Forums

Full Version: THE GLOBAL FINANCIAL MELTDOWN
You're currently viewing a stripped down version of our content. View the full version with proper formatting.
Pages: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Admin

THE EXPIRING ECONOMY

Paul Craig Roberts
http://www.globalresearch.ca/index.php?context=va&aid=14676


Tent cities springing up all over America are filling with the homeless unemployed from the worst economy since the 1930s. While Americans live in tents, the Obama government has embarked on a $1 billion crash program to build a mega-embassy in Islamabad, Pakistan, to rival the one the Bush government built in Baghdad, Iraq.

Hard times have now afflicted Americans for so long that even the extension of unemployment benefits from 6 months to 18 months for 24 high unemployment states, and to 46 - 72 weeks in other states, is beginning to run out. By Christmas 1.5 million Americans will have exhausted unemployment benefits while unemployment rolls continue to rise.

Amidst this worsening economic crisis, the House of Representatives just passed a $636 billion "defense" bill.

Who is the United States defending against? Americans have no enemies except those that the US government goes out of its way to create by bombing and invading countries that comprise no threat whatsoever to the US and by encircling others—Russia for example—with threatening military bases.

America’s wars are contrived affairs to serve the money laundering machine: from the taxpayers and money borrowed from foreign creditors to the armaments industry to the political contributions that ensure $636 billion "defense" bills.

President George W. Bush gave us wars in Iraq and Afghanistan that are entirely based on lies and misrepresentations. But Obama has done Bush one better. Obama has started a war in Pakistan with no explanation whatsoever.

If the armaments industry and the neoconservative brownshirts have their way, the US will also be at war with Iran, Russia, Sudan and North Korea.

Meanwhile, America continues to be overrun, as it has been for decades, not by armed foreign enemies but by illegal immigrants across America’s porous and undefended borders.

It is more proof of the Orwellian time in which we live that $636 billion appropriated for wars of aggression is called a "defense bill."

Who is going to pay for all of this? When foreign countries have spent their trade surpluses and have no more dollars to recycle into the purchase of Treasury bonds, when US banks have used up their "bailout" money by purchasing Treasury bonds, and when the Federal Reserve cannot print any more money to keep the government going without pushing up inflation and interest rates, the taxpayer will be all that is left. Already Obama’s two top economic advisors, Treasury Secretary Timothy Geithner and director of the National Economic Council Larry Summers, are floating the prospect of a middle class tax increase. Will Obama be maneuvered away from his promise just as Bush Sr. was?

Will Americans see the disconnect between their interests and the interests of "their" government? In the small town of Vassalboro, Maine, a few topless waitress jobs in a coffee house drew 150 applicants. Women in this small town are so desperate for jobs that they are reduced to undressing for their neighbors’ amusement.

Meanwhile, the Obama government is going to straighten out Afghanistan and Pakistan and build marble palaces to awe the locals half way around the world.

The US government keeps hyping "recovery" the way Bush hyped "terrorist threat" and "weapons of mass destruction." The recovery is no more real than the threats. Indeed, it is possible that the economic collapse has hardly begun. Let’s look at what might await us here at home while the US government pursues hegemony abroad.

The real estate crisis is not over. More home foreclosures await as unemployment rises and unemployment benefits are exhausted. The commercial real estate crisis is yet to hit. More bailouts are coming, and they will have to be financed by more debt or money creation. If there are not sufficient purchasers for the Treasury bonds, the Federal Reserve will have to purchase them by creating checking accounts for the Treasury, that is, by debt monetization or the printing of money.

More debt and money creation will put more pressure on the US dollar’s exchange value. At some point import prices, which include offshored goods and services of US corporations, will rise, adding to the inflation fueled by domestic money creation. The Federal Reserve will be unable to hold down interest rates by buying bonds.

No part of US economic policy addresses the systemic crisis in American incomes. For most Americans real income ceased to grow some years ago. Americans have substituted second jobs and debt accumulation for the missing growth in real wages. With most households maxed out on debt and jobs disappearing, these substitutes for real income growth no longer exist.

The Bush-Obama economic policy actually worsens the systemic crisis that the US dollar faces as reserve currency. The fact that there might be no alternative to the dollar as reserve currency does not guarantee that the dollar will continue in this role. Countries might find it less risky to settle trade transactions in their own currencies.

How does an economy based heavily on consumer spending recover when so many high-value-added jobs, and the GDP and payroll tax revenues associated with them, have been moved offshore and when consumers have no more assets to leverage in order to increase their spending?

How does the US pay for its imports if the dollar is no longer used as reserve currency?

These are the unanswered questions.


INTERNATIONAL BAILOUT BRINGS US CLOSER TO ECONOMIC COLLAPSE

Ron Paul
http://informationclearinghouse.info/article22890.htm

Last week Congress passed the war supplemental appropriations bill. In an affront to all those who thought they voted for a peace candidate, the current president will be sending another $106 billion we don’t have to continue the bloodshed in Afghanistan and Iraq, without a hint of a plan to bring our troops home.

Many of my colleagues who voted with me as I opposed every war supplemental request under the previous administration seem to have changed their tune. I maintain that a vote to fund the war is a vote in favor of the war. Congress exercises its constitutional prerogatives through the power of the purse, and as long as Congress continues to enable these dangerous interventions abroad, there is no end in sight, that is until we face total economic collapse.

From their spending habits, an economic collapse seems to be the goal of Congress and this administration. Washington spends with impunity domestically, bailing out and nationalizing everything they can get their hands on, and the foreign aid and IMF funding in this bill can rightly be called an international bailout!

As Americans struggle through the worst economic downturn since the Great Depression, this emergency supplemental appropriations bill sends $660 million to Gaza, $555 million to Israel, $310 million to Egypt, $300 million to Jordan, and $420 million to Mexico. Some $889 million will be sent to the United Nations for so-called "peacekeeping" missions. Almost one billion dollars will be sent overseas to address the global financial crisis outside our borders. Nearly $8 billion will be spent to address a "potential pandemic flu" which could result in mandatory vaccinations for no discernable reason other than to enrich the pharmaceutical companies that make the vaccine.

Perhaps most outrageous is the $108 billion loan guarantee to the International Monetary Fund. These new loan guarantees will allow that destructive organization to continue spending taxpayer money to prop up corrupt leaders and promote harmful economic policies overseas.

Not only does sending American taxpayer money to the IMF hurt citizens here, evidence shows that it even hurts those it pretends to help. Along with IMF loans comes IMF required policy changes, called Structural Adjustment Programs, which amount to forced Keynesianism. This is the very fantasy-infused economic model that has brought our own country to its knees, and IMF loans act as the Trojan Horse to inflict it on others. Perhaps most troubling is the fact that leaders in recipient nations tend to become more concerned with the wishes of international elites than the wishes and needs of their own people. Argentina and Kenya are just two examples of countries that followed IMF mandates right off a cliff. The IMF frequently recommends currency devaluation to poorer nations, which has wiped out the already impoverished over and over. There is also a long list of brutal dictators the IMF happily supported and propped up with loans that left their oppressed populace in staggering amounts of debt with no economic progress to show for it.

We are buying nothing but evil and global oppression by sending your taxdollars to the IMF. Not to mention there is no Constitutional authority to do so. Our continued presence in Iraq and Afghanistan does not make us safer at home, but in fact undermines our national security. I vehemently opposed this Supplemental Appropriations Bill and was dismayed to see it pass so easily.

WHY AMERICA IS A BANK OWNED STATE

Samah El-Shahat
http://informationclearinghouse.info/article22897.htm


In my last column I introduced the idea that America's handling of the financial crisis, and in particular the way it has refused to deal with the banks, is more in keeping with how an "emerging" economy might behave and act.

So this week, I will say that America has become a bank-owned state, allowing its banking oligarchs to suffocate the economy so they can survive at any price.

As a development economist, what always made developing and poorer countries stand out was the level of inequality between individuals.

That is, the difference between how a small percentage, usually the country's capitalists, oligarchs and those close to people in power, were overdosing on wealth as the rest struggled to make ends meet, or even survive.

Everyone in the country knew it, from the poorest farmer on the street to the richest oligarch. It was in your face, unashamed, unabated and highly discomforting.
Discomforting because it made all of us who witnessed it feel crippled at the power of the status quo, ruing the unfairness of life when merit always comes last, relative to who you know and who you are.

We took some relief from believing that this only happens because these countries were authoritarian, and not so accountable to their electorate.

Yet, if we look closer at the leading capitalist economies such as those of America and the UK, we will find that inequity raises its ugly head equally, and as starkly, when you look at the numbers.

Kept in the dark

Here too, a small percentage have the lion's share of national income in their hands, while the rest of the population experience stagnant incomes, all within a democratic, rather than an authoritarian, political regime.

Yet the real difference here is that, away from the numbers, the wider population and the electorate were mostly kept in the dark about this.

In 2006, the top one per cent of American households' share of all disposable income amounted to almost a quarter of all households' disposable income, according to Robert Hunter Wade, professor of political economy at the London School of Economics.

In crude terms, one per cent of the population have a quarter of all the wealth.
Moreover, Wade found the average income of the bottom 90 per cent of the population remained almost stagnant after 1980, although consumption kept rising thanks to the build-up of private debt.

This means that 90 per cent of the American economy were financing their American dream on debt.

In the UK, Wade found the pay gap between the highest and average earners had widened alarmingly.

Back in 1989, chief executives pocketed 17 times more than average earners.

By 2007, those same "captains of industry" were earning 75 times more than the average worker.

That is one enormous leap and I wouldn't mind that happening to my salary!

What's good for Wall Street ...

Warning signs that the financial crisis would become the great recession were there for all to see for a long time.

But where were the alarms in the system itself to say that these countries and the individuals in them were pursuing an unsustainable way of life?

Where were the signs that things were going to end disastrously and, worse still, that the most vulnerable might end up paying the heftiest and most disproportionate price than anyone else?

I believe the status quo was allowed to go unquestioned because banks were benefiting obscenely from the interest on our debt, and governments were in cahoots with these banks.

Let's not forget that governments conveniently moved away from the provision of affordable healthcare, free university education and affordable housing while the banks entered our lives, aggressively, to fill that void.
In addition, I think that this warped and unjust way of operating was not questioned because the electorate was kept in the dark in the most subtle way possible.

The whole issue was made invisible. It was kept off the radar screens of electoral politics.

The American electorate were made accomplice to this because they were convinced that what was good for Wall Street, was good for America as a whole.

It was a political sleight of hand of the highest order. And this explains the bipartisan agreement to the ill-designed deregulation of the finance sector that we have seen over the years.

America has become a bank-owned state.

Ann Pettifor, a fellow development economist who works for the New Economics Foundation, says the US administration has been hijacked, and democracy has been pushed aside in favour of what is good for the bankers, by what Abraham Lincoln called "the money power".

And how right she is. The way the banks are being bailed out is a clear example of this political edifice.

Sucking the life out of tax-payers

The fact some of these failing banks have been thrown a lifeline is a testament to the hold they have over Barack Obama's administration.

Some of the banks should be allowed to die because they are so insolvent and holding so much in toxic assets that they will forever need to be on taxpayer-funded life support.

The problem is, this life support is sucking the life out of the taxpayer in the process, as it weighs them down with ever-increasing debt.

On top of that, the money could be used to restructure the economy in a way that is less reliant on the financial sector.

Underlying this refusal to kill those banks in poor health is a faulty and, dare I say, convenient assumption, that is not backed up by reality or fact, that the banks are facing a liquidity crisis as opposed to them facing a solvency crisis.

A liquidity crisis means the banks are facing a credit shortage, and once that is sorted, all will be well.

A solvency crisis means that the assets of many banks, firms and households are worth less than their debt.
And this means that these banks have to be completely nationalised.

Which leads us to Timothy Geithner, the US treasury secretary, and his "stress tests".

The tests were meant to give a clear and final assessment of these banks' balance sheets, telling us which were healthy and which would not be able to survive and would need more cash if the recession deepens.

As in any induced test, like the ones we undergo when we have our hearts tested, the "stress tests" were meant to simulate worse-case scenarios. Well, that was the promise at least.

The hope was that some would be declared so bad, they would have to go under once and for all.

Unfortunately, the tests turned out peculiarly lacking in stress.

Nouriel Roubini, professor at the Stern School of Business at New York University, says: "The government used assumptions for the macro variables in 2009 and 2010 that are so optimistic that the actual data for 2009 are already worse than the adverse scenario.

"As for some crucial variables, such as the unemployment rate – key to proper estimates of default and recovery rates for residential mortages ... and other bank loans – the current trend shows that by the end of 2009 the unemployment rate will be higher than the average unemployment rate assumed in the more adverse scenario for 2010, not for 2009."

The unemployment rate used in the worse-case scenario was assumed to average 8.9 per cent in 2009 and 10.3 per cent in 2010. But unemployment has already reached 9.4 per cent this year, and looks likely to overtake 10.3 per cent by next year.

So, there is nothing really challenging about these worse case scenarios at all.

Next week, I'll write about Timothy Geithner's plan to wipe toxic assets off the banks' balance sheets without getting rid of one single bank ... and how long before we say ENOUGH and really do something about it.

Samah El-Shahat also presents Al Jazeera's People & Power programme.

Admin

ENTERING THE GREATEST DEPRESSION IN HISTORY
MORE BUBBLES WAITING TO BURST

Andrew Gavin Marshall
http://informationclearinghouse.info/article23224.htm

While there is much talk of a recovery on the horizon, commentators are forgetting some crucial aspects of the financial crisis. The crisis is not simply composed of one bubble, the housing real estate bubble, which has already burst. The crisis has many bubbles, all of which dwarf the housing bubble burst of 2008. Indicators show that the next possible burst is the commercial real estate bubble. However, the main event on the horizon is the “bailout bubble” and the general world debt bubble, which will plunge the world into a Great Depression the likes of which have never before been seen.

Housing Crash Still Not Over

The housing real estate market, despite numbers indicating an upward trend, is still in trouble, as, “Houses are taking months to sell. Many buyers are having trouble getting financing as lenders and appraisers struggle to figure out what houses are really worth in the wake of the collapse.” Further, “the overall market remains very soft [...] aside from speculators and first-time buyers.” Dean Baker, co-director of the Center for Economic and Policy Research in Washington said, “It would be wrong to imagine that we have hit a turning point in the market,” as “There is still an enormous oversupply of housing, which means that the direction of house prices will almost certainly continue to be downward.” Foreclosures are still rising in many states “such as Nevada, Georgia and Utah, and economists say rising unemployment may push foreclosures higher into next year.” Clearly, the housing crisis is still not at an end.[1]

The Commercial Real Estate Bubble

In May, Bloomberg quoted Deutsche Bank CEO Josef Ackermann as saying, “It's either the beginning of the end or the end of the beginning.” Bloomberg further pointed out that, “A piece of the puzzle that must be calculated into any determination of the depth of our economic doldrums is the condition of commercial real estate -- the shopping malls, hotels, and office buildings that tend to go along with real- estate expansions.” Residential investment went down 28.9 % from 2006 to 2007, and at the same time, nonresidential investment grew 24.9%, thus, commercial real estate was “serving as a buffer against the declining housing market.”

