Defaulting banks - where will it stop?

[Jan Klimkowski]

Fascinating analysis of the extent of various national liabilities below. Switzerland looks like it should already have been fondued. But if Iceland has sunk, Britain must be toast, and - rather surprizingly - the Teutons are rather more exposed than previously assumed on this particular analysis.

The all-important and striking graphic is here:
http://www.nytimes.com/imagepages/2008/1...APHIC.html

Off the Charts
The World’s Banks Could Prove Too Big to Fail — or to Rescue

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By FLOYD NORRIS
Published: October 10, 2008

AS the banking system quaked this week in many countries, and various governments took steps to bail out their banks or at least guarantee deposits, one question was asked quietly: Can the governments afford it?
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National Banking SystemsGraphic
National Banking Systems

That is not a question for the United States, which can print dollars and has a banking system that is the largest in the world but is small in relation to the national economy.

The country where that worry first surfaced was Iceland, whose three major banks had greatly expanded overseas, including starting substantial retail operations in a number of European countries. The government has taken control of all three banks, and is not guaranteeing that foreign customers will be protected.

Iceland is also the only country to have its sovereign debt rating downgraded so far as a result of the financial crisis.

The accompanying chart shows the size of national banking systems relative to their countries’ economies, measured in two ways, and also show how well capitalized the banks appear to be, through the latest reported data.

In general, higher figures in any of the graphics indicate increased danger. They do not pretend to show what shape the banks are in, but they do reflect the size of the problem each country would face if its banking system did get into trouble.

The first two charts look not at deposits but at short-term debt carried by the banks. The banks usually have long-term debt as well. But by its nature, that debt cannot be withdrawn if worries about a bank’s solvency suddenly increase. They also have deposits, but deposits are less likely to flee, at least if deposit guarantee systems are trusted. Short-term debt, on the other hand, matures within a year and may not be available to a bank that is in trouble.

The first comparison — the tinted circles — looks at the size of bank short-term debt as a percentage of a country’s gross domestic product. Such figures are not directly comparable, since one is the total amount of income in a country over a year, and the other is the amount owed by banks that may have to be paid over that year. But the comparisons do show relative sizes.

In the United States, the banks have total short-term debt that is equal to 15 percent of G.D.P. But in some countries where banking systems have grown to international proportions, the debt exceeds G.D.P. That is true in Switzerland, Belgium, Iceland and Britain.

The second comparison — the open circles — looks at the short-term bank debt in relation to each country’s national debt.

Again, the relationship is not direct, because a country may have excellent credit that would enable it to borrow much more, but large numbers still raise questions.

“Can they guarantee the deposits if the bank owes 3.5 times the national debt?” asked Bob Prince, the co-chief investment officer of Bridgewater Associates, which provided the data.

For countries in the euro zone, there is an additional consideration. They do not have the right to print money. That may also be true for some other banking systems, if the liabilities are primarily in currencies other than their own. Those countries could face special problems if they needed to come up with huge amounts of cash to rescue banks.

Finally, the leverage ratio gives a rough indication of how risky a nation’s banking system might be. It is the ratio of total bank assets to the net worth of the bank. That could be misleading if the assets are very safe — government bonds, for example, versus subprime mortgage loans — but in general the higher the ratio the smaller the margin of safety.

There again, the United States appears to face a relatively small problem, with an average leverage ratio of 12. The figures range up to 52 in Germany. Theoretically, a 2 percent drop in the value of all German bank assets would wipe out the net worth of the banking system.

These figures will be meaningless if the governments retain the trust of depositors and creditors. “It becomes a matter of psychology,” Mr. Prince said. If governments say the deposits are safe “and the market believes them, then they don’t have to have any money to back up their promises.”

Floyd Norris comments on finance and economics in his blog at norris.blogs.nytimes.com.

http://www.nytimes.com/2008/10/11/busine...8uGv6/WdHA

[Jan Klimkowski]

The bankers are shamelessly rewriting their Five-Point-Plan-To-Save-The-Global-Economy to avoid any mark-to-market disclosure. The *.1s are the new version - 5 versus 5.1 is particularly risible:

The {Original} five-point plan Vs. The above:

1.0 Pledge to save key banks from collapse
1.1 Take decisive action using all available tools to support struggling financial institutions and prevent their failure.

2.0 Action to free-up credit and money markets by providing ample amounts of liquidity from central banks
2.1 Take all necessary steps to unfreeze credit and money markets.

3.0 Support for the part-nationalisation of banks and other institutions by the taxpayer purchase of shares
3.1 Ensure that banks can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.

4.0 Stronger deposit protection schemes to reassure savers their money is safe
4.1 Ensure that savers' deposit insurance and guarantee programs are robust so savers have confidence in the safety of their deposits.

5.0 Force banks to disclose the true state of their losses
5.1 Take action, where appropriate, to restart the mortgage securitisation markets.

Culled from here:
Original *.0
http://www.guardian.co.uk/business/2008/...baleconomy
New *.1
http://www.telegraph.co.uk/finance/finan...-plan.html

[Jan Klimkowski]

And on it goes whilst our leaders blather with zero conviction about "restoring confidence to the markets":

The Next Derivatives Bloodbath: Insurance Companies and Auto Makers

by George Washington's Blog

Global Research, October 12, 2008

This essay is about future derivatives problems. But before we look to the future, let's recap what happened yesterday, to gain some perspective.

Post-Game Analysis on Lehman

As the Washington Post writes today about yesterday's auction of some $400 billion dollars in credit default swaps for Lehman:

'If we see defaults from the standpoint that protection sellers don't pay up, then we're going to have a huge problem in the market,' Telpner said. 'But we don't have any explicit evidence indicating that sellers ultimately are not going to be able to pay the amounts owed to buyers.'

And the Sunday Times writes today:

"The valuation leaves the insurers of the debt a bill of about $365 billion. It is not clear whether the insurers, which are required to settle the bill in the next two weeks, will be able to pay – a development that could further undermine increasingly stressed capital markets."

Will the insurers" of Lehman's CDS be able to pay up? The big bank insurers to the Lehman swaps have been hoarding cash, and so can presumably pay.

The bigger question is whether the hedge funds - such as Citadel - will be able to pay up or will go belly up. The next couple of weeks will tell.

But even if no companies are wiped out by their Lehman CDS obligations, it is clear that yesterday was, indeed, a traumatic day for the world economy. As today's Sunday Times article put it:

"Lehman’s corporate debt default promises to increase the stress across global credit markets. Sean Egan, of the Egan-Jones ratings agency, said: 'This is a killer. Lehman said a month ago that it was in terrific shape and now you can’t even get ten cents on the dollar for its debt.

'It underscores the deep structural flaws in our financial system, knocks confidence in the financial markets and raises the cost of capital. It also demonstrates that we are experiencing not only a crisis of confidence, but a crisis.'"

Next Up: Automakers

The next phase of the derivatives wipeout will hit insurance companies and auto makers.

Initially, Standard and Poor's is saying that GM and Ford may very well go bankrupt.

As of 2004, "GM was among the five companies most frequently included in credit-derivatives contracts in 2004, along with Ford Motor Co., France Telecom SA, DaimlerChrysler AG and Deutsche Telekom AG, Fitch said. Investors bought more contracts protecting payments from Korea, Italy and Russia than any other governments."

Indeed, according to Fitch's, as of 2004 and 2005, there were perhaps billions of dollars in GM credit default swaps traded per day. Fitch's noted that "GM CDS are the second most included named in synthetic collateralized debt obligations (CDOs), behind Ford, as disclosed in several Fitch analyses of the CDS market."

On October 3rd, Bloomberg wrote:

General Motors Corp. saw its credit default swaps rise to a record after the automaker said Sept. 19 it was going to draw down the remainder of a $4.5 billion revolving credit line to preserve cash because of the instability in the financial markets. Detroit-based GM, the largest U.S. carmaker, has lost almost $70 billion since 2004.

As of June of this year, "The cost to insure GM's debt with credit default swaps rose to 33.5 percent upfront . . . plus annual payments of 500 basis points" and "Ford saw its credit default swap spread increased to 30.5 percent upfront, plus 500 basis points annually".

According to financial advisor Mike "Mish" Shedlock, there are appromixately one trillion dollars of credit default swaps for GM.

If GM went bust, there would be huge credit default swap liability. While I have seen no estimates of the current amount of Ford CDS, it is probably also quite high, given that it was one of the most common CDS issued in 2004.

Insurance

The insurance companies are also getting hit hard by CDS.

The October 3rd Bloomberg article goes on to state:

"The cost to protect against default by Hartford, Prudential Financial Inc. and MetLife Inc. soared to records and shares fell yesterday on speculation that turmoil in financial markets may be spreading to insurance companies."

As an article at Naked Capitalism explains:

First it was banks and securities firms, and now the focus of worry has widened to include insurance companies. Reader John referred us to a Reuters article that MetLife credit default swaps are now trading on an upfront basis, which means buyers of protection against the default of MetLife bonds must make an upfront payment as well as agreeing to periodic fees. Only companies seen as being in serious risk of failure trade on an upfront basis. Another story shows similar pricing of XL Capital CDS.

Concerns about MetLife became serious when the company announced it was writing down its investment portfolio and withdrew its 2008 earnings forecast.

From Reuters:

Metlife Inc's credit default swaps on began trading on an upfront basis on Thursday, indicating perceptions that its credit quality is considered distressed.

The cost to insure Metlife's debt rose to around 10.5 percent the sum insured as an upfront sum, or $1.05 million to insure $10 million in debt for five years, in addition to annual premiums of 5 percent, according to Markit Intraday.

The swaps had closed on Wednesday at a spread of around 717 basis points, or $717,00 per year for five years to insure $10 million in debt, according to Markit.

The second Reuters story:

Credit default swaps on XL Capital Ltd (XL.N: Quote, Profile, Research) began trading on an upfront basis on Thursday, and its stock price plunged more than 37 percent.

The cost to insure XL's debt rose to around 12.5 percent the sum insured as an upfront sum, or $1.25 million to insure $10 million in debt for five years, in addition to annual premiums of 5 percent, according to Phoenix Partners Group....

The swaps had opened at a spread of around 750 basis points, or $750,00 per year for five years to insure $10 million in debt, according to Phoenix.

Instead of being the end of the derivatives bloodbath, Lehman was probably just the beginning.

http://www.globalresearch.ca/index.php?c...&aid=10535

[David Guyatt]

It's almost as if this whole situation was "gamed" years ago and then put into play.

This sounds crazy I know, but the alternative view, that this was a great unforeseen event that now threatens to collapse the entire western economic system, is unrealistic, imo.

I wonder if a "saviour" is going to come along out of nowhere and somehow put everything to rights?

[Jan Klimkowski]

I wonder if a "saviour" is going to come along out of nowhere and somehow put everything to rights?

Well, Austrian fa.... um, far right leader Joerg Haider managed to crash his car going at 70mph through a village, with fatal consequences, yesterday. I wonder who'll be checking the brakes?

I would still expect a "messiah" to come from the far, extreme nationalist, right. In the aftermath of the catastrophic German hyperinflation of 1922-23, when the bankers & ruling elites were hunting for a national saviour, they eventually chose a fascist in Hitler, if he was rather misleadingly a "national socialist". But Hitler's brand of anti-banker rhetoric clothed in racist stereotype served the likes of Prescott Bush very well.

It's analogous to the Republicans ranting and raving about Washington special interests and pork barrel whilst in reality their snouts are slurping in the trough, and their asses are owned by those same special interests.

In Europe, the logical "saviour" play to distract the masses would be to blame ethnic group x for all our financial woes. Berlusconi has already started mass fingerprinting of his Roma "gypsy" population, and demonizing them would be very simple.

[Peter Lemkin]

[quote=Jan Klimkowski]Fascinating analysis of the extent of various national liabilities below. Switzerland looks like it should already have been fondued. But if Iceland has sunk, Britain must be toast, and - rather surprizingly - the Teutons are rather more exposed than previously assumed on this particular analysis.

The all-important and striking graphic is here:
http://www.nytimes.com/imagepages/2008/1...APHIC.html

Interesting graphic - we might just soon see some of that Nazi Gold appear.....and the Japanese from the Far East.....interesting times - everyone will be forced to 'show their hands' as the ship burns and sinks, and they get on their own emergency conveyance modality 'nude'.....

[Jan Klimkowski]

The analyst known as "Mish", who's been pretty accurate throughout this crisis has just offered his views on the latest EU plan to "restore confidence".

Draft Statement: Europe Guarantees Bank Debt

YahooFinance has a Draft summit statement says euro nations would guarantee bank debt.

Countries that use the euro will temporarily guarantee future bank debt to encourage lending and ease the credit crunch, according to a draft statement under discussion by European leaders Sunday.

The declaration says the governments would guarantee "for an interim period and on appropriate commercial terms" new debt issued by banks for up to five years.

"This scheme would be limited in amount, temporary and will be applied under close scrutiny of financial authorities until Dec. 31, 2009," it says.

The leaders of the 15 euro-zone nations held an emergency summit Sunday night in Paris to seek European solutions to the financial crisis engulfing markets worldwide. The meltdown dominated summits around the world this weekend.

The statement also says that one way governments could save banks would include buying big stakes.

British Prime Minister Gordon Brown, who met with France's President Nicolas Sarkozy before the euro summit, said the plan "would involve not only more cash in the financial market but also a recapitalization of our banking system.

"And allied to that -- something that I believe is absolutely crucial -- to begin again the funding of businesses and mortgages with a guarantee given by governments. That can happen and will happen in the next few months," he told reporters.

Guarantees for 5 years, Close Scrutiny For 1 Year

Notice the discrepancy between the length of guarantees and the scrutiny over them. Also note that the UK has upped the guarantee ante to include mortgages. Wonderful.

Guarantees Creep Up

Notice how the length and scope of the guarantees is creeping up. It started with 1-2 years, went to 3 years, and now the EU is proposing guarantees for up to 5 years and that "no financial institution of systemic importance" can be allowed to fail.

Hells bells, why pussyfoot around with this stuff? Let's just have every country guarantee everything forever. And if it comes to that (which it rapidly seems to be doing), one must stop and think about the value of those guarantees.

The conclusion to his article, entitled "Worthless Guarantees and Printing Presses" is that:

Of course governments have something that insurers don't. That something is a printing press. However, there is theory and there is practice. There is a price to pay for those government guarantees. We have already seen the complete collapse of Iceland's currency.

Blanket guarantees of everything will eventually end in a collapse of some major country or some major currency, the breakup of the EU, or a global depression of some sort, perhaps all of the above.

All those government guarantees, just like the guarantees of Ambac and MBIA , are totally worthless, just in different ways.

:

The full article is here:
http://globaleconomicanalysis.blogspot.c...nting.html

[Terry Mauro]

[COLOR="Blue"]"Naomi Klein spoke at the University of Chicago last week, invited by a group of faculty opposed to the creation of an economic research center called the Milton Friedman Institute. It has a $200 million endowment and is named after the University’s most famous economist, the leader of the neoliberal Chicago School of Economics.

NAOMI KLEIN: When Milton Friedman turned ninety, the Bush White House held a birthday party for him to honor him, to honor his legacy, in 2002, and everyone made speeches, including George Bush, but there was a really good speech that was given by Donald Rumsfeld. I have it on my website. My favorite quote in that speech from Rumsfeld is this: he said, “Milton is the embodiment of the truth that ideas have consequences.”

So, what I want to argue here is that, among other things, the economic chaos that we’re seeing right now on Wall Street and on Main Street and in Washington stems from many factors, of course, but among them are the ideas of Milton Friedman and many of his colleagues and students from this school. Ideas have consequences.

More than that, what we are seeing with the crash on Wall Street, I believe, should be for Friedmanism what the fall of the Berlin Wall was for authoritarian communism: an indictment of ideology. It cannot simply be written off as corruption or greed, because what we have been living, since Reagan, is a policy of liberating the forces of greed to discard the idea of the government as regulator, of protecting citizens and consumers from the detrimental impact of greed, ideas that, of course, gained great currency after the market crash of 1929, but that really what we have been living is a liberation movement, indeed the most successful liberation movement of our time, which is the movement by capital to liberate itself from all constraints on its accumulation.

So, as we say that this ideology is failing, I beg to differ. I actually believe it has been enormously successful, enormously successful, just not on the terms that we learn about in University of Chicago textbooks, that I don’t think the project actually has been the development of the world and the elimination of poverty. I think this has been a class war waged by the rich against the poor, and I think that they won. And I think the poor are fighting back. This should be an indictment of an ideology. Ideas have consequences.

Now, people are enormously loyal to Milton Friedman, for a variety of reasons and from a variety of sectors. You know, in my cynical moments, and I say Milton Friedman had a knack for thinking profitable thoughts. He did. His thoughts were enormously profitable. And, he was rewarded. His work was rewarded. I don’t mean personally greedy. I mean that his work was supported at the university, at think tanks, in the production of a ten-part documentary series called Freedom to Choose, sponsored by FedEx and Pepsi; that the corporate world has been good to Milton Friedman, because his ideas were good for them.

But he also was clearly a tremendously inspiring teacher, and he had a gift, like all great teachers do, to help his students fall in love with the material. But he also had a gift that many ideologues have, many staunch ideologues have—and I would even use the word “fundamentalists” have—which is the ability to help people fall in love with a perfect imagined system, a system that seems perfect, utopian, in the classroom, in the basement workshop, when all the numbers work out. And he was, of course, a brilliant mathematician, which made that all the more seductive, which made those models all the more seductive, this perfect, elegant, all-encompassing system, the dream of the perfect utopian market.

Now, one of the things that comes up again and again in the writings of University of Chicago economists of the Friedman tradition, people like Arnold Harberger, is this appeal to nature, to a state of nature, this idea that economics is not a political science or not a social science, but a hard science on par with physics and chemistry. So, as we look at the University of Chicago tradition, it isn’t just about a set of political and economic goals, like privatization, deregulation, free trade, cuts to government spending; it’s a transformation of the field of economics from being a hybrid science that was in dialogue with politics, with psychology, and turning it into a hard science that you could not argue with, which is why you would never talk to a journalist, right? Because that’s, you know, the messy, imperfect real world. It is beneath those who are appealing to the laws of nature.

Now, these ideas in the 1950s and ’60s at this school were largely in the realm of theory. They were academic ideas, and it was easy to fall in love with them, because they hadn’t actually been tested in the real world, where mixed economies were the rule.

Now, I admit to being a journalist. I admit to being an investigative journalist, a researcher, and I’m not here to argue theory. I’m here to discuss what happens in the messy real world when Milton Friedman’s ideas are put into practice, what happens to freedom, what happens to democracy, what happens to the size of government, what happens to the social structure, what happens to the relationship between politicians and big corporate players, because I think we do see patterns.

Now, the Friedmanites in this room will object to my methodology, I assure you, and I look forward to that. They will tell you, when I speak of Chile under Pinochet, Russia under Yeltsin and the Chicago Boys, China under Deng Xiaoping, or America under George W. Bush, or Iraq under Paul Bremer, that these were all distortions of Milton Friedman’s theories, that none of these actually count, when you talk about the repression and the surveillance and the expanding size of government and the intervention in the system, which is really much more like crony capitalism or corporatism than the elegant, perfectly balanced free market that came to life in those basement workshops. We’ll hear that Milton Friedman hated government interventions, that he stood up for human rights, that he was against all wars. And some of these claims, though not all of them, will be true.

But here’s the thing. Ideas have consequences. And when you leave the safety of academia and start actually issuing policy prescriptions, which was Milton Friedman’s other life—he wasn’t just an academic. He was a popular writer. He met with world leaders around the world—China, Chile, everywhere, the United States. His memoirs are a “who’s who.” So, when you leave that safety and you start issuing policy prescriptions, when you start advising heads of state, you no longer have the luxury of only being judged on how you think your ideas will affect the world. You begin having to contend with how they actually affect the world, even when that reality contradicts all of your utopian theories. So, to quote Friedman’s great intellectual nemesis, John Kenneth Galbraith, “Milton Friedman’s misfortune is that his policies have been tried.” "[/COLOR]

[COLOR="Blue"]"And so, the Chicago Boys were born. And it was considered a success, and the Ford Foundation got in on the funding.

But lately, particularly just in the past few months, I have noticed something similar happening on the far libertarian right, at places like the Cato Institute and the Reason Foundation. It’s a kind of a panic, and it comes from the fact that the Bush administration adapted—adopted so much of their rhetoric, the fusing of free markets and free people, the championing of so many of their pet policies. But, of course, Bush is the worst thing that has ever happened to believers in this ideology, because while parroting the talking points of Friedmanism, he has overseen an explosion of crony capitalism, that they treat governing as a conveyor belt or an ATM machine, where private corporations make withdrawals of the government in the form of no-bid contracts and then pay back government in the form of campaign contributions. And we’re seeing this more and more. The Bush administration is a nightmare for these guys—the explosion of the debt and now, of course, these massive bailouts.

So, what we see from the ideologues of the far right—by far right, I mean the far economic right—frantically distancing themselves and retreating to their sacred texts: The Road to Serfdom, Capitalism and Freedom, Free to Choose. So that’s why I’ve taken to calling them right-wing Trotskyists, because they have this—and mostly because it annoys them, but also because they have the same sort of frozen-in-time quality. You know, it’s not, you know, 1917, but it’s definitely 1982. Now, the left-wing Trots don’t have very much money, as you know. They make their money selling newspapers outside of events like this. The right-wing Trots have a lot of money. They build think tanks in Washington, D.C., and they want to build a $200 million Milton Friedman Institute at the University of Chicago.

So, I said I would talk a little bit about Friedmanism and the links to the current crisis. And, you know, it’s pretty direct. Milton Friedman is pretty much accepted as the godfather of deregulation. And this was—this ideology was the rationale for turning the financial sector into the casino that we see today. You know, Milton Friedman was clear about this. He believed that “history took a wrong turn,” and that’s a quote; it’s a quote from a letter he wrote to Augusto Pinochet. He said, “History took a wrong turn in your country, as well as mine.” And he was referring to the responses to the Great Depression. In Chile, it was the rise of import substitution and developmentalism. But in the United States, he was of course referring to the New Deal.

And I think that the Chicago School of Economics is properly understood as a counterrevolution against the New Deal, against regulations like Glass-Steagall, that was put in place in 1934 after having seen people lose their life savings to the market crash, and it was a firewall, a very simple, sensible law that said if you want to be an investment bank, if you want to gamble, gamble with your investors’ money, but the government isn’t going to help you because it’s your own risk. You can fail. And if you want to be a commercial bank, then we will help you. We will offer insurance to make sure that those savings are safe, but you have to restrict the risks that you take. You cannot gamble. You cannot be an investment bank. And a firewall was put up between investment banks and consumer banks.

And now we look at the way in which this crisis is supposedly being solved, and what we see, actually, is a wave of mergers in the banking sector, a wave of mergers with the banks getting bigger and bigger until ultimately—you know, the Financial Times was predicting today that eventually the United States will have three big banks, just like Japan does. That’s where it’s heading. And, of course, all of those banks will be too big to fail. So they all have this implicit guarantee; it’s not just Fannie and Freddie. It’s any function that is too important to fail has this implicit guarantee.

Phil Gramm is the person, you know, on the legislative side who did the most to create the legislative context for what we’re seeing right now in the financial sector. You know, I think everyone knows that Phil Gramm, most famously, recently is the one who said that America was in a mental recession and a bunch of whiners and all of that. And so, he’s not officially an adviser to McCain, but there is talk that if he were to win the elections, he would be Treasury Secretary. You know, I point—I bring him up because Phil Gramm was a Milton Friedman fanatic. I think you know this. In 1999, the same year that he led the charge to strike down Glass-Steagall, he also—Phil Gramm—pressed Congress to get the Medal of Honor for Friedman. When he ran in the—when he made his 1996 presidential run, McCain was the co-chair of his campaign. Phil Gramm was asked, “If you had to rely on a single person as your foremost economic policy adviser, who would it be?” And he replied, “Dr. Milton Friedman.” So we see the connections between deregulation and Friedmanism.

I also think there’s something else at play in the kind of politicians that are attracted to this particular ideology. You know, Reagan was the first really to embrace it, and Nixon was the great disappointment to Friedman. I’m sure you all know that. You know, he writes in his memoir that when Nixon was elected, he was euphoric. I mean, he couldn’t imagine an American president more closely aligned ideologically than Richard Nixon. But Richard Nixon insisted on governing, and he wanted to win elections, and he imposed wage and price controls. And Milton Friedman sort of had a bit of a temper tantrum and declared him the most socialist president in modern American history. But, you know, it was—so it was really Reagan who campaigned, you know, with his copy of Capitalism and Freedom on the campaign trail, who was the first person to really put Friedmanism into practice.

And I raise this because, you know, one of the things that we hear about McCain is that he doesn’t really know about economics, and so I think that makes us inclined not to take his economic ideas seriously, not to think he would be a really serious economic force. I think just the opposite. And I think if you look at his campaign platform, you see just the opposite. He wants to privatize Social Security. He is saying that in the first 100 days they’ll look at every single government program, and they will either reform it or shut it down if it is not serving taxpayers. I mean, they are talking about a sort of hundred-day economic shock therapy period. And I think it’s the fact that he doesn’t know about economics, and that Sarah Palin, I suspect, knows a little less, that actually makes them so dangerous.

And I don’t—you know, I don’t think it is—not to be too flippant—I’m sure that I’ve, you know, offended everyone, so I may as well just say bad things about Ronald Reagan—but I do think that, you know, that it isn’t a coincidence that, you know, a movie star president champions these ideas, or a body-builder governor, you know, who says, “Dr. Friedman changed my life”—I don’t know if you’ve seen Arnold Schwarzenegger’s introductions to Freedom to Choose, but they’re good. You should. YouTube them. But the appeal of these ideas, I think, to politicians who are actually in over their head on economics—and, by the way, this goes for military dictators, too, like Pinochet—who get control over a country and are totally clueless about how to run an economy, is that it lets them off the hook completely. It says government is the problem, not the solution. Leave it to the market. Laissez-faire. Don’t do anything. Just undo. Get out of the way. Leave it to us.[/COLOR]

Thank you, Peter. I do have the material you sent me "saved" because it spoke right to me, and everything I stand for. I am eternally grateful for your alert and constant vigilance. Therefore, I felt it imperative to "bold" those aspects of Naomi's transcripts, which are familiar to what I've learned since 1994 about the state of our economic system.

You know, I really hate to seem like I'm whipping a dead horse, here. But, LaRouche has been expounding on those exact same negative aspects of the neocon policies of Milton Friedman and his side-kick Friedrich Von Hayek, for whom he had also procured a job at the University of Chicago, for years, now.

And, lest we not forget the meeting Milton Friedman, and Prescott Bush had in 1933 at Hayek's Swiss Chalet prior to forming Prescott's banking partnership with their Nazi cohorts, pre World War II. This, of course, came from the PBS series, "Commanding The Heights," which aired in the 1990's.

Thanks, again.

[Jan Klimkowski]

As usual, Naomi Klein speaks mucho sense.

The British govt is spending £40-50 billion to take majority stakes in the UK's largest banks. This should should represent the Death of Thatcherism. And of Reaganomics. And of the Chicago Boys' mantra of privatization, deregulation, massive cuts in public spending etc.

This should be a great day.

But something tells me it's not going to turn out that way.

[Jan Klimkowski]

I'm perfectly relaxed about DPF continuing its intelligent discussion of the Protocols, but I'd be even happier if it was split off into a new dedicated thread.

Meanwhile, in terms of the global financial meltdown, imo there is now no Plan B.

The world's governments have turned over their last card - the one they hope is the Ace in the Hole. However, if this is a solvency problem rather a liquidity problem - which is my belief - then these "guarantees" of interbank lending and the recapitalizations of busted bank balance sheets will sooner or later fail.

Institutions will default.

And because those institutions are now irreversibly entwined with national taxpayers, indeed with the economies of sovereign states, if and when an institution fails, then countries will start failing, or defaulting too.

The politicians' "ace" in the hole will be revealed as a two of diamonds, and will be beaten by the derivatives' ponzi scheme Ace of Spades. An unimaginable black hole into which all our "chips" will be raked by the madly grinning house croupier, whilst dinner-suited bouncers frogmarch us into the night.

Ticker Forum's Karl Denninger is musing along similar lines:

Don't Be So Sure This Will Work

Last night Trichet and other policymakers in Europe basically forced Bernanke's hand, initiating 100% guarantees of interbank lending.

This forced Bernanke to follow suit early this morning, lest the US markets and US credit system implode into a smoking hole instantly.

This was not a position Bernanke was willing to take on his own, or he would have. But when the rest of the world has done it, you literally have no choice, unless you intend to be turned into an instantaneous credit island - an event that the United States would literally not survive.

So the die was cast and Paulson and Bernanke's refusal to endorse this step in the G7 meeting Friday was literally rammed down their throat.

Now, however, we have a new problem.

You see, if there are defaults, they now flow straight through to sovereign balance sheets. The IMF is now stating that there are three nations that are insolvent now, and there will be more. You can bet on it.

Amazingly, The United States is not anywhere in the worst shape here. While we certainly have our problems those over in Europe are much greater, but they're also distributed - not every nation over there is in an equal amount of trouble.

With no common taxing authority the EU has a horrifying problem if the defaults start to cascade, as allocating the losses will be nearly impossible to do with any sort of fairness. The political and monetary unrest that is likely to come from this will be considerable, and at this point I suspect that the "common currency" may fail outright - a disastrous outcome and one that could threaten geopolitical stability in the region.

http://market-ticker.denninger.net/