Saturday, February 5, 2011

February 5 2011: The Real Estate Industrial Complex

Detroit Publishing Co. On Broadway 1911
"New York City, Broadway at night from Times Square"

Ilargi: Barbara J. Thompson, executive director of the National Council of State Housing Agencies, a non-profit organization that purports to keep homes in the US affordable, is either deeply misguided or a shrewd manipulator working on behalf of the business segment of what Business Week's Lorraine Woellert calls "The Real-Estate-Industrial Complex".
The Real Estate Lobby Is Ready to Rumble
Barbara J. Thompson plans to put a human face on the high-stakes debate over whether to preserve cherished U.S. government subsidies for home loans. Hundreds of faces, in fact. Next month, she'll lead a legion of "everyday people" to Capitol Hill to affirm the virtues of homeownership and urge Congress not to abandon federal support for low-cost mortgages.

"These are your neighbors, they're the people who teach your kids at school, they're your firefighters," says Thompson, executive director of the National Council of State Housing Agencies, whose members help provide loans to first-time home buyers. "The middle working class is the bedrock of our country."

Ilargi: The present US housing finance system, in which the government - through Fannie Mae, Freddie Mac, Ginnie Mae, the FHA and others-, guarantees all losses from mortgage loans for the lenders, but none for the borrowers, is the prime perpetrator in, if not the outright cause of, the financial -and political- crisis the US finds itself in. It's those government -read: taxpayer- guarantees that made it possible for lenders to throw all caution to the wind, lend to anyone who could fog a mirror, and use the proceeds to engage in ultra-high-stakes poker games in the international finance markets.

What the borrowers got were homes at artificially -hugely- elevated prices, and, when the markets started to crash, foreclosures, job losses and bankruptcies. Still, people like Barbara J. Thompson, who claims to "represent" your neighbors, teachers and firefighters, wants that same system to be perpetuated and revived.

But wouldn't it be better for those people who are the "bedrock of our country" if prices came down? Wouldn't that do a whole lot more towards home affordability than "cheap" loans? What exactly makes a house affordable to you? Is it a price you can afford, or is it a loan you can afford? If you look at the main Wall Street banks, and you realize that they a) were all bankrupt until your money was poured into their black holes, and b) they now pay record bonuses again, what is it that makes you think the system that made them rich is going to do you, as a borrower, any good?

Lorraine Woellert continues:
Joining Thompson's cause will be thousands of homebuilders, real estate agents, civil-rights leaders, and bankers who aim to deliver a similar message to Congress: Preserve government support for housing. Together, these groups represent what one might call, with apologies to President Dwight D. Eisenhower, a real estate-industrial complex that transcends partisan politics, geography, and socio-economic divides.

What unites them is a desire to protect a near-century of grants, tax breaks, and insurance policies funneled in large part through the government-owned mortgage-finance companies Fannie Mae and Freddie Mac, which played starring roles in the U.S. housing crisis. Fannie and Freddie bought home loans from banks and sold them to global investors with an implicit government guarantee to cover losses in the event of a default. The arrangement helped foster an $11 trillion mortgage industry and supported a housing sector that overheated—and then started unraveling in 2008.

Now as lawmakers begin to overhaul the system, the housing lobby is mobilizing against its common enemy: a Republican plan to eliminate the federal government's guarantee of mortgages. "It's a coalition that's going to be very difficult for our adversaries to beat," says Jerry Howard, president and chief executive officer of the National Association of Home Builders. "We're preparing for one hell of a fight."

Ilargi: It's a cute idea, isn't it, that the interests of Wall Street are the same as those of everyone's neighbors and firefighters? Unfortunately, the idea is also preposterous. Wall Street’s grip on the system has made homes much less affordable, not more so. Hence, Mrs. Thompson's stance of taking the same side as Wall Street can never be defended from the point of view of prospective homebuyers. It makes no sense for neighbors, or teachers, or firefighters. For that matter, it makes no sense for any American except those who have skin in the game either as lenders or as investors in mortgages or mortgage backed securities.

So how does this all work? Here's what Henry Blodget (and Barry Ritholtz) have to say on that theme:
The Perfect Bailout: Fannie And Freddie Now Send Taxpayer Cash Directly To Wall Street
Fannie and Freddie got a "blank check" from Treasury Secretary Tim Geithner at the end of the financial crisis. This blank check allows the housing giants to lose as much money as they want, with the taxpayer footing the bill.

Fannie and Freddie use much of this money to buy mortgages from Wall Street at what may be grossly inflated prices.  This is a super arrangement for the banks, because they get to unload all their terrible mortgages at prices that won't produce losses. And it's fine for Fannie and Freddie because, well, because they have the blank check. But of course there's no free lunch. And in this scheme, the US taxpayer is, as usual, footing the bill.

In other words, Fannie and Freddie are now doing what the Treasury wanted the original "TARP" bailout to do--use taxpayer money to help banks clean toxic assets off their balance sheets.  Unlike the original TARP, however--which justifiably outraged taxpayers--no one knows or cares about what Fannie or Freddie are doing.

So, it's the perfect bailout.

Ilargi: Blodget is so dead on in his description of this one, it's hard to understand how he can still run a site, Business Insider, that doesn't say exactly that all of the time. As if it's some minor matter that Wall Street, aided and abetted by Washington, is sucking every single American citizen dry as we speak. And that is precisely what he's saying, no two ways about it:

"This blank check allows the housing giants to lose as much money as they want, with the taxpayer footing the bill."

If Blodget understands the way it works, then why doesn't he, like I do, shout it from the rooftops all the time? And what about Barbara J. Thompson, executive director of the National Council of State Housing Agencies? Why does she side with those who are milking America dry, and pretend it's good for teachers and firefighters to be milked?

Again, Lorraine Woellert:
The group includes financiers who want to keep capital flowing on Wall Street, legions of real estate brokers and builders whose incomes depend on a robust housing market, and activists committed to the cause of shelter as a basic right. Among the ranks are some of Washington's biggest players, including the National Association of Realtors, whose members donated $3.9 million to candidates in the last election cycle, making it the nation's biggest political action committee. Then there's the American Bankers Assn., another powerhouse, which spent $6.2 million on lobbying last year, according to the Center for Responsive Politics.

On Feb. 16, the National Fair Housing Alliance, a civil-rights coalition, will bring together the Financial Services Roundtable and the Center for American Progress, a think tank aligned with the Obama Administration, along with other influential players to explore areas of common interest. The mortgage guarantee will be one of them, says Deborah Goldberg, who is leading the alliance effort. "Eliminating the government role in the secondary market is not the fix anybody is looking for," Goldberg says.

Ilargi: All of these people are either bought or clueless. How in earth can you pretend to represent those who would like to buy a home on the most favorable and most affordable terms, and then promote policies that are certain to make that home more expensive? ”Eliminating the government role in the secondary market is not the fix anybody is looking for“? Well, excuse me, but it is, Deborah Goldberg of civil-rights coalition National Fair Housing Alliance.

Lax subprime lending standards and conflicts between the public's interest and obligations to shareholders helped drive Washington-based Fannie Mae and Freddie Mac, based in McLean, Va., to the brink of collapse in 2008. The U.S. Treasury Dept. took control of the companies that year and has since advanced them $151 billion in taxpayer money to keep them solvent. Fannie and Freddie spent more than $164 million on lobbying in the decade leading up to the financial collapse. They now are banned from influencing Congress.

The real estate-industrial complex is doing that for them. In fighting to preserve some level of government insurance on mortgages, housing lobbyists are defending a crucial role played by Fannie and Freddie in greasing Wall Street's securitization machine. The duo now owns or guarantees more than half of all U.S. mortgages.

Ilargi: This is really grandiose, and Woellert has it down:

”Fannie and Freddie spent more than $164 million on lobbying in the decade leading up to the financial collapse. They now are banned from influencing Congress. The real estate-industrial complex is doing that for them.”

What she fails to mention is for instance that Fannie and Freddie already received $180 billion or so in direct -black hole- support, even before they got that blank check.
Republicans and their free-market allies want the mortgage system to stand on its own, and they've targeted the government guarantee for extinction. The House Financial Services Committee plans to begin hearings on Feb. 9. "There can't be any explicit guarantee," says Representative Scott Garrett (R-N.J.), who will have a lead role in housing legislation. "The taxpayer has been on the hook for this credit risk for a long time."

For Garrett and other Republicans, withstanding the lobbying onslaught might be difficult. Homebuilders and real estate agents in particular tend to support Republicans, according to the Center for Responsive Politics, and both groups are enlisting local business leaders and donors to make their case directly to lawmakers. "We're looking to make the arguments in a very personal way with each congressman," says Ronald Phipps, president of the National Association of Realtors. "We represent not just the 1.1 million Realtors and the 46 million consumers who have mortgages but also the 75 million homeowners in the U.S.," Phipps says.

Ilargi: Hmm, yeah, well: "We represent not just the 1.1 million Realtors and the 46 million consumers who have mortgages but also the 75 million homeowners in the U.S."

Makes it sound you speak for a lot of people, doesn't it? So how come that your interests, and those of the realtors, consumers and homeowners you speak for, are the same as those of the lenders who screwed over those same consumers and homeowners? Or would you perhaps like to deny that home prices are down 25-30% by now, and are still falling? Would you like to deny that the people you say you speak for have been hurt to the bone by that? Thought not. But you still think more of the same system that caused this is the right medicine?

Well, you can always play the vote card:
Realtors and builders also have a simple message that resonates with lawmakers, says Peter J. Wallison, a former Treasury Dept. official and an architect of the Republican plan to dismantle Fannie and Freddie. That message comes down to: One wrong move, and home sales and construction could come to a halt, unsettling the economy just as it seems to be recovering from the Great Recession. Even small-government idealists, such as Tea Party conservatives, could be sympathetic to such bread-and-butter arguments. "They will say that without the government's backing it will be very difficult for them to build homes or get financing for mortgages," Wallison says. "We have a very, very difficult road ahead of us."

See, though I definitely agree with them on the core issue, I don't have any confidence in the Republicans doing the right thing. All they’ll wind up doing is sell the whole thing, privatize it, and leave secret government guarantees in place, and that in a place to boot where their own anti-government stance has no place whatsoever.

People, voters, neighbors, teachers etc. want cheap loans, and they want those more than they want cheap homes. It's frankly beyond comprehension, but it is the order of the day. So if you see The Bernank claim that nothing he does has anything to do with higher food prices, maybe you should tell him that artificially high home prices in America DO, in fact, and in plain view, cause exactly those high prices. Zombie homes, zombie banks, zombie government. They all tend to kill people.

For the sake of people the world over, and that includes the dozens of millions in the US who are on foodstamps, or emergency assistance, or any of these programs, the funny accounting we have been seeing for the past few years should be gone. And so should Fannie and Freddie. They have two functions left today, which are far removed from their original ones. First, they keep Wall Street banks alive in a zombie state, in which these can transfer toxic paper to the public (Treasury) with no questions asked. Second, they keep home prices at a level where all hell doesn't yet break loose today, but is guaranteed to do so tomorrow.

However, and I’ve said this a thousand times if I said it once, do you feel that it's a good idea to keep BofA and Citi et al alive to screw you over and pay the profit to their execs? Or do you think it's better to let them sink, pay their debts, and die off if they can't pay them, rather than have the taxpayer be on the hook for all of it and who knows how much more?

If you ask me, it doesn't seem to matter much anymore, certaibly when it comes to mortgage loans.

Option #1 is the Obama way, in which the banks get the same blank check that Fannie and Freddie have had, through some opaque government/banks partnership.

Option #2 is the Republican way, in which the banks get the same blank check that Fannie and Freddie have had, no government needed.

The result is the same.

Still, through the incessant lobbying of the banks and their state supporters, it’s clear where this is going. Fannie and Freddie will be dismantled, their $3-$4 trillion in losses on mortgages written off on the American people, with nary a glance at their losses on the securities and other derivatives written on those same mortgages, and then a fresh new public/private entity will get the same insane privileges that they had. And there’ll be people claiming Fannie and Freddie served a great goal: make homes affordable. It should be obvious by now that whereas they maybe did that in the 1930's (or at least Fannie did), they do the exact opposite today. And that any subsequent replacement government guaranteed mortgage finance system will too.

It's people like Barbara J. Thompson, executive director of the National Council of State Housing Agencies, who, in their delusional state, guarantee it.

And it's not an easy topic: those who own a home, mortgage or not, want the value to remain as high as possible, lest they lose their investment or even go underwater. While those looking to buy a home are told that without the Fannie/Freddie black check guarantee system, they’ll never be able to purchase one.

What is this? A Stockholm Syndrome? Whoever gets to lose most wants it most. Makes you wonder what Barbara J. Thompson wears when the lights go out, doesn't it?

One thing's for sure: America is a society that comes with its own in-built Trojan Horse.

The Real Estate Lobby Is Ready to Rumble
by Lorraine Woellert - Business Week

Financiers, homebuilders, and real estate agents are uniting to save mortgage subsidies

Real estate agents, homebuilders, Wall Street banks, community banks, and civil rights groups have been lobbying Congress to maintain various federal subsidies on mortgages

American Bankers Association
Representing banks of all sizes, it spent more than $6.2 million on lobbying in 2010

Financial Services Roundtable
Lobbyists for banks and nonbank financial companies with $92.7 trillion in total assets, including Bank of America, General Electric, and Wells Fargo

National Association Of Realtors
A trade group with 1.1 million members, its political action committee contributed $3.9 million during the 2010 midterm election cycle, more than any other PAC

National Association Of Homebuilders
A Republican-leaning federation that helped House Financial Services Committee Chairman Spencer Bachus (R-Ala.) raise nearly $200,000 from the housing industry, the top donor to his 2010 reelection campaign

National Fair Housing Alliance
Steers a coalition of more than 20 civil-rights groups, including the NAACP, in an effort to preserve access to fair credit and homeownership

National Council Of State Housing Agencies
These state government boards have more than $115 billion in bonds outstanding to aid first-time home buyers. They plan a lobbying campaign in March to highlight who benefits from low-cost mortgages

Barbara J. Thompson plans to put a human face on the high-stakes debate over whether to preserve cherished U.S. government subsidies for home loans. Hundreds of faces, in fact. Next month, she'll lead a legion of "everyday people" to Capitol Hill to affirm the virtues of homeownership and urge Congress not to abandon federal support for low-cost mortgages.

"These are your neighbors, they're the people who teach your kids at school, they're your firefighters," says Thompson, executive director of the National Council of State Housing Agencies, whose members help provide loans to first-time home buyers. "The middle working class is the bedrock of our country."

Joining Thompson's cause will be thousands of homebuilders, real estate agents, civil-rights leaders, and bankers who aim to deliver a similar message to Congress: Preserve government support for housing. Together, these groups represent what one might call, with apologies to President Dwight D. Eisenhower, a real estate-industrial complex that transcends partisan politics, geography, and socio-economic divides.

What unites them is a desire to protect a near-century of grants, tax breaks, and insurance policies funneled in large part through the government-owned mortgage-finance companies Fannie Mae and Freddie Mac, which played starring roles in the U.S. housing crisis. Fannie and Freddie bought home loans from banks and sold them to global investors with an implicit government guarantee to cover losses in the event of a default. The arrangement helped foster an $11 trillion mortgage industry and supported a housing sector that overheated—and then started unraveling in 2008.

Now as lawmakers begin to overhaul the system, the housing lobby is mobilizing against its common enemy: a Republican plan to eliminate the federal government's guarantee of mortgages. "It's a coalition that's going to be very difficult for our adversaries to beat," says Jerry Howard, president and chief executive officer of the National Association of Home Builders. "We're preparing for one hell of a fight."

The group includes financiers who want to keep capital flowing on Wall Street, legions of real estate brokers and builders whose incomes depend on a robust housing market, and activists committed to the cause of shelter as a basic right. Among the ranks are some of Washington's biggest players, including the National Association of Realtors, whose members donated $3.9 million to candidates in the last election cycle, making it the nation's biggest political action committee. Then there's the American Bankers Assn., another powerhouse, which spent $6.2 million on lobbying last year, according to the Center for Responsive Politics. "It's David and Goliath," says Daniel J. Mitchell, an economist at the free-market Cato Institute who favors eliminating the government guarantee. "Not all hope is lost, but I'm not brimming with optimism."

On Feb. 16, the National Fair Housing Alliance, a civil-rights coalition, will bring together the Financial Services Roundtable and the Center for American Progress, a think tank aligned with the Obama Administration, along with other influential players to explore areas of common interest. The mortgage guarantee will be one of them, says Deborah Goldberg, who is leading the alliance effort. "Eliminating the government role in the secondary market is not the fix anybody is looking for," Goldberg says.

Lax subprime lending standards and conflicts between the public's interest and obligations to shareholders helped drive Washington-based Fannie Mae and Freddie Mac, based in McLean, Va., to the brink of collapse in 2008. The U.S. Treasury Dept. took control of the companies that year and has since advanced them $151 billion in taxpayer money to keep them solvent. Fannie and Freddie spent more than $164 million on lobbying in the decade leading up to the financial collapse. They now are banned from influencing Congress.

The real estate-industrial complex is doing that for them. In fighting to preserve some level of government insurance on mortgages, housing lobbyists are defending a crucial role played by Fannie and Freddie in greasing Wall Street's securitization machine. The duo now owns or guarantees more than half of all U.S. mortgages.

This month, Treasury Secretary Timothy Geithner will formally kick off the public debate when he presents Congress with a range of options for reducing the government's role in home financing while also encouraging Wall Street firms to take on some of the risk. Administration officials call the document "a path" to fixing housing finance and are lowering expectations that they will provide a magic bullet.

Republicans and their free-market allies want the mortgage system to stand on its own, and they've targeted the government guarantee for extinction. The House Financial Services Committee plans to begin hearings on Feb. 9. "There can't be any explicit guarantee," says Representative Scott Garrett (R-N.J.), who will have a lead role in housing legislation. "The taxpayer has been on the hook for this credit risk for a long time."

For Garrett and other Republicans, withstanding the lobbying onslaught might be difficult. Homebuilders and real estate agents in particular tend to support Republicans, according to the Center for Responsive Politics, and both groups are enlisting local business leaders and donors to make their case directly to lawmakers. "We're looking to make the arguments in a very personal way with each congressman," says Ronald Phipps, president of the National Association of Realtors. "We represent not just the 1.1 million Realtors and the 46 million consumers who have mortgages but also the 75 million homeowners in the U.S.," Phipps says.

Realtors and builders also have a simple message that resonates with lawmakers, says Peter J. Wallison, a former Treasury Dept. official and an architect of the Republican plan to dismantle Fannie and Freddie. That message comes down to: One wrong move, and home sales and construction could come to a halt, unsettling the economy just as it seems to be recovering from the Great Recession. Even small-government idealists, such as Tea Party conservatives, could be sympathetic to such bread-and-butter arguments. "They will say that without the government's backing it will be very difficult for them to build homes or get financing for mortgages," Wallison says. "We have a very, very difficult road ahead of us."

The Perfect Bailout: Fannie And Freddie Now Send Taxpayer Cash Directly To Wall Street
by Henry Blodget - Tech Ticker

As the terror of the financial crisis recedes, many folks have forgotten about the two huge taxpayer-owned mortgage companies, Fannie Mae and Freddie Mac. But they're still there, money-manager Barry Ritholtz reminds us. And they're still sending billions of dollars of taxpayer cash directly to Wall Street, in what might be described as the "perfect bailout."

How does this bailout work? Fannie and Freddie got a "blank check" from Treasury Secretary Tim Geithner at the end of the financial crisis. This blank check allows the housing giants to lose as much money as they want, with the taxpayer footing the bill.

Fannie and Freddie use much of this money to buy mortgages from Wall Street at what may be grossly inflated prices.  This is a super arrangement for the banks, because they get to unload all their terrible mortgages at prices that won't produce losses. And it's fine for Fannie and Freddie because, well, because they have the blank check. But of course there's no free lunch. And in this scheme, the US taxpayer is, as usual, footing the bill.

In other words, Fannie and Freddie are now doing what the Treasury wanted the original "TARP" bailout to do--use taxpayer money to help banks clean toxic assets off their balance sheets.  Unlike the original TARP, however--which justifiably outraged taxpayers--no one knows or cares about what Fannie or Freddie are doing.

So, it's the perfect bailout.

Goldman Sachs On Why The Housing Market Is Terrible And Homebuilders Are Doomed
by Gus Lubin - Business Insider

A note out from Goldman's Joshua Pollard tells investors to fade the rally in homebuilders.

While homebuilder stocks have outperformed the market by 1.5% in the past three months, Pollard says stocks are getting ahead of the recovery. Actually housing data has been lackluster this winter, and indicators like new mortgage applications point to a low sales in the spring.

Goldman has reduced its target for 2012 new home sales to 425k from 485k. The bank predicts 10-15% new home sales growth in 2011 and 2012, well below consensus estimates for 20% growth in 2012.

Mortgage applications show the direction of home sales -- and they crashed over the winter

Mortgage applications show the direction of home sales -- and they crashed over the winter

Low mortgage apps in January indicate only a 61% increase by April

Low mortgage apps in January indicate only a 61% increase by April

Low mortgage applications in January predict low mortgage applications in April (and last year's jump was based on housing stimulus)

Weak growth in mortgage apps translate into seasonally-adjusted flat new home sales

Weak growth in mortgage apps translate into seasonally-adjusted flat new home sales

This is the key season for homebuilders. A weak spring means a weak year.

This is the key season for homebuilders. A weak spring means a weak year.

Homebuilder stocks are massively outpacing housing starts

Homebuilder stocks are massively outpacing housing starts

Low new homes inventory reduces pricing pressure

Low new homes inventory reduces pricing pressure

The premium on new homes is at the highest level in decades

The premium on new homes is at the highest level in decades

Now look at the large existing homes inventory -- not even counting the delinquent mortgages that could flood the market

Now look at the large existing homes inventory -- not even counting the delinquent mortgages that could flood the market

Low new home inventory predicts low new home sales

Low new home inventory predicts low new home sales

BIG PICTURE: Goldman expects 10-15% new home growth in 2011 and 2012 -- i.e. no significant recovery

BIG PICTURE: Goldman expects 10-15% new home growth in 2011 and 2012 -- i.e. no significant recovery

Although the bottom in housing sales...

Although the bottom in housing sales...

Recently this correlation is weakening. New home sales are not keeping up with even a lackluster jobs recovery.

Recently this correlation is weakening. New home sales are not keeping up with even a lackluster jobs recovery.

Good sales data in December was skewed by a record increase 71% in the West -- and Goldman blames this on statistical error!

Good sales data in December was skewed by a record increase 71% in the West -- and Goldman blames this on statistical error!

