a survey released by CESI Debt Solutions.

Phlogiston Água de Beber said...

鎧伝サムライトルーパー said...
"One thing nagging at my mind is a suspicion that many of those excess claims will not go quietly. The [crystal ball] is being rather evasive about this question."

Maybe the ball is evasive because the answer is both unpleasant and obvious. History and human nature tell us everything we need to know about how smooth and ordered is the process of extinguishing excess claims.

Ronin Warriors, thank you. I love it when I can tease a thought completion out of somebody. It seems that we may be of similar mind. Welcome to the Doomerburgh Commentariat.

The Mad Scientist said...

"Yeah, that's what they thought in 1930, too. Virtually nobody conceived that stock prices could drop by 90% - but that's what happened."

That is your fall back? That it did happen once?
For all the BOOHA about Japan, the Nikkei still trades at 20X earnings!
That is 20 years after the bubble burst!
By all standards, their housing bubble (as measured as a percentage of their GDP) and their stock market bubble (compare P/E of S and P 500 and Nikkei at peaks)was much much worse. Yet 20 years later while GDP has stagnated, the stocks still trade at very high multiples.
So Illargi and Stoneleigh and perhaps you will be disappointed in the next 3 years.

jal said...

Further info
Retirement and Credit Card Debt Survey

Anonymous said...

--- > Notes:

Fisher's formulation

In Fisher's formulation of debt deflation, when the debt bubble bursts the following sequence of events occurs:

Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links:

1. Debt liquidation leads to distress selling and to

2. Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes

3. A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be

4. A still greater fall in the net worths of business, precipitating bankruptcies and

5. A like fall in profits, which in a "capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make

6. A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to

7. pessimism and loss of confidence, which in turn lead to

8. Hoarding and slowing down still more the velocity of circulation.

The above eight changes cause

9. Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

—(Fisher 1933)


Anonymous said...


A refresher on the 1930s

Indeed some rationales for bad policy in the 1930s have echoes in today’s debates—the need for fiscal austerity to “restore confidence”, the “moral hazard” argument against extending assistance to countries in financial distress, and so on. But the best cure of all for complacency is to reflect on the fact that banks, the crux of what went wrong in the 1930s, are still causing mayhem 60 years on, and regulators haven’t yet worked out what to do with them.

The Economist, 1989

--- > Comments:

I think the Economist had a crystal ball and we are reflecting on that now. Of course, predicting the current market is an exercise in ridiculous. The rapidity and severity of the changes in the real economy should give everybody shivers. It is a different world already, no matter what the billboard lights say.

Ruben said...


Ronin Warriors came up for me, too, when I googled that Japanese, but I think that is the anglicized name of the movie, not the real translation. The translated Wiki page calls it Samurai Armor Electricity. A direct translation of the katakana says Samurai Toroopaa. Which may be Troopers or Troupe.

I personally am voting for Samurai Troupe. If you run the first two kanji characters through Babelfish it comes up with Armor Transmission, which makes for an even more interesting Samurai Troupe.

Too bad I didn't pay more attention when I was living in Japan....

Stoneleigh said...

The Mad Scientist,

What Jeff Rubin is calling for is higher prices over the long run. Whether the US can afford to pay for it or not, there are many other new consumers showing up.

He is calling for a one-way trip to triple digit prices by next year. His analysis is based only on the fundamentals, combined with extrapolating current trends forward. It shows no understanding at all of what prices really reflect or how markets work. Trend extrapolation is a superficial substitute for real analysis, even at the level of the fundamentals, and certainly at the level of fundamentals plus market mechanisms. It amounts to stepping on the accelerator while looking only in the rear-view mirror, which is practically a guarantee of a nasty accident.

Potluck, I think regarding the stock market, we may be close to a peak, although I doubt we will go down as low as Stoneleigh thinks (hopes) we will.

Why would I hope for such a thing? I know what accompanies that kind of collapse and I know won't like it any more than anyone else.

BTW Stoneleigh, saying something is going to happen and putting your money where your mouth is, are 2 different things.

As it happens, I have put my whole life where my mouth is.

If you were so sure what is going to happen, to what extent and when, then you could make some serious money and not be asking for donations to run your site.

I am not a gambler. Yes there are opportunities to make money in the markets, but there will be many more opportunities to lose one's shirt. Markets are wealth concentration mechanisms benefitting the insiders at the expense of the little guy.