Commercial real estate lags behind housing trends, and so too, will the crisis, as “commercial construction projects are losing their appeal.” Further, “there are lots of reasons to suspect that commercial real estate was subject to some of the loose lending practices that afflicted the residential market. The Office of the Comptroller of the Currency's Survey of Credit Underwriting Practices found that whereas in 2003 just 2 percent of banks were easing their underwriting standards on commercial construction loans, by 2006 almost a third of them were relaxing.” In May it was reported that, “Almost 80 percent of domestic banks are tightening their lending standards for commercial real-estate loans,” and that, “we may face double-bubble trouble for real estate and the economy.”[2]

In late July of 2009, it was reported that, “Commercial real estate’s decline is a significant issue facing the economy because it may result in more losses for the financial industry than residential real estate.  This category includes apartment buildings, hotels, office towers, and shopping malls.” Worth noting is that, “As the economy has struggled, developers and landlords have had to rely on a helping hand from the US Federal Reserve in order to try to get credit flowing so that they can refinance existing buildings or even to complete partially constructed projects.” So again, the Fed is delaying the inevitable by providing more liquidity to an already inflated bubble. As the Financial Post pointed out, “From Vancouver to Manhattan, we are seeing rising office vacancies and declines in office rents.”[3]

In April of 2009, it was reported that, “Office vacancies in U.S. downtowns increased to 12.5 percent in the first quarter, the highest in three years, as companies cut jobs and new buildings came onto the market,” and, “Downtown office vacancies nationwide could come close to 15 percent by the end of this year, approaching the 10-year high of 15.5 percent in 2003.”[4]

In the same month it was reported that, “Strip malls, neighborhood centers and regional malls are losing stores at the fastest pace in at least a decade, as a spending slump forces retailers to trim down to stay afloat.” In the first quarter of 2009, retail tenants “have vacated 8.7 million square feet of commercial space,” which “exceeds the 8.6 million square feet of retail space that was vacated in all of 2008.” Further, as CNN reported, “vacancy rates at malls rose 9.5% in the first quarter, outpacing the 8.9% vacancy rate registered in all of 2008.” Of significance for those that think and claim the crisis will be over by 2010, “mall vacancies [are expected] to exceed historical levels through 2011,” as for retailers, “it's only going to get worse.”[5] Two days after the previous report, “General Growth Properties Inc, the second-largest U.S. mall owner, declared bankruptcy on [April 16] in the biggest real estate failure in U.S. history.”[6]

In April, the Financial Times reported that, “Property prices in China are likely to halve over the next two years, a top government researcher has predicted in a powerful signal that the country’s economic downturn faces further challenges despite recent positive data.” This is of enormous significance, as “The property market, along with exports, were leading drivers of the booming Chinese economy over the past decade.” Further, “an apparent rebound in the property market was unsustainable over the medium term and being driven by a flood of liquidity and fraudulent activity rather than real demand.” A researcher at a leading Chinese government think tank reported that, “he expected average urban residential property prices to fall by 40 to 50 per cent over the next two years from their levels at the end of 2008.”[7]

In April, it was reported that, “The Federal Reserve is considering offering longer loans to investors in commercial mortgage-backed securities as part of a plan to help jump-start the market for commercial real estate debt.” Since February the Fed “has been analyzing appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) and other mortgage assets as collateral for its Term Asset-Backed Securities Lending Facility (TALF).”[8]

In late July, the Financial Times reported that, “Two of America’s biggest banks, Morgan Stanley and Wells Fargo ... threw into sharp relief the mounting woes of the US commercial property market when they reported large losses and surging bad loan,” as “The disappointing second-quarter results for two of the largest lenders and investors in office, retail and industrial property across the US confirmed investors’ fears that commercial real estate would be the next front in the financial crisis after the collapse of the housing market.” The commercial property market, worth $6.7 trillion, “which accounts for more than 10 per cent of US gross domestic product, could be a significant hurdle on the road to recovery.”[9]

The Bailout Bubble

While the bailout, or the “stimulus package” as it is often referred to, is getting good coverage in terms of being portrayed as having revived the economy and is leading the way to the light at the end of the tunnel, key factors are again misrepresented in this situation.

At the end of March of 2009, Bloomberg reported that, “The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year.” This amount “works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.”[10]

Gerald Celente, the head of the Trends Research Institute, the major trend-forecasting agency in the world, wrote in May of 2009 of the “bailout bubble.” Celente’s forecasts are not to be taken lightly, as he accurately predicted the 1987 stock market crash, the fall of the Soviet Union, the 1998 Russian economic collapse, the 1997 East Asian economic crisis, the 2000 Dot-Com bubble burst, the 2001 recession, the start of a recession in 2007 and the housing market collapse of 2008, among other things.

On May 13, 2009, Celente released a Trend Alert, reporting that, “The biggest financial bubble in history is being inflated in plain sight,” and that, “This is the Mother of All Bubbles, and when it explodes [...] it will signal the end to the boom/bust cycle that has characterized economic activity throughout the developed world.” Further, “This is much bigger than the Dot-com and Real Estate bubbles which hit speculators, investors and financiers the hardest. However destructive the effects of these busts on employment, savings and productivity, the Free Market Capitalist framework was left intact. But when the 'Bailout Bubble' explodes, the system goes with it.”

Celente further explained that, “Phantom dollars, printed out of thin air, backed by nothing ... and producing next to nothing ... defines the ‘Bailout Bubble.’ Just as with the other bubbles, so too will this one burst. But unlike Dot-com and Real Estate, when the "Bailout Bubble" pops, neither the President nor the Federal Reserve will have the fiscal fixes or monetary policies available to inflate another.” Celente elaborated, “Given the pattern of governments to parlay egregious failures into mega-failures, the classic trend they follow, when all else fails, is to take their nation to war,” and that, “While we cannot pinpoint precisely when the 'Bailout Bubble' will burst, we are certain it will. When it does, it should be understood that a major war could follow.”[11]

However, this “bailout bubble” that Celente was referring to at the time was the $12.8 trillion reported by Bloomberg. As of July, estimates put this bubble at nearly double the previous estimate.

As the Financial Times reported in late July of 2009, while the Fed and Treasury hail the efforts and impact of the bailouts, “Neil Barofsky, special inspector-general for the troubled asset relief programme, [TARP] said that the various US schemes to shore up banks and restart lending exposed federal agencies to a risk of $23,700bn  [$23.7 trillion] – a vast estimate that was immediately dismissed by the Treasury.” The inspector-general of the TARP program stated that there were “fundamental vulnerabilities . . . relating to conflicts of interest and collusion, transparency, performance measures, and anti-money laundering.”

Barofsky also reports on the “considerable stress” in commercial real estate, as “The Fed has begun to open up Talf to commercial mortgage-backed securities to try to influence credit conditions in the commercial real estate market. The report draws attention to a new potential credit crunch when $500bn worth of real estate mortgages need to be refinanced by the end of the year.” Ben Bernanke, the Chairman of the Fed, and Timothy Geithner, the Treasury Secretary and former President of the New York Fed, are seriously discussing extending TALF (Term Asset-Backed Securities Lending Facility) into “CMBS [Commercial Mortgage-Backed Securities] and other assets such as small business loans and whether to increase the size of the programme.” It is the “expansion of the various programmes into new and riskier asset classes is one of the main bones of contention between the Treasury and Mr Barofsky.”[12]

Testifying before Congress, Barofsky said, “From programs involving large capital infusions into hundreds of banks and other financial institutions, to a mortgage modification program designed to modify millions of mortgages, to public-private partnerships using tens of billions of taxpayer dollars to purchase 'toxic' assets from banks, TARP has evolved into a program of unprecedented scope, scale, and complexity.” He explained that, “The total potential federal government support could reach up to 23.7 trillion dollars.”[13]

Is a Future Bailout Possible?

In early July of 2009, billionaire investor Warren Buffet said that, “unemployment could hit 11 percent and a second stimulus package might be needed as the economy struggles to recover from recession,” and he further stated that, “we're not in a recovery.”[14] Also in early July, an economic adviser to President Obama stated that, “The United States should be planning for a possible second round of fiscal stimulus to further prop up the economy.”[15]


In August of 2009, it was reported that, “THE Obama administration will consider dishing out more money to rein in unemployment despite signs the recession is ending,” and that, “Treasury secretary Tim Geithner also conceded tax hikes could be on the agenda as the government worked to bring its huge recovery-related deficits under control.” Geithner said, “we will do what it takes,” and that, “more federal cash could be tipped into the recovery as unemployment benefits amid projections the benefits extended to 1.5 million jobless Americans will expire without Congress' intervention.” However, any future injection of money could be viewed as “a second stimulus package.”[16]



The Washington Post reported in early July of a Treasury Department initiative known as “Plan C.” The Plan C team was assembled “to examine what could yet bring [the economy] down and has identified several trouble spots that could threaten the still-fragile lending industry,” and “the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks.”



Further, “The team is also responsible for considering potential government responses, but top officials within the Obama administration are wary of rolling out initiatives that would commit massive amounts of federal resources.” The article elaborated in saying that, “The creation of Plan C is a sign that the government has moved into a new phase of its response, acting preemptively rather than reacting to emerging crises.” In particular, the near-term challenge they are facing is commercial real estate lending, as “Banks and other firms that provided such loans in the past have sharply curtailed lending,” leaving “many developers and construction companies out in the cold.” Within the next couple years, “these groups face a tidal wave of commercial real estate debt -- some estimates peg the total at more than $3 trillion -- that they will need to refinance. These loans were issued during this decade's construction boom with the mistaken expectation that they would be refinanced on the same generous terms after a few years.”



However, as a result of the credit crisis, “few developers can find anyone to refinance their debt, endangering healthy and distressed properties.” Kim Diamond, a managing director at Standard & Poor's, stated that, “It's not a degree to which people are willing to lend,” but rather, “The question is whether a loan can be made at all.” Important to note is that, “Financial analysts said losses on commercial real estate loans are now the single largest cause of bank failures,” and that none of the bailout efforts enacted “is big enough to address the size of the problem.”[17]



So the question must be asked: what is Plan C contemplating in terms of a possible government “solution”? Another bailout? The effect that this would have would be to further inflate the already monumental bailout bubble.



The Great European Bubble



In October of 2008, Germany and France led a European Union bailout of 1 trillion Euros, and “World markets initially soared as European governments pumped billions into crippled banks. Central banks in Europe also mounted a new offensive to restart lending by supplying unlimited amounts of dollars to commercial banks in a joint operation.”[18]



The American bailouts even went to European banks, as it was reported in March of 2009 that, “European banks declined to discuss a report that they were beneficiaries of the $173 billion bail-out of insurer AIG,” as “Goldman Sachs, Morgan Stanley and a host of other U.S. and European banks had been paid roughly $50 billion since the Federal Reserve first extended aid to AIG.” Among the European banks, “French banks Societe Generale and Calyon on Sunday declined to comment on the story, as did Deutsche Bank, Britain's Barclays and unlisted Dutch group Rabobank.” Other banks that got money from the US bailout include HSBC, Wachovia, Merrill Lynch, Banco Santander and Royal Bank of Scotland. Because AIG was essentially insolvent, “the bailout enabled AIG to pay its counterparty banks for extra collateral,” with “Goldman Sachs and Deutsche bank each receiving $6 billion in payments between mid-September and December.”[19]



In April of 2009, it was reported that, “EU governments have committed 3 trillion Euros [or $4 trillion dollars] to bail out banks with guarantees or cash injections in the wake of the global financial crisis, the European Commission.”[20]



In early February of 2009, the Telegraph published a story with a startling headline, “European banks may need 16.3 trillion pound bail-out, EC document warns.” Type this headline into google, and the link to the Telegraph appears. However, click on the link, and the title has changed to “European bank bail-out could push EU into crisis.” Further, they removed any mention of the amount of money that may be required for a bank bailout. The amount in dollars, however, nears $25 trillion. The amount is the cumulative total of the troubled assets on bank balance sheets, a staggering number derived from the derivatives trade.



The Telegraph reported that, “National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.”[21]



When Eastern European countries were in desperate need of financial aid, and discussion was heated on the possibility of an EU bailout of Eastern Europe, the EU, at the behest of Angela Merkel of Germany, denied the East European bailout. However, this was more a public relations stunt than an actual policy position.



While the EU refused money to Eastern Europe in the form of a bailout, in late March European leaders “doubled the emergency funding for the fragile economies of central and eastern Europe and pledged to deliver another doubling of International Monetary Fund lending facilities by putting up 75bn Euros (70bn pounds).” EU leaders “agreed to increase funding for balance of payments support available for mainly eastern European member states from 25bn Euros to 50bn Euros.”[22]



As explained in a Times article in June of 2009, Germany has been deceitful in its public stance versus its actual policy decisions. The article, worth quoting in large part, first explained that:



Europe is now in the middle of a perfect storm - a confluence of three separate, but interconnected economic crises which threaten far greater devastation than Britain or America have suffered from the credit crunch: the collapse of German industry and employment, the impending bankruptcy of Central European homeowners and businesses; and the threat of government debt defaults from loss of monetary control by the Irish Republic, Greece and Portugal, for instance on the eurozone periphery.



Taking the case of Latvia, the author asks, “If the crisis expands, other EU governments - and especially Germany's - will face an existential question. Do they commit hundreds of billions of euros to guarantee the debts of fellow EU countries? Or do they allow government defaults and devaluations that may ultimately break up the single currency and further cripple German industry, as well as the country's domestic banks?” While addressing that, “Publicly, German politicians have insisted that any bailouts or guarantees are out of the question,” however, “the pass has been quietly sold in Brussels, while politicians loudly protested their unshakeable commitment to defend it.”



The author addressed how in October of 2008:



[...] a previously unused regulation was discovered, allowing the creation of a 25 billion Euros “balance of payments facility” and authorising the EU to borrow substantial sums under its own “legal personality” for the first time. This facility was doubled again to 50 billion Euros in March. If Latvia's financial problems turn into a full-scale crisis, these guarantees and cross-subsidies between EU governments will increase to hundreds of billions in the months ahead and will certainly mutate into large-scale centralised EU borrowing, jointly guaranteed by all the taxpayers of the EU.



[...] The new EU borrowing, for example, is legally an ‘off-budget’ and ‘back-to-back’ arrangement, which allows Germany to maintain the legal fiction that it is not guaranteeing the debts of Latvia et al. The EU's bond prospectus to investors, however, makes quite clear where the financial burden truly lies: “From an investor's point of view the bond is fully guaranteed by the EU budget and, ultimately, by the EU Member States.”[23]



So Eastern Europe is getting, or presumably will get bailed out. Whether this is in the form of EU federalism, providing loans of its own accord, paid for by European taxpayers, or through the IMF, which will attach any loans with its stringent Structural Adjustment Program (SAP) conditionalities, or both. It turned out that the joint partnership of the IMF and EU is what provided the loans and continues to provide such loans.



As the Financial Times pointed out in August of 2009, “Bank failures or plunging currencies in the three Baltic nations – Latvia, Lithuania and Estonia – could threaten the fragile prospect of recovery in the rest of Europe. These countries also sit on one of the world’s most sensitive political fault-lines. They are the European Union’s frontier states, bordering Russia.” In July, Latvia “agreed its second loan in eight months from the IMF and the EU,” following the first one in December. Lithuania is reported to be following suit. However, as the Financial Times noted, the loans came with the IMF conditionalities: “The injection of cash is the good news. The bad news is that, in return for shoring up state finances, the new IMF deal will require the Latvian government to impose yet more pain on its suffering population. Public-sector wages have already been cut by about a third this year. Pensions have been sliced. Now the IMF requires Latvia to cut another 10 per cent from the state budget this autumn.”[24]



If we are to believe the brief Telegraph report pertaining to nearly $25 trillion in bad bank assets, which was removed from the original article for undisclosed reasons, not citing a factual retraction, the question is, does this potential bailout still stand? These banks haven’t been rescued financially from the EU, so, presumably, these bad assets are still sitting on the bank balance sheets. This bubble has yet to blow. Combine this with the $23.7 trillion US bailout bubble, and there is nearly $50 trillion between the EU and the US waiting to burst.



An Oil Bubble



In early July of 2009, the New York Times reported that, “The extreme volatility that has gripped oil markets for the last 18 months has shown no signs of slowing down, with oil prices more than doubling since the beginning of the year despite an exceptionally weak economy.” Instability in the oil and gas prices has led many to “fear it could jeopardize a global recovery.” Further, “It is also hobbling businesses and consumers,” as “A wild run on the oil markets has occurred in the last 12 months.” Oil prices reached a record high last summer at $145/barrel, and with the economic crisis they fell to $33/barrel in December. However, since the start of 2009, oil has risen 55% to $70/barrel.