January Jobs Created 36,000 - Falling Short of Consensus by Over 100,000 but Unemployment Rate Plunges to 9.0%
by TraderMark - Benzinga

This is the 3rd straight month of very strange data - each of the past 3 months has been a disappointment on job growth in the absolute but the past 2 months have seen sharp drops of 0.4% in the unemployment rate - this number has fallen from 9.8% to 9.0% in just 2 reports.  This is because we are talking 2 separate reports, each one speaks to a different figure.  For general public consumption (i.e. what the politicians talk about) the unemployment rate  is all that matters so the conspiracy theorists can begin the talk of how the unemployment rate has dropped 0.8% while only some 150,000 jobs have been created the past 2 months (officially).

Transportation (-38K) and construction (-32K) were the 2 weak links in January, so that can be blamed on the snow of course if you are glass half full.  But even with those reversed back to zero (+70K) the official job creation would have fallen far below consensus. The household survey seems to indicate a lot of people are becoming self employed which is why the unemployment rate seemed to drop on first glance.  Perhaps this is what skewed the job creation figure this month, as it surveys traditional businesses rather people starting their own business. Wage growth jumped nicely from +0.1% to +0.4% but the workweek dropped by 0.1 which is a negative.

The labor force participation rate was unchanged at 64.2% - this is far below the historical rate, but at least did not drop even further. Probably the most important point - the annual benchmark revisions that come out each January were released today, and (as usual) the jobs created in 2010 were overstated by nearly 400,000.  Which makes our overreaction to each month's data as gospel, laughable.  Whatever we see today or the next 10-11 months will be revised to a substantial degree in January 2011... The market sunk initially when the 36,000 job figure was announced, but bounced quickly a few seconds later when the unemployment rate was mentioned.

Good news, bad news and much muddle in employment statistics
by Diane Stafford - Kansas City Star

The national unemployment rate plunged to 9 percent in January from 9.4 percent in December, the Labor Department said Friday. That was the lowest rate since April 2009. Good news, right?

Not entirely. The rate fell not because job growth mushroomed. It fell mostly because the Bureau of Labor Statistics revised numbers it had relied on last year, and partly because winter weather disrupted businesses and their data reporting. The January jobs numbers, which even experts called a confusing muddle, indicated more people dropped out of the work force than landed jobs. In fact, the nation’s employers created an anemic 36,000 jobs.

The bureau’s revisions said that the U.S. population last year was 347,000 less than previously estimated and that its employment estimates last year were too high by 472,000 jobs. Because of the revisions, the January report showed a big increase in the number of people who dropped out of the labor force. And when factored into the jobs picture, it drove down the jobless rate. Instead of trying to explain the convoluted statistical moves, it’s easier to offer an underlying explanation of why unemployment and employment numbers can paint differing pictures of the job market.

The government counts employment two ways — a household survey of individuals and a survey of employers. Usually, the two different methods show trends that dovetail. But sometimes the surveys flash conflicting signals because what individuals tell surveyors might be different from what actual payroll records show.

First, let’s look at the unemployment rate. It comes from a survey of 60,000 households. The government asks people whether they were working or looking for work during a pay period in the month. That survey gives insight into the number of job hunters, the number of self-employed, and the number of discouraged or underemployed workers. In January, the household survey indicated that about 600,000 more people were unemployed than in December. And the survey indicated that the size of the workforce dropped by about a half million.

“The data may be telling us that households are redefining how they live,” said Bruce Yandle, economist at George Mason University. “Instead of two people in the house working, you have people saying, ‘My new job is house dad.’?” Giving the data a first glance, economists said it looked like the labor force participation rate — which measures the share of people who are working or looking for work — fell to 64.2 percent, its lowest rate since March 1984, when the nation was clawing its way out its last major recession.

The statistics bureau figured that the jobless rate in the smaller work force had fallen to 9 percent. But to economists that rate looked too buoyant compared to what the companion survey of employers showed. The number of jobs created by the nation’s employers — the disappointing 36,000 net gain in January — comes from a survey that reaches 140,000 businesses and government agencies. It gathers preliminary data on how many jobs employers added or lost during the month.

The January gain was far less than the 146,000 forecast and about one-quarter the payroll growth needed merely to keep pace with population growth. Economists generally agree that the employer survey is more accurate than the household data, which relies on people’s self-reported work status. Despite the confusing statistics, the January surveys gave economists some bright spots to point to:

•About 13.86 million workers classified themselves as unemployed, down from more than 15 million during much of 2009 and 2010.
•Employment grew in the manufacturing and retail sectors. “Private-sector employment increased for the 11th straight month,” noted Steven Wood, chief economist at Insight Economics.
•Over the last two months, the unemployment rate has fallen 0.8 percentage point.
•The Labor Department also revised the November job gains from 71,000 to 93,000 and the December gains from 103,000 to 121,000.

But confounding the two reports was the warning that severe winter weather may have discombobulated the surveys because of businesses’ temporary shutdowns. “The thumbprints of the weather were all over this report,” said Neil Dutta, an economist at Bank of America Merrill Lynch. Dutta and other economists said the February jobs report would be needed to get a more accurate reading of labor market trends. Still, he said, “we know the job market is recovering.”

It’s hard to get past this fact, though: With just 36,000 jobs added, payroll employment remained more than 7.7 million below what it was when the recession began in December 2007. “This means that we should be far more impressed by the fact that job growth has averaged just 87,000 the last three months than by the fact that the unemployment rate was reported as falling by 0.8 percentage points,” said Dean Baker, co-founder of the Center for Economic and Policy Research. “This rate of job growth is not even fast enough to keep pace with the growth of the labor force.”

With the January report, the statistics bureau also announced its annual “benchmark update” to align initially published employment numbers with actual corporate tax records from April 2009 to March 2010. Before the revision, the Labor Department reported that the nation had added about 1.1 million jobs last year. The revision knocked that down to 909,000 jobs. “Generally, we’re going to be flat-lined for a long time,” said Art Hall, director of the Center for Applied Economics at the University of Kansas. “If people come off the bench (to re-enter the job market), that will be an optimistic sign, but is it because they see opportunities or because their unemployment (benefits) ran out?”

The January report said the number of long-term unemployed — those who had been job hunting for 27 weeks or more — edged down to 6.2 million, or 43.8 percent of the jobless. The manufacturing sector added 49,000 jobs in January, and retail trade grew by 28,000 jobs. All other industries had basically flat or lower payroll counts. Construction jobs fell by 32,000, and the transportation and warehousing sector dropped 38,000. The report also measured average workweek length and average earnings. The average workweek for all employees on private, nonfarm payrolls fell in January by one-tenth of an hour to 34.2 hours. Average hourly earnings for all employees rose 8 cents from December, to $22.86. Over the past 12 months, average hourly earnings rose by 1.9 percent.

Gallup Finds U.S. Unemployment Up Slightly in January to 9.8%
by Gallup

Unemployment, as measured by Gallup without seasonal adjustment, increased to 9.8% at the end of January -- up from 9.6% at the end of December, but down from 10.9% a year ago.

Gallup's U.S. Unemployment Rate: 2010-2011 Trend

The percentage of part-time workers who want full-time work improved slightly, to 9.1% of the workforce in January from 9.4% in December -- similar to the 9.0% of January 2010.

Percentage of Americans Working Part Time and Wanting Full-Time Work: 2010-2011 Trend

Underemployment Essentially Unchanged in January

Underemployment -- the combination of part-time workers wanting full-time work and Gallup's U.S. unemployment rate -- was 18.9% in January, essentially the same as the 19.0% of December. Underemployment now stands one percentage point below the 19.9% of a year ago.

 U.S. Underemployment: 2010-2011 Trend

Labor Force and Unemployment Statistical BS
by Mike Shedlock

I had no idea what to expect in today's jobs report. ADP projected 187,000 jobs but has been wildly off numbers reported by the BLS. Economists expected +146,000 jobs. The actual establishment survey report shows +36,000.

I knew huge revisions and methodology changes were coming this month would make gaming the report a crap-shoot. However, the amazing thing in the jobs report was not the number of jobs, but the statistical sleight-of-hand in the unemployment rate.

Statistical BS

The unemployment rate (based on the household survey), unexpectedly fell from 9.4% to 9.0%. How did that happen?

Based on population growth, the labor force should have been expanding over the course of a year by about 125,000 workers a month, a total of 1.5 million workers. Instead, (for the entire year) the BLS reports that the civilian labor force fell by 167,000. Those not in the labor force rose by 2,094,000. In January alone, a whopping 319,000 people dropped out of the workforce.

To get the unemployment rate down from 9.8% to 9.0%, you simply do not count two million workers. Look on the bright side, at this rate we will be back to full employment in no time.

Huge Downward Revisions

One way to make recent numbers look better is to revise the historical data downward. Today we have a third massive backward revision since the beginning of the recession.

"The total nonfarm employment level for March 2010 was revised downward by 378,000 (411,000 on a seasonally adjusted basis). The previously published level for December 2010 was revised downward by 452,000 (483,000 on a seasonally adjusted basis)."

Decade of Revisions Next Year

"The population control adjustments introduced with household survey data for January 2011 were applied to the population base determined by Census 2000. The results from Census 2010 will not be incorporated into the household survey population controls until the release of data for January 2012."

Hallelujah, the recent census report will provide fertile ground to revise away anything the BLS wants.

January Jobs Report

Please consider the Bureau of Labor Statistics (BLS) January 2010 Employment Report.

The unemployment rate fell by 0.4 percentage point to 9.0 percent in January, while nonfarm payroll employment changed little (+36,000), the U.S. Bureau of Labor Statistics reported today. Employment rose in manufacturing and in retail trade but was down in construction and in transportation and warehousing. Employment in most other major industries changed little over the month.

Unemployment Rate - Seasonally Adjusted

Bear in mind, were it not for millions of people allegedly dropping out of the labor force over the last year, the unemployment rate would be over 11% right now.

Nonfarm Payroll Employment - Seasonally Adjusted

Establishment Data

click on chart for sharper image
Index of Aggregate Weekly Hours

The average workweek for all employees on private nonfarm payrolls fell by 0.1 hour to 34.2 hours in January. The manufacturing workweek for all employees rose by 0.1 hour to 40.5 hours, while factory overtime remained at 3.1 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls declined by 0.1 hour to 33.4 hours; the workweek fell by 1.0 hour in construction, likely reflecting severe winter weather.

In January, average hourly earnings for all employees on private nonfarm payrolls increased by 8 cents, or 0.4 percent, to $22.86. Over the past 12 months, average hourly earnings have increased by 1.9 percent. In January, average hourly earnings of private-sector production and nonsupervisory employees rose by 10 cents, or 0.5 percent, to $19.34.
BLS Birth-Death Model Black Box

The big news in the BLS Birth/Death Model is the BLS is going to move to quarterly rather than annual adjustments.

Effective with the release of January 2011 data on February 4, 2011, the establishment survey will begin estimating net business birth/death adjustment factors on a quarterly basis, replacing the current practice of estimating the factors annually. This will allow the establishment survey to incorporate information from the Quarterly Census of Employment and Wages into the birth/death adjustment factors as soon as it becomes available and thereby improve the factors.

For more details please see Introduction of Quarterly Birth/Death Model Updates in the Establishment Survey

In recent years Birth/Death methodology has been so screwed up and there have been so many revisions that it has been painful to watch.

It is possible that the BLS model is now back in sync with the real world. Moreover, quarterly rather than annual adjustments can only help the process.

The Birth-Death numbers are not seasonally adjusted while the reported headline number is. In the black box the BLS combines the two coming out with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance. Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth-Death Number Revisions

Inquiring minds note enormous backward revisions in Birth-Death reporting. Here is the chart for 2010 that I showed last month.

Birth Death Model Revisions 2010 (as reported last month)

Birth Death Model Revisions 2010 (as reported this month)

Is this new model going to reflect reality going forward?

That's hard to say, but things were so screwed up before that it is unlikely to be any worse. One encouraging sign is several negative numbers in the recent chart. January would have been negative too, had they shown it. Historically there were only 2 negative number every year, January and July. That anomaly broke November of 2010.

Household Data

In the last year, the civilian population rose by 1,872,000. Yet the labor force dropped by 167,000. Those not in the labor force rose by 2,094,000. In January alone, a whopping 319,000 people dropped out of the workforce.

Households Stats
  • The number of unemployed persons decreased by about 600,000 in January to 13.9 million, while the labor force was unchanged. (Based on data adjusted for updated population controls)
  • The number of long-term unemployed (those jobless for 27 weeks or more) edged down to 6.2 million and accounted for 43.8 percent of the unemployed.
  • After accounting for the annual adjustment to the population controls, the employment-population ratio (58.4 percent) rose in January, and the labor force participation rate (64.2 percent) was unchanged.
  • The number of persons employed part time for economic reasons declined from 8.9 to 8.4 million in January. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.
  • In January, 2.8 million persons were marginally attached to the labor force, up from 2.5 million a year earlier. (These data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.
In January 2010 the number of people working part time for economic reason was 8.3 million. 12 months later the total has gone up by 631,000.

Table A-8 Part Time Status

click on chart for sharper image

There are now 8,407,000 workers whose hours may rise before those companies start hiring more workers.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

click on chart for sharper image

Grim Statistics

Given the total distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is hard to discuss the numbers.

The official unemployment rate is 9.0%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

While the "official" unemployment rate is an unacceptable 9.0%, U-6 is much higher at 16.1%. Moreover, both the official rate and U-6 would be much higher were it not for huge numbers of people dropping out of the workforce.

Things are much worse than the reported numbers would have you believe.

Missing Workers: 4.9 Million Out Of Work And Forgotten
by Lila Shapiro - Huffington Post

Over the last three years, nearly 5 million U.S. workers have effectively gone missing. You won't find their photos on the backs of milk cartons. The Coast Guard isn't out looking for them. No missing-persons reports have been filed. These are jobless Americans who have grown so discouraged by their unsuccessful searches for work that they have simply given up the hunt. They are no longer counted among the 14.5 million Americans officially considered unemployed as of the end of last year, according to the Department of Labor.

Indeed, when the government on Friday delivered its latest monthly snapshot of the labor market for January, which showed the unemployment rate falling to 9 percent, these people -- a group larger than the population of Los Angeles -- were not even counted. Some are sprinkled into the fine print, counted in categories such as "discouraged workers," but most are invisible. The past several months have shown strong signs of improvement in the U.S. economy.

Manufacturing expended at the fastest rate in seven years in January, the private sector is adding thousands of jobs, gross domestic product is on the rise. The Economist describes the current profit-reporting season as "shaping up to be one of the best ever." Given these indications of improvement, one might expect that those who felt discouraged months ago would resume looking for employment. But the group of Americans who have given up looking for work is larger than ever.

In January, the percentage of Americans who were either employed or actively looking for work fell to 64.2 percent, what economist Heidi Shierholz calls "a stunning new low for the recession." Shierholz estimates that 4.9 million Americans are left out of the Department of Labor's official unemployment count because they are too discouraged to continue seeking work. "We have now added jobs every single month for a year," Shierholz said. "So you would think that there would be labor-force growth, these missing workers starting to come back in. Not only is that not happening, it's actually starting to go in the other direction. There's never been a pool of missing workers this large. It's not clear to me when they'll come back."

When Raymond Sievers was laid off from his job at a biotechnology firm in California, where he worked for a company that manufactures drugs for cancer patients, he was upset, but not devastated. Sievers was 44, living comfortably in San Diego with his wife and two young children. He had a master's degree in biology, and full confidence that he and his family would recover from this setback. That was back in April 2008.

"I thought, 'I've got over 12 years of experience manufacturing these drugs with excellent success,'" Sievers said. "So I looked for a year and a half and got nowhere. All these years of experience and this fabulous degree, and no one cares." Sievers spent three years sending out hundreds of job applications, which earned him a couple of near-misses. But while he still has his resume up on multiple employment sites, Sievers -- now 47 -- has given up looking. "One can only take 'no' so many times," Sievers said quietly. He and his wife, who was also recently laid off, are living off their savings and biding their time, trying to minimize their expenses. They try not to think about the future, too scared to contemplate what will happen if their savings give out.

Sievers is no longer one of the 14.5 million officially unemployed Americans -- the grim 9.4 percent of the working-age population out of a job as of the end of last year. That 9.4 percent starts looking almost rosy when compared with the roughly 10.7 percent of Americans who would be counted unemployed if you added just half of the discouraged workers like Sievers back in. For those economists engaged in the tricky work of predicting when an improving American economy will translate into a declining unemployment rate, there is one unknown that trumps all other uncertainties: as the economy improves, will these American workers return to the workforce? And if so, when?

For the discouraged worker, the question of when, if ever, they will get their old life back is even more elusive. "What am I going to do with the rest of my life? I keep saying to myself: what am I going to do? I have another 20 good years in me!" said Christopher Prukop, 65, who lives alone in Brookline, Mass. He is tall, with a weathered, handsome face and a charismatic smile, still extremely energetic despite years of strain.

Prukop lost his job fundraising for an international animal-welfare organization in March 2008. He has a bachelor's degree from Middlebury College and a master's degree in history from Tufts University, as well as 20-plus years of fundraising experience and eight years of good performance reviews from his last place of employment. He enjoyed his life -- going to the ballet and museums in Boston -- and he loved his work. But after almost three years, hundreds of applications and roughly 50 job interviews, none of which panned out, he felt done. "It's very easy to give up," Prukop said. "Especially when you put yourself on the line repeatedly, looking for a job and being told no. After a while you begin to have major doubts about what you've accomplished in life, and what you sill have to offer. After a while you start wondering, 'What have i really done?'"

Prukop would love to be back to work, and would take a job if one was offered to him, but the daily grind of effort and rejection grew to be too unbearable. He is among the most fortunate of discouraged workers. He made decent money for 20 years -- his last job paid around $55,000 annually -- accumulated savings, bought a condo and is in excellent health. He could afford not to apply for the lowest level jobs available. When he turned 65, he registered for Social Security, and now lives off those checks and the remains of his savings, hoping that disaster won't strike.

Sitting in a coffee shop, Prukop lowered his voice when the conversation turned to money. "I don't want to live on Social Security. Nor do I want to work at a Star Market," he whispered. "Not having a job is very limiting in one sense. So much of how we define ourselves is defined by the job we have. It's how we function in life. I just don't see myself being old and retired." Help, Prukop said, has not been forthcoming. "There seems to be this unspoken hope that people like me will just sort of disappear."

Uncharted Territory
Labor economists are obsessed with the problem of these missing workers and what effect their possible return could have on the job market. "The big problem that labor economists have realized for a long time is that the unemployment rate misses a huge part of the story," said Till Marco von Wachter, an economics professor at Columbia University who studies the effects of long-term unemployment. "The big question is how many people are out there, really, who have no work?"

A missing workforce this large -- and this capable -- is unprecedented. The discouraged workers of the Great Recession are largely qualified workers. They want to be working. But the job market has been too weak for too long. "The problem is, when you hear about long-term unemployment from the past, it really was about workers who had to change careers, or who were unemployed not because of the labor market, but because of something about themselves," von Wachter said. "But now, we have a situation in the labor market where people are unemployed for long periods of time, but it's not about them. And now we're really in uncharted territory. So the question is: will they bounce right back when the labor market comes back, or will they not."

Shierholz, an economist at the Economic Policy Institute, calculates the number of missing workers by comparing the number of working-age Americans employed or officially unemployed in 2007 to the number employed or officially unemployed today. Over three years, the total number of employed and officially unemployed Americans should have increased by more than four million, instead it shrunk by several hundred thousand. By subtracting the size of the labor force in 2007 from that of the labor force in 2010, Shierholz counts 4.4 million workers left out of the official unemployment rate as of December 2010. In January, she updated that number to 4.9 million, accounting for population growth. In an email, Shierholz crunched the December numbers:
The labor force fell by 260,000 in December, and the labor force participation rate fell to at 64.3%, the lowest point of the recession. Incredibly, the labor force is now smaller than it was before the recession started, so the pool of "missing workers," i.e., workers who dropped out of (or didn't enter) the labor force during the downturn, remains large. We can estimate its size in the following way. The labor force should have increased by around 4.2 million workers from December 2007 to December 2010 given working-age population growth over this period, but instead it has fallen by 246,000. This means that the pool of missing workers now numbers around 4.4 million. If just half of these workers were currently in the labor force and were unemployed, the unemployment rate would be 10.7% instead of 9.4%. None of these workers is reflected in the official unemployment count, but their entry or re-entry into the labor force will contribute to keeping the unemployment rate high.

This is why December's unemployment numbers were not viewed as good news: even though the unemployment rate dropped from 9.8 to 9.4 percent, over half of the decline came from the 260,000 Americans who dropped out of the labor force altogether.

"You could solve the 'unemployment problem' tomorrow if all fourteen and a half million workers just said 'I give up, I don't want a job anymore,'" joked Carl E. Van Horn, a labor economist at Rutgers University and one of the authors of a recent report, "The Shattered American Dream: Unemployed Workers Lose Ground, Hope, and Faith in their Futures." "The reason people give up is contextual and its volatile. It's not a permanent condition," van Horn said. "Being employed or not employed is a bright line. You have a job, you don't have a job. Discouraged is an attitude. It's not a fact, it's an attitude -- are you discouraged? Did you give up because you were discouraged? Tomorrow you might hear the president say something inspirational, and you think, I'm not discouraged! I'm going to look for work again! It's not a bright a line, it's squishy."

It is this volatility, in part, that makes it so difficult to predict when discouraged workers will be able to return to work. "As the economy starts growing again, they're likely to get drawn back in again," van Horn notes, adding, "What do you want as a society? You probably want as many people working as possible. So it's not an insignificant question, but it is one that's hard to nail down in any given period of time."
Like Christopher and Raymond, many of the ones who give up searching for work are people who have something -- anything -- to fall back on. "They accept downward mobility," van Horn said. "And that can be a very rational decision to just say, 'Well, it's worth it.'"

Those fortunate enough to, live off their savings or their families offer support. Some discouraged workers can afford to go back to school or wait for the job that they really want rather then settling for work below their education level or experience. When Karen Collins first became unemployed, she sold her jewelry and began applying for work. While she waited for her job search to bear fruit, she kept selling: most of her living room furniture, then the shelves in the garage and the basement, then her car. The last thing she sold on Craigslist was a $1,000 camera she once used for her catering and cake-decorating business.

"I make this joke all the time: I would have shot myself, but we pawned the gun!" Collins said. At age 52, she lives with her boyfriend and 19-year-old adopted son. Back in 2008, she owned her own business -- a successful banquet center and catering business, where she also decorated custom cakes. When the recession hit, the business started failing: annual Christmas parties she once hosted were canceled, weddings were delayed, people cut back on celebrations.

