EconoMonitor

Nouriel Roubini's Global EconoMonitor

The Perfect Storm of a Global Recession

There is now an increasing probability that the global economy – not just the US – will experience a serious and protracted recession. Macro developments in the last few weeks suggest that now all of the G7 economies (the group of the major advanced economies including US, UK, Japan, Germany, France, Italy and Canada) are already in a recession or close to tipping into one. Other advanced economies or emerging markets (the rest of the Eurozone including Spain. Ireland the the other Euro members; New Zealand, Iceland, Estonia, Latvia and some other South-East Europe economies) are also on the tip of a recessionary hard landing.

And once this group of twenty plus economies enters into a recession there will be a sharp growth slowdown in the BRICs (Brazil, Russia, India and China) and other emerging market economies. The IMF defines a global recession as a global growth rate below 2.5% as emerging market economies usually grow much faster (6%) than advanced economies where growth averages about 2%. For example, a country like China – that even with a growth rate of 10% plus has officially thousands of riots and protests a year – needs to move 15 million poor rural farmers to the modern urban industrial sector with higher wages every year just to maintain the legitimacy of its regime; so for China a growth rate of 6% would be equivalent to a recessionary hard landing. It now looks like that, by the end of this year or early 2009, the global economy will enter a recession.

Let’s detail why we a global recession is now likely…

This global recession is being fed by a variety of factors: the bursting of housing bubbles in many economies (US, UK, Spain, Ireland and other. Eurozone memebers); the burst of massive credit bubbles in countries where money and credit used to be too easy for too long and supervision and regulation of credit too loose; the severe credit and liquidity crunch following the US morgage and debt crisis; the most severe financial crisis since the Great Depression (not as bad as the Great Depression but second only to that episode); the negative wealth and investment effects of falling stock markets (that have already fallen globally by a bearish 20% plus); the burden of high oil and commodity prices for commodity importing economies; the global effects via trade links of the US recession (as the US still counts for about 30% of global GDP); the weakness of the US dollar that is reducing the competitiveness of countries exporting a lot to the US; the stagflationary effects of high oil and commodity prices forcing central banks to increase interest rates to fight inflation at a time when there are severe downside risks to growth and to financial stability.

In the US data suggest that the economy entered into a recession in the first quarter of this year as the five indicators used to define a recession (GDP, employment, production, income and sales) all peaked and then contracted between October 2007 and February 2008. The economy rebounded – in a double-dip W-shaped recession – in the second quarter boosted by the temporary effects on consumption of $100 billion of tax rebates. But those effects will fade out by late summer while the more persistent factors hitting a shopped-out, saving-less and debt-burdened US consumer will remain: falling home values; falling stock prices; credit crunch in mortgages and consumer debt (credit cards, auto loans, student loans) ; rising debt and debt servicing ratios as mortgages and other consumer debt interest rates are resetting higher; high gasoline and food prices; collapsing consumer confidence; and, most important, a fall in employment for seven months in a row.

Similar factors are at play in the UK, Spain and Ireland where housing bubbles are going bust together with a bust of excessive consumer debt thus leading to a recession. But even in Italy, France, Greece, Portugal, Iceland and the Baltic economies frothy housing markets are starting to deflate. More broadly and ominously all of the Eurozone is now headed towards a recession including the three largest economies and G7 members: Germany, France and Italy. Bursting of housing bubbles; the effects of the liquidity and credit crunch that has also hit European financial markets and limits the ability of European firms to borrow, hire and invest; the fall of exports to the slumping US; high oil and commodity prices; the loss of competitiveness of Eurozone exports with a super-strong Euro; and the hawkishness of the ECB that – unlike the US Fed that aggressively cut policy rates – first kept rates on hold and has recently raised them to fight inflation. So no wonder that production, sales and consumer and business confidence are all falling in the entire Eurozone. And thus second quarter Eurozone GDP growth will be even worse – and close to zero – than the US while the future growth ahead looks even worse.

Of the remaining G7 economie Japan is already contracting. Japan used to grow modestly for two reasons: strong exports to the US and a weak yen. Now the exports to the US are falling while the yen is not as weak as before. On top of these two negative shocks two other shocks are pushing Japan into a recession: high oil prices for a country that imports all of the oil that it consumes; and falling business profitability and confidence.

The last of the G7 economies, Canada, should have benefited from high energy and commodity prices; but its GDP has already contracted in the first quarter. With a quarter of its GDP exported to the US and such exports being three quarters of its exports Canada’s economy is totally dependent on a sick US economy that is contracting.

So literally every single G7 economy is now headed towards a recessionary hard landing. And now other smaller economies (mostly the new members of the EU that all have large current account deficits) are at the risk of a sudden stop of capital and reversal of capital inflows that could trigger a hard landing; such hard landing is already occurring in Latvia, Estonia, Iceland and New Zealand. This G7 recession will next lead to a sharp growth slowdown in emerging market economies and likely tip the overall global economy into a recession. This slowdown in emerging market economies growth depends on a variety of factors. Those economies dependent on exports to the US and Europe and having large current account surpluses (China, most of Asia and most other emerging markets) will suffer from the G7 recession; those with large current account deficits (India, South Africa and twenty plus economies in East Europe from the Baltics to Turkey) may suffer from the global credit crunch and a sudden stop of capital; those that are commodity exporters (Russia, Brazil and other such exporters in the Middle East, Asia, Africa and Latin America) will suffer from a large fall in energy and other commodity prices that are likely to fall by 30% from their recent peaks following the G7 recession and global slowdown; those that have allowed their currencies to appreciate relative to the US dollar will now experience a sharp export growth slowdown; those experiencing rising and now double digit inflation (over 30 emerging market economies) will have to raise interest rates to fight inflation slowing down growth; and those that have let – with loose monetary and credit policies – inflation to become too large will experience a loss of export competitiveness as inflation leads to real exchange rate appreciation.

While falling oil and commodity prices – now down 15% from their recent peaks – will somewhat reduce stagflationary forces in the global economy, inflation is for now becoming more entrenched – via a vicious cricle of rising prices, wages and costs – in many emerging markets in a high inflationary expectation trap. So this high inflation will constrain the ability of these central banks to respond to the downside risks to growth. In advanced economies inflation will become by year end less of a problem for central banks as a slack in goods markets will reduce the pricing power of
firms; as slack in labor markets – with rising unemployment – will keep wages and labor costs at bay; and as sharply falling commodity prices will dampen this source of inflation.

Still all G7 central banks are now worried about the temporary rise in headline inflation. So for now they are all on hold or threatening to hike policy rates to fight potential inflation risks. But over time severe recession risks and the risk of a severe banking and financial crisis – with credit losses now estimated to be at least $1 trillion and possibly as high as $2 trillions and hundreds of banks going bust – will force all G7 central banks to cut further policy rates. But this policy easing will be too slow and delayed, especially outside the US, and will occur only when the G7 and global recession will become entrenched. Thus, the policy response to this upcoming perfect storm will be too little too late to prevent it.

238 Responses to “The Perfect Storm of a Global Recession”

Mr. T.August 11th, 2008 at 8:00 am

I am confused about the rally in the dollar. This does not seem to be part of Bernanke’s play book as he has been attemtping to anchor inflation expectations and has been pursuing a path of systematic devaluation of the dollar in order to mask the deflationary environment we now find ourselves in.If the dollar continues to rise then Deflation will start to become apparent to all which should make things interesting to say the least. Perhaps the Fed is not as all powerful as many would believe?

Little SaverAugust 11th, 2008 at 8:07 am

Looks like central banks are becoming major investors in private markets. Wonder where that will end:“The overwhelming bulk of securitizations have been designed solely for the purposes of accessing central bank liquidity,” analysts led by Ganesh Rajendra wrote in a report published on Aug. 8. Creating and keeping bonds to borrow from central banks “has become a de facto substitute for capital market funding for many banks,” the analysts wrote.http://www.bloomberg.com/apps/news?pid=20601087&sid=aQvMp3ThPQuI&refer=home

curiousAugust 11th, 2008 at 8:17 am

On the topic of institutional trading and managed (not free) markets: Is it not curious that the SEC’s list of banks that cannot nakedly be shorted are virtually identical to the Fed member banks, and that each one now has a “dark liquidity pool” trading mechanism overseen by the SEC. If massive liquidity is added from the Fed window(s)to these member banks, and the fact that that liquidity does not appear to be reaching borrowers. One could think that the fed liquidity is flowing to the dark pools to manage the markets. Just thinking.

AnonymousAugust 11th, 2008 at 8:19 am

One source claims that the Friday dollar rally was engineered by the Fed and the ECU. Is there any evidence of that? I have not seen this posed here.

GuestAugust 11th, 2008 at 8:37 am

So if this will not be like the 1930s depression (or even worse due to its magnitude) what will it be like? We all go “d’oh” and thats it?

London BankerAugust 11th, 2008 at 8:44 am

@ Little SaverEven central banks have balance sheets, and many inside and outside the central banks are now worried that too much of the toxic burden of the credit crunch has been transferred to central banks by these innovative liquidity facilities. They have less credibility, less objectivity, less leverage to fulfill their functions and obligations to the wider economies they are supposed to serve, having put themselves too quickly at the mercy of market principals who caused the problems.The ECB is trying to find a way out, trying to restart a market that it does not underwrite. Good luck to it.My view is that competition is not just good for markets, but also good for supervisors and central banks. Without variation and differentiation, we can’t objectively assess what works and what doesn’t. Without Malaysia saying “screw you” to the IMF in 1997 we might not have seen what a quick, strong rebound was possible for a determined small nation. Similar resistence to US hegemony in financial regulation might well do the world a favour, offering better, faster, more capital efficient models for intervention and/or supervision.The drive toward global “harmonisation” in regulation and central banking seems in retrospect to have been a drive toward one party rule under US hegemony. This has not proved healthy in the long term for the rest of the world or the USA.

GuestAugust 11th, 2008 at 8:50 am

The recent behavior of the US dollar is certainly consistent with a currency intervention maneuver based on buying by the central banks (incl. an attempt to force short covering in the currency markets).But what has changed in the fundamental problems affecting the US economy? Nothing. So any change in the dollar based on short-term intervention is not going to affect the long-term resolution.I just got back from a trip to the midwest in the USA. Things are slowing down markedly in the economy there. And the BIG question is … what are Americans going to do for jobs, as the auto sector and the banking sector hit the skids??? Sure, the US farmer is still in good shape (and will continue to be). But what’s everyone else going to do?PeteCA

AnonymousAugust 11th, 2008 at 8:51 am

Dear Professor:The vulnerability of the European Union’s energy situation is being highlighted in the Caucuses. The dollar has shown geopolitical strength due to the fact that it is backed by military might. The European Union is a great economic power, but it depends on the NATO umbrella. Until an alternative energy and hydrogen economy is put into place, the control of hydrocarbon energy is the greatest economic strength an economy can have. We are deluding ourselves if we don’t think we are now witnessing the begginings of a hydrocarbon resource war scenario. The EU is being led to acquiesce in a project to capture all the light sweet crude left. The excess creation of debt all over the world will also lead to acquiesence to economics by other means. Clausewitz did not just say that politics is war, he was including economics in politics. A global economic hard landing will lead to intense nationalism at the service of corporate elites. There is nothing like economic stress to bring out the violent survival instinct in a manipulable public.The present situation you are so correctly describing will end a mad race for accumulation of hydrocarbons.The dollar will only survive as a reserve currency with signoirage privilege, if it maneuvers itself tobe collateralized by the light sweet crude of iraq, iran and saudi reserves. The Political Elite know about collateral. The bankers have brought us to the edge of an economic abyss for a reason. There are no accidents in realpolitics and economics. If we try to divorce the discussion of hydrocarbon realpolitic from the Macroeconomic picture, we are just deluding ourselves into thinking economics is one dimension. The world is not flat and neither is economics. Economics, Politics, and War are one in the same.

richinarAugust 11th, 2008 at 9:23 am

From previous thread@GloomyI fear you may be right about the depression thing.I don’t know about the hyperinflation thing as many make strong arguments for deflation. I do believe tough times are ahead. If we leave it to TPTB to rebuild we will continue to get what we deserve.@allWe need to find ways to get involved now and in a serious manner in order to impact the rebuilding process or we will be subjected to whatever is built.I continue to find frustration each time I write my representatives regarding important issues. For instance I wrote my senators regarding the housing bill and my strong stance against it. I got an e-mail back that stated how “PROUD” my senator was to vote for the bill. Our government is broken (not that my point should be considered as gospel regarding any subject). How can we work together to fix it and take back our future?

NoviceAugust 11th, 2008 at 9:46 am

@PeteCAWritten by Guest on 2008-08-11 08:50:26″But what’s everyone else going to do?”Enlist? When all else fails- war gives everyone something to do.Novice

MASHIACH BEN CHANAAugust 11th, 2008 at 10:28 am

THE RUSSIANS ARE COMINGHELLO RUSSIAN RAPIST GOODBYE WIMPY NATOALL THE READERS ON THIS BLOG. YOU SHOULD IMMEDIATELY PULL OUT WHAT EVER INVESTMENT YOU HAVE IN EUROPE, SELL YOUR REAL-ESTATE AND AND STOCKS THAT YOU HOLD IN EUROPEAN COMPANIES OR ANY HOLDING IN EUROPE, BECAUSE RUSSIAWILL INVADE THE ENTIRE EUROPE, PROFESSOR RUBINI I AM SURPRISED THAT YOU ARE NOT DISCUSSING THE SEVERITY OF THE SITUATION IN EUROPE. ALL YOU GUYS ARE SITTING AND HAVING DISCUSSION ON MACRO ECONOMY WHILE RUSSIA IS PLANNING TO SWALLOW THE WHOLE WESTERN EUROPE.

AnonymousAugust 11th, 2008 at 10:36 am

Written by MASHIACH BEN CHANAwhy do you call yourself Messiah the son of Hanna.I have one thing to say to you…Gey kakken offen yam. You unserstand yiddish.