As the Times article points out, “the recent rise in oil prices is reprising the debate from last year over the role of investors — or speculators — in the commodity markets.” Energy officials from the EU and OPEC met in June and concluded that, “the speculation issue had not been resolved yet and that the 2008 bubble could be repeated.”[25]



In June of 2009, Hedge Fund manager Michael Masters told the US Senate that, “Congress has not done enough to curb excessive speculation in the oil markets, leaving the country vulnerable to another price run-up in 2009.” He explained that, “oil prices are largely not determined by supply and demand but the trading desks of large Wall Street firms.” Because “Nothing was actually done by Congress to put an end to the problem of excessive speculation” in 2008, Masters explained, “there is nothing to prevent another bubble in oil prices in 2009. In fact, signs of another possible bubble are already beginning to appear.”[26]



In May of 2008, Goldman Sachs warned that oil could reach as much as $200/barrel within the next 12-24 months [up to May 2010]. Interestingly, “Goldman Sachs is one of the largest Wall Street investment banks trading oil and it could profit from an increase in prices.”[27] However, this is missing the key point. Not only would Goldman Sachs profit, but Goldman Sachs plays a major role in sending oil prices up in the first place.



As Ed Wallace pointed out in an article in Business Week in May of 2008, Goldman Sachs’ report placed the blame for such price hikes on “soaring demand” from China and the Middle East, combined with the contention that the Middle East has or would soon peak in its oil reserves. Wallace pointed out that:



Goldman Sachs was one of the founding partners of online commodities and futures marketplace Intercontinental Exchange (ICE). And ICE has been a primary focus of recent congressional investigations; it was named both in the Senate's Permanent Subcommittee on Investigations' June 27, 2006, Staff Report and in the House Committee on Energy & Commerce's hearing last December. Those investigations looked into the unregulated trading in energy futures, and both concluded that energy prices' climb to stratospheric heights has been driven by the billions of dollars' worth of oil and natural gas futures contracts being placed on the ICE—which is not regulated by the Commodities Futures Trading Commission.[28]



Essentially, Goldman Sachs is one of the key speculators in the oil market, and thus, plays a major role in driving oil prices up on speculation. This must be reconsidered in light of the resurgent rise in oil prices in 2009. In July of 2009, “Goldman Sachs Group Inc. posted record earnings as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds.”[29] Could one be related to the other?



Bailouts Used in Speculation



In November of 2008, the Chinese government injected an “$849 billion stimulus package aimed at keeping the emerging economic superpower growing.”[30] China then recorded a rebound in the growth rate of the economy, and underwent a stock market boom. However, as the Wall Street Journal pointed out in July of 2009, “Its growth is now fuelled by cheap debt rather than corporate profits and retained earnings, and this shift in the medium term threatens to undermine China’s economic decoupling from the global slump.” Further, “overseas money has been piling into China, inflating foreign exchange reserves and domestic liquidity. So perhaps it is not surprising that outstanding bank loans have doubled in the last few years, or that there is much talk of a shadow banking system. Then there is China’s reputation for building overcapacity in its industrial sector, a notoriety it won even before the crash in global demand. This showed a disregard for returns that is always a tell-tale sign of cheap money.”



China’s economy primarily relies upon the United States as a consumption market for its cheap products. However, “The slowdown in U.S. consumption amid a credit crunch has exposed the weaknesses in this export-led financing model. So now China is turning instead to cheap debt for funding, a shift suggested by this year’s 35% or so rise in bank loans.”[31]



In August of 2009, it was reported that China is experiencing a “stimulus-fueled stock market boom.” However, this has caused many leaders to “worry that too much of the $1-trillion lending binge by state banks that paid for China's nascent revival was diverted into stocks and real estate, raising the danger of a boom and bust cycle and higher inflation less than two years after an earlier stock market bubble burst.”[32]



The same reasoning needs to be applied to the US stock market surge. Something is inherently and structurally wrong with a financial system in which nothing is being produced, 600,000 jobs are lost monthly, and yet, the stock market goes up. Why is the stock market going up?



The Troubled Asset Relief Program (TARP), which provided $700 billion in bank bailouts, started under Bush and expanded under Obama, entails that the US Treasury purchases $700 billion worth of “troubled assets” from banks, and in turn, “that banks cannot be asked to account for their use of taxpayer money.”[33]



So if banks don’t have to account for where the money goes, where did it go? They claim it went back into lending. However, bank lending continues to go down.[34] Stock market speculation is the likely answer. Why else would stocks go up, lending continue downwards, and the bailout money be unaccounted for?



What Does the Bank for International Settlements (BIS) Have to Say?



In late June, the Bank for International Settlements (BIS), the central bank of the world’s central banks, the most prestigious and powerful financial organization in the world, delivered an important warning. It stated that, “fiscal stimulus packages may provide no more than a temporary boost to growth, and be followed by an extended period of economic stagnation.”



The BIS, “The only international body to correctly predict the financial crisis ... has warned the biggest risk is that governments might be forced by world bond investors to abandon their stimulus packages, and instead slash spending while lifting taxes and interest rates,” as the annual report of the BIS “has for the past three years been warning of the dangers of a repeat of the depression.” Further, “Its latest annual report warned that countries such as Australia faced the possibility of a run on the currency, which would force interest rates to rise.” The BIS warned that, “a temporary respite may make it more difficult for authorities to take the actions that are necessary, if unpopular, to restore the health of the financial system, and may thus ultimately prolong the period of slow growth.”



Of immense import is the BIS warning that, “At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses,” and explaining how fiscal packages posed significant risks, it said that, “There is a danger that fiscal policy-makers will exhaust their debt capacity before finishing the costly job of repairing the financial system,” and that, “There is the definite possibility that stimulus programs will drive up real interest rates and inflation expectations.” Inflation “would intensify as the downturn abated,” and the BIS “expressed doubt about the bank rescue package adopted in the US.”[35]



The BIS further warned of inflation, saying that, “The big and justifiable worry is that, before it can be reversed, the dramatic easing in monetary policy will translate into growth in the broader monetary and credit aggregates,” the BIS said. That will “lead to inflation that feeds inflation expectations or it may fuel yet another asset-price bubble, sowing the seeds of the next financial boom-bust cycle.”[36]



Major investors have also been warning about the dangers of inflation. Legendary investor Jim Rogers has warned of “a massive inflation holocaust.”[37] Investor Marc Faber has warned that, “The U.S. economy will enter ‘hyperinflation’ approaching the levels in Zimbabwe,” and he stated that he is “100 percent sure that the U.S. will go into hyperinflation.” Further, “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”[38]



Are We Entering A New Great Depression?



In 2007, it was reported that, “The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood.” Further:



The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system.



[...] In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be "cleaned up" afterwards - which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.[39]



In 2008, the BIS again warned of the potential of another Great Depression, as “complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.”[40]



In 2008, the BIS also said that, “The current market turmoil is without precedent in the postwar period. With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point,” and that all central banks have done “has been to put off the day of reckoning.”[41]



In late June of 2009, the BIS reported that as a result of stimulus packages, it has only seen “limited progress” and that, “the prospects for growth are at risk,” and further “stimulus measures won't be able to gain traction, and may only lead to a temporary pickup in growth.” Ultimately, “A fleeting recovery could well make matters worse.”[42]



The BIS has said, in softened language, that the stimulus packages are ultimately going to cause more damage than they prevented, simply delaying the inevitable and making the inevitable that much worse. Given the previous BIS warnings of a Great Depression, the stimulus packages around the world have simply delayed the coming depression, and by adding significant numbers to the massive debt bubbles of the world’s nations, will ultimately make the depression worse than had governments not injected massive amounts of money into the economy.



After the last Great Depression, Keynesian economists emerged victorious in proposing that a nation must spend its way out of crisis. This time around, they will be proven wrong. The world is a very different place now. Loose credit, easy spending and massive debt is what has led the world to the current economic crisis, spending is not the way out. The world has been functioning on a debt based global economy. This debt based monetary system, controlled and operated by the global central banking system, of which the apex is the Bank for International Settlements, is unsustainable. This is the real bubble, the debt bubble. When it bursts, and it will burst, the world will enter into the Greatest Depression in world history.



Notes



[1]        Barrie McKenna, End of housing slump? Try telling that to buyers, sellers and the unemployed. The Globe and Mail: August 6, 2009:
http://www.theglobeandmail.com/report-on...le1240418/



[2]        Gene Sperling, Double-Bubble Trouble in Commercial Real Estate: Gene Sperling. Bloomberg: May 9, 2009:
http://www.bloomberg.com/apps/news?pid=20601110&sid=a.X91SkgOd8g



[3]        AL Sull, Commercial Real Estate - The Other Real Estate Bubble. Financial Post: July 23, 2009:
http://network.nationalpost.com/np/blogs...ubble.aspx



[4]        Hui-yong Yu, U.S. Office Vacancies Rise to Three-Year High, Cushman Says. Bloomberg: April 16, 2009:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aegH6dXG8H8U



[5]        Parija B. Kavilanz, Malls shedding stores at record pace. CNN Money: April 14, 2009:
http://money.cnn.com/2009/04/10/news/eco.../index.htm



[6]        Ilaina Jonas and Emily Chasan, General Growth files largest U.S. real estate bankruptcy. Reuters: April 16, 2009:
http://www.reuters.com/article/businessN...8P20090417



[7]        Jamil Anderlini, China property prices ‘likely to halve’. The Financial Times: April 13, 2009:
http://www.ft.com/cms/s/0/9a36b342-280e-...abdc0.html



[8]        Reuters, Fed Might Extend TALF Support to Five Years. Money News: April 17, 2009:
http://moneynews.newsmax.com/financenews...medium=RSS



[9]        Francesco Guerrera and Greg Farrell, US banks warn on commercial property. The Financial Times: July 22, 2009:
http://www.ft.com/cms/s/0/3a1e9d86-76eb-...abdc0.html



[10]      Mark Pittman and Bob Ivry, Financial Rescue Nears GDP as Pledges Top $12.8 Trillion. Bloomberg: March 31, 2009:
http://www.bloomberg.com/apps/news?pid=20601087&sid=armOzfkwtCA4



[11]      Gerald Celente, The "Bailout Bubble" - The Bubble to End All Bubbles. Trends Research Institute: May 13, 2009:
http://geraldcelentechannel.blogspot.com...d-all.html



[12]      Tom Braithwaite, Treasury clashes with Tarp watchdog on data. The Financial Times: July 20, 2009:
http://www.ft.com/cms/s/0/ab533a38-757a-...abdc0.html



[13]      AFP, US could spend 23.7 trillion dollars on crisis: report. Agence-France Presse: July 20, 2009:
http://www.google.com/hostednews/afp/art...w6rlOKdz-A



[14]      John Whitesides, Warren Buffett says second stimulus might be needed. Reuters: July 9, 2009:
http://www.reuters.com/article/pressRele...MZ20090709



[15]      Vidya Ranganathan, U.S. should plan 2nd fiscal stimulus: economic adviser. Reuters: July 7, 2009:
http://www.reuters.com/article/newsOne/i...1D20090707



[16]      Carly Crawford, US may increase stimulus payments to rein in unemployment. The Herald Sun: August 3, 2009:
http://www.news.com.au/heraldsun/story/0...64,00.html



[17]      David Cho and Binyamin Appelbaum, Treasury Works on 'Plan C' To Fend Off Lingering Threats. The Washington Post: July 8, 2009:
http://www.washingtonpost.com/wp-dyn/con...id=topnews



[18]      Charles Bremner and David Charter, Germany and France lead €1 trillion European bailout. Times Online: October 13, 2009:
http://business.timesonline.co.uk/tol/bu...937516.ece



[19]      Douwe Miedema, Europe banks silent on reported AIG bailout gains. Reuters: March 8, 2009:
http://www.reuters.com/article/topNews/i...YD20090308



[20]      Elitsa Vucheva, European Bank Bailout Total: $4 Trillion. Business Week: April 10, 2009:
http://www.businessweek.com/globalbiz/co...op+stories



[21]      Bruno Waterfield, European bank bail-out could push EU into crisis. The Telegraph: February 11, 2009:
http://www.telegraph.co.uk/finance/finan...warns.html



[22]      Ian Traynor, EU doubles funding for fragile eastern European economies. The Guardian: March 20, 2009:
http://www.guardian.co.uk/world/2009/mar...cy-funding



[23]      Anatole Kaletsky, The great bailout - Europe's best-kept secret. The Times Online: June 4, 2009:
http://www.timesonline.co.uk/tol/comment...426565.ece



[24]      Gideon Rachman, Europe prepares for a Baltic blast. The Financial Times: August 3, 2009:
http://www.ft.com/cms/s/0/b497f5b6-8060-...abdc0.html



[25]      JAD MOUAWAD, Swings in Price of Oil Hobble Forecasting. The New York Times: July 5, 2009:
http://www.nytimes.com/2009/07/06/business/06oil.html



[26]      Christopher Doering, Masters says signs of oil bubble starting to appear. Reuters: June 4, 2009:
http://www.reuters.com/article/Inspirati...5620090604



[27]      Javier Blas and Chris Flood, Analyst warns of oil at $200 a barrel. The Financial Times: May 6, 2008:
http://us.ft.com/ftgateway/superpage.ft?...1414392593



[28]      Ed Wallace, The Reason for High Oil Prices. Business Week: May 13, 2009:
http://www.businessweek.com/lifestyle/co...720178.htm



[29]      Christine Harper, Goldman Sachs Posts Record Profit, Beating Estimates. Bloomberg: July 14, 2009:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a2jo3RK2_Aps



[30]      Peter Martin and John Garnaut, The great China bailout. The Age: November 11, 2008:
http://business.theage.com.au/business/t...-5lpe.html



[31]      Paul Cavey, Now China Has a Credit Boom. The Wall Street Journal: July 30, 2009:
http://online.wsj.com/article/SB10001424...17196.html



[32]      Joe McDonald, China's stimulus-fueled stock boom alarms Beijing. The Globe and Mail: August 2, 2009:
http://www.globeinvestor.com/servlet/sto...2/GIStory/



[33]      Matt Jaffe, Watchdog Refutes Treasury Claim Banks Cannot Be Asked to Account for Bailout Cash. ABC News: July 19, 2009:
http://abcnews.go.com/Business/Politics/story?id=8121045&page=1



[34]      The China Post, Bank lending slows down in U.S.: report. The China Post: July 28, 2009:
http://www.chinapost.com.tw/business/ame...ending.htm



[35]      David Uren. Bank for International Settlements warning over stimulus benefits. The Australian: June 30, 2009:
http://www.theaustralian.news.com.au/sto...01,00.html



[36]      Simone Meier, BIS Sees Risk Central Banks Will Raise Interest Rates Too Late. Bloomberg: June 29, 2009:
http://www.bloomberg.com/apps/news?pid=20601068&sid=aOnSy9jXFKaY



[37]      CNBC.com, We Are Facing an 'Inflation Holocaust': Jim Rogers. CNBC: October 10, 2008:
http://www.cnbc.com/id/27097823



[38]      Chen Shiyin and Bernard Lo, U.S. Inflation to Approach Zimbabwe Level, Faber Says. Bloomberg: May 27, 2009:
http://www.bloomberg.com/apps/news?pid=20601110&sid=avgZDYM6mTFA



[39]      Ambrose Evans-Pritchard, BIS warns of Great Depression dangers from credit spree. The Telegraph: June 27, 2009:
http://www.telegraph.co.uk/finance/econo...spree.html



[40]      Gill Montia, Central bank body warns of Great Depression. Banking Times: June 9, 2008:
http://www.bankingtimes.co.uk/09062008-c...epression/



[41]      Ambrose Evans-Pritchard, BIS slams central banks, warns of worse crunch to come. The Telegraph: June 30, 2008:
http://www.telegraph.co.uk/finance/marke...-come.html



[42]      HEATHER SCOFFIELD, Financial repairs must continue: central banks. The Globe and Mail: June 29, 2009:
  

Admin

GREEN SHOOTS OR SCORCHED EARTH?
Mike Whitney
http://informationclearinghouse.info/article23272.htm

Here's what we know. The Fed doesn't drop rates to zero unless its facing a 5 alarm fire and needs to pull out all the stops. The idea is to flood the markets with liquidity in order to avoid a complete financial meltdown. It's a last-ditch maneuver and the Fed does not take it lightly.

