Nouriel Roubini's Global EconoMonitor

Republicans start to support the idea of nationalizing insolvent banks

George Stephanopoulos cited twice the Washington Post op-ed – that Matt Richardson and I wrote in support of nationalizing insolvent banks – in his Sunday “ABC’s “This Week” program and asked his four program guests if they supported the idea of bank nationalization. While the Democrats Maxine Waters and Charles Schumer were a bit formally cautious in formally supporting this idea – lest of being accused of being Bolsheviks – the Republican Senator Lindsey Graham – a conservative from South Carolina – would not rule out the idea of nationalizing insolvent banks. As Graham put it in the ABC program…:

“This idea of nationalizing banks is not comfortable,” said Sen. Lindsey Graham (R-SC). “But I think we’ve got so many toxic assets spread throughout the banking and financial community, throughout the world, that we’re going to have to do something that no one ever envisioned a year ago, no one likes. To me, banking and housing are the root cause of this problem. I’m very much afraid any program to salvage the banks is going to require the government… I would not take off the idea of nationalizing the banks.”

And while President Obama repeated again his arguments that the Swedish model of nationalizing the banks – as opposed to the Japanese approach of keeping zombie banks alive – was not appropriate for the U.S. he did not totally rule out – when probed twice in an interview with the Washington Post’s E.J. Dionne – the possibility that a government takeover of some insolvent institutions may eventually take place.

Frank James of the Chicago Tribune also reports – in his piece “Nationalizing Banks Gains GOP  Steam?” – about the Washington Post op-ed that I wrote with Richardson, about the ABC news program and the views of President Obama who did not flatly rule out the option of nationalization:

Nouriel Roubini, the economist who warned of the financial collapse long before it happened, is making waves again, this time with an opinion piece he co-authored in the Washington Post in which he and fellow New York University economics professor Matthew Richardson argue that U.S. banks should be nationalized.

An excerpt:

The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is to nationalize it.

As free-market economists teaching at a business school in the heart of the world’s financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner’s recent plan to save it has many of the right elements, it’s basically too late.

The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion — including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans — is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages…

… Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end.

This is really breath-taking, that even free-market economists are talking about the federal government taking over the nation’s largest banks. I’m not sure which is more mind-bending, the thought of an African American in the White House or Citigroup becoming part of the Executive Branch. Bank of America would truly be living up to its name then.

What’s even more astonishing is for a Republican from South Carolina, not Maine mind you, but the Palmetto State, a conservative like Sen. Lindsey Graham, to say that nationalization needs to be something to consider. And he wasn’t alone. Rep. Peter King of New York also allowed for this possibility.

As Sam Stein reports in the Huffington Post:

In a gloomy segment about the financial sector on ABC’S This Week, two self-avowed fiscal conservatives said that the U.S. Government should at least consider nationalizing the country’s banking system as a means of moving beyond the current lending crisis.

“This idea of nationalizing banks is not comfortable,” said Sen. Lindsey Graham (R-SC). “But I think we’ve got so many toxic assets spread throughout the banking and financial community, throughout the world, that we’re going to have to do something that no one ever envisioned a year ago, no one likes. To me, banking and housing are the root cause of this problem. I’m very much afraid any program to salvage the banks is going to require the government… I would not take off the idea of nationalizing the banks.”

The remark prompted a bewildered smile of sorts from fellow panelist Maxine Waters (D-CA) who said, to no one in particular, “We have come a long way.”

Stein goes on to say in his report that Democrats like Sen. Charles Schumer of New York and President Obama oppose nationalization.

Schumer is Sen. Big Banks so his resistance to nationalizing financial institutions is not surprising.

But Obama has actually seems to be keeping an open mind about it. In a Friday interview aboard Air Force One with the Chicago Tribune’s Clarence Page and other columnists, Obama was asked about a Swedish-style nationalization.

Though he acknowledged there’d be difficulties with it, he didn’t rule it out. Here’s his exchage with one of the columnists:

Q Just to follow up, if I hear you correctly you are saying that you could reach a point where you have to go further in terms of the government. If what you’re doing now doesn’t work —

THE PRESIDENT: I think what you can say is I will not allow our financial system to collapse. And we are going to do whatever is required to get credit flowing again so that companies and consumers can do their business and we can get this economy back on track.

That sounds like an I’ll-do-whatever-it-takes-including-nationalization type of statement to me.

292 Responses to “Republicans start to support the idea of nationalizing insolvent banks”

economicminorFebruary 16th, 2009 at 10:17 am

Why is the media and some of you making such a big deal about this?The US took over the Savings and Loans and did a great job of fixing that. There is no need to take over ALL banks, just the totally corrupted dishonest insolvent ones. And then pass the good assets off to the good banks, which there are some in every community in the US and then sell off over the next couple of years the bad assets.This is good economic policy as the bad assets can be picked up at a cheap price and put back to some economic use at a profit. The way things are going, we have so many vacant houses and commercial sites because no one can afford to buy them and make any economic use of them. Why is this a good plan over taking them over and selling them off?

FEDupFebruary 16th, 2009 at 11:58 am

agree, but the devil is in the details and waiting too long to do it is like not doing it at all: i.e. Nurse says “Doctor, the patient has been dead for 24 hours”. Doctor replies “well let’s try CPR anyway!”

GuestFebruary 16th, 2009 at 6:04 pm

Um, it’s a big deal because the banks that are insolvent and need to be taken over and liquidated are the biggest banks in the world, and they aren’t going down without a fight.Is that not obvious?

Guest from the NetherlandsFebruary 17th, 2009 at 12:38 pm

We should screw all those miserable credit rating agencies like Moody’s, S&P and Fitch. What they do now is downgrading banks for CDO’s and the like on their balance sheets, whereas they gave these CDO’s AAAAAAAA status not such a long time ago. Jas everyone forgotten that? They should be sued to death, all of them. And finally removed from the scene.

dhoimeFebruary 19th, 2009 at 6:36 pm

Since 2005, when the inevitability of the long depression that we are now entering became obvious; I have noticed that there is a certain type of American who just does not (will not?), (can not?) understand just how bad things are and will get. The cosy “don’t give us any bad news” methods of the US main stream media at work perhaps? This is about money, so let’s try and be adult about it. Some points which I feel may clarify:1. ALL the US’s BIG banks are functionally insolvent by a factor of hundreds. So for each notional dollar they have they owe somewhere between 100 and 1000 dollars.2. They do not have anything to “sell” except the unsaleable dreck they marketed as “securities”. They won’t sell them because they don’t know what they are worth OR they do know what they are worth and don’t want to (can’t) take that big a hit because they would be insolvent.3. From 2000 all small US banks and many other foreign banks, states, pension funds and mutuals bought this stuff because it was rated as AAA by the US government accredited and “supervised” rating agencies – Moody, S&P and Fitch.4. AAA used to mean that it would be very unusual to loose money on the deal.5. Turn out that a lot of the stuff is not and never was AAA. So no one knows what these things are worth. There are numbers as low as 5 cents in the dollar floating around. Check the MBS defaults.6. If you can’t value something, what would you pay for it? So if someone can be found to buy it (Buffet or Goss), what will they pay? That is why the US tax-payer is on the hook because they can and will keep paying for this for years – whatever they are worth.7. Some numbers. The December 2008 Bank of International Settlements report on over the counter derivatives put a notional figure of $57 trillion on CDS’s and $82 trillion on “Unallocated” derivatives outstanding. The latter would include the MBS garbage.8. Making a breath-taxingly optimistic guess that they are worth 90 cents in the dollar means these banks have to “write-off” to the tax-payer-funded “Bad bank” something like $14 trillion or to make that understandable: the whole US GDP for 14 months.9. The ultimate cost of the Savings and Loans crisis was estimated to have totalled around $160 billion. You remember those big budget deficits in the 1990s? 4 years of them? That was US tax-payers paying for the S&L – and Congress sold a lot of the good stuff to their pals in the banks at criminally low prices.10. So this thing is, very optimistically, about 90 times bigger than the S&L. So that’s, oh, only 90*4years = 360 years of huge budget deficits to look forward to.Would that be a big enough deal for you? Too esoteric? Imagine what the interest bill @ 3% on a $1trillion borrowings a year for 360 years is going to do to ALL federal funded projects like health, education, food stamps, the military, state funding, etc, etc.Where the hell the US is going to find this sort of money is beyond me. It’s a source of much discussion in the bond markets. Everybody is just waiting for a US Treasury bond issue be under-subscribed (fail) and then it’s on. Treasury seems to be pressuring these same insolvent banks and a few foreign reserve banks to keep supporting the market (especially at the long end), so there is pressure building. If buying slows, yields will go from 3% to oh, take a number, say 10%? A stampede to the exits on US Treasury funds will follow and very shortly thereafter by a massive run on the US dollar. The US is now bankrupt. Now that will get your attention!Last year, before everything and everybody was bailed-out or stimulated using other peoples money, the US imported $440 billion of foreigner’s savings to “balance” its budget. Now with the tax-take failing (unemployment), a constantly negative trade balance and massively increased government expenditure; they are going to go to the world’s bond market and borrow (according to Obama) a trillion$ a year “for the foreseeable future”. My calculations indicate this is bulls**t; it will be for the UNforesable future and I’m sure that the world’s investors are not about to get involved in bonds that long.Oh, none of the above deals with any minor legal issues like massive fraud, tax evasion or racketeering. Also I have not touched on the issue of worldwide distrust of US banks and the opacity of the US market place. Without that trust, it will be a very slooow road to any sort of recovery.

PrashantFebruary 15th, 2009 at 11:39 pm

I hope they do nationalize the insolvent banks and get done with it. That would solve one problem. The other problem is how to revive the economy. The current approach – the stimulus package – doesn’t seem to address the basic problem. We need to start manufacturing again! We can’t let China do that for us. Dr Nouriel, I would love to hear your views on how to revive the economy.

GuestFebruary 16th, 2009 at 7:37 am

Yea the fundamental problem is wages don’t support asset prices or the cost of living. Just fixing the banks won’t fix that. We need higher employment but even more so higher wages!

GuestFebruary 16th, 2009 at 8:28 am

you want to jump star USA manufacture, you need one of two thing. cheap labor, yep, workers accepting lowererr pay & benefits or print dollar to pay off all public debts & devalue dollar against other currency to gain labor cost advantage. otherwise, no chance for manufacturing. Also China manufacturing is losing to much much lower manufacturing cost in Vietnam alike place now.

GuestFebruary 16th, 2009 at 9:57 am

I just don’t buy that argument, it’s similar to saying we can’t afford to pay people for anything because slaves are willing to do the same work a lot cheaper. No one wants to admit this they all try to obfuscate the issue but clearly it’s a simple case of shareholders and CEO’s taking all the profits and squeezing labor to the point where the economy falls completely off a cliff-that is the underlying problem to the crisis as has been in all economic crisis’s throughout history!Just because you can get away with paying people nothing doesn’t mean it’s in the best interest of everyone.