Collins was forced to gradually let her employees go until finally, in January 2010, she closed up shop entirely. She has suffered from lifelong narcolepsy, but when she was working always managed to keep herself medicated and alert. Once she shuttered her business, things really started to fall apart. "As soon as I shut the door, I end up in the hospital for kidney stones. I've never been sick like that before," she said. "It's June, I'm trying to get my son's college going. And now my mom becomes ill. I move her in with us, and try to take care of her. I'm sleeping on the living room floor. Then she dies on me in November. At her funeral I fall and break my leg in three places. and my narcolepsy is over the top. It's horrible."

Since Collins ran her own business and didn't pay herself a paycheck, she has been unable to collect unemployment benefits. She is now living off monthly disability checks, which barely allow her to scrape by. She has applied for hundreds of jobs with no success. "I worked all my life, I had everything," Collins said. "And then one year, I don't even have an earring left," she paused. "I'm an accomplished confectionery artist and I can't even get a cake-decorating job at Kroger's."

For the time being, she has given up applying for jobs and is focusing on her health and picking up the pieces of her life. She dreams of some day opening her own cake shop, but has no idea when that will be feasible. In the meantime, she has a website that she begun building back when she owned the banquet hall and was preparing for a life focused exclusively on her main passion, cake decoration.

Collins is angry at the government. She wants to write a book called "The One-Year Working-Class Survival Guide: When Washington Throws You Under The Bus," and thinks that those on Capitol Hill and in the White House should have their paychecks come to a complete stop for an entire year so that they will know how she feels. On her Facebook page, her favorite quotation is from Lily Tomlin: "I always wanted to be somebody, but now I realize I should have been more specific."

But the real kicker for Collins is her pets. She has a bloodhound, a boxer and a 75-pound turtle named Chester. Sometimes she would joke to her son not to worry, they could always eat Chester. In an email, she wrote:
"You don't think about a lot of things when you are living the everyday normal working life. The thought of; "how am I going to feed my pets when I have lost everything?" never crossed my mind in my entire life. It's a shame how many pets ended up abandoned or at animal shelters due to the economy. I can definitely see how it happened. I did everything in my power to keep mine. I really wasn't going to eat "Chester", my tortoise. It was a joke I would say to my son to make him laugh. My boxer, Molly, has been allergic to 'all food' for the last 5 years. In my "normal life", she ate prescription dog food. When the black cloud came over, she had to eat anything."

"It really reminds me of cleaning up after a fire," Collins said. "That's what I feel like every morning. I'm grabbing the broom and trying to clean it up. And I feel like it's going to be years before I ever do."

The Ruinous Fiscal Impact of Big Banks
by Simon Johnson - New York Times

The newly standard line from big global banks has two components – as seen clearly in the statements of Jamie Dimon of JPMorgan Chase and Robert E. Diamond Jr. of the British bank Barclays at Davos last weekend.

First, if you regulate us, we’ll move to other countries. And second, the public policy priority should not be banks but rather the spending cuts needed to get budget deficits under control in the United States, Britain and other industrialized countries. This rhetoric is misleading at best. At worst it represents a blatant attempt to shake down the public purse. On Tuesday, in testimony to the Senate Budget Committee, I had an opportunity to confront this myth-making by the banks and to suggest that the bankers’ logic is completely backward.

Start with the bankers’ point about budget deficits and spending cuts. Public deficits and debt relative to gross domestic product have ballooned in the last three years for one simple reason – the big banks at the heart of our financial system blew themselves up. On this point, the conclusions of the Financial Crisis Inquiry Commission, which appeared last week, are very clear and utterly compelling.

No one forced the banks to take on so much risk. Top bankers lobbied long and hard for the rules that allowed them to behave recklessly. And these same people effectively captured the hearts, minds and, some would say, pocketbooks of the regulators – in the sense that a well-regarded regulator can and often does go work for a bank afterward.

The mega-recession, which is starting to look more like a mini-depression in terms of employment terms for the United States (which lost 6 percent of employment and is still down 5 percent from the pre-crisis peak), caused a big decline in tax revenues. Falling taxes under such circumstances are part of what is known technically as the "automatic stabilizers" of the economy, meaning they help offset the contractionary effect of the financial shock without the government having to take any discretionary action.

Whatever you think about the effectiveness of the additional fiscal stimulus packages provided to the economy in early 2008 (under President Bush) or starting in early 2009 (under President Obama), remember that the impact of these on the deficit was small relative to the decline in tax revenue. The total fiscal impact of this cycle of regulatory co-option, as reflected, for example, in the Congressional Budget Office baseline debt forecast (which compares what this was precrisis and what this is now) – is about a 40-percentage-point increase in net federal government debt held by the private sector.

As we discussed at length during the Senate hearing, it is therefore not possible to discuss bringing the budget deficit under control in the foreseeable future without measuring and confronting the risks still posed by our financial system. Neil Barofsky, the special inspector general for the Troubled Assets Relief Program, put it well in his latest quarterly report, which appeared last week: perhaps TARP’s most significant legacy is "the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are ‘too big to fail.’ "

Next up for the United States economic outlook is not necessarily another too-big-to-fail boom-bust-bailout cycle. It may well move on to too big to save, which is what Ireland is now experiencing. When reckless banks get big enough, their self-destruction ruins the fiscal balance sheet of an entire country. In this context, the idea that megabanks would move to other countries is simply ludicrous. These behemoths need a public balance sheet to back them up, or they will not be able to borrow anywhere near their current amounts.

Whatever you think of places like Grand Cayman, the Bahamas or San Marino as offshore financial centers, there is no way that a JPMorgan Chase or a Barclays could consider moving there. Poorly run casinos with completely messed-up incentives, these megabanks need a deep-pocketed and somewhat dumb sovereign to back them. The latest credit rating methodology from Standard & Poor’s says essentially just this – henceforth, it will evaluate banks not just on their standalone creditworthiness, but also in terms of their ability to attract generous support from a creditworthy government in the event of a crisis.

New York-based banks might move to London, and vice versa. But the Bank of England is far ahead of the Federal Reserve in its thinking about how to rein in banks – see, for example, the new paper by David Miles (a member of the Monetary Policy Committee in Britain) on the need for much more equity financing in banks than specified in the Basel III agreement.

Officials outside the United States are increasingly beginning to understand the point being made by Anat Admati and her colleagues – bank capital is not expensive in any social sense (for example, look at Switzerland, where the biggest banks are now required to have about double the Basel III levels of equity funding). The United States needs its financial system, particularly its largest banks, to be financed much more with equity than is currently the case.

The intellectual right in the United States understands all this and, broadly speaking, agrees. Officials in other countries begin to see the light. Unfortunately, officials in the United States and those of the political right who seek public office – as well as much of the political left – still appear greatly in thrall to the big banks.

Fed chief Ben Bernanke denies US policy behind record global food prices
by Richard Blackden and Harry Wilson - Telegraph

Ben Bernanke, the chairman of the US Federal Reserve, has dismissed the idea that the central bank’s policies are to blame for the rise in global food prices to a record high that helped trigger political unrest in Egypt. Mr Bernanke said that the rapid growth of developing economies was behind the increase in food prices, rather than the Fed’s decision to embark on a second, $600bn (£371bn) round of printing money. "Clearly what’s happening is not a dollar effect, it’s a growth effect," Mr Bernanke said in a rare question and answer session with journalists at the National Press Club in Washington on Thursday.

The United Nations Food and Agriculture Organization (UN FAO) has warned that high prices, already above levels in 2008 which sparked riots, were likely to rise further. The FAO measures food prices from an index made up of a basket of key commodities such as wheat, milk, oil and sugar, and is widely watched by economists and politicians around the world as the first indicator of whether prices will end up higher on shop shelves. The index hit averaged 230.7 points in January, up from 223.1 points in December and 206 in November.

The index highlights how food prices, which throughout most of the last two decades have been stable, have taken off in alarming fashion in the past three years. In 2000, the index stood at 90 and did not break through 100 until 2004. Surging food prices have come back into the spotlight after they helped fuel protests that toppled Tunisia's president in January. Food inflation has also been among the root causes of protests in Egypt and Jordan, raising speculation other nations in the region would hoard grain stocks to reassure their populations. Abdolreza Abbassian, an economist at the FAO, said: "The new figures clearly show that the upward pressure on world food prices is not abating."

But America's latest dose of quantitative easing has drawn heavy criticism from overseas that it will only stoke an inflationary problem that many developing economies are having to tackle. "It’s entirely unfair to attribute excess demand issues in emering markets to US monetary policy," Mr Bernanke said.

The Fed chairman also urged Congress not to use the fact that the US government will technically have to raise its legal debt limit as a "bargaining chip" in the debate over how to cut America’s budget deficit. The government is projected to hit the current debt limit of $14.29 trillion in May, and Congress will be required to vote to extend it. Republicans and some Democrats are threatening to vote against it without immediate cuts in government spending.

"I would very much urge Congress not to focus on the debt limit as the bargaining chip in this situation," Mr Bernanke said. "We need to be very careful not to create any impression that the US won’t pay its creditors." Mr Bernanke also added that he is optimistic that the rate of job growth will accelerate over the next couple of quarters.

Egypt's Revolution: Coming to an Economy Near You
by Umair Haque - Harvard Business Review

It was a society in stagnation, if not decline. Despite ostensible stability, its people — especially its young people — faced a future bleaker than the dark side of Pluto. For decades, the richest grew even richer, as national debt mounted, middle-class people tried to make ends meet, and upward mobility fell. Government failed to address these problems, and the governed felt increasingly disenfranchised — and partisan. Mass unemployment metastasized from a temporary illness to a chronic condition. One of its major cities decided to erect a permanent tent city, for a permanently excluded, marginalized underclass.

This isn't Tunisia, or Egypt — but America. Yes, in many ways Egypt and America couldn't be more different. But the broad contours are just a little too similar for comfort. Consider a tweet that made the rounds this weekend. "Youth unemployment: #Yemen 49%, #Palestine 38%, #Morocco 35%, #Egypt 33%, #Tunisia 26%". It sounds staggering. But youth unemployment rates are 20-40% across Europe. And in the USA, estimates range from 20-50% depending on how you count, and when. Egypt's youth unemployment crisis — which many seemed to think on Twitter was merely an Arab problem (oh, those Arabs!) is, in point of fact, a global one.

What we're watching is a massive malfunctioning of the global economy. At the root of the problem: dumb growth. Dumb growth is, in many ways, bogus — rather than reflecting enduring wealth creation, it largely reflects the transfer of wealth: from the poor to the rich, the young to the old, tomorrow to today, and human beings to corporate "people." Dumb growth is growth without prosperity.
And it's far from an Egyptian problem.
Lane Kenworthy has recently called America's version of it "the Great Decoupling." In the US, net worth, median income, job creation, happiness — all have been flat for a decade (plus). Other measures of prosperity, which I'd argue matter more, haven't just flatlined, they've cratered: polls show that trust, connection, stability, social mobility, are all down. The problem of dumb, empty "growth" is global.

And my hunch is that it's going to get worse, before it gets better. Consider the food, commodity, and energy price spikes likely to sweep the globe this year. Consider the costs of climate disruption. If it's bad for a family whose breadwinner is unemployed in the States, how bad is it for the more than three billion people — that's more than half the world, folks — living on less than $2 a day?

How do we fix it? In his new book, Tyler Cowen argues that the problem is that that we've eaten all the "low-hanging fruit," — that there's not a great enough quantity of innovation. That's a sharp insight, but I'd argue (in my own new book) that the problem's slightly different: not a high enough quality of innovation. The challenge now is leaping to a higher order of innovation: institutional innovation, because it's institutions that set the incentives that mold and shape human achievement in the first place.

And for far too many people, yesterday's economic institutions are literally not delivering the goods. Yes, the tools of capitalism have lifted entire nations out of poverty. But for decades, real prosperity has been flat. Now, at a macroeconomic level, our current economic institutions simply transfer prosperity upwards, to the richest 10% --> 1% --> 0.1% --> 0.01% and so on. This is what I call a global "ponziconomy" — a titanic, gleaming whirling, wealth transfer machine. And we can't fix it with the same tools we used to build it. That's why it's never been more vital for us — we, the people — to challenge the institutions of yesteryear.

All of which brings me back to Egypt as the canary in a very large coal mine. It's hard to overstate just how unexpected a transformation is occurring in Egypt. Death, taxes, and Hosni Mubarak — they were the three great certainties in modern Egyptian life.

But just underneath the surface, the tectonic pressure of dumb growth was steadily mounting. Bogus prosperity's like magma, filling the volcanic chamber of a society: you can bottle it up for only so long before it erupts, and spectacularly. Today, the world's gaze is fixed on the pyroclastic flow: never-ending demonstrations, protests, people self-organizing in a state that has shut down the internet, mobile networks, and public transport. But the fault lines underneath this explosion were laid down decades ago — and they might just run across the globe.

The lesson: You can't steal the future forever — and, in a hyperconnected world, you probably can't steal as much of it for as long. Now, I don't think Americans will take to the streets to oust their government. The challenge of the democratic, developed world is a quieter rebellion: against a bankruptcy not just of the pocketbook, but of meaning. It's not to take a stand against a dictator, but to take a stand against an unenlightened, nihilistic, hyperconsumerist, soul-suckingly unfulfilling, lethally short-termist ethos that inflicts real and relentless damage on people, society, the natural world, and future generations.

If we want to deliver the goods — enduring, meaningful stuff that engenders real prosperity — we're probably going to have start with delivering them to one another. Our untrammeled path back to prosperity — should we choose to blaze it — is millions of personal revolutions made up of billions of tiny choices that reclaim our humanity from the heartless merchants of indifference, fear, anger, and vanity. Some say it's impossible. Me? I believe that in a world of bogus prosperity, what's impossible is for the status quo to stand.

The Most Explosive Factor In The Egyptian Riots
by Gus Lubin - Business Insider

There's one explosive factor that sets Egypt apart from Saudi Arabia, Tunisia and every other country in the Middle East. Egypt has nearly 5,300 people per square mile. The closest competitor (not counting city states like Hong Kong) is Bangladesh, with 2,900 people per square mile. Tunisia has less than 200 people per square mile.

We're getting that alarming figure for Egypt by disregarding the uninhabitable desert that makes up 96 percent of the country. Nearly everyone in the country lives in a 15,000 square miles of arable land around the Nile Delta. Even with a similar calculation for countries like Tunisia, no other country comes close. Population density contributes to poor health and social unrest. It means the riots become very large and hard to stop. And the flip side is a lack of arable land, which means Egypt is especially vulnerable to a food crisis. Add this to demographic factors like high population growth and you've got a problem that won't be fixed soon.

Barry Ritholtz: It’s NOT the Weather Stupid, It’s the Economy
by Stacy Curtin - Tech Ticker

More than half the country is under alert yet again Wedneday amid wicked winter weather conditions. From blizzards to ice storms to dangerously freezing temperatures, you name it and the National Weather Service (NWS) had a warning for it. A storm of "historic" proportions is grounding thousands of flights yesterday and today and threatening crops across the Midwest.  Chicago was the city worst hit with blizzard conditions not seen in 40 years.

The snow blast has stopped for the central and southern parts of the Midwest, but snow’s not completey out of the question for states from the northern Midwest to New England. Even though this has been the worst winter in years, Barry Ritholtz, founder of Fusion IQ, has a warning of sorts of his own for America’s corporate PR spin machine: IT'S WINTER! And it happens every year.  So, don't blame the weather for sluggish corporate results.

"If you get four feet of snow in Dallas in June that’s a legitimate excuse" for a shock to earnings or sales figures, Ritholtz tells Aaron and Henry in the accompanying clip. "Snow and sleet and ice in January and February? This is not a surprise" and should not be made an excuse for poor performance. Winter’s really got nothing to do with the overall economy either, says Ritholtz. Even if you stay at home, don’t go out to eat, don’t go to the movies and don’t go shopping for days and weeks on end, that will only slightly impact the economy. Actually, if you take a look at some of the latest data points, the economy looks like it is doing just fine.

The Sky is Blue
Ritholtz has some other pet peeves when it comes to people stating the obvious and making excuses. His favorite? "Hey, no one could have seen this coming," a common execuse among Wall Street CEOs and regulators regarding the 2008 financial crisis. And, for all of those restaurant food chains out there, here's another Ritholtz newsflash: The Super Bowl is this weekend!

Just like winter, the NFL championship game happens every year. He says not to go blaming the game for a drop in sales this month. His recommendation: Get creative. Offer some buy-one-get-one deals on wings and beer!

Stocks Up, Houses Down, And What This Means for Most Americans
by Robert Reich

Put your ear to the ground and you can almost hear the bulls stampeding. The Dow closed above 12,000 Tuesday for the first time since June 2008. The Dow is up 4 percent this year after increasing 11 percent in 2010. The Standard & Poor 500 is also up 4 percent this year, and the Nasdaq index, up 3.7 percent.

"The U.S. economy is back!" says a prominent Wall Streeter. Ummm. Not quite.

Corporate earnings remain strong (better-than-expected reports from UPS and Pfizer fueled Tuesday’s rally). The Fed’s continuing slush pump of money into the financial system is also lifting the animal spirits of Wall Street. Traders like nothing more than speculating with almost-free money. And tumult in the Middle East is pushing more foreign money into the relatively safe and reliable American equities market.

It’s simply wonderful, especially if you’re among the richest 1 percent of Americans who own more than half of all the shares of stock traded on Wall Street. Hey, you might feel chipper even if you’re among the next richest 9 percent, who own 40 percent. But most Americans own a tiny sliver of the stock market, even including stocks in their 401(k) plans.

What do most Americans own? To the extent they have any significant assets at all, it’s their homes. And the really big story right now – in terms of the lives of most Americans, and the effects on the US economy — isn’t Wall Street’s bull market. It’s Main Street’s bear housing market.

According to the Wall Street Journal’s latest quarterly survey of housing-market conditions, home prices continue to drop. They’ve dropped in all of the 28 major metropolitan areas, compared to a year earlier. And remember how awful things were in the housing market a year ago! In fact, the size of the year-to-year price declines is larger than the previous quarter’s in all but three of the markets surveyed.

Home prices have dropped most in cities already hard hit by the housing bust – Miami, Orlando, Atlanta, Chicago. But declines increased in other markets that had before escaped most of the downdraft, such as Seattle and Portland.

Things could easily get worse on the housing front because millions of owners are in various stages of foreclosure or seriously delinquent on their mortgages. Millions more owe more than their homes are worth, and, given the downward direction of the housing market, are going to be sorely tempted to just walk away. This means even more foreclosure sales, pushing housing prices down even further.

So don’t be fooled. The American economy isn’t back. While Wall Street’s bull market is making America’s rich even richer, most Americans continue to be mired in a worsening housing crisis that the Administration is incapable of stemming, and of which Wall Street has now seemingly washed its hands.

Cruel Irony: Dollar's Reserve Status Enables U.S. Debt Addiction
by Aaron Task - Tech Ticker

According to RBC's semi-annual global economic outlook survey, 80% of global financial executives and business leaders expect the dollar to remain the world's reserve currency three years from now. But just 52% of respondents expect the dollar to be the world's currency in five years. Marc Harris, head of global research at RBC Capital Markets, says views on the dollar have actually improved since a year ago in the wake of the European debt crisis. "In essence, there isn't another reserve currency," he says, although gold is "coming back" as a reserve currency "of sorts."

But at the end of the day, institutional investors around the world still have faith in the dollar, at least for the foreseeable future. The 'funny' thing is that the dollar's reserve status means the U.S. is "able to float higher debts and deficit overall," Harris says. "It floats us, sustains us [and] allows us to sustain a much higher level of debt" than would normally be tolerated. In other words, the dollar's reserve status makes possible the massive amounts of Federal borrowing that is putting the dollar's reserve status in jeopardy. Ironic, isn't it?

The fact 48% of respondents to the RBC survey don't expect the dollar to be the world's reserve currency in 5 years reflects "strategic issues," namely concerns about the massive federal deficit, he says. "We all know the U.S. and world economies have to face this austerity; near-term we can put it off [but] long-term everybody knows it's coming. You can't stimulate forever. " As with politicians and policymakers, Harris says global investors and business leaders are wondering: "How do we resolve this seemingly irresolvable problem."

by Omer Rosen - Boston Review

In the spring of 2000, I began a three-year stint on Citigroup’s corporate-derivatives team. I was just months past my twentieth birthday, with no work experience to speak of, in a world beyond my imagination. As my boss summed me up after a day of interviews, I was “fucking unpolished.”

The credit-derivatives group, then just three or four people I sat next to, soon spawned an ever-expanding team managing ever-more complex creations: credit-default swaps, collateralized debt obligations, and the myriad other structures built with black boxes and shrouded by acronyms. Meanwhile, my group continued to peddle mostly the forbears of these recent menaces, the more mundane interest-rate swaps and Treasury-rate locks. The newer derivatives, though hardly identical to their predecessors, nonetheless evolved in similar environments, were likewise designed to manipulate risk, and were also customized on a trade-by-trade basis.

Our clients were non-financial corporations, the Deltas and Verizons of the world, which relied on us for advice and education. Our directive was “to help companies decrease and manage their risks.” Often we did just that. And often we advised clients to execute trades solely because they presented opportunities for us to profit. In either case, whenever possible we used our superior knowledge to manipulate the pricing of the trade in our favor.

I never heard this arrangement described as a conflict of interest. I learned to think we were simply smarter than the client. For unsophisticated clients, being smarter meant quoting padded rates. For the rest, a bit of “legerdemath” was required. Most brazenly, we taught clients phony math that involved settling Treasury-rate locks by referencing Treasury yields rather than prices.

If a client requested verification of our pricing, we volunteered to fax a time-stamped printout of market data from when the trade was executed. One person talked to the client on the phone while another stood by the computer and repeatedly hit print. The printouts were sorted, and the one showing the most profitable rate for the bank was faxed to the client, regardless of which rate was actually transacted. If a rate for the client’s specific trade was not on the printout, we might create rigged conversion spreadsheets for them to use in conjunction with the printout.

Other sources of profit lay in details that clients thought were merely procedural but in actuality affected pricing as well. Once, a client called after his interest-rate swap was completed and asked to change a method of counting days. Unbeknownst to him, this change should have lowered his rate. I made the requested change but kept his rate the same, allowing us to realize unwarranted profit. This was standard practice. My coworkers knew what I had done, as did the traders, as did the people who booked trades. I even tallied the “restructuring” as an achievement in a letter angling for a higher bonus.