HubbsAugust 11th, 2008 at 10:52 am

My sentiments exactly Pete.Who was it I saw years ago giving a lecture about the end of work or more ominously the fact that humanity will be obsolete as there will not be enough meaningful jobs for every one? Noam Chomsky? Very pessimistic. My mother, who was watching at the same time, dismissed him as a nut. Across emerging markets, people are leaving the farms for the cities…to do what? Is this a new paradox emerging whereby despite all the scientific advancements and increases in productivity, people will have to go back to the farms for stability? Bigger booms lead to bigger busts ands this situation outweighs the risks of drought, flood, locusts etc. incurred with farming: even subsistance farming.

utahbengoshiAugust 11th, 2008 at 11:12 am

In response to: “We need to find ways to get involved now and in a serious manner in order to impact the rebuilding process or we will be subjected to whatever is built.”See http://www.ourcaucus.com. only 6 of the 12 videos are completed to date but it gives a good view of how we have been sold out by both parties and what we must do to begin to reverse the public policy/public finance death spiral.In light of the Fannie/Freddie vote, I recently demanded a private audience with my senators (Hatch and Bennett) and have spoken at length with my congressman (now-defeated Chris Cannon). They all acknowledge privately that, in the words of Sen. Bennett, “we have no choice” but to do and continue the bailouts because they (the democrats according to Sen. Bennett, really all of them in my view) have sold our sovereignty for a mess of foreign-financed, bridges-to-nowhere pottage. Hatch’s office said that the Senator cannot come out and take a concerted stance against such action because if he were to do so he would be “marginalized.” Cannon admitted when confronted with NR’s facts that we are heading for a complete fiscal meltdown. And yet, they continue to fiddle while it all burns. The top presidential candidates do not address these critical issues and will only do so in a reactionary fashion after evidence presented by NR becomes too plain to deny (i.e. after it’s too late). It will take a concerted effort by the people changing the DC status quo by sending back only those who will stop the madness. It will take those of you who are dialed in (posters to this site whose insight I have appreciated for many months) educating with unwearingness all in our sphere of influence. Thank you Professor for your guiding light.

GuestAugust 11th, 2008 at 11:13 am

cnbc on turn of dollar to upside???what??? with record deficit???? money sucking middle east war with not end in sight???? blooming public treasury debt???? with prospect of FED pumping more money into the system????

Hong Kong fun managerAugust 11th, 2008 at 12:08 pm

My Amash, my daugther’s teacher, a security guard of the bank, a movie star, a bus driver, an office lady at Starbucks , a chef at Macdonald and an officer of China’s customs say that money have been driven to US markets.So are you guys in the usa getting rich?

GuestAugust 11th, 2008 at 12:31 pm

@ Nouriel Roubini: “those that have allowed their currencies to appreciate relative to the US dollar will now experience a sharp export growth slowdown; those experiencing rising and now double digit inflation (over 30 emerging market economies) will have to raise interest rates to fight inflation slowing down growth; and those that have let – with loose monetary and credit policies – inflation to become too large will experience a loss of export competitiveness as inflation leads to real exchange rate appreciation….In advanced economies inflation will become by year end less of a problem for central banks as a slack in goods markets will reduce the pricing power of firms; as slack in labor markets – with rising unemployment – will keep wages and labor costs at bay; and as sharply falling commodity prices will dampen this source of inflation…But over time severe recession risks and the risk of a severe banking and financial crisis – with credit losses now estimated to be at least $1 trillion and possibly as high as $2 trillions and hundreds of banks going bust – will force all G7 central banks to cut further policy rates…”if you’re going to have a worldwide inflation, perhaps as severe as the 1970s, to discuss lowering policy rates in the US in the same thought seems to be a conflict. To believe that, you must think that inflation is an accidental condition brought on by market interaction. Inflation, however, is clearly Fed and government induced to supply politicians with bigger government in order to reward their lobbyist masters.If a return to free markets is possible, inflation not only must be controlled it must be eliminated. To take another viewpoint is to sacrifice the world’s savers and sound money investors and the mechanisms of a free and unhampered market on the altar of a bureaucratic monster headed for certain destruction.You are right: “The forces behind the Great Moderation (stable growth and low inflation), such as better inventory management, inflation-targeting, globalization and financial innovation, are losing their power to lower and stabilize inflation.” That was lost in 1913.How can you have a worldwide inflation like the 1970s, and tell us constantly about the interaction of global markets, and then tell us that the US doesn’t have inflation as you did in “A Wobbly Coalition of the Unwilling”? The States buy a tremendous share of consumer products from China. Is China going to be exempt from the ”severe” world inflation? If not, who is going to ignore the coming price rises in consumer products ranging from shoes, to dog food, to medicine, to computers, to light bulbs? If these emerging nations can’t export anything, then they’ll have to reduce prices. Inflation will last the same length of time as you predict it for the US. I can’t understand your logic.But I do know one thing; to allow the Fed bankers to “manage” all the economies of the world and to allow that same Fed to hold the rate of interest in this economy below its free-market level is to create inflation. By debasing the currency a la Argentina fiat money, the Fed is destroying the purchasing power of every American, enriching its banker members, and creating Bust Towns all over America – and now the world. And then it uses government BLS, Stalin Five-Year-Plan style, to tell us there is no inflation in America, to tell us the state has met its GDP production goals, and that there are no unemployed peasants starving in their mortgaged hovels.The Fed has no money. When it creates new money out of nothing through the magic of central banking, that money gushes into the banks. From there, it floods through the economy diluting the value of all money and causing prices to rise. The old paycheck just doesn’t buy as much any more. Blame it on Russia.But, by gad, the banks got what they wanted — the extraction of the value of our hard-earned money with their right to intervene in the free market by tipping the balance of interest rates downward, favoring debt over thrift and collecting interest on the debt until Hades freezes over. And, when their fiat money bubbles pop, their paid media shills shift the blame to the “economy” or “government policy” or “policy rates” or the “exchange-value of the dollar” or even to the “capitalist” system itself. What a bankers’ Utopica the US has become.Under free-market capitalism, lowered prices is a good thing: in free markets, advanced technology and innovation eventually lower the price of most all goods, advancing the standard of living of all. C’est la vie, mon cheri.

GuestAugust 11th, 2008 at 12:57 pm

@utahbengoshidono horitsu kaisha e hataraite iru ka? Tashika ni Nihon ni sunda koto ga aru: Doko de, dono machi e homon shita ka?

GuestAugust 11th, 2008 at 1:07 pm

The pro-war, pro-empire neocons in the American executive branch are now trying the back door to more war with their incredible lies. The Russian-Georgia war is a propaganda avalanche to drive Americans once more to tie old glory to their vehilcle antennas.Justin Raimondo, one of our country’s most courageous voices in these issues, doesn’t flinch on this one: here’s how he begins:“The Real Aggressor”: Georgian invasion of South Ossetia sets the stage for a wider war. by Justin RaimondoAugust 11, 2008: The anti-Russian bias of the Western media is really something to behold: “Russia Invades Georgia,” “Russia Attacks Georgia,” and variations thereof have been some of the choice headlines reporting events in the Caucasus, but the reality is not only quite different, but the exact opposite. Sometimes this comes out in the third or fourth paragraph of the reportage, in which it is admitted that the Georgians tried to “retake” the “breakaway province” of South Ossetia. The Georgian bombing campaign and the civilian casualties – if they are mentioned at all – are downplayed and presented as subject to dispute.The Georgians have been openly engaging in a military buildup since last year, and President Mikhail Saakashvili and his party have been proclaiming from the rooftops their aim of re-conquering South Ossetia (and rebellious Abkhazia, while they’re at it). Avid readers of Antiwar.com saw this coming. In a column entitled “Wars to Watch Out For,” I wrote:”As President Mikheil Saakashvili deflowers his own revolution and shuts down the opposition media, he could well try to divert attention away from his political problems by ginning up a fresh conflict with the breakaway regions of Abkhazia and South Ossetia, both of which are protected by Russian troops and regional militias.”That’s what Western reporters aren’t telling their readers: the South Ossetians (and the Abkhazians) have had de facto independence since 1991, when they rose up against their “democratic” central government, which had banned regional parties from participating in elections. They beat back the Georgian army, which, nonetheless, inflicted a lot of casualties and damage. A low-level war has been in progress ever since, with Saakashvili and his ultra-nationalist party using the rebels as a foil to divert attention from their repressive domestic policies and Georgia’s sad status as an economic basket case…What’s particularly disgusting is the spectacle of the fraudulent Saakashvili’s smug mug all over Western television – the BBC and Bloomberg, for starters – invoking his great love of “democracy” and “freedom” and calling on the U.S. to intervene in the name of supposedly shared “values.” What drivel! Up until very recently, Saakashvili has been busy rounding up his political opponents and charging them with espionage, as his police beat demonstrators in the streets…http://www.antiwar.com/justin/?articleid=13285

GuestAugust 11th, 2008 at 1:15 pm

The lowering of interest rates, unfettered to markets, has helped create this banker-dominant economy. The banking corporations are getting richer and richer and the people poorer and poorer — in the most advanced economy in the world. And, now, the entire world economy is limping toward collapse.

GloomyAugust 11th, 2008 at 1:16 pm

Bond Vigilantes Who Gave Bush a Pass May Ambush Obama or McCainBy Matthew BenjaminAug. 11 (Bloomberg) — The bond vigilantes who’ve been missing in action under George W. Bush may be preparing for a return engagement once Barack Obama or John McCain takes office next year.Investors and former policy makers predict that the same market forces that torpedoed President Bill Clinton’s “putting people first” spending initiatives at the start of his presidency are gathering again at the prospect of McCain’s tax cuts and Obama’s health-care and education programs.“Though times are different and a lot of the government spending is necessary, we’re going to see rates rise in a saw- tooth pattern over the next few years,” says E. Craig Coats Jr., the head of Salomon Brothers’ government securities desk when it was the world’s biggest bond trader. Coats considers himself one of the original vigilantes, the bearish traders who drove up long-term interest rates, persuading Clinton to place deficit-reduction above fulfilling his spending promises.“The demand from the Treasury is just going to be huge,” says Coats, 62, who is now the co-head of fixed income at Keefe, Bruyette & Woods Inc. in New York.Still, says Yardeni, now head of Yardeni Research Inc. in Great Neck, New York, deepening deficits, “rotten” financial systems and government intervention in the economy mean “there could be a renewed flight from the dollar and from our bonds.”Leon Panetta, Clinton’s first budget director, says that “if we continue to run these large deficits, not only bond traders but the securities markets are suddenly going to awaken with concern about whether or not the administration is doing anything to discipline the budget.”If that happens, Panetta says, “it’s just a matter of time before they start to put pressure on a new administration.”Clinton’s experience shows what such pressure can do to a president’s agenda. Promises of spending on education, public works and a middle-class tax cut fell by the wayside as advisers led by Robert Rubin, who later became Treasury secretary, convinced the new president the best thing he could do for the economy was to show investors his resolve on fiscal discipline.Clinton’s Rage“You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of fucking bond traders?” Clinton raged at aides, according to journalist Bob Woodward’s book, “The Agenda.”“Government borrowing is annoyingly high,” says Jeffrey Gundlach, chief investment officer at Los Angeles-based TCW Group, Inc., which has $145 billion under management. “In the long term, we’re looking at rising yields,” says Gundlach, 48, who has managed bond funds for more than 20 years.http://www.bloomberg.com/apps/news?pid=20601109&sid=ayrMJ4R.bmLY&refer=home

London BankerAugust 11th, 2008 at 1:25 pm

@ richinar and utahbengoshiI have never yet found an elected politician who was useful at influencing either legislation or regulation. To get that job done, do it at the policy wonk and civil servant level through comments on consultation drafts. These folks are easy to reach and easy to flatter and will welcome any well crafted proposal which promises to make their lives easier and get better results.It’s hard, tedious, meticulous work, but you can make a huge difference to the outcome of policy if you line all of your policy ducks up just so and trail your ideas around through a couple think tanks for cover. It’s exactly how the evil bastards corrupted the system in the first place, but in desperate times, it is also how honest people of good will can reform it back to first principles.I’m making a difference here in the UK, and have been since the spring. Much of my input is now bearing fruit as reforms that will prove more workable, practical, stable and equitable than the original panicked proposals. I will never get credit, but I am feeling very good about my karma.Those of us who have been through bear markets before have to educate the young – anyone under 45 – about what they can expect as Bretton Woods II falls apart, conflicts intensify, inflation soars, workers agitate and strike, stocks languish, companies fail, pensions are looted, fraudsters abound, etc. These young folk can hardly imagine such consequences, much less prepare policy frameworks to cope with each successive challenge in a principled and equitable manner. If we let the banks and corporates be the only ones influencing the process, we won’t like the outcome.Quit writing your legislators. Start writing the policy wonks on the white papers and consultation documents. It’s boring, but it works.

GuestAugust 11th, 2008 at 1:27 pm

”Olympic Fog”By ALAN ABELSON | Keeping the bear-market rally alive. Is it all over for McCain?EXCERPT (August 11, 2008)IT WAS A BIG WEEK IN THE STOCK MARKET, the obligatory two-hundred-plus point skid in one session not withstanding. The popular notion was that the fresh tumble in oil fueled the latest surge. But our own hunch is that all due credit should go to the start of the Beijing Olympics.Launched with enormous pomp and circumstance (with 1.3 billion people to pitch in, how can you miss putting on a blockbuster show) and, thanks to TV and the Internet, a spectacle viewed by uncounted masses around the globe, the excitement radiated powerfully throughout the planet, including this little slice of it we inhabit.Indeed, the contagion of good feeling was more than evident in the good old U.S.A., despite President Bush’s scolding of the Chinese government for its tendency to give short shrift to anything it deemed dissent; you know, little things, like freedom of speech and assembly. We should note that unfailingly polite, the powers-that-be gently deflected Dubya’s criticism (how do you say “get lost” in Mandarin?).Besides being infected with the carefully crafted celebratory spirit engendered by the onset of the games, investors here, we suspect, were also victims of the dense fog that passes for air in Beijing for it happily obscured the formidable discouraging negatives looming all around them.We might interject that a gold medal should be awarded our cycling team for providing an indelible visual memory of the ’08 Olympics by disembarking from their plane wearing protective masks. The official apologists — a.k.a. the International Olympic Committee — cheerfully gave its seal of approval to the condition of the air, whose pollution content is only something like three times the limit in our own fair lands. And that’s after months of vigorous scrubbing.As an explanation for the spurt in stock prices, Olympian exuberance or fog may not be all that more fanciful than the usual bromides served up by market commentators, especially if they’re preening or screeching (their styles vary) on Tout TV. As we intimated last week, there’s nothing unusual about a spanking good rally in a bear market; if anything, it’s the norm.As the insightful David Rosenberg of Merrill Lynch points out, since the current bear market began a year ago, there have been half a dozen of these multi-hundred- point bursts upward, but interestingly, there were none — zip — during the 2002-2007 advance that preceded it. Be aware, too, in case you’re not the counting kind, that there have been 10 days in the current down cycle in which the Dow closed down 300 points or more and, in the bear market of 2000-2002, there were nearly twice as many 300-point up sessions as 300-point down sessions.David cautions investors to keep very much in mind that sharp, swift bursts upward are characteristic of bear markets and not get carried away by what he terms “an oversold technical rally.”To which we say, right on!http://www.tickerforum.org/cgi-ticker/akcs-www?post=55791

GuestAugust 11th, 2008 at 1:35 pm

More from Barron’s and Abelson’s “Up and Down Wall Street” this week:THEY’RE PLAYING THE MOVIE BACKWARDS.We’re talking about the banks, by whatever moniker they go by, investment or commercial. And in particular — although, gosh knows, almost all of them did it — those hyperactive types who took to leverage, misleading practice and reckless lending like voracious ants to an untended picnic basket.For years especially when this century was still pristine, roseate and young, they borrowed and lent like there was no tomorrow, pretty much because they all grew confident that there wouldn’t be. And they, and especially the witless or wily rouges who ran them, raked in vast piles of lovely greenbacks or whatever currency the suckers had to offer.But, behold a miracle: The money is flowing back. Not to every lamb that was shorn — we didn’t say a major miracle — but to thousands of them. More specifically, Citigroup and Merrill Lynch agreed to buy back $7.3 billion and $10 billion, respectively, of auction-rate securities, those deceptive pieces of long-term paper that purportedly had all the engaging attributes of short-term paper (think commercial paper or even Treasury notes) and were good as cash. Except they weren’t — as became painfully evident to their holders, individuals, corporate and institutional, when the $300 billion market for the stuff froze up.Many another banking behemoth is destined to follow Citi and Merrill’s lead, no doubt out of compassion for their unwary clients, but just possibly also by the spur of lawsuits, filed and threatened by various and sundry parties claiming deep injury.Merrill, sad to relate, has been much in the spotlight as it strives to unwind the mighty tangle of financial affairs that is the somewhat less than glittering legacy of its former CEO, Stan O’Neal. Among other things, it has sold or arranged to unload a number of assets (some of which actually deserve that label) and the putative sale of which might help to give a more lustrous image to its balance sheet.Thus, at the end of last month, it agreed to sell $30.6 billion in rather doggy paper for $6.7 billion, or not quite 22 cents on the dollar. However, Merrill is supplying 75% of the purchase price and the only recourse it gets is the dubious paper it’s selling. The estimable Barry Ritholtz figures that, all things considered, the actual sales price works out to around 5.5 cents on the dollar.Merrill also announced it will sell its 20% interest in Bloomberg (the flourishing company, not the excellent mayor) to Bloomberg for roughly $4.3 billion. However, our gimlet-eyed buddy Doug Kass discovered digging into Merrill’s recently issued 10Q that the deal calls for Merrill to receive only $110 million of the purchase price in cash and the rest in notes with maturities of 10 to 15 years.Out of necessity and desire, Merrill is making a game effort to put its house in order. But the devil, as the old saw has it, is in the details.