ALAFebruary 16th, 2009 at 3:19 pm

Manufactures in the USA have been going out of business for a long time due to the cheap cost of production found in China, to say the USA can ramp up manufacturing again is easier said than done. Those who would be buying furniture for example to resale would still purchase from Chinese manufactures as their plants produce a well built product at a great price. We would have to impose tariffs on Chinese imports for a long period of time before American wholesalers would start to purchase then sale products produced from American manufactures, and with the low cost of production in China the tariff would have to be high. America made a bad choice when it granted China most favored nation status and signed NAFTA, it has put the USA at a huge disadvantage for reconstituting our manufacturing base. I believe it will take years to unravel the mess we willingly walked into before we can realize any significant changes in our daily lives on a large scale.The American government will only destroy what hope is left for America, the USPS lost over 3 billion dollars last year and want to raise the cost of stamps again this year and I know why, look at the people working for the postal service they are some real winners. I know some are ok but you have to know what I am talking about or go to the V.A hospitals and look at the enthusiastic people there. I’m sorry but bigger government is the last thing we need but it will be the first thing we get.

economicminorFebruary 16th, 2009 at 10:45 am

This is the same thing, arrived at in different ways. Both end up with lower purchasing power by the workers.I actually don’t think this is the real problem. The cost of doing business, including labor but also including taxes, regulations, executive pay, transportation, materials, medical overhead costs, energy all feed into the cost of manufacturing. When the aggregated costs are high in one country and low in another, and there are no barriers, the manufacturing moves to the lower cost country.When you transfer the production to other countries and you don’t replace those jobs with new manufacturing you deplete the income to your workers which is the REAL national income. We replaced those jobs with financial service jobs and then when that didn’t pan out so good, those in power decided to jury rig the system to put people to work in housing and commercial real estate. But this was all backed up by credit, not income from real productive enterprise. We also kept the unemployed down by having never ending conflicts. This was also done, not with current earnings but with debt.The US wanted to ignore the principals of real income for a long time and borrowed to make up the difference. We did this for everything. War, schooling, the USPS, consumer consumption, transportation, medical, just about every part of the US is leveraged against some future income that we shipped off shore. We did this with out even being able to access or benefit from this offshored labor. Trade agreements and tax structures were structured to benefit those Masters of the Universe who could control this and not the general public that was being forced to borrow against their futures to supplement it.Well, we reached a point where the costs of borrowing for everything and the real cost of production done elsewhere have come to consequences that have caused a huge crisis.There is no way to easily fix this either. Minsky was very right in his thesis that stability has led to instability except NO one thought it would be this bad!The best way to fix this is painful. We need to allow the bankruptcies to happen. We need to have lower costs across the board. This would happen when the debt is removed from the system and business can operate at much lower costs.

Guest, alsoFebruary 16th, 2009 at 6:06 pm

The problem is, so many of our citizens are stupid, lazy, uninvolved, and/or crooked. Too bad for us that none of these is mutually exclusive.On the one hand, the consumer “has a right” to purchase whatever from whomever at the “lowest possible cost”. This is just lovely, except the consumer also wants nice bathrooms at work, nice roads to drive on, a minimum wage, Social Security, equal employment and unemployment protection, and on and on.So, I want to make a Widget in America.First, I must site my factory. Now this used to be simple enough, but not anymore. by the time I get through with the EPA and DEHC and several other govenrmental agencies, I have a small fortune invested already and have yet to make a Widget. But, we all want clean water and air. We sent our elected officials to Washington, and they voted our wishes, so who am I to complain about my fellow citizens.Next, I must build my factory. Oh boy, what an ordeal this is…but again, my fellow citizens want loading docks that are not too high, and not too low. They want wide aisles, and don’t want the racking system to be too tall. We have to have ramps, not just stairs, so the handicapped can apply, and it just goes on and on and on. Hundreds of pages of State, Local and Federal regulations. But I am a good citizen and a ‘can do’ American, so I suck it up, plow ahead, and build my factory.Finally, I get to hire my work force and crank up production…after I figure out all the labor relations laws and make sure I am compliant. By now, my lawyer has bought a new boat and taken a very nice vacation with the fees his firm has earned from me in the past year since this adventure began, but my fellow Americans want all of this stuff, and I am a good citizen. I just hope they like my Widgets.Finally, we start shipping and, oh boy, sales are good! It was worth all the effort, the time, the expense!…1 year later, I am at a trade show, and 2 aisle over I see my Widget in a competitor’s booth! But wait. It is not MY Widget! This one is made in (fill in the blank), and instead of the $2 I sell mine for, theirs is $1!! WTF! There must be something wrong! It cost me more than $1 to make a Widget! I better call my Congressman, because this can’t be right. I am a good citizen. I did everything he (by his votes in Congress) told me to do. I made a great product. The consumer loves my Widgts. Surely, my competitor can’t just come here and put me out of business.Woe is me; woe is us.Stupid, greedy, uninvolved… unemployed.

economicminorFebruary 16th, 2009 at 8:00 pm

yeah sad!The foreign country’s mfg can infringe upon your patent and our government does nothing. You are left to try and stop something you have absolutely no control over….I just don’t know why this is the US citizen’s fault. There has been nothing we have been able to do about it. Our Corpocracy rules and it decided that there were more profits to be made in a country with no environmental laws, no labor laws, no zoning laws, no problem.Our Corpocracy does such a good job running our country.Of course they also thought that we could buy forever.Now that we have run out of ability to buy, they are stupefied and think it is a liquidity issue. We just need more money to borrow.The Stupid are those at the top that have become so disconnected to reality that they have no way to see the actual consequences of their actions until it is way to late!

GuestFebruary 16th, 2009 at 8:07 pm

“The Stupid are those at the top that have become so disconnected to reality that they have no way to see the actual consequences of their actions until it is way to late!”At this point, I am hoping that it is actually merely monumental stupidity & disconnection. Crazy, I know..

blindmanFebruary 17th, 2009 at 9:03 am

g,you make the case. it seems as time goes by inour fractional reserve system, which requires inflation, that “innocent” additional cost, over timewill always make production uncompetitive in comparison to new populations brought into the global system of technological production and and labor in the emerging markets are cheap in comparison. free trade, innovation are destructive of older infrastructures. as it goes production is destructive. one coin, two sides and you can’t have one without the other.labors reward is not the problem, that is the basis for production. (demand). environmentaland safety regulations are also not a problem, they are solutions to problems.comparive temporal disparity with regards to productive infrastructure in a global marketplaceis the source of destructive structural your example you probably would not get past the first step of buying the land, inflated price and loan,or renting, inflated cost. in a few years the chinees and indians won’t be able to afford their own land either.the price we pay for easy money. dysfunction and imbalance.

GuestFebruary 17th, 2009 at 8:16 am

just exactly why must you have cheap labor? Look at the Euro-zone: people there have 4-5 week paid vacations, besides other paid holidays throughout the year. Euro-zone is also not suffering for its own sake but because its banks saw growth potential also outside: mainly in that cotton-picking U.S. of A.

GuestFebruary 17th, 2009 at 9:33 am

If so then America should have permanent bases on the moon and expanding from there, and technology should be our domain. America needs to put every available dime into technology and space exploration we need to do things that other countries could only dream about. We could then train in private schools and collages young Americans to follow in these endeavors. The public education system will only dumb down our citizens which would be fine if we were only producing widgets for 1 dollar. The public school systems are a large part of our problem, I actually feel sorry for most of those who are being trained for nothing of importance following that up with a collage education that only continues the exploitation of these lost and ignorant young people.

HubbsFebruary 17th, 2009 at 10:41 am

Quite a discussion here in this block. The implication is that trade barriers, and all the negative consequences from them (Smoot-Hawley etc) may be the best solution to nurturing our industry and self sufficiency back to health. This of course would require vigorous lookout for monopoly formation which could erupt if domestic industries have no foreign competition to keep them honest. And don’t forget corruption in Washington. A monopoly in a trade protected closed economy would really raise hell if not contained.The domestic industries would at least compete on the same dollar metric whether deflation or inflation. Imported raw materials might get expensive due to inflation of the US dollar and thus spur development of alternatives domestically, which in the end would be a good thing.

SoftwarengineerFebruary 17th, 2009 at 1:23 pm

FAT GOVERNMENT AND STARVING SKELETON PRIVATE SECTOR TAX BASEIts clearly arguable that today’s stimulus bill won’t create any jobs at all; albeit it does apparently fund maintaining government jobs at 100% fatness, simultaneously, the private sector job base is a hopeless starving skeleton at 80-85% of what it was in 1998, with almost no help from the stimulus bill. Where’s the stimulus bill at producing domestic private sector industrial base [manufacturing] jobs?Will keeping existing teachers, police and government administrators, nurses, etc. working during this economic crisis help the hopeless RE collapse from getting worse? Their incomes aren’t that high and the high % of single income households just makes it far worse. Couple that with its just a 2009 fry pan stimulus, with another trillion needed for 2010….this endless debt cycle to maintain uncontrolled population growth government at its present levels is impossible, especially with baby boomers hitting the 60/70 YO age range with a plethora of medical and disability needs a-coming [I’d mention retirement, but I don’t see that happenning for almost all of them, they can’t afford it anymore, uncontrolled RE growth stole their retirement 401K investment interest rates].

Anonymous ibid.February 15th, 2009 at 11:51 pm

The problem is knowing which banks are insolvent. You just about have to nationalize a bank to find out what it has on its books.And then there’s the question of whether you take the market price of assets or a realistic estimate of what the asset is worth if priced by Net Present Value methods.

economicminorFebruary 16th, 2009 at 10:48 am

Send in the auditors. Do it one at a time or have a week long banking holiday.Just DO IT!And this will lead them to many insolvent businesses which will no longer get funding to remain Zombies and they will go to bankruptcy and we will finally start getting to a place where we can see an end to this.

RohelioFebruary 17th, 2009 at 7:47 pm

eco,’week long holiday’??…has anyone tried to unravel one of these daisy chains which thread from NY to Dubai and beyond? Sorting out these derivatives is a game of ‘pick-up sticks’ played with a heap of limp spaghetti.

JLCFebruary 16th, 2009 at 1:02 am

“Chorus Grows: Nationalization.””We’ve got to get on with it,” said Christopher Whalen, the respected bank analyst who publishes the Institutional Risk Analyst newsletter.”We need to take over the banks,” said Joshua Rosner, a managing director of the research firm Graham-Fisher.”When I talk to experts, after about two minutes they say, ‘We should just nationalize,”‘ said Simon Johnson, a banking expert at the Sloan School of Business at the Massachusetts Institute of Technology. “That tells me that the consensus is moving in this direction, and we are all just afraid to say it.”

newsfrombelowFebruary 16th, 2009 at 1:04 am

when the most powerful banksters realize this is in their interest, through a greater concentration of financial power relative to their competition, then the deal will be done. remember, some were allowed to fail, others were preserved and protected over the past several months. to think that there will not be a short survivors list after all is said and done. if i were betting i would say, goldman sachs, jpmorgan, morgan stanley…….bank of america, citicorp, wells fargo…..two of these three lose….goldman of course only recently having converted itself into a bank holding company in order to be eligible for TARP funds, having previously been an investment bank.

economicminorFebruary 16th, 2009 at 10:52 am

This will never be in their interests as they will be disavowed and defanged and left much poorer and then the hyenas and then pick their bones over Fiduciary and other civil lawsuits..There is NO win for them. They are going to lose and that is why they are fighting very hard to not have the NEW Resolution Trust take them down.