When the media discuss a lack of transparency in the pricing of over-the-counter derivatives, they suggest a murky world, where things happen in shadows. This imagery is poorly chosen. “Things” don’t happen in the dark, but in well-lit trading floors like ours. Engaging in these practices was just part of our day-to-day activities, as natural as picking up one’s dry-cleaning. After all, in an open room three-quarters of the size of a football field, with hundreds of people working and mingling, how could anything be wrong?

Last year a friend in the credit-card division of one of the major banks told me that his group had received an award. “Great news,” I thought. He then explained that the group had managed to increase the rates charged on the bank’s entire portfolio of credit cards before regulation limiting such increases took effect. Does this sound like an industry that is learning?

Trustee: J.P. Morgan Abetted Madoff
by Michael Rothfeld - Wall Street Journal

J.P. Morgan Chase & Co. ignored or dismissed warning signs about the Madoff fraud even as it earned hundreds of millions of dollars from its relationship with his firm, according to a lawsuit unsealed Thursday.
The $6.4 billion lawsuit, filed in federal bankruptcy court, claims that bankers at J.P. Morgan discussed the possibility that Bernard Madoff was operating a Ponzi scheme, worried that a firm of such size was audited by a storefront accountant and called his returns "too good to be true." "While numerous financial institutions enabled Madoff's fraud, JPMC was at the very center of that fraud, and thoroughly complicit in it," according to the 115-page lawsuit, filed under seal in December by Irving Picard, the trustee seeking to recover money for Mr. Madoff's victims and made public on Thursday.

J.P. Morgan said in a statement that the lawsuit "is meritless and is based on distortions of both the relevant facts and the governing law." The bank said it "did not know about or in any way become a party to the fraud orchestrated by Bernard Madoff." The complaint seeks the return of nearly $1 billion in J.P. Morgan's profits and fees, and $5.4 billion in damages. It goes into great detail about the bank's alleged efforts, starting in about 2006, to make money by offering products tied to Mr. Madoff through investment funds that fed money to him.

J.P. Morgan only reported its suspicions of Mr. Madoff to British authorities in late October 2008, two months before he surrendered, the lawsuit said. In a suspicious activity report filed with Britain's Serious Organised Crime Agency, the bank said the performance of Mr. Madoff's investments appeared to be "too good to be true—meaning that it probably is."

Even that warning was made in passing, the lawsuit said. It came after a London employee of J.P. Morgan was threatened while trying to redeem the bank's money from a Madoff-related fund by a fund employee who mentioned having "Colombian friends" who could "cause havoc," adding, "we know where to find you." Towards the end of 2008, J.P. Morgan pulled out about $276 million it had invested in funds that channeled money to Mr. Madoff—and asked those funds to keep the move quiet, according to the lawsuit.

The lawsuit offers a detailed account of the more than two decade relationship between J.P. Morgan and Mr. Madoff. In 2006, when J.P. Morgan started to consider structuring products involving funds that channeled money to Mr. Madoff, it began to take a look at the feeder funds and other entities related to his business. The lawsuit claims that the bank didn't pay attention to billions of dollars passing through the Madoff firm's main J.P. Morgan account, much of it by hand-written check, or to discrepancies in the account balance and unreported obligations—including a $95 million loan made in 2005.

"They had, legally, an obligation to make inquiry, and they didn't," said David Sheehan, an attorney for Mr. Picard. "You're literally seeing millions of dollars going in and out on a daily basis, and not one phone call is being made." In response, the bank said in its statement Thursday that Mr. Madoff's firm "was not an important or significant customer" in the scheme of its overall commercial banking business. The trustee's suit claims that the bank collected an estimated half a billion dollars in fee and interest payments.

Various J.P. Morgan employees raised questions about Mr. Madoff's credibility, but the concerns went nowhere, the suit alleges. As its Equity Exotics & Hybrids Desk began exploring investments tied to Madoff feeder funds, the suit says, it found that the fund managers didn't know the names of Mr. Madoff's counterparties, had no input or control over his trading activity, and hadn't even been able to see his operations.

While bankers sought to create products tied to Mr. Madoff's firm, its risk managers had a conversation with him in March 2007, where he informed them that he wasn't willing to engage in "full due diligence," according to the lawsuit. On more than one occasion, the suit alleges, bankers expressed concern about the fact that a firm of such a large size was audited by a small suburban firm. One wrote in an email, "Let's go see (auditors) Friehling and Horowitz the next time we're in see that the address isn't a car wash at least," according to the lawsuit, referring to the accountants.

In 2007, an employee said he had heard from a colleague over lunch that "there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a [P]onzi scheme—he said if we google the guy we can see the articles for ourselves—Pls do that and let us know what you find." According to the lawsuit, the bank looked at Mr. Madoff's firm more exhaustively in 2008, after its troubled acquisition of Bear Stearns. As part of that review, bank employees allegedly met with Sonja Kohn, the head of Bank Medici, whom Mr. Picard has separately accused of being an accomplice of Mr. Madoff by funneling money into his operation, and with an executive at the Fairfield Greenwich Group, which also operated feeder funds.

Afterwards, an employee told colleagues that Mr. Madoff's business associates knew very little about him, and seemed "scared" to push him for answers, the suit says. "Fairfield claims to have seen the 19th floor," the center of Mr. Madoff's trading operations, the employee wrote, "but…I am not entirely convinced that Madoff allowed them to actually enter the trading area." The bankers at J.P. Morgan concluded that the feeder funds had only a faxed confirmation from Mr. Madoff that trades were occurring, but couldn't verify it. "It's almost a cult [Madoff] seems to have fostered," the employee wrote.

Congress Wants to Hear from Meredith Whitney on Muni Call
by Charlie Gasparino - FOXBusiness

A congressional subcommittee investigating the recent implosion of the $3 trillion municipal bond market wants analyst Meredith Whitney to come clean and explain her doomsday prediction of hundreds of billions of dollars in muni defaults over the next year.

The subcommittee, headed by Congressman Patrick McHenry, R-NC, has launched a broad investigation into the struggling market for debt issued by states and cities to determine, among other matters, whether states should be able to declare bankruptcy amid widespread fiscal woes, particularly in the Northeast, and exactly what has caused a sharp decline in prices in recent months.

As part of this inquiry, the subcommittee is looking into the validity of Whitney’s call made on national television that predicted between 50 and 100 major municipal bond defaults over the coming year, which would cost investors hundreds of billions of dollars in losses. The call sparked massive panic among small investors -- the largest purchasers of muni bonds -- because of the tax advantages. 

Many small investors unloaded their bonds, and redeemed shares of municipal bond mutual funds, at a loss. Many top municipal bond analysts have taken issue with Whitney’s prediction, saying such levels of defaults are unprecedented even during tough economic times. McHenry told FOX Business the subcommittee called Whitney to get to the bottom of the debate.  "We want her to fill out her views one way or another," he said.

But Whitney has so far rebuffed the committee's attempts to have her appear at the hearings scheduled for February 9, and there is talk on the committee about subpoenaing her to appear, as well as subpoenaing her to produce her controversial report on municipal bonds. As first reported by FOX Business, Whitney’s report differed substantially in tone from her comments. In fact, the report stated that despite large state budget gaps, there would likely be no defaults on the state level, and it made just a passing reference to some defaults among municipalities.

Many analysts have criticized Whitney for the differences between the report and her public comments, saying that she was looking to gain public attention and needlessly worried investors. 

UK insolvency figures reach new record
by Kara Gammell - Telegraph

More than 135,000 people in England and Wales were declared insolvent during 2010, according to figures released by the Insolvency Service, the highest level since records began in 1960. Just over 104,000 people went bankrupt or took out an individual voluntary arrangement or debt relief order during the first nine months of the year – only slightly below the total for the whole of 2008.

Insolvency practitioners say the number of people seeking help remained high during the final quarter of the year, with the figure is up from the 134,142 people who went insolvent during 2009, which was itself the highest level since records began in 1960. It also represents a doubling in the number of people who were unable to keep up with their debts during the past five years.

A further 140,000 people are also expected to be declared insolvent this year, with levels remaining elevated well into 2012, as the full impact of government spending cuts are felt. But the figures may show a further fall in the number of people going bankrupt as increasing numbers opt for a debt relief order instead.

The orders, which offer an alternative to bankruptcy for people with debts of less than £15,000, assets of less than £300 and less than £50 surplus income a month, have been growing in popularity since they were first introduced in April 2009. Insolvency practitioners have warned that the UK is facing a "perfect storm" as consumers struggle to cope with the debt mountain they have built up at a time when unemployment is high.

The UK’s leading debt charity, Consumer Credit Counselling Service (CCCS), has warned that the rise in the number of personal insolvencies is unlikely to continue throughout 2011.
The charity said that a mixture of pressures on household budgets including the recent VAT increase, rising inflation, wage freezes, overtime bans, redundancy and welfare changes will push many struggling debtors over the edge of financial stability and into insolvency.

Delroy Corinaldi, CCCS external affairs director, said: "The picture is bleak, particularly in view of the pressures on advice services. "Fee-charging debt management companies must not be allowed to plug the gap left by the reduction in public funding for debt advice. It would compound the situation if overindebted households believed they had no alternative but to pay for debt advice."

The Next Crisis Most Likely a Run on European Banks, Michael Lewis Says
by Peter Gorenstein - Tech Ticker

Michael Lewis chronicles Wall Street's latest and arguably largest failure in "The Big Short" now out in paperback.   In it, he tells the story of how Wall Street made record profits "lending to people who would never repay the loans" and those who profited by recognizing the flawed system couldn't last.  Eventually, as we all know, the whole charade blew up, resulting in billion dollar bailouts for the largest financial institutions, a 'too big to fail' policy and the Great Recession. In this accompanying clip, Lewis discusses the causes, the lessons and the dangers that remain.

The Last Crisis
The causes of the crisis are fairly clear, Lewis says, but the current remedies fail to address the fundamental risks that remain. Though most firms have paid back their TARP loans, Lewis is still highly critical of too big to fail. "When firms fail they should be allowed to to fail," he says. "They should be broken up." Equally troubling is the fact the Dodd-Frank financial regulatory reform law is unlikely to change the pay structure that rewards bankers for taking reckless risk, irrespective of long-term results. "The incentives that guide them haven't changed," and that continues to threaten the system, he says.

The Next Crisis
Ironically, Lewis now sees the U.S. banks as fairly safe and sound, especially relative to their counterparts across the pond.  "The bad loans that were made lots of place around the world haven't been recognized with except for a handful of foreclosures here in the States, they've been put on sovereign balance sheets," he explains. "The question is not 'if' but when Ireland, Greece, Portugal Spain start to renege on their debts." Lewis fears that may result in a run on the European banks.

How "Big Short" Author Michael Lewis Got Duped By Wall Street
by Daniel Gross - Tech Ticker

Best-selling author Michael Lewis knows his way around Wall Street and the world of money. His first book, Liar’s Poker, chronicled his misadventures as a bond trader in the go-go 1980s. In Moneyball, he explored the way economic analysis is applied to baseball. And in The Big Short, which has just come out in paperback, he chronicled how a few shrewd investors managed to profit during the meltdown of the housing and credit bubbles.

Lewis has learned, from personal experience, to cast a jaundiced eye on establishment Wall Street firms and the innovative financial products and advice they sell. That has let him to a generally conservative posture when managing his own money. But even those with the most market knowledge violate their own rules.

In a recent interview with us, Princeton economist Burton Malkiel, a longtime advocate of the efficient market theory – i.e. the notion that individuals can’t beat the market – said that he occasionally tries to pick individual stocks and sectors because it’s fun. Similarly, Lewis found himself sitting on some toxic assets in the fall of 2008 that he had purchased at the advice of a large Wall Street brokerage firm.

As he tells Henry Blodget and me in the accompanying video, Lewis is, in general, highly skeptical of the large Wall Street brokerage business model. "The stock market is not necessarily rigged against individual investors," he says. "But if you’re listening to what brokers are telling you, they’re shading the odds against you rather than for you."

Why? The big firms have evolved since the 1980s, "away from servicing the customer and maintaining nice, happy relations with the customer to managing friction with the customer on behalf of the firms’ traders," Lewis says. Since large Wall Street firms are trading in the same stocks, bonds, and other securities that they’re advising institutional and individual customers about, "there’s an inherent conflict of interest and you’re not likely to come out of it well if you’re on the other side of the desk."

On the whole, however, the stock market is a much safer place for individuals than the bond market. "The bond market I’d say is generally rigged against the individual investors," Lewis declares. "But there’s a caveat. It’s rigged to the extent that Wall Street firms know what they’re doing. And in the last four or five years we had this episode where these Wall Street firms created a poker table where they were the fools, and as a customer you could actually do quite well being on the other side of trades from them." That’s the story he tells in The Big Short.

Lewis' advice for individual investors: "be conservative, don’t listen to brokerage advice, and index." But he admits to violating his own rules. Which brings us back to those toxic assets.

Through a family connection, Lewis had long had an account with Merrill, Lynch. And at one point, "I had succumbed to the advice" and agreed to put a small amount of his retirement funds into investments recommended by the broker. "It was like I couldn’t be bothered to think about it. I said: 'here’s a little bit of money, I just don’t want to lose it.'"

The funds ended up in two positions that promised a bit of extra yield at what turned out to be a very high risk: preferred shares of Lehman Brothers and Auction Rate Securities, fixed-income instruments that were frequently promoted as an equivalent to cash. Of course, when the meltdown came in the fall of 2008, the Lehman preferred shares were essentially wiped out, and the Auction Rates Securities market froze. Individual investors found they were unable to access the funds. "At that point, I shut it down, closed the account and moved my money to Schwab," Lewis says.

Lesson Learned...Again
The famed author takes pains to point out that his broker wasn’t dishonest. "He didn’t know any better than I did what the risks were," he said. But Lewis re-learned a lesson he thought he had already learned. "That made it clear in my mind that I’m the responsible party, and I’m not going to be browbeaten and sold." And it reinforced the notion that investors should avoid making too many decisions.

When managing his own money, Lewis largely makes portfolio allocations – deciding what portions are in stocks and in other asset classes. But while he invests in stocks primarily through indexes, Lewis does admit to having a view on the market. "It’s a very conservative view. I feel like we are in very perilous times, and I skew the portfolio slightly toward large battleship companies" that might withstand turbulent economic seas.

In The Big Short, Lewis chronicles the way in which newfangled, innovative financial products -- credit default swaps, subprime securities, collateralized debt obligations – led to disaster because virtually none of the highly experienced, highly paid professionals involved appreciated the risks they entailed. The same holds true for individual investors, as Lewis found out. "What bothered me was that I hadn’t even heard of these things," he concedes. "On my own, I never would have conjured up Auction Rates Securities or Lehman preferred" as an investment.

The upshot? As an investor "I want to minimize the things I hear about," Lewis says. "The things you hear about are usually not good for you."

Merrill Fired Analyst Who Angered Huge Bank Clients Before Financial Crisis, Says Michael Lewis
by Henry Blodget - Tech Ticker

Remember a couple of years ago when everyone from Ben Bernanke to the heads of Wall Street banks defended their role in the financial crisis by saying "no one could have seen this coming?" Well, that was bunk: Plenty of people saw it coming.

And the denial went way beyond mere after-the-fact excuses, says Michael Lewis, bestselling author of Liar's Poker, The Big Short, and many other books. In a new article in Vanity Fair, Lewis tells the story of an analyst at Merrill Lynch who, months before the crisis, said the lending practices of several big Irish banks were the riskiest and most reckless in Europe.

The Irish banks freaked out when they saw the report and demanded that Merrill retract it. Merrill DID retract it, and then rewrote and re-issued a version that was far more flattering to the Irish banks. And at the end of the year, the analyst was canned. Of course, several months after the report appeared, the financial crisis hit and the Irish banks collapsed.

Lewis's story suggests that it's still far riskier for a Wall Street analyst to be bearish and right than bullish and wrong. More importantly, Lewis says, the Irish banking disaster still has not been adequately addressed. The banks have been temporarily bailed out by German taxpayers, but eventually the bad debts will come due.

Michael Lewis on How Merrill Lynch and Brian Lenihan Stuck the People of Ireland with a Debt of €106 Billion
by Vanity Fair

Vanity Fair contributing editor Michael Lewis shows how Merrill Lynch and two troubled Irish banks convinced Ireland’s finance minister, Brian Lenihan, to sign off on having his country’s taxpayers foot the bill for an estimated €106 billion in property-related losses. Lenihan and the Irish government approved the measures to make foreign owners of Irish bank bonds—including Goldman Sachs and German and French banks—whole again. As Lewis writes, "These private bondholders didn’t even expect to be made whole by the Irish government… People who had made a private bet that went bad, and didn’t expect to be repaid in full, were handed their money back—from the Irish taxpayer."

What was Merrill Lynch’s role in this? Months before Anglo Irish, Bank of Ireland, and Allied Irish Bank, Ireland’s three biggest banks, went bust, Phil Ingram, a research analyst for Merrill Lynch in London, published a report that shed light on their dire situation owing to aggressive commercial-real-estate lending practices. His report was almost immediately retracted by his superiors, then edited and softened. Six months later, at the request of the Irish government, Merrill Lynch threw together a seven-page memo that stated, "All of the Irish banks are profitable and well capitalised"—which soon proved to be an utter falsehood. For this Merrill charged the Irish government €7 million.

Lewis interviewed Lenihan in an attempt to uncover the man’s reasoning for his actions. Lenihan asserted that he had no choice in the matter. "Under English law," he explained to Lewis, "bondholders enjoy the same status as ordinary depositors. " As Lewis points out, this is legalistic—"narrowly true, but generally false. The Irish government always had the power to impose losses on even the senior bondholders, if it wanted to." When he made the decision in 2008, Lenihan said it was done to prevent contagion. But, as Lewis points out, this wasn’t true either. A year and a half later, Lenihan offered a different reasoning, claiming that the bonds were owned by Irishmen.

"The Irish, in other words," Lewis writes, "were simply saving the Irish. This wasn’t true." The bondholders were mostly foreigners.

In summation, Lewis writes, "Soon Brian Lenihan will stand up in the Irish Parliament and offer a fourth explanation for why private investors in Ireland’s banks cannot be allowed to take losses. ‘There is simply no way that this country, whose banks are so dependent on international investors, can unilaterally renege on senior bondholders against the wishes of the E.C.B. [European Central Bank],’ he will say." This, as Lewis points out, is circular logic. If Lenihan had never guaranteed the banks’ losses with money borrowed from the E.C.B., then the Irish wouldn’t be at the mercy of the E.C.B.’s wishes.

Lewis reflects on the consequences of Lenihan’s actions in no uncertain terms: "That had been the strangest consequence of the Irish bubble: to throw a nation which had finally clawed its way out of centuries of indentured servitude back into it." Now it will take the next three years at least to repay the Irish banks’ losses.

When Irish Eyes Are Crying
by Michael Lewis - Vanity Fair

First Iceland. Then Greece. Now Ireland, which headed for bankruptcy with its own mysterious logic. In 2000, suddenly among the richest people in Europe, the Irish decided to buy their country—from one another. After which their banks and government really screwed them. So where’s the rage?

When I flew to Dublin in early November, the Irish government was busy helping the Irish people come to terms with their loss. It had been two years since a handful of Irish politicians and bankers decided to guarantee all the debts of the country’s biggest banks, but the people were only now getting their minds around what that meant for them.

The numbers were breathtaking. A single bank, Anglo Irish, which, two years before, the Irish government had claimed was merely suffering from a "liquidity problem," faced losses of up to 34 billion euros. To get some sense of how "34 billion euros" sounds to Irish ears, an American thinking in dollars needs to multiply it by roughly one hundred: $3.4 trillion. And that was for a single bank. As the sum total of loans made by Anglo Irish, most of it to Irish property developers, was only 72 billion euros, the bank had lost nearly half of every dollar it invested.

The two other big Irish banks, Bank of Ireland and, especially, Allied Irish Banks (A.I.B.), remained Ireland’s dirty little secrets. Both older than Ireland itself (the Bank of Ireland was founded back in 1783; A.I.B. is made up of three banks founded in the 19th century), both were now also obviously bust. The Irish government owned big chunks of the two ancient banks but revealed less about them. As they had lent vast sums not only to Irish property developers but also to Irish homebuyers, their losses were also obviously vast—and similar in spirit to the losses at the upstart Anglo Irish.

Even in an era when capitalists went out of their way to destroy capitalism, the Irish bankers set some kind of record for destruction. Theo Phanos, a London hedge-fund manager with interests in Ireland, says that "Anglo Irish was probably the world’s worst bank. Even worse than the Icelandic banks."

Ireland’s financial disaster shared some things with Iceland’s. It was created by the sort of men who ignore their wives’ suggestions that maybe they should stop and ask for directions, for instance. But while Icelandic males used foreign money to conquer foreign places—trophy companies in Britain, chunks of Scandinavia—the Irish male used foreign money to conquer Ireland. Left alone in a dark room with a pile of money, the Irish decided what they really wanted to do with it was to buy Ireland. From one another.

An Irish economist named Morgan Kelly, whose estimates of Irish bank losses have been the most prescient, made a back-of-the-envelope calculation that puts the losses of all Irish banks at roughly 106 billion euros. (Think $10 trillion.) At the rate money currently flows into the Irish treasury, Irish bank losses alone would absorb every penny of Irish taxes for at least the next three years.

In recognition of the spectacular losses, the entire Irish economy has almost dutifully collapsed. When you fly into Dublin you are traveling, for the first time in 15 years, against the traffic. The Irish are once again leaving Ireland, along with hordes of migrant workers. In late 2006, the unemployment rate stood at a bit more than 4 percent; now it’s 14 percent and climbing toward rates not experienced since the mid-1980s.

Just a few years ago, Ireland was able to borrow money more cheaply than Germany; now, if it can borrow at all, it will be charged interest rates nearly 6 percent higher than Germany, another echo of a distant past. The Irish budget deficit—which three years ago was a surplus—is now 32 percent of its G.D.P., the highest by far in the history of the Eurozone. One credit-analysis firm has judged Ireland the third-most-likely country to default. Not quite as risky for the global investor as Venezuela, but riskier than Iraq. Distinctly Third World, in any case.

Yet when I arrived, in early November 2010, Irish politics had a frozen-in-time quality to it. In Iceland, the business-friendly conservative party had been quickly tossed out of power, and the women booted the alpha males out of the banks and government. (Iceland’s new prime minister is a lesbian.) In Greece the business-friendly conservative party was also given the heave-ho, and the new government is attempting to create a sense of collective purpose, or at any rate persuade the citizens to quit cheating on their taxes. (The new Greek prime minister is not merely upstanding, but barely Greek.)