Stoneleigh said...

The Mad Scientist,

For all the BOOHA about Japan, the Nikkei still trades at 20X earnings! That is 20 years after the bubble burst! By all standards, their housing bubble (as measured as a percentage of their GDP) and their stock market bubble (compare P/E of S and P 500 and Nikkei at peaks)was much much worse. Yet 20 years later while GDP has stagnated, the stocks still trade at very high multiples.

So Illargi and Stoneleigh and perhaps you will be disappointed in the next 3 years.

Japan is a different case. It's bubble burst at a time when it was sitting on a enormous pile of money, and had an export oriented economy position to benefit from the largest global consumption boom in history. These factors allowed them to kick the can down the road quite a long way. Needless to say, neither of these advantages are available to us.

Besides, the Japanese deflation isn't over yet. All bubbles show an undershoot compared to where they began, and Japan has not yet reached that point. At some point they will be forced to face the predicament they have managed to stave off for so long.

The world is now facing a scenario where indebtedness in most developed countries has gone past the point of no return, and where global trade is going to be incredibly hard hit. We will not be able to stave off the inevitable for much longer. Our attempts to do so are merely digging us into an even deeper hole.

Why do you assume that we are cheerleading for collapse and would be disappointed if it didn't happen? Predicting something is by no means the same as wishing for it.

Stoneleigh said...

El G,

Nice to have you back. Best hopes for high speed internet access in Argentina :)

as a rather failing memory serves me, he would counter Stoneleigh's argument of falling nominal crude prices by maintaining that economic collapse will be limited to the "West," and demand will increase in Asia. I believe that he is dead wrong in this respect. If the entire planet participates, more or less, in the collapse, then where is the demand for oil going to come from to keep the nominal prices in triple digits? And, of course, demand is defined as the desire for a good and the ability to pay for it.

I agree with you that demand based on ability to pay is the critical factor. He does not see a collapse in Asia and I do. Japan is close to falling off a cliff again and China is in a massive bubble. I would say though that I think the depression ahead for China (the empire in the ascendancy) will not be as terminal an event as it will be for the west. The implication is that their demand could rebound sooner than ours. I expect oil to bottom early in this depression partly for this reason. In the Great Depression, oil bottomed in 1931, and I would expect to see something similar this time.

I do think we're going to see triple digit oil prices down the line, but not before a deflation-induced price collapse. What we're seeing is an enhanced boom and bust dynamic, with tremendous volatility (a measure of fear).

Linda said...

I don't understand why people see China as an empire in ascent. If we don't buy their poison laden crap, then they can't sell it. They have too many people. Their skies are yellow with pollution. They are running out of farmland. They are running out of water. They have a major public work to re-plumb their country--change their rivers for water. This is ascendency? I always scratch my head when I hear this.

Anonymous said...

@mad sci


Where to begin.


It has a phony currency created by phony banks rigging a phony stock market for phony exports to support it's phony Democracy.

I hope you have a "We're Number One" tattoo somewhere on your person.

When Japan's bubble burst, they had MOUNTAINS of savings and a KILLER export business to fall back on for the last 20 years or so.

What does America have?

Phoniness to fall flat on it's face with.

'Quantitative Easing"

Sounds like an industrial grade laxative, not a sound sane fiscal policy.

The ZIRP regime in Japan, for the last couple decades, payed average Japanese citizens near nothing in interest on their savings while lending out those same savings to foreign gangster banks to gamble and speculate with.

The Japanese as a people are deeply depressed. They can't even reproduce at replacement levels. They are way, way under the 2.2 baby level. As an ethnic group, they will be effectively gone in a couple generations at the rate they are going.

Meanwhile, across the Sea of Japan, the Chinese can't keep it in their pants. They are not depressed, they are smoking hot.

America the Phony Country

The Number One Banana Republic, Kings of Crony Capitalism.

all wax and no wick.

Legendary Armor Rōnin said...

"I don't understand why people see China as an empire in ascent. If we don't buy their poison laden crap, then they can't sell it. They have too many people. Their skies are yellow with pollution. They are running out of farmland. They are running out of water."

Well, it's a matter of relativity.

IMO the PRC has no chance whatsoever of supplanting the U.S. as the world's premier power during the 21st century: They have no capability to project power globally, as (for now) do the U.S., Russia, the UK, and some European nations; they do not now have, nor do they have any serious plans to develop, an air force or navy capable of challenging the U.S. for control of the world's skies or oceans. They do not yet have globe-spanning missile technology.