P&LFebruary 16th, 2009 at 1:25 am

Sounds like the Republicans have begun to eat their own!Perhaps the President is more adept than many here think. He’s let the Republicans get themselves bunched up in a tight little corner, without much wiggle room. As the righteous defenders of fiscal conservatism and free markets, how can they argue about this? It’s the most cost effective and fair solution, and they all know it.And, not to be a cynic or anything, but maybe there are some new restrictions on lobbying and contributions included in TARP2, which, when combined with salary caps, etc., have made these former cash cow bankers into political bankrupts, unable to pay for continued favorable treatment.

AnonymousFebruary 16th, 2009 at 10:11 pm

This goes beyond party politics. Schumer and Frank are up to their elbows in blame here. Clinton signed the repeal of Glass Stegal in 1999. Rubin went to work for citi. Reigns was the head of Fannie Mae. These are both democrats and former Clinton cabinet members. Get your facts straight. Conservatives and Greenspan warned about the GSE’s back in 2003. Google it. youtube it. Frank is on record resisting republican efforts to INCREASE regulation of the GSE’s because such regulation could hurt low income borrowers get a home. OPEN YOUR EYES. Our entire political system is compromised with corruption.

AnonymousFebruary 16th, 2009 at 11:04 pm

Great comment. If only more people saw things this way. This is a non-partisan crisis that both parties are complicit in. Finger-pointing will only prolong the pain for the whole world and people are starting to realize this, even in DC.

GuestFebruary 20th, 2009 at 9:28 pm

Understand this simple fact: In an ultra-low rate environment, where prices are appreciating rapidly, and mortgages are being securitized, ALL THAT MATTERS IS THAT THE BORROWER NOT DEFAULT IN 90 days (or 6 Months). The goal was to make a loan that did not default in that period of time, it cannot be put back to the originator.As a mortgage salesman, you only lose your a fee if a borrower defaults within 3 or 6 months. What do you do to maximize your returns? The best way to do that — to put people in houses that would not default in 90 days. Cheap teaser rates for 24 months, then the big reset. By then, it was no longer your problem.Can you grasp what a monumental change this was? Instead of making sure that borrowers could pay back ALL OF THE 30 YEAR FIXED MORTGAGE, you only had to find people who could afford the teaser rate for a a few months. THIS WAS AN ENORMOUS AND UNPRECEDENTED SHIFT IN LENDING.Those who continue to blame the CRA, Fannie Mae, etc. reveal their fundamental misunderstanding of how credit operates in general, what the financing process was like from 2002-07, and how this situation came to pass.

The AlarmistFebruary 16th, 2009 at 3:18 am

First, to call Lindsay Graham a conservative demonstrates a complete lack of attention to the politics of the last decade. Graham, a bipartisan in the fine tradition of John McCain during the entire Bush presidency, could at best be described as a RINO right up until the election of Obama. So is it surprising that he might (read that as ‘most likely would) support nationalising a few banks? No.I’ve said it in a previous comment a few days ago: Buying up the toxic assets is akin to bleeding a patient … it might reduce the toxins currently in the blood, but it doesn’t go to the organ that continues to flood the system with poison. Has anyone noticed that no matter how much we pump into the big banks, they seem to keep presenting us with problems that require even more cash? Talk about a gift that keeps on giving.Sométimes the patient is so sick it is best to simply let him die. So it is with the bigger of the banks. Don’t forget that there are still more than 8000 solvent financial institutions in the US that can more than take up the slack left in the banking system by the extinction of the dinosaur banks that binged on the debt-driven consumer economy they and our wise government created with easy credit.Do we really think we can borrow our way out of a crisis caused by debt?

GuestFebruary 17th, 2009 at 6:08 am

Wonderful post my friend. You are right on and letting the patient die makes room for rebirth of newer younger faster leaner companies and countries.

AnonymousFebruary 16th, 2009 at 3:25 am

“Don’t forget that there are still more than 8000 solvent financial institutions in the US that can more than take up the slack left in the banking system…..”Well, they are perhaps solvent for now. Give it some time. They have small margins of wiggle room as it is. The big banks have the Feds bailing them out. Watch how the FDIC treats the community banks close to the edge. Shut down overnight. Guess where the money deposits will be funneled ultimately to?Yup, the remaining Tarped big banks. And that I think is by design.AM

REDFebruary 16th, 2009 at 4:39 am

One could argue that if you remove a significant amount of bank competition by nationalising it, the banks that are left will be able to increase margins, pick up new customers, and generally run good, profitable businesses. You could also argue that the ones left were the ones with good management and boards, good risk management, and a good customer service ethos that allowed them to keep their customers.Hmmm, Sounds like a win – win

GuestFebruary 16th, 2009 at 10:59 am

You make a good case for a money monopoly.And I recall that on the previous thread your answer to California’s dire budget crisis and the fact that some 2,000 public works projects have been stopped because the state has no money to pay for them and a credit rating so bad it can’t get loans, was,“Why won’t these idiots just increase taxes???”Your proposal appears to be a lose-lose for the responsible banks overtaken by the Fed Leviathan and the responsible taxpayers overtaken by the Pigs at the Trough.Is it too difficult to grasp the concept that there are people in this country who have the power to make a bank entry in a ledger and that the government of the United States now owes them billions (trillions) of dollars, and to collect the principal and interest on this “loan”?It is a confidence game, a win-win for the private stockholders of the Federal Reserve System who own this marvelous money machine that is exempt from disclosure, a machine that you cannot own.Is it a win-win for the American people when their honest community banks are gone, and when the Fed Leviathan via the bank goliaths rachets up the supply of money and, thus, prices–and the cost of living– or, pulls the rug out from under credit and picks up the possessions of the dead?Are we forever to be ignorant and bound by the London merchant bankers who command the power over all the money of the world?

REDFebruary 16th, 2009 at 3:25 pm

I’m all for getting rid of the Fed but thats another argument than my post. If a state government doesn’t have the money, they need to raise taxes or cut spending. California has been burying its head in the sand since the 70’s.Time to pay the piper. Tsx the rich!!

GuestFebruary 17th, 2009 at 5:45 pm

We already pay the highest taxes in CA. Tax paying people would just move out of the state and that would just exacerbate the problem. We just have too many people here sucking the system dry. Think immigration…

GuestFebruary 16th, 2009 at 5:16 am

why can’t USA become like Saudi Arabia instead of Japan or Sweden? At least the Saudis have lots of money.

GuestFebruary 16th, 2009 at 10:09 am

They also have a shitload of oil. Good God that was the dumbest post I have read on here ever. And there have been some doozies but you my friend just topped them all.

Tim FarleyFebruary 16th, 2009 at 5:37 am

I wonder that as the real problem has at its base the lending of money to people who cant pay and that they borrowed money on assets that at worst were about 40% overvalued ( Houses )..Then what about the State taking over the asset at 60% of the original contract price for say the period 2004-2007, charging 2-4% of that value as a rent and if the tennant pays this amount and keeps the house in good condition for any period up to 20 yrs from now he or his heirs can purchase the house for a 25% MARGIN TO THE STATE at the time of such purchase, therby giving the State a profit on its purchase price, the poor a place of residence and an incentive to look after the house, and the market a base price. Is this stupid or does it have some value?

GuestFebruary 16th, 2009 at 6:14 am

To simple solution and what about the banksters?Where is their profit?Nono.This is socialism or someting else unamerican.Only swedes or other european socialistics would do that.

GuestFebruary 16th, 2009 at 10:13 am

The banks are free to make profits somewhere else, they forfeited their rights on that piece of property when the government had to bail them and the homeowner out of foreclosure

GuestFebruary 16th, 2009 at 11:02 am

The “government” is “bailing out” the “homeowners” to bail out the banksters. Read the fine print amd follow the money — right down to your pocket.

Andrew HeldFebruary 16th, 2009 at 1:15 pm

You might like Hussman’s approach. See some of his older weekly posts.”The heart of this problem continues to be the need to restructure the payment obligations of borrowers. For the better part of a year now, I have repeatedly (and increasingly urgently) advocated the restructuring of mortgage obligations by a variety of methods (collecting the pieces of securitized mortgages through “all or nothing” auctions, writing down principal in return for “property appreciation rights”, etc).”

GuestFebruary 16th, 2009 at 3:23 pm

Novel, simplistic ideas may be an answer. Then again, maybe not. After all, they are not proposed by the folks who “know the system”

GuestFebruary 16th, 2009 at 6:34 am

They must nationalize before the second wave of resets that no one will survive.So they must socialize the debts but capitalize the profit… USA is now a Fasci-Plutocracy. NR is just making things worst, why didn’t ask for default all the FED and major banks ? Rigged !!!!!!!

GuestFebruary 16th, 2009 at 7:02 am

My concept of bank nationalization for insolvent banks is not to have a long term government run bank but to have an orderly bankruptcy of the bank and minimize loss to the taxpayer, fire management, eventfully sell the assets and stock holders take the loss. Bank America and CITI group would no longer exist. The idea of Maxine Waters playing politics with a bank must be prevented, politicians like her already have done enough to get us here. I think running a lemonade stand is beyond her ability. Not sure if enough people realize it but we have got to start producing wealth as a nation not more social programs. When I was a dairy farmer in the 80’s I was producing wealth and it struck me when I looked around at that time how many people were involved in wealth consuming job. Last year a salesman at a local dealership of American made motorcycles told me it was old money that people were using to fund their lifestyles and he said there was plenty of old money in our area. Today he does not have his job I believe the old money ran out!

DRFebruary 16th, 2009 at 7:36 am

Q for the brainiacs (most posters here).How does the market react to ‘bank nationalization’? Is this priced into the market to some extent? Does the revealation to the masses shock them and does that move the market down significantly? Do bank shares rally becasue the shareholders get off free and the taxpayer is left with the bill? Does this pummel the US$ down?Thoughts….?

Little SaverFebruary 16th, 2009 at 7:55 am

Depends on the conditions, methinks. What’s in it for shareholders? Creditors? Government? Bank executives? Who will be running the banks?