Ireland was the first European country to watch its entire banking system fail, and yet its business-friendly conservative party, Fianna Fáil (pronounced "Feena Foil"), would remain in office into 2011. There’s been no Tea Party movement, no Glenn Beck, no serious protests of any kind. The most obvious change in the country’s politics has been the role played by foreigners. The Irish government and Irish banks are crawling with American investment bankers and Australian management consultants and faceless Euro-officials, referred to inside the Department of Finance simply as "the Germans."

Walk the streets at night and, through restaurant windows, you see important-looking men in suits, dining alone, studying important-looking papers. In some new and strange way Dublin is now an occupied city: Hanoi, circa 1950. "The problem with Ireland is that you’re not allowed to work with Irish people anymore," I was told by an Irish property developer, who was finding it difficult to escape the hundreds of millions of euros in debt he owed.

Ireland’s regress is especially unsettling because of the questions it raises about Ireland’s former progress: even now no one is quite sure why the Irish suddenly did so well for themselves in the first place. Between 1845 and 1852, during the Great Potato Famine, the country experienced the greatest loss of population in world history—in a nation of eight million, a million and a half people left. Another million starved to death or died from the effects of hunger.

Inside of a decade the nation went from being among the most densely populated in Europe to the least. The founding of the Irish state, in 1922, might have offered some economic hope—they could now have their own central bank, their own economic policies—but right up until the end of the 1980s the Irish failed to do what economists expected them to: catch up with their neighbors’ standard of living. As recently as the 1980s one million Irish people—a third of the population—lived below the poverty line.

What has occurred in Ireland since then is without precedent in economic history. By the start of the new millennium, the Irish poverty rate was under 6 percent and by 2006 Ireland was one of the richest countries in the world. How did that happen? A bright young Irishman who got himself hired by Bear Stearns in the late 1990s and went off to New York or London for five years returned feeling poor. For the better part of a decade there has been quicker money to be made in Irish real estate than in investment banking. How did that happen?

For the first time in history, people and money longed to get into Ireland rather than out of it. The most dramatic case in point are the Poles. The Polish government keeps no comprehensive statistics on the movement of its workforce, but its foreign ministry guesstimates that, since the country’s admission to the European Union, more than a million Poles have left Poland to work elsewhere. At the peak, in 2006, as many as a quarter-million of them were in Ireland. For the United States to achieve a proportionally distortive demographic effect, it would need to hand green cards to 17 million Mexicans.

How did any of this happen? There are many theories: the elimination of trade barriers, the decision to grant free public higher education, the persistent lowering of the corporate tax rate, beginning in the 1980s, which turned Ireland into a tax haven for foreign corporations. Maybe the most intriguing was offered by a pair of demographers at Harvard, David E. Bloom and David Canning, in a 2003 paper called "Contraception and the Celtic Tiger." Bloom and Canning argued that a major cause of the Irish boom was a dramatic increase in the ratio of working-age to non-working-age Irish brought about by a crash in the Irish birthrate. This had been driven mainly by Ireland’s decision, in 1979, to legalize birth control.

That is, a nation’s fidelity to the Vatican’s edicts was inversely proportional to its ability to climb out of poverty: out of the slow death of the Catholic Church arose an economic miracle.

The Harvard demographers admitted their theory explained only part of what had happened. At the bottom of the success of the Irish there remains, even now, some mystery. "It appeared like a miraculous beast materializing in a forest clearing," writes the pre-eminent Irish historian R. F. Foster, "and economists are still not entirely sure why." Not knowing why they were so suddenly so successful, the Irish can perhaps be forgiven for not knowing exactly how successful they were meant to be. They had gone from being abnormally poor to being abnormally rich, without pausing to experience normality. When, in the early 2000s, the financial markets began to offer virtually unlimited credit to all comers—when nations were let into the dark room with the pile of money and asked what they would like to do with it—the Irish were already in a peculiarly vulnerable state of mind. They’d spent the better part of a decade under something very like a magic spell.

A few months after the spell was broken, the short-term parking-lot attendants at Dublin Airport noticed that their daily take had fallen. The lot appeared full; they couldn’t understand it. Then they noticed the cars never changed. They phoned the Dublin police, who in turn traced the cars to Polish construction workers, who had bought them with money borrowed from Irish banks. The migrant workers had ditched the cars and gone home. Rumor has it that a few months later the Bank of Ireland sent three collectors to Poland to see what they could get back, but they had no luck. The Poles were untraceable: but for their cars in the short-term parking lot, they might never have existed.

True Love’s First Kiss
Morgan Kelly is a professor of economics at University College Dublin, but he did not, until recently, view it as his business to think much about the economy under his nose. He had written a handful of highly regarded academic papers on topics (such as "The Economic Impact of the Little Ice Age") considered abstruse even by academic economists. "I only stumbled on this catastrophe by accident," he says. "I had never been interested in the Irish economy. The Irish economy is tiny and boring."

Kelly saw house prices rising madly and heard young men in Irish finance to whom he had recently taught economics try to explain why the boom didn’t trouble them. And they troubled him. "Around the middle of 2006 all these former students of ours working for the banks started to appear on TV!" he says. "They were now all bank economists, and they were nice guys and all that. And they were all saying the same thing: ‘We’re going to have a soft landing.’ "

The statement struck him as absurd: real-estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long-term investment real estate has become and flee the market, and the market will crash. It was in the nature of real-estate booms to end with crashes—just as it was perhaps in Morgan Kelly’s nature to assume that, if his former students were cast on Irish TV as financial experts, something was amiss. "I just started Googling things," he says.

Googling things, Kelly learned that more than a fifth of the Irish workforce was employed building houses. The Irish construction industry had swollen to become nearly a quarter of the country’s G.D.P.—compared with less than 10 percent in a normal economy—and Ireland was building half as many new houses a year as the United Kingdom, which had almost 15 times as many people to house. He learned that since 1994 the average price for a Dublin home had risen more than 500 percent. In parts of the city, rents had fallen to less than 1 percent of the purchase price—that is, you could rent a million-dollar home for less than $833 a month.

The investment returns on Irish land were ridiculously low: it made no sense for capital to flow into Ireland to develop more of it. Irish home prices implied an economic growth rate that would leave Ireland, in 25 years, three times as rich as the United States. ("A price/earning ratio above Google’s," as Kelly put it.) Where would this growth come from? Since 2000, Irish exports had stalled, and the economy had been consumed with building houses and offices and hotels. "Competitiveness didn’t matter," says Kelly. "From now on we were going to get rich building houses for each other."

The endless flow of cheap foreign money had teased a new trait out of a nation. "We are sort of a hard, pessimistic people," says Kelly. "We don’t look on the bright side." Yet, since the year 2000, a lot of people had behaved as if each day would be sunnier than the last. The Irish had discovered optimism.

Their real-estate boom had the flavor of a family lie: it was sustainable so long as it went unquestioned, and it went unquestioned so long as it appeared sustainable. After all, once the value of Irish real estate came untethered from rents there was no value for it that couldn’t be justified. The 35 million euros Irish entrepreneur Denis O’Brien paid for an impressive manor house on Dublin’s Shrewsbury Road sounded like a lot until a trust controlled by the real-estate developer Sean Dunne’s wife reportedly paid 58 million euros for a 4,000-square-foot fixer-upper just down the street.

But the minute you compared the rise in prices to real-estate booms elsewhere and at other times, you re-anchored the conversation; you biffed the narrative. The comparisons that sprung to Morgan Kelly’s mind were with the housing bubbles in the Netherlands in the 1970s and Finland in the 1980s, but it almost didn’t matter which examples he picked: the mere idea that Ireland was not sui generis was the panic-making thought. "There is an iron law of house prices," he wrote. "The more house prices rise relative to income and rents, the more they subsequently fall." The problem for Kelly, once he had these thoughts, was what to do with them. "This isn’t my day job," he says. "I was working on medieval-population theory."

By the time I got to him, Kelly had angered and alienated the entire Irish business and political establishments, but he himself is neither angry nor alienated, nor even especially public. He’s not the pundit type. He works in an office built when Irish higher education was conducted on linoleum floors, beneath fluorescent lights, surrounded by metal bookshelves, and generally felt more like a manufacturing enterprise than a prep school for real estate and finance—and he likes it. He’s puckish, unrehearsed, and apparently—though in Ireland one wants to be careful about using this word—sane.

Though not exactly self-effacing, he is clearly more comfortable talking and thinking about subjects other than himself. He spent years in graduate school, collecting a doctorate from Yale, and yet somehow retained an almost child-like curiosity. "I was in this position—sort of being a passenger on this ship," he says. "And you see a big iceberg. And so you go and ask the captain: Is that an iceberg?"

His warning to his ship’s captain took the form of his first-ever newspaper article. Its bottom line: "It is not implausible that [Irish real-estate] prices could fall—relative to income—by 40 to 50 per cent." (They did.) He sent his piece to the small-circulation Irish Times. "It was a whim," he says. "I’m not even sure that I believed what I was saying at the time. My position has always been ‘You can’t predict the future.’ " As it happened, Kelly had predicted the future with uncanny accuracy, but to believe what he was saying you had to accept that Ireland was not some weird exception in human financial history. "It had no impact," Kelly says of his piece. "The response was general amusement. It was What will these crazy eggheads come up with next? sort of stuff."

What the crazy egghead came up with next was the obvious link between Irish real-estate prices and Irish banks. After all, the vast majority of the construction was being funded by Irish banks. If the real-estate market collapsed, they would be on the hook for the losses. "I eventually figured out what was going on," says Kelly. "The average value and number of new mortgages peaked in summer 2006. But lending standards were clearly falling after this."

The banks continued to make worse loans, but people borrowing the money to buy houses were growing wary. "What was happening," says Kelly, "is that a lot of people were getting cold feet." The consequences for Irish banks—and the economy—of the inevitable shift in market sentiment would be catastrophic. The banks’ losses would lead them to slash their lending to actually useful businesses. Irish citizens in hock to their banks would cease to spend. And, perhaps worst of all, new construction, on which the entire economy was now premised, would cease.

Kelly wrote his second newspaper article, more or less predicting the collapse of the Irish banks. He pointed out that in the last decade they and the economy had fundamentally changed. In 1997 the Irish banks were funded entirely by Irish deposits. By 2005 they were getting most of their money from abroad. The small German savers who ultimately supplied the Irish banks with deposits to re-lend in Ireland could take their money back with the click of a computer mouse. Since 2000, lending to construction and real estate had risen from 8 percent of Irish bank lending (the European norm) to 28 percent.

One hundred billion euros—or basically the sum total of all Irish public bank deposits—had been handed over to Irish property developers and speculators. By 2007, Irish banks were lending 40 percent more to property developers than they had to the entire Irish population seven years earlier. "You probably think that the fact that Irish banks have given speculators €100 billion to gamble with, safe in the knowledge that taxpayers will cover most losses, is a cause of concern to the Irish Central Bank," Kelly wrote, "but you would be quite wrong."

This time Kelly sent his piece to a newspaper with a far bigger circulation, the Irish Independent. The Independent’s editor wrote back to say he found the article offensive and wouldn’t publish it. Kelly next turned to The Sunday Business Post, but the editor there just sat on the piece. The journalists were following the bankers’ lead and conflating a positive outlook on real-estate prices with a love of country and a commitment to Team Ireland. ("They’d all use this same phrase, ‘You’re either for us or against us,’ " says a prominent bank analyst in Dublin.) Kelly finally went back to The Irish Times, which ran his article in September 2007.

A brief and, to Kelly’s way of thinking, pointless controversy ensued. The public-relations guy at University College Dublin called the head of the department of economics and asked him to find someone to write a learned attack on Kelly’s piece. (The department head refused.) A senior executive at Anglo Irish Bank, Matt Moran, called to holler at Kelly. "He went on about how ‘the real-estate developers who are borrowing from us are so incredibly rich they are only borrowing from us as a favor.’

I wanted to argue, but we ended up having lunch. This is Ireland, after all." Kelly also received a flurry of worried-sounding messages from financial people in London, but of these he was dismissive: "I get the impression there’s this pool of analysts in the financial markets who spend all day sending scary e-mails to each other." He never found out how much influence his little newspaper piece exerted on the minds of people who mattered.

It wasn’t until almost exactly one year later, on September 29, 2008, that Morgan Kelly became the startled object of popular interest. The stocks of the three main Irish banks, Anglo Irish, A.I.B., and Bank of Ireland, had fallen by between a fifth and a half in a single trading session, and a run on Irish bank deposits had started. The Irish government was about to guarantee all the obligations of the six biggest Irish banks. The most plausible explanation for all of this was Morgan Kelly’s narrative: the Irish economy had become a giant Ponzi scheme and the country was effectively bankrupt.

But it was so starkly at odds with the story peddled by Irish government officials and senior Irish bankers—that the banks merely had a "liquidity" problem and that Anglo Irish was "fundamentally sound"—that the two could not be reconciled. The government had a report thrown together by Merrill Lynch, which declared that "all of the Irish banks are profitable and well capitalised." The difference between this official line and Kelly’s was too vast to be split. You believed either one or the other, and until September 2008, who was going to believe this guy holed up in his office wasting his life writing about the impact of the Little Ice Age on the English population? "I went on TV," says Kelly. "I’ll never do it again."

Kelly’s colleagues in the University College economics department watched his transformation from serious academic to amusing crackpot to disturbingly prescient guru with interest. One was Colm McCarthy, who, in the Irish recession of the late 1980s, had played a high-profile role in slashing government spending, and so had experienced the intersection of finance and public opinion.

In McCarthy’s view, the dominant narrative inside the head of the average Irish citizen—and his receptiveness to the story Kelly was telling—changed at roughly 10 o’clock in the evening on October 2, 2008. On that night, Ireland’s financial regulator, a lifelong Central Bank bureaucrat in his 60s named Patrick Neary, came live on national television to be interviewed. The interviewer sounded as if he had just finished reading the collected works of Morgan Kelly. Neary, for his part, looked as if he had been dragged from a hole into which he badly wanted to return. He wore an insecure little mustache, stammered rote answers to questions he had not been asked, and ignored the ones he had been asked.

A banking system is an act of faith: it survives only for as long as people believe it will. Two weeks earlier the collapse of Lehman Brothers had cast doubt on banks everywhere. Ireland’s banks had not been managed to withstand doubt; they had been managed to exploit blind faith. Now the Irish people finally caught a glimpse of the guy meant to be safeguarding them: the crazy uncle had been sprung from the family cellar.

Here he was, on their televisions, insisting that the Irish banks were "resilient" and "more than adequately capitalized" … when everyone in Ireland could see, in the vacant skyscrapers and empty housing developments around them, evidence of bank loans that were not merely bad but insane. "What happened was that everyone in Ireland had the idea that somewhere in Ireland there was a little wise old man who was in charge of the money, and this was the first time they’d ever seen this little man," says McCarthy. "And then they saw him and said, Who the fuck was that??? Is that the fucking guy who is in charge of the money??? That’s when everyone panicked."

The Drinks Cabinet
On the morning in early November when the Irish government planned to unveil a brutal new budget, I take my seat in the visitors’ gallery of the Irish Parliament. Beside me sits an aide to Joan Burton, who, as the Labour Party’s financial spokesperson, was at the time a fair bet to become the next minister of finance, the unnatural heir to an unholy mess. Down on the floor the seats are mostly empty, but a handful of politicians, Burton included, discuss what they have been discussing without intermission for the past two years: the nation’s financial crisis.

The first thing you notice when you watch the Irish Parliament at work is that the politicians say everything twice, once in English and once in Gaelic. As there is no one in Ireland who does not speak English and a vast majority who do not speak Gaelic, this comes across as a forced gesture that wastes a great deal of time. I ask several Irish politicians if they speak Gaelic, and all offer the same uneasy look and hedgy reply: "Enough to get by." The politicians in Ireland speak Gaelic the way the Real Housewives of Orange County speak French. To ask "Why bother to speak it at all?" is of course to miss the point.

Everywhere you turn you see both emulation of the English and a desire, sometimes desperate, for distinction. The Irish insistence on their Irishness—their conceit that they’re more devoted to their homeland than the typical citizen of the world is—has an element of bluster about it, from top to bottom. At the top are the many very rich Irish people who emit noisy patriotic sounds but arrange officially to live elsewhere so they don’t have to pay tax in Ireland; at the bottom, the waves of emigration that define Irish history. The Irish people and their country are like lovers whose passion is heightened by their suspicion that they will probably wind up leaving each other. Their loud patriotism is a cargo ship for their doubt.

On this day, in addition to awaiting word on the budget, the Dáil (pronounced "Doyle"), as the Irish call their House of Commons, has before it a vote on whether to hold elections to fill its four empty seats. The ruling party, Fianna Fáil, holds a slim majority of two seats and, because they are universally believed to have created a financial catastrophe, an approval rating of 15 percent. If the elections were held today, they’d be tossed from power—in itself a radical idea, as they have more or less ruled Ireland since its founding as an independent state. Yet they have successfully resisted the call to fill the empty seats.

A bell rings for a vote, and Irish politicians stream in. A few minutes before the vote, the doors to their chamber will be closed and guarded. A politician who is late is a politician who cannot vote. A glass barrier separates the visitors’ gallery and the floor: I ask my tour guide about it. "It’s not to stop people from throwing things at their government," she says, then goes on to explain. Some years ago an Irish politician came late, after the doors had been locked. He ran up to the visitors’ gallery, jumped down from it into the press gallery, 10 feet below, and from there rappelled down the wall to the floor. They allowed the vote, but put up the glass barrier. They disapproved of the loophole, but rewarded the guy with the wit to exploit it. This, she claims, is very Irish.

The first to take his seat is Bertie Ahern, the prime minister from June 1997 until May 2008 and Political Perp No. 1. Ahern is known both for a native shrewdness and for saying lots of spectacularly dumb-sounding things that are fun to quote. Tony Blair had credited him with a kind of genius in how he brokered the Northern Ireland peace negotiations; on the other hand, seeking to explain the financial crisis, he actually said, "Lehman’s was a world investment bank. They had testicles everywhere."

Ahern spent his last days in office denying he’d accepted bribes from property developers, at least in part because so much of what he did in office seemed justified only if he were being paid by property developers to do it. But Bertie Ahern too obviously believed in the miracle of Irish real estate. After Morgan Kelly published his article predicting the collapse of the Irish banks, for instance, Ahern famously responded to a question about it on national radio by saying, "Sitting on the sidelines, cribbing and moaning is a lost opportunity. I don’t know how people who engage in that don’t commit suicide."

Now Ahern is just another Irish backbencher, with a hangdog slouch and a face mottled by broken capillaries. To fill the empty hours, he’s taken a job writing a sports column for the Rupert Murdoch tabloid News of the World, which might just be the least respectable job in global journalism. Ahern’s star, such as it was, has fallen.

When the Irish land boom flipped from miracle to catastrophe, a lot of important people’s status, along with perhaps their sense of themselves, flipped with it. An Irish stockbroker told me that many former bankers, some of whom he counts as clients, "actually physically look different." He’d just seen the former C.E.O. of A.I.B., Eugene Sheehy, in a restaurant, being heckled by other diners. Sheehy once had been a smooth and self-possessed character, whose authority was beyond question. "If you saw the guy now," says my stockbroker friend, "you’d buy him a cup o’ tea."

The Irish real-estate bubble was different from the American version in many ways: it wasn’t disguised, for a start; it didn’t require a lot of complicated financial engineering beyond the understanding of mere mortals; it also wasn’t as cynical. There aren’t a lot of Irish financiers or real-estate people who have emerged with a future. In America the banks went down, but the big shots in them still got rich; in Ireland the big shots went down with the banks.

Sean Fitzpatrick, a working-class kid turned banker, who built Anglo Irish Bank more or less from scratch, is widely viewed as the chief architect of Ireland’s misfortune: today he is not merely bankrupt but unable to show his face in public. Mention his name and people with no interest in banking will tell you with disgust how he disguised millions of euros in loans made to himself by his own bank. What they don’t mention is what he did with the money: invested it in Anglo Irish bonds! When the bank failed Fitzpatrick was listed among its creditors, having (in April 2008!) purchased five million euros of Anglo Irish subordinated floating-rate notes.

The top executives of the three big banks all operated in a similar spirit: they bought shares in their own companies right up to the moment of collapse, and continued to pay dividends, as if they had capital to burn. Virtually all of the big Irish property developers who behaved recklessly signed personal guarantees for their loans. It’s widely assumed that they must be hiding big piles of money somewhere, but the evidence thus far suggests that they are not. The Irish Property Council has counted at least 29 suicides by property developers and construction workers since the crash—in a country where suicide often goes unreported and undercounted. "I said to all the guys, ‘Always take money off the table.’ Not many of them took money off the table," says Dermot Desmond, an Irish billionaire, who made his fortune from software in the early 1990s, and so counts here as old money.

The Irish nouveau riche may have created a Ponzi scheme, but it was a Ponzi scheme in which they themselves believed. So too for that matter did some large number of ordinary Irish citizens, who bought houses for fantastic sums. Ireland’s 87 percent rate of home-ownership is among the highest in the world. There’s no such thing as a non-recourse home mortgage in Ireland. The guy who pays too much for his house is not allowed to simply hand the keys to the bank and walk away. He’s on the hook, personally, for whatever he borrowed. Across Ireland, people are unable to extract themselves from their houses or their bank loans. Irish people will tell you that, because of their sad history of dispossession, owning a home is not just a way to avoid paying rent but a mark of freedom. In their rush to freedom, the Irish built their own prisons. And their leaders helped them to do it.

Just before the closing bell, the two men who sold the Irish people on the notion that they, the people, were responsible not merely for their own disastrous financial decisions but also for the ones made by their banks arrive in the chamber: Prime Minister Brian Cowen and Finance Minister Brian Lenihan. Along with the leader of the opposition, and the second in command of their own party, both are offspring of politicians who died in office: Irish politics is a family affair. Cowen happens also to have been the minister of finance from 2004 until mid-2008, when most of the bad stuff happened.

He is not an obvious Leader of Men. His movements are sullen and lumbering, his face numbed by corpulence, his natural resting expression a look of confusion. One morning a few weeks before, he went on national radio sounding, to well-trained Irish ears, drunk. To my less trained ones he sounded merely groggy, but the public is in no mood to cut him a break. (Four different Irish people told me, on great authority, that Cowen had faxed Ireland’s 440-billion-euro bank guarantee into the European Central Bank from a pub.) And the truth is, if you were to design a human being to maximize the likelihood that people would assume he drank too much, you’d have a hard time doing better than the Irish prime minister. Lenihan, who follows on Cowen’s bovine heels, comes across, by comparison, as a decathlete in peak condition.