However, they are orders of magnitude more affluent and powerful than they were during the middle of the last century, and during this next century they're likely to be one of the most globally-influential nations. Whether or not U.S. consumers continue to be Chinese customers will determine how quickly they continue to rise in affluence, but the industrial base that they've slipped out from under America will continue to endure and pay large social and military dividends for them.

Indeed, if not for the potential of India, I'd have no hesitation in predicting that some form, descendant or piece of today's PRC would be the world's second-most powerful nation during the 21st century.

Legendary Armor Rōnin said...

China lives in close proximity to two of the world's most powerful nations, Russia and Japan, but those also happen to be two nations that are quite literally dying away. Among the world's advanced industrialized nations, they are the top two in terms of population decline.

China's No. 1 problem in achieving that to which they aspire is their political structure. Demographic problems, pollution, water shortages and upcoming energy constraints are all lesser and soluble problems, although of course painful. Also, all or most of those problems are common to every other advanced or upcoming nation, and so are not unique to China.

Additionally, as A Walk in the Woods wrote, the Chinese are hungry, they have the "Eye of the Tiger." Brazil, for instance, holds huge natural resource advantages over the PRC: They have abundant, rich and fertile farmlands, plenty of water, huge deposits of oil, a modestly productive populace... But Brazilian culture is not aggressive or ambitious. They don't want to be top dawg.

Phlogiston Água de Beber said...


Thanks, for making me aware that Google may have mislead me as to the best translation of 鎧伝サムライトルーパー but it is the best tool I have at my disposal. Copying and pasting the Katakana is a bit of a pain. Perhaps 鎧伝サムライトルーパー will step forward with the intended translation.

Phlogiston Água de Beber said...

Dmitry Orlov has a new guest post up this morning from a Russian named Yevgeny. As Dmitry has always maintained, it will be different in the capitalist world. Still I think it gives us clues to what things will be like in some locales.

But what is "Community"?

scrofulous said...

Why do you assume that we are cheerleading for collapse and would be disappointed if it didn't happen? Predicting something is by no means the same as wishing for it.

I think an argument for collapse could be made that does not need be made from a misanthropic or similar negative point of view. It might just be the best snake in the pile to associate with.

It's one of those questions that does not seem to be discussed, much like the question of overpopulation or peak oil once were considered to be taboo or at best idiotic.

Legendary Armor Rōnin said...

"Perhaps 鎧伝サムライトルーパー will step forward with the intended translation."

Sorry, no can do. For me it's just an affectation. Wikipedia says "literally, 'Legendary Armor Samurai Troopers'."

I was attempting to choose a handle with some personal significance, and given the forum, thought to allude to my chosen path for surviving and possibly thriving in the era to come, which is to throw my lot in with the elites and TPTB, at least for the next few years.

As I am doing so by rendering security/martial services, I thought "mercenary", but really by temperament I'm not a soldier of fortune type. Then there are "Janissary" and "Hessian", both of which have elements of how I'm feeling, but neither are exactly right. Then I hit on "rōnin", which seems perfect: A samurai with no lord or master during the feudal period (1185–1868) of Japan, esp. one whose feudal lord had been deprived of his territory. A samurai became masterless from the death or fall of his master, or after the loss of his master's favor or privilege.

This period of one law for those of privilege, and another for the rest of us, certainly seems more feudal than democratic, and I definitely feel dispossessed.

So, as I was doing a netsearch to ensure that I understood the meaning properly, I came across some anime images, and on a whim decided to use the Japanese characters for Ronin Warriors.

But I can see how that'd get tiresome, (kinda like Prince's continued usage of a non-alphabetic symbol for his name, even after he'd used that device to help him get out of his contract with Warner Bros.), so I'll Anglicize it.

The Mad Scientist said...

Telling people to stay in cash is a market call whether you like it or not. One which since November 2008 has cost everyone who followed it, at least 50% of their real worth when measured in all assets except homes.
Regarding your point about your message not resonating at such euphoric times, I can certainly understand. But your (you and Illargi) foresight was horrible right at the bottom as well.
In fact when I suggested that a huge economic rebound was coming led by China and India and stock prices were at a generation low in late 2008, I was told I lived in La-La land. China and India have seen their GDPs expand by over 15% in that time frame.
What that shows is that you have a stunningly shortsighted approach and you could not see what was in front of you a year in advance. As for forecasting 20 years out, neither of us have a clue as to what progress will be made. I am sure that if blogs existed someone with your limited thinking would have started one about Japan’s collapse and hence the world’s in 1990.