The Fed initiated its zero interest rate policy, ZIRP, eight months ago (December 16 2008) and hasn't raised rates since. In the meantime, Fed chair Ben Bernanke has pumped huge amounts of money into the financial system using thoroughly-untested and unconventional means. No one knows whether Bernanke can roll up his multi-trillion dollar lending facilities or not (and avoid Zimbabwe-like hyperinflation) because no one has ever created similar programs. It's all "make-it-up-as-you-go" policymaking. What we do know, however, is that the Fed intends to keep rates at rock-bottom for the foreseeable future, which means that the lights are all still blinking red.

Here's an excerpt from the Federal Open Market Committee (FOMC) on Wednesday:

"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted."

Translation: The economy is still getting battered and the Fed will keep rates at zero until the storm passes. Bernanke will continue to purchase boatloads of Fannie and Freddie mortgage-backed securities (MBS) to avoid an even-more precipitous decline in housing prices. The Fed will also purchase $300 billion in US Treasuries (monetization) in an effort to prime the pump and keep long-term interest rates artificially low. (Note: The Fed is only suspending its monetization program--Treasury buy-backs--because the dollar dropped to a dangerous support level, below which lies the abyss. Thus, Bernanke's announcement is not a sign of confidence in the fictional "recovery", but fear of a "disorderly unwind" of the dollar.)

On balance, the Fed's statement is an expression of desperation, not optimism. Bernanke would like nothing more than to prove to his critics wrong by raising rates and shutting down a couple lending facilities. But he has no choice. The situation is dire. Just imagine where housing prices would be today if Bernanke hadn't bought $1 trillion of mortgage-backed securities? Housing would be crashing even harder than it is already.

The Fed is in a pitch-battle with deflation, and it's losing ground fast. If that wasn't true, then Bernanke would simply raise rates .50 basis points and soak up some of the excess liquidity he's been spraying everywhere. But he can't, because if he did, the equities markets would plummet 500 points in an afternoon and the financial system would be tossed back on the rocks. Bernanke's liquidity is the only thing keeping the economy vanishing into a deflationary black hole.

The economy is still on life-support and the "green shoots" storyline is pure fiction. The financial system will be on a drip-feed from the Fed for years to come. Maybe forever. Things aren't better; they're worse. Look at the facts.

There were 1.9 million foreclosures in 2009 in the first six months, and there will be another 1.5 before the end of the year. Is that better?

According to Bloomberg:

"A glut of unsold homes is also pushing down prices. The 3.8 million homes for sale in June would take 9.4 months to sell at the current pace of transactions, according to the National Association of Realtors. The inventory turnover rate averaged 4.5 months in the six years from 2000 to 2005.....More than 18.7 million homes, including foreclosures, residences for sale and vacation homes, stood vacant in the U.S. during the second quarter....Total home sales fell 23.7 percent in June versus a year earlier." (Bloomberg)

Bloated supply, falling prices, record foreclosures, flagging demand--and according to Deutsche Bank--48 percent of all mortgages will be underwater by 2011. It's all bad.

Here's another clip from Bloomberg today 8-12-09:

"Home price declines in the U.S. accelerated in the second quarter, dropping by a record 15.6 percent from a year earlier, as foreclosures weighed on values.

The median price of an existing single-family home dropped to $174,100, the most in records dating to 1979, the National Association of Realtors said today.

‘I don’t think we’re at a bottom yet in home prices,’ said Scott Anderson, a senior economist at Wells Fargo & Co. in Minneapolis. ‘There’s also a pretty big shadow supply of houses. People are kind of waiting for the bottom but there’s a pent up supply out there.”...Home prices are tumbling even as mortgage rates remain near all-time lows. The average U.S. rate for a 30-year fixed home loan was to 5.22 percent last week, down from 5.25 percent the prior week.’" (Bloomberg)

The decline in housing prices is accelerating, not slowing down. The historic collapse in real estate is ongoing and it is wiping out trillions in homeowner equity making it increasingly difficult for consumers to borrow on the diminishing value of their collateral. This is why foreclosures, defaults and personal bankruptcies are soaring. According to the American Bankruptcy Institute: consumer bankruptcy filings reached 126,434 in July, a 34.3 per cent increase year over year, and a 8.7 per cent increase sequentially (116,365 in June). July's number is the highest monthly total since the October 2005 bankruptcy reform aka the Bankruptcy Abuse Prevention and Consumer Protection Act.)

This is why households and consumers can no longer spend as much as they had before the crisis. Credit lines are being pared back; personal savings are rising, and GDP (excluding fiscal stimulus) is shrinking.

Every one of the 3.5 million foreclosures represents hundreds of thousands of dollars the banks will never recoup. That's why the rate of bank failures will be much greater than current estimates. The banks are facing a triple-whammy; soaring foreclosures, tumbling asset prices, and a meltdown in commercial real estate. The combo has created a gigantic capital hole which is forcing the banks to slow lend even to applicants with flawless credit. The Fed has built up excess bank reserves by $800 billion, but it hasn't made a bit of difference. They banks are still not able to lend.

The uptick in housing last month reflects seasonal changes and a shifting of pain from the low end of the market to higher priced homes; nothing more. Homes that are priced over $1 million are now sitting on the market for 20 months; a lifetime in real estate parlance. High-end neighborhoods have turned into leper colonies. Zero interest; zero traffic. Expect a crash this year.

Now take a look at this from CNBC's Diana Olick:

"The number of homes listed officially on the market, while still at historically high levels, might be only the tip of the iceberg," said Stan Humphries, chief economist at real estate website Zillow.com in Seattle, Washington.

“According to Zillow's latest Homeowner Confidence Survey, 12 per cent of homeowners said they would be ‘very likely’ to put their home on the market in the next 12 months if they saw signs of a real estate market turnaround, 8 percent said ‘likely,’ while 12 percent said ‘somewhat likely.’
Survey results could translate into around 20 million homeowners trying to sell their homes, a startling number given that the Census bureau indicates there are 93 million U.S. houses, condos and co-ops, Humphries said.

“According to the National Association of Realtors, the market is currently on track to sell 4.89 million homes annually.

"’At this pace, it would take about four years to run through this amount of backlogged inventory,’ he said.

"’Shadow inventory has the potential to give us another leg down on home prices during the second half of the year,’ said Steven Wood, chief economist at Insight Economics in Danville, California. (Diana Olick, "Shadow inventory lurks over US housing recovery" CNBC)

The banks are using all types of accounting tricks to hide the real losses or the true value of downgraded assets. The only difference between a common crook and a commercial banker is a well-paid accountant.

The banking system is broken and it’s only going to get worse as the hammer comes down on the commercial real estate market. The Fed and Treasury are already working out the details for another stealth bailout that they'll initiate without Congress's approval. It's all very hush-hush. The plan will involve more mega-leveraging of government liabilities. Bernanke has appointed himself the de facto Czar of Hedge Fund Nation, Clunkerville USA. An article in this week's Financial Times further illustrates how the Fed has transformed the economy into a riverboat casino:

"The Federal Reserve Bank of New York is aggressively hiring traders as its seeks to manage its burgeoning securities holdings, making the central bank one of Wall Street's most active recruiters of financial talent.

“The Fed, which says that most of its new recruits come from private sector financial firms, is hiring employees as many banks, rating agencies, hedge funds and private equity groups shed staff. New York city officials recently estimated that the sector's woes would lead to a loss of up to 140,000 jobs.

“The Fed's need for more traders is a direct consequence of the central bank's efforts to keep credit flowing through the US economy. The Fed has been buying fixed-income securities at such a rate that its assets have more than doubled to $2,000bn in the past year, leading the central bank to conclude that it needs more people to monitor the markets and to manage its credit risks." (Financial Times, "NY Fed in hiring spree as assets soar", Aline van Duyn)

Can you believe it? The Fed is drafting a gaggle of professional speculators just to keep all its balls in the air. What a joke. This isn't a recovery; it's a sit-com. Here's Warren Buffett summing it up on CNBC:

"I get figures on 70-odd businesses, a lot of them daily. Everything that I see about the economy is that we've had no bounce. The financial system was really where the crisis was last September and October, and that's been surmounted and that's enormously important. But in terms of the economy coming back, it takes a while.... I said the economy would be in a shambles this year and probably well beyond. I'm afraid that's true."

"The economy is in a shambles". That's from the horse's mouth. Inventories are down 11 per cent year-over-year, durable goods are down 10.4 per cent y-o-y, industrial capacity is at record lows, manufacturing is still contracting, housing is in the tank, shipping and rail freight are scraping the bottom, retail is in a long-term funk, and--according to Krugman--the slight dip in unemployment was a statistical anomaly. Here's Bob Herbert's great summary of the unemployment data:

"Some 247,000 jobs were lost in July, a number that under ordinary circumstances would send a shudder through the country. It was the smallest monthly loss of jobs since last summer. And for that reason, it was seen as a hopeful sign. The official monthly unemployment rate ticked down from 9.5 percent to 9.4 percent....The country has lost a crippling 6.7 million jobs since the Great Recession began in December 2007...

“The percentage of young American men who are actually working is the lowest it has been in the 61 years of record-keeping, according to the Center for Labor Market Studies at Northeastern University in Boston. Only 65 of every 100 men aged 20 through 24 years old were working on any given day in the first six months of this year. In the age group 25 through 34 years old, traditionally a prime age range for getting married and starting a family, just 81 of 100 men were employed.... The numbers are beyond scary; they’re catastrophic.

“This should be the biggest story in the United States. When joblessness reaches these kinds of extremes, it doesn’t just damage individual families; it corrodes entire communities, fosters a sense of hopelessness and leads to disorder....

“A truer picture of the employment crisis emerges when you combine the number of people who are officially counted as jobless with those who are working part time because they can’t find full-time work and those in the so-called labor market reserve — people who are not actively looking for work (because they have become discouraged, for example) but would take a job if one became available....The tally from those three categories is a mind-boggling 30 million Americans — 19 percent of the overall work force.

“This is, by far, the nation’s biggest problem and should be its No. 1 priority." ("A Scary Reality" Bob Herbert, New York Times)

Sorry, Bob, the media has no time for unemployment news. It tends to undermine the positive vibes from green shoots stories.

The stock market rally has made it harder for people to see the truth. But the facts haven't changed. Deflation is setting in across all sectors and the economy has reset at a lower rate of economic activity. Housing prices are falling, consumer spending is slowing, layoffs are rising, and demand is getting weaker. That means growth will be sub-par for the foreseeable future. Here's an excerpt from a speech given by San Francisco Fed Janet Yellen drawing the same conclusion:

"I don’t like taking the wind out of the sails of our economic expansion, but a few cautionary points should be considered... a massive shift in consumer behavior is under way.. American households entered this recession stretched to the limit with mortgage and other debt. The personal saving rate fell from around 8 per cent of disposable income two decades ago to almost zero. Households financed their lifestyles by drawing on increasing stock market and housing wealth, and taking on higher levels of debt. But falling house and stock prices have destroyed trillions of dollars in wealth, cutting off those ready sources of cash. What’s more, the stark realities of this recession have scared many households straight, convincing them that they need to save larger fractions of their incomes.... a rediscovery of thrift means fewer sales at the mall, and fewer jobs on assembly lines and store counters....

“This very weak economy is, if anything, putting downward pressure on wages and prices. We have already seen a noticeable slowdown in wage growth and reports of wage cuts have become increasingly prevalent—a sign of the sacrifices that some workers are making to keep their employers afloat and preserve their jobs. Businesses are also cutting prices and profit margins to boost sales..... With unemployment already substantial and likely to rise further, the downward pressure on wages and prices should continue and could intensify....

“If the economy fails to recover soon, it is conceivable that this very low inflation could turn into outright deflation. Worse still, if deflation were to intensify, we could find ourselves in a devastating spiral in which prices fall at an ever-faster pace and economic activity sinks more and more."

"Falling prices." "Deflation." "Devastating spiral." That's not the kind of honesty that one expects from a Fed chief. Yellen must have stopped drinking the lemonade.

And don't forget the banking system is still broken. Not a dime from the $700 billion TARP bailout was used to purchase toxic assets. The banks are still drowning in red ink. Bernanke has known since last September when Lehman Bros. defaulted, that the bad assets would have to be removed before the economy could recover. An underwater banking system is a constant drain on public resources and a drag on growth. Bernanke knows this, but rather than remove the assets by nationalizing the banks or restructuring their debt (as he should have done) he expanded the Fed's balance sheet by $1.2 trillion which provided the liquidity that financial institutions pumped into the stock market. "Bernanke's Rally" has generated the capital the banks needed to keep them from writing-down their debts or filing for Chapter 11, but the problems still persist right below the surface. Just this week, Elizabeth Warren's Congressional Oversight Panel released a damning report which stressed the need to address the issue of toxic assets. According to the COP's report:

"Financial stability remains at risk if the underlying problem of toxic assets remains unresolved.... If the economy worsens, especially if unemployment remains elevated or if the commercial real estate market collapses, then defaults will rise and the troubled assets will continue to deteriorate in value. Banks will incur further losses on their troubled assets. The financial system will remain vulnerable to the crisis conditions that TARP was meant to fix....

“Changing accounting standards helped the banks temporarily by allowing them greater leeway in describing their assets, but it did not change the underlying problem. In order to advance a full recovery in the economy, there must be greater transparency, accountability, and clarity, from both the government and banks, about the scope of the troubled asset problem.

“The problem of troubled assets is especially serious for the balance sheets of small banks. Small banks‘ troubled assets are generally whole loans, but Treasury‘s main program for removing troubled assets from banks‘ balance sheets, the PPIP will at present address only troubled mortgage securities and not whole loans.

“Given the ongoing uncertainty, vigilance is essential. If conditions exceed those in the worst case scenario of the recent stress tests, then stress-testing of the nation‘s largest banks should be repeated to evaluate what would happen if troubled assets suffered additional losses."

To sum up: There will be no real recovery until the toxic assets problem is resolved. Unfortunately, the Treasury and Fed have shown that they intend to sweep this issue under the rug for as long as possible.

Toxic assets, falling home prices, widespread malaise in the credit markets are just part of the problem. The deeper issue is the dismal condition of the US consumer who has seen his home equity dissipate, his retirement funds sawed in half,his access to credit curtailed, and his job put at risk. Ordinary working class Americans now face what David Rosenberg calls, "the era of consumer frugality---new paradigm of savings, asset liquidation and debt repayment ." Life styles will have to be toned-down and living standards lowered to meet the new deflationary reality. More and more people will be forced to jettison their credit cards and live within their means. It's not the end of the world, but it does foreshadow a protracted period of negative growth, social unrest and persistent high unemployment. Stock market euphoria can last a long time, but the laws of gravity still apply. Things will shake out eventually---and when they do--stocks will return to earth, debts will be written down, and a new era of thriftiness will ensue. Until then, it looks like we'll just keep faking it.

Admin

HOW BAD WILL IT GET ?
Mike Whitney
http://www.informationclearinghouse.info...e23422.htm

The U.S. economy is at the beginning of a protracted period of adjustment. The sharp decline in business activity, which began in the summer of 2007, has moderated slightly, but there are few indications that growth will return to pre-crisis levels. Stocks have performed well in the last six months, beating most analysts expectations, but weakness in the underlying economy will continue to crimp demand reducing any chance of a strong rebound. Bankruptcies, delinquencies and defaults are all on the rise, which is pushing down asset prices and increasing unemployment. As joblessness soars, debts pile up, consumer spending slows, and businesses are forced to cut back even further. This is the deflationary spiral Fed chairman Ben Bernanke was hoping to avoid. Surging equities and an impressive "green shoots" public relations campaign have helped to improve consumer confidence, but the hard data conflicts with the optimistic narrative reiterated in the financial media. For the millions of Americans who don't qualify for government bailouts, things have never been worse.

Kevin Harrington, managing director at Clarium Capital Management LLC, summed up the present economic situation in an interview with Bloomberg News: “If we have a recovery at all, it isn’t sustainable. This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later."

Reflecting on the Fed's unwillingness to force banks to report their losses on hard-to-value illiquid assets, Harrington added, “We haven’t fixed the problem. We’ve just slowed down the official recognition of it."

