Defaulting banks - where will it stop?

[Jan Klimkowski]

Here's an October 18 article by Michael Hudson:

Parsing Mr. Paulson’s Bailout Speech: The Unprecedented Giveaway of Financial Wealth

by Michael Hudson

Mr. Paulson¹s bailout speech on Monday, October 13 poses some fundamental economic questions: What is the impact on the economy at large of this autumn¹s unprecedented creation and giveaway of financial wealth to the wealthiest layer of the population? How long can the Treasury¹s bailout of Wall Street (but not the rest of the economy!) sustain a debt overhead that is growing exponentially? Is there any limit to the amount of U.S. Treasury debt that the government can create and turn over to its major political campaign contributors?

In times past, national debt typically was run up by borrowing money from private lenders and spent on goods and services. The tendency was to absorb loanable funds and bid up interest rates on the one hand, while spending led to inflationary price increases for goods and services. But the present giveaway is different. Instead of money being borrowed or spent, interest-yielding bonds are simply being printed and turned over to the banks and other financial institutions. The hope is that they will lend out more credit (which will become more debt on the part of their customers), lowering interest rates while the money is used to bid up asset prices * real estate, stocks and bonds. Little commodity price inflation is expected from this behavior.

The main impact will be to reinforce the concentration of wealth in the hands of creditors (the wealthiest 10 percent of the population) rather than wiping out financial assets (and debts) through the bankruptcies that were occurring as a result of "market forces". Is it too much to say that we are seeing the end of economic democracy and the emergence of a financial oligarchy * a self-serving class whose actions threaten to polarize society and, in the process, stifle economic growth and lead to the very bankruptcy that the bailout was supposed to prevent?

Everything that I have read in economic history leads me to believe that we are entering a nightmare transition era. The business cycle is essentially a financial cycle. Upswings tend to become economy-wide Ponzi schemes as banks and other creditors, savers and investors receive interest and plow it back into new loans, accruing yet more interest as debt levels rise. This is the "magic of compound interest" in a nutshell. No "real" economy in history has grown at a rate able to keep up with this financial dynamic. Indeed, payment of this interest by households and businesses leaves less to spend on goods and services, causing markets to shrink and investment and employment to be cut back.

Wearing blinders to avoid confronting any reality that would suggest that banks cannot make money ad infinitum by selling more and more credit – that is, indebting the non-financial economy more and more – government officials such as Treasury Secretary Paulson or Federal Reserve Chairman Bernanke are professionally unable to acknowledge this problem, and it does not appear in most neoclassical or monetarist textbooks. But the underlying mathematics of compound interest are rediscovered in each generation, often prompted by the force majeur of financial crisis.

A generation ago, for instance, Hyman Minsky gained a following by describing what he aptly called the Ponzi stage of the business cycle. It was the phase in which debtors no longer were able to pay off their loans out of current income (as in Stage #1, where they earned enough to cover their interest and amortization charges), and indeed did not even earn enough to pay the interest charges (as in Stage #2), but had to borrow the money to pay the interest owed to their bankers and other creditors. In this Stage #3 the interest was simply added onto the debt, growing at a compound rate. It ends in a crash.

This was the flip side of the magic of compound interest – the belief that people can get rich by "putting money to work." Money doesn’t really work, of course. When lent out, it extracts interest from the "real" production and consumption economy, that is, from the labor and industry that actually do the work. It is much like a tax, a monopoly rent levied by the financial sector. Yet this quasi-tax, this extractive financial rent (as Alfred Marshall explained over a century ago) is the dynamic that is supposed to enable corporate, state and local pension funds to pay for retirement simply out of stock market gains and bond investments – purely financially and hence at the expense of the economy at large whose employees are supposed to be gainers. This is the essence of "pension-fund capitalism," a Ponzi-scheme variant of finance capitalism. Unfortunately, it is grounded in purely mathematical relationships that have little grounding in the "real" economy in which families and companies produce and consume.

Mr. Paulson’s bailout plan reflects a state of denial with regard to this dynamic. The debt overhead is self-aggravating, becoming less and less "solvable" and hence more of a quandary, that is, a problem with no visible solution. At least, no solution acceptable to Wall Street, and hence to Mr. Paulson and the Democratic and Republican congressional leaders. The banks and large swaths of the financial sector are broke from having made bad gambles in the belief that money could be made to "work" under conditions that shrink the underlying industrial economy and stifle wage gains, eroding the market for consumer goods. Debt deflation reduces sales and business activity in general, and hence corporate earnings. This depresses stock market and real estate prices, and hence the value of collateral pledged to back the economy’s debt overhead. Negative equity leads to bankruptcy and foreclosures.

By increasing America’s national debt from $5 trillion earlier this year to $13 trillion in almost a single swoop by taking on junk loans and other bad investments rather than letting them to under as traditionally has occurred in the "cleansing" culmination of business crashes ("cleansing" in the sense of clean slates for debts that cannot reasonably be paid), Mr. Paulson’s bailout actions increase the interest payments that the government must pay out of taxes or by borrowing (ore printing) yet more money. Someone must pay for bad debts and junk loans that are not wiped off the books. The government is now to take on the roll of debt collector to "make a profit for taxpayers" by going around and kneecapping the economy – which of course is comprised primarily of the "taxpayers" ostensibly being helped.

It is a con game. Financial gains have soared since 1980, but banks and institutional investors have not used them to finance tangible capital formation. They simply have recycled their receipt of interest (and credit-card fees and penalties that often amount to as much as interest) into yet new loans, extracting yet more interest and so on. This financial extraction leaves less personal and business income to spend on consumer goods, capital goods and services. Sales shrink, causing defaults as the economy is less able to pay its stipulated interest charges.

This phenomenon of debt deflation has occurred throughout history, not only over the modern business cycle but for centuries at a time. The most self-destructive example of financial short-termism is the decline and fall of the Roman Empire into debt bondage and ultimately into a Dark Age. The political turning point was the violent takeover of the Senate by oligarchic creditors who murdered the debtor-oriented reformers led by the Gracchi brothers in 133 BC, picking up benches and using them as rams to push the reformers over the cliff on which the political assembly was located. A similar violent overthrow occurred in Sparta a century earlier when its kings Agis and Cleomenes sought to annul debts so as to reverse the city-state’s economic polarization. The creditor oligarchy exiled and killed the kings, as Plutarch described in his Parallel Lives of the Illustrious Greeks and Romans. This used to be basic reading among educated people, but today these events have all but disappeared from most people’s historical memory. A knowledge of the evolution of economic structures has been replaced by a mere series political personalities and military conquests.

The moral of ancient and modern history alike is that a critical point inevitably arrives at which economies either adopt hard creditor-oriented laws that impoverish the population and plunge downward socially and militarily, or save themselves by alleviating the debt burden. What is remarkable today is the almost total failure of political leaders to provide an alternative to Mr. Paulson’s bailout of Wall Street from the Bear Stearns bankruptcy down through the government takeover of Fannie Mae and Freddie Mac to last week’s giveaway to the banks. Nobody is even warning where this destructive decision is leading. Governments ostensibly representing "free market" philosophy are acting as the lender of last resort – not to households and business non-financial debtors, and not to wipe out the debt overhang in a Clean Slate, but to subsidize the excess of financial claims over and above the economy’s ability to pay and the market value of assets pledged as collateral.

This attempt is necessarily in vain. No amount of money can sustain the exponential growth of debt, not to mention the freely created credit and mutual gambles on derivatives and other financial claims whose volume has exploded in recent years. The government is committed to "bailing out" banks and other creditors whose loans and swaps have gone bad. It remains in denial with regard to the debt deflation that must be imposed on the rest of the economy to "make good" on these financial trends.

Here’s why the plan for the government to recover the money is whistling in the dark: It calls for banks to "earn their way out of debt" by selling more of their product – credit, that is, debt. Homeowners and other consumers, students and car buyers, credit card users and their employers – the "taxpayers" supposed to be helped – are to pay the repayment money to the banks, instead of using it to purchase goods and services. If they charge only 6% per year, they will extract $93 billion in interest charges – $42 billion to pay the Treasury for its $700 billion, and another $51 billion for the Federal Reserve’s $850 billion in "cash for trash" loans.

If you are going to rob the government, I suppose the best strategy is simply to brazen it out. To listen to the mass media, there seemed no alternative but for Congress to ram the plan through just as Wall Street lobbyists had written i, to "save the market from imminent meltdown," refusing to hold hearings or take testimony from critics or listen to the hundreds of economists who have denounced the giveaway.

Hubris has reached a level of deception hardly seen since the 19th century’s giveaways to the railroad barons. "We didn’t want to be punitive," Mr. Paulson explained in a Financial Times interview, as if the only alternative was an enormous gift. Europe did not engage in any such giveaway, yet he claimed that England and other European countries forced his hand by bailing out their banks, and that the Treasury simply wanted to keep U.S. banks competitive. Wringing his hands melodramatically, he assured the public on Monday that "We regret having to take these actions." Banks went along with the pretense that the bailout was a worrisome socialist intrusion into the "free market," not a giveaway to Wall Street in the plan drawn up by their own industry lobbyists. "Today’s actions are not what we ever wanted to do," Mr. Paulson went on, "but today’s actions are what we must do to restore confidence to our financial system." The confidence in question was a classic exercise in disinformation – a well-crafted con game.