London BankerAugust 11th, 2008 at 1:41 pm

I should qualify what I meant. You can still write your legislators if it makes you happy, but my experience is that it is entirely futile. Writing policy wonks and civil servants is a more direct path to influencing policy.

SubGeniusAugust 11th, 2008 at 1:49 pm

/unlurk@LBThanks for all the time you put in both here and in RealLife@MissAmericaThanks also for all your insights. Keep it up, please.I have never, and probably will never, be involved in the markets myself but am fascinated by the insight into the hidden machinations of the rich and powerful (even though I try to avoid having anything to do with them…my plan is to spend as much time as possible in the wide blue yonder aboard a very small vessel – I suspect considerably smaller than LB’s!)/relurk

richinarAugust 11th, 2008 at 2:06 pm

@LBI would like to know much more about what you are saying. When writing to reps it is easy to convey an overall feeling regarding subject matter. I have no idea on how to influence policy at the level you suggest. Any pointers?

GuestAugust 11th, 2008 at 2:51 pm

@London Banker: “I’m making a difference here in the UK, and have been since the spring. Much of my input is now bearing fruit as reforms that will prove more workable, practical, stable and equitable than the original panicked proposals. I will never get credit, but I am feeling very good about my karma.”Ah, London Banker. You’ve made a big difference in America, too – you and Dr. Roubini. And extra kudos to Dr. R for recognizing your value, and giving you a worldwide forum from the RGE Monitor – Dr. Roubini is a man whose contributions, given without prejudice and often unsung, have benefited the world (as others now move in to share his renown after the call was made).My response to your contributions could be summed up in part by Margaret Fuller: “Would that…a sense of the true aim of life might elevate the tone of politics and trade till public and private honor become identical.”Your comments here on Roubini’s forum are of equal importance to your weekly blog, in my view. Not only for their insight, but how else will newcomers find you?Had I your wisdom and power to change things for the better, I would value that above all else in the world. So many of our forefathers put their lives and fortunes on the line to do just that. And where would be now…if they hadn’t been there?

GuestAugust 11th, 2008 at 2:55 pm

I would like to hear from the Dr. if he still believes in potential inflationary pressure (as explained in his previous article) even if his vision of a potential global recession comes true. I would like to hear explainations for the possibility for global, I guess, stagflation.

GuestAugust 11th, 2008 at 3:18 pm

TPTB have used all the tricks in the book to hold up the markets — the lying, cheating, false promises, and manipulations – and they’re out of tricks. You can hold up anything up for a little while, but eventually, you have to pay for the bacon. Friday’s rally was based on nothing. Caveat emptor!!As The International Forecaster put it August 9:What has changed all of a sudden? Are we to believe that the price of oil is the be all and end all to financial markets? Is not oil still way north of $100 per barrel? Is there not a worsening credit crunch? Is there not a rapidly declining real estate market transpiring as we write this article, evidencing a decline, which shows no end in sight? Is not unemployment, even officially, at extremely high levels? Is not M3 still in the 16% to 18% range, thus continuing to lock in hyperinflation for years to come? Is not inflation running rampant worldwide? Is not US consumer spending experiencing negative growth when inflation is factored in? Are not corporate earnings abysmal? Are we not in a recession? Are losses from financial institutions in the trillions of dollars still not being hidden from sight by use of bogus “creative accounting” methods blessed by our corrupt regulators? Is there not a war in progress in the Georgian province of South Ossetia that could break out into World War IV, while the potential for hostilities around the world remain extremely high?http://www.theinternationalforecaster.com/International_Forecaster_Weekly/Markets_Continue_to_be_Subject_to_Manipulations_and_False_Information

FrançoisAugust 11th, 2008 at 3:33 pm

the policy response to this upcoming perfect storm will be too little too late to prevent it.“This conclusion makes little sense. There is simply no way that policy response can save anything at this stage.Running out of cash is running out of it. Being smart does not help. It might even make things worse. As much as I like our dear professor output, this not a good post IMHO.

AnonVAugust 11th, 2008 at 3:34 pm

@WAWAWA“2.2 The medals shall be at least 60mm in diameter and 3mm thick. Themedals for first and second places shall be of silver of at least925-1000 grade; the medal for first place shall be gilded with atleast 6g of pure gold.”

AnonymousAugust 11th, 2008 at 3:42 pm

London Banker,Who are the influential think tanks, policy wonks in the US that have the ear of the legislators in Congress?It seems they are bought and paid for by Wall Street already!

WAWAWAAugust 11th, 2008 at 4:41 pm

Things are getting pretty dicy in Georgia, looks like that Russians are determined to overthrough existing gov. in Georgia.Puttin just left the olympics, that means that he means busniness and wants to achieve his objectives.Would the U.S. attack Iranin’s Russian build nuclear reactor, in retaliation? Something big is happeing.

London BankerAugust 11th, 2008 at 4:44 pm

I just watched a documentary about Charles Darwin narrated by Richard Dawkins. His exploration develops Darwinian theories toward altruism and kindness as human genetic expressions. Humans are uniquely able to empathise and aspire for gain beyond their immediate kin or tribe. I like to think my genes have such expression, and that my sons will inherit those genes in a world I help to shape for the benefit of many I will never know. Kindness and altruism are human expressions, just as valid and just as natural as brutality and selfishness. Uniquely, we humans choose which impulses we prioritise and express through our morality and judgement. Perhaps that is why I remain an optimist.

GuestAugust 11th, 2008 at 5:00 pm

@London BankerThe primatologist Frans de Waal says our human nature is half chimpanzee and half bonobo. Hence our eternal struggle between the violent and loving solution.

London BankerAugust 11th, 2008 at 5:04 pm

@ Guest on 2008-08-11 17:00:26Dr de Waal, who featured in tonight’s episode, and I too like to think that humans have a really big brain for a reason.

GLOOMYAugust 11th, 2008 at 5:22 pm

PAULSON SHOWS HIS GREAT WISDOM IN CHOOSING MORGAN STANLEY TO EVALUATE RISK AT FANNIE AND FREDDIEAug. 11 (Bloomberg) — Morgan Stanley had its long-term credit rating lowered by Moody’s Investors Service, which expects the second-biggest U.S. securities firm to lose an additional $7 billion on risky assets.Morgan Stanley’s debt was downgraded one level to A1 from Aa3, Moody’s said in a statement today. Both firms are based in New York. A1 is the fifth-highest investment-grade rating.“The size of trading losses in the past year has reduced our confidence in Morgan Stanley’s risk controls,” the ratings firm said in the statement.We can all breath easy now, knowing the situation is in good hands.

GloomyAugust 11th, 2008 at 5:35 pm

NUTHIN’ BUT BLUE SKIES AHEADAug. 11 (Bloomberg) — The Federal Reserve said more banks made it harder to borrow money as defaults and delinquencies on home loans soared and the economy faltered.Most “domestic institutions reported having tightened their lending standards and terms on all major loan categories over the previous three months,” the Fed said today in its quarterly Senior Loan Officer Survey.Funds were scarcer for homebuyers and small businesses, credit card loans became tougher to get, and even banks’ best customers were subject to greater scrutiny. Tighter credit may delay any recovery in economic growth, which economists forecast will slow well into next year.“The credit crunch is intensifying,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “It reinforces the view that the economy will be weak in the next several months and there will be renewed pressure on the Fed to start easing again.”

GuestAugust 11th, 2008 at 5:36 pm

Some good points here although I don’t agree with Fitch’s take on Russia; maybe she is a “peacekeeper”. I can’t discard every word in my vocabulary because Wall Street and Washington DC use Orwellian newspeak to deceive the sheep while leading them to slaughter — financially and physically.From today”s Naked Capitalism:This post is by Jim Fitch of Some Assembly Required.When someone tells you the current crisis is”near the end”, ask them which end.Resiliency: Proving once again their resourcefulness, American consumers ran up twice as much credit card debt in June as economists thought possible, increasing their total Visa bill to $2.59 trillion. And even with that, retailers continue to fail.Participation: Some have pointed out that we are participating in spirit, if not in fact, in the oil miss-adventure in the Caucasus. And that’s The Truth, or at least Pravda.Clues: A 200:1 return. Pretty good for a ‘put’ with a nine day shelf-life. Too good, according to options experts, who suggest that the only way such a wager (against Bear Stearns) makes sense is if whoever put up the $1.7 million engaged in a very concerted effort to drive Bear Stearns out of business. They did – within 4 days – and gained over $200 million. Bears looking into.You Can’t Get There From Here : Wachovia, fourth largest US bank, is getting out of the mortgage origination business in 19 states. The action is related to Wachovia’s struggle to swallow the bad debt it got when it spent $24 billion to buy doomed mortgage lender Golden West Financial. The bank is eliminating over 10,000 jobs. Wachovia stock closed up on Friday.A Run Walk on the Bank: UBS reports that its private-banking clients withdrew about $5 billion from the bank in the second quarter, the first net withdrawal in eight years.Click Your Heels: In another triumph of hope over experience, by holding overnight rates steady at 2% this week, the Fed once again put forth its belief that despite a cascade of horrific financial data, the US economy is bulletproof.Spinning Top: The Russians are referring to the the troops that invaded Georgian South Ossetia as ‘peace-keepers’; the US holds the copyright on ‘liberators’.Change for a the Dollar: The sudden run-up in the dollar suggests everything has changed. It hasn’t. The US is still massively in the red, and there is no prospect of its breaking even in the near future or paying back its debts in the longer term.Click Your Heels: Most Americans believe that their consumerist way of life is going to last forever, that nothing can derail their economy, that the economists or the financiers or the government or god or somebody has decreed that collapse cannot and will not happen in the US. Wrong.Years of Living Dangerously: Rules to invest by; simple, basic, and apparently very hard to apply.Some Assembly Required reflects my somewhat cynical view of the world on a daily basis. Think of it as having coffee with a curmudgeon. Come visit; bring your own coffee.

PhilTAugust 11th, 2008 at 7:56 pm

@ London Banker on 2008-08-11 16:44:13 et al” I just watched a documentary about Charles Darwin narrated by Richard Dawkins. His exploration develops Darwinian theories toward altruism and kindness as human genetic expressions…”I appreciate, Sir, your mention of this documentary in this forum. I will keep an eye out for it in the USA.Over this past weekend I watched a German film from director/writer Stefan Ruzowitzkythat was just now released in the USA on dvd entitled “The Counterfieter(s)” {German title is “Die Fälscher,” 2007)Borrowing from Imdb.com, one of the taglines of this film is:”It takes a clever man to make money, it takes a genius to stay alive…”The irony was indescribable as I watched this film in light of current events.Be well …

GuestAugust 11th, 2008 at 8:03 pm

Do you have a Plan B for your life?We are building a community. A solution for peak oil, the unfolding financial and economic crisis, climate change and the pursuit of authentic happiness.Please visit our web site:www.relocatenow.eu

AfAAugust 11th, 2008 at 8:10 pm

Written by Guest on 2008-08-11 19:22:58That chart flows from the Monetary Exchange Equation (MEE) explained earlier by @ptm; M x V = P x Q.In my opinion there are 2 problems the data the chart presents. First, the GDP/M or Q/M equals to V/P (velocity divided by prices) not only V. So when the graph increases, it means that velocity is increasing faster than inflation. If it is decreasing, it means that velocity is increasing slower than inflation OR velocity is decreasing faster than inflation (well that if you assume the relationship is stable over time).The second “problem” is that the chart assumes the MEE actually holds. Although the graph presents the data over a very long term period; the only period where the MEE is thought to hold.However, if the chart presents any meaningful information, it could mean one of two things:- we have been living in an inflationary secular cycle since 1995, OR- the money circulation considerably slowed since 1995 (with affluent consumers and new electronic money this does not make real sense), OR- some combination of thereofPersonally I would go with the first choice.

AnonymousAugust 11th, 2008 at 8:25 pm

@guest 2008-08-11 17:36:40″The sudden run up in the dollar suggests everything has changed. It hasn’t.”I agree that the dismal economic conditions for the dollar have not changed. However there are a series of coincidences that make international investors reach for the buy trigger on the dollar. Saakasvili made a move that makes no sense in a vacuum, but could be part of a chess move to preoccupy the Russian Forces. The U.S. Senate has approved a new Chief of Staff for the Air Force who will have sole unprecedented temporary control while Senate returns from vacation and approves a new Secretary of the Navy. His name is Norm Schwartz. There is an armada of american and european nations heading for the Middle East possibly to enforce a blockade of ship inspections as part of United Nations sanctions for Iran failing to suspend uranium enrichment. The Russian Navy in the Eastern Mediterranean will be occupied with logistical support in Georgia. The Russian Navy in the Black Sea cannot return to Sevastopol while troops are moving on Tbilisi. The United States dollar is no longer only backed by oil. It is backed by the largest military industrial complex on earth. Economics can proverbially fall off the cliff, but if it lands on the deck of a carrier group, all of a sudden investors are reassured. I am now coining a new weird word. The natopetrodollar. This is a dollar that seeks out oil from the deck of a carrier not an offshore rig. We have reached this absurd situation by not having the scientific foresight to plan for finite resources and failing to internalize war costs in our economic calculations.We could all be running on Hydrogen Fuel Cells with all the money invested in military hardware. Now we have to improvise. Improvisation is not wisdom in military affairs according to the “Art of War”. We are now dealing with unknown unknowns.