In the two years since the crisis began, neither the Fed nor policymakers at the Treasury have taken steps to remove toxic assets from banks balance sheets. The main arteries for credit still remain clogged despite the fact that the Bernanke has added nearly $900 billion in excess reserves to the banking system. Consumers continue to reduce their borrowing despite historically low interest rates and the banks are still hoarding capital to pay off losses from non performing loans and bad assets. Changes in the Financial Accounting Standards Board (FASB) rules for mark-to-market accounting of assets have made it easier for underwater banks to hide their red ink, but, eventually, the losses have to be reported. The wave of banks failures is just now beginning to accelerate. It should persist into 2011. The system is gravely under-capitalized and at risk. Christopher Whalen does an great job of summarizing the condition of the banking system in a recent post at The Institutional Risk Analyst:

"The results of our Q2 2009 stress test of the US banking industry are pretty grim. Despite all of the talk and expenditure in Washington, the US banking industry is still sinking steadily and neither the Obama Administration nor the Federal Reserve seem to have any more bullets to fire at the deflation monster. With the dollar seemingly set for a rebound and the equity and debt markets looking exhausted, one veteran manager told The IRA that the finish of 2009 seems more problematic than is usual and customary for the end of year.

Plain fact is that the Fed and Treasury spent all the available liquidity propping up Wall Street’s toxic asset waste pile and the banks that created it, so now Main Street employers and private investors, and the relatively smaller banks that support them both, must go begging for capital and liquidity in a market where government is the only player left. The notion that the Fed can even contemplate reversing the massive bailout for the OTC markets, this to restore normalcy to the monetary models that supposedly inform the central bank’s deliberations, is ridiculous in view of the capital shortfall in the banking sector and the private sector economy more generally." (2ndQ 2009 Bank Stress Test Results: The Zombie Dance Party Rocks On" Christopher Whalen, The Institutional Risk Analyst)

It's not just the banking system that's in trouble either. The stock market is beginning to teeter, as well. Bernanke's quantitative easing (QE) program has provided enough liquidity to push equities higher, but he's also created another bubble that's showing signs of instability. According to Charles Biderman, CEO of TrimTabs Investment Research, the Fed's bear market rally has run out of gas and company insiders are headed for the exits as fast as they can.In a Bloomberg interview Biderman said:

"Insider selling is 30 times insider buying, while corporate stock buybacks are non-existent. Companies are saying they don't want to touch their own stocks."..."When companies are heavy sellers (of their own stocks) and retail customers are borrowing to buy stocks; that's always been a sign of a market top."

The best-informed market participants believe that the 6-month rally is beginning to fizzle out. The consensus is that stocks are grossly overpriced and the fundamentals are weak. Bernanke's strategy has improved the equity position of many of the larger financial institutions but, unfortunately, there's been no spillover into the real economy. Money is not getting to the people who need it most and who can use it to get the economy moving again.

The economy cannot recover without a strong consumer. But consumers and households have suffered massive losses and are deeply in debt. Credit lines have been reduced and, for many, the only source of revenue is the weekly paycheck. That means everything must fall within the family budget. The rebuilding of balance sheets will be an ongoing struggle as households try to lower their debt-load through additional cuts to spending. But if wages continue to stagnate and credit dries up, the economy will slip into a semi-permanent state of recession. Washington policymakers--steeped in 30 years of supply side "trickle down" ideology--are not prepared to make the changes required to put the economy on a sound footing. They see the drop in consumption as a temporary blip that can be fixed with low interest rates and fiscal stimulus. They think the economy has just hit a "rough patch" between periods of expansion. But a number of recent surveys indicate that they are mistaken, and that "This time it IS different". Working people have hit-the-wall. Consumers will not be able to lead the way out of the slump.

According to a recent Gallup Poll:

"Baby boomers' self-reported average daily spending of $64 in 2009 is down sharply from an average of $98 in 2008. But baby boomers -- the largest generational group of Americans -- are not alone in pulling back on their consumption, as all generations show significant declines from last year. Generation X has reported the greatest spending on average in both years, and is averaging $71 per day so far in 2009, down from $110 in 2008....

Gallup finds significant declines among all generations in average reported daily spending in 2009 compared to 2008. Given that consumer spending is the primary engine of the U.S. economy, it's not clear how much the economy can grow unless spending increases from its current low levels. But spending may not necessarily be the best course of action for baby boomers as they approach retirement age and prepare to rely on Social Security and their retirement savings as primary sources of income. Indeed, the two generations consisting largely of retirement-age Americans consistently show the lowest levels of reported spending. ("BBoomers’ Spending, Like Other Generations’, Down Sharply)


Admin

BIG BUCKS FOR BAILOUT BARONS
Katrina vanden Heuvel
http://www.informationclearinghouse.info...e23419.htm


One year after the global banking system collapsed the Institute for Policy Studies (IPS) 16th Annual Executive Excess report -- "America's Bailout Barons" -- shows that the perverse system of executive compensation which contributed to the financial meltdown is still thriving for top bailout recipients.

President Obama had it right in April when he delivered his "economic Sermon on the Mount " and said, "We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock." And, as the IPS report notes, even earlier in the year Obama spoke out against excessive executive compensation, saying, "In order to restore our financial system, we've got to restore trust. And in order to restore trust, we've got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street."

But the fact is we haven't learned -- or haven't acted on -- the lessons we must heed if we're going to build a more just, sustainable economy that works for the real economy rather than the Wall Street. The IPS report focuses on the twenty banks that have received the most bailout money from the federal government and shows that the banks and bankers are still acting and being rewarded as if they are Masters of the universe -- abetted by a government that is failing to take on the status quo.

Sure, some steps have been taken to rein in compensation for TARP recipients -- but they are timid ones. And IPS's valuable report makes clear, "Lobbying armies from corporate and financial trade associations are energetically doing battle behind the scenes to keep even modest changes in pay rules off the legislative table."

As a result historic inequality in pay is still prevalent and the neo-Gilded Age tycoons are raking it in. According to the report, a generation ago top execs rarely earned more than thirty to forty times the pay of the average American worker. But now top execs make an average of 319 times more than the typical worker. For the top twenty financial industry execs the divide is even greater -- 436 times more than the average worker in 2008. In the past three years, the top five execs at the twenty US financial firms receiving the most Bailout Bucks took home pay packages worth a staggering $3.2 billion -- an average of $32 million each. In 2008 those cats averaged nearly $14 million each--even though their twenty firms laid off more than 160,000 people since January of that year.

While a new and smart economic populism has fueled plenty of talk about compensation reform, good proposals haven't been seized. Senators Bernie Sanders and Claire McCaskill tried to cap compensation for employees of bailed-out firms so that it wouldn't exceed that of the President of the US, $400,000. The amendment was passed but then stripped in conference committee. In April, Progressive Caucus member and Chief Deputy Whip Jan Schakowsky introduced the Patriot Corporations Act to extend tax breaks and contracting preferences to companies that meet certain benchmarks, including not compensating any executive at more than 100 times the income of the company's lowest-paid worker. That bill has been referred to committee. Hedge fund managers are still only paying 15 percent capital gains rate on the profit share they get for managing investment funds rather than the 35 percent income tax they should pay. And unlimited amounts of executive compensation are still shielded in deferred accounts--at an annual cost of $80.6 billion to taxpayers--in contrast to the limits placed on income deferred by normal taxpayers via 401(k) plans.

There is no shortage of opportunities to curb this unjust and unproductive growth in unequal pay. As IPS senior scholar and Nation contributor Chuck Collins put it, "Public officials in Congress and the White House hold the pin that could pop the executive pay bubble. They have so far failed to use it." It's time to use it.



Admin

PREDICTING WORSE AHEAD FROM AMERICA'S ECONOMIC CRISIS
Stephen Lendman
http://www.globalresearch.ca/index.php?context=va&aid=15063

Austrian economist Ludwig von Mises (1881 - 1973) said:

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Under Alan Greenspan, Ben Bernanke and successive US Treasury Secretaries, America chose the latter path and now faces the consequences of their reckless, criminal behavior.

In early 2009, economist Michael Hudson said:

The (US) economy has reached its debt limit and is entering its insolvency phase. We are not in a cycle but (at) the end of an era. The old world of debt pyramiding to a fraudulent degree cannot be restored," only delayed to postpone a painful day of reckoning.

Economist Hyman Minsky (1919 - 1996) described a "Ponzi finance" system during prolonged expansions and economic booms. Speculative excesses create bubbles, triggering structural instability, then asset valuation collapse that turns euphoria to revulsion and market crashes.

On December 29, 2008, the Wall Street Journal online headlined: "As if Things Weren't Bad Enough, Russian Professor Predicts End of US," then continued:

"For a decade, Russian academic (and former KGB analyst) Igor Panarin has been predicting the US will fall apart in 2010" to include an "economic and moral collapse, a civil war, and the eventual breakup of the country." For years, no one took him seriously, but no longer. He's invited to Kremlin receptions, gets interviewed twice a day, publishes books, is a frequent lecturer, and appears regularly in the media as an expert on US - Russia relations as well as the great interest in his predictions and new book titled, "The Crash of America."

On March 25, 2009, RussiaToday.com headlined: "Is there anything Obama can do about the US Collapse?" No, according to Panarin, for these reasons:



-- "the moral and psychological factor and the stress of the American population;"



-- America's deepening financial and economic crisis; and



-- "the increase of anti-Americanism in the world," the result of continued US belligerency.



Panarin sees America collapsing into six areas of foreign influence and perhaps disintegrating as a nation:



-- depressed northern states close to Canada "in their mentality and economic development;"



-- the Southwest "fuel and energy complex, the oil sector" close to Mexico;



-- California and the Pacific Northwest falling under Chinese influence;



-- the Northeast and Middle Atlantic regions under the EU;



-- Alaska may be returned to Russia; and



-- Hawaii may become a Japanese or Chinese protectorate.



Panarin sees 2010 as America's tipping point and says no miracle rescues can save it. In addition, he cites French political scientist Emmanuel Todd's 1976 prediction of the Soviet Union's dissolution that got him laughed at and scorned at the time but proved right.



Todd now predicts a similar fate for the US in his 2002 book, "After the Empire: The Breakdown of the American Order." He cites:



-- unilateral militarism shows weakness, not strength;



-- America is parasitic, relying on voluntary or extracted "tributes" from vassal states;



-- global terrorism is a myth;



-- many nations, including EU states, China and Russia, are beginning to resist US adventurism;



-- terminal corruption and decay;



-- economic weakness and decline;



-- producing little, America's "specialty is consumption (so) relies on foreign imports" to satisfy it;



-- a declining middle class and growing poverty will curtail spending sharply;



-- if capital inflows cease, the dollar will crash:



-- a coming collapse of the stock market, financial institutions and the dollar;



-- a ballooning trade deficit and shrinking manufacturing base;



-- a predatory ruling class plundering the world with impunity, yet out of touch with its own people growing poorer, more desperate and angrier;



-- America's abandonment of universalism and egalitarianism;



-- excess consumption trapping people in an ocean of debt and lowering their living standards;



-- "the rest of the world....is on the verge of discovering that it can get along without America; America is realizing that it cannot get along without the rest of the world;"



-- an emerging Eurasia will end US supremacy, then isolate and curtail its dominance; and



-- "If America continues to endeavor to show its power, it will simply reveal (to) the world its impotence."



For his part, Panarin compares America to the Titanic after hitting an iceberg when it was unclear whether the crew would try to save the ship or more importantly its passengers. Unfortunately, under Bush and Obama, they're trying to save themselves at the expense of the ship and passengers.



After disintegration, Panarin sees three dominant influence areas emerging - the EU, Russia and China. After 11 years of monitoring US policies, he believes his prediction is largely confirmed and states the following:



America's FY 2009 "budget deficit is 4.5 times the 2008 deficit, while firearms sales are up 40%. On October 1, the coupons that were given state workers are to be cashed out. When (they) realize that they are getting nothing for (them), they will take out their firearms and chaos will unfold."



Further, on September 30, 2009, results will be published that are "destined to shock investors worldwide. After that, and (Japan and China's) snubbing of the dollar....which will transfer 50% of (their) international operations to Yuan starting in 2010, the currency will then flow like a landslide out of style." Already nations like China, Russia, Brazil, Argentina and others are trading in their own currencies or will do so shortly.



In Panarin's view, "the probability of the US ceasing to exist (in its present form) by June 2010 exceeds 50%. At this point, the mission of all major international powers is to prevent chaos" because what hurts America also harms them.




A Multiple-Dip Depression



Economist John Williams publishes the shadowstats.com electronic newsletter with updated sample data on his site. He calls government figures corrupted and unreliable because manipulative changes rigged them for political and market purposes. To correct them, he reverse-engineers GDP, employment, inflation, and other key data for greater reliability to subscribers.



On August 1, Williams called the "Current Economic Downturn (the) Worst Since (the) Great Depression." It began a year earlier than reported, triggered a systemic solvency crisis, and the effects of "a multiple-dip depression (are) far from over."



The July 31, 2009 national income accounts "confirmed that the US economy is in its worst economic contraction since the first downleg of the Great Depression, which was a double-dip" one like today's.



Intermittent upturns are common, like from spiked auto sales from the cash-for-clunkers program that borrowed future purchases for today's. "Yet, this downturn will continue to deteriorate, proving to be extremely protracted, extremely deep and particularly nonresponsive to traditional stimuli."



The economy suffers from deep structural problems related to household income. Consumers are over-indebted, can't borrow, and Washington's policies aren't helping them. Continued economic decline will follow. "The current depression is the second dip in a multiple-dip downturn that started in 1999 (and triggered) the systemic solvency crisis" that was visible by August 2007 but started in late 2006.



The worst lies ahead, the result of the "government's long-range insolvency and (dollar debasing that risks) hyperinflation during the next five years," and perhaps sooner in 2010. It will cause "a great depression of a magnitude never before seen in" America, disrupting all business and commerce and reverberating globally.



Williams defines deflation as a decrease in goods and services prices, generally from a money supply contraction. Inflation is the reverse. Hyperinflation debases the currency to near worthlessness. Officially, two or more consecutive declining quarters means recession, but better measures are protracted weakened production, employment, retail sales, construction, capital investment, and demand for durable goods among other factors.



A depression occurs when inflation-adjusted peak-to-trough contraction exceeds 10%, and a great depression when it's 25% or worse.



Today's economic downturn preceded the systemic solvency crisis after key data "hit cycle highs and began to weaken in late-2005 for housing and durable goods orders....early-2006 for nonfarm payrolls, (and) late-2006 for retail sales and industrial production, patterns more consistent with a late-2006" real recession onset. Gross Domestic Income (GDI) data confirms this analysis.



Its real growth peaked in Q 1 2006, and revised GDI data contracted in seven of the last nine quarters. "Revised GDP shows the sharpest annual decline in the history of the quarterly GDP series," suggesting a much deeper and protracted downturn than previously reported.



July 2009 marked the 19th consecutive month of contraction, "the longest downturn since the first downleg of the Great Depression." More recent GDP declines of 3.3% and 3.9% in Q 1 and Q 2 2009, "are the worst showings in the history of the quarterly GDP series" dating back to 1947-48. In 1946, a greater contraction occurred because of post-war production cutbacks, but it was short-term.



Today's most reliable economic indicators show the downturn is deepening, not abating as deceptive media accounts report. "The SGS (Shadow Government Statistics) alternative measure of GDP suggests (a) 5.9% contraction....versus the official year-to-year" 3.9% figure.



The official estimated annualized Q 2 2009 decline was 1% compared to SGS's figure "in excess of five-percent." Its alternative data show "deeper and more protracted recessions" than officially reported, suggesting a deepening crisis ahead.




The CBO's Grim Forecast



Even the conservative Congressional Budget Office sees a weaker economy ahead, contrary to most consensus views of a sustainable upturn. Its latest projections are as follows:

-- 2010 U-3 unemployment at 10.2%, edging down to 8% by 2011 and 4.8% by 2014;



-- in 2010, 12 million will be underemployed;



-- for the next five years, economic weakness and lower demand will pressure workers with unemployment or underemployment;



-- part-time work only will be available for millions wanting full-time jobs;



-- low consumption will persist through 2014;



-- unemployment benefits will be exhausted;



-- households will be pressured to make mortgage payments, pay for health care, meet other obligations, and provide for their families at a time state and city budget crises force deep cuts in vital social services, not made up for by the federal government;



-- tax revenues are down 17%, the sharpest decline since 1932;



-- $600 billion in investment losses will result plus another $5.9 trillion in lost output through 2014; and



-- the federal deficit will nearly double over the next 10 years to about $20 trillion.