On this day, incredibly yet predictably, the Parliament decides not to hold a vote to fill three of the four empty seats. Then they adjourn, and I spend an hour with Joan Burton. Of the major parties in Ireland, Labour offers the closest thing to a dissenting opinion and a critique of Irish capitalism. As one of only 18 members of the Dáil who voted against guaranteeing the banks’ debts, Burton retains rare credibility. And in an hour of chatting about this and that, she strikes me as straight, bright, and basically good news. But her role in the Irish drama is as clear as Morgan Kelly’s: she’s the shrill mother no one listened to.

She speaks in exclamation points with a whiny voice that gets on the nerves of every Irishman—to the point where her voice is parodied on national radio. When I ask her what she would do differently from what the Irish government is doing, even she is stumped. Like every other Irish politician, she is now at the mercy of forces beyond her control. The Irish bank debt is now Irish government debt, and any suggestion of default will only raise the cost of borrowing the foreign money they now can’t live without. "Do you know that Irish people are now experts on bonds?" says Burton. "Yes, they now say 100 basis points rather than 1 percent! They have developed a new vocabulary!"

As the scope of the Irish losses has grown clearer, private investors have been less and less willing to leave even overnight deposits in Irish banks and are completely uninterested in buying longer-term bonds. The European Central Bank has quietly filled the void: one of the most closely watched numbers in Europe has been the amount the E.C.B. has loaned to the Irish banks. In late 2007, when the markets were still suspending disbelief, the banks borrowed 6.5 billion euros.

By December of 2008 the number had jumped to 45 billion. As Burton spoke to me, the number was still rising from a new high of 86 billion. That is, the Irish banks have borrowed 86 billion euros from the European Central Bank to repay private creditors. In September 2010 the last big chunk of money the Irish banks owed the bondholders, 26 billion euros, came due. Once the bondholders were paid off in full, a window of opportunity for the Irish government closed. A default of the banks now would be a default not to private investors but a bill presented directly to European governments. This, by the way, is why there are so many important-looking foreigners in Dublin, dining alone at night. They’re here to make sure someone gets his money back.

One measure of how completely the Irish can’t imagine offending their foreign financial rulers is how quickly Burton declines to contemplate such a default. She bears no responsibility for the banks’ private debts, and yet, when we creep up on the possibility of simply walking away from them, she veers off. Actually, she ups and leaves. "Oh, I have to go," she says. "I have to meet the finance minister with the bad news." Brian Lenihan has called a private meeting with the opposition, so that its leaders will be the first to hear of the Draconian new Irish budget. This meeting is held not inside the Parliament, where the media can be kept at arm’s length, but in a nearby building, where the media are allowed to congregate. "We tried to have it in here, but he moved it outside," says Burton. "He’s taken to bringing us in to tell us the bad news first so that when we walk out we’re the ones announcing it to the media." She smiles. "He’s tricky that way."

Ireland’s Choice
Brian Lenihan is the last remaining Irish politician anywhere near power whose mere appearance does not cause people on the streets of Dublin to explode with either scorn or laughter. He came to the job just months before the crisis and so escapes blame for its origins. He’s a barrister, not a financial or real-estate person, with a proven ability to earn a good living without being bribed by property developers. He comes from a family of political people who are thought to have served honorably, or at any rate not used politics to enrich themselves.

And in December 2009 he was diagnosed with pancreatic cancer. Anyone who has been anywhere near an Irish Catholic family knows the member who has had the most recent run of bad luck enjoys exalted status—the right to do pretty much whatever he wants, while everyone else squirms in silence. Since news of Lenihan’s illness broke—just days after he’d learned of it himself, rushing him into telling his children—he has minimized his suffering. Underlying the public-opinion polls that show the Irish feel a lot better about the minister of finance than they do about other politicians in his party is a common, unspoken understanding of his bravery.

Brian Lenihan is also, as Joan Burton points out, tricky. It’s racing up on eight in the evening when I meet him in a Department of Finance conference room. He has spent most of his day defending the harshest spending cuts and tax hikes in Irish history to Irish politicians, without offering any details about who, exactly, will pay for the banks’ losses. (He’s waiting to do that until after the single by-election the Dáil authorized is held.)

He smiles. "Why is everyone so interested in Ireland?" he asks almost innocently. "There’s really far too much interest in us right now." "Because you’re interesting?" I say. "Oh no," he says seriously. "We’re not, really."

He proceeds to make the collapse of the Irish economy as uninteresting as possible. This awkward social responsibility—normalizing a freak show—is now a meaningful part of the job of being Ireland’s finance minister. At just the moment the crazy uncle leapt from the cellar, the drunken aunt lurched through the front door and, in front of the entire family and many important guests, they carved each other to bits with hunting knives. Daddy must now reassure eyewitnesses that they didn’t see what they think they saw.

But the physical evidence that something deeply weird just happened in Ireland is still too conspicuous. A mile from the conference table where we take our seats is a moonscape of vast, two-year-old craters from which office parks were once meant to rise. There are fully finished skyscrapers that sit empty, water pooling on their lobby floors. There’s a skeleton of a tower, cranes resting on either side like parentheses, which was meant to house Anglo Irish Bank. There’s a city dump for which a developer paid 412 million euros in 2006—and which is now, when you include the cleanup costs, valued at zero.

"Ireland is very unusual," says William Newsom, who has more than 30 years of experience valuing commercial real estate for Savills in London. "There are whole swaths of either undeveloped land with planning permission or even partially developed sites which, I believe, for practical purposes have zero value." The peak of the Irish madness is frozen in time, for all to see. There’s even an empty Starbucks, in the heart of what was meant to be a global financial center to rival London’s, where a carton of low-fat milk curdles beside a silver barista pitcher. The finance minister might as well be standing in Pompeii and saying that actually the volcano wasn’t really worth mentioning. Just a little lava!

"This isn’t Iceland" is what Lenihan actually says. "We’re not a hedge fund that’s populated by 300,000 farmers and fishermen. Ireland is not going back to the 80s or the 90s. This is all in a much narrower band." And then he goes off on a soliloquy, the main point of which is: Ireland’s problems are solvable, and I am in control of the situation.

Back in September 2008, however, there was evidence that he wasn’t. On September 17 the financial markets were in turmoil. Lehman Brothers had failed two days earlier, shares of Irish banks were plummeting, and big corporations were withdrawing their deposits from them. Late that evening Lenihan phoned David McWilliams, a former senior European economist with UBS in Zurich and London, who had moved back home to Dublin and turned himself into a writer and media personality. McWilliams had been loudly skeptical about the Irish real-estate boom. Two weeks earlier he had appeared on a radio show with Lenihan, and Lenihan appeared to him entirely untroubled by the turmoil in the financial markets. Now he wanted to drive out to McWilliams’s house and ask his advice on what to do about the Irish banks.

The peculiar scene is described in McWilliams’s charmingly indiscreet book, Follow the Money. Lenihan arrives at the McWilliams residence, a 45-minute drive from Dublin, marches through to the family kitchen, and pulls a hunk of raw garlic out of his jacket pocket. "He kicked off by saying if his officials knew he was here in my house, there’d be war," writes McWilliams. The finance minister stayed until two in the morning, drinking tea and anxiously picking McWilliams’s brain. McWilliams came away with the feeling that the minister didn’t entirely trust the advice he was getting from the people around him—and that he was not merely worried but confused. McWilliams told me that he sensed that the mental state of the Department of Finance was "complete chaos."

A week later the department hired investment bankers from Merrill Lynch to advise it. Some might say that if you were asking Merrill Lynch for financial advice in 2008 you were already beyond hope, but that is not entirely fair. The bank analyst who had been most prescient and interesting about the Irish banks worked for Merrill Lynch. His name was Philip Ingram. In his late 20s, and a bit quirky—at the University of Cambridge he had studied zoology—Ingram had done something original and useful: he’d shined a new light on the way Irish banks lent against commercial real estate.

The commercial-real-estate loan market is generally less transparent than the market for home loans. Deals between bankers and property developers are one-offs, on terms unknown to all but a few insiders. The parties to any loan always claim it is prudent: a bank analyst has little choice but to take them at their word. But Ingram was skeptical of the Irish banks. He had read Morgan Kelly’s newspaper articles and even paid Kelly a visit in his university office. To Ingram’s eyes, there undoubtedly appeared to be a vast difference between what the Irish banks were saying and what was really happening.

To get at it he ignored what they were saying and went looking for knowledgeable insiders in the commercial-property market. He interviewed them, as a journalist might. On March 13, 2008, six months before the Irish real-estate Ponzi scheme collapsed, Ingram published a report, in which he simply quoted verbatim what British market insiders had told him about various banks’ lending to commercial real estate. The Irish banks were making far riskier loans in Ireland than they were in Britain, but even in Britain, the report revealed, they were the nuttiest lenders around: in that category, Anglo Irish, Bank of Ireland, and A.I.B. came, in that order, first, second, and third.

For a few hours the Merrill Lynch report was the hottest read in the London financial markets, until Merrill Lynch retracted it. Merrill had been a lead underwriter of Anglo Irish’s bonds and the corporate broker to A.I.B.: they’d earned huge sums of money off the growth of Irish banking. Moments after Phil Ingram hit the Send button on his report, the Irish banks called their Merrill Lynch bankers and threatened to take their business elsewhere. The same executive from Anglo Irish who had called to scream at Morgan Kelly called a Merrill research analyst to scream some more.

Ingram’s superiors at Merrill Lynch hauled him into meetings with in-house lawyers, who toned down the report’s pointed language and purged it of its damning quotes from market insiders, including its many references to Irish banks. And from that moment everything Ingram wrote about Irish banks was edited, and bowdlerized by Merrill Lynch’s lawyers. At the end of 2008, Merrill fired him. One of Ingram’s colleagues, a fellow named Ed Allchin, was also made to apologize to Merrill’s investment bankers individually for the trouble he’d caused them by suggesting there was still money to be made on shorting Irish banks.

It would have been difficult for Merrill Lynch’s investment bankers not to know, at some level, that in a reckless market the Irish banks had acted with a recklessness all their own. But in the seven-page memo to Brian Lenihan—for which the Irish taxpayer forked over to Merrill Lynch seven million euros—they kept whatever reservations they may have had to themselves. "All of the Irish banks are profitable and well capitalised," wrote the Merrill Lynch advisers, who then went on to suggest that the banks’ problem wasn’t at all the bad loans they had made but the panic in the market.

The Merrill Lynch memo listed a number of possible responses the Irish government might have to any run on Irish banks. It refrained from explicitly recommending one course of action over another, but its analysis of the problem implied that the most sensible thing to do was guarantee the banks. After all, the banks were fundamentally sound. Promise to eat all losses, and markets would quickly settle down—and the Irish banks would go back to being in perfectly good shape. As there would be no losses, the promise would be free.

What exactly was said in meetings on the night of September 29, 2008, remains, amazingly, something of a secret. The government has refused Freedom of Information Act-type requests for records. But gathered around the conference tables inside the prime minister’s offices was an array of top government and finance officials, including Lenihan, Cowen, the attorney general, and bank officials and regulators. Eventually they brought in the heads of the two yet-to-be-disgraced big Irish banks: A.I.B. and Bank of Ireland. Evidently they either lied to Brian Lenihan about the extent of their losses or didn’t know themselves what those were. Or both. "At the time they were all saying the same thing," an Irish bank analyst tells me. " ‘We don’t have any subprime.’ "

What they meant was that they had avoided lending to American subprime borrowers; what they neglected to mention was that, in the general frenzy, all of Ireland had become subprime. Otherwise sound Irish borrowers had been rendered unsound by the size of the loans they had taken out to buy inflated Irish property. That had been the strangest consequence of the Irish bubble: to throw a nation which had finally clawed its way out of centuries of indentured servitude back into it.

The report from Merrill Lynch, which touted the banks as fundamentally sound, buttressed whatever story they told the finance minister. Ireland’s financial regulator, Patrick Neary, had echoed Merrill’s judgment. Morgan Kelly was still viewed as a zany egghead; at any rate, no one who took him seriously was present in the room. Anglo Irish’s stock had fallen 46 percent that day; A.I.B.’s had fallen 17 percent; there was a fair chance that when the stock exchange reopened one or both of them would go out of business. In the general panic, absent government intervention, the other banks would have gone down, too. Lenihan faced a choice: Should he believe the people immediately around him or the financial markets? Should he trust the family or the experts? He stuck with the family. Ireland gave its promise. And the promise sank Ireland.

Even at the time, the decision seemed a bit odd. The Irish banks, like the big American banks, managed to persuade a lot of people that they were so intertwined with their economy that their failure would bring down a lot of other things, too. But they weren’t, at least not all of them. Anglo Irish Bank had only six branches in Ireland, no A.T.M.’s, and no organic relationship with Irish business except the property developers. It lent money to people to buy land and build: that’s practically all it did. It did this mainly with money it had borrowed from foreigners. It was not, by nature, systemic. It became so only when its losses were made everyone’s.

In any case, if the Irish wanted to save their banks, why not guarantee just the deposits? There’s a big difference between depositors and bondholders: depositors can flee. The immediate danger to the banks was that savers who had put money into them would take their money out, and the banks would be without funds. The investors who owned the roughly 80 billion euros of Irish bank bonds, on the other hand, were stuck. They couldn’t take their money out of the bank. And their 80 billion euros very nearly exactly covered the eventual losses inside the Irish banks. These private bondholders didn’t have any right to be made whole by the Irish government.

The bondholders didn’t even expect to be made whole by the Irish government. Not long ago I spoke with a former senior Merrill Lynch bond trader who, on September 29, 2008, owned a pile of bonds in one of the Irish banks. He’d already tried to sell them back to the bank for 50 cents on the dollar—that is, he’d offered to take a huge loss, just to get out of them. On the morning of September 30 he awakened to find his bonds worth 100 cents on the dollar. The Irish government had guaranteed them! He couldn’t believe his luck. Across the financial markets this episode repeated itself. People who had made a private bet that went bad, and didn’t expect to be repaid in full, were handed their money back—from the Irish taxpayer.

In retrospect, now that the Irish bank losses are known to be world-historically huge, the decision to cover them appears not merely odd but suicidal. A handful of Irish bankers incurred debts they could never repay, of something like 100 billion euros. They may have had no idea what they were doing, but they did it all the same. Their debts were private—owed by them to investors around the world—and still the Irish people have undertaken to repay them as if they were obligations of the state.

For two years they have labored under this impossible burden with scarcely a peep of protest. What’s more, all of the policy decisions since September 29, 2008, have set the hook more firmly inside the mouths of the Irish public. In January 2009 the Irish government nationalized Anglo Irish and its 34-billion-euro (and mounting) losses. In late 2009 they created the Irish version of the tarp program, but, unlike the U.S. government (which ended up buying stakes in the banks), they actually followed through on the plan and are in the process of buying 70 billion euros of crappy assets from the Irish banks.

A single decision sank Ireland, but when I ask Lenihan about it he becomes impatient, as if it isn’t a fit topic for conversation. It wasn’t much of a decision, he says, as he had no choice. The Irish financial markets are governed by rules rooted in English law, and under English law bondholders enjoy the same status as ordinary depositors. That is, it was against the law to protect the little people with deposits in the bank without also saving the big investors who owned Irish bank bonds.

This rings a bell. When U.S. Treasury secretary Hank Paulson realized that allowing Lehman Brothers to fail was viewed not as brave and principled but catastrophic, he, too, claimed he’d done what he’d done because the law gave him no other option. But in the heat of the crisis, Paulson had neglected to mention the law just as Lenihan didn’t bring up the law requiring him to pay off the banks’ private lenders until long after he’d done it. In both cases the explanation was legalistic: narrowly true, but generally false. The Irish government always had the power to impose losses on even the senior bondholders, if it wanted to. "Senior people have forgotten that the government has certain powers," as Morgan Kelly puts it. "You can conscript people. You can send them off to certain death. You can change the law."

On September 30, 2008, in the heat of the moment, Lenihan gave the same reason for guaranteeing the banks’ debts that Merrill Lynch had given him: to prevent "contagion." Tell financial markets that a loan to an Irish bank was a loan to the Irish government and investors would calm down. For who would doubt the credit of the government? A year and a half later, when suspicions arose that the banks’ losses were so vast they might bankrupt the government, Lenihan offered a new reason for the government’s gift to private investors: the bonds were owned by Irishmen.

Up until then the government’s line had been that they had no idea who owned the bank’s bonds. Now they said that, if the Irish government didn’t eat the losses, Irish credit unions and insurance companies would pay the price. The Irish, in other words, were simply saving the Irish. This wasn’t true, and it provoked a cry of outrage from the credit unions, which said that they owned hardly any of the bonds. A political investigative blog called Guido Fawkes somehow obtained a list of the Anglo Irish foreign bondholders: German banks, French banks, German investment funds, Goldman Sachs. (Yes! Even the Irish did their bit for Goldman.)

Across Europe just now men who thought their title was "minister of finance" have woken up to the idea that their job is actually government bond salesman. The Irish bank losses have obviously bankrupted Ireland, but the Irish finance minister does not want to talk about that. Instead he mentions to me, several times, that Ireland is "fully funded" until next summer, which is to say that the Irish government has enough cash in the bank to pay its bills until next July. It isn’t until I’m on my way out the door that I realize how trivial this point is.

The blunt truth is that, since September 2008, Ireland has been, every day, more at the mercy of her creditors. To remain afloat, Ireland’s biggest banks, which are now owned by the Irish government, have taken short-term loans from the European Central Bank amounting to 86 billion euros. Two weeks later Lenihan will be compelled by the European Union to invite the I.M.F. into Ireland, relinquish control of Irish finances, and accept a bailout package. The Irish public doesn’t yet know it, but, even as we sit together at his conference table, the European Central Bank has lost interest in lending to Irish banks.

And soon Brian Lenihan will stand up in the Irish Parliament and offer a fourth explanation for why private investors in Ireland’s banks cannot be allowed to take losses. "There is simply no way that this country, whose banks are so dependent on international investors, can unilaterally renege on senior bondholders against the wishes of the E.C.B.," he will say.
But there was once a time when the wishes of the E.C.B. didn’t matter to Ireland. That time was before the Irish government used E.C.B. money to pay off the foreign bondholders in Irish banks.

Bring Me a Little Ire
Once a decade I experiment with driving on the wrong side of the road, and wind up destroying dozens of side-view mirrors on cars parked on the left. When I went looking for some Irish person to drive me around, the result was a fellow I will call Ian McRory (he asked me not to use his real name in this article), who is Irish, and a driver, but pretty clearly a lot of other things, too. Ian has what appears to be a military-grade navigational system, for instance, and surprising knowledge about abstruse and secretive matters.

"I do some personal security, and things of that nature," he says, when I ask him what else he does other than drive financial-disaster tourists back and forth across Ireland, and leaves it at that. Later, when I mention the name of a formerly rich Irish property developer, he says, casually, as if it were all in a day’s work, that he had let himself into the fellow’s vacation house and snapped photographs of the interior, "for a man I know who is thinking of buying it."

Ian turns out to have a good feel for what I, or anyone else, might find interesting in rural Ireland. He will say, for example, "Over there, that’s a pretty typical fairy ring," and then explain, interestingly, that these circles of stones or mushrooms that occur in Irish fields are believed by local farmers to house mythical creatures. "Irish people actually believe in fairies?," I ask, straining but failing to catch a glimpse of the typical fairy ring to which Ian has just pointed. "I mean, if you walked right up and asked him to his face, ‘Do you believe in fairies?’ most guys will deny it," he replies. "But if you ask him to dig out the fairy ring on his property, he won’t do it. To my way of thinking, that’s believing." And it is. It’s a tactical belief, a belief that exists because the upside to disbelief is too small, like the former Irish belief that Irish land prices would rise forever.

The highway out of Dublin runs past abandoned building sites and neighborhoods without people in them. "We can stop at ghost estates on the way," says Ian, as we clear the suburbs of Dublin. "But if we stop at every one of them, we’ll never get out of here."

We pass wet green fields carved by potato farmers into small plots, and every now and then a small village, but even the inhabited places feel desolate. The Irish countryside remains a place people flee. Among its drawbacks, from the outsider’s point of view, is the weather. "It’s always either raining or about to rain," says Ian. "I drove a black guy from Africa around the country once. It’s raining the whole time. He says to me, ‘I don’t know why people live here. It’s like living under an elephant.’ "

The wet hedgerows cultivated along the highway to hide the wet road from the wet houses now hide the wet houses from the wet road. picture of the village of the future, reads a dripping billboard with a picture of a village that will never be built. Randomly selecting a village that appears to be more or less finished, we pull off the road. It’s an exurb, without a suburb. GLEANN RIADA, reads the self-important sign in front. It’s a few dozen houses in a field, attached to nothing but each other, ending with unoccupied slabs of concrete buried in weeds.

You can see the moment the money stopped flowing from the Irish banks, the developer folded his tent, and the Polish workers went home. "The guys who laid this didn’t even believe it was supposed to be finished," says Ian. The concrete slab, like the completed houses, is riven by the kind of cracks you see in a house after a major earthquake, but in this case are caused by carelessness. Inside, the floors are littered with trash and debris, the fixtures have been ripped out of the kitchen, and mold spreads spider-like across the walls. The last time I saw an interior like this was in New Orleans after Katrina.

In October, Ireland’s Department of the Environment published its first audit of the country’s new housing stock after inspecting 2,846 housing developments, many of them called "ghost estates" because they’re empty. Of the nearly 180,000 units that had been granted planning permission, the audit found that only 78,195 were completed and occupied. Others are occupied but remain unfinished. Virtually all construction has now ceased. There aren’t enough people in Ireland to fill the new houses; there were never enough people in Ireland to fill the new houses.

Ask Irish property developers who they imagined was going to live in the Irish countryside, and they all laugh the same uneasy laugh and offer up the same list of prospects: Poles; foreigners looking for second homes; entire departments of Irish government workers, who would be shipped to the sticks in a massive, planned relocation that somehow never materialized; the diaspora of 70 million human beings with a genetic link to Ireland. The problem that no one paid all that much attention to during the boom was that people from outside Ireland, even those with a genetic link to the place, have no interest in owning houses there. "This isn’t an international property market," says an agent at Savills’s Dublin branch named Ronan O’Driscoll. "There aren’t any foreign buyers. There were never foreign buyers." Dublin was never London. The Irish countryside will never be the Cotswolds.

Which way entire nations jumped when the money was made freely available to them obviously told you a lot about them: their desires, their constraints, their secret sense of themselves. How they reacted when the money was taken away was equally revealing. In Greece the money was borrowed by the state: the debts are the debts of the Greek people, but the people want no part of them. The Greeks already have taken to the streets, violently, and have been quick to find people other than themselves to blame for their problems: monks, Turks, foreign bankers. Greek anarchists now mail bombs to Angela Merkel and hurl Molotov cocktails at their own police.