TAE Summary said...

* Time to call out TAE; Stoneleigh's predictions are off by 1 year and 1000 DOW points; Just because a credit collapse in 1930 caused stocks to go down doesn't mean it will happen again; TAE should offer something concrete, like free donuts

* How to invest:
- Posit the 5 likeliest future scenarios, e.g. deflation, hyperinflation, business as usual, nuclear war, the age of aquarius
- Assign a percentage likelihood to each scenario
- Determine the best investment for each scenario
- Invest using the formula available_funds*likelihood_of_scenario
- Re-evaluate every six months
- When only one scenarios materializes, demonize the the proponents of the others using the formula available_demonization*likelihood_of_scenario

* Robert Rubin
- He is an important thinker
- He is prone to sticking his foot in his mout
- Take his advice if you like it
- He calls for higher prices over the long run
- He believes broke people can afford oil at $300 per barrel
- He will regret his criticism of Stoneleigh
- He at least recongized resource limitations
- He cannot comprehend an end to growth
- All Rubin's might be related

* Credit expansion borrows from the future and allows the same money to be counted twice; There are many mutually exclusive claims to the same pie; The pie has been copied and then shredded and the shreds sold to idiots; Take your slice out of the bank now

* America is phony; Japan is different than the US; China is not ascending; Ireland, Greece and Portugal are doomed; Silver==Money in Spanish

* The debt monster has the government by the throat; There will be deeper social cuts and austerity measures; Frugal living is the new prosperity; Enjoy living on less or don't

* Reality:
1) Trust is dying
2) Fiat currencies fail
3) Bubbles pop
4) Asian demand for Asian goods depends on American demand for Asian goods

* Conspiracy theories require 5 functioning synapses to understand; Landing a rover on mars just takes physics and fortran; All in/deflationist are wrong; Buy precious metals

* Simple truths are hard to comprhend; Things are more complicated than you think; Economics is founded on false assumptions; Predictions are probablistic; 2 < 5

* Mark of the beast will soon be required for commerce; Get your money out of the bank before December 7th; When a spring snaps it creates a chasm

* Irishman 1: Will ye do me a favor. When I'm dead will ye pour a bottle of fine Irish whiskey on my grave on St. Patrick's day
Irishman 2: I will. But do ye mind if I filter it through my kidney's first?

Ruben said...

@mad scientist

Calling investment portfolios "real wealth" is hilarious. Can you eat them? Can they turn up the thermostat? No. In order to turn your portfolio into wealth you have to cash it out, and that involves a choice of action. Historically, most people have not been good at figuring out how to avoid collapses and so have lost the opportunity to turn their investment portfolio into something warm in their belly.

Hombre said...

Angry Scientist - You are aptly named. I think you are seeing pessimism when you read realism, and you certainly don't give our hosts an even break.

Linda - They (China) are newly into capitalism of sorts which means the corporations can gorge on the backs of the people for a short while via exploitative expansion, but not for very long. I agree with your view that they are entirely overpopulated, facing huge infrastructure and pollution problems and way too late in the energy cycle to have a "China Century." Why? The oil is half gone already!
I do give them credit though for managing 1.3B people in any kind of civil and controllable way. I am not a "commie" China basher. My respect for them as a people was very much enhanced by reading the classic "Farmers for Forty Centuries" by King.

Legendary Armored Samurai - I bow... welcome!

Draft said...

The Mad Scientist said "But your (you and Illargi) foresight was horrible right at the bottom as well."

Actually, as I documented in a comment thread a few weeks ago, Stoneleigh (though not Ilargi) correctly called the market bottom in March 2009, almost to the day. She said at the time that she expected a sharp rally that would last at least through the fall. So her call there was right, just as she was right back in 2007 about the market heading downhill.

The question is whether she's right now, but for that we'll have to wait and see.

Ilargi said...

New post up.

Waking from Suspended Animation


pfh said...

OK.. I always agree with the definition of the problem, and with the definitions of the problem others use to blame on other things.

But how do we get down off our worsening systemic overhang. A change of names could turn "gradual bankruptcy" into "right of passage" if you read Keynes' comment on the subject the right way.