In sum, CBO projects a more severe protracted downturn than it earlier forecast in January.




Troubled Times Ahead



On July 14, Egon von Greyerz, Founder and Managing Partner of Zurich-based Matterhorn Asset Management AG, specializing in precious metals and other investments, said "The Dark Years Are Here" and explained why.



Because of "the devastating effects of credit bubbles, government money printing (and) disastrous actions that governments are taking, (upcoming) tumultuous events will be life changing for most people in the world." They'll begin by year end, last for two to three years, then be followed by extended economic, political, and social upheaval, perhaps continuing for two decades.



Greyerz cites three main concerns:

-- exploding unemployment and government deficits;



-- trillions of unreported bank losses and worthless derivatives; and



-- rising inflation, high interest rates, collapsed Treasury bond (and UK gilt) valuations resulting in more money creation, worthless paper, and a "perfect vicious circle (leading to) a hyperinflationary depression followed by the collapse of the dollar and British pound.

America is hemorrhaging financially and economically. Other countries now realize they hold "worthless" US dollars. Reckless money creation achieved short-term hope, benefitted Wall Street alone short-term, elevated world stock markets, and led some to believe the crisis was over when, in fact, it's worsening.



Aside from expected short-lived upturns, "every single sector of the real economy is deteriorating whether it is production, unemployment, corporate profits, real estate, credit defaults, construction, federal deficits, local government and state deficits etc."



In response, the Fed keeps printing money and destroying its value. "This is total lunacy! How can any intelligent person believe that printed pieces of paper can solve an economic catastrophe?"



We're in "the first phase of this tragic saga." Likely by year end, a second more serious one will start. Real unemployment now tops 20%. It hit 25% in the Great Depression with 35% of the nonfarm population out of work and desperate.



"It is our firm opinion that (US) non-farm unemployment levels will reach 35% at least....in the next few years" with all uncounted categories included.



Growing millions with no jobs, incomes, savings, or safety net protections will create "a disaster of unimaginable consequences that will affect the whole fabric of American society" to a degree far greater than in the Great Depression.



Growing unemployment now plagues Western and Eastern Europe as well, and by 2010 will more greatly affect most parts of the world, "including China, Asia and Africa. Never before has there been a global unemployment crisis affecting the world simultaneously." Ahead expect sharp drops in consumption and global trade leading to depression, poverty, "famine and social unrest."



Already, conditions are worse than in the 1930s, but the worst is yet to come. Expect:

-- an extremely severe global depression in most countries with grave economic, political, and social consequences;

-- social safety net protections will end;

-- private and state pensions will likely collapse; and

-- unemployment, poverty, homelessness, hunger, and famine will cause a protracted period of economic, political, social, and institutional upheaval.

If von Greyerz, Panarin, Todd, and others with similar views are right, a deepening, protracted, unprecedented global catastrophe approaches that "will be life changing for most people in the world."



Admin

MARKET CRISIS 'WILL HAPPEN AGAIN'  
http://news.bbc.co.uk/1/hi/business/8244600.stm

Alan Greenspan: 'This will happen again'

The world will suffer another financial crisis, former Federal Reserve chief Alan Greenspan has told the BBC.

"The crisis will happen again but it will be different," he told BBC Two's The Love of Money series.

He added that he had predicted the crash would come as a reaction to a long period of prosperity.

But while it may take time and be a difficult process, the global economy would eventually "get through it", Mr Greenspan added.

"They [financial crises] are all different, but they have one fundamental source," he said.

"That is the unquenchable capability of human beings when confronted with long periods of prosperity to presume that it will continue."

Speaking a year after the collapse of US investment bank Lehman Brothers, which was followed by a worldwide financial crisis and global recession, Mr Greenspan described the behaviour as "human nature".

He said the current crisis was triggered by the trade in US sub-prime mortgages - home loans given to people with bad credit histories - but he added that any factor could have been the catalyst.

If it were not the problem of these toxic debts, "something sooner or later would have emerged", Mr Greenspan said.

Risks

Mr Greenspan, who when he ran the US central bank was hailed as a man who could move markets, also warned that the world's financial institutions should have seen the looming crisis.

"The bankers knew that they were involved in an under-pricing of risk and that at some point a correction would be made," he said.


  
If I am right, the next financial crisis, when it comes, stands to make the last two years look like a 'warm up'

Stephen, a city insider, writing in the latest BBC City Diaries


City Diaries: 9 September  
"I fear too many of them thought they would be able to spot the actual trigger point of the crisis in time to get out."

He also warned that Britain, with its globally-focussed economy, would be harder hit than the US by the current recession and collapse in world trade.

"Obviously we've both suffered very considerably but ... Britain is more globally oriented as an economy and the dramatic decline in exports globally and trade generally following the collapse of Lehman Brothers had dramatic effects in the financial system of Britain," Mr Greenspan said.

"It's going to take a long while for you [Britain] to work your way through this."

Road to recovery

In order to prevent the situation arising again, financiers and governments should look to clamp down on fraud and increase capital requirements for banks, the former central banker said.

Greenspan view on global economy
Regulations targeting the latter would mean banks would be forced to hold enough money to cover their normal operations and honour withdrawals.

However despite his belief in a brighter future, the former Fed chief did warn that the path to recovery should steer clear of protectionism as applying strict regulations could hamper recent developments that have opened up global trade.

"The most recent endeavour to re-regulate is a reaction to the crisis. The extraordinary impact of these global markets is making a lot of financial people feeling they have lost control.

"The problem is you cannot have free global trade with highly restrictive, regulated domestic markets."

Historic event

During the interview for BBC Two's The Love of Money series, the former Fed chief said the current economic crisis was a "once in a century type of event", and one that he did not expect to witness.

Blamed by some for not doing more to prevent the crisis, Mr Greenspan denied any responsibility for the problems gripping the global economy.

"It's human nature, unless somebody can find a way to change human nature, we will have more crises and none of them will look like this because no two crises have anything in common, except human nature."

Alan Greenspan was interviewed as part of BBC Two's Love of Money series to be broadcast at 2100 BST on 10, 17 and 24 September.



Admin

UNCTAD REPORT

"There hasn't been much achievement in regulating the financial
markets,"*says Heiner Flassbeck, one of the study's authors associated
with the U.N. Conference on Trade and Development (UNCTAD). "The world is still mired in deep economic crisis."

*The UNCTAD "Trade and Development Report"* points out that despite a professed commitment to tackle the recession, many countries in the
developed world have failed to rein in the financial industry's indulgence
in speculative investment.

According to the report, this crisis reflects the "predominance" of the
financial markets over the real economy.

Flassbeck lashed out at governments of the most industrialised countries for not doing enough to rein in the powers of the financial industry, saying that they had let the financial sector continue to do "business as usual".

Though appreciative of the fact that within the industrialised world, the
U.S. was the only country to take concrete measures to address the issue of recession by holding Congressional hearings, he noted that Washington was mainly focusing on the housing market and credit industry.

"There are [also] bubbles in the currency, stock, and commodity markets," Flassbeck stressed. "[There is a lot more] that has been missed." In the last six months, the same bubbles were being inflated again "in a primitive attempt to anticipate a recovery that is not yet there," he said, "but they would deflate again when speculators realise that the global recovery is not as strong as anticipated."

Flassbeck argues that private sector demand can only grow through
consumption and investment, but concludes that rising unemployment and depressed wages are undermining the growth in consumption.

"There is no demand for new investments, and profits have declined due to new demands," he said, stressing the need for governments to take meaningful steps to stimulate the economy.

In explaining how certain countries in the developing world faced unfairness in their attempts to cope with the current crisis, he noted that many countries that are laden with wealth opted for cuts in interest rates and increased stimulus measures, while due to the conditions imposed by the International Monetary Fund (IMF), others had to do the opposite.

He cited the example of Hungary, where the markets had shown confidence for seven years. The moment the global financial crisis hit that country, the currency in Budapest declined. Why? Because, the IMF told the Hungarian government that it must regain the confidence of the same financial markets that had 'overvalued' its currency.

This kind of behaviour requires international scrutiny, he said, suggesting
the creation of a new global institution.

"There is now a need for asymmetry between deficit and surplus countries," he said. "Currency exchange rates should not be left to markets but to an international agreement or body that would stabilise exchange rates on the basis of competitiveness rather than speculation."

"The World Trade Organisation (WTO) does not accept such distortions, while the International Monetary Fund does not address trade issues," he said. "Only an institution with a much broader mandate should be responsible for the coherence of the international economy."

He said the problem of climate change cannot be addressed if fossil fuel
prices are subject to speculation, adding that the U.S. Congress was the "only body to address the financialisation of the commodity markets".

The U.N. General Assembly president, Miguel d'Escoto Brockmann, agrees with this prognosis. On the launch of the report this week, he said: "The real global and economic crisis has yet to be faced."

In his view, speculation has played "too large a role" that must be taken
into account in formulating monetary policies to deal with the current cycle of recession.

The 181-page report warns paints a grim picture for achieving the
anti-poverty Millennium Development Goals (MDGs) in many parts of Africa, and predicts "dim" prospects for recovery in most of the countries in the developed world.

The study's authors strongly recommend reforms of the international
financial institutions, including the World Bank and IMF, a call that has
been reiterated by international civil society groups in the past several
years.

Admin

HAPPY ANNIVERSARY FINANCIAL CRISIS: IT’S NOT OVER YET

Danny Schechter
http://www.globalresearch.ca/index.php?context=va&aid=15211

The market meltdown that began in September 2007 was a 'slow-motion catastrophe', says finance journalist and author Danny Schechter.

New York, New York: Get out your party hats and strike up the band. We are about to celebrate the second anniversary of the GFC - the Global Financial Crisis.

No doubt the event will be marked by event-driven television programming and on the world's op-ed pages, even though this is a crisis that began long before most of the world found out about it.

Special report

The market meltdowns began in September 2007, but this has been a slow-motion catastrophe that started with the euphoria of financial bubbles that seemed to defy the laws of gravity by only rising.

When the markets were up, there were few naysayers.

Economist Brad Delong was one of the few reminding us that:

"Institutions and human psychology lead financial markets to bounce back and forth between exuberant greed and catatonic fear."

The housing bubble created in 2001 by a combination of low interest rates set by the Federal Reserve's Alan Greenspan, massive, predatory sub-prime lending by shadow lenders and financial institutions, and so-called market "innovation" in the form of exotic derivatives, securitization and deregulation all pushed profits in the financial services industry to new highs.

'Financial monster'

The consequences were largely ignored, as a process called financialization put more and more power in the hands of the economic architects on Wall Street.

New York University's Dr Nouriel Roubini was called "Dr Doom" for predicting the emergence of a "financial monster" that could not be sustained.

Roubini reasoned: "Combine an opaque and unregulated global financial system where moderate levels of leverage by individual investors pile up into leverage ratios of 100 plus; add to this toxic mix investments in the most uncertain, obscure, misrated, mispriced, complex, esoteric credit derivatives that no investor can properly price; then you have created a financial monster that eventually leads to uncertainty, panic, market seizure, liquidity crunch, credit crunch, systemic risk and economic hard landing."

What he and many others did not draw adequate attention to were the underlying structural problems in the US economy that led it to collapse.

Stephen Lendman of Gobal Research enumerated some of them:

- Soaring consumer debt;

- Record high federal budget and current account deficits;

- An off-the-chart national debt, far higher than the reported level;

- High and rising level of personal bankruptcies and mortgage loan defaults;

- An enormous government debt service obligation we are taxed to pay for;

- Loss of manufacturing and other high-paying jobs to low-wage countries;

- A secular declining economy, 84 per cent service-based and mostly composed of low-wage, low or no-benefit, non-unionised jobs;

- An unprecedented wealth gap disparity;

- Growing rates of poverty in the richest country in the world;

- A decline of essential social services

As the financial markets became more volatile, credit began to freeze, and an event outside the US signaled the deeper global crisis; customers were queuing outside London's Northern Rock bank demanding their money back.

Bank runs

Soon the Bank of England was pumping money in just one day after warning others, in the name of "moral hazard" rules, not to bail out lenders who had engaged in irresponsible practices.

A Wall Street insider told me: "A century ago, the depth of a banking crisis was measured by the length of the queue outside banks. These days, financial panics are more likely to be played out through heavy selling in share, bond or currency markets than old-fashioned bank runs."

The UK government was forced to rescue Northern Rock after it collapsed [AFP]

The bankers knew how bad it was. Here is Jim Glassman of JP Morgan: "The credit-market storm is a far more dangerous thing that anything we've seen in memory."

More and more news reports were glum. Here is the Sydney Morning Herald in Australia reporting on "How Bad Debt Infected the World": "The foreclosure butterfly flapped its wings in small town USA and the hurricane built and tore through world banking."

In many countries, angry critics blamed the US for exporting a form of "financial Aids" worldwide.

Luiz Inacio Lula da Silva, the Brazilian president, blamed "white men with blue eyes on Wall Street".

"I believe there is a systemic debt problem and it will take years to work out - and the Federal Reserve cannot resolve the issues," said Richard Bove, a bank analyst at Punk Ziege.

Michael Bloomberg, the mayor of New York City and a financial guru, also said the causes went deeper.

He believed the global credit crunch had as much to do with public debt as the US sub-prime meltdown. The billionaire media and business mogul talked about the "lunacy" of debt levels in the US and the UK at the Conservative Party conference in Britain.

"This is not a mortgage crisis," Bloomberg insisted, "It's a crisis in confidence and we're all in it together."

Bail outs

Washington responded with interest rate cuts and the injection of billions into banks, along with similar stimulus efforts by central banks in other countries.

Despite this, the credit markets remained locked and the problem remained unsolved. Businesses closed, some went bankrupt and jobs were cut.

In March 2008, Bear Stearns became the first of the big banks to go down. Others followed and many, like insurance giant AIG, had to be bailed out.

"As recession was officially recognized in the US, American consumers stopped trekking to the malls, sinking our consumption-based economy even further"

Mortgage giants Fannie Mae and Freddie Mac were next to implode.

Suddenly the world was fixated on the fall of Wall Street. Lehman Brothers was not bailed out - creating a ripple worldwide with its many "counter parties" - and was soon driven into bankruptcy.

The Bank of America bought Merill Lynch in a transaction that is still being challenged.

On September 19, the Bush administration announced a $700bn bail-out plan to confront the crisis.

Ben Bernanke, the chairman of the Federal Reserve, would later privately say they acted to head off an imminent collapse - a new depression.

Publicly he was more restrained, saying: "If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse."

Initially, this was seen as simply a financial problem but it quickly became a social crisis too. States and cities began cutting back essential services as their tax bases contracted.

Markets plunge

Then the Dow fell 777.68 points, the largest one-day point drop in history.

The index experienced its largest one-day point loss ever after the House of Representatives voted down the government's proposed rescue plan.

By April 2008, the IMF projected a $945bn loss from the financial crisis. G7 ministers agreed to a new wave of financial regulation to combat a protracted downturn.

As a recession was officially recogized in the US, American consumers stopped trekking to the malls, sinking our consumption-based economy even further.

There was a ricochet effect worldwide - declines in growth were dramatic.

Banks in many countries which had bought into US real estate and asset-less sub-prime mortgages reported vast losses too.

It was like a deck of cards collapsing.

For the first quarter of 2009, the annualized rate of decline in GDP was 14.4 per cent in Germany, 15.2 per cent in Japan, 7.4 per cent in the UK, 9.8 per cent in the Euro area and 21.5 per cent for Mexico.

The World Bank reported that by March 2009, the Arab world had lost $3 trillion because of the crisis.

In April 2009, unemployment in the Arab world was said to be a "time-bomb" and, according to the Arab Labor Organization, it was among the hardest hit regions in the world.

One month later, the United Nations reported a drop in foreign investment in Middle East economies because of a slower than expected rise in demand for oil.

In June, the World Bank predicted a tough year for Arab states.