Mr. Paulson depicted the government’s purchase of special non-voting stock as a European-style nationalization. But government’s appointed public representatives to the boards of European banks being bailed out. This has not happened in America. Bank lobbyists are reported to have approached Treasury to express their worry that their shareholdings might be diluted. But the Treasury-Democratic Party plan invests $250 billion in government credit in non-voting shares. If a recipient of this credit goes broke, the government is left the end of the line behind other creditors. Its "shares" are not real loans, but "preferred stock." As Mr. Paulson explained on Monday: "Government owning a stake in any private U.S. company is objectionable to most Americans – me included." So the government’s shares are not even real stock, but a special "non-voting" issue. The public stock investment will not even have voting power! So the government gets the worst of both worlds: Its "preferred stock" issue lacks the voting power that common stock has, while also lacking the standing for repayment in case of bankruptcy that bondholders enjoy. Instead of leading to more public oversight and regulation, the crisis thus has the opposite effect here: a capitulation to Wall Street, along lines that pave the ground for a much deeper debt crisis to come as the banks "earn their way out of debt" at the expense of the rest of the economy, which is receiving no debt relief!

Mr. Paulson shed the appropriate crocodile tears on behalf of homeowners and the middle class, whose interest he depicted as lying in ever-rising housing and stock market prices. "In recent weeks, the American people have felt the effects of a frozen financial system," he explained. "They have seen reduced values in their retirement and investment accounts. They have worried about meeting payrolls and they have worried about losing their jobs." He almost seemed about to use the timeworn widows and orphans cover story and beg Americans please not to unplug Granny from her life support system in the nursing home. We need to preserve the value of her stocks, and help everyone retire happily by restoring normal Wall Street financial engineering to make voters rich again.

European executives who steered their banks into the debt iceberg have been fired. England wiped out shareholders in Northern Rock last summer, and more recently Bradford and Bingley. But in America the culprits get to stay on. No bank stockholders are being wiped out here, despite the negative equity into which the worst risk-taking banks have fallen or the prosecutions brought against them for predatory lending, consumer fraud and related wrongdoing.

Government aid will be used to pay exorbitant salaries to the executives who drove these banks into insolvency. "Institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes," Mr. Paulson pretended – only to qualify it by saying that the rule would apply only "during the period that Treasury holds equity issued through this program." The executives can stay on and give themselves the usual retirement gifts after all, prompting Democratic Congressman Barney Frank complained about how weak the Treasury restrictions are. "Compensation experts say that the provisions, though politically prudent to appease public anger, will probably have little real impact on how financial executives are paid in coming years. They predict banks will simply pay higher taxes and will find other creative ways of paying their executives as they see fit. Some say there could even be a sudden surge in compensation as soon as the government program ends, in a few years, leading to eye-popping numbers down the road. … When Congress limited the tax deductibility of cash salaries to $1 million, for example, it simply led to an explosion in stock options used as compensation and even higher total payouts."

And speaking of stock options, the government shortchanged itself here too, despite its promises to ensure that it will shares in the gains when banks recover. Senator Schumer went so far as to assure voters that "under any capital injection plan that Treasury pursues, dividends must be eliminated, executive compensation must be constrained, and normal banking activities must be emphasized." This was mostly hot air. England and other countries have insisted that banks not pay dividends until the government is reimbursed. The idea is to avoid using public money to pay dividends to existing shareholders and continued exorbitant salaries to their mismanagers! But the terms of the U.S. bailout is made simply call for banks not increase their dividend payouts – a policy they most likely would follow in any case in view of their earnings crunch.

Mr. Schumer verged on the ridiculous when he proclaimed: "We must operate in the same way any significant investor operates in these situations – when Warren Buffett invested in Goldman Sachs and General Electric in recent weeks, he demanded strict, but not onerous terms. The government must be similarly protective of taxpayer interests." But Mr. Buffett obtained a much better deal for his $5 billion investment in Goldman Sachs, including warrants to buy its stock at a price below the going price when he helped rescue the company. Likewise in England, the government took stock ownership at low prices before the bailout, not at higher prices after it! But instead of exercising its warrants at the depressed prices where bank stocks stood at the time Mr. Paulson detailed the bailout terms, the U.S. Treasury would be able to exercise its warrants (equal to 15 percent of its investment) only at prices that were to be set after the banks had time to recover with the Treasury’s aid. Existing stockholders thus will benefit more than the government – which is why bank stocks soared on news of the bailout’s terms. So the government does not appear to be a good bargainer in the public interest. In fact, Mr. Paulson may be guilty of deliberate scuttling of the public interest that, as Treasury Secretary, he is supposed to defend.

Given his financial experience, Mr. Paulson had to know how deceptive his promise was in placing such emphasis on the government’s stock options, the sweetener that has made so many executives fabulously wealthy: "taxpayers will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions," he explained. But the "reasonable return" is only 5% annually, just above what the government typically has to pay, not a rate reflecting anything like what the "free market" now charges Wall Street firms with negative equity. The government’s $250 billion in preferred stock will carry a dividend that rises to 9% after five years, with no limit on how long the loan may be outstanding.

All I can say is, Wow! If only homeowners could get a similar break: a reduction in their interest rate to just 5%, rising to a penalty rate of just 9% – without the heavy penalties and late fees that Countrywide/Bank of America charges! By contrast, German banks that receive a public rescue will pay "a fee of at least 2% annually of the amount guaranteed. The U.K. will charge 0.50% plus the cost of default insurance on a bank's debt." A British banker wrote to me that "the government offers 12% preference shares, and ordinary shares at an absolutely huge discount to asset value to provide the cash." But the U.S. Government agreed to exercise its stock options at the post-bailout price, not the price prior to rescue. It even gives up most of these options if the banks do repay the Treasury’s loan. On the excuse of encouraging private Wall Street investors to replace government "ownership" and "intrusion" into the marketplace, banks can "cut in half the number of common shares the government will eventually be able to purchase. That can be done if a bank sells stock by the end of 2009, and raises at least as much cash as the government is investing."

These bailout terms suggest that what Wall Street wants is pretty much what colonialist Britain achieved for so many years in India and Africa: puppet leaders with an imperial political advisor, in America’s case a Secretary of the Treasury and a vice-regent as head of the Federal Reserve System. But what the rest of the economy needs is a genuinely free leader able to impose better and more equitable laws to write down debt, not build it up and bail out more bad loans. Within the present administration itself, Sheila Bair, head of the Federal Deposit Insurance Corporation, complained in a Wall Street Journal interview that she didn’t understand "Why there’s been such a political focus on making sure we’re not unduly helping borrowers but then we’re providing all this massive assistance at the institutional level." She "described painstaking efforts made by lawmakers in crafting the federal Hope for Homeowners program to make sure it limited resale profits for borrowers who received affordable home loans," by giving the government a share of the rising sales price.

The imbalance between creditor demands and debtors’ ability to pay is indeed the problem! Mr. Paulson claimed in his Monday address that he needed to get to the root of the economic problem. But in his view it is simply that the banks "are not positioned to lend as widely as is necessary to support our economy. Our goal is to see … that they can make more loans to businesses and consumers across the nation." As he explained in his Financial Times interview (cited above), "for the first time you have seen an action that is systematic, that is getting at the root causes" of the financial crisis. But his perspective is remarkably narrow-minded. It denies that the problem is debt above and beyond the ability of the economy at large to pay, and higher than the market price of property and assets pledged as collateral.

Creating a system for the banks to "earn their way out of debt" means creating yet more interest-bearing debt for the economy at large. Mortgage loans are what is supposed to restore high housing prices and office costs – precisely what caused the debt meltdown in the first place! Despite Mr. Paulson’s and Ms. Bair’s characterization of the present crisis as merely a liquidity problem, it is really a debt problem. The volume of real estate debt, auto debt, student loans, bank debt, pension debts by municipalities and states as well as private companies exceed their ability to pay.

Shortly after Mr. Paulson’s Monday speech a Dutch economics professor, Dirk Bezemer, wrote me that: "In my thinking I liken it to a Ponzi game where in the final stages the only way to keep things going a bit longer is to pump in more liquidity. That is a solution in the sense that it restores calm, but only in the short run. This is what we now see happening and – despite the 10% stock market rally today – I am still bracing myself for the inevitable end of the Ponzi game – suddenly or as a long drawn out debt deflation." He went on to explain what he and other associates of mine have been saying for many years now: "The actual solution is to separate the Ponzi from the non-Ponzi economy and let the pain be suffered in the first part so as to salvage what we can from the second. This means bailing out homeowners but not investment banks, etc. The qualification to this general approach is that those Ponzi game players whose demise is a real ‘system threat’ need support, but only with punitive conditionalities attached. And just like Third World countries, they won’t have a choice."

The situation has some similarities to global warming. Current U.S. presidential debates propose solving the ³oil problem² not so much by conservation as by extracting more oil from Alaska and along the U.S. seacoast to sustain rising domestic demand. The effect of this policy is to increase air pollution and hence global warming. In a similar fashion, the problem of ³debt pollution² is being ³solved² by creating yet more debt, not by reducing its volume.

Neither the Treasury nor Congress is helping to resolve this problem. The working assumption is that giving newly created government debt to the banks and Wall Street will lead to more lending to re-inflate the real estate and stock markets. But who will lend more to the one-sixth of U.S. homes already said to have fallen into negative equity territory? As debt deflation eats into the domestic market for goods and services, corporate sales and earnings will shrink, dragging down stock prices. Wall Street is in control, but its policies are so shortsighted that they are eroding the underlying economy * which is passing from democracy to oligarchy, and indeed it seems to a bipartisan financial kleptocracy.

http://www.globalresearch.ca/index.php?c...&aid=10597

[Jan Klimkowski]

Time to resurrect the thought: One bank to rule them all and in the darkness bind them....

NYT COLUMNIST TAPS JPM CONF CALL; FIRM HAS NO INTENTION OF USING $25B TARP FUNDS TO INCREASE LOANS
-NYT columnist Joe Nocera monitored a recent high-level executive only JPM conference call quoting an executive from JP Morgan's plans for the $25B TARP funds. The executive stated to the call that the banks focus would instead be on using its stronger balance sheet to acquire weak rivals and pick through the wreckage to the banks advantage. He referred to the TARP capital as a "nice backstop"

“Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?”