GuestAugust 11th, 2008 at 8:45 pm

@Written by Anonymous on 2008-08-11 20:25:14you sound like youre someone important,now that youve mentioned the Art of War,i think you know the most important thing to examine is “THE WAY”,whether the sovereign+people+soldier+generals are in unison in thoughts/soul/belief, i dont see that in US,and i dont see THE US WAY can be accepted by other nationsSir Basil L Hart pointed out in his book why the everlasting peace sought after WW2 never came and why German failed to win the hearts of conquered nations, Germany failed because under Hitler’s satin velvet glove is a hard iron fist,world peace never really came because NO NATION can be the only sole leader and impose its will on others anytime she chooses to,Finally, if im correct, clausewitz stated preparation of war is made in time of peace..

GuestAugust 11th, 2008 at 8:55 pm

@Pete

I just got back from a trip to the midwest in the USA. Things are slowing down markedly in the economy there. And the BIG question is … what are Americans going to do for jobs, as the auto sector and the banking sector hit the skids??? Sure, the US farmer is still in good shape (and will continue to be). But what’s everyone else going to do?

I am in the midwest AND in automotive and I can contest to what you are saying from first hand experience. Everyone is getting laid off… It is starting to look rather ugly.

GuestAugust 11th, 2008 at 9:02 pm

@Hubbs

My sentiments exactly Pete.Who was it I saw years ago giving a lecture about the end of work or more ominously the fact that humanity will be obsolete as there will not be enough meaningful jobs for every one? Noam Chomsky?

Perhaps you are thinking of Billy Joy?http://www.wired.com/wired/archive/8.04/joy_pr.htmlFantastic software engineer with a rather dim view of our endeavors in the field…

MattAugust 11th, 2008 at 9:07 pm

I’ve got a new thought: how about everyone gets creative not miserably analytical? There’s plenty of bearish commentary, and if we want the worst go to financialarmageddon.com or bankimplode.com for the schadenfreude team and post there. But here, why not argue what’s up, down and sideways about what the policy community is facing, in geopolitical, macro, micro, regulatory and other terms? Hell, the investment community is doing it, so how about the blogerati? I have recently dusted off Galbraith and Popper, and am considering Kuhnian analysis of what’s going on, but basically there’s a problem of information; full, timely, meaningful, verifiable information. Without that, the markets, as we’re seeing, are exposed to massive herd or lemming behavior, redoubled by computer models in reinforcement, without regard to either fundamentals nor the sociology of market behaviour. No wpnder there are colossal spikes in trading volumes of certain fin stocks in early July, now being almost equivalenced.I guess my consideration is more treating the patient than blaming it for past excesses, but is that wrong?If someone can explain to me the VIX subsidence, the further collapse in Fannie/Freddie shares and how they show up on the USG balance sheet, the 3:30pm rallies on the S&P, and dark pools and their materiality, I’d be mighty grateful.PS I’m not an investor.MD

MattAugust 11th, 2008 at 10:06 pm

Sorry, second post as Im clearing physical mail after two weeks’ vacation.So who’s learned what in the credit crisis? I return home to piles of mail and find two unsolicited offers from credit card companies. Both are big. One says “We’ve recently reviewed your credit information, and we’ve designed this offer we believe is right for you… right now”. This is not a product nor a company I want to do business with, never have and never will. The second offer is from a very very big listed company, with a penchant for Courier font and raves such as “you’ve been selected for the XXXX preferred rewards gold card”, blah, and blah, and much more blah, about rewards, insurance, travel and so on. Rates, resets, thresholds and so on are not mentioned. I do not like this, I do not trust it, and as a consumer, I will not go there. What is even more alarming is that I am a foreign national on temporary assignment in the US, broadly without a US credit record, and yet these companies have my details, some assessment of creditworthiness, and are posting this stuff to my home address. Who’s sharing what with whom and why?? Sidelong observation: I didn’t get this stuff before I got my Social. Draw your own conclusions, although my local authorities have had plenty of work in that regard recently.If it’s happening to me, it’s happening to others. With what effect?Anyhow, I’ve thought for some time that RGE has been excellent on the wider credit crisis; I talked to my (institutional) mob on the wider picture and risks to balance sheets beyond subprime housing back in April/May and was basically treated as a cassandrine. Tune has changed recently, however.MD

kbsAugust 11th, 2008 at 10:07 pm

Among BRIC countries, recession helps China and India but not for Brazil and Russia. India imports nearly 70% of its oil. Recession means commodities like oil prices decline. Good news for China and better news for India since India is not much dependent on exports.

GuestAugust 11th, 2008 at 10:18 pm

@Guest: “I am in the midwest AND in automotive and I can contest to what you are saying from first hand experience. Everyone is getting laid off… It is starting to look rather ugly.”In “Recession fears as America sheds jobs”, Ambrose Evans-Prichard wrote August 8, 2008:Americans have begun to lose their jobs at the fastest rate in five years as the slow poison of the US credit crunch spreads through the broader economy.Fresh unemployment claims reached 448,000 last week – the highest since the dotcom bust – heightening fears that the summer fiscal package may not be enough to prevent a slide towards recession over coming months.It follows data showing an extra one million employees have been relegated from full-time to part-time jobs over the last year, a pattern that has disguised the true level of weakness in the labour market.”We think the economy will contract outright in the second quarter,” said Paul Ashworth, US economist at Capital Economics…The slowdown sweeping the world will knock away the export pillar that has helped keep US firms afloat through the crisis. Exports were up 9.2pc in the second quarter. “We’re in a recession. It is going to widen, it’s going to deepen,” said Allen Sinai from Decision Economics. The Commerce Department said the economy had eked out growth of 1.9pc (annualised) in the second quarter, a far weaker figure than expected.It sharply downgraded its estimates for growth all the way back to 2005, confirming long-held suspicions that the US government has persistently over-stated the strength of the US economy. It also revealed that growth had turned negative late last year…The Federal Reserves’s “dynamic map” of the mortgage crisis shows that 19.4pc of all sub-prime loans in Florida and 14pc in California are in foreclosure…S&P said the “distress ratio” of speculative-grade companies rocketed to 23.5pc in July, up from 13pc a month earlier. The complex ratio is regarded as a “precursor” to default.In total, 38 corporations that it rates have gone bankrupt this year with combined debts of $30bn. Combined defaults for the whole of last year were $4bn…

GuestAugust 11th, 2008 at 10:30 pm

@kbs “Among BRIC countries, recession helps China and India but not for Brazil and Russia. India imports nearly 70% of its oil. Recession means commodities like oil prices decline. Good news for China and better news for India since India is not much dependent on exports.”Yes, good news for China in that recession may reduce the cost of China’s oil imports. But, the increase in riots and protests that recession may bring on is potentially very bad news for the legitimacy of the regime.As Roubini says here: The IMF defines a global recession as a global growth rate below 2.5% as emerging market economies usually grow much faster (6%) than advanced economies where growth averages about 2%. For example, a country like China – that even with a growth rate of 10% plus has officially thousands of riots and protests a year – needs to move 15 million poor rural farmers to the modern urban industrial sector with higher wages every year just to maintain the legitimacy of its regime; so for China a growth rate of 6% would be equivalent to a recessionary hard landing. It now looks like that, by the end of this year or early 2009, the global economy will enter a recession.

GuestAugust 11th, 2008 at 10:48 pm

This is totally OT but, is anyone else having a problem reading this site?The background color is light blue and the text is aqua. Totally impossible to see the words! Started a couple months back.

GuestAugust 11th, 2008 at 11:27 pm

DEMAND FOR MONETARY REFORM IN ENGLANDThe following letter was addressed in 1943 to His Excellency, Most Reverend William Godfrey, the Apostolic Delegate to Great Britain, to the Anglican Archbishops of Canterbury, York and Wales, and to other Ecclesiastical Dignitaries in Great Britain. It was accompanied by a proposal to form an association having for object an honest National Money System for England. The letter, in part, ran as follows:Your Grace,(1) We, all of British blood and descent, have studied the fundamental causes of the present world unrest, have long been forced to the conclusion that an essential first step towards the return of human happiness and brotherhood with economic security and liberty of life and conscience, such as will permit the Christian ethic to flourish again, is the immediate resumption by the community in each nation of its prerogative over the issue of money including its modern credit substitutes.(2) This prerogative has been usurped by those still termed in general “bankers,” both national and international, who have perfected a technique to enable themselves to create the money they lend by the granting of bookkeeping credits, and to destroy it by the withdrawal of the latter at their discretion, in accordance with entirely mistaken and obsolete ideas which they do not defend against impartial and informed scientific criticism and examination. In this way a form of national money debt has been invented, in which the lender surrenders nothing at all; and which it is physically an impossibility for the community ever to pay. Any attempt to do so produces the artificial “economic blizzard,” as it did after the 1914-’18 war.(3 This has led to the gradual rise of a form of national, international and supra-national power, dominating through its monopolization of the National social credit all the basic creative activities of mankind. Thus, in this as in other countries, it has become impossible to obtain publication in the Press, or to broadcast on the radio, the truth concerning this economic enslavement which holds the peoples of the world in thrall…This 9-point letter was signed by the inventor of the Norman Thompson Flying Boat, a Nobel Laureate in Chemistry, the Chairman of The Farmers’ Action Council, a Governor of the Old Vic. and Sadler’s Wells, the Founder-President of the People’s Common Law Parliament, an industrialist, a manufacturer, a mechanical and mining engineer, a political journalist, members of Parliament, several authors and editors, the Vicar of Christ Church, the Warden of St. Anne’s House, a geometrician, a solicitor, the former Finance Minister of Council-Bombay Presidency-India, a gas engineer, and others.

GuestAugust 11th, 2008 at 11:35 pm

@Guest: “This is totally OT but, is anyone else having a problem reading this site? The background color is light blue and the text is aqua.”I, for one, am having no problem: the site has never been better. The type background is white; the type is black; clarity is excellent. You need Octavio Richetti when he returns from his treks or a facsimile – OR usually knows what’s wrong, technical-wise. Good luck!

utahbengoshiAugust 12th, 2008 at 1:09 am

@ dono horitsu kaisha e hataraite iru ka? Tashika ni Nihon ni sunda koto ga aru: Doko de, dono machi e homon shita ka?saikin hisashiburi nihon e itte kimashita. daibun mae osaka shiyakusho kokusaikouryuuka de tsutomete orimashita. yon nen hodo nihon ni sunde orimashita. Ima jibun no houritsu jimusho wo yatte orimasu. anata wa?

MASHIACH BEN CHANAAugust 12th, 2008 at 2:38 am

The people of Russia are all behind their leaders for Russian invasion of the whole Europe, they don’t give a damn about democracy all they want is a Great Russian empire. The Russian soldiers are like bears. Hitler lost the war when he went to Russia so did napoleon when the French army marched to Russia. The NATO alliance army is like chickens the second the Russian army moves to their country the so-called peace activist who were drafted to army will run away with the speed of light.The United States of America will seat on the sidelines and will do nothing unless the USA territory comes under attack otherwise they do not want to commit suicide and enter a nuclear confrontation with Russia.Professor rubint thank you for saving Russia when they went on default, during the time you were Clinton economic adviser in white house, bravo big standing ovation.hello russia goodbye NATO.

GuestAugust 12th, 2008 at 2:52 am

how is it that the sharemarket has rebounded due to oil coming down to levels deemed extremely high two months ago. this does not make sense is it a suckers rally again

AfAAugust 12th, 2008 at 3:05 am

Professor,I am real sick and tired of this BS.As it is your own blog, you said you would censor any topics and ideas you don’t like. Please, it is time to rerun your anti-BS software. Otherwise, the ideas above would soon be seen as yours.Sincerely

GuestAugust 12th, 2008 at 4:12 am

“Georgia military action was planned/encouraged by NATO/US to pin down Russia in Caucasus”IF i said IF this is true, then we have moved to next stage,We know Bush previously tried to bypass Russia by installing (oil) pipeline in that region,but this is some escallation..

GuestAugust 12th, 2008 at 6:10 am

“There is now an increasing probability that the global economy – not just the US – will experience a serious and protracted recession.”@ RoubiniI disagree only with your term “recession”. It should be “depression”. No problem, I will give you some more time as you are slowly getting there.Ho humPeter

SennaAugust 12th, 2008 at 6:11 am

Boku wa senkyoshi, daigakusei, soshite yunyu/yushutshu no shigoto de Nihon ni tsutomemashita. Hokkaido, Okayama-shu, Hiroshima-shu, to Kagoshima no atari e otozuremashita. Ima UtahShu de sunde, kanai wa bengoshi de Oguden-shu na horitsu jimusho ni hataraite imasu. Yahari, zensekai wa motto chisaku natte imasu. Ninen kan de kono blog o keizai/kinyu mondai ni taishite naraimasu. Rubini no susume o shitigatte, toshi shita kara ie no Okane o hozon suru yo ni kimashita.Ima to shorai ni, Yoroshiku onegai shimasu.

London BankerAugust 12th, 2008 at 6:18 am

More on how you get a record deficit while your coporations are reporting record profits:WASHINGTON (AP) — Two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005, according to a new report from Congress.The study by the Government Accountability Office, expected to be released Tuesday, said about 68 percent of foreign companies doing business in the U.S. avoided corporate taxes over the same period.More than 38,000 foreign corporations had no tax liability in 2005 and 1.2 million U.S. companies paid no income tax, the GAO said. Combined, the companies had $2.5 trillion in sales. About 25 percent of the U.S. corporations not paying corporate taxes were considered large corporations, meaning they had at least $250 million in assets or $50 million in receipts.The corporations own Congress, own the executive branch, and have decided that only workers should pay taxes.

fedwatcherAugust 12th, 2008 at 6:32 am

Professor Roubini,Global recession or global depression, only time will tell. However, we are in it now! It is not a highly probable event, it is a fact. It has arrived, and commodity prices and the dollar are finally recognizing it.More and more ‘talking heads’ are saying the ‘D’ word, deflation, but it will be a long time before (other than Paul Farrell of MarketWatch) the talking heads say the other ‘D’ word, depression.

GloomyAugust 12th, 2008 at 6:40 am

NO PLACE TO RUN AND HIDE”Investors” now bolt out of commodities and emergining markets, but where to run? They head into the US stock market. But soon the next leg of the bear market will remove the illusion that the US stock market is a good hiding place Then, likely into bonds, until the herd realizes that negative real interest rates aren’t such a great idea either. Then on to God knows what. Blind mice scurrying around eventually all get eaten by the bear in this fairy tale.

GuestAugust 12th, 2008 at 7:07 am

Dear Ben Bernanke,I see by your actions that you must read this blog and I’ll give you (ouch) the point that (ouch) you wield a powerful sword (ouch, ouch, ouch!). But what’s the point (no pun intended) of driving gold down almost 20% off its high? Are we getting under your skin? Want to show us who we are dealing with? I know you are just doing your job and there is nothing “personal” in your actions, but if don’t mind, why not let gold float back up to say $900 again, that way we can both be happy?

Little SaverAugust 12th, 2008 at 8:13 am

How Much Will Government Bailouts Actually Cost the American Taxpayer?Richard Benson did some guesstimates:http://www.prudentbear.com/index.php/commentary/guestcommentary?art_id=10092What is this economic disaster going to cost the taxpayer? Let’s try to add it up.Estimated Bailout (In Billions of Dollars)The Federal Reserve 10Student Loans 20Pension Benefit Guarantee Corporation 30Federal Housing Administration 20Small Business Administration 20Federal Home Loan Banks 50FDIC 150Fannie & Freddie 300Total 600

beijing girlAugust 12th, 2008 at 8:25 am

it’s said that short selling to be banned in the us markets. True or not??But why short buying is fine in the us markets?who can tell me?

AussieRobAugust 12th, 2008 at 9:06 am

Dear ProfessorI would be interested as to your views on where Australia is headed with the current developments. Are we just a quarry supplying a slowing China or does our central bank have a few more smarts than your federal reserve

AnonymousAugust 12th, 2008 at 9:34 am

@London BankerAmerican Corporations have their own Congress in the shadows of K street. The one in the Capitol Building is just for show. The tax loopholes are designed by the best Offshore International Tax Lawyers. The Executive is there to veto anything that places a burden on the bosses of the K street lobby and to issue “Signing Statements” to further neuter any accidental laws that the Capitol Building Congress may design. The next administration will see the Return of the “Bond Vigilantes”(bloomberg post above)which only surface when all the subsidies, bailouts and outright gifts have been given out to bosses of K street and the tax burden has to be allocated to the payroll taxes. The argument will be made that any tax burden on corporations will have them relocate in Dubai, and any increase in marginal rates for the wealthy will just motivate them to use the loopholes to stash their earnings offshore. Who is left? The people who pay payroll taxes will be hit, and the whatever is left of the middle class will erode further. The problem is that there are no more credit bubbles to allow procrastination by the payroll workers. This is where the Prozac and Television come in. However, the Prozac is too expensive for the 57,000 million uninsured and Cable will become more expensive every day. This is where meth labs and fight clubs(random violence just to know you are alive) comes in. Nobody will benefit in the long run by squeezing the payroll workers to death. The bosses of K street are paying for short term high profit returns, not national civility. If National Civil Happiness is not on the agenda, then we will end up a Banana Republic with heavily gated enclaves of the bosses of K Street and the rest in a controlled semi-chaotic order.It is obvious that Corporations receive great benefits by using the infrastructure and should pay more taxes. The problem is that there would have to be Global International Conventions on Taxation to prevent the Corporations from getting a free ride.Remember they get to pay less taxes while getting mammoth subsidies and bailouts. London Banker focuses again on a key issue. Thank you!

London BankerAugust 12th, 2008 at 9:49 am

@ Anonymous on 2008-08-12 09:34:56What you say is true, but sickening too. In Europe we got around the problems by bringing in Value Added Tax, which is assessed on all businesses throughout Europe, with a system for reclaiming across borders. The basics are that a business charges value added tax on what it sells of goods and services, and reclaims value added tax it pays to its suppliers of goods and services. By and large, it works, although there is also fraud.I just find it amazing that the US can absorb 80 percent of the world’s savings as a debtor nation at the same time it is impoverishing its workers and enriching its elites to a scale never seen in a century.In the 25 years from 1973-2008, average wages fell 10 percent while average corporate profits increased 219 percent. The tax burden of the richest one percent fell from 30 percent to 23 percent. By contrast, the minimum wage lost over a third of its value in real terms.When the gravy train of international credit to finance ever bigger dividends and bonuses stops, the US corporate kleptocrats squeal and get $600 billion more government handouts and bailouts as detailed above.Nauseating.

AnonymousAugust 12th, 2008 at 9:56 am

Any guess on how long US stock market uptrend will continue in view of the lower oil prices and flight from commodities?

NoviceAugust 12th, 2008 at 11:01 am

Can oil continue to fall? with winter coming to the northern hemisphere- where the greatest consumption occurs, is it possible that demand can continue to fall when cold weather hits? Unlike driving which we can cut back on- we still need to heat our homes. And with the cost of that fuel considerably higher from last year, won’t that just add to the economic burden. Does anyone think that this dollar fall is a manipulation in advance of winter oil consumption?Novice

GuestAugust 12th, 2008 at 11:46 am

@Anonymous: “It is obvious that Corporations receive great benefits by using the infrastructure and should pay more taxes. The problem is that there would have to be Global International Conventions on Taxation to prevent the Corporations from getting a free ride.”No, we would need no GICT. The US Congress provides the infrastructure that protects corporations from paying their share of taxes and deflects any backlash from the American people. And the US Congress has the power to change that infrastructure.It is recent Congresses that have sold out the American people to Big Lobby corporations, off shoring the people’s jobs and destroying years of established tax and tariff law that assessed corporations for America’s every advantage.Congress partners with corporate crime, from allowing them to jettison their pension plans to expanding their access to low-wage foreign workers to giving them extensive judicial protection for their one-sided contracts. It sells them monopoly protection, enabling the big companies to merge and smash the little onesAnd all the while, US-based corporations have the full protection of the US Marine Corp and protection against all manner of legal onslaughts, coming under the full purview of US law enacted by Congress. They have the most complete civil police protection in the world — against protest or employee strife or property assault.All at the expense of the American people.As Ron Paul says, “Without money, the poor and the middle class are disenfranchised since access [to Congress] for the most part requires money.

GuestAugust 12th, 2008 at 12:13 pm

The US economic and fiscal disaster upon us is a direct result of failed leadership, imo, as the US has failed to lead the world on so many fronts, including economic, social, the environment, and of course, the Iraq War and costly occupation based on false pretext.Can we expect anything different and any change in our current downward trajectory from our leaders going forward?”The president had Mr. McCain to the White House three times in one week recently to talk about how Mr. Bush should make the case for the war in Iraq…” July 3, 2006 NYT “A New Partnership Binds Old Republican Rivals”

GuestAugust 12th, 2008 at 12:13 pm

The US economic and fiscal disaster upon us is a direct result of failed leadership, imo, as the US has failed to lead the world on so many fronts, including economic, social, the environment, and of course, the Iraq War and costly occupation based on false pretext.Can we expect anything different and any change in our current downward trajectory from our leaders going forward?”The president had Mr. McCain to the White House three times in one week recently to talk about how Mr. Bush should make the case for the war in Iraq…” July 3, 2006 NYT “A New Partnership Binds Old Republican Rivals”

GuestAugust 12th, 2008 at 12:32 pm

Ralph Nader gives his views on US corporations in an interview in 2004 with “The American Conservative” magazine and Pat Buchanan on why his third-party presidential bid ought to appeal to conservatives disaffected with George W. Bush. His views on corporations are well worth the read:TAC: You often mention corporations. What is the theory behind this or what are the alternatives to corporate economic power? I presume you are not talking about state ownership or socialism, or perhaps you are …RN: Well, that is what representative government is for, to counteract the excesses of the monied interests, as Thomas Jefferson said. Because big business realizes that the main countervailing force against their excesses and abuses is government, their goal has been to take over the government, and they do this with money and politics. They do it by putting their top officials at the Pentagon, Treasury, and Federal Reserve, and they do it by providing job opportunities to retiring members of Congress. They have law firms that draft legislation and think-tanks that provide ready-made speeches. They also do it by threatening to leave the country. The quickest way to bring a member of Congress to his or her knees is by shifting industries abroad.Concentrated corporate power violates many principles of capitalism. For example, under capitalism, owners control their property. Under multinational corporations, the shareholders don’t control their corporation. Under capitalism, if you can’t make the market respond, you sink. Under big business, you don’t go bankrupt; you go to Washington for a bailout. Under capitalism, there is supposed to be freedom of contract. When was the last time you negotiated a contract with banks or auto dealers? They are all fine-print contracts. The law of contracts has been wiped out for 99 percent of contracts that ordinary consumers sign on to. Capitalism is supposed to be based on law and order. Corporations get away with corporate crime, fraud, and abuse. And finally, capitalism is premised on a level playing field; the most meritorious is supposed to win. Tell that to a small inventor or a small business up against McDonald’s or a software programmer up against Microsoft.Giant multinational corporations have no allegiance to any country or community other than to control them or abandon them. So what we have now is the merger of big business and big government to further subsidize costs or eliminate risks or guarantee profits by our government…PB: What are the reasons a conservative should vote for Ralph Nader?…Conservatives are very upset about their tax dollars going to corporate welfare kings because that undermines market competition and is a wasted use of their taxes.Conservatives are upset about the sovereignty-shredding WTO and NAFTA. I wish they had helped us more when we tried to stop them in Congress because, with a modest conservative push, we would have defeated NAFTA because it was narrowly passed. If there was no NAFTA, there wouldn’t have been a WTO.Conservatives are also very upset with a self-styled conservative president who is encouraging the shipment of whole industries and jobs to a despotic Communist regime in China. That is what I mean by the distinction between corporate Republicans and conservative Republicans.Next, conservatives, contrary to popular belief, believe in law and order against corporate crime, fraud, and abuse, and they are not satisfied that the Bush administration has done enough…And conservatives are aghast that a born-again Christian president has done nothing about rampant corporate pornography and violence directed to children and separating children from their parents and undermining parental authority.If you add all of those up, you should have a conservative rebellion against the giant corporation in the White House masquerading as a human being named George W. Bush. Just as progressives have been abandoned by the corporate Democrats and told, ”You got nowhere to go other than to stay home or vote for the Democrats,” this is the fate of the authentic conservatives in the Republican Party.I noticed this a long time ago, Pat. I once said to Bill Bennett, “Would you agree that corporatism is on a collision course with conservative values?” and he said yes.The impact of giant corporations, commercialism, direct marketing to kids, sidestepping parents, selling them junk food, selling them violence, selling them sex and addictions, selling them the suspension of their socialization process—years ago conservatives spoke out on that, but it was never transformed into a political position. It was always an ethical, religious value position. It is time to take it into the political arena…http://www.amconmag.com/2004_06_21/cover.html

GuestAugust 12th, 2008 at 1:00 pm

@Guest: “’Georgia military action was planned/encouraged by NATO/US to pin down Russia in Caucasus.’…IF i said IF this is true, then we have moved to next stage… We know Bush previously tried to bypass Russia by installing (oil) pipeline in that region, but this is some escallation…”Mainline News These Days: a daily update on a category-one storm that brings heavy rains to Texas or the daily update on the personal quest of a young man for medals to hang around his neck.In between, the media squeezes in a few details about the Russian-Georgia War. There’s not enough room, however, for important analysis… just “he said, she said” reports and the company line from our neocon government and their UN and state department mouthpieces.One media report we did see, in the “San Francisco Chronicle”, did have a couple of little used pertinent facts:Q: Where are they fighting?A: The bulk of the fighting revolves around two pro-Russian enclaves, South Ossetia and Abkhazia.Russia has long viewed itself as the protector of the two enclaves, which have been under pressure from the central government in Georgia.In 1990, Georgia voted to abolish the autonomy of South Ossetia, and by 1991 the ethnic antagonists were fighting. In 1992, Georgia and Russia signed a peace treaty and Russian troops began patrolling the South Ossetia border.That same year, Abkhazia declared its independence from Georgia and another war was fought, which ended in 1994 with a treaty between Russia and Georgia. Russian troops then began patrolling that enclave, too.Q: What touched off the latest fighting?A: Georgia launched a surprise operation last week to seize control of South Ossetia. An enraged Russia sent its military into the breakaway republics and bombed Georgia proper… (end quote)The “Chronicle” editorial writers paid no attention, of course, and followed the neocon propaganda…Russia is the aggressor.

SeanAugust 12th, 2008 at 1:24 pm

This is an investigative report conducted by a UK reporter recently in Hollywood, Florida which was voted an All-American city. The stories are just depressing , and the sad thing is, it seems true.==============================================================http://www.guardian.co.uk/business/2008/aug/08/subprimecrisis.useconomy Hard times for Hollywood With the US housing market in freefall, Jonathan Franklin visits the former Florida boomtown where repossessions are at an all-time high, pawnshops are thriving and residents predict an economic meltdown to rival the great depressionJonathan Franklin The Guardian, Friday August 8 2008’You feel bad. You don’t want to take their wedding rings from them – that’s their memories and everything,” says Michael Bruce from behind a row of thick steel bars. “But they need the money and that’s what we are here for.”Bruce holds out a black velvet jewellery tray. Each row holds a dozen wedding and engagement rings: big diamond, little diamond, stylish or gaudy, he has dozens. “When they take the ring off their finger, they get all choked up. It’s just something you got to deal with … that’s just the way the economy is – it’s trash.”Bruce, whom everyone here calls Junior, is the manager at a pawnshop on the outskirts of Hollywood, Florida, itself a diamond of a city in a perfect setting of Atlantic beaches. “It is easier for them to pull a ring off their finger than to bring in a lawn mower” to raise some cash, says Bruce, who every day sees Americans so desperate not to default on their mortgage payments that they come to his shop to sell “everything from musical equipment to the gold teeth from their mouths”.No one seems to have cash, debts are piled high and even the banks appear to be running out of money, says Junior. “Better to lose your ring than your house.”Junior’s pawnshop sits alongside a faceless strip mall, across the street from a cement fortress – the sheriff’s office – 30km north of Miami’s South Beach. Inside a steady stream of people come in to sell off their possessions. There’s a stack of palmtop computers, brand new Bose speakers and so many Guess watches that Junior won’t take them any more. “I get the guy who drives up in the Bentley, and the people who walk in. No one has cash.”Down the street at Circuit City, an electronics store, the 18-year-old sales clerk, Alex, agrees. “Before, the economy was booming, the stock market was OK and people could spend. Now nothing is the same, a lot more people are struggling. There are more lower class than middle class,” he says. “Do you know how many foreclosures there are every day? My aunt sells real estate and every day she has new foreclosures [by banks]. People just don’t have enough money.” Alex says he is already planning to leave the US to look for work overseas. “I don’t think the country is going to go bankrupt, but if the next president can’t get the economy going, I’m moving to Spain.”The collapse of the local economy is obvious along the palm-shaded streets of Hollywood, Florida. Instead of “Welcome to Hollywood”, the first sign a visitor now sees is a bright yellow sign stuck into the flowers. It reads: “Sell Your House, Fast Ca$h 954-294-5420.”Answering the phone at that number is Ricardo Morales, 39, who set up his own website, ricardobuyshouses.com, and has been scooping up properties for as little as 25% of their listed value. “The banks have properties that are listed at $240,000 [£123,000], but now they are dumping them for $89,000 [£46,000]. That seems to be their favourite price now – $89,000 and we are talking a three-bedroom, four-bath home in a nice area. The banks are dropping the prices like crazy.” In 2007, Hollywood, Florida, was elected “All America City” by the National Civic League, a tribute to its sense of community and progressive social policies. Now it seems only to epitomise America’s housing slump. Earlier this week, the government-sponsored mortgage giant Freddie Mac said that the country was facing the biggest decline in property values since the 1930s. In Hollywood, practically every street is packed with “For Sale” or “Open House” signs. On some streets five or six houses in a row are for sale, most with additional details like “Price Reduced” or “Foreclosure”.In a normal economy, no neighbour would ever so publicly admit to running out of cash and finding their house seized. Today the front doors are plastered with notices like “Sheriff’s Notice” and “Final Notice of Eviction.”Instead of signs for lost poodles and beagles, the telephone poles and traffic signs in Hollywood are plastered with handwritten signs pleading, “Buy my home.” One homeowner simply bought an “Open House” sign and scrawled in bad handwriting a single word: “CHEAP.”I follow the “cheap” trail and find a tired home, in a quiet neighbourhood, next to golf courses and a canal. The beach is quite close, about 15 blocks away. The owner is simply gone. He left the front and back doors open.A box of cockroach poison sits on the table next to a piece of paper with a cellphone number. The house is abandoned, wires coil from the walls, the plants are dead and it looks like the owner just simply gave up. I wait an hour, but no one appears.Pawning wedding rings and abandoning homes are just two small indications of the turbulence that is not only destabilising the US economy but also risks throwing the global economy into a stall. From 1995 to 2005, the US economy grew steadily. Housing prices in many areas trebled. Then in late 2005, the economy peaked. Housing prices slowed, went flat, and then started to fall. Prices for condominiums in the Hollywood area have fallen by approximately 40%. People who bought in 2005, 2006, or 2007 now owe the bank much more than their home is worth.Nowhere has the economy been more crushed than southern Florida, where Hollywood sits. As developers, speculators and investors saw year after year of 20%-plus gains in property prices, money poured in. Banks joined the party by offering a novel kind of loan – “no documentation”. Applicants would simply be asked by a bank’s loan officer, “How much do you earn?” and “Have you ever been bankrupt?” and most important “How much money do you need?””There was a lot of fraud. People would lie about how much they earned … Whatever you put was true. You put down your salary and they gave you $1m and said, ‘Go buy a house,'” explains Carlos Justo, a broker who has worked in property for 30 years. “I had a client – he’s a banker – and he said, “Carlos, my 13-year-old son could get a mortgage. He has a social-security number and a tax ID. If he had applied, he could have gotten $1m.”As the banks made little effort to verify the information, “credit-challenged” applicants were often able to get the now notorious sub-prime loans – contracts that allowed for two or three years of minimal payments and then an increase of 500%, so that an $800 monthly payment suddenly balloons into $4,000 a month.”You want to know how crazy it got?” asks Katerina Brosda, a 28-year-old estate agent. “At one point [in 2006] I was walking around with 57 cheques for $100,000 each in my pocketbook, for two weeks! Each one was a deposit for a new condo and I walked around with my purse like this …” She clutches her white Chanel purse close to her chest. “I had a couple of associates who were sleeping out in a tent waiting to get into the sales office to buy a condo and I saw people fighting over units, hitting each other over who was going to get the last one.”These days the locals are struggling to dig themselves out of debt. At the Hollywood public library, in the section where they sell off used or surplus books, the only empty shelf is the section on financial help.”We can’t keep that kind of book in stock. As soon as they come in, th
ey go out,” said Antoni, a grey-haired, bespectacled man in his 60s who is a library volunteer. “People are just upping and leaving. For the middle class on down, it is going to be a heartache.”With so much chaos in the economy, everyone you meet on the streets of Hollywood is either a property expert or a victim. “It’s all about greed,” says a man in an SUV the size of a bus. “George Bush spent a trillion dollars on this war in Iraq; what is that going to do to our grandchildren? He’s going to cause another great depression.” While he blocks the street and ignores cries to move his Chevrolet Excursion and let traffic through, he tells me that the meltdown has shaken his faith in America. “I never thought that Americans could do this to Americans.” Around the corner, standing outside his three-bedroom home, notionally worth $780,000 (£390,000), “Jim Robinson” – he refuses to give his real name – smokes a cigar and admits that if he wanted to sell, he would have to drop the price to about $600,000. But he sees the economic collapse as extending far wider than housing: “This country is no longer an industrial power. We don’t even manufacture steel, the Saudis own 30% of Wall Street and Dubai had to bail out Citibank.”With his dense tattoos and tales of gunfights in the Sudan, Robinson is an ex-mercenary who has travelled widely in the developing world, in conditions of drought, starvation and war. Now he sees those same chaotic conditions engulfing his beloved Hollywood. “These people are so clueless about what is happening beyond their compact little world, they are absolutely clueless as to what the potential [for economic meltdown] could be. You shut down the grocery store for a day and they panic. Look at what happens when we have a hurricane! People go to stores and fight over a loaf of bread.”Bob Boynce, a south-Florida estate agent, also sees signs of panic. “People are walking away from their homes,” he says. “We sold homes to young couples four years ago for $400,000. Now they could only sell for $275,000, so they are walking out and losing it all. This is happening in great numbers. You won’t see that in the newspapers.” He describes this new generation, known as “the walkers”: “Their [mortgage] payments may be $4,000 a month. They can rent a place for $1,700. They are cutting their payments in half. The only thing that can be done to them [for defaulting] is that their credit rating will be bad. They can’t arrest you; it is not a crime. This is happening by the thousands; I have two close friends who have done this.””Walking” has become endemic in parts of urban America where house-price falls have been particularly steep, and the pattern is often the same. First the family move out their furniture. Then the car. Finally they post the keys back to the bank. In the morning, when the bank employees go to collect the day’s mail, the box of letters often rattles, the sound of so many keys clanging together. This too has a name: “jingle mail.”But with the locals out of cash, who is buying? “The foreigners are coming in droves: 80% of the people coming into our office are from England, France, Germany, Italy. Between the falling prices and falling dollar, they can buy here for practically nothing. Who wouldn’t be here?” says Paul Merlesena, a local estate agent who notes that some of the first homes at auction have just sold for $240,000. “Last year they were selling for $660,000.” Looking a bit sad, he says: “If this was all reversed, America would be eating up Europe.” Another group of buyers has started moving in at the luxury end of the market in parts of the Miami area – wealthy Russians. Fond of winter sunshine and gated security, Russians are picking up mansions whose price tags have become increasingly attractive thanks to the weak dollar.In the US media, the housing meltdown has been portrayed as a series of isolated events, rather than a connected body of evidence pointing to another great depression. Outside an office building in Hollywood, crates of unopened mail dumped in a skip give an indication of the breakdown that is occurring between ordinary Americans and the financial system.The first letter I pick up is dated March 25 and addressed to Isaac from Miami: “Your debt to Land Rover Capital Group is still unpaid,” it begins, offering him a simple form to fill out and mail back with a cheque for “the balance in full” – $13,540.76. As Isaac evidently does not open such mail, what is the chance that the money will be paid off?Another letter is chasing a debt of $88,000 owed by Uri of Miami. The lawyers from New York are making a once-only offer: if he will just put post a cheque for $35,000, the debt will be cleared. This is a 55% discount on the total actually owed. There are other letters for Uri, for other debts running to tens of thousands. One bank is offering to settle for 15 cents on the dollar – a $32,000 debt instantly chopped to barely $5,000. Judging from the letters in the skip, Uri alone owes close to $100,000, yet the people chasing that money seem unable to get him to even open the mail. Multiply Uri by a few million and you begin to understand the seriousness of this meltdown. It is not the kind of story that a generally patriotic American press likes to investigate. But in that one skip, in a small corner of a picture-perfect American city, all the evidence shows repayment claims from banks, car companies, credit-card providers, all turning into so much worthless paper.I stayed in Hollywood for only a week. I came to love the quiet streets where the screech of parrots was often the loudest sound around. The bike lanes were swept clean and the library, a huge building with 24 internet-ready computers, was free to the public. But I left haunted by that pawnshop, the wedding rings, the broken end of the American dream.Even Junior’s takings have slumped. “People come in here and want money. They are not spending anything,” he says on my last visit. “Our sales are completely down, except for one thing: golf stuff is selling. It’s crazy. The stuff you think people will not want to go out and do! Obviously they are not working, so they go out to the range”.

London BankerAugust 12th, 2008 at 1:35 pm

@ Guest on 2008-08-12 13:00:51The Russians are teaching George a lesson. They went in where they were wanted, to protect civilians from violence instigated by Georgia at the behest of the USA, they brutally crushed the opposition military and sent it packing, declared victory 5 days later, and then graciously offered terms very like those that existed pre-violence.If the US had done that in Iraq five years ago, the world wouldn’t be looking at massive inflation, deflation and disloction today.More than that, if Bush or Israel go after Iran, and Iran asks Russia for help to defend its sovereign territory, we know exactly what we can expect. We don’t have the manpower to resist the Russian Army and Iranian Army combined (and don’t underestimate the Iranians). We will then lose Iran, Iraq and experience a very harsh peace in the West on Russia’s terms for energy supplies.If Washington hadn’t tried to humiliate Russia these past 10 years, the world would be working on very different terms today.

GLOOMYAugust 12th, 2008 at 2:20 pm

I’M MAKING MY LIST AND CHECKING IT TWICE (BUT THE GRINCH, NOT SANTA WILL BE COMING)How silly, I forgot to add the insurance companies to my list of coming bailouts(although I am enjoying shorting XLF which includes them). The amount of new treasuries that will be needed to bail out Fan, Fred, many large banks, GM, Ford, Chrysler, the airlines and the insurance companies is going to be astronomical. Good luck keeping treasury rates low in the coming flood of US debt. From Minyanville:”For another example, consider the case of American International Group (AIG), the once great insurance behemoth. It’s now, in my opinion, been reduced to a company that is spinning out of control, unable to determine how bad its credit portfolio is and how bad its investment portfolio is. Mind you, this is a company with $1 trillion in assets, but bonds that are going down in price quickly and probably not coming back anytime soon. I have been contemplating ever since Stage 2 of the Credit Crisis began what company would be first to not be able to finance themselves.I thought it could be Lehman Brothers (LEH) (it still could), Merill Lynch (MER) (they sold their Bloomberg stake and other assets and diluted common shareholders at 10-year lows just to stay alive), but I hadn’t considered AIG and the insurance companies. But I am now.Take a look at how AIG bonds are trading after its disastrous announcement. It’s absolutely un-economical, in my opinion, to raise more capital as it already buried equity and preferred buyers on its last asset-raising go-round, so I don’t know how it stays alive.Its comments in the press clearly demonstrate the lack of risk-controls. The problem here, of course, is that AIG isn’t alone. It’s just one of scores of companies that cannot finance themselves. The credit market is speaking, loud and clear.Note that prior to the credit crisis’s beginnings, AIG paper traded at a mere 69 basis points above 5 year Treasuries and has ballooned all the way to 675 basis points above Treasuries. “http://www.minyanville.com/articles/MER-lehman-C-citigroup-bank-of/index/a/18450

Aleister PerduraboAugust 12th, 2008 at 2:22 pm

Well at least all those boarded up hotels and motels can be converted to rooming houses.

GuestAugust 12th, 2008 at 2:28 pm

@LBSadly true. Unfortunately, Tony Blair did not succeed winning hearts and minds of poor Irakis either, thus blaming the Empire worldwide. Blair, Sit! Stay! Heel! Sure, W!Seems like the Russians have the same mental problem as some others, trying to play empire 19th century like. Fortunately, they are slowly running out of oil.

AfAAugust 12th, 2008 at 2:33 pm

The markets probably did not realize yet that the demand curve of oil has shifted upward, and that demand destruction alone would not get us back to where prices have been originally. The biggest unknown is the supply curve though, as nobody really knows if it is still the same or moved upward too.The most intriguing is that tensions between Russia and Georgia do not seem to influence the oil price movement, something that, a month ago would have pushed oil beyond $150.

GloomyAugust 12th, 2008 at 2:37 pm

America needs a ‘Good Depression'(MarketWatch) — Yes, a depression. Spelled: D-e-p-r-e-s-s-i-o-n. Wake up America, recessions don’t work any more. Why?Get serious folks. We had a 30-month recession not long ago. Eight years later the market’s still barely at its 2000 peak, a loser. Worse, we’re back in a new recession. But Washington politicians are keeping it a secret, feeding us doctored feel-good statistics as legendary political historian Kevin Phillips wrote in “Numbers Racket: Why the Economy is Worse Than We Know.”So we blindly refuse to bite the bullet and stop our out-of-control spiral into collapse. America needs a big wake-up call … and it’s coming soon, whether you like it or not!Last November we posted “17 reasons America needs a recession.” Today it’s far worse, and getting worse still. See previous Paul B. Farrell.Most economists predict it’ll take till 2010 to burn off our excess housing inventory. RGE Monitor say Fannie and Freddie bailouts aren’t working; they’ll soon be “profoundly insolvent” and need to be “nationalized.” Treasury Secretary Henry Paulson has no long-term plans, he’s a caretaker, plugging holes, anxious to get back to Wall Street’s money machine, running out the clock till he turns over the catastrophe he enflamed to a new bunch of politicians and their armies of 42,000 greedy lobbyists.Lessons learned? Zero. Why? Wall Street, Washington and Corporate America are a one-trick pony with one narrow-minded strategy: Economic g-r-o-w-t-h, bull markets, megabonuses. In good times they tout “free markets.” But when greed bombs, these big babies throw free market “principles” under the “Reagan Revolution” bus as their lobbyists go whining to Congress for megabillion taxpayer bailouts and access at the Fed casino’s discount window to siphon off more taxpayer money. What hypocritical wimps!Wall Street and its co-conspirators are doing such a miserable job, America needs a new strategy: Stop all the short-term “hole-plugging.” Let go and let an old-fashioned “Good Depression” do the job that our happy-talking leaders refuse to do. Let it clean house and reawaken America to basic values. Otherwise a “Good Depression” will turn into a new “Great Depression.”http://www.marketwatch.com/news/story/seven-reasons-america-needs-good/story.aspx?guid=%7BE8E9E137-3375-41D0-9601-FA4D14601140%7D

AfAAugust 12th, 2008 at 2:47 pm

@ GloomyYou may probably would like to add FDIC and pensions to your list in addition to few more rounds of drug er stimulus packages.

GuestAugust 12th, 2008 at 2:48 pm

@London Banker: “The Russians are teaching George a lesson.”But is George smart enough to learn? Great post!!

GloomyAugust 12th, 2008 at 2:55 pm

@AfaThanks, that should have been obvious to me. I also forgot any S&P 500 company that might go under (CDS counterparty risk), but outside of the above mentioned ones I don’t know any specific names, do you?

GuestAugust 12th, 2008 at 2:59 pm

Risks of Deflationhttp://www.ft.com/cms/bfba2c48-5588-11dc-b971-0000779fd2ac.html?_i_referralObject=821839845&fromSearch=n

GuestAugust 12th, 2008 at 3:37 pm

Over the next 6 months, renegades George and Dick and their uni centric, monolithic, bully-headed approach to the global community, are potentially the greatest threats to world peace and prosperity.When you’re always right, you’ve got nothing to lose.Either McCain or Obama will be a welcome, if not crucial change from our “leadership” in DC, imo.Signed, an American who loves his country, but is extremely concerned.

GuestAugust 12th, 2008 at 3:50 pm

L.B. and Guest 15:37:01. Good posts.“If you can’t bite,” goes the old saying, “don’t show your teeth.” Much of the European press pegs the U.S. as the influence behind tiny Georgia’s surprise assault on an area existing under Russian-Georgia peace treaties. The U.S. press (like their partnership with the “get Saddam” message) calls this “Russian aggressiveness”.So, not only are America’s pro-war empire builders politically nuts (Iraq’s “cake walk”), they are also wildly militarily incompetent. Russian experts such as Condi Rice could tell you that this tough, armed-to-the teeth military customer (no parliamentary decisions are needed in a Russian response) is not only the world’s second most powerful military power, it’s the second largest petroleum power. Germany, for instance, depends on Russia for 40 percent of its natural gas.Many Russian observers could easily have predicted Russia’s response to the Georgia action. Young US- and Israeli-trained Georgian soldiers never knew what they were in for, first going to Iraq as Cheney’s second largest segment of the “coalition of the willing” behind Britain, and then returning to Georgia (in U.S. planes) to face Red Army armor. Either Condi – Russian and oil (Chevron) specialist — doesn’t talk back to the neocons or, if she does, the neocons don’t listen. Perhaps, like Colin Powell, she’d rather hang on to her cabinet post than make waves.

WAWAWAAugust 12th, 2008 at 4:03 pm

Either McCain or Obama will be a welcome, if not crucial change from our “leadership” in DC, imo.I don’t want to make it a political blog, but I have very little regards for McCain & obama.Politicians are there to give us illusion that we have a democracy, where in fact, major policies are either directly or tacidly designed by centers on MONEY.Scientist are wrong saying that our universe revolves around sun, It always has and will revolve arount MONEY.

GuestAugust 12th, 2008 at 5:21 pm

Sean: Many thanks for the post. This weeklong South Florida report sheds more light on our investment banker economy than any weeklong drubbing from government numbers. Wall Street, of course, finds the propaganda numbers more useful, and its media partners are happy to accommodate. Even financial reporters not on the Wall Street payroll only “hear” one side of the economic picture. As the proverb says: “The eyes believe themselves; the ears believe other people.”

GloomyAugust 12th, 2008 at 6:00 pm

THE MIGHTY SHALL FALLAnnointed JP Morgan is going to go down. One hears discussion of name of banks that will remain solvent. The reality is that none will be in the coming depression. From Calculated Risk:”Ladenburg analyst Richard Bove is being quoted (headlines only) that JP Morgan’s “original concept” has “broken down”. And that the issues will not be resolved until “well into 2009.”http://calculatedrisk.blogspot.com/2008/08/analyst-bove-close-to-perfect-storm-for.htmlLet me translate: “well into 2009” means when hell freezes over.

kilgoresAugust 12th, 2008 at 7:50 pm

@ Guest on 2008-08-12 12:32:22Thanks for sharing the Nader piece. At some point, those of woman born — natural persons — must recapture the authority they have surrendered unwittingly to those whose birth can be attributed only to a fiction of the law — large corporations and other artificial persons– and reclaim those rights of citizenship that properly belong only to them.SWK

AfAAugust 12th, 2008 at 8:35 pm

@ GloomyA quick analysis of 2008’s Fortune 500 companies reveals that:- Financial Services and Insurance represent about 27% of all revenues and profits of all total 500 companies (there are about 122 corporations)- Oil, gas, electricity and metals also represent about the same portion.- All the other industrial families heavily depend on the first two:* Motor vehicles, automotive parts, Aerospace & defense and other industrial equipments represent more than 10% of total revenues* Freight, delivery, transportation, airlines and retail/ wholesale also represent about 10%.* Telecoms, electronics, office equipments … another 12%* Chemicals, food processing, engineering, construction, health care and pharmas and others account for the rest (about 12% but a bigger share of profits)I don’t want to draw any conclusions but, imagine what could happen if one or both of the first two groups (financials and energy) run into trouble. It is all the rest of the food chain that is in jeopardy. Moreover, it is these two industries that have much to gain by keeping the current status quo (cheap credit and cheap energy) and a lot to lose if things change (alternative energy and stricter investment discipline will make the current system, with its 500 names, decayed). I don’t think that would appreciate that.So to answer your question, if the credit and energy crisis persists, you may find many big US names in the Fortune 500 running into trouble. Very high in the list (#1) appears Wal-Mart. I doubt their business model would last for long: higher transportation costs and higher pressure on wages in China coupled with JIT strategy would push WalMart to lose much of its historic competitive advantages (well that could also mean some jobs could be back to America, but I doubt it will be in any meaningful way to allow WalMart regain its worldwide leadership)

GuestAugust 12th, 2008 at 8:55 pm

In RGE Monitor top “Spotlight Issues” today:Greenwich Survey: Institutional Investors Expect Another Broker Dealer’s Collapse In H2 2008 Amid Continued Writedowns Aug 12, 2008FT August 12: Greenwich Associates Survey of 146 institutions, incl. global banks, hedge funds, investment managers, mutual funds, pension funds result: Insitutional investors expect another big financial firm will collapse within next six months. Knock-on effects on credit exchange derivatives poses serious threat to global markets–> bank sponsored clearinghouse is good first step, but traded derivatives would be safer instead of keeping them over-the-counter (OTC)…Roubini:The entire income generating model of financial institutions – make income out of securitization fees rather than by holding the credit risk of RMBS, CDO, CMBS, CLO – is broken now: how will investment banks make money going forward?…http://www.rgemonitor.com/components/option,com_signup/signup_type,free

AfAAugust 12th, 2008 at 9:14 pm

Oh, and my Naked Cox Portfolio which is long the 19 stocks restricted against naked shorting and short other financial, RE and insurance ETFs is a total disaster.I wonder how much pain is still waiting out there when the short ban expires. A proof that interventions never succeed beyond the very short term??

AfAAugust 12th, 2008 at 9:22 pm

Wohoo. Only 1.5 Trillion miles to go (based on Professor’s estimates):”Banks’ Subprime Losses Top $500 Billion on WritedownsBy Yalman OnaranAug. 12 (Bloomberg) — Banks’ losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as writedowns spread to more asset types.The writedowns and credit losses at more than 100 of the world’s biggest banks and securities firms rose after UBS AG reported second-quarter earnings today, which included $6 billion of charges on subprime-related assets.The International Monetary Fund in an April report estimated banks’ losses at $510 billion, about half its forecast of $1 trillion for all companies. Predictions have crept up since then, with New York University economist Nouriel Roubini predicting losses to reach $2 trillion.”

GuestAugust 12th, 2008 at 9:36 pm

Of course, Kavitha Cherian and Rachel Ziemba have had infinite details on the “Conflict in Georgia: Economic and Financial Fallout” since yesterday. It’s an excellent analysis: couldn’t be better – with a map and economic charts. It’s on the RGE Analysts’ EconoMonitor. Here’s the Update:UPDATE: the conflict now seems to be at an end – thankfully, but the effects on economic ties and the geopolitical faultlines it exposed are likely to be longer lasting. Russia has demonstrated its willingness to intervene with full force, and the U.S. and EU have illustrated that they have limited willingness to counter such efforts. Meanwhile, while asset markets might recover from the declines mentioned below, it might engender future concerns concerns about equity markets in the CIS, perhaps increasing the risk premium priced into these equity markets End UpdateThe unthawing of conflict in South Ossetia has arguably been long in coming with tensions gradually heightened in recent months with Russia augmenting its decades old peacekeeping force in the province and increasing ties to the provinces of Abkhazia and South Ossetia, both of which have been de facto independent since the 1990s This particular conflict was sparked by a Georgian offensive to reclaim the province launched last week – so much for an Olympic peace. Russia responded by bombing targets in Georgia and sending more troops into South Ossetia and subsequently into Abkhazia.Georgian President Saakaskvili may have overestimated support from the EU and U.S. (Georgia is one of the few members of the coalition of the willing in Iraq)…http://www.rgemonitor.com/econo-monitor/253319/conflict_in_georgia_economic_and_financial_fallout

AnonymousAugust 12th, 2008 at 9:47 pm

The broker dealers should all fail if they cannot succeed on their own without Fed help.After all that’s the standard they have caused to be applied to US citizens. Time for a taste of their own medicine, they have had too much help already, and if they aren’t disintegrated it’s a disgrace.Remember, they have NO loyalty to the US and are basically UN-like entities. It’s awful that real US people are required to help those international monsters.

GuestAugust 12th, 2008 at 9:50 pm

“Going for the Heart” by Llewellyn H. Rockwell, Jr.The heart of the modern state is the central bank. By heart I mean the very thing that makes it work, and without which the modern state would quickly wither and die. It is the thing that makes the money. As such, it purports to be our stabilizer, our source of employment, the fuel behind the economic growth that brings us technology.In truth, it does none of these things. What it does do effectively is prop up the leviathan state and all its pomps. You would never know this from the textbook, of course. The subject is rarely mentioned in political science. Historians treat the establishment of the Fed as an event far less important than the creation of the Department of Labor.It is interesting how rarely its existence is ever questioned, much less condemned. Instead, the head of the central bank is fawned over and courted by all sides of the political spectrum. He enjoys a level of immunity from criticism that no one else in politics has. Again, this is proof of the extent to which we do not believe in authentic freedom, since it is the central bank that is the true source of the decline of our freedom.Why do we have such a hard time imagining a world without a central bank? In the United States, the central bank was a 20th-century invention. No central bank of the current sort existed anywhere in the world before the 19th century. Somehow we got along just fine because the monetary system was self-managing. It was rooted in real commodities that provided the stable link to real economic activity. Banks were treated as regular enterprises that had profits and losses, and could succeed and fail. What guaranteed their stability, even with the evil of fractional reserves, was the competitive system.All that came to an end, gradually, with the advent of the central bank. Money lost its connection to anything real beyond the linen paper on which it is printed. Banks became protected from failure. Most important, the central bank started to guarantee government debt. With what did it guarantee that debt? More linen paper, stuff which can be printed up without limit.With this innovation, the fiscal restraint on the state came to an end. All the talk about congressional authorization of spending and the constitutional restraint on the state became white noise or a tissue of lies. The people got out of the habit of asking: “How precisely do you expect to pay for this?” We all just assume that there is some magic money machine out there that will achieve our every dream.The lack of criticism of the Fed tells you all you need to know. It is the one sacrosanct institution because it is the most necessary institution to modern statecraft. Without it, we wouldn’t fund both welfare and warfare. We wouldn’t dream of a world empire and debate policy the way we debate art, as merely a matter of preference. There would be strict, physical limits on what the state could and could not do…The central bank has failed in its overt mission for nearly 100 years. It has destroyed our money, funded unjust wars, given rise to a ghastly bureaucratic state, and pumped up more credit bubbles than we can count…If we really believed in authentic science – not the pseudo-science of public policy – we could conclude that this failed central bank has got to go. Its creation is not a footnote, but a main step in making possible all modern tyranny.Its abolition is a key to freedom itself.Llewellyn H. Rockwell, Jr. is founder and president of the Ludwig von Mises Institute in Auburn, Alabama, editor of LewRockwell.com.http://www.lewrockwell.com/rockwell/going-for-the-heart.html

AnonymousAugust 12th, 2008 at 9:54 pm

Oh, and don’t worry about “systemic risk”. For those who originate such words, the big broker-dealers ARE the system. It just means that they are at risk. Imagine a world without them. The sun will still rise, the birds will still sing!

AnonymousAugust 12th, 2008 at 10:40 pm

The important thing is that the bulge-bracket broker dealers be allowed to fail on their own. The Fed is not purely bad although if it’s a blessing it is surely a mixed one. The Fed reports to Congress, and it is sometimes even useful. But the broker dealers are trying to suck out the economic lifeblood of US citizens to save their own institutional skins and those of their favored relationships and certain key employee-shareholders. It should not go on any more.

GuestAugust 12th, 2008 at 11:15 pm

Written by Sean on 2008-08-12 13:24:48quit complaining, let the free market do the deleveraging. russian buying up mansion? good good, better than letting it foreclose. now, if those stupid politicians, FED, Treasury Paulson would stop intervening, then the free market will heal faster.and dont blame the free market for mistake caused by previous FED chief Greenspan.

AfAAugust 12th, 2008 at 11:21 pm

Intervention or not, it looks like the dollar has already peaked (based on the short and recent rally) and is ripe for a second round of sell off.

GuestAugust 12th, 2008 at 11:31 pm

“The United States dollar … is backed by the largest military industrial complex on earth.”this statement is starting to get old and sound very stupid each day. wonder if there is retard that is bidding on dollar because that delusional statement.

GuestAugust 13th, 2008 at 12:02 am

@Anonymous: “The Fed reports to Congress, and it is sometimes even useful…”Welllllllllll. In that the Fed is the world’s largest and most successful scam, and in that it has never in its five score history been audited by Congress, and in that it is a gigantic fraud already out in the open for all to see, I find it hard to find anything useful for it to do.I suppose it would be possible to allow the System to continue as a check clearing-house so long as it did not function as a central bank.As Fed documentarian G. Edward Griffin says, the first step that must be taken before abandonment of the Fed is to convert our present fiat money into real money 100% backed by precious metal. In that a check-clearing house will be needed, he said, the “banks that presently own the Fed should be allowed to continue performing that service. However, they must no longer receive tax subsidies to operate, and competition must be allowed. However, the Federal Reserve System, as presently chartered by Congress, must be abolished.”Said Griffin: “The monetary and political scientists who created and sustained the Federal Reserve System never intended to repay the national debt. It has been their ticket to profit and power. Inflation is repudiation on the installment plan.“The present system is a political trick, an accounting gimmick… We are refusing to play the game any longer.”As Anonymous said: “Imagine a world without them. The sun will still rise, the birds will still sing!”Ahhhhh, yes.

MASHIACH BEN CHANAAugust 13th, 2008 at 1:53 am

THE RUSSIANS ARE COMINGWHO EVER END UP DOING BUSINESS WITH RUSSIANS THEY END UP GETTING RUBBED I NEVER HEARD FROM ANY BUSINESS PERSON TELLING ME THAT HE MADE PROFIT WITH RUSSIANS, I CONSIDER THE FORMER USSRSTATES ALSO RUSSIAN.ONE EXAMPLE IS PROFESSOR RUBINIS GOOD FRIEND MR. JAMES WOLFENSHON. WITH HIS SUPER IQ WHOM WERE RUBBED FROM RUSSIANS.READ THE ARTICLE BELOW FROM BLOOMBERG.Wolfensohn Ignored Azerbaijan Warnings, Group Says (Update4)By David Glovin and Christopher SwannAug. 12 (Bloomberg) — James Wolfensohn, who headed the World Bank a decade ago as it backed the sale of state-owned companies in emerging economies, ignored subordinates’ warnings and helped a man later accused of stealing $182 million from investors in Azerbaijan, a watchdog group said.The Government Accountability Project said in a report presented today to the U.S. Treasury Department that Wolfensohn disregarded staff warnings about Czech financier Viktor Kozeny, who tried in 1998 to buy Azerbaijan’s state-run oil company. After receiving the November 1997 warnings, Wolfensohn met with Kozeny and then wrote a letter absolving him of any wrongdoing, which helped Kozeny attract investors whom he later cheated, the nonprofit group said.“None of the World Bank officials in a position to anticipate corruption was able to expose it, given that the bank president had helped to conceal it,” according to the report. Wolfensohn “lent his reputation and his institution’s support to precisely the kind of fraud and theft that he so frequently denounced.”Bea Edwards, the author of the report, said in an interview that the ease with which Kozeny got World Bank leaders to suppress staff dissent underscores the lack of accountability at the lender. She said her group will use the report to lobby for changes at the bank.`Veneer of Accountability’“There’s this veneer of accountability but there is no oversight,” Edwards said. “Kozeny had the bank sanitize his reputation.”The report may tarnish the Washington-based lender as it recovers from the resignation last year of President Paul Wolfowitz, who quit after the same group reported that he’d given a pay raise to a female employee with whom he was romantically involved.Wolfensohn, 74, who emphasized anti-corruption measures as World Bank president, said through a spokesman that the report is wrong. Jean-Louis Sarbib, managing director of Wolfensohn & Co., a New York-based mergers advisory firm, said in a letter that Wolfensohn asked his vice president to review Kozeny’s complaint that World Bank staffers had disparaged him.The vice president’s review found that the staffers hadn’t criticized Kozeny, Sarbib said. Wolfensohn relayed that conclusion to Kozeny and to Azeri officials in a December letter.`Checked the Allegations’“The World Bank checked the allegations which had come to Mr. Wolfensohn’s attention and found them to be baseless,” Sarbib said. “At no point did Mr. Wolfensohn disregard warnings from staff or from any other source.”World Bank spokesman David Theis said the lender has a robust investigative arm and heeds warnings of corruption and fraud from staffers.“Since 1999, these investigations have resulted in the blacklist of 342 firms and individuals with their names publicly listed on our Web site,” Theis said. “The single largest source of allegations that we investigate is from bank staff itself.”The Government Accountability Project works on behalf of whistleblowers in the public and private sectors. It’s probing Kozeny’s failed attempt to win control of Azerbaijan’s state oil company. The group is focusing on Kozeny’s use of offshore vehicles, his background and his involvement with the World Bank. The group said it plans to issue two more reports.In the BahamasKozeny, 45, who is living in the Bahamas and fighting extradition to the U.S, faces two indictments stemming from the Azeri deal. In one, New York state prosecutors accuse him of stealing $182 million from his U.S. investors. In the other, federal prosecutors say he paid millions of dollars in bribes to Azeri leaders.The Government Accountability Project’s probe is financed by venture investor Frederic Bourke, who claims Kozeny stole millions of dollars from him and others in the deal. Bourke, 62, has been charged in the U.S. bribery prosecution. Prosecutors alleged he knew of Kozeny’s bribes.The project said Bourke, whose lawyers have provided it documents, is a whistleblower who exposed Kozeny’s wrongdoing and shouldn’t be prosecuted. Kozeny, for his part, denied he stole money from investors.In an e-mailed statement from the Bahamas, Kozeny said he met with Wolfensohn “to clear a factual issue” and didn’t engage in lobbying. He calls the claim that he used Wolfensohn’s letter to attract investors “rubbish,” and he criticized the group for its work on Bourke’s behalf.Denied Stealing“None of the investors ever heard or even saw the letter,” wrote Kozeny, who denied stealing money from his investors. “Bourke is trying to buy an NGO.”In the report, the group criticized Wolfensohn for aiding Kozeny in his effort to win control of Azerbaijan’s state oil company.The World Bank began financing Azerbaijan’s economic initiatives in 1995, soon after it won independence from the Soviet Union. In 1996, with bank support, Azerbaijan started selling state-owned assets, with the oil company being the most valuable of them.According to the report, Kozeny arrived in Azerbaijan in 1997 with a reputation as “The Pirate of Prague” after his alleged theft of $1 billion from investment funds he controlled in his native Czech Republic. Kozeny, who denied these allegations, had three obstacles to overcome in Azerbaijan, the report’s authors said.Needed to ConvinceKozeny needed to convince World Bank officials that the Azeri asset-sale was credible, persuade Azeri officials to allow him to participate and induce investors to believe he would win control of the oil company, according to the report. World Bank staffers in Azerbaijan doubted his ability accomplish any of the three, according to the report.“Kozeny mobilized his contacts and associates to conduct a campaign designed to launder his reputation,” the report’s authors said in the report. “Kozeny and his legal team determined that a key ally would be James Wolfensohn.”Two Kozeny associates in the U.S. lobbied Wolfensohn, according to the report. Kozeny’s plan was threatened, though, after Azeri officials in November 1997 told him that World Bank staffers had disparaged him.Kozeny’s advisers urged him to meet with Wolfensohn, armed with a list of every deal, including questionable ones, Wolfensohn did as an investment banker, according to the report. The group doesn’t know if Kozeny uncovered any questionable deals by the World Bank president. Wolfensohn said in an e-mail that he hasn’t made any “embarrassing investments.” Kozeny called this an “absolute fabrication.”Met With KozenyWolfensohn, who met with Kozeny on Nov. 30, 1997, wrote a letter to him and to Azeri officials nine days later in which he said that the World Bank had no reason to criticize him, according to the report. The letter came after the bank’s vice president probed Kozeny’s complaint, on Wolfensohn’s request.Edwards said the group doesn’t know why Wolfensohn met with Kozeny or wrote the letter.“Kozeny, with his written exoneration from Wolfensohn in hand, then undertook a concerted effort to enlist U.S. investors in his voucher funds in Azerbaijan,” according to the report.Investors who were swayed included Lee Cooperman, whose hedge fund, Omega Advisers Inc., invested $126 million in Kozeny’s venture. The fund lost its i
nvestment and later sued Kozeny for theft. In a letter to investors last year, Cooperman said one reason Omega invested with Kozeny was because the deal was “endorsed by the World Bank.”Tevfik Yaprak, one of the World Bank staffers identified in the report as warning Azeri leaders about Kozeny, declined to comment when contacted by Bloomberg News. A second, Joseph Saba, didn’t return calls seeking comment. A third, Igor Artemiev, couldn’t be reached for comment.Kozeny was dismissive of the report.“I am supposedly, according to GAP, running the World Bank from behind?” he said in an e-mail. “That is Walt Disney-type- of-stuff.”The case is U.S. v. Kozeny, 05-CR-00518, U.S. District Court for the Southern District of New York (Manhattan).To contact the reporters on this story: David Glovin in New York federal court at dglovin@bloomberg.net; Christopher Swann in Washington at cswann1@bloomberg.netLast Updated: August 12, 2008 17:20 EDT

MASHIACH BEN CHANAAugust 13th, 2008 at 2:45 am

THE RUSSIANS ARE COMINGHELLO RUSSIA GOODBYE NATOwashingtonpost.comBy Eugene RumerWednesday, August 13, 2008; Page A15Russia’s victory in Georgia is payback for years of geopolitical irrelevance, for Moscow’s retreat from Eastern Europe and from the Soviet Union, for Western finger-wagging at Russian transgressions at home and abroad. Russia is back: Its gross domestic product has increased from $200 billion in 1999 to $1.2 trillion in 2007. Moscow has more money from oil and gas exports than it knows what to do with.The Russian military is showing off its newfound strength, punishing the Georgians for their sins, the greatest of which is forgetting in whose back yard they live. Moscow has warned Poland and the Czech Republic not to deploy U.S. missile defense components on their territories. The Kremlin has also told Washington that it should mind its own business.We have seen something like this before, though. Thirty years ago, flush with oil and gas revenue, the Soviet Union was threatening Europe and challenging the United States. In 1979, Soviet tanks rolled into Afghanistan and seemed poised to keep going to fulfill centuries-old Russian ambitions of reaching the warm waters of the Indian Ocean. The West could do nothing to stop Moscow’s juggernaut unless it was willing to risk nuclear annihilation.The Soviet invasion of Afghanistan drove the final nail into the coffin of detente — a policy of tentative East-West rapprochement. It also marked the start of one of the frostiest chapters in the Cold War saga, which ended with the Soviet Union’s collapse. A decade later, there would be no more Warsaw Pact. Europe would be sending humanitarian aid to Russia. The Soviet military would be defeated in Afghanistan. What caused all that? We are still not quite sure. The war in Afghanistan, excessive military spending, reliance on oil and gas exports for revenue, failure to reform the Soviet economy, and the lack of outlets for domestic opposition are all high on the list of regular suspects.Fast-forward to 2008. Russia is riding high, making up for all that was lost in preceding decades. U.S. and European leaders are flummoxed by how to punish the rising giant that they also badly need — to feed our oil addiction, to help us cut a deal with Iran and to go on buying our currency to keep its value from sliding further. But who is to say that Russia’s victory in Georgia will not lead to another disaster in a few years?There is plenty of trouble brewing in Russia, not unlike the trouble to which Moscow turned a blind eye 30 years ago, as its tanks rolled into Afghanistan and caused a break in relations with the West. The vast Russian military can crush Georgia’s army of 35,000. But Russia’s own North Caucasus region, just across the border from Georgia, has been a simmering cauldron for nearly two decades. The conditions in Russia look different from the conditions of 30 years ago, but Russia’s reality is still grim. Moscow may have more billionaires than other European capitals, but the Russian population is still shrinking, the average Russian man is not expected to live past 60, oil still dominates the country’s economic future, and the taps are running dry.No matter how the current crisis is resolved, the consequences for East-West (that Cold War term again) relations will be far-reaching. The stain on Russia’s reputation in the West will not be erased for years. It will take a very different — and most improbable — Russian attitude to repair the damage.In the meantime, could it be that Russia, petro-confident and irredentist, seeking to reverse the record of the past two decades, is careering toward another 1989 or 1991? Will it heed the lessons of the Soviet era? What will happen if it does not? Will the North Caucasus break out of Moscow’s grip? Will the Far East turn into a Chinese colony? Will the West once again confront the prospect of Moscow’s former satrapies suddenly becoming major nuclear powers? Will the specter of Russian “loose nukes” keep haunting the West?It will take skill and patience to get Russia to a soft landing from its present high. Moscow’s record at soft landings is not good. The consequences of it landing hard will be felt far beyond its borders. We should be thinking about that, even if the Russians are not.The writer is a senior fellow at National Defense University’s Institute for National Strategic Studies. The views expressed here are solely those of the author.

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even UK admits theyre heading into a recession,will the US take heed?? there is no running away…Ben/Paulson you guys have lost itnow let the system heal itselfhttp://news.bbc.co.uk/2/hi/business/7557777.stmBank warns of flat growth aheadThe Bank has to balance rising inflation with slower growthThe Bank of England says it expects the UK economy will not grow at all over the next year or so.In the Bank’s gloomiest assessment yet, governor Mervyn King said that he expected growth “to be flat” and did not rule out a recession.He warned inflation would peak at 5%, making it hard for the central bank to cut interest rates in the near future.However, he said that the slowing economy would eventually curb inflationary pressures.”I think with broadly flat output, it’s bound to be the case that there is a possibility of a quarter or two of negative growth,” Mr King said.He added that consumer spending and house prices would weaken, particularly because of tighter credit conditions.

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Miss ItalyAugust 13th, 2008 at 6:44 am

According to the material available on the internet, Victor Kozeny is Czech, NOT Russian…. “the pirate of Prague”Miss Italy

MASHIACH BEN CHANAAugust 13th, 2008 at 7:46 am

@ Miss ItalyThe Russians have such bad name, so what they do they go and bribe the eastern European government I am talking the Russian who have connections and buy passport, is so easy to do it in Eastern Europe.

GuestAugust 13th, 2008 at 1:40 pm

THANK YOU FOR YOUR VIEWS. GREAT ANALYSIS AND CONCLUSIONS. AS USUAL.I THINK THAT THE AMERICAN SYSTEM HAS BECOME CORRUPTED BY TOP BANKERS BECOMING POLITICIANS AND VICEVERSA WITH OBVIOUS CONFLICTS OF INTEREST, ADORING THE SHORT TERM MONEY GOD.

Yung Keun ParkSeptember 12th, 2008 at 8:51 am

I believe a mild recession is in sight, though I believe that overall health of global economy is much more resilient than before. Today’s WSJ journal article on Japanese recession reflects this point of view.Japan’s Economy ContractsBy YUKA HAYASHISeptember 12, 2008 12:57 a.m.TOKYO — Japan said its economy shrank at an annualized pace of 3% during the April-June quarter, revising down an earlier estimate.The government said early Friday it had revised down its second-quarter data for gross domestic product, the widest measure of the nation’s economic activity. The most recent data reflects a bigger-than expected decline in corporate capital spending, it said. Preliminary estimates released in August showed the second-quarter GDP shrunk 2.4% on an annualized basis from the previous quarter.The contraction was the largest in nearly seven years and follows two quarters of above-average growth. It came as sharp increases in energy, food and commodities prices in the global market eroded Japanese consumers’ ability to spend and hurt sales of Japanese exporters in the U.S. and other major markets. As their business outlook darkened, companies began scaling back their investments aimed at maintaining or expanding their operations. Capital spending fell 0.5% from the previous quarter, the largest decline in a year.Household spending fell 0.5% from the previous quarter, and exports were down 2.5%.Economists say the economy could shrink again in the third quarter, albeit at a more modest pace. That would put Japan in a recession, which is defined widely as two consecutive quarters of GDP declines. But many economists also say they expect Japan will bounce back from the current slowdown much more easily than in the past, as many companies, particularly large corporations, are learner and more efficient after years of restructuring.Write to Yuka Hayashi at yuka.hayashi@wsj.com

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