In Ireland the money was borrowed by a few banks, and yet the people seem not only willing to repay it but to do so without a peep of protest. Back in October 2008, after the government threatened to means-test for medical care, the old people marched in the streets of Dublin. A few days after I’d arrived the students followed suit, but their protest was less public anger than theater, and perhaps an excuse to skip school. (DOWN WITH THIS SORT OF THING, read one of the students’ signs.) I’d tapped two students as they stumbled away from the event to ask why they had all painted yellow streaks on their faces. They looked at each other for a beat. "Dunno!" one finally said and burst out laughing.

Other than that … silence. It’s more than two years since the Irish government foisted the losses of the Irish banks on the Irish people, and in that time there have been only two conspicuous acts of social unrest. In May 2009, at A.I.B.’s first shareholder meeting after the collapse, a senior citizen hurled rotten eggs at the bank’s executives. And early one morning in September 2010, a 41-year-old property developer from Galway named Joe McNamara, who had painted his cement mixer with anti-banker slogans, climbed inside the cab, drove through Dublin, and, after cutting the brake lines, stalled the machine up against the gates of the Parliament. The elderly egg thrower was a distant memory, but McNamara was still, more or less, in the news: declining requests for interviews. "Joe is a private person," his lawyer told me. "He feels like he’s made his point. He doesn’t want any media attention."

Before he’d parked his cement mixer in the Parliament’s driveway, McNamara had been a small-time builder. He’d started out laying foundations, and like a lot of rural tradesmen, he’d been given a loan by the Anglo Irish Bank. Thus began his career as a property developer. He’d moved to Galway, into a tacky new development beside a golf course, but the real source of his financial distress lay an hour or so beyond the city, in a resort hotel he’d tried to build on a remote island called Achill, in the tiny village in which he’d grown up, called Keel. "Achill," says Ian after I tell him that’s where I’d like to go, then goes silent for a minute, as if giving me time to reconsider. "This time of year Achill’s going to be fairly bleak." He thinks another minute. "Mind you, in the summer it can be fairly bleak as well."

It’s twilight as we roll across the tiny bridge and onto the island. On either side of the snaking single-lane road peat bogs stretch as far as the eye can see. The feel is less "tourist destination" than "end of the earth." ("The next stop is Newfoundland," says Ian.) The Achill Head Hotel—Joe’s first venture, still run by his ex-wife—was closed and dark. But there, smack in the middle of the tiny village of Keel, was the source of all of Joe McNamara’s financial troubles: a giant black hole, surrounded by bulldozers and building materials. He’d set out in 2005 to build a modest one-story hotel, with 12 rooms.

In April 2006, with the Irish property market exploding, he’d expanded his ambition and applied for permission to build a multi-story luxury hotel. At exactly that moment, the market turned. "We went away in June of 2006," Ronan O’Driscoll, the Savills broker, had told me. "We came back in September and everything had just stopped. How does everyone decide at once that it is time to stop—that it’s become mad?" For the past four years the hotel’s site had scarred the village. But it wasn’t until early 2010 that Anglo Irish Bank, which had lent McNamara the money to develop it, threatened to force him into receivership.

Irish bankruptcy laws were not designed for spectacular failure, perhaps because the people who wrote them never imagined spectacular success. When a bank forces an Irish person into receivership, a notice is published in a national and a local newspaper—ensuring the bankrupt’s widespread shame. For as many as 12 years the person is not permitted to take out a loan for more than 650 euros without disclosing his bankruptcy status or own assets amounting to more than 3,100 euros, and part of whatever he earns may pass to his creditors at the discretion of the court. "It’s not like the United States, where being bankrupt is almost a badge of honor," says Patrick White, of the Irish Property Council. "Here you are effectively disbarred from commercial life."

There is an ancient rule of financial life—that if you owe the bank five million bucks the bank owns you, but if you owe the bank five billion bucks you own the bank—that newly applies to Ireland. The debts of its big property developers—now generally defined as anyone who owed the bank more than 20 million euros—are being worked out behind closed doors. In exchange for helping the government to manage or liquidate their real-estate portfolios, the biggest failures are hoping to be spared bankruptcy. Smaller developers, like McNamara, are in a far harder place, and while no one seems to know how many of these people exist, the number is clearly big.

Ireland’s National Asset Management Agency (its tarp) controls roughly 70 billion euros of commercial-property loans. It is believed that smaller Irish property-related loans amount to another 85 billion euros. Some very large number of Irish former tradesmen are in exactly Joe McNamara’s situation. Some very large number of Irish homeowners are in something very like it.

The difference between McNamara and everyone else is that he complained about it publicly. But then, apparently, thought better of it. I’d tracked down and phoned his ex-wife, who just laughed and told me to get lost. I finally reached McNamara himself, ambushing him on his cell phone. But he just muttered something about not wanting to draw further attention to himself, then hung up. It was only after I texted him to say I was en route to his hometown that he became sufficiently aroused to communicate.

"What are you doing in Keel????" he hollered by text message, more than once. "Tell me Why are you going to Keel???" Then, once again, he fell silent. "The problem with the Irish people," Ian says, as we drive away from the black hole that ruined Joe McNamara, "is that you can push them and push them and push them. But when they break they go wacko." A month later, after a period of silence, McNamara would reappear, blasting the theme from The Good, the Bad and the Ugly from the top of a cherry-picker crane that he had parked, once again, in front of the Parliament.

Two things strike every Irish person when he comes to America, Irish friends tell me: the vastness of the country, and the seemingly endless desire of its people to talk about their personal problems. Two things strike an American when he comes to Ireland: how small it is and how tight-lipped. An Irish person with a personal problem takes it into a hole with him, like a squirrel with a nut before winter. He tortures himself and sometimes his loved ones too. What he doesn’t do, if he has suffered some reversal, is vent about it to the outside world. The famous Irish gift of gab is a cover for all the things they aren’t telling you.

So far as I could see, by November 10, 2010, the population of Irish people willing to make a stink about what has happened to them has been reduced to one: the elderly egg thrower. The next day we pull up outside his home, a modest old semi-detached house on the outskirts of Dublin. The cheery gentleman who opens the door in a neat burgundy sweater and well-pressed slacks has, among his other qualities, fantastically good manners. He has the ability to seem pleased even when total strangers ring his doorbell, and to make them feel welcome. On the table in Gary Keogh’s small and tidy dining room is a book, created by his grandchildren, dated May 2009, called "Granddad’s Eggcellent Adventure."

In the months after Lenihan’s bank bailout, Keogh began to pay attention to the behavior of Irish bankers. His own shares in A.I.B., once thought to be as sound as cash or gold, were rapidly becoming worthless. But the bank’s executives exhibited not the first hint of remorse or shame. A.I.B. chairman Dermot Gleeson and C.E.O. Eugene Sheehy troubled Keogh the most. "The two of ’em stood up, time and again, and said, ‘Our bank is 100 percent sound,’ " he says. "As if nothing at all was the matter!" He set out to learn more about these people in whom he had always placed blind trust. And what he found—high pay, corporate boondoggles—outraged him further. "The chairman paid himself 475,000 [euros] to chair 12 meetings!" Keogh still shouts.

What Keogh learned remains both the most shocking and the most familiar aspect of the Irish catastrophe: how easily ancient financial institutions abandoned their traditions and principles. An upstart bank, Anglo Irish, had entered their market and professed to have found a new and better way to be a banker. Anglo Irish made incredibly quick decisions: an Irish property developer who was an existing client could walk into its office in the late afternoon with a new idea and walk out with a commitment of hundreds of millions of euros that night. Anglo Irish was able to shovel money out its door so quickly because it had turned banking into a family affair: if they liked the man, they didn’t bother to evaluate his project.

Rather than point out the insanity of the approach, the two old Irish banks simply caved to it. An Irish businessman named Denis O’Brien sat on the board of the Bank of Ireland in 2005, when it was faced with the astonishing growth of Anglo Irish, which was about to double in size in just two years. "I remember the C.E.O. coming in and saying, ‘We’re going to grow at 30 percent a year,’ " O’Brien tells me. "I said, How the fuck are you going to do that? Banking is a 5-to-7-percent-a-year-growth business at best."

They did it by doing what Anglo Irish had done: writing checks to Irish property developers to buy Irish land at any price. A.I.B. even opened a unit dedicated to poaching Anglo’s biggest property-developer clients—the very people who would become the most spectacular busts in Irish history. In October 2008, the Irish Independent published a list of the five biggest real-estate deals in each of the past three years.

A.I.B. lent the money for 6 of the 15, Anglo Irish for just 1, as a co-lender with A.I.B. On Irish national radio recently, the insolvent property developer Simon Kelly, whose family’s real-estate portfolio has run up bad debts of 2 billion euros, confessed that the only time in his career a banker became upset with him was when he repaid a loan, to Anglo Irish, with money borrowed from A.I.B. The former Anglo Irish executives I interviewed (off the record, as they are all in hiding) speak of their older, more respectable imitators with a kind of amazement. "Yes, we were out of control," they say, in so many words. "But those guys were fucking nuts."

Gary Keogh thought about how Ireland had changed from his youth, when the country was dirt-poor. "I used to collect bottles. Now the health service doesn’t even bother to take back crutches anymore? No! We’re far too wealthy."

Unlike most people he knew, he had no debts. "I had nothing to lose," he says. "I didn’t owe anyone any money. That’s why I could do it!" He’d also just recovered from a serious illness, and so, emotionally, felt a bit as if he were playing with house money. "I had just got a new kidney and I was very pleased with it," he says. "But I think it must have been Che Guevara’s kidney." He describes his elaborate plot the way an assassin might describe the perfect hit. "I only had two rotten eggs," he says, "but by God they were rotten! Because I kept them six weeks in the garage!"

The A.I.B. shareholders’ meeting of May 2009 was the first he’d ever attended. He was, he admits, a bit worried something might go wrong. Worried that parking might be a problem, he took the bus; worried that his eggs might break, he used a container to protect them; worried that he didn’t even know what the room looked like, he left himself time to case the meeting hall. "I got to the front door early and had a little recce," as he puts it, "just to see what was going to happen." His egg container was too large to sneak inside, so he ditched it. "I had one egg in each jacket pocket," he says. Worried that his eggs might be too slippery to grip and throw, he’d put Band-Aids on them. "I positioned myself four rows back and four seats in," he says. "Not too close but not too far." Then he waited for his moment.

It came immediately. Right after the executives took their places at the dais, a shareholder stood up, uninvited, with a point of order. Gleeson, A.I.B.’s chairman, barked, "Sit down!"
"He thought he was a dictator!" says Keogh, who had heard enough. He rose to his feet and shouted, "I’ve listened to enough of your crap! You’re a fucking git!" And then he began firing. "He thought he had been shot," he says now with a little smile, "because the first egg hit the microphone and went POW!" It splattered onto the shoulder pad of Gleeson’s suit. The second egg missed the C.E.O. but nailed the A.I.B. sign behind him.

Then the security guards were on him. "I was told I would be arrested and charged, but I never was," he says. Of course he wasn’t: this was at bottom a family dispute. The guards wanted to escort him out, but he left the place on his own and climbed aboard the next bus home. "The incident happened at 10 past 10 in the morning," he says. "I was home by 10 to 11. At 10 past 11 the phone rang. And I was on the radio for an hour." Then, but briefly, all was madness. "The press descended on the house and they wouldn’t get out," he says. It didn’t really matter; he wasn’t sticking around. He’d done exactly what he’d planned to do, and saw no need to make a further fuss. He flew out of Dublin Airport at seven the next morning, for a long-planned Mediterranean cruise.


Nassim said...

Regarding religions and biases, I agree pretty much that these superstitious influences are much of what is wrong in the world ...


Yes, I agree. But sometimes these funny ideas lead to wonderful things

Jerusalem - Hymn by William Blake & Charles Hastings Parry

The whole idea that Jesus was in England is simply beyond crazy


Maybe sometime in the future it will be a "fact" LOL

Nassim said...

What Politicians Really Think About Egypt - UK Version

Amazing interview with Tony Blair in which he claims that Saddam Hussein was really bad for Iraq while Mubarak was really good for Egypt. Just like the Israelis, he wants "change" but on his terms. This guy does not have a clue. Once again, he implies that Saddam Hussein was involved in 9/11. Once again he brings up Iran as the bogeyman while not making any sensible comment about Egypt and its institutionalised repression and torture.

The second interview is with George Galloway MP. Gallaway was kicked out of Egypt a year ago. His speech is really inspiring. Well worth watching.

When the tyrant will escape with his ill-gotten gains and his family members, but that fools and hirelings like him working for that regime would be lucky to avoid being strung up from the street lamps.

I was wrong Mubarak is not a person without a status. He has a status, and that status is murderer, torturer, dictator and he should be on trial.

Alexander Ac said...


"People, voters, neighbors, teachers etc. want cheap loans, and they want those more than they want cheap homes. It's frankly beyond comprehension..."

Well. It seems that many supposedly intelligent people do not understand that cheap loans make houses actually more expensive. Many people quite seriously claim that without mortgages the home prices would be the same.

People simply do not understand the bubble dynamics...

Ruben said...


I posted a book app for you last post. But for this post, you may be unaware the Mormons believe that, in the maturing years before his adult fame, Jesus walked amongst the First Nations in North America.

Alexander Ac said...

Regarding the previous post, a guest blogger on Yves Smith Naked Capitalism, shows that GINI coefficient (in 2009, according to CIA Factbook) is actually worse for USA than for Egypt, Tunisia, or Jemen.

There are some reasons why we see no mass protest in USA. How long will that last is in guestion.

Sorry if it circulated here before.

Steve From Virginia said...

In the real world the real problem is the lack of real resources even as the bankers and their friends email vast imaginary sums back and forth to each other.

Imaginary mortgage debts are paid by imaginary workers who have imaginary jobs. Happy Days are Here Again, Hallelujah! I believe in magic!

The real non- working workers will not pay anyone so the joke is really on the bankers who cut their own throats with childrens' games. The Soviet Union has crossed the Atlantic Ocean: the banks pretend work and the Treasury pretends to pay them.

All of this is done with fingers crossed and winks and nods of understanding. What else is there to do? There is nothing else on teevee ...

Meanwhile, the real world literally runs out of gas. What else is left to be built out for the benefit of the automobile that is able to earn something back for the builder? Benefit to the automobile includes all those tract houses that cannot pay for themselves or for the 'home'- builders who vomit them up. Benefit to the automobile that includes all the state and local governments which are going broke by the minute ...

There is really no cause for anger or concern, taxpayers aren't on the hook for anything as they cannot pay what they do not have.

idoc said...

Ilargi; unfortunately Blodget misses one crucial point. the open spigot of the Fannie/Treasury complex encourages even MORE and ONGOING creation of toxic loans to unqualified homeowners to milk the system of every last ounce of blood before it all collapses, which is soon.

Anonymous said...

@ Nassim,

i think blair has a clue... and an agenda that over rides decency and truth.

lots of people have convinced themselves that all this bad stuff are simply mistakes by people who don't know better.

the alternative is that some evil SOBs are controlling things.

my money is on the latter.

Greenpa said...

As The Empires Crumble Dept.

Your banker bonuses at work.

Funding promised by G8 countries to build the necessary new and more permanent containment structure over the Chernobyl reactor has not been paid...

idoc said...

i am even willing to bet the Wall St banks r creating fake MBS, backed by nothing, as fast as they can as we speak to sell to FNM/FRE before they can be found out

rcg1950 said...

Ilargi: It's a cute idea, isn't it, that the interests of Wall Street are the same as those of everyone's neighbors and firefighters? Unfortunately, the idea is also preposterous ... For that matter, it makes no sense for any American except those who have skin in the game either as lenders or as investors in mortgages or mortgage backed securities.

Were it not for the outstanding debt on all the housing stock, letting it deflate it would be a no brainer. But we all know it’s the debt that turns this from a simple problem into an impossible conundrum. All the boomers (myself included) who had hoped to cover part of their retirement from the ponzi scheme going on a little bit longer also have ‘skin in the game.’ As do somewhat younger people who are underwater or outright defaulting on their mortgages. Or the entire economy that has depended on unending expansion of credit to fuel the income strapped American consumer. (keep in mind that education and health care are in America just more costly consumer items). Nearly every one in this country has skin in this preposterous game.

We’re in a steel debt trap. We’re damned if we deflate and face calamity if we try to hold the prices up. I think just about every one who comes to this site understands this. There are no solutions that can sustain anything resembling business as usual. While one might imagine a national project of transition to a saner, localized low consumption society, it is impossible for me (short of believeing in 2nd comings) to imagine the cultural, psychological and political changes that could bring such a project into being. Which takes us back to I&S’s (and Orlov’s and others’) individual ‘solutions’ -- get out of debt, learn to live on much less, develop relationships with people who can and will support one another and try to survive the collapse of this hyper-complex civilization as best we can. Not really a ‘solution’ at all, just some common sense advice in the face of irresistible forces that set this outcome in motion long ago and are now unstoppable.

Archie said...

It's been nearly 40 years since I read Immanuel Velikovsky's books, "Worlds In Collision" and "Earth In Upheaval". But I think this article bears out some of what he wrote:

Magnetic Polar Shifts Causing Massive Global Superstorms.

sensato said...

Chris Hedges was interviewed on TV Ontario recently.

p01 said...

Some Sane Advice is all I'm hoping to find.


Phil said...

The BBC's Paul Mason is on good form again:

Twenty reasons why it's kicking off everywhere

Nassim said...


Thank you for the information about Goodreads. I have ordered my own barcode scanner to do a few experiments.

I think blair has a clue... and an agenda that over rides decency and truth.

I meant that Blair, like any self-employed promoter or salesman, is afraid that he might lose his current revenue stream and he is not sure what will replace it.

"The earth's climate has been significantly affected by the planet's magnetic field, according to a Danish study published Monday that could challenge the notion that human emissions are responsible for global warming.

"'Our results show a strong correlation between the strength of the earth's magnetic field and the amount of precipitation in the tropics,' one of the two Danish geophysicists behind the study, Mads Faurschou Knudsen of the geology department at Aarhus University in western Denmark, told the Videnskab journal.

Frank A,

While I do accept climate change (anyone who has studied history, let alone geology, must accept it), I don't believe that we can do anything to stop it or reverse it. We have to adapt.

The sun is the main motor behind the earth's climate and the magnetic field is dictated partly by the sun. I did not know that the magnetic field had accelerated its displacement. Lots of unforeseeable consequences are possible.

We are 3000km from where Yasi hit the coast and we are getting flooded over here in Melbourne. It does happen every few years though. We got 80mm of rain in one day but the maximum for February was three times that. It is impossible to distinguish between the short-term and the long-term until decades later.

Nassim said...

George W. Bush cancels visit to Swiss charity gala over fears he could be arrested on torture charges

No wonder Blair looks so worried.

Frank said...

@Frank A.

I too read Velikovsky all those years ago.

Freely quoting Isaac Asimov in an article he wrote 40 odd years ago.

"I'm a chemist. When Velikovsky says the biologists totally blew the ice age extinctions, I'll smile.

When he tells the physicists that Newton's second law can be suspended at will, I'll grin.

When he tells me that carbon is a gas, he's a loon."


Supergravity said...
This comment has been removed by the author.
Supergravity said...

This planet's environs are known to be somewhat electrodynamically unstable. The verifiable occurrence of poorly understood geophysical and astrophysical anomalies, such as spiking solar radiative flux, galactic radiative flux, associated galactic plane exposure, minor gamma ray bursts, coronal mass ejections or periodic geomagnetic field reorientations, are particularly ill-conductive towards maintaining complex electrical infrastructure, although largely innocuous to organic life, save for climatological dynamics.

Any confluence of such inevitable anomalous events would be expected to collapse the functioning of a planetary or continental electric grid of contemporary configuration for periods of several days or weeks on average once every 240 years, disruptions of longer duration forseeably resulting in the death of all connected urban populations with current dependencies, by a short trip into the olduvai gorge.

There's also a theory, maintained by me, wherein the presence of a direct-current planetwide electric grid intersecting with a geomagnetic field may measurably modulate the periodicity and duration of natural geomagnetic field reorientation by mechanisms of ethereal charge recoupling, when the ambient field intensity is weakened, such as now. The physics of magnetic fields would allow it, but the effect should be minute.

p01 said...

For an eye-opening glimpse into the past (and possibly the future, although I doubt it, since the population at this time lacks ALL knowledge necessary for survival), please see this book by Marvin Harris. Excerpt here


Archie said...

@Frank (my elder?),

Make no mistake Frank, I am NOT a scientist. In my youthful curiosity, I read Velikovsky with the same inquisitiveness as I read Carlos Castenada. Made for great conversations amongst my friends. But I always understood the controversial nature of his claims.

Honestly, I can't remember the last time I thought about him. And then I read that article in the Salem News and immediately thought of him. Total vindication? Nah, I don't think so but it still makes for interesting conversation. Unless, of course, you are in the crosshairs of one of these superstorms, or even on the remote periphery as Nassim related.

If only the forces of Mother Nature would seriously fuck with the MOTU. I would pay good money to see that happen.

Supergravity said...

Also, the orbital satellite grid, such as it is, is expected to be completely destroyed in the event of an actual geomagnetic field reorientation of any duration, even if lasting just a few days, by intensified exposure to solar winds.

The general usage of long-distance electric transmission grids, if producing wholly unnatural field cofigurations intersecting with and greatly disturbing the natural field distributions, may quicken the inevitable onset of the next geomagnetic pole reversal or alter its transitory duration, perhaps moreover in conjunction with incidentally disequilibriated ionospheric heating by poorly tuned electrojet capacitor arrays. However, more sophisticated appliance of charge recoupling mechanisms could conceivably allow some control over the timing and duration of a typical geomagnetic reorientation for deliberate purposes of minimising infrastructural damages.

Ian said...

Poor old Illargi. All that effort and a mere handful of comments (whilst ZH and others have literally hundreds).

Two main reasons: 1. The 'Depression Now' mantra is being seen, in reality, as mistaken and 2. Illargi's censorship has turned on him and readers now censor TAE. How poetic!
(go ahead & delte Illargi - it's just for you anyway)

Ian said...

Of course, once I Am Nobody and a couple of others start their largely meaningless diatribes with each other, that'll send the response up by 500% !!

Nassim said...

There has been a huge influx of aircraft (both fighters and cargo jets) at a certain FL AF base where Middle East operations are conducted from in the past 2 days. I can see their airspace from my house and the only other time I've seen it this busy is during the yearly air show, which isn't until November. Something is definitely about to go down.

American Warships Heading to Egypt

Ian said...