Economic turnaround?

Yet in August 2009, the world's finance ministers were beginning to declare victory, seeing signs of a slowing in the economic decline.

Some even cautiously projected signs of a recovery.

The amount of money lost is subject to much debate, largely because those in the know have failed to agree on what should be included in the final tally.

One estimate focusing on infusions of capital by central banks around the world, so-called stimulus plans, and monies at risk in debt swaps and shaky derivative products put the number at $196.7 trillion - but that could be low.

In the US, unemployment continues to rise, foreclosures mount, as do bankruptcies.

Many journalists, politicians and economists appear to bemoan the fact that adequate financial reforms and new regulations have yet to be put in place.

Of the fact only a few executives have gone to jail despite evidence of massive fraud in the housing market, Peter Schiff, a conservative financier, noted: "No one has been held accountable for a financial crisis that the professors, pundits and politicians told us would not come.

"All the same players are running the game, [they] always change the rules so they stay on top."

"Washington has done nothing to protect us from a new crisis and, in fact, has made a new crisis likely"

Paul Krugman, the liberal New York Times economist, seemed to agree: "Washington has done nothing to protect us from a new crisis and, in fact, has made a new crisis likely.

"There have been many reports on what Wall Street firms did, and continue to do to transfer wealth to their own coffers, but little in the way of a criminal investigation, as if it is all above rigorous scrutiny."

Many of the biggest banks are back in the business of handing out giant bonuses and record compensation packages. Even as a lot has changed, a great deal remains the same.

President Obama warned on September 22: "If we don't pass financial regulatory reform, the banks are going to go back to the same things they were doing before.

"In some ways it could be worse, because now they know that the federal government may think they're too big to fail. And so, if they're unconstrained [by stricter regulations] they could take even more risks."

There is very little to celebrate on this "anniversary", the people most in the know about finance are now wrestling with both hope and despair - hope that a turnaround will spread and fear that another, more serious downturn is possible.

They are all, however, acutely aware that there has been no structural change or new regulation.

As Americans often say: "We're not out of the woods yet."

Danny Schechter, the "News Dissector", writes about the economy at: Mediachannel.org and made the film In Debt We Trust warning of the crisis in 2006. He is now completing a book, The Crime Of Our Time and film treating the financial crisis as a crime story. Comments to dissector@mediachannel.

 

WE CAN'T BREAK UP THE GIANT BANKS, CAN WE? YES WE CAN!

Washington's Blog - 2009-09-13

Top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion. In response, defenders of the too-big-to-fails make one or more of the following arguments:

(1) The government does not have the authority to break up the big boys

(2) To break up the banks, the government would have to nationalize them, which would be socialism

(3) The giant banks have now recovered and are no longer insolvent, so it would be counter-productive to break them up

(4) We need the giant banks to restore credit to the economy
None of these arguments are persuasive.

The Government Does Have Authority to Break Up the Big Boys

One of the world's leading economic historians - Niall Ferguson - argues in a current article in Newsweek:
[Geithner is proposing that] there should be a new "resolution authority" for the swift closing down of big banks that fail. But such an authority already exists and was used when Continental Illinois failed in 1984.

Indeed, even the FDIC mentions Continental Illinois in the same breadth as "too big to fail" banks.


And William K. Black - the senior regulator during the S&L crisis, and an Associate Professor of both Economics and Law at the University of Missouri - says that the Prompt Corrective Action Law (PCA), 12 U.S.C. § 1831o, not only authorizes the government to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law by refusing to close insolvent banks.
Others argue that the PCA does not apply to bank holding companies, and so the government really does not have the power to break up the big boys (see this, for example; but compare this).

Whether or not the financial giants can be broken up using the PCA, no one can doubt that the government could find a way to break them up if it wanted.

FDR seized gold during the Great Depression under the Trading With The Enemies Act.

Geithner and Bernanke have been using one loophole and "creative" legal interpretation after another to rationalize their various multi-trillion dollar programs in the face of opposition from the public and Congress (see this, for example).

So don't give me any of this "our hands are tied" malarkey. The Obama administration could break the "too bigs" up in a heartbeat if it wanted to, and then justify it after the fact using PCA or another legal argument.

Temporarily Nationalizing a Bank is Not Socialism
Many argue that it would be wrong for the government to break up the banks, because we would have to take over the banks in order to break them up.

That may be true. But government regulators in the U.S., Sweden and other countries which have broken up insolvent banks say that the government only has to take over banks for around 6 months before breaking them up.

In contrast, the Bush and Obama administrations' actions mean that the government is becoming the majority shareholder in the financial giants more or less permanently. That is - truly - socialism.

Breaking them up and selling off the parts to the highest bidder efficiently and in an orderly fashion would get us back to a semblance of free market capitalism much quicker.

The Giant Banks Have Not Recovered

The giant banks have still not put the toxic assets hidden in their SIVs back on their books.

The tsunamis of commercial real estate, Alt-A, option arm and other loan defaults have not yet hit.

The overhang of derivatives is still looming out there, and still dwarfs the size of the rest of the global economy. Credit default swaps still have not been tamed (see this).

Indeed, Nobel prize winning economist Joseph Stiglitz said today:

The U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”

Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama's administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”
While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to "creative accounting", such as Goldman "skipping" December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.


Some very smart people say that the big banks - even after many billions in bailouts and other government help - have still not repaired their balance sheets. Reggie Middleton, Mish, Zero Hedge and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.

But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can't prove they are solvent, they should be broken up.

We Don't Need the Giant Banks

Fortune pointed out in February that smaller banks are stepping in to fill the lending void left by the giant banks' current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven't been able to expand and thrive is that the too-big-to-fails have decreased competition:
Growth for the nation's smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under...
As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.
BusinessWeek noted in January:
As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners...

At a congressional hearing on small business and the economic recovery earlier this month, economist Paul Merski, of the Independent Community Bankers of America, a Washington (D.C.) trade group, told lawmakers that community banks make 20% of all small-business loans, even though they represent only about 12% of all bank assets. Furthermore, he said that about 50% of all small-business loans under $100,000 are made by community banks...

Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. "Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks," says Christine Barry, Aite's research director. "They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers."


And Fed Governor Daniel K. Tarullo said in June:
The importance of traditional financial intermediation services, and hence of the smaller banks that typically specialize in providing those services, tends to increase during times of financial stress. Indeed, the crisis has highlighted the important continuing role of community banks...

For example, while the number of credit unions has declined by 42 percent since 1989, credit union deposits have more than quadrupled, and credit unions have increased their share of national deposits from 4.7 percent to 8.5 percent. In addition, some credit unions have shifted from the traditional membership based on a common interest to membership that encompasses anyone who lives or works within one or more local banking markets. In the last few years, some credit unions have also moved beyond their traditional focus on consumer services to provide services to small businesses, increasing the extent to which they compete with community banks.

Indeed, some very smart people say that the big banks aren't really focusing as much on the lending business as smaller banks.


Specifically since Glass-Steagall was repealed in 1999, the giant banks have made much of their money in trading assets, securities, derivatives and other speculative bets, the banks' own paper and securities, and in other money-making activities which have nothing to do with traditional depository functions.

Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still have trillions in bad derivatives gambling debts to pay off, and so they are only loaning to the biggest players and those who don't really need credit in the first place. See this and this.


So we don't really need these giant gamblers. We don't really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.

The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:
The largest banks often don't show the greatest efficiency. This now seems unsurprising given the deep problems that the biggest institutions have faced over the past year.
"They actually experience diseconomies of scale," Narter wrote of the biggest banks. "There are so many large autonomous divisions of the bank that the complexity of connecting them overwhelms the advantage of size."
And Governor Tarullo points out some of the benefits of small community banks over the giant banks:
Many community banks have thrived, in large part because their local presence and personal interactions give them an advantage in meeting the financial needs of many households, small businesses, and agricultural firms. Their business model is based on an important economic explanation of the role of financial intermediaries--to develop and apply expertise that allows a lender to make better judgments about the creditworthiness of potential borrowers than could be made by a potential lender with less information about the borrowers.
A small, but growing, body of research suggests that the financial services provided by large banks are less-than-perfect substitutes for those provided by community banks.

It is simply not true that we need the mega-banks. In fact, as many top economists and financial analysts have said, the "too big to fails" are actually stifling competition from smaller lenders and credit unions, and dragging the entire economy down into a black hole.

But don't believe me.

The Bank of International Settlements - the "Central Banks' Central Bank" - has slammed too big to fail. As summarized by the Financial Times:

The report was particularly scathing in its assessment of governments’ attempts to clean up their banks. “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery,” it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail. This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future. Given that BIS is the ultimate insider, this is quite a criticism.

WALL STREET UNDER OBAMA : BIGGER AND RISKIER
Shamus Cooke
http://www.globalresearch.ca/index.php?context=va&aid=15202

After the financial levees broke and the crumbling banks ushered in the economic crisis, angry people clamored for drastic change in the financial system. Obama reflected these feelings well, at times using radical rhetoric to denounce the banking titans. What he promised was deep regulatory change so that such a crisis “would never happen again.”

Like every other promise of substance, Obama’s pledge to “rein in” the banks has fallen by the wayside; the well-timed rhetoric smoothed over public tensions and now business is back to usual.  The New York Times remarks:

“Backstopped by huge federal guarantees [the bank bailouts], the biggest banks have restructured only around the edges…pay is already returning to pre-crash levels, topped by the 30,000 employees of Goldman Sachs, who are on track to earn an average of $700,000 this year… Executives at most big banks have kept their jobs.” (September 11, 2009).

Not only are the same people who helped destroy the economy still in their immensely powerful positions, but their power has increased.  The Economist explains:

“Far from ceding ground, the big banks have grown even bigger, aided by government-brokered mergers. Rules have been bent or broken … nearly half of American mortgages made in the first half of the year came from Wells Fargo, which took over Wachovia, or BofA, which swallowed Countrywide.”

And:  “America’s leading banks were too big to fail before the crisis. Now they are bigger still.” (September 10, 2009).

The super banks that emerged from the wreckage are still participating in the same ultra-risky financial gambling that ruined the lives of countless people. In fact, the banks’ bad behavior has been incredibly reinforced, since the profit-induced gambling that led to their failure resulted in taxpayer bailouts that were equally profitable.

The economist, Nassim Taleb, warned “that the system has grown riskier since last fall. The extensive government support that began after Lehman collapsed will lead investors to assume that governments will always prevent major banks from collapsing.” (New York Times, September 11, 2009).

The same article concluded that “The banks will keep the profits when their bets pay off, while taxpayers will swallow the losses when the bets go bad and threaten the system.”

Obama is treating financial regulation in the same manner he confronted health care: radical language was used to please public opinion with little action attached. The financial system is similar to health care in another way as well, prompting Obama into minimal action: Just like skyrocketing health care costs cut into the profits of many corporations, the shoddy financial system is a threat to corporations in general. This is the reason that some kind of reform is being pursued by the White House.

The problem is that Obama crammed Wall Street executives into every crevice of his administration, while Congress, too, is inundated with lobbying (legal bribes) from the big banks. Any change, therefore, is difficult.  The New York Times notes:

“The Obama administration has proposed regulatory changes, but even their backers say they face a difficult road in Congress. For now, banks still sell and trade unregulated derivatives, despite their role in last fall’s chaos. Radical changes like pay caps or restrictions on bank size face overwhelming resistance. Even minor changes, like requiring banks to disclose more about the derivatives they own, are far from certain.” (September 11, 2009; emphasis added).

Internationally, bank regulation is a hot-button issue.  The junk stocks sold abroad by U.S. corporations amounted to tens of trillions of dollars, and infected the economies everywhere while making select corporations inside certain nations — the U.S. and England — immensely profitable.

The G-20 is set to meet in Pittsburgh this month to discuss the issue.  Germany and France want drastic change, since their banks are far less powerful. These nations’ “leaders said they want the G-20 to limit the size of banks and tighten capital rules.” (Bloomberg, September 2, 2009).  This measure will obviously be denied by England and the U.S., where banks have grown in size and continue to profit immensely from lax rules.

Although the world’s closely linked economies would benefit from cooperation over financial regulation, it is the conflicting interests of powerful corporations inside these countries that will make true reform impossible.  Or, as the managing director of the Institute of International Finance put it, “We’re in a tug of war between national political pressures and the desire to coordinate” (Bloomberg, September 2, 2009).

The G-20, therefore, will likely publish a vague statement about cooperation around financial regulation, while behind the scenes conflicts will erupt between France and Germany vs. the U.S. and England.

Obama’s short time in office has taught a valuable lesson to millions of people: the Democrats rank equal with the Republicans when it comes to aiding and abetting the super wealthy, who feel equally comfortable aligning themselves with either party.  To them, campaign donations and lobbying are foolproof, profitable investments.

The Democrats will continue to bail out banks when the occasion arises; indeed, the amount of money the Federal Reserve continues to lavish on them is secret information.  Labor and community groups must organize a stop to the bailouts, while demanding that all the bailout money is to be paid back.  Banks unable to pay back the money should be put into foreclosure and taken over as public utilities, to be used to rebuild the country’s infrastructure, providing jobs and reasonable loans to those who need them.  Such ideas can help provide the impetus to finally break the corporate two-party system, so that the interests of workers can finally find an expression in politics. Withdrawing the union’s support of the Democrats is the first step toward making this a reality.

Shamus Cooke is a social service worker, trade unionist, and writer for Workers Action (www.workerscompass.org).  He can be reached at shamuscook@yahoo.com

Admin

GLOBAL SYSTEMIC CRISIS: IN PURSUIT OF THE IMPOSSIBLE ECONOMIC RECOVERY
http://www.globalresearch.ca/index.php?context=va&aid=15261


Before this summer, LEAP/E2020's team announced that there would be no recovery in sight in September 2009, and not until summer 2010 in any event. Well indeed, contrary to the claims of the media, and financial and political circles, we confirm our anticipation.

The slowdown in the speed of collapse of the global economy, at the origin of all the « good news » (1), is only due to the world's enormous public financial effort of the last twelve months (2). But the « time saved » using taxpayers' money around the world should have been dedicated to redesigning the international monetary system at the heart of the current systemic crisis (3). Yet, besides a few cosmetic considerations (4) and huge gifts to US and European banks, nothing serious has been undertaken, and, when it comes to the future, the « every man for himself » rule prevails (5).

Now, as summer 2009 comes to a close, and as the three rogue waves start impacting the global economy hard (unemployment (6), bankruptcies (7) and monetary shocks (8)), the time to mend the system, or to prepare for a soft transition towards a new global system, is over (9). The first signs of a major decoupling (10) are beginning to appear: the rest of the world is rapidly moving away from the Dollar zone. As shown by the chart below, there is a 95 percent chance that 1,000 billion new USDs will be printed in a very near future... not very attractive for the Dollar zone.


Inconsistent statistics reflect a chaotic world economy
We are heading straight to the phase of geopolitical dislocation expected to begin in the fourth quarter of 2009 (11). In this issue of the GEAB, our team analyses the trends at work (real estate market, srategic issues…) within the current chaos resulting from a flood of unchecked public expenditure and a persistently uncontrolled financial system in a context of growingly inconsistent statistics. Paradoxically, dislocation has become, according to our researchers, the only way to economic recovery (a recovery that will take place around a global architecture and interaction between economic, social and financial spheres profoundly different from anything we knew in past decades. Our team believes that the first features of the “post-crisis world” should begin to appear by summer 2010 and, in the coming months, they will dedicate themselves to their identification.

Meanwhile, as anticipated in the previous editions of the GEAB, no one can now construct a true picture of today’s global economic situation as macroeconomic figures are more and more contradictory or simply absurd (12). Measurement data and instruments have been so manipulated (13) and limited to a volatile US Dollar as sole benchmark (14), that no government, international organisation or bank (15) can now tell in which direction the global system is heading. The media reflect this chaos and contribute to their readers’/auditors’/viewers’ bewilderment: depending on the day, or even the hour, that they give contradictory news on finance, economy or currency. Policy makers, entrepreneurs, employees,… economists or analysts… are reduced to Pascal’s wager (16) to assess what will happen in future months.



Global output, trade and consumer prices (2000 – 2009) – Source: BRI, 2009
According to LEAP/E2020, the chart above tells about facts that cannot be ignored: the global economic, financial and monetary system is drifting at an increasing rate, its weakness is reaching unequalled lows in modern history, and the slightest shock (financial, geopolitical or even natural) can now break it apart (17). The States’ breathtaking plunge into bottomless public debt (18) (governments feel that, without the support of public money, world economies would soon resume their collapse) is creating a literally explosive situation, conveying massive tax increase in Japan, Europe, the US… If there is any recovery in sight, it is that of tax. As a matter of fact, confronted to historic unemployment rates and a free-falling economy, Japanese voters decided to dismiss their decade-old leaders: they have probably inaugurated the great political upheaval of the next phase of the crisis (19). This summer, the Obama administration was also surprised to discover the importance of the popular anger which focused on his health system reform programme (though a much needed one).



Charter rates for container ships (in USD/day) – Showing the decline between the two first quarters of 2008 and 2009 - Source: Spiegel / ISL Port Monitor
Here is a very illustrative analogy of the crisis today that imposed itself on our researchers: a rubber ball in a staircase. It seems to rebound on every step (then giving the impression that the fall has stopped) but it falls even lower on the next step, “resuming” its collapse.


“Disoriented” economic players and policy-makers
Of course, all this doesn’t create a favourable investment climate for business. Production capacity is under-used everywhere in historic proportions. Stocks are only renewed at a drip-feed rate (eliminating any hope of a recovery based on their replacement). Consumers have become realistic economically: no money, no purchase. Their salaries fall when they haven’t simply been lost through job losses, the banks don’t lend any more because they know that they themselves are still insolvent (despite the “golden” powder thrown in the eyes of public opinion these last months) (21). The state itself, on its own, cannot substitute itself for the frenetic consumerism of the past. In the US, a return to the previous state would require about USD 2,500 billion pumped into the economy each year. Barak Obama’s stimulus package, less than USD 400 billion a year over two years is far from the amount needed if he has to replace the non-spending of households and businesses. The problem is that this is exactly the present situation of the US economy.



US retail sales during recent recessions (Rebased to 100 at recession inception, duration in months) - Source: Financial Sense, 2009
But the US are not alone in this regard. Asia and Europe are also confronted with a drastic unemployment surge that statistical manipulation (22) cannot hide beyond this summer: jobless no longer entitled to unemployment benefits, youngsters placed in waiting internships or jobless recruited for short-term public construction projects, lay-offs postponed by means of short-time allowance measures, plants artificially maintained in activity thanks to public funds,… from Beijing to Paris, in Washington, Berlin, London or Tokyo, every trick is being used to hide the situation as long as possible… until the recovery arrives. Unfortunately, the recovery will not arrive in time. It’s Blücher instead of Grouchy (23). Instead of a recovery in September, the world is suffering the impact of this summer’s three rogue waves:

. massive unemployment, for people soon to be excluded from further benefits in particular, and its disastrous consequences for nations’ political and social stability, are beginning to appear

. the number of bankruptcies (companies, municipalities,…) and deficits of all sorts, are exploding

. and, of course, the impact of all this on the US Dollar, Treasuries (and the UK, suffering collateral damage) .

The first wave already reached the shore at the end of summer 2009. The second one is coming up. And the third is beginning to appear on the horizon.

In any event, if the Eurozone and Asia are in a better situation to face up to the impact of these waves (as already analyzed in GEAB N°28 of last October), their situation is not so good that they can expect a recovery yet. It is however on the US, the Dollar and US Treasuries on the one hand, and on the UK and the Pound on the other , that the consequences of the three waves will be harder. Mid-summer night dreams also have an end!

But for those who still have enough money to travel, the holidays can go on as hotels, airline companies, holiday resorts… are giving discounts at prices never seen before. Another sign that the recovery is here!



Notes:

(1) For example, the fact of talking in percentage points is part of this summer's « euphoria » operation. Indeed, many banks, whose stock price was close to zero could claim « rebounds » of +200 percent, +300 percent or +500 percent. Taking a look at Natixis, Citi or Royal Bank of Scotland stock prices helps to understand the trap: regaining 500 percent when the stock fell down to 1, that makes 5... which would leave you holding a loss of 40 if you bought 2 years ago (or if you borrowed money in exchange of this security).

(2) This is illustrated by France's recent announcement that the state wishes to continue to support the banking system until the end of 2010. Source: Reuters, 09/13/2009

(3) See LEAP open letter to the G20 published last April in the Financial Times on the eve of London's G20 summit.

(4) The great « traders' bonus hunt » is morally praiseworthy. However it should not make us forget that traders are nothing but the « privateers » of the banks hiring them and of the financial centres hosting the latter. These employers and their hosts give them their « letters of marque » (or should we say « of bonus »?) authorizing them to buccaneer the seas of global finance. Limiting their bonuses to their total salary would compel banks to hire them as master mariners instead of filibusters.

(5) Source: Times, 09/02/2009

(6) In the United States, the real rate of unemployment growth remains between 600,000 and 1 million new jobless every month, if we include those who decide to stop searching for a job (source: CNBC/New York Times, 09/07/2009). To get an idea of the socially explosive wave currently hitting the US economy, in California, since September 1st, 143,000 new jobless are no longer entitled to insurance benefits (including their families, that makes an extra 1 million people in distress... just for this month) – source : MyBudget360, 09/02/2009. In Europe, Asia, … everywhere, unemployment rates are almost the highest in modern history (at 5.7 percent, Japan already reached its historic high in July – source : Japan Times, 09/08/2009) ... despite all sorts of manipulation to reduce the figures.

(7) As an anecdote, there have been more bankruptcies in the US between GEAB N°36 (June 16, 2009) and GEAB N°37 (September 16, 2009) than during the whole of 2008, including two of the most important bankruptcies of the year. But, of course, the media cannot make their headlines on both swine fever and bankruptcies. The same goes for the rate of US corporate bankruptcies which has reached a 12.2 percent all-time high (source: Yahoo, 09/09/2009). In Spain, the number of bankruptcies in the first semester of 2009 is three times the number in 2008 (source: Spanish News, 08/06/2009). In France, employers expect 70,000 corporate bankruptcies by the end of this year (source: Capital, 09/02/2009).

(8) The accelerating pace of the weakening of the US Dollar is creating new monetary stress worldwide and the upcoming request, by the Obama administration, to increase the authorized US federal debt ceiling by USD 1,500-billion is not likely to slow down the selling of the US currency. Indeed the USD 12,000-billion debt ceiling is about to be reached. Sources: Wall Street Journal, 09/12/09; Bloomberg, 09/08/2009; Wall Street Journal, 09/12/09

(9) As we said, such a « window of opportunity » existed between spring and summer 2009. This window is now closed.

(10) See GEAB N°22, 02/2008

(11) See GEAB N°32, 02/2009.

(12) For example, US and French unemployment rate reductions at the beginning of this summer, or the growth in Chinese output. Sources: New York Times, 08/10/2009; Expansion, 07/27/2009; Wall Street Journal, 05/25/2009

(13) It is worth reading Marion Selz’s paper entitled « Statistics, a public service twisted » introducing a recently published book written anonymously by a group of French statisticians with the evocative title « The great fiddle: How the government manipulates statistics». Obviously, in these times of global crisis, the information revealed in this book applies to almost all governments. Source: La vie des idées, 09/02/2009

(14) When, in February 2008 in GEAB N°22, we anticipated that the world was heading to a « Dollar carry-trade », not many people believed us. However this is now exactly what is happening on currency markets. Source: Le Monde, 09/12/2009

(15) Banks which, in April 2009, were eager to get the right to return to the « fair value » system (I estimate my asset is worth 100) (source: Bloomberg, 04/02/2009) instead of valuing their assets at “market value” (on the market, your asset is worth 10). Thus they persist in keeping assets in their balance sheets which they cannot realistically value; precisely because they suspect these assets to be worth 10 or 20 percent of their ‘fair value. The countryside and cities of the US, UK, Spain, Latvia, Japan, China, and other countries are full of houses, flats and buildings that no one buys because their prices are artificially maintained high above the market price so that banks’ balances sheets do not show that they are in fact insolvent because almost all their assets are “rotten”. Bankers too are trying to save time, in the hope of a return to yesterday’s world. Are they old children nostalgic of their golden age or big offenders endangering society? The future will soon tell us as the next phase of global geopolitical dislocation will develop.

(16) Refering to Blaise Pascal’s argument to convince miscreants to believe in God: wager as though God exists because if it is so, paradise is the reward, and otherwise, it simply doesn’t matter; while the contrary wager might take you to hell.

(17) In the next GEAB, the October issue N°38, we shall update our country- and big region-based anticipations, including of course an assessment of the situation regarding US and UK defaults.

(18) With a record-high debt issuance in Europe (EUR 1,100-billion in 2009, and more than EUR 250-billion for the UK only), and with USD 9,000-billion federal deficit over the next ten years, there is no doubt on the fact that the situation is uncontrollable. Source: Yahoo/Reuters, 09/04/2009; CBS, 08/25/2009

(19) In the US, in Europe and in China too. Sources: Reuters, 09/08/2009; Financial Times, 09/06/2009; BBC, 07/26/2009.

(20) On the subject of banks, our team strongly recommends reading the excellent article by Matt Taibbi, “Inside the great American bubble machine” which appeared in Rollingstones on 07/02/2009. It sets out the history of Goldman Sachs and throws essential light on its financial practices and central role in the current financial crisis. In the way of deceased India companies, or the knights templars, it is likely that in five to a maximum of ten years from now, American political power, in the face of a socio-economic collapse and under public pressure, will be obliged to tear apart this institution which interferes in all levels of government activity.

(21) In the end, all these indicators depend on the US Dollar as a measure of value. But if Dollar volatility were to be transferred to a compass, we would see the needle swing between North, South, East and West every month. No wonder then that political, economic and financial leaders are so « disoriented »!

(22) Napoleon too, during the battle of Waterloo, firmly believed th at luck was still on his side and that reinforcements (Grouchy) would materialize at the decisive moment of the battle. Alas, the long awaited troops, whose dust showed their rapid progress, happened to be the enemy’s reinforcements (Blücher). We know what happened next… and we cannot bet that the G20 leaders are strategists as experienced as Napoleon was.

(23) The crisis has somewhat « British humour » and proves that we are far from having seen all its consequences. Indeed, London is now expecting to have to pay a heavy bill in order to rescue its little network of tax havens. The Cayman Islands, for instance, can no longer pay their civil servants. No doubt British taxpayers will be very happy with this perspective! Otherwise, these islands could also resort to a simple idea: create taxes. Source: Guardian, 09/13/2009


POST BUBBLE MALAISE. NO ECONOMIC RECOVERY

Mike Whitney
http://www.globalresearch.ca/index.php?context=va&aid=15241

We keep hearing that "The worst is behind us", but the spin doesn't square with the facts. Sure the stock market has done well, but scratch the surface and you'll find that things are not as what they seem. Zero hedge--which is quickly becoming the "go-to" market-update spot on the Internet--recently posted an eye-popping chart which traces the Fed's monetization programs (Quantitative Easing) with the 6-month surge in the S&P 500. The $917 billion increase in securities held outright equals the Fed's $1 trillion increase to its balance sheet. In other words, the liquidity from the Fed is following the exact same trajectory as stocks, a sure sign that the market is being manipulated. Surprisingly, traders seem to know that the Fed is goosing the market and have just shrugged it off as "business as usual". Go figure? Perhaps it pays to take a philosophical approach to market rigging. Who needs the gray hair anyway? The result, however, has been that short-sellers (traders betting the market will go down) who have placed their bets according to (weak) fundamentals, have gotten clobbered. They appear to be the last holdouts who still place their faith in the unimpaired operation of the free market. (Right) Here's how former hedge fund manager Andy Kessler sums it up in a recent Wall Street Journal article, "The Bernanke Market". Here's a clip:


"By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market."

So, the Fed has given a boost to stocks while keeping the bond market priced for deflation. That's quite a trick. One market is flashing "recovery" while the other is signaling "contraction". Bernanke has worked this miracle, by simply changing the definition of "indirect bidders" (which used to mean "foreign buyers" of US Treasuries) to mean just about anyone-anywhere. Here's an explanation of this latest bit of chicanery from the Wall Street Journal in June:


"The sudden increase in demand by foreign buyers for Treasuries, hailed as proof that the world's central banks are still willing to help absorb the avalanche of supply, mightn't be all that it seems.


“When the government sells bonds, traders typically look at a group of buyers called indirect bidders, which includes foreign central banks, to divine overseas demand for U.S. debt. That demand has been rising recently, giving comfort to investors that foreign buyers will continue to finance the U.S.'s budget deficit.


“But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners." ("Is foreign Demand as Solid as it Looks, Min zeng)


Pretty clever, eh? So, if the Treasury doesn't want dupes like us to know when foreign demand drops off a cliff, they just twist the definitions to meet their needs. My guess is that the Fed is building excess bank reserves (nearly $1 trillion in the last year alone) with the tacit understanding that the banks will return the favor by purchasing Uncle Sam's sovereign debt. It's all very confusing and circular, in keeping with Bernanke's stated commitment to "transparency". What a laugh. The good news is that the trillions in government paper probably won't increase inflation until the economy begins to improve and the slack in capacity is reduced. Then we can expect to get walloped with hyperinflation. But that could be years off. For the foreseeable future, it's all about deflation.


No matter how you look at it, the economy is on the ropes. Yes, there should be a rebound in the next few quarters, but once the stimulus wears off, its back to the doldrums. According to David Rosenberg of Gluskin Sheff, "All the growth we are seeing globally this year is due to fiscal stimulus.... For 2010, the government’s share of global growth, by our estimates, will be 80%. In other words, there are still very few signs that organic private sector activity is stirring."


The question is, how long can the Obama administration write checks on an account that's overdrawn by $11 trillion (The National debt) before the foreign appetite for US Treasuries wanes and we have a sovereign debt crisis? If the Fed is faking sales of Treasuries to conceal the damage--as I expect it is--we could see the dollar plunge to $2 per euro by the middle of 2010. Imagine pulling up to the gas pump and paying $6.50 per gallon. Ouch! That should be revive the economy.


For the next year or so, the demon we face is deflation; a severe contraction exacerbated by household deleveraging and massive financial sector defaults. The Fed's money-printing operations just can't keep pace with capital-hole that continues to expand from delinquencies, foreclosures, and failed loans. Workers have seen their credit lines cut and their hours reduced, households are $3 trillion above trend in their debt-to-equity ratio, and unemployment is soaring. Industry analysts expect a $1.5 trillion cut-back in credit card spending. That's why Bernanke is firehosing the whole financial system with low interest liquidity, to stimulate speculation and reverse the effects of a slumping economy.

Here's a clip from an article in the UK Telegraph:


"Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation...

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.


"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said. (Ambrose Evans-Pritchard, "US credit shrinks at Great Depression rate prompting fears of double-dip recession", UK Telegraph)

The Fed has pumped up bank reserves, but the velocity of money has sputtered to a standstill. There won't be an uptick in economic activity until consumers reduce their debt-load, rebalance their personal accounts and find jobs. That's a long way off, which is why San Francisco Fed chief Janet Yellen sounded more like Nouriel Roubini in this week's presentation "The Outlook for Recovery in the U.S. Economy" in S.F.:

"With slack likely to persist for years, it seems likely that core inflation will move even lower, departing yet farther from our price stability objective. From a monetary policy point of view, the landscape will continue to present challenges. We face an economy with substantial slack, prospects for only moderate growth, and low and declining inflation. With our policy rate already as low as it can go, it’s no wonder that the FOMC’s last statement indicated that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” I can assure you that we will be ready, willing, and able to tighten policy when it’s necessary to maintain price stability. But, until that time comes, we need to defend our price stability goal on the low side and promote full employment."

That's from the horse's mouth. Recovery? What recovery?

The consumer is maxed out, private sector activity is in the tank, and government stimulus is the only thing keeping the economy off the meat-wagon. Bernanke might not admit it, but the economy is sinking into post-bubble malaise.

Pages: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31