GuestFebruary 16th, 2009 at 6:21 pm

I believe it is somewhat priced in, but not totally. If it were, BOA and Goldman would be trading for about ten cents. Of course, at the present rate of descent, it won’t take much longer for them to get there.What will it do to the market. No one knows. Mr Market is very smart, but he has a mind of his own. Many are aware this must happen eventually, so it may come as a relief to them. Others are in denial – even still – amazing!The greatest probability is that Mr Market is heading lower, regardless. How long before we bottom and start to recover is the true question. My opinion is, that can’t happen until the financials are taken out and shot. We can put this off and dig the hole ever deeper, but one day the bad banks must be sacrificed.

HayesFebruary 16th, 2009 at 7:42 am

Obama’s Rhetoric Is the Real ‘Catastrophe’

President Barack Obama has turned fearmongering into an art form. He has repeatedly raised the specter of another Great Depression. First, he did so to win votes in the November election. He has done so again recently to sway congressional votes for his stimulus package. In his remarks, every gloomy statistic on the economy becomes a harbinger of doom. As he tells it, today’s economy is the worst since the Great Depression. Without his Recovery and Reinvestment Act, he says, the economy will fall back into that abyss and may never recover.This fearmongering may be good politics…

GuestFebruary 16th, 2009 at 8:19 am

Fearmongering? Oh gee, what a novel idea. The Bush Administration raised the level of fearmongering to a legitimate science with its daily terrorism alert codes.”President Barack Obama has turned fearmongering into an art form.” That’s rich.Keep shopping folks or the terrorists will win!

GuestFebruary 16th, 2009 at 11:32 am

Can’t you get off your partisan horse, for one second, and think of the country? Yes, Bush was bad. Yes, Obama’s cabinet is bad — and he and his advisors chose it. Yes, the Democrats were in power most of the last century. Yes, the neo-cons endangered the entire world puppeteering Bush. Yes, the neo-liberals are bad under Obama.Can’t we at least discuss their policies and look for solutions without your partisan harping? The entire world knows the U.S. two-party system has devolved into a one-party prostitute. The entire world knows America is now a political economy, run by politicians. Face it!

GuestFebruary 16th, 2009 at 5:17 pm

Surely you jest. If partisan tripe written in a Wall Street rag can’t be called-on and criticized for its obfuscation, then the country is doomed.Who’s the patriot?

economicminorFebruary 16th, 2009 at 11:15 am

Which never go down so now they have become meaningless.We are forever in a state of elevated alert until we fall asleep.

GuestFebruary 16th, 2009 at 1:57 pm

And the boy cried Wolf again in a desperate attempt to distract the people from the theft off all they own by those behind the Federal Reserve fraction reserve banking usury scam.The banksters are stealing America from right under our noses, and they own the politicians, all of them, so don’t expect any help from Washington, the are OWNED!

HayesFebruary 16th, 2009 at 7:53 am

From an earlier thread this excellent post by Tom K (seems to me he called it correctly)

There is, nor will there be, a Geithner strategy for the banks. But there will be an Obama & White House strategy that Geithner may announce and to implement.The White House has already decided to wipe out the zombie banks over Geithner objection. The issues are politics, public optics, blowback from Wall Street, and the actual mechanisms. These have to be done carefully, in stages, and the WH has to be seen as being ‘forced’ into making such a radial move.Step 1 is to play fussy, hard-to-catch, struggling for a solution. That was what Geithner did yesterday. Wall Street will be in uproar over his lack of a clear easy bailout plan, while the rest of the country and some famous pundits will demand ‘kill the zombie bank’ approach. Geithner already opened the can by offering to ‘stress test’ the banks. That’s a code word for wiping out the zombies. Yesterday Obama gave an interview* with this words “Wall Street is looking for an easy way out. There is no easy way out.” That’s his signal for wrecking time ahead for the banks.Step 2 is to put those clowns in front of Congress and convince the public they should be shot. Everybody will agree.Step 3 is to announce a voluntary ‘stress test’ plan. One that’s going to dig into the books for skeletons. Meaning those who don’t volunteer are either healthy or should jump into receivership. Those who dare to volunteer will be restructured with public money and put into adult supervision.In short, nationalization American style is coming. What about all the complexities, murky strategies, confusing words. Smoke screen my friend.Hide replies Reply to this comment By Tom K on 2009-02-11 21:02:55


GuestFebruary 16th, 2009 at 8:33 am

Like most everything else, nationalization, intervention, receivership, whatever you want to call it, can be done the right way or the wrong way. As always, the devil is in the details and vigilance remains critical.

GuestFebruary 16th, 2009 at 8:36 am

this stupid Obama just dump all problem at Geithner and Summers. Dont they have their hand full with TARP already? Now they have to handle auto too? There is no one Obama can use for auto?

GuestFebruary 16th, 2009 at 11:50 am

Least we forget, the House Banking Committee hearings Sept. 21st-22nd, 2001, on Russian money-laundering through U.S. banks provided an eye-popping view of the world of runaway financial sector corruption as practiced today in Moscow and New York, London and Lugano, Berlin and Beirut. Testimony revealed it was then Treasury Secretary Larry Summers, chief economist at the World Bank in 1990, who passed the Russian “cookie plate to Goldman Sachs.” And revealed how Harvard economists (let us count the number in the Obama Administration) created the Russian kleptocracy.”It’s a world where billions of U.S. taxpayer dollars are transferred to the International Monetary Fund and then filtered through a small number of well-placed people – only a few dozen, in Russia, New York, Washington, and Boston – who launder the money into private accounts on Wall Street and into the coffers of some of the world’s major banks.”Is it now the job of Summers, Obama’s National Economic Council director, and Obama’s Treasury Secretary Timothy Geithner (Goldman and NYFed), to pass the American “cookie plate to Goldman Sachs”?

HayesFebruary 16th, 2009 at 8:05 am

also this link courtesy NCDecade at Bernie’sBy PAUL KRUGMANPublished: February 15, 2009By now everyone knows the sad tale of Bernard Madoff’s duped investors. They looked at their statements and thought they were rich. But then, one day, they discovered to their horror that their supposed wealth was a figment of someone else’s imagination.

PeteCAFebruary 16th, 2009 at 10:24 am

My thoughts are that the world GDP is set to take a downturn. That’s the most probable outcome. Either that, or we’re going to see a global crisis of some kind that pushes the price of oil skywards.PeteCA

TobyFebruary 16th, 2009 at 10:42 am

Could you make a simple assumption that the index has to go down to the Oil level of 120, ie from 140 to 120, that is 14% decline.Global GDP would then have go down from approx 54 trillion USD to 47, or?It will be interesting to see how the fractional reserve sysem based upon growth is reacting to this, massive deflation as it looks. I do not see how adding more debt will change the oilproduction output?

Jason BFebruary 16th, 2009 at 8:34 am

The American consumer drove world economic development based on the explosion of debt. Now we are maxed out on debt. Our monetary system is based on fractional reserve banking, in which money is loaned into existence. More money must be loaned so the previous borrower has the additional debt-based money to pay off the loan PLUS INTEREST. Once debt stops expanding, the borrowers don’t have the money to pay off their loans plus interest. The demand for dollars increases, and the value of dollars increases. This isn’t good, but a symptom of a deadly illness in the economy, like a high fever. Some debtors are caught without a chair once the lending music stops, can’t find the dollars they need to pay off their debt plus interest, and default. When they default, all the money they borrowed into existence ceases to exist, and is no longer available for others to pay their debts. These defaults are widespread, and since we have a debt-based monetary system the economy is thrown into deflation as debt-money is destroyed. The administration wants to get credit flowing again to stop this dynamic. There are several confounding and compounding factors that make the solution more complicated than just getting credit flowing again.*One is the high existing indebtedness. debt to gdp Consumers have no more capacity to borrow. Another is the negative savings rate. Easy credit inflated the value of assets. Everyone could get their hands on money, so prices inflated. That created a wealth effect, making people think that they no longer had to save because the value of their assets was increasing. Now that easy credit is gone, assets are values are decreasing. Even if the consumer had the capacity to borrow, they wouldn’t until they built up savings again.*Another is that easy credit moved future purchases into the present. Anyone who was going to buy anything – a car, washing machine, refrigerator, furniture, did so with 1 year no interest loans. Everyone has everything they will need for years, and consumption will suffer. Since consumption is now over 70% of our economy (!), this will have a terrible effect on the US.*Securitization is another. The debt was bundled together based on actuarial calculations of whatever, divided into tranches and insured, then rated AAA and sold, then insured again with Cd O’s and so on. Now that the underlying loans are defaulting the securities are declining sharply in value. Those who insured the securities or are the counterparty to a CDO on a trigger event like the security declines in value below a certain point are being forced to pay up and are being dragged down too (AIG).*Another is the off-shoring of manufacturing, and the decline of manufacturing in the US. Now that the financial services based economy has imploded, there is nothing to take its place. We make much fewer products here that we can sell to the rest of the world. We have no manufacturing jobs for people to be employed at in order to make a decent wage and pay off their debts and buy stuff. We have a ‘service based’ economy, but who to sell services to? Unemployed people don’t make a good market, or good tourists.*Housing is another. A house is the most expensive thing most people will ever ‘own’. Ownership of housing is way more widespread than ownership of stocks. More people are affected by a housing crash than a stock crash, and on a much larger scale. There is also a massive overhang of housing supply, since it was overbuilt during the boom.*The upcoming retirement of baby-boomers is another. Born after WWII, they are the largest demographic in society, moving through time and influencing everything. They have amassed massiveassets (equity, homes, bonds, you name it) in their peak earning years, and are now depending on selling those assets to finance their retirement.What happens when this huge cohort tries to sell their assets in the marketplace to the much smaller cohort behind them? see baby bulge They flood the market with supply, which reduces price. There will be massive downward pressure on asset prices for the foreseeable future. Even if the Administration solution can get credit flowing again, there is no way that it will be taken up by consumers. Even if it was, credit is not a solution to the confounding problems. That Pandora box has already been opened. According to this graph: double whammy we are currently in a lull in mortgage resets. This will ramp up again this summer. The first wave put us in the trouble we’re in now. The losses revealed the weaknesses in our economy. It triggered the credit crisis. Now we have reduced consumer spending, reduced retail profits, layoffs, retail failures, closing retail stores, empty malls and commercial mortgage failures. The retail chapter 11’s and commercial mortgage failures, layoffs and knock-on effects will be on top of the second wave of resets in the Credit Suisse graph.It is going to be a hell of a summer.

GuestFebruary 16th, 2009 at 8:36 am

I think a transparent public discussion must begin on the potentially catastrophic problems that have been created by the massive credit default swap market.

GuestFebruary 16th, 2009 at 10:01 am

To what end? The simple fact is that when world banks settle up their CDSs, they will owe $10’s of billions each. Everyone in the industry knows it.

HayesFebruary 16th, 2009 at 8:46 am

Volatile trading in Lloyds sharesBy John O’DohertyPublished: February 16 2009 09:12 | Last updated: February 16 2009 13:24Investors in Lloyds Banking Group experienced a volatile ride on Monday as their shares fell as much as 22 per cent in early trading before largely recouping their losses after the government gave reassurances that it was not about to nationalise the UK lender…

HayesFebruary 16th, 2009 at 9:30 am

from the article above:”As Sam Stein reports in the Huffington Post:”IMHO quoting from the Huffington Post is tantamount to citing Wikipedia in a scholarly article.