And just one final thing before I depart for good (I wouldn't want to be the one who gave Illargi RSI in his 'delete' finger, would I?)

At least Stonleigh is the real deal and I have great respect for her - even if I've come to the opinion that it's going to be inflation first, not a depression.

She doesn't hide behind a screen name like you, Illargi. She has the courage of her convictions and is up front. Gotta admire that. Admire you? Nope!

And if she's using TAE contributions to travel & lecture, well fair enough. Not sure that contributors would be so keen if any of their hard-earned found its way to anonymous 'others'..

OK Illargi, once more and for the last time (for me) ...DELETE

Ruben said...


I hope I am not getting irritating, I am just excited by ways to share things instead of consuming things.

So here is some freeware for Mac and for PC

p01 said...

Ian said
"Poor old Illargi. All that effort and a mere handful of comments (whilst ZH and others have literally hundreds)"

I could comment on ZH and I'm sure could comment on any site that screams "we're doomed'.
I don't, and that's because I don't think any other site understands the whole picture AS I SEE IT, and I don't cry my eyeballs out on another site's comment section because they don't agree with me.
So please go on a comment spree on ZH/anywhere for my part, I will not feel deprived of any knowledge.

No regards,

Nassim said...

... I am just excited by ways to share things instead of consuming things.

I quite understand. I don't like waste either. The trouble is:

1- Postage is enormously wasteful - especially when stuff is being swapped or returned (2 trips)

2- Where we live, we have a fantastic free library and they can also get books from other libraries for you for free.

3- The libraries periodically sell off older books and slightly out-of-date reference books for almost nothing.

This pretty well destroys any sort of need for this service.

As for the software, I can develop almost anything that takes my fancy is quick order. I program in Delphi which pretty well knocks the stuffing out of things like C++ , C#, VB and so on.

p01 said...

And one more thing:
This is the real deal, baby, this is not a drill (ceci n'est pas un drill) like "A Walk In The Woods" said.
So get your stuff straight, because IT'S HERE NOW and it's not going anywhere no matter how the wise-guys from ZH make it sound like fun, cartoons and cute bears.

Still no regards,

Ruben said...


re: software--I will keep you in mind next time I have an awesome idea.

re: postage--I am interested more from the perspective of the town that couldn't afford its library. Assuming of course the townsfolk could still afford internet, which is maybe not the safest assumption. Or a tool library....

Nassim said...

... mind next time I have an awesome idea.

Ideas are "tuppence a dozen" :)

cogen said...

"Hypocrisy is the vaseline of political intercourse" B Connolly, Forbes 4/7/08, pp120

scandia said...

@Phil, I was just thinking about Obama saying that the kids need to be educated to create jobs etc...Is that the next bubble?
The article you posted had this line, " At the heart of it all is a new sociological type, the graduate with no future. "
I would think a lot of parents drew from collateral in their homes to fund post secondary education for their children. If home valuations are in decline then how will the degree factories be funded? Will banks continue to accept property as collateral when valuations are best left opague from the banks current imperative?
Oh what a friggin systemic mess!

Starcade said...


We're shocked we're still standing.

I guess you really do believe it can go on forever, don't you?

Dan said...

@ Ian

Perhaps a little self-reflection might be in order, as your anger toward Ilargi is more about you than it is about him. But you seem smart. That should be no great epiphany. Ilargi's presentation is one paradigm, one man's expression.

I must admit that at times I find Ilargi's to-the-point, "deal with it" tone rather difficult. It makes me feel defensive and sad and angry when people don't sugar-coat things for me...but that IS ABOUT ME...not them.

Ilargi is telling a story, and his story is one of massive exploitation and dishonesty and fraud and violence...and millions of people are suffering unnecessarily due to the terrible actions of men. And he is angry. If you Ian (or me, or whomever) cannot deal with his tone, that is YOUR issue...not his.

Anonymous said...

@Steve from Virginia said "There is really no cause for anger or concern."

Dude, you are so right on. I understand why Ilargi & others get so worked up, but in reality, the people supposedly in charge know the score.

There ain't no one steering this ship. The rule of law and all pretenses towards conforming to some kind of legal precedents are not so lightly abandoned.

The death sentence was handed down - many cannot understand why those who received the message have reacted in nihilistic fashion.

They know there isn't any tomorrow, which means there isn't going to be anybody holding them to account for their behavior today.

scandia said...

Just reading over at ZH that Frank Visner, Obama's envoy to Egypt, is on the Mubarak payroll!!!!LOL...
Who could make this stuff up?
" Oh the tangled web we weave when our intent is to deceive..."

Anonymous said...

@ Scandia

You raise a relevant point. A lion's share of students are getting their degrees solely based on credit. As the margin for employment narrows rapidly, they will end up with debt that they cannot pay and universities will fail because there won't be any students able/willing to pay cash upfront. (Preaching to choir)

A PBS Frontline documentary called "College Inc." touches on part of the problem.

IMHO the WISE (not smart) students have already stopped going to school to prepare themselves for the imminent unfolding. (get out of debt, increase purchasing power, physical preparations, mental/spiritual preparations etc.)

Today's students will be tomorrow's slaves. (Almost as if by design??)


Punxsutawney said...


Thank you for your response, and stories from Egypt and the Middle East. It’s always great to get a perspective from outside the media filter here.

And having been around the rich for brief parts of my life, “Yes indeed, they are different”.

Also, I have a question for the organic farmers/gardeners here:

Does anyone know how many people it would take to organically farm 80 acres of vegetables; tomatoes, onions, beans, carrots, etc? Assume very good soil and water. Obviously the needs would be seasonal.

bluebird said...

@snerfling and Steve from Virginia...

Eat drink and be merry for tomorrow we all shall die.

rcg1950 said...

p01 said...
Some Sane Advice is all I'm hoping to find.

Paul - Thanks for the link the Dead Soul Tribe piece. Hauntingly beautiful.

I&S - thanks for this haven of sane advice.

Hombre said...

@Supergravity - Having just finished reading "Cyber Wars" I am concerned we won't have to wait for natural electromagnetic storms to zap the chips which are at the heart of our commerce and communications. We can do it ourselves! In either case it means instant chaos!

@Ian - So, Ilargi's a grump! Think of it this way... you're walking along the street and somebody bodyslams you toward the sidewalk. (poor ole Ilargi) Your immediate anger turns to understanding when you see the truck whiz by exactly where you were standing moments ago.

Oh, don't miss JHK's rant on the Superbowl! :-)

Hombre said...

@Walter - That might work, with BB.
I hope you will make some revelatory posts so we know you aren't a Fox hit man! :-)
(I'm half chameleon by nature)

Phil said...

Ian said:

"... even if I've come to the opinion that it's going to be inflation first, not a depression"

Oh dear! Oh dear!

"inflation" and depression are not mutually exclusive, as Ilargi has been at pains to point out.

Phil said...


In the UK, one of the big debates of the moment is over the large hike in tuition fees for university students.

Given that university graduates earn more than the average citizen, and thus pay more taxes both on income and their purchases, student fees are a bit silly, to put it mildly. The extra tax collected from them over their working lives more than pays for their tuition.


But, what's this I see in yonder future?

Dole queues full of unemployed/unemployable graduates?

Ah, it all makes sense now.


ogardener said...

Blogger Punxsutawney said...

"Does anyone know how many people it would take to organically farm 80 acres of vegetables; tomatoes, onions, beans, carrots, etc? Assume very good soil and water. Obviously the needs would be seasonal."

With or without fossil fuel energy inputs?

team10tim said...


lots of people have convinced themselves that all this bad stuff are simply mistakes by people who don't know better.

the alternative is that some evil SOBs are controlling things.

It's not a clean split and there are information feedback loops. Leaders tend to hear what they want to hear and support staff tend to oblige them and advance or rebuff them get dismissed. The whole process lacks integrity.

Nassim said...

When Irish Eyes Are Crying

This is an excellent piece. The only thing missing is the fact that corruption in Irish politics has been going on for generations. They seem to think that it is quite OK to be a politician and to make a bundle out of playing on the planning laws or some other wheeze.

Charles Haghey (1926-96), for example, was notoriously corrupt and lived like a duke. He went to the grave unpunished and the rest had to copy him. At the time, Haugheys scandals were considered amusing stuff - "what a clever lad he is". If you want to understand what I mean, take a look at the film Murphy's Stroke with Pierce Brosnan - it was based on the real story of the horse Gay Future.

Despite his professed desire to fade from public attention, retirement was anything but smooth for the former Taoiseach. A series of political, financial and personal scandals tarnished his image and reputation in his later years. In the late 1990s the public were shocked to hear revelations about his extravagant private life — Haughey owned racehorses,[31] a large motor sailing yacht Celtic Mist, a private island and a Gandon designed mansion.[32] Haughey was severely ridiculed and criticised when he was found to have embezzled money that was a subvention to the Fianna Fáil Party; money that was from central Government's taxpayer's funds for the operation of a political party and spent large sums of these funds on Charvet shirts and expensive dinners in a top Dublin restaurant, while preaching belt-tightening and implementing budget cuts as a national policy.

I think the lesson we are all learning is that once small-scale corruption is tolerated, the big corruption comes close behind.

Frank said...


Besides what OGardener asked,

With or without external fertilizer? (organic fertilizer is still fertilizer)

If no fossil fuel, horses?

If fertilizer, intensive or regular field cultivation?

Kate said...


To add to the questions asked of you in reference to your question, the crops you plan to grow will also affect labor needs, as would the experience level of your workforce. 80 good acres will support a LOT of vegetables. -Enough to supply the produce needs of hundreds of people. If you seriously have that much to work with, consider turning some of it over to fruit and nut orchards. These aren't necessarily enormously less work, but they will bear for years, supply different needs than annual crops, and only need to be planted once. If you're in PA, keep in mind that apple and pear trees can provide excellent bases for cider and perry.

As a very, very rough estimate, I would say you'd need at least 1-2 persons per acre, working ~four hour days, for the majority of the growing season, assuming no or minimal fossil fuel inputs and that most of them will need some instruction. You could get by with much smaller numbers in early spring and late fall.

Also, if you're alternatively minded and think enough time remains, consider creating a forest garden. Eventually forest gardens will far outproduce conventional farms acre per acre, and at a cost of much, much less labor, once the forest garden is established.

Nassim said...

WikiLeaks: Israel's secret hotline to the man tipped to replace Mubarak

Adolph Eichman bad. Omar Suleiman good.

Punxsutawney said...


I realized after that I should have mentioned the use of fossil fuel inputs for the time being. After that I assume it would be draft horses, or even oxen.


One could assume external fertilizer (Organic as it would need to meet EU standards for such) and I would assume regular field cultivation.

Thank you Kate,

I’m here in Western Oregon with 40 acres of land that is mostly Doug Fir at the moment. But it does have multiple reliable sources of water, and I may very well be living on or off of it in the not too distant future, so your Forest Garden idea is something I will look into for myself.

The 80 acres is just one part of the whole place which is in Eastern Europe, owned by a friend of mine, and she has been growing organic fruit and wine grapes there which she has sold to the Germans and French for several years now. I think diversifying into nuts would be a good idea as the fruit crops were wiped out by bad weather last year. The goal is to make the farm self-sustainable in that she can grow enough to feed the people who work there.

I have a standing offer to come manage it for her, as she needs someone honest and with a good dose of common sense to keep an eye on things. Seems to be in short supply there at times. Though she's one of the most solid people I have ever met.

However, even though I have some familiarity with farming as my mother grew up on a farm and I spent summers there as a child, I would be in over my head I’m afraid. And there are other risks and family issues with going over seas at the moment.

Gravity said...

Wouldn't the title of this post be more properly the "real estate-industrial-banking-congressional complex", or alternatively the "real estate-commercial-congressional banking complex"?

Nassim said...

We are going to clean this country of this rubbish

Google executive Wael Ghonim speaks after release from Egyptian custody, sparking outpouring of support from protesters.

Sadly, I think it will end up being an urban guerrilla scenario. If this guy were not working for Google, he would have been turned to dust and he knows it.

In every district of Cairo and every part of Egypt, at least 5% of the working population is working for the secret police - Mukhabarat - either part-time or full-time. I am not exaggerating - it is a lot more than was the case with the Stasi in East Germany. We had a porter looking after our house and he clearly worked for the Mukhabarat as a sideline - he was spying on us. My Dad did not bother getting rid of him because his replacement would have been just the same - better the enemy you know.

People will simply have to take out these people one by one. It is not until they are scared and unable to go to their own homes and are afraid for their own wives and kids that there will be a change of regime. I know what I am writing may sound harsh to some of you but this is the way it goes. In the words of an infamous person - "you are either with us or against us"

When I worked in Iran, my work required me to have a special ID which allowed me to work airside at any civilian airport. It was signed by the chief of police and the chief of the gendarmerie of the country. Obviously, it had to be cleared by their own Mukhabarat - the SAVAK. BTW, the SAVAK was not trained by East Germany. It was trained by Israel's Mossad.

I will never forget what it was like when I was leaving and I went to return my ID to the security department (all SAVAK personnel) during the revolution. These guys were actually polite and had lost all their arrogance. They were shit-scared and I really enjoyed telling them that I was leaving the country. I guess most of them were eliminated :)

Gravity said...

Estimates of the frequency of geomagnetic pole reversals indicate these happen every 500,000 years or so, but its apparently been about 780,000 years since the last reversal, so we're overdue for one, or maybe the frequency is actually closer to once every 800,000 years. There are indications we're now entering a period of increased geomagnetic instability, magnetic north has recently been shifting at greater speeds, and rifts and weak spots in the magnetosphere have been detected. These changes would supposedly lead into a full pole reversal event within a few hundred years, thus rendering the planet electrodynamically unstable in the transitory period as the magnetosphere reconstitutes itself, perhaps lasting for years or even centuries. Some pole shifts may take thousands of years to fully complete.

Presumably such transitions include locally fluctuating magnetic fields, and a short and sudden period of exponential decrease in field intensity bottoming in near-zero field strenght, during which the lower atmosphere could become strongly electrostatically charged, damaging or destroying electrical circuits everywhere, and surely annihilating the satellite grid by magnetic flux or exposure to solar winds.

Although a pole shift is expected to cause violent and chaotic weather patterns, these events don't seem to cause long-term damage to biospheric integrity, since no mass-extinction events are currently correlated with the periodicity of polarity shifts, although the onset of ice ages may be correlated with them.

Still, current electrical logistics and infrastructure remain supremely vulnerable to myriad disruptive astrophysical events which may occur more often than pole shifts, if any such event of sufficient magnitude were to occur, industrial civilization could suffer cascading breakdowns and be decimated beyond repair, since all machinery used to construct electrical components themselves contain vulnerable electrical components. EMP weaponry doesn't help either.

Of course, there's far more likely scenario's, apart from external electrocalamity cascades, potentially resulting in the collapse of industrial civilization this century. Most of these are of a social nature and have no defining astrophysical or technological dimensions. I'll shift my attention to those.

Frank said...

@Blogger Punxsutawney

If you're looking just to feed the farm workers, you don't need extra inputs, just a composting toilet. Soil fertility naturally rises year by year, but generally not enough to make up for crops shipped out.

You'll need three or four acres per draft animal. The big variable is length of growing season: the shorter it is, the more hay field you need. Big drafts (think the Budweiser Clydesdales) do need grain when they're working. Grass is fine when they're goofing off, but working they need hundreds more calories and have less time to eat.

Also, 80 acres of veg ought to feed well over 100 people, even including grain or potatoes for bulk calories.

Gravity said...

Prominent dutch economists have now opined that the state guaranteeing financial liabilities at this scale may not be such a good idea, since this will burden the taxpayers more than generally acknowledged. Strangely, no mention of additionally incurred moral hazard.

Of course, there are few scenario's in which these guarantees will remain financeable for much longer without bankrupting the public purse.

Archie said...

Here is some background information with respect to the USA's "approved" interim replacement to Mubarak, Omar Sulieman. Nice fellow in some circles I suppose.

However, I don't think the young Egyptian revolutionaries will be fooled. This will likely get very violent and ugly, and pretty soon I think.

ogardener said...

Blogger Kate said...

"As a very, very rough estimate, I would say you'd need at least 1-2 persons per acre, working ~four hour days, for the majority of the growing season, assuming no or minimal fossil fuel inputs and that most of them will need some instruction. You could get by with much smaller numbers in early spring and late fall."

I concur given the detail of the question.

Nassim said...

Frank A,

The interview with "Young revolutionaries on the roof" is precisely what I mean. Protesting in Tahrir Square is for sitting ducks. They have to resist in their own backyards. There is a long history of this sort of thing in Cairo - long before Napoleon got there. Nobody can teach them much.

FWIW, Napoleon's representative in Egypt, Kléber, was assasinated by a Kurdish student (I had thought it was a Palestinian) in Cairo. Avenue Kléber in Paris is called after him. It joins the Place du Trocadéro and the Place de l'Étoile - two famous landmarks. His successor converted to Islam and had an Egyptian wife. When he tried to retreat to Europe, the French Army was decimated at Gaza - plague plus resistance - a long way from home. Everyone knows about the retreat from Moscow but few seem to know about this army which disappeared.

French Campaign in Egypt and Syria

Nassim said...

Egyptians cannot get into Sharm El Sheikh (in Sinai) without a security permit from the interior ministry, after extensive security checks

“Revolutionaries on the Roof”

When I was a kid in the Egypt of the 1950/60's, you needed a military pass to get into Sinai at all. My Dad had a mining operation and so, with great difficulty, passes were obtained for us. I was able to visit Sinai long before anyone thought of tourism there. The sea and beaches were totally wild. We could not swim in the sea for fear of sharks. No joke.

Nowadays, any person from Ukraine, UK, France, Israel and so on can go there - but only very select Egyptians. This really sticks in my gullet. All these half-naked Westerners having a great time staying in hotels owned by Mubarak and the military hierarchy while the people of Egypt cannot go there freely. We all know about the British having had signs up in Shanghai saying No Chinese, no dogs but the British were the occupiers and that is not quite as bad as your own government doing that sort of thing IMHO.

I guess that in the fullness of time, Americans will not be allowed to Manhattan's Upper East Side without passes. Just in case.

scandia said...

There is something I don't get about the response of political leaders to corrupt regimes.
I have heard repeatedly that the ultimate goal is to restore " confidence " as confidence is the magic elixer of the economy.
What will the confidence level of Egypt be when the brave protesters go home defeated.
Hypothetically would I as a Cairo business person feel more confident knowing the US warships were on their way to ' assist "? What will be the confidence level of Cdns with further integration of Cdn/US security and immigration policy? Will the fact that Homeland security will have complete access to my " file " encourage me to start and grow a business? Will loss of civil liberty bring confidence to the marketplace?
I have been thinking about the history of slavery. We , as a species, have not done with slavery.It would be prudent to study the outcome of slave revolts from the slave perspective. Our modern day slaves in revolt have an added complexity- the cruel master is a system as opposed to an individual.
I see the marketplace shrinking to fewer but more confident participants. Knowing one cannot fail does build confidence:)
For awhile yet.....I feel confident that the universal laws will restore balance.

g-minor said...

I have been thinking about the history of slavery. We , as a species, have not done with slavery.

Quite right. There can be no complex society without slavery. Perhaps that's a bit dogmatic but I think all known civilizations have embraced the institution of slavery. For years, I have given talks on Peak Oil. I begin by asking if anyone in the audience has ever seen a slave. Usually, no one has and I then explain that the surplus provided by slaves has, for two centuries, been provided by fossil fuels. Britain outlawed slavery at about the time that coal was first burned on an industrial scale and the Emancipation Proclamation in the U.S. came just four years after Drake hit his gusher in Pennsylvania. I don't propose that fossil fuels caused the abolition of slavery but only that they made it stick -- for a while, anyway.


Kate said...

If slavery is absolutely a given for our future, I wonder whether there's anything that could be done to ensure that the version of slavery we end up with is one of the more "humane" ones. The plantation slavery of the American South was probably one of the worst forms of it ever to exist. The Greeks and Romans employed, on the whole, a less harsh version of slavery, where emancipation of individual slaves was commonplace, and many slaves were highly educated and valued for their skills. The Greeks considered mining to be too wasteful of human life to leave to slaves, who were considered valuable. They preferred using convicts for that work.

If our destiny is a civilization that includes slavery, and none of us know who may end up a slave, then it would behoove us to do what we can to midwife a form of slavery that does the least harm. For any of us may end up as slaves ourselves.

Phlogiston Água de Beber said...


Political leaders are the bull gears in the corruption system. Their job is to absorb the load delivered by the corruption engines and transmit it differentially throughout the system. One cog in that system is the Ministry of Truth where they come up with cockamamie slogans like "restoring confidence." There is nothing wrong with their confidence and they don't give a damn about ours. Well, actually I think they do rather prefer that our confidence not be too high. What seems to have shaken their confidence a little is how unsuccessful they have been in their attempts to intimidate the anti-Mubarak protesters.

I attribute that to the Bobby McGee principle. The protesters that get airtime seem to be saying that they have almost nothing left to lose. That just might be the Achilles Heel of the corruption system. It absolutely depends on payola and intimidation. They can't payoff everybody and fear mongering is an imperfect art. In particular, the Ministry of Intimidation must not allow itself to create horror shows that the Ministry of Truth cannot satisfactorily explain to those who are still susceptible to intimidation.

From what I can tell, the economy is doing very well as seen from their perspective. It has been a suspicion of mine for many years that they prefer that it not look so good from our perspective. As Nassim just pointed out, the Egyptian elite can simply lock the riffraff out of their special places. I guess our Ministries of Truth could not figure out a slogan to justify that idea. As our middle class grew prosperous, it started showing up in bothersome numbers at places like Pebble Beach or Banff. Easiest way to solve that is make them too poor to get there.

Ilargi said...

New post up.

An unstable tower of breaking promises


Biologique Earl said...

The media reporting on the real situation in Egypt and the efforts of the US to get their 2 cents worth in the melay is pathetic as pointed out by the links posted by Frank A.

The truth is the Israel and their lapdog USA as well as Britain and many others, DO NOT want any change to take place in Egypt.

All the talk of democracy and freedom from tyranny for the Egyptian people is just BS and a cover for extending the tyranny of the last 30 yrs under Mubarak.

Least of all do they want an end of the governmental and military and police corruption so rampant in Egypt. Without widespread high level corruption, they (especially the US) would find it difficult to buy the favours and control that they have had over the years.

I add the two links below to Franks:

I strongly recommend the site "Democracy Now" for very informative and objective reporting on the subject of what is taking place in Egypt and other parts of the world.

Be prepared for increasing warnings of total chaos, lack of appropriate leadership, terrorism, extremism and the other ism's that the US loves to use to scare everyone with in order to keep the status quo in place.