It was Oct. 17, just four days after JPMorgan Chase’s chief executive, Jamie Dimon, agreed to take a $25 billion capital injection courtesy of the United States government, when a JPMorgan employee asked that question. It came toward the end of an employee-only conference call that had been largely devoted to meshing certain divisions of JPMorgan with its new acquisition, Washington Mutual.

Which, of course, it also got thanks to the federal government. Christmas came early at JPMorgan Chase.

The JPMorgan executive who was moderating the employee conference call didn’t hesitate to answer a question that was pretty politically sensitive given the events of the previous few weeks.

Given the way, that is, that Treasury Secretary Henry M. Paulson Jr. had decided to use the first installment of the $700 billion bailout money to recapitalize banks instead of buying up their toxic securities, which he had then sold to Congress and the American people as the best and fastest way to get the banks to start making loans again, and help prevent this recession from getting much, much worse.

In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who’s been indiscreet enough to say it within earshot of a journalist.

(He didn’t mean to, of course, but I obtained the call-in number and listened to a recording.)

“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”

Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.

It is starting to appear as if one of Treasury’s key rationales for the recapitalization program — namely, that it will cause banks to start lending again — is a fig leaf, Treasury’s version of the weapons of mass destruction.

In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation. As Mark Landler reported in The New York Times earlier this week, “the government wants not only to stabilize the industry, but also to reshape it.” Now they tell us.

Indeed, Mr. Landler’s story noted that Treasury would even funnel some of the bailout money to help banks buy other banks. And, in an almost unnoticed move, it recently put in place a new tax break, worth billions to the banking industry, that has only one purpose: to encourage bank mergers. As a tax expert, Robert Willens, put it: “It couldn’t be clearer if they had taken out an ad.”

Friday delivered the first piece of evidence that this is, indeed, the plan. PNC announced that it was purchasing National City, an acquisition that will be greatly aided by the new tax break, which will allow it to immediately deduct any losses on National City’s books.

As part of the deal, it is also tapping the bailout fund for $7.7 billion, giving the government preferred stock in return. At least some of that $7.7 billion would have gone to NatCity if the government had deemed it worth saving. In other words, the government is giving PNC money that might otherwise have gone to NatCity as a reward for taking over NatCity.

I don’t know about you, but I’m starting to feel as if we’ve been sold a bill of goods.

•

The markets had another brutal day Friday. The Asian markets got crushed. Germany and England were down more than 5 percent. In the hours before the United States markets opened, all the signals suggested it was going to be the worst day yet in the crisis. The Dow dropped more than 400 points at the opening, but thankfully it never got any worse.

There are lots of reasons the markets remain unstable — fears of a global recession, companies offering poor profit projections for the rest of the year, and the continuing uncertainties brought on by the credit crisis. But another reason, I now believe, is that investors no longer trust Treasury. First it says it has to have $700 billion to buy back toxic mortgage-backed securities. Then, as Mr. Paulson divulged to The Times this week, it turns out that even before the bill passed the House, he told his staff to start drawing up a plan for capital injections. Fearing Congress’s reaction, he didn’t tell the Hill about his change of heart.

Now, he’s shifted gears again, and is directing Treasury to use the money to force bank acquisitions. Sneaking in the tax break isn’t exactly confidence-inspiring, either. (And let’s not even get into the less-than-credible, after-the-fact rationalizations for letting Lehman default, which stands as the single worst mistake the government has made in the crisis.)

On Thursday, at a hearing of the Senate Banking Committee, the chairman, Christopher J. Dodd, a Connecticut Democrat, pushed Neel Kashkari, the young Treasury official who is Mr. Paulson’s point man on the bailout plan, on the subject of banks’ continuing reluctance to make loans. How, Senator Dodd asked, was Treasury going to ensure that banks used their new government capital to make loans — “besides rhetorically begging them?”

“We share your view,” Mr. Kashkari replied. “We want our banks to be lending in our communities.”

Senator Dodd: “Are you insisting upon it?”

Mr. Kashkari: “We are insisting upon it in all our actions.”

But they are doing no such thing. Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead. And those pleas, in this environment, are falling on deaf ears.

Yes, there are times when a troubled bank needs to be acquired by a stronger bank. Given that the federal government insures deposits, it has an abiding interest in seeing that such mergers take place as smoothly as possible. Nobody is saying those kinds of deals shouldn’t take place.

But Citigroup, at this point, probably falls into the category of troubled bank, and nobody seems to be arguing that it should be taken over. It is in the “too big to fail” category, and the government will ensure that it gets back on its feet, no matter how much money it takes. One reason Mr. Paulson forced all of the nine biggest banks to take government money was to mask the fact that some of them are much weaker than others.

We have long been a country that has treasured its diversity of banks; up until the 1980s, in fact, there were no national banks at all. If Treasury is using the bailout bill to turn the banking system into the oligopoly of giant national institutions, it is hard to see how that will help anybody. Except, of course, the giant banks that are declared the winners by Treasury.

[Peter Lemkin]

Here's an October 18 article by Michael Hudson:



http://www.globalresearch.ca/index.php?c...&aid=10597

Hudson really seems to have this manufactured crisis nailed down. He also has longterm solutions to all of 'this' in some of his books and papers. To get from here to 'there' will not be easy, and will take getting rid of the usual 'suspects', controllers and a paradigm shift in the thinking of those who still think, these days. Meanwhile, he is great reading by the light of 'civilization' burning.

Less involved with analysis of the current problems [but totally aware of them], but with a solution is David Korten, in his book The Great Turning and its spin-off Great Turning Film and Society http://globalpublicmedia.com/lectures/781. Korten's book When Corporations Rule The World is also a must read.

[Peter Lemkin]

Another obit for the USA....from a unusual viewpoint of Arab banking. I'm not inclined to believe that SA or the other Arab States have a better model of capitalism, but the article is certainly correct in much of its critique of the US finacial system. The world is not looking at the USA with much favor of late for a laundrylist of reasons ...understatement of the week!

Death of the American Empire
America is self-destructing & bringing the rest of the world down with it

by Tanya Cariina Hsu
Global Research, October 23, 2008

I believe that banking institutions are more dangerous to our liberties than standing armies. (Thomas Jefferson, US President; 1743 - 1826)

America is dying. It is self-destructing and bringing the rest of the world down with it.

Often referred to as a sub-prime mortgage collapse, this obfuscates the real reason. By associating tangible useless failed mortgages, at least something 'real' can be blamed for the carnage. The problem is, this is myth. The magnitude of this fiscal collapse happened because it was all based on hot air.

The banking industry renamed insurance betting guarantees as 'credit default swaps' and risky gambling wagers were called 'derivatives'. Financial managers and banking executives were selling the ultimate con to the entire world, akin to the snake-oil salesmen from the 18th century but this time in suits and ties. And by October 2009 it was a quadrillion-dollar (that's $1,000 trillion) industry that few could understand.

Propped up by false hope, America is now falling like a house of cards.

It all began in the early part of the 20th century. In 1907 J.P. Morgan, a private New York banker, published a rumour that a competing unnamed large bank was about to fail. It was a false charge but customers nonetheless raced to their banks to withdraw their money, in case it was their bank. As they pulled out their funds the banks lost their cash deposits and were forced to call in their loans. People now therefore had to pay back their mortgages to fill the banks with income, going bankrupt in the process. The 1907 panic resulted in a crash that prompted the creation of the Federal Reserve, a private banking cartel with the veneer of an independent government organisation. Effectively, it was a coup by elite bankers in order to control the industry.

When signed into law in 1913, the Federal Reserve would loan and supply the nation's money, but with interest. The more money it was able to print, the more 'income' for itself it generated. By its very nature the Federal Reserve would forever keep producing debt to stay alive. It was able to print America's monetary supply at will, regulating its value. To control valuation however, inflation had to be kept in check.

The Federal Reserve then doubled America's money supply within five years, and in 1920 it called in a mass percentage of loans. Over five thousand banks collapsed overnight. One year later the Federal Reserve again increased the money supply by 62%, but in 1929 it again called the loans back in, en masse. This time, the crash of 1929 caused over sixteen thousand banks to fail and an 89% plunge on the stock market. The private and well-protected banks within the Federal Reserve system were able to snap up the failed banks at pennies on the dollar.

The nation fell into the Great Depression and in April 1933 President Roosevelt issued an executive order that confiscated all gold bullion from the public. Those who refused to turn in their gold would be imprisoned for ten years, and by the end of the year the gold standard was abolished. What had been redeemable for gold became paper 'legal tender', and gold could no longer be exchanged for cash as it had once been.

Later, in 1971, President Nixon removed the dollar from the gold standard altogether, therefore no longer trading at the internationally fixed price of $35. The US dollar was now worth whatever the US decided it was worth because it was 'as good as gold'. It had no standard of measure, and became the universal currency. Treasury bills (short-term notes) and bonds (long-term notes) replaced gold as value, promissory notes of the US government and paid for by the taxpayer. Additionally, because gold was exempt from currency reporting requirements it could not be traced, unlike the fiduciary (i.e. that based upon trust) monetary systems of the West. That was not in America's best interest.

After the Great Depression private banks remained afraid to make home loans, so Roosevelt created Fannie Mae. A state supported mortgage bank, it provided federal funding to finance home mortgages for affordable housing. In 1968 President Johnson privatised Fannie Mae, and in 1970, Freddie Mac was created to compete with Fannie Mae. Both of them bought mortgages from banks and other lenders, and sold them onto new investors.

The post World War II boom had created an America flush with cash and assets. As a military industrial complex, war exponentially profited the US and, unlike any empire in history, it shot to superpower status. But it failed to remember that, historically, whenever empires rose they fell in direct proportion.

Americans could afford all the modern conveniences, exporting its manufactured goods all over the world. After the Vietnam War, the US went into an economic decline. But people were loath to give up their elevated standard of living despite the loss of jobs, and production was increasingly sent overseas. A sense of delusion and entitlement kept Americans on the treadmill of consumer consumption.

In 1987 the US stock market plunged by 22% in one day because of high-risk futures trading, called derivatives, and in 1989 the Savings & Loan crisis resulted in President George H.W. Bush using $142 billion in taxpayer funds to rescue half of the S&L's. To do so, Freddie Mac was given the task of giving sub-prime (below prime-rate) mortgages to low-income families. In 2000, the "irrational exuberance" of the dot-com bubble burst, and 50% of high-tech firms went bankrupt wiping $5 trillion from their over-inflated market values.

After this crisis, Federal Reserve Chairman Alan Greenspan kept interest rates so low they were less than the rate of inflation. Anyone saving his or her income actually lost money, and the savings rate soon fell into negative territory.

During the 1990s, advertisers went into overdrive, marketing an ever more luxurious lifestyle, all made available with cheap easy credit. Second mortgages became commonplace, and home equity loans were used to pay credit card bills. The more Americans bought, the more they fell into debt. But as long as they had a house their false sense of security remained: their home was their equity, it would always go up in value, and they could always remortgage at lower rates if needed. The financial industry also believed that housing prices would forever climb, but should they ever fall the central bank would cut interest rates so that prices would jump back up. It was, everyone believed, a win-win situation.

Greenspan's rock-bottom interest rates let anyone afford a home. Minimum wage service workers with aspirations to buy a half million-dollar house were able to secure 100% loans, the mortgage lenders fully aware that they would not be able to keep up the payments.

So many people received these sub-prime loans that the investment houses and lenders came up with a new scheme: bundle these virtually worthless home loans and sell them as solid US investments to unsuspecting countries who would not know the difference. American lives of excess and consumer spending never suffered, and were being propped up by foreign nations none the wiser.

It has always been the case that a bank would lend out more than it actually had, because interest payments generated its income. The more the bank loaned, the more interest it collected even with no money in the vault. It was a lucrative industry of giving away money it never had in the first place. Mortgage banks and investment houses even borrowed money on international money markets to fund these 100% plus sub-prime mortgages, and began lending more than ten times their underlying assets.

After 9/11, George Bush told the nation to spend, and during a time of war, that's what the nation did. It borrowed at unprecedented levels so as to not only pay for its war on terror in the Middle East (calculated to cost $4 trillion) but also pay for tax cuts at the very time it should have increased taxes. Bush removed the reserve requirements in Fannie Mae and Freddie Mac, from 10% to 2.5%. They were free to not only lend even more at bargain basement interest rates, they only needed a fraction of reserves. Soon banks lent thirty times asset value. It was, as one economist put it, an 'orgy of excess'.

It was flagrant overspending during a time of war. At no time in history has a nation gone into conflict without sacrifice, cutbacks, tax increases, and economic conservation.

And there was a growing chance that, just like in 1929, investors would rush to claim their money all at once.

To guarantee, therefore, these high risk mortgages, the same financial houses that sold them then created 'insurance policies' against the sub-prime investments they were selling, marketed as Credit Default Swaps (CDS). But the government must regulate insurance policies, so by calling them CDS they remained totally unregulated. Financial institutions were 'hedging their bets' and selling premiums to protect the junk assets. In other words, the asset that should go up in value could also have a side-bet, just in case, that it might go down. By October 2008, CDS were trading at $62 trillion, more than the stock markets of the whole world combined.

These bets had absolutely no value whatsoever and were not investments. They were just financial instruments called derivatives - high stakes gambling, 'nothing from nothing' - or as Warren Buffet referred to them, 'Weapons of Financial Mass Destruction'. The derivatives trade was 'worth' more than one quadrillion dollars, or larger than the economy of the entire world. (In September 2008 the global Gross Domestic Product was $60 trillion).

Challenged as being illegal in the 1990s, Greenspan legalised the derivatives practise. Soon hedge funds became an entire industry, betting on the derivatives market and gambling as much as they wanted. It was easy because it was money they did not have in the first place. The industry had all the appearances of banks, but the hedge funds, equity funds, and derivatives brokers had no access to government loans in the event of a default. If the owners defaulted, the hedge funds had no money to pay 'from nothing'. Those who had hedged on an asset going up or down would not be able to collect on the winnings or losses.

The market had become the largest industry in the world, and all the financial giants were cashing in: Bear Stearns, Lehman Brothers, Citigroup, and AIG. But homeowners, long maxed out on their credit, were now beginning to default on their mortgages. Not only were they paying for their house but also all the debt amassed over the years for car, credit card and student loans, medical payments and home equity loans. They had borrowed to pay for groceries and skyrocketing health insurance premiums to keep up with their bigger houses and cars; they refinanced the debt they had for lower rates that soon ballooned. The average American owed 25% of their annual income to credit card debts alone.

In 2008, housing prices began to slide precipitously downwards and mortgages were suddenly losing value. Manufacturing orders were down 4.5% by September, inventories began to pile up, unemployment was soaring and average house foreclosures had increased by 121% and up to 200% in California.

The financial giants had to stop trading these mortgage-backed securities, as now their losses would have to be visibly accounted for. Investors began withdrawing their funds. Bear Stearns, heavily specialised in home loan portfolios, was the first to go in March.

Just as they had done in the 20th century, JP Morgan swooped in and picked up Bear Stearns for a pittance. One year prior Bear Stearns shares traded at $159 but JP Morgan was able to buy in and take over at $2 a share. In September, Washington Mutual collapsed, the largest bank failure in history. JP Morgan again came in and paid $1.9 billion for assets valued at $176 billion. It was a fire sale.

Relatively quietly over the summer Freddie Mac and Fannie Mae, the publicly traded companies responsible for 80% of the home mortgage loans, lost almost 90% of their value for the year. Together they were responsible for half the outstanding loan amounts but were now in debt $80 to every $1 in capital reserves.

To guarantee they would stay alive, the Federal Reserve stepped in and took over Freddie Mac and Fannie Mae. On September 7th 2008 they were put into "conservatorship": known as nationalisation to the rest of the world, but Americans have difficulty with the idea of any government run industry that required taxpayer increases.

What the government was really doing was handing out an unlimited line of credit. Done by the Federal Reserve and not US Treasury, it was able to bypass Congressional approval. The Treasury Department then auctioned off Treasury bills to raise money for the Federal Reserve's own use, but nonetheless the taxpayer would be funding the rescue. The bankers had bled tens of billions from the system by hedging and derivative gambling, and triggered the portfolio inter-bank lending freeze, which then seized up and crashed.

The takeover was presented as a government funded bailout of an arbitrary $700 billion, which does nothing to solve the problem. No economists were asked to present their views to Congress, and the loan only perpetuates the myth that the banking system is not really dead.

In reality, the damage will not be $700 billion but closer to $5 trillion, the value of Freddie Mac and Fannie Mae's mortgages. It was nothing less than a bailout of the quadrillion dollar derivatives industry which otherwise faced payouts of over a trillion dollars on CDS mortgage-backed securities they had sold. It was necessary, said Treasury Secretary Henry Paulson, to save the country from a "housing correction". But, he added, the $700 billion taxpayer funded takeover would not prevent other banks from collapsing, in turn causing a stock market crash.

In other words Paulson was blackmailing Congress in order to lead a coup by the banking elite under the false guise of necessary legislation to stop the dyke from flooding. It merely shifted wealth from one class to another, as it had done almost a century prior. No sooner were the words were out of Paulson's mouth before other financial institutions began imploding, and with them the disintegration of the global financial system - much modelled after the lauded system of American banking.

In September the Federal Reserve, its line of credit assured, then bought the world largest insurance company, AIG, for $85 billion for an 80% stake. AIG was the largest seller of CDS, but now that it was in the position of having to pay out, from collateral it did not have, it was teetering on the edge of bankruptcy.

In October the entire country of Iceland went bankrupt, having bought American worthless sub-prime mortgages as investments. European banks began exploding, all wanting to cash in concurrently on their inflated US stocks to pay off the low interest rate debts before rates climbed higher. The year before the signs had been evident, when the largest US mortgage lender Countrywide fell. Soon after, the largest lender in the UK, Northern Rock, went under - London long having copied Wall Street creative financing. Japan and Korea's auto manufacturing nosedived by 37%, global economies contracting. Pakistan is on the edge of collapse too, with real reserves at $3 billion - enough to only buy a month's supply of food and oil and attempting to stall payments to Saudi Arabia for the 100,000 barrels of oil per day it provides to the country. Under President Musharraf, who left office in the nick of time, Pakistan's currency lost 25% of its value, its inflation running at 25%.

Meanwhile energy costs had soared, with oil reaching a peak of almost $150 per barrel in the summer. The costs were immediately passed on to the already spent homeowner, in rising heating and fuel, transport and manufacturing costs. Yet 30% of the cost of a barrel of oil was based upon Wall Street speculators, climbing to 60% as a speculative fear factor during the summer months. As soon as the financial crisis hit, suddenly oil prices slid down, slicing oil costs to $61 from a high of $147 in June and proving that the 60% speculation factor was far more accurate. This sudden decline also revealed OPEC's lack of control over spiralling prices during the past few years, almost squarely laid on the shoulders of Saudi Arabia alone. When OPEC, in September, sought to maintain higher prices by cutting production, it was Saudi Arabia who voted against such a move at the expense of its own revenue.

Europe then decided that no more would it be ruined by the excess of America. 'Olde Europe' may have had enough of being dictated to by the US, who refused to compromise on loans lent to their own broken nations after WWII. On October the 13th, the once divided EU nations unilaterally agreed to an emergency rescue plan totaling $2.3 trillion. It was more than three times greater than the US package for a catastrophe America alone had created.

By mid October, the Dow, NASDAQ and S&P 500 had erased all the gains they made over the previous decade. Greenspan's pyramid scheme of easy money from nothing resulted in a massive overextension of credit, inflated housing prices, and incredible stock valuations, achieved because investors would never withdraw their money all at once. But now it was crashing at break-neck speed and no solution in sight. President Bush said that people ought not to worry at all because "America is the most attractive destination for investors around the globe."

Those who will hurt the most are the very men and women who grew the country after WWII, and saved their pensions for retirement due now. They had built the country during the war production years, making its weapons and arms for global conflict. During the Cold War the USSR was the ever-present enemy and thus the military industrial complex continued to grow. Only when there is a war does America profit.

Russia will not tolerate a new cold war build-up of ballistic missiles. And the Middle East has seen its historical ally turn into its worst nightmare, be it militarily or economically. No longer will these nations continue to support the dollar as the world's currency. The world's economy is no longer America's to control and the US is now indebted to the rest of the world. No more will the US be able to demand its largest Middle Eastern oil supplier open up its banking books so as to be transparent and free from corruption and terrorist connections lest there be consequences - the biggest act of criminal corruption in history has just been perpetrated by the United States.

It was the best con game in town: get paid well for selling vast amounts of risk, fail, and then have governments fix the problem at the expense of the taxpayers who never saw a penny of shared wealth to begin with.

There is no easy solution to this crisis, its effects multiplying like an infectious disease.

Ironically, least affected by the crisis are Islamic banks.

They have largely been immune to the collapse because Ilamic banking prohibits the acquisition of wealth via gambling (or alcohol, tobacco, pornography, or stocks in armaments companies), and forbids the buying and selling of a debt as well as usury. Additionally, Shari'ah banking laws forbid investing in any company with debts that exceed thirty percent.

"Islamic banking institutions have not failed per se as they deal in tangible assets and assume the risk" said Dr. Mohammed Ramady, Professor of Economics at King Fahd University of Petroleum & Minerals. "Although the Islamic banking sector is also part of the global economy, the impact of direct exposure to sub-prime asset investments has been low" he continued. "The liquidity slowdown has especially affected Dubai, with its heavy international borrowing. The most negative effect has been a loss of confidence in the regional stock markets." Instead, said Dr. Ramady, oil surplus Arab nations are "reconsidering overseas investments in financial assets" and speeding up their own domestic projects.

Eight years ago, in May 2000, Saudi Islamic banker His Highness Dr. Nayef bin Fawaaz ibn Sha'alan publicly gave a series of economic lectures in Gulf states. At the time his research showed that Arab investments in the US, to the tune of $1.5 trillion, were effectively being held hostage and he recommended they be pulled out and reinvested in the tangibles of the Arab and Islamic markets. "Not in stocks however because the stock market could be manipulated remotely, as we have seen in the last couple of years in the Arab market where trillions of dollars evaporated" he said.

He warned then that it was a certainty that the US economic system was on the verge of collapse because of its cumulative debts, ever-increasing deficit and the interest on that debt. "When the debts and deficits come due, they just issue new Treasury bonds to cover the old bonds due, with their interest and the new deficit too." The cycle cannot be stopped or the debt cancelled because the US would no longer be able to borrow. The consequence of relieving this cycle would be a total collapse of their economic system as opposed to the partial, albeit massive, crash of 2008.

"Islamic banking", said Dr. Al-Sha'alan, "always protects the individuals' wealth while putting a cap on selfishness and greed. It has the best of capitalism - filtering out its negatives - and the best of socialism - filtering out its negatives too." Both systems inevitably had to fail. Additionally, Europe and Japan did not need to be held accountable and indebted to America anymore for protection against the Soviets.

"The essential difference between the Islamic economic system and the capitalist system", he continued "is that in Islam wealth belongs to God - the individual being only its manager. It is a means, not a goal. In capitalism, it is the reverse: money belongs to the individual, and is a goal in and of itself. In America especially, money is worshipped like God."

In sum, the crash of the entire global economic system is a result of America's fiscal arrogance based upon one set of rules for itself and another for the rest of the world. Its increased creative financing deluded its people into a false sense of security, and now looks like the failure of capitalism altogether.

The whole exercise in democracy by force against Arab Muslim nations has almost bankrupted the US. The Cold War is over and the US has nothing to offer: no exports, no production, few natural resources, and no service sector economy.

The very markets that resisted US economic policies the most, having curbed foreign direct investments into America, are those who will fare best and come out ahead.

But not before having paid a very high price.

Tanya Cariina Hsu is a political researcher and analyst focusing on Saudi Arabian and US relations. One of the contributors to recent written testimony on the Kingdom of Saudi Arabia for the US Congressional Senate Judiciary Committee on behalf of FOCA (Friends of Charities Association) in its Hearing on Capitol Hill in Washington D.C., her analysis has been published and critically acclaimed throughout the US, Europe and the Middle East.

The first to break the barrier against public discussion of the Israeli influence upon US foreign policy decision making, in Capitol Hill's "A Clean Break" Symposium in Washington D.C. in 2004, as the Institute for Research: Middle East Policy (IRmep) Director of Development and Senior Research Analyst, Ms. Hsu remains an International Fellow with the Institute.

Born in London, she re-located to Riyadh, Saudi Arabia in 2005 and is currently completing a book on US policy towards Saudi Arabia.

[Jan Klimkowski]

Hmmm - "Spooky" Ambrose Evans-Pritchard, onetime print assassin of Clinton & currently roving "business correspondent" for the Daily Telegraph is today floating the idea, through Council for Foreign Relations sources, of the IMF printing money.

That would be a whole new type of Shock Therapy.

It's BOHICA time.

IMF may need to "print money" as crisis spreads
The International Monetary Fund may soon lack the money to bail out an ever growing list of countries crumbling across Eastern Europe, Latin America, Africa, and parts of Asia, raising concerns that it will have to tap taxpayers in Western countries for a capital infusion or resort to the nuclear option of printing its own money.

By Ambrose Evans-Pritchard
Last Updated: 1:22PM GMT 28 Oct 2008

The Fund is already close to committing a quarter of its $200bn (£130bn) reserve chest, with a loans to Iceland ($2bn), Ukraine ($16.5bn), and talks underway with Pakistan ($14.5bn), Hungary ($10bn), as well as Belarus and Serbia.

Neil Schering, emerging market strategist at Capital Economics, said the IMF's work in the great arc of countries from the Baltic states to Turkey is only just beginning.

"When you tot up the countries across the region with external funding needs, you get to $500bn or $600bn very quickly, and that blows the IMF out of the water. The Fund may soon have to start calling on the West for additional funds," he said.

Brad Setser, an expert on capital flows at the Council for Foreign Relations, said Russia, Mexico, Brazil and India have together spent $75bn of their reserves defending their currencies this month, and South Korea is grappling with a serious banking crisis.

"Right now the IMF is too small to meet the foreign currency liquidity needs of the larger emerging economies. We're in a dangerous situation and there is the risk of extreme moves in the markets, as we have seen with the Brazilian real. I hope policy-makers understand how serious this is," he said.

The IMF, led by Dominique Strauss-Kahn, has the power to raise money on the capital markets by issuing `AAA' bonds under its own name. It has never resorted to this option, preferring to tap members states for deposits.

The nuclear option is to print money by issuing Special Drawing Rights, in effect acting as if it were the world's central bank. This was done briefly after the fall of the Soviet Union but has never been used as systematic tool of policy to head off a global financial crisis.

"The IMF can in theory create liquidity like a central bank," said an informed source. "There are a lot of ideas kicking around."

For now, Eastern Europe is the epicentre of the crisis. Lars Christensen, a strategist at Danske Bank, said the lighting speed and size of Ukraine's bail-out suggest the IMF is worried about the geo-strategic risk in the Black Sea region, as well as the imminent risk a financial pandemic. "The IMF clearly fears a domino effect in Eastern Europe where a collapse in one country automatically leads to a collapse in another," he said.

Mr Christensen said investor sentiment towards the region has reached the point of revulsion. The Budapest bourse plunged 10pc yesterday despite the proximity of an IMF deal Meanwhile, Standard & Poor's issued a blitz of fresh warnings, downgrading Romania's debt to junk status, and axing the ratings Poland, Latvia, Lithuania, and Croatia.

The agency said Romania was "vulnerable to a sudden-stop scenario where capital inflows dry up or even reverese", leaving the country unable to cover a current account deficit of 14pc of GDP.

Romania's central bank has taken drastic steps to defend the leu, squeezing liquidity so violently that overnight rates shot up to 900pc. But there are growing doubts whether this sort of shock therapy can obscure the fact that economic booms are now turning to bust across the region.

Merrill Lynch has advised to clients to take "short" positions against the leu. "The fundamental picture suggests that Romania may face a currency crisis in the near term, similar to what Hungary has gone through over the last week," it said. The bank also warned that Turkey and the Philippines are vulnerable.

Hungary was forced to raise interest rates last week by 3 percentage points to 11.5pc to defend its currency. Even Denmark has had to tighten by a half point to keep within its Exchange Rate Mechanism, raising fears that every country on the fringes of the eurozone will have resort to a deflationary squeeze.

The root problem is that Eastern Europe and Russia have together borrowed $1,600bn from foreign banks in euros and dollars to fund their catch-up growth spurt over the last five years, according to data from the Bank for International Settlements. These loans are now coming due at an alarming pace. Even rock-solid companies are having trouble rolling over debts.

Mr Schering said Turkey was likely to join the queue for bail-outs very soon. "Their external liabilities have reached $186bn, and a lot of this is short-term debt that has to be rolled over in coming months," he said.

Turkey's prime minister Recep Tayyip Erdogan said over the weekend that his country would not "darken its future by bowing to the wishes of the IMF", but it is unclear how long Ankara can maintain its defiant stand as capital flight drains reserves.

Pakistan - now facing imminent bankruptcy - has also raised political hackles, balking at IMF demands for deep cuts in military spending as a condition for a standby loan. Diplomats say it is unlikely that the West will let the nuclear-armed Islamic state slip into chaos.

http://www.telegraph.co.uk/finance/comme...reads.html

[Peter Lemkin]

Hmmm - "Spooky" Ambrose Evans-Pritchard, onetime print assassin of Clinton & currently roving "business correspondent" for the Daily Telegraph is today floating the idea, through Council for Foreign Relations sources, of the IMF printing money.

That would be a whole new type of Shock Therapy.

It's BOHICA time.



http://www.telegraph.co.uk/finance/comme...reads.html

I really doubt it will ever become legal, before the sun burns itself out, for us to print money when we need it....or how about just being able to write checks with nothing backing them - ditto credit cards with no limits and no payments - just like the banks, big nations, et al.

Are we about to enter a brave new world of many new entities printing their own monopoly money - WB/IMF/etc.? Strange days.

[Jan Klimkowski]

Long interview with Dr Michael Hudson expanding on ground discussed earlier in this thread.

http://www.globalresearch.ca/index.php?c...&aid=10731

Here's a teaser (and why Wall Street wins regardless of the outcome of the US Presidential election):

MH: Now so far, people have talked about the $700 billion that is at stake and the government has said we’re going to put securities in here, however what the media has not reported, although the British newspaper The Economist had a wonderful chart last week, showing that the Federal Reserve has already swapped $500 billion worth of Treasury bonds for junk. The cash for trash has already begun since March by the Federal Reserve so $500 billion is almost as much as the $700 billion that the Treasury is talking about, this has already been given away by the Fed to Wall Street insiders and nothing has been said in the media about this at all. Although its been statistically reported by the Fed. The Fed reports its holdings and securities. It reports its holdings of Treasury Securities, which have gone down by $ 500 trillion.

It reports its overall securities, which are now $1.1 trillion compared to less than $500 billion in Treasury Securities. And this leaves between $500 billion and $600 billion in essentially non-treasury securities, which are the junk they’ve taken on with these swaps that it’s arranged. And the Fed has been swapping this not only with the banks that its supposed to represent but its been doing cash for trash with insurance companies, investment banks and people who have no relation at all under the Fed and this is being done under the Fed’s special small print of the Fed’s Articles of Incorporation saying it can do this to save the economy. Well its not saving the economy at all. It’s wrecking the economy by doing this. It’s wrecking the economy by buying trash from insiders and as I said, creating a new Kleptocracy.

BF: Well I’ve never heard of this other, this previous $500 billion. No, that wasn’t reported. Well if they don’t have to…Why are they…

MH: Well the Fed says that it has reported it. Anybody can go online on the Federal Reserve and check the daily and weekly Federal Reserve Statistics. You can be sure that just everybody on Wall Street that has a stake in the financial system has done that. The media has blacked it out.

BF: Well if they gave away $500 billion previously with a media blackout why did they even bother to go public with the $700 billion?

MH: Because they need altogether about $5 trillion to create… If they’re going to create 500 billionaires to run the country for the next century and to create really a new feudal class they need $5 trillion and they don’t want the people to know what’s occurring because if they did the voters would get so upset they’d create probably a new political party, an alternative. And they don’t want the voters to have an alternative certainly before this election. They’ve got one candidate, McCain who is advised by Phil Gramm’s who is in completely in [???]’s pocket. They have another presidential candidate, Obama, whose financial advisor is Treasury Secretary Rubin. If you want to see what is likely to happen to the United States you should look at what Mr. Rubin did when America had a completely free hand in redesigning the Russian economy. This was their ideal. You’ve seen since the 1996 giveaways in Russia, the Russian population has fallen more than it fell in World War Two. The financial devastation today is even more devastating than military destruction. The result is a shortened life expectancy, lower birth rate, depression. The effect is psychological and social, not merely economic.

BF: Well why didn’t they keep their subsequent $700 billion a secret? Did they just feel they couldn’t?

MH: Because it’s become so large, larger than the Federal Reserve has on its balance sheet. The Federal Reserve only had $1.1 trillion and the Treasury can print an infinite amount of bonds to exchange for trash and what they needed was much more than just a trillion, they need really trillion after trillion to bail out the bad debts because that is how deep the hole is that Wall Street (and behind it, Free Market Economics of the Chicago School variety) has led the country into.

BF: Well then would you say it’s too big to bail out?

MH: In essence yes. It can’t really be bailed out. But what you can do is let the insiders get as much money as they can as quickly as they can under emergency conditions so that they can take their money and run. Of course it can’t be bailed out. But you can have a lot of insiders take their money and run. And they’re going to run--out of the dollar.

[Peter Lemkin]

How low can you go?......going down? down. down......
d
o
w
n
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In its latest economic outlook, Merrill Lynch economists "worry about inflation, or more precisely," a lack of it. From crashing global equity markets, falling commodity prices, rising unemployment, stagnant wages, over-indebted households, declining production, the continuing housing crisis, and more. All pointing to several future quarters of negative growth. Showing that Fed chairman Bernanke will face "his greatest fear: deflation." An analysis of the coincident to lagging indicators signals "deep recession."

In his October 24, commentary, Merrill's North American economist David Rosenberg sees "economic data deteriorating in a very serious way (and says) we are witnessing unprecedented stuff happen:"

-- the two-year housing recession "is still far from over" with new lows in a number of key readings;

-- it's "morphed into a capex recession, industrial production" had its worst decline in 34 years;

-- consumer confidence showed record declines;

-- retail sales keep falling; evidence is that auto and chain store sales will show four straight down months; it's happened only four other times since 1947, so "we're living through a 1-in-200 event;"

-- based on CPI data, prices are falling; at a rapid pace also seen only four other times since 1947;

-- GDP will decline at 2% annual rate in Q 4; 4% in Q 1 2009 and 3.3% in Q 2.

Conclusion: "This recession is unlike any seen in the last five decades." Typically caused by inflation, inventory cycles or aggressive Fed tightening. "This is a balance sheet recession deeply rooted in asset liquidation and debt repayment, and would seem to have more in common with pre-WW I cycles."

Going back to 1855, "a typical recession lasts 18 months." It's no assurance this one won't be longer. Rosenberg thinks it started in January and believes will end "within a month of the National Bureau of Economic Research (NBER) making the call." It defines recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." Some say that occurs when economic growth is negative for two or more consecutive quarters.

The signs are evident and growing, yet NBER is usually late making its call. It may hold off until housing shows signs of stabilizing. For some analysts, it's the core economic problem, and as long as it keeps eroding no end of recession is in sight. The latest data aren't encouraging:

-- Case-Shiller's 10 and 20-city composite indexes set new record declines of 17.7% and 16.6% respectively; year-over-year dropping for 20 consecutive months; Case-Shiller predicts a peak to trough 28.6% drop in its 10-city composite index; it also sees up to 50% declines in some areas;

-- nominal house prices down 20% from their 2006 peak; according to the Center for Economic Policy Research (CEPR), this implies a 27% real decline; a loss of $5 trillion in housing wealth, and 60% of the bubble deflated so more is yet to come; at least another 10 - 15% to return to trend levels; another question is "whether markets will overshoot on the downside;" a very distinct possibility;

-- on October 29, CEPR reported record high ownership vacancies according to Census Bureau data at 2.8%; for rental units at 9.9%, slightly below the peak first quarter 10.1% level; CEPR predicts a fully deflated housing bubble by mid-2009 but added a caveat; "With the employment picture turning bleaker and the plunge in the stock market," housing is certain to be even more negative in coming months; "the tens of millions of workers....fearful about their future job prospects will be very reluctant to buy a new home;" compounded by trillions of lost personal wealth (from home and stock market losses) will make households "much more cautious in all their expenditures;"

-- the Office of Federal Housing Enterprise Oversight (OFHEO) index fell .6% in its latest July reading and is down 5.3% on a year-over-year basis; its sharpest decline ever;

-- Fitch expects home prices to fall another 10% in the next 18 months and will decline by an average 25% in real terms over the next five years; beginning from the second quarter 2008; they're now back to early 2004 levels and heading lower;

-- the PMI Group predicts home price declines will double to a national average of 20% by next year with lower values in areas experiencing the sharpest increases;

-- economist Paul Krugman cites his "preferred metric;" the ratio of housing prices to rental rates; it shows the former got way overvalued; will retrace and result in about a 25% home valuation decline;

-- Goldman Sachs forecasts a 15% home price decline with no recession and 30% with one; and

-- The Economist sees "no end in sight....to America's housing bust as prices continue to fall fast."

On October 28, economist Nouriel Roubini was even more alarming on housing citing "The recessionary macro effect of the worst US housing bust ever." He reported the view of a "senior professional in one of the (world's) largest financial institutions" who emailed him "privately and confidentially." As early as a year ago, he predicted "the worst housing recession in US history" and described "a bust process" in four phases:

(1) "rising mortgage defaults, home prices start falling, sale volumes fall, housing starts and permits decline;" it's been happening and we're beginning phase two;

(2) "home-builders' bankruptcies, housing starts and permits crash, substantial layoffs in construction and real estate-related fields (mortgage brokers, mortgage lenders, etc.);"

(3) "substantial price declines in major metro areas, large rise in defaults of prime but low-equity mortgages;"

(4) "large-scale government intervention to help households going bankrupt;" a political phenomenon so its timing and nature can't be reliably forecast.

He cites clear phase two evidence already:

-- countless smaller builder and subcontractor bankruptcies;

-- Levitt Corp. home-building unit getting loan default notices;

-- national home builder Tousa with $1 billion in senior notes and subordinated debt hired law firm Akin Gump Strauss Hauer Feld as a precaution in case of bankruptcy; and

-- Neumann Homes and Enterprise Construction file for bankruptcy.

Roubini agrees with his emailer "with one caveat." He believes we're past the beginning of phase two; most of its aspects have occurred, and we're heading into phase three or close to it; he cites sharply falling home prices; rising defaults in prime and near prime mortgages; also some prime and near prime lenders in trouble; we're also getting close to phase four as "over a dozen proposals to rescue 2 million plus households on the way to default and foreclosure are now being debated in Washington." Debate is one thing. Meaningful action another and likely a ways off at best. Possibly once a new president is in office for something substantial if it comes at all.

Rubini's emailer followed up with another. That consensus now "admits" what it denied last year. The reality of a severe housing downturn. In price action and foreclosures. The worst since the 1930s. But they're still behind the curve by acknowledging "only minor macro effects." He called it extraordinary that a decline this severe is being taken dismissively. "Perhaps the most astonishing aspect of this event is the refusal to recognize the possible dimensions, the impact of what is coming." It's "delusional" to believe that the "biggest housing recession in US history will not have severe macro effect. Most of the consensus (according to Bloomberg earlier)" was for 1.8% fourth quarter growth. It then predicted a Q 4 slow growth bottom with "economic growth recover(ing) in soft landing territory (2.5%)."

On what basis, he asks? "Mostly wishful thinking (because of) the economic and financial shocks leading to falling demand (and a worsening housing bust); anemic capex spending; slowdown in commercial real estate demand; sharp private consumption slowdown and weak supply (from weakening ISM - Institute of Supply Management;" falling employment; a glut of new and existing homes; weak auto sales; consumer durables; "a capacity overhang;" and excess inventory); these factors will persist well into the new year.

The latest Q 3 GDP report hints at what's coming. A minus .3% with personal consumption (PCE) dropping 3.1%. The first decline since 1991 and largest drop since falling 8.6% in 1980. Residential construction also fell at a 19.1% annual rate. Its 11th straight quarter drop. It now represents 3.3% of GDP. Its lowest level since 1982. Non-residential investment fell 1% and will likely fall further in Q 4. A quarter likely to be much weaker than Q 3 as most private activity is slowing. Only government spending remains strong.

On October 31, still another disturbing report. Bloomberg reported that the "US Chicago Purchasers Index (the Institute for Supply Management-Chicago, ISM) Falls by Most on Record." To 37.8 down from 56.7 in September, and its lowest reading since the 2001 recession. A clear indication of a deepening downturn. Readings below 50 signal contraction.

Another Shoe to Drop: Credit Cards

Even The New York Times published a rare ahead-of-the-curve October 28 admission. In an Eric Dash article headlined: "Consumers Feel the Next Crisis: Credit Cards." As they're squeezed by an "eroding economy." An "already beleaguered banking industry" is threatened as lenders are sharply curtailing credit card offers and "sky-high credit lines." Even creditworthy consumers are affected because of growing amounts of bad loan losses. An estimated $21 billion in the first half of 2008.

With layoffs increasing, analysts forecast at least another $55 billion in the next 18 months. Around 5.5% of outstanding debt now and may "surpass the 7.9% level reached after the technology bubble burst in 2001." As a result, lenders like American Express, Bank of America, MasterCard and Visa are "tightening standards (and) culling their portfolios of the riskiest customers." Credit lines are being reduced as well, and lenders are avoiding over-indebted consumers. Treading carefully in housing ravaged areas and with customers employed by troubled industries.

It's impacting already strapped households. With lower credit scores. Higher rates for those rated creditworthy. Less willingness to allow high balances. Less availability of loans with many needing them shut out. "The depth of the financial crisis has shocked a credit-hooked nation into rethinking its habits. Many families once content to buy now and pay later are eager to trim their reliance on credit cards....At the same time," lenders are retrenching with one CEO saying "If you're not fearful, you're crazy."

It's seen in mail solicitations slowing to a trickle. "Credit card issuers have realized their market is shrinking and that there is no room for extra credit cards, so they have to scale back," according to Mintel analyst Lisa Hronek. "People are completely maxed out with mortgages, home equity lines and credit card debt."

It's hitting hard on both ends. Rising losses and shrinking profits for issuers. Less credit availability for consumers already strapped and cutting back of necessity. At a time the only bull market is in bailouts. Amidst towering debt levels. Soaring defaults. Wobbly global economies. Some cratering. America teetering. Confidence shattered, and everyone wondering what's next.

First the Banks. Next "the Coming Insurance Meltdown"

According to analyst Mike Larson of Weiss Research. AIG was just the beginning. Falsely called an "anomaly (and that) the rest of the insurance industry is doing just fine." Larson and Weiss disagree and identified "46 insurers with $500 million or more in assets that are at an elevated risk of failure." It's seen in their share prices. Down 80 - 90% for some because the largest US and Bermuda-based insurers have lost $98 billion year-to-date, and they have more in unrealized losses.

A Possible Goeotterdaemmerung?

On October 28, from the Financial Times forum in a Peterson Institute for International Economics Anders Aslund article titled: "It can be worse than the Great Depression." A possibility, not a prediction. Because of "the worst global asset bubble and financial panic" since that time. Because lessons learned then haven't prevented new mistakes, and unlike in the 1920s, "CNBC and Bloomberg can spread worldwide panic instantly." Old blunders may not be repeated, but "new policies (may be) even worse."

Anders laid out a "then" and "now" comparison:

-- Then: exchange rates over-zealously defended; Now: floating exchange rates could cause a trade panic;

-- Then: the money supply shrank dramatically; Now: monetary expansion and budget deficits are dangerously excessive; currency collapses may result; the fundamentals don't justify the current dollar surge;

-- Then: nations didn't go bankrupt; some may today; some major ones; Italy, for example, had over 100% of GDP in public debt before the crisis; it risks major state bankruptcies; America was unmentioned, but the rapidly mounting public debt and money supply growth alone pose immense risks, including default and future hyperinflation;

-- Then: subprime loans existed at modest levels, but that era didn't have "non-transparent collateralized debt obligations;" Now: derivatives "created the mother of all bubbles; the deeper the financial system, the harder we may fall;"

-- Then: the Great Depression "largely emanated from two countries, the US and Germany; Now: "never before has the world seen such a monstrous and truly global bubble;"

-- Then: financial institutions engaged in minimal overleveraging; Now: it's mirror opposite; "never have big financial institutions been as overleveraged as Fannie Mae and Freddie Mac or the former US investment banks, not to mention the hedge funds;"

-- Then: protectionism froze global trade; Now: frozen finances in countries like Iceland, Ukraine and possibly others have temporarily left them outside the world financial system;"

-- Then: the dollar and gold "were unchallenged sources of value;" Now: the dollar is neither stable nor the uncontested world currency;

-- Then: policymakers made mistakes but "stood for principles;" Now: "George Bush is assembling (Group 20 leaders) for a photo opportunity in Washington on November 15;" failure to come up with meaningful corrective policies "could unleash untold (global) financial panic;" and

-- Then: the 1920s lacked television and the internet for fast information dissemination; Now: information and decisions move instantly; often with no transparency; the combination is potentially harmful.

The Global Europe Anticipation Bulletin (GEAB), LEAP/E2020's Disturbing Prediction

In its October 15 28th edition. About a "global systemic crisis." An alert because its researchers believe that before summer 2009 "the US government will be insolvent (and will) default and be prevented to pay its creditors (holders of US Treasury Bonds, of Fannie May and Freddy Mac shares, etc.)." It envisions "the setting up of a new Dollar to remedy the problem of default and of induced massive drain from the US." It gives five reasons for its prediction:

-- the current US dollar surge is temporary; the result of world stock market collapses;

-- the Euro has become "a credible 'safe haven;' " an alternative to the dollar;

-- the out-of-control US public debt;

-- the collapsing US economy; and

-- future "strong inflation or hyper-inflation;" by 2009.

GEAB states: "the whole planet has become aware that a global systemic crisis is unfolding, characterised by the collapse of the US financial system and its contagion to the rest of the world." As a result, "a growing number of global players are beginning to act on their own." In their own self-interest. Because US policies are ineffective. The crisis is very serious and "far more important, in terms of impact and outcome, than" in 1929. With the US economy weaker now than then. Because of unmanageable public debt. Reckless consumer borrowing and spending. Enormous current account and budget deficits. A hollowed out industrial base, and a highly inflated dollar.

With that in mind, it's up to "vigilant" citizens and "clear-sighted" leaders to assure that America won't "drive the planet into a disaster." It will take divergent policies. What's "good for the rest of the world will not be good for the US." America defaulting will be partly from "this decoupling of decision-making...." A new dollar will be "imposed." And "one morning (in) summer 2009....after a long week-end or bank holiday," Americans will discover that their "US T-Bonds and Dollars are only worth 10 per cent of their value...."

A Jesse's Cafe Americain commentary suggests something similar. That in 2009, "the US will be forced to selectively default and devalue its debt." Because of its extraordinary financial needs. A $2 trillion annual deficit. It will take a terrible toll on Treasuries. Forcing a significant drop by 2011. We're approaching "the apogee of the Treasury bubble, with the credit bubble" already broken.

Once market deleveraging subsides, "the dollar and Treasuries will drop, perhaps with momentum, as the rest of the world realizes that the US has no choice but to default." Unless foreign sources (for a while at least) keep buying American debt despite the risk. Offer debt forgiveness. The dollar is devalued short of default. Taxes raised substantially, and debt instruments pay higher interest rates. Even then, these measures may fall short and prove ineffective.

America way exceeded its debt service ability from real cash flows. A turnaround will require a "severe devaluation and selective default." For GEAB down to 10 cents on the dollar. Following on its March 2008 prediction that by yearend "a formidable debacle will affect pension funds (worldwide) endangering the entire system of capital-based pensions." Their revenues collapsing "at the very moment when they should be making their first large series of payments to pensioners." A disturbing picture in the current climate that may reveal other unexpected hazards in the coming months.

On October 28, Bloomberg reported on the Treasury's "unprecedented" 2009 financing needs. To fund a growing budget deficit and raise hundreds of extra billions to contain the current financial crisis. To assure guarantees the government committed for. Almost $6 trillion alone for Fannie and Freddie debt and mortgage securities. With continued growing demands as other obligations arise. Plus over $1 trillion annually for national defense with all expenditure categories included. An impossible burden Bloomberg didn't mention. A deepening dilemma as the financial crisis grinds toward more unsettling realities.

What Euro Pacific Capital's Peter Schiff writes about in his 2007 book "Crash Proof: How to Profit from the Coming Economic Collapse." What he adds to in commentaries on his web site: europac.net. His latest on October 31 titled "The Tales Get Taller." Debunking mainstream explanations for recent dollar strength. A currency he's very bearish on. Because of our extreme profligacy. Decades of borrowing trillions we can't repay. How we blew it on consumption and by letting our industrial base erode.

Our problems are now too big to contain. A possible bankruptcy is ahead. "The main lesson our creditors will learn from this crisis is not to lend American consumers any more money. Once the lending stops, our 'cart before the horse' borrow to spend economy will crumble. While the rest of the world absorbs their losses and moves on, we will be digging our way out of the rubble for years to come. Earthquakes are caused by the fundamental shifts of tectonic plates beneath the Earth's surface. A similar move is underway in the global economy."

America's salad days are over, he believes. We've gone from a nation of savers, investors and producers to one of borrowers, consumers and gamblers. Official government statistics lie. They conceal hidden truths. America's house of cards is crumbling. It won't be pretty when it collapses. His advice is get out of the dollar. Get your money out of the country while you can, and gold is one of his recommendations.

Gold is on Paul Amery's mind as well in his Prudent Bear.com October 31 commentary titled "The Credit Crisis Endgame." He sees it likely becoming "a bloody standoff between investors and governments (on a) market for government bonds" battlefield.

He reviewed the unfolding credit crunch stages:

-- its beginning with liquidity drying up in "esoteric, structured-finance securities, linked to riskier types of mortgages;"

-- it then spread "to more mainstream mortgage bonds, structured finance in general, and other types of debt;"

-- by early summer 2008, it hit many non-financial companies having trouble refinancing loans;

-- by late summer, it affected sovereign states; mostly ones with high current account deficits like Iceland, Hungary and Ukraine;

-- it points globally to a spreading ailment affecting major economies and their bond markets.

The US for example. While nominal Treasury bond yields declined (10 year T-bonds at 4% October 31), their credit risk component has been increasing since last year. Credit specialists CMA DataVision shows the 10 year credit default swap (CDS) spread rose steadily. From 1.6 basis points in July 2007; to 16 basis points in March 2008; to 30 basis points in September; and to over 40 basis points on October 27. In other words, insuring against a US government bond default rose 25-fold in the past 15 months. The same is true for Britain and Germany.

Some observers find this astonishing. How could America or other major states default on their debt? It would be "the equivalent of a (financial market) nuclear explosion" smashing global economies with it.

Further, the dollar is the world's reserve currency. The Fed can create unlimited amounts of them, so any default would likely be through inflation and devaluation, some argue.

Maybe not, according to University of Maryland's Carmen Reinhart and Harvard's Kenneth Rogoff in their April 2008 paper: "The Forgotten History of Domestic Debt." They explained that throughout history debt defaults have been more common than realized. They're the rule, not the exception, in times of severe economic stress.

Again America for example. Budget and national debt levels have exploded. Bailout amounts will increase them and cause enormous strains. Morgan Stanley forecasts a sharply rising 2009 fiscal deficit. Besides the escalating national debt, to more than double the previous 1983 record. As a percent of GDP, it's expected to be around 70% in 2009. The tip of the iceberg, some say, compared to the private debt to GDP ratio. At an unprecedented 300%, according to University of Western Sydney economist Steve Keen.

He saw the storm coming before most others. He's also very skeptical about the rescue plan and compares it to King Canute's effort against the tide. Given the enormity of the problem, he sees the possibility of the debt pyramid crashing from a violent and uncontrollable chain of defaults, taking the government bond market down with it.

Strains in the US Treasury market are already evident in spite of their historically low yields. Recent auctions have had poor bid-to-cover ratios and long "tails" indicate weak demand. Secondary market delivery failures are also at record levels. Another sign of poor liquidity. If the worst of all possible worlds happens - a US debt default - the consequences will be "cataclysmic for the financial economy." The entire system will be bankrupt.

Where to hide if it happens? Amery suggests a few safe havens. The "ultimate" one being in precious metals. Think gold. Understand also that the $725/ounce October 31 spot price reflects market manipulation (over the short term) to drive it down from its March 2008 high above $1000. As one analyst puts it: I'll "give you three good reasons why gold is (underperforming). First: manipulation. Second: rampant manipulation. Third: incessant, nonstop, unabated, fiendish manipulation."

He also believes the process is only temporary and won't stop the metal's eventual rise. Given the current crisis and its likely duration, it won't surprise experts to see its price above $1000 again before it ends.

A Final Comment

In spite of trillions of asset losses. American and global households hardest hit. Wobbly world economies getting weaker. The virtual certainty of a deep and protracted recession, and the likelihood of no robust recovery when it ends.

Despite all this and Wall Street's worst year in decades, it's celebrating like it always does. With big bonuses. In the many billions of dollars. According to Bloomberg, Merrill Lynch plans $6.7 billion. Goldman Sachs about $6.85 billion and Morgan Stanley about $6.44 billion.

Bloomberg noted that Goldman, Morgan Stanley, Merrill, Lehman Bros. and Bear Stearns paid their employees "a cumulative $145 billion in bonuses from 2003 through 2007," or more than the Philippines' GDP. In 2007, the firms paid out a record $39 billion. In a year when three of them posted their worst quarterly losses ever and their shareholders lost over $80 billion. Two of them no longer exist. Another went into forced liquidation. Their combined 2008 losses should way exceed last year when they're reported.

Yet there's plenty of money for bonuses. Courtesy of ESSA/TARP. For executive pay and dividends as well. At a time all these companies are insolvent. Their survival dependent on federal handouts. US taxpayers are on the hook for them as their consumption declines. According to the Commerce Department at the fastest rate in 28 years. Because they don't get big bonuses. Are maxed out on credit and haven't the money to spend.

But the Fed and US Treasury do and plan to dispense more of it. To other takers lining up. Sovereign nations. Insurance companies. GM and Chrysler perhaps for their reported merger. Dependent on government cash to complete it. Any other company as well deemed worth saving. Big campaign contributors with friends in high places. What beleaguered homeowners don't have.

Floated proposals to help them appear meager at best. For a fraction of the millions in trouble with inadequate suggested funding amounts. A suggested $40 billion for 20 million or more homeowners facing foreclosure. With more at issue as well, according to The New York Times. Giving qualified borrowers a few grace years. Perhaps three. For lower mortgage payments that won't reduce their principal balance. It would only provide temporary relief and delay today's problem for a later time. When households may be no better off than now, yet face higher ARM reset obligations.

What's needed, but not proposed, is a 1930s type Home Owners' Loan Corporation (HOLC) plan that refinanced homes at affordable rates and prevented foreclosures. One on a grand scale as part of an enlightened New Deal agenda.

In lieu of "trickle down" to fraudsters, "trickle up" for beleaguered households. An idea so far with no traction for a new administration to consider. The one now in charge has no "imminent" plan, according to White House spokesperson, Dana Perino. On October 30, she added only that "If we find one that we think strikes the right notes....then we would move forward and announce it." Ones so far advanced are for Wall Street. Main street apparently can wait.

Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached at lendmanstephen@sbcglobal.net.


http://www.globalresearch.ca/index.php?c...&aid=10773

[David Guyatt]

One genuine fear that factors into the last two posts by Jan and Peter is that if confidence in the dollar evaporates -- and it easily could -- then there is nothing in the armoury to stop a catastrophic slide of the dollar off the edge of the cliff.

[Jan Klimkowski]

Long, fairly conventional article in Der Spiegel, with the self-explanatory title of: "What Happens When Countries Go Bankrupt?"

The full article is here:
http://www.spiegel.de/international/busi...19,00.html

Here's an excerpt:

Can the IMF Keep Up?

But what happens if the IMF runs out of money? The Washington-based financial fire department has already promised to pony up €27 billion ($34.3 billion) for Iceland, Ukraine and Hungary. This is about one-fifth of the funds the IMF currently has available for such packages, and Pakistan is looming.

Should the virus of financial failure continue to spread, the €156 billion currently available to the IMF would soon be exhausted. If that happened, the major industrialized nations would have to inject additional funds and provide the IMF, possibly through loans, with fresh capital for the high-risk countries. Global investors would hardly be interested.

And what happens if capital flight from the faltering threshold countries fuels the greed of speculators even further? For months now, they have been betting their money on, not just the ruin of banks and insurance companies, but the demise of entire countries. "It's blood in the water for the hedge fund sharks," wrote Britain's Sunday Telegraph, noting that economies like Hungary's are simply too weak to resist.

"Major players in the foreign currency market, like hedge funds and banks, are betting on the further decline of Eastern European currencies," says Hans-Günter Redeker, chief strategist with the foreign currency division of French banking conglomerate BNP Paribas. The gamblers have also set their sights on Ukraine, Poland, the Czech Republic, Romania and Turkey. Even Russia, the natural resource paradise, is seen as a worthwhile bet, because it will hardly be able to defend the ruble for much longer, given the massive exodus of capital.

The entire world is currently spooked by the Argentine ghost. Even if wealthy countries reach out to ailing nations, some governments will not survive the storm. Even this would not be truly dramatic. But if the industrialized nations then decide to leave the threshold countries to their own devices, the ensuing wildfire will burn indefinitely.