PeteCAFebruary 16th, 2009 at 10:36 am

Let’s step backwards a minute and take a look at the big picture for the USA …* The entire banking system in America has now nosedived to the point where our leaders are seriously considering nationalizing the system (meaning that further huge amounts of public money will be poured into the black hole)* The auto industry in America has cratered and is shifting to life support.* Credit default risks on US Government debt are rising rapidly* Deleveraging by US households has really only just started. The painful process of debt resolution by consumers and putting money into savings is only just getting rolling. No break in this action.It looks a whole lot like our standard of living in the US is moving towards a substantial plunge. Along the lines of what Dmitri Orlov has been saying. And naturally, we cannot sustain the auto industry that we used to have – because fewer people will be driving big trucks, SUV’s and other gas guzzlers. With US savings at low levels, and retirement portfolios gutted already, we cannot justify the huge investment industry that Wall Stspawned over the previous decades.This is a permanent change in lifestyle. We can’t roll the process back by printing more US dollars … there’s no economic productivity that comes from that approach.PeteCA

amacflyFebruary 16th, 2009 at 2:26 pm

Absolutely, who will trust a 401k, SEPIRA etc now. Who but the Rockerfellers and their servants at GS has future funds left to spend or leave to their children? People are still saying this isn’t as bad as the Great Depression, but everywhere I look I see the long term consequences of this as being so much worse for future spending. In the 30’s we had an economy, and we were essentially a creditor nation, but now we are a deep debtor nation.While our situation is very, very different from Germany’s in the late 20’s, we need to be very mindful of the similarities. We are sailing an insolvent fractional reserve fiat monetary system very close to the wind in very stormy seas, and no one on board has experienced such treacherous conditions before. It seems to me that GS et all are just grabbing every life jacket for themselves, and are preparing to jump ship with their (our) bullion.Pitchforks by the summer?

PeteCAFebruary 16th, 2009 at 11:00 am

Just looking at some charts this morning on …www.stockcharts.comThe US banking index has really nosedived since the start of ’09. See $BKX on stockcharts. Note that the RSI indicator has remained consistently below 50%, indicating no recovery at present.Credit to Jim Willie at this link: pointing out that the index for regional banks (RKH) is not doing a whole lot better. Once again, RKH is remaining generally below the 50% level on the RSI indicator. No near-term resurgence seems likely.Looking at specific banks reveals the concern more succinctly. See for example BAC on stockcharts – which is the symbol for Bank of America. It has plunged from $46/share to around $5/share at the current time. Remember, Bank of America is one of the big “favored” banks that the Fed felt should be saved (at the expense of others). And furthermore, BoA is holding a large amount of derivatives holdings. This is why I have been pointing out recently here that it seems impossible to maintain the global bubble in derivatives. Something has to give.PeteCA

MorbidFebruary 16th, 2009 at 1:46 pm

Pete,If the banks are nationalized is the Fed on the hook to bail out the derivatives? Or do the derivatives become worthless to whoever holds them? Would not bankruptcy be a better approach?

PeteCAFebruary 16th, 2009 at 4:14 pm

Morbid. The short answer is that probably no-one knows. But anybody who seriously proposes nationalization of the banks had better be able to chart a course through the tangled web of derivatives deals. I doubt that it’s as simple … as just canceling all the deals.You see the irony here? If the banks at Wall Street had instead been betting all their money at Vegas, they would have been shut down by the house – when they couldn’t pay up! But instead, the Fed and Congress never put an end to the gambling on Wall Street. So Americans are left to contemplate the fact that when it comes to regulating high-flying financial deals, the casino’s at Las Vegas know a lot more about bringing down the hammer than the US Government :-)PeteCA

GuestFebruary 16th, 2009 at 5:00 pm

There it is — “anybody who seriously proposes nationalization of the banks had better be able to chart a course through the tangled web of derivatives deals.” We used to say the Federal Reserve was crooked; now we can say both the Fed and the Treasury are crooked. So who will oversee this untangling, justly? Congress? Roubini has called for disinterested parties to undertake the nationalization process — but I fear under present conditions, that cannot be done. Americans should only agree to such a process IF and WHEN they know the process and the processors and the power level of enforcement — and only if all banks across the nation, large and small, can come to terms — not just the bully banks.

GuestFebruary 16th, 2009 at 11:00 am

I am going to make an outrageous assertion! I believe that the world of investment professionals for thelast 7 years have acted akin to communist apparatchiks in the Soviet Union and Cuba. Why? WhenI discussed securities with anybody at an investment bank, it was a HERESY to counterdict MODERNPORTFOLIO THEORY and EFFICIENT MARKET THEORY. I submit to you that any system or societythat does not constantly try to falsify its premises becomes near totalitarian in structure, and will failbecause it fails to adapt. The Greek Skeptic School of philosophy were the first philosophers that understood that IDEAS MUST BE OPEN TO ADAPTABILITY. Their method was to test all ideas andtry to falsify them. Soros is a student of Karl Popper who understood the importance of this very basic concept. IDEAS ARE NOT GOOD IF YOU TEST THEM AND THEY DON’T WORK. The communist totalitarians are famous for violating this rule. Stalin ruined the Aral Sea, because he decided that theSoviets had to produce Cotton in mass quantities at the expense of draining the Aral Sea. Castro sought to tell the farmers in Pinar Del Rio what crops they should produce, when he had never farmed in his life.I submit to you that any system that is totalitarian is moronic. Democracy is all about evolutionary adaptation in government. Sometimes you lean conservative, sometimes you lean liberal. Governmentphilosophy has to adapt to REAL CIRCUMSTANCES not dogmatic IDEAS. WHEN THE IDEAS AREHARD AND FAST DOGMA AND CAN’T BE FALSIFIED, SOCIETIES CRASH.The key to testing IDEAS is that you must test for extreme events or your mathematical models only work in good times. When you test mathematical probabilities using a bell curve(gaussian curve in statistics) and ignore the outliers at the bottom of both sides of the curve, you are doomed to failure. The fat tails on both sides will manifest and if you are fully invested at the zenith of the curve in your assumptions. Your assumptions will make an ass out of you and me. The financial community has taken as an article of faith that mixing low quality assets with high quality assets will give better results than sticking to good assets with lower returns and safety. This is the Modern Portfolio Theory. Now the banks took this a little further and they created PORTFOLIO MARGINING. If you have too much leverage(in your margining) in some assets and less in others everything will average out. This is how the INVESTMENT BANKS justified asking the SEC for exemptions to invest at 40/1 leverage in their propietary trading(the bank’s own bets).THE AUTHORITIES WERE DISCIPLES OF THE QUASI RELIGIOUS “EFFICIENT MARKETSTHEORY”. Anybody with some interdisciplinary exposure to the hard sciences knows “chaos theory” andfractals. Anything that eminates from nature(such as human ivestment psychology) is not linear and evolution has been proven to have abrupt changes as a standard. The human investment markets areINHERENTLY UNSTABLE AND INEFFICIENT WITHOUT REGULATION, BECAUSE MOST HUMANINVESTMENT IS INHERENTLY SUBJECT TO IRRATIONAL INPUTS. The corporate media is the mostirrational of inputs. Anybody who takes the rantings of the CNBC hucksters as real investment adviceis inherently irrational because CNBC is owned by GE and GE owns GE Capital. They have skin in the game. They tend to hire Goldman Sachs alumni who are akin to Opus Dei, but more prone to lying.What is with this tendency to have Goldman Sachs alumni in all sectors of decision making? Robert Rubin, Henry Paulson, Tim Geithner! These apparatchiks are akin to the nomenclatura of the communist party. They are spread throughout our society to be the keepers of the faith. They are the heads of theeconomic inquisition. Any HERETIC will pay the price! In 1998, Brooksley Born who had been appointedthe head of the Commoditites Futures Trading Commission had the HERETICAL CONCEPT PERCEPTION that the (OTC) OVER THE COUNTER DERIVATIVES HAD TO BE SUPERVISED.The Rubin-Goldman Mafia ran her out of town, and here we are with a FRANKENSTEIN OF OVERTHE COUNTER DERIVATIVES THAT ARE MORE DESTRUCTIVE THAN THE SUBPRIME DEBTTRIGGER THAT CREATED THE CASCADE OF TIGHTLY COUPLED FINANCIAL INSTRUMENTSINTO A CREDIT FREEZE. When you make heretics pay the price of telling the truth to power, yoursociety has no place but down. In a democracy, there can be no heresy! All ideas must be tested and falsified and adopted if truly functional. THIS IS INHERENT IN EVOLUTIONARY ADAPTATION.”It doesn’t matter whether a cat is black or white, can it hunt mice”. We as a society decided thatonly greedy cats who ate our steaks and left us the mice to eat were going to run the financial system.Are we freaking morons? Even worse, we now want these greedy cats to literally eat our flesh andleave us as a skeleton country in total debt. The mice are the derivatives that are totally separatefrom the subprime mortgage crisis. The greedy cats will eat the flesh and the mice will eat the bones.EITHER THE GOVERNMENT TAKES CONTROL FROM THE GREEDY CATS, and resets the sytemto be regulated, or we will fail. We will fail for the same reasons the communists failed. They wereinneficient apparatchiks who ran the system for their purposes and subjugated the people with totalitarianideas. The financial elite is the same! They just use more subtle and stealthy methods developed inMadison Avenue. They manufacture consent and root out the heretics.

see.clayFebruary 16th, 2009 at 12:00 pm

dunno who you are, but like your thinking and writing style. I have always wondered why the same drookies, with the same backgrounds always end up at the top. You would think that there is at least 1 outsider that could contribute something new. The whole goldman deal makes no sense, why appoint people to positions in power whose job is to fix the problems that they architected…fuggin stupid. I liken it to the revolving door in the ranks of college/pro coaches, some schluck loses 10 games and the next year he has another million dollar job. whatever, same old story with new faces.

The AlarmistFebruary 17th, 2009 at 2:53 am

Ideas don’t matter, it’s who you know and how much you contribute.Is TART … sorry, I mean TARP, or should we call it (FSP now?) all that surprising coming from GS alumni when the key trading firm that will make a killing in nearly every facet of the treatment of Toxic Assets (primary dealer, secondary dealer, and advisor to the Govt) all come from GS?And no, the Banksters don’t have control, but they are like the accountants to the political gangsters who are running the show now.

GuestFebruary 16th, 2009 at 3:35 pm

gentlemen:it’s intuitively obvious to even the most casual observer that the revolving door between Goldman Sachs and the US government, specifically the US Treasury is because the banksters have control of our government and have had this control for a very long time. This is not conjecture, this is a fact.

God is a real estate developerFebruary 16th, 2009 at 11:12 am

Look. Either land is the source of all life, all wealth, all possibility to survive – or it’s not. Either Earth is everyone’s birthright – or it’s not. Either every human being has the perfect birthright to a place to put their feet and live their lives – or they don’t.Which is it?We desperately need to stop monkeying around and deal seriously with the fundamental misconceptions our economics is erected upon. Essential error number one is the failure to found our economics on the human right to a place to put your feet.

Real Estate by God, Inc.February 16th, 2009 at 1:05 pm

Everybody owns it all is the whole point. All the value of what no man created belongs to all of mankind.Have you read “Archimedes” by Mark Twain, Guest?Thomas Paine said: “It is the value of the improvement only, and not the earth itself that is individual property…Every proprietor owes to the community a ground rent for the land which he holds.”We should feel foolish, paying rent to the rich for our own birthrights…what dupes we have been!

GuestFebruary 16th, 2009 at 7:36 pm

Haven’t read it – I’ll go pick it up. Thanks for introducing something that hasn’t been rehashed a hundred times over.

wawawaFebruary 16th, 2009 at 11:40 am

According you can buy a MB E-Class for $6000 below invoice. Times has changed? Huhh?Now I beleive deflation is here and is real.

AnonymousFebruary 16th, 2009 at 11:29 pm

I’ve been watching fast-food prices plunge as many side-by-side stores have been slashing prices — many ‘high quality’ fast food joints (eg. Quiznos) have been offering permanent $5 prices for items that used to be priced at $7-8. In Toronto, a pizza pizza chain right beside a Quiznos in my area responded almost immediately with a $5 two pizza slice special.Anecdotal of course, but these are two deals that have put more money in my pocket (love pizza and subs :). The deflation process seems to be just starting..

Andrew HeldFebruary 16th, 2009 at 11:40 am

Bill Bonner: “So you see, dear reader, how deliciously the plot turns? In the bubble years, the bankers ripped off the public…pretending to make them rich, of course…while the regulators looked the other way. Now, the politicians create a distraction, pretending to punish the bankers, while together they pick the public’s pocket for $3 or $4 trillion more. The bankers are judged guilty; but the audience hangs.”(with a hat tip to Melduke)

amacflyFebruary 16th, 2009 at 2:39 pm

We see it, but since they own the media, the people at large will never know, until as Jefferson warned…”If the American people ever allow private banks to control the issue of their currency, first by inflation then by deflation, the banks and the corporations will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.”What then? We’ll be living in a nationalized socialist police state. Germany shortened it to the easier to say Nazi party.

GuestFebruary 16th, 2009 at 3:17 pm

Just because it is called a socialist state doesn’t make it so.What the nazis had was a FASCIST state.Fascism (also called CORPORATISM) is the result of corporates and the government operating in cahoots. It is not a system operating to the benefit of the general population, which would be socialism.

amacflyFebruary 16th, 2009 at 8:39 pm

Nazi is short for National Socialist German Workers’ Party (Nationalsozialistische Deutsche Arbeiterpartei), and it goes without saying it wasn’t socialist either, and nor will ours be. Either we’ll abolish the Fed, and rid our nation of the bankster mafia that are stealing it from under our noses day by day, or we become the debt slaves of a terrible police state. All of us who have posted here will find ourselves on some list to be carted off to a FEMA camp for reintegration, or some other suitably kind sounding (final) solution.This is a long clip, but well worth watching, it is very, very well researched, I’ve cross referenced as much of the info as I can since first seeing it. It gives a very good overview of how the banksters managed to take over our financial system.

subgeniusFebruary 17th, 2009 at 2:03 am

Like the above post says, a name given to an enterprise does not necessarily denote the real nature of said entity. Cases in point:1) Nationalsozialistische Deutsche Arbeiterpartei – not socialist, but fascist2) Federal Reserve – not Federal, not a Reserve

blindmanFebruary 17th, 2009 at 2:03 pm

a,.several years ago this little video opened myeyes. i also recommend it to everyone i speak to,along with verbewarp and public radio. and yoga andoldtime banjo, clawhammer style. and rge monitor.etc.police state is not an option. even the governmentknows that. they can’t even stop people fromdriving while on a cell phone. the police wouldrevolt before they would execute that control, manufacturing consent, is donewith information in an advanced economy. they use guns and barbed wire when they can’t control the mind through information and the media.just a thought.

GuestFebruary 16th, 2009 at 12:02 pm

Roubini: you said earlier that you did NOT pull your investments from the market before the recession that you predicted hit. Now in this recent blog you claim to not have any investments in the market. Is the latter due to the former? In other words, despite seeing it coming you LOST money and now have no more investments hence you can claim that “I never trade in markets and so I am never “talk my book” when I present my views.”Perhaps you should better define what you mean by “markets” since you explicitly admitted to losing money in your stock market investments.

GuestFebruary 16th, 2009 at 12:39 pm

SHUT UP! He is not going to answer you. Please repost this 1,000 more times you look like a jackass each and every time! Go back and read the response to this in the last thread.

:)February 16th, 2009 at 4:13 pm

Roubini: you said earlier that you did NOT pull your investments from the market before the recession that you predicted hit. Now in this recent blog you claim to not have any investments in the market. Is the latter due to the former? In other words, despite seeing it coming you LOST money and now have no more investments hence you can claim that “I never trade in markets and so I am never “talk my book” when I present my views.”Perhaps you should better define what you mean by “markets” since you explicitly admitted to losing money in your stock market investments.

GuestFebruary 17th, 2009 at 11:31 am

;)shut up you say? my good man if this were not a virtual gathering place i believe you’d have to reconsider your lack of manners, not to mention you must have very low intelligence…

GuestFebruary 17th, 2009 at 12:27 pm

No my dear friend it’s just that you have asked this on every post and it’s obvious that NR is not going to respond to you. Nor should he, it is his money. In addition if you went back and read his posts he said he did not actively invest other than his 401k. So his 401k lost money but he does not have any active investments that he directs. To simplify perhaps the professor should use different terms, but if you had the slightest bit of intelligence you could read between those lines.As for reconsidering my lack of manners, I actually showed considerable restraint and seeing you in person would not cause me to “reconsider”. I personally do not care if I offended you or not. Your question is offensive to me, what NR does with his money is HIS business.

snsFebruary 17th, 2009 at 10:13 pm

roubini EXPLICITLY stated he lost $$$ in the markets. Call it 401k call it chicken. You are a rube. If you would not reconsider your ill manners face to face you would be properly taken care of. You can delude yourself all you want on a virtual forum. Your lack of intelligence cannot be tempered by your ill manners; quite the contrary. The man did not heed his own date. Period. I would like the man to elaborate on this. Again, 401k is a form of trade in the markets so what exactly does one speak in this instance when one “talk[s] the book”?

GuestFebruary 17th, 2009 at 10:16 pm

the question should not offend you as it is not directed at you. it is none of your business. perhaps you can find someone else to channel your offended and wounded low IQ.

GuestFebruary 17th, 2009 at 11:42 pm

I love it when people threaten me online I think it’s hilarious. And I explained to you how he defined $$ and active investments in his posts. And no he did not heed his own advice and why he did not is his own reason. Explain how I am not intelligent? I’m curious how you came to that conclusion. I myself have no idea if you are smart or stupid but I do know you are dipshit, you have proven that. As for properly taking care of me what qualifies you to do that? How would you do that? Please be creative, you beating my ass is not really going to work so try for something else. Now as to you offending me, you directed that question to all of us as you continually post it in the forum and your stupidity (oops maybe you did prove you are stupid) offends me. Please don’t procreate, keep the gene pool clean my friend.

God is a real estate developerFebruary 16th, 2009 at 1:13 pm

“The richest 5% in every nation, rich and poor, North and South, East and West, now own between 70% and 95% of their own countries.”Land monopoly is the very back bone of rule by the rich: Churchill: “Land Monopoly is not the only monopoly, but it is by far the greatest of monopolies – it is perpetual monopoly, and it is the mother of all other forms of monopoly.”Here is (most of) “Archimedes” by Mark Twain:“It is evident that he was an over-rated man. He was in the habit of making a lot of fuss about his screws and levers, but his knowledge of mechanics was in reality of a very limited character. I have never set up for a genius myself, but I know of a mechanical force more powerful than anything the vaunting engineer of Syracuse ever dreamed of. It is the force of land monopoly; it is a screw and lever all in one; it will screw the last penny out of a man’s pocket, and bend everything on earth to its own despotic will.Give me the private ownership of all the land, and will I move the earth? No; but I will do more. I will undertake to make slaves of all the human beings on the face of it. Not chattel slaves exactly, but slaves nevertheless. What an idiot I would be to make chattel slaves of them. I would have to find them salts and senna when they were sick, and whip them to work when they were lazy.No, it is not good enough. Under the system I propose the fools would imagine they were all free. I would get a maximum of results, and have no responsibility whatever. They would cultivate the soil; they would dive into the bowels of the earth for its hidden treasures; they would build cities and construct railways and telegraphs; their ships would navigate the ocean; they would work and work, and invent and contrive; their warehouses would be full, their markets glutted, and:The beauty of the whole concern would beThat everything they made would belong to me.It would be this way, you see: As I owned all the land, they would of course, have to pay me rent. They could not reasonably expect me to allow them the use of the land for nothing. I am not a hard man, and in fixing the rent I would be very liberal with them. I would allow them, in fact, to fix it themselves. What could be fairer? Here is a piece of land, let us say, it might be a farm, it might be a building site, or it might be something else – if there was only one man who wanted it, of course he would not offer me much, but if the land be really worth anything such a circumstance is not likely to happen.On the contrary, there would be a number who would want it, and they would go on bidding and bidding one against the other, in order to get it. I should accept the highest offer – what could be fairer? Every increase of population, extension of trade, every advance in the arts and sciences would, as we all know, increase the value of land, and the competition that would naturally arise would continue to force rents upward, so much so, that in many cases the tenants would have little or nothing left for themselves.In this case a number of those who were hard pushed would seek to borrow, and as for those who were not so hard pushed, they would, as a matter of course, get the idea into their heads that if they only had more capital they could extend their operations, and thereby make their business more profitable. Here I am again. The very man they stand in need of; a regular benefactor of my species, and always ready to oblige them. With such an enormous rent-roll I could furnish them with funds up to the full extent of the available security; they would not expect me to do more, and in the matter of interest I would be equally generous.I would allow them to fix the rate of it themselves in precisely the same manner as they had fixed the rent. I should then have them by the wool, and if they failed in their payments it would be the easiest thing in the world to sell them out. They might bewail their lot, but business is business. They should have worked harder and been more provident. Whatever inconvenience they might suffer, it would be their concern, and not mine.What a glorious time I would have of it! Rent and interest, interest and rent, and no limit to either, excepting the ability of the workers to pay. Rents would go up and up, and they would continue to pledge and mortgage, and as they went bung, bung, one after another, it would be the finest sport ever seen. thus, from the simple leverage of land monopoly, not only the great globe itself, but everything on the face of it would eventually belong to me. I would be king and lord of all, and the rest of mankind would be my most willing slaves.It hardly needs to be said that it would not be consistent with my dignity to associate with the common rank and file of humanity; it would not be politic to say so, but, as a matter of fact, I not only hate work but I hate those who do work, and I would not have their stinking carcasses near me at any price. High above the contemptible herd I would sit enthroned amid a circle of devoted worshippers. I would choose for myself companions after my own heart. I would deck them with ribbons and gewgaws to tickle their vanity; they would esteem it an honour to kiss my glove, and would pay homage to the very chair that I sat upon; brave men would die for me, parsons would pray for me, and bright-eyed beauty would pander to my pleasures.For the proper management of public affairs I would have a parliament, and for the preservation of law and order there would be soldiers and policemen, all sworn to serve me faithfully; their pay would not be much, but their high sense of duty would be a sufficient guarantee that they would fulfill the terms of the contract.Outside the charmed circle of my society would be others eagerly pressing forward in the hope of sharing my favours; outside of these would be others again who would be forever seeking to wriggle themselves into the ranks of those in front of them, and so on, outward and downward, until we reach the deep ranks of the workers forever toiling and forever struggling merely to live, and with the hell of poverty forever threatening to engulf them. The hell of poverty, that outer realm of darkness where there is weeping and wailing and gnashing of teeth – the social Gehenna, where the worm dieth not, and the fire is not quenched – here is a whip more effective by far than the keenest lash of the chattel slave owner, urging them on by day, haunting their dreams by night, draining without stint the life blood from their veins, and pursuing them with relentless constancy to their graves.In the buoyancy of youth many would start full of hope and with high expectations; but, as they journeyed along, disappointment would follow disappointment, hope would gradually give place to despair, the promised cup of joy would be turned to bitterness, and the holiest affection would become a poisoned arrow quivering in the heart!What a beautiful arrangement – ambition urging in front, want and the fear of want bringing up the rear! In the conflicting interests that would be involved, in the throat-cutting competition that would prevail, in the bitterness that would be engendered between man and man, husband and wife, father and son, I should, of course, have no part. There would be lying and cheating, harsh treatment by masters, dishonesty of servants, strikes and lockouts, assaults and intimidation, family feuds and interminable broils; but they would not concern Me. In the serene atmosphere of my earthly paradise I would be safe from all evil. I would feast on the daintiest of dishes, and sip wines of the choicest vintage; my gardens would have the most magnificent terraces and the finest walks. I would roam mid the umbrageous foliage of the trees, the blooming flowers, the warbling of birds, the jetting of fountains, and the splashing of pellucid waters. My palace would have its walls of alabaster and domes of crystal, there would be furniture of the most exquisite workmanship, carpets and hangings of the richest fabrics and finest textures, carvings and paintings that were miracles of art, vessels of gold and silver, gems of the purest ray glittering in their settings, the voluptuous strains of the sweetest music, the perfume of roses, the softest of couches, a horde of titled lackeys to come and go at my bidding, and a perfect galaxy of beauty to stimulate desire, and administer to my enjoyment.Thus would I pass the happy hours away, while throughout the world it would be a hallmark of respectability to extol my virtues, and anthems would be everywhere sung in praise.Archimedes never dreamt of anything like that. Yet, with the earth for my fulcrum and its private ownership for my lever, it is all possible. If it should be said that the people would eventually detect the fraud, and with swift vengeance hurl me and all my courtly parasites to perdition, I answer, “Nothing of the kind, the people are as good as gold, and would stand it like bricks – and I appeal to the facts of today to bear me witness.”***************“The patience of the oppressed has always been the most inexplicable, as well as probably the most important, fact in all history.” -Author Amos Elon from “The Pity of it All”

I can't float in air. Can you?February 16th, 2009 at 1:26 pm

quote Jeffery J Smith at The Progress Report (”The few who get the value of oil and the worth of earth in general on one hand also catch tax breaks with the other.”What caused societies to imagine they ever had any right to give away my birthright to a place to put my feet??Do present and future people have a lesser right to a place to put their feet than past generations did before land was all owned?

GuestFebruary 16th, 2009 at 1:32 pm

In slave market countries such as China the individual is still nothing and the only thing that matters is the State.That “our” government sold out the fruits and gains of our freedom to slave market plantations and now wants to reduce America’s standard of living so we can be “competitive” in global markets is unconscionable.The country of our Founders shamefully entered into a political partnership with a regime in China that has killed upwards of 65 million people, holding billions more in bondage, and called it a “step in defense of peace.” And now “our” corporatists and politicians in the name globalization on the way to collective globalism tell us we must give up our individual freedoms for their world system.”When the capitalist is gone,” asks Ruth Wilder Lane, “who will manage production? The State. And what is the State? The State will be the mass of toiling workers.”Communism and slave labor wages work very well for those in power who profited from the wage deferential and pocketed it. Western power holders and bankers industrialized China with America’s wealth — they saved China’s system from itself. China admitted its revolution had failed when it invited the Western World into its commune. Communism does not work. There is nothing in it for the individual as we will soon see.And now, there are people on this blog who say we must all fail together – making their socialist case that everyone be equally miserable on their envy of those who succeeded in a free society. Are we all to be corralled onto global corporatist slave planatations and ruled by the whip of the plantation master?

you're full of strawman bluff and confusionFebruary 16th, 2009 at 1:49 pm

If there are people on this blog who have said what you claim they are saying, please point to an example post. And if you can’t point to an example post, come back here and accept responsibility for your misrepresentation of the facts.

GuestFebruary 16th, 2009 at 3:42 pm

Isabel Sawhill, an analyst at the Brookings Institution, says “after adjusting for inflation, a 35-year-old man makes less today than in the 1970s.”The money monopoly aided by the misinformed who think that our problems are capitalism and self-serving citizens of the world such as Bill Gates are directing this country toward a slave economy, and the people who don’t know it must live on another planet. In recent days the support for bigger and bigger government and an additional foray into socialistic economics have been supported dozens of times on this blog and believe it or not, since you have perhaps missed it, these bloggers are proud to call it socialism.One qualifying comment today begins: “[Y]ou want to jump start USA manufacture, you need one of two things, cheap labor, yep, workers accepting lower pay & benefits or print dollars to pay off all public debts & devalue the dollar against other currency to gain labor cost advantage (Guest on 2009-02-16 08:28:54) — in other words, slave wages without benefits, and/or devalued slave wages via State inflation taxes.

GuestFebruary 16th, 2009 at 2:47 pm

Out of Iraq? Not so fast … by Justin RaimondoPresident Obama’s campaign promise to get us out of Iraq in sixteen months gave him the electoral heft to oust “frontrunner” Hillary and catapulted him into the White House. Yet, now that the public’s attention is fixed on our swiftly deteriorating economic plight, that promise is being quietly – but definitely – broken. I’ve been predicting that for god-knows-how-many weeks, but now we have substantial evidence that my hunch presaged an emerging reality. Eli Lake reports in the Washington Times:”As President Obama weighs options for withdrawing U.S. combat troops from Iraq, the country’s military is purchasing American helicopters, cargo planes and tanks equipment that typically requires a prolonged U.S. presence for maintenance and training.”Lt. Gen. Frank Helmick, who is in charge of training Iraq’s security services and military, told The Washington Times that some of the ordered equipment would not be delivered until 2012, even though a new status of forces agreement (SOFA) requires all U.S. troops to exit the country by [the end of] 2011.”To Gen. Helmick, this looks like the Iraqis are seeking “a long-term strategic relationship with the United States.”Translation: We ain’t leaving! …Justin Raimondo is editorial director of and is the author of An Enemy of the State: The Life of Murray N. Rothbard and Reclaiming the American Right: The Lost Legacy of the Conservative Movement.

MedicFebruary 16th, 2009 at 4:58 pm

Wow. A Washington Times article that serves the right wing agenda – I for one am shocked. I suppose next you’ll tell me that Fox News is not exactly a fan of Obama.

JLarkinFebruary 16th, 2009 at 2:54 pm

Affirming Calculated Risk and Nouriel’s oft stated idea that small banks are in real trouble due to commercial RE loans — guess the predicted “hundreds” of bank failures may only be months away. Locally in Atlanta I see every strip with vacancy for lease, and furthermore lots of condo/townhouse complexes under construction right now with condo sales prices falling off a cliff.

GuestFebruary 16th, 2009 at 6:12 pm

The credit market is the lifeblood of corporations funding themselves. With the credit markets shut, credit to viable and solvent companies to make their legitimate loan and payroll payments is shut off, forcing them into bankruptcy. The big vulture bankers then pick them up at fire sale prices, using if they wish, bailout money from the taxpayers. Next they buy up or destroy good small banks that seized up indirectly, using monopoly muscle or, again, bailout money from Congress.From the Fed’s start of business in 1914 to 1929, a total of 4500 were forced to close their doors. (H. Parker Willis, economist and First Fed Secretary of the Board 1914-1920)”Likewise, as the economic depression deepened in the early 30s, and as farmers had less and less money to spend in town, banks began to fail at alarming rates. During the 20s, there was an average of 70 banks failing each year nationally. After the crash during the first 10 months of 1930, 744 banks failed – 10 times as many. In all, 9,000 banks failed during the decade of the 30s. By 1933, depositors saw $140 billion disappear through bank failures. (From Farming in the 1930s)Now, it is predicted another 1000 or more may fail in the next three to five years. And as Professor Roubini noted earlier, 6-8 banks already control about 80 percent of the market … It’s time to make them smaller, not bigger.

2centsFebruary 16th, 2009 at 4:07 pm

BINGO! Banking logjam identified. If this guy knows his business, he is basically saying that the government’s propensity to save/shelter the big banks by pussyfoot’n around their demise is what is causing hardship at the 7992 remaining banking institutions.Now, I don’t believe for a minute that all those 7992 are without sever trouble, especially with CRE defaults starting to inch up, but clearly he is saying that the government stupidity is what is troubling his universe. Note: His implication is that if the gov’t saves the big 8 banks then that means the private funds will run that way and the other 7992 will then be in dire straits!In summary, the 60-64% @ the big banks is in deep deep doo doo, but the other 36-40% isn’t as bad off. We can choose to “try” to save the 60-64% and send the 36-40% headed for the falls without a paddle, or we can cut the rope and let the 60-64% crash. Sounds like we’re headed for an all or nothing plan right now. I’ve got my fingers and toes crossed (all of’m)!

GuestFebruary 16th, 2009 at 6:22 pm

Pardon me, 2cents, but I couldn’t resist putting this portion on, particularly with that big banker moniker, the “miserable eight.” A real find!!Community Banker: Break Up Big Banksby CalculatedRisk on 2/16/2009 02:24:00 PM”The money is going to sit on the sidelines until [regulators] announce they’re going to do something with these [big banks]. Nobody is going to put fresh capital into the banking business when your major competitor is going to be continuously bailed out by the United States government with more and more money.”Rusty Cloutier, the president and CEO of MidSouth BankFrom Diana Golobay at Housing Wire: Break Up Big Banks, Says Community BankerRusty Cloutier, the president and CEO of MidSouth Bank, recently told major news outlets that “[c]oncentration is a bad thing” and called for the feds to break up the “miserable eight” largest banks that, he said, control 60 to 64 percent of the country’s assets, restoring competition to the banking industry and restoring investor confidence in the system.This is an excellent point. Most of the big banks can’t raise capital because investors are afraid of preprivatization. And small banks can’t raise capital because investors are concerned that their competitors (the large banks) will be continuously bailed out by the government.

economic treachery to the republicFebruary 16th, 2009 at 6:34 pm

Amount spent in 2007 by special interests on lobbying congresspersons: over $17 million for each day congress was in session.

GuestFebruary 16th, 2009 at 6:52 pm

JUST A POEMWith all the rumors, I am afraid to trust my bankIs it one of those that’s going to tank?We have always been told that they are safe as can beYet, I don’t know if mine will turn into a zombieThere are calls from experts to nationalizeBut will this be done before mine dies?The banking industry sure has changed in a very short timeIn fact, my dollars are hardly worth a dimeWhat do we do, who do we trust?Is seems the whole country is going to go bustI guess the good news is oil prices are downBut the bad is I’m working part time as a clownEach night I wonder if this mess will be solved by ObamaOr will I have to move back home with my mama.It is now February 2009And I don’think we have much more timeSo I will muster up a new measure of faith and hope,But please, Mr. President, don’t play me as a dope.For if our leaders lead us into doom,Their last trip will be a one-way ticket to the moon!

PeteCAFebruary 16th, 2009 at 7:25 pm

From above …”The big vulture bankers then pick them up at fire sale prices, using if they wish, bailout money from the taxpayers. Next they buy up or destroy good small banks that seized up indirectly, using monopoly muscle or, again, bailout money from Congress….”Exactly. With the same people in charge of the banks, nothing has changed.And here’s an anecdote that people here may find a bit sickening. Got talking to a guy who was a leading real estate loan agent for one of the big banks. Back in 2006 he was making well over half a million dollars a year. Guess what’s happenin’ right now? He’s not laid off. The bank just knocked his salary down to a small retainer (still in the six figures range), and told him to play golf for a couple of years. When bottom-price deals come back in the RE market, he’ll be back arranging new loans for the bank.You see why they keep screaming at Congress to put a floor under foreclosures? It’s got nothing to do with home owners. It’s all about banks and profits.PeteCA

jugglingcdosFebruary 16th, 2009 at 8:11 pm

depression Then Expensive Oil n Gas…this “period” of low price is confusing to some people.. this is actually not a good sign, not good at all.. CEO of Europe’s third-largest energy company said that the world is currently very close to its peak oil production capacity, and warned that the supply may not be able to keep up with demand in the years ahead.“The capacity that the oil industry has to go to 93-95 million barrels per day is already over,” Christophe de Margerie, chief executive of Total, the French oil and gas company, said.Global crude supplies were 86.4 million barrels per day in 2008.

blindmanFebruary 16th, 2009 at 8:25 pm, February 16, 2009 3:00 pmPublic Affairs. if you hit play the interview comes late in the first hour.i suggest, download and then hear the interview that begins around minute 9. when downloaded, second houronly downloads? weird.topic. bilderberg, club of rome plan , intention,reduce oil consumption, population, destroy demand,currency destruction etc…”the true story of the bilderberg group”..daniel estulin.those who steer and those who activate event. connected but different, different skill sets etc.same aim. power acquisition..

GuestFebruary 16th, 2009 at 8:40 pm

Heard of a massive forced liquidation event – earthquake sized – in Asia. Financial Tsunami can’t be far behind. Anyone who can find details on this, please post.

PeteCAFebruary 16th, 2009 at 9:33 pm

Checking … looks like someone sold a lot of shares in the Hang Seng index. Apparently moved the money into dollars (T-Bills). Gold is also gaining from the transaction.PeteCA

GuestFebruary 16th, 2009 at 11:19 pm

AM: I posted it all. What does it mean, that bit about “The worse news is that if this happens Bernanke will have killed us (in the US) by extending those swap lines all over the planet…?” It is not on Bloomberg.comRED ALERT: FX Dislocation In Process8:17 CTI do not know what is going on here, and I don’t think I want to.Someone, apparently someone in Asia, wants dollars. A LOT of dollars. There is a forced-liquidation event underway that is massive, it is against all asset classes and it is spreading.It originated at approximately 7:15 CT this evening and originated out of Asia somewhere. All of the primary currency crosses got hit at once – Euro, Pound, Yen – all weakened dramatically against the dollar and it is still going on. The Asian stock markets got walloped at the same time in coordinated waves of forced selling.At the same time the US futures markets got nailed as well, down some six handles on the /ES in a near-vertical drop. While this sounds “not that big” to move these markets in a coordinated fashion like this is a trillion-dollar enterprise – this is not some small company that went bankrupt, or even a large company.There is no news coverage at the present time identifying the source of this but it is not small and contrary to some reports it is not “automatic selling”; this is forced liquidation.Folks, if this translates into Eastern Europe where there are severe instabilities already brewing literally everything in the financial world could come apart “all at once.”The worse news is that if this happens Bernanke will have killed us (in the US) by extending those swap lines all over the planet during the last six months. These will become utterly uncollectable and they are massive, in the many hundreds of billions of dollars.To those who are reading this, I hope if you’re in the markets you are prepared for extreme levels of violence. You must expect that the authorities will try to arrest the destruction if they are able, but you must also be prepared for the possibility that we have reached a “critical mass” point beyond which “duck and cover” is the only winning strategy.Unfortunately.I hope I’m wrong; this is going to be a long night.

GuestFebruary 16th, 2009 at 11:30 pm

reply posted on 16-2-2009 @ 08:56 PM by redhattyA simple table of currencies – time noted on the chartSomeone (big someone) somewhere – best guess is Asia is dumping pretty much all the asian currencies and buying US Dollars (in the currency exchange)Last November Ben Bernanke opened swap lines all over the world, they are STILL open. These swap lines are basically foreign debt that cannot be paid, but still allow other countries to get US Dollars.75% of the world exchange of goods is done in US DollarsIf Asia or Europe go boom on any significant scale , so do we. Literally immediately.Right now, European and Asian currencies are going down – FASTSERIOUS potential for BIG BOOM

GuestFebruary 16th, 2009 at 11:40 pm

reply to post by cosmiccatThis should go well for U.S. markets… in the short term…He’s pretty much stating that some major money just entered the FX… They are buying up U.S. dollars, which devalues other currencies against the dollar… which in essence, means anyone who fled the USD as their primary currency, is seeing their stock values go down… Thus, they are forced to sell… hence “forced Liquidation’.The stocks will slide a little bit as the liquidation happens. its almost an engineered market slide.We’ll know more when we find out the motive of the market manipulation. I would imagine the powers who bought up the USD to raise the value, will soon liquidate their USD holdings, buying up the cheaper, devalued currencies… thus making the dollar plummet, and the currency they would have just purchased, more valuable.There’s also the possibility they are doing this to devalue the stocks in other currencies… at this point, they’d sell the USD off, and buy up the cheaper stocks as well…the sheer money it would take to do this is HUGE… I would be inclined to either think this has been spurred off by a foreign government…Not many people in the world have trillions of dollars to play with in this manner… so finding the source shouldn’t be overly difficult… it’ll just take time.

GuestFebruary 17th, 2009 at 7:14 am

One entity make one move and it changes the market? That’s not a market that has all the tell tale signs of a rigged game! But hey that doesn’t stop people from going to the casino either and everyone knows that’s rigged.

GuestFebruary 16th, 2009 at 9:04 pm

He notes that David Rockefeller said in his Memoirs, “Some even believe we are a part of a secret cabal working against the best interests of the United States, characterizing my family and me as ‘internationalists’ and of conspiring with others around the world to build a more integrated global political and economic structure — one world, if you will. If that’s the charge, I stand guilty and I am proud of it.”

blindmanFebruary 16th, 2009 at 9:29 pm OF A GLOBALISTBILDERBERGER ADMITS INFLUENCE ON WORLD DECISIONS.By James P. Tucker Jr…….BBC�s Hayton said on air. �Jim Tucker, [senior] editor of . . . American Free Press, for example, alleges they organize wars and elect and depose political leaders. He describes the group as simply �evil.� So where does the truth lie?�Bilderberg meetings �often feature future political leaders shortly before they become household names,� Hayton said. �Bill Clinton went in 1991, while still governor of Arkansas. Tony Blair was there two years later while still anopposition member of Parliament. All the recent presidents of the European Commission attended Bilderberg meetings before they were appointed.�BBC did not mention that Blair also attended in 1998 as prime minister.NO ACCIDENTDavignon explained that Bilderberg�s steering committee �does its best assessment of who are the bright new boys or girls in the beginning phase of their career who would like to get known. . . . It�s not a total accident.��Professor Kees van der Piji of Sussex University in Britain says such private networks of corporate and political leaders play an informal but crucial role in the modern world,� Hayton said. He quotes the professor:� �There need to be places where these people can think about the main challenges ahead, coordinate where policies should be going, and find out where there could be a consensus.� �This benign image of Bilderberg, however, denies reality. A simple glance at the secret roster of attendees shows it is composed of the wealthy elites, who are all seeking similar goals..�increasing their power and profits, while turning the rest of us into serfs on the global plantation…..

amacflyFebruary 16th, 2009 at 10:47 pm

Danny Estulin’s book is wonderful insight into the global elite, most of who care for nothing but their own empires. It is sad that these are the unaccountable rulers of the world. Came across a great quote from Theodore Roosevelt tonight, it is even more relevant today than in 1912 when he said it.Political parties exist to secure responsible government and to execute the will of the people. From these great tasks both of the old parties have turned aside. Instead of instruments to promote the general welfare they have become the tools of corrupt interests, which use them impartially to serve their selfish purposes. Behind the ostensible government sits enthroned an invisible government owing no allegiance and acknowledging no responsibility to the people. To destroy this invisible government, to dissolve the unholy alliance between corrupt business and corrupt politics, is the first task of the statesmanship of the day.

GuestFebruary 16th, 2009 at 11:08 pm

If this cover-up mortgage ruse is the crooked and unfair game this government is going to play on the responsible people of this country, we should all take out big loans on our homes and “walk away” if our payments aren’t reduced the same as our defaulting neighbors. If our neighbor’s house went down in value, so did ours. Why this Cinderella treatment for some of us, while our ugly sisters and the banksters get the royal government treatment? Why should responsible people pay taxes to a government that is this uneven-handed? This is inequality under the law, taxation without representation. This is Stalinism: “From each according to his abilities: to each according to his needs.” And some of these people’s bank-approved “needs” ran high, to $700,000 plus “homes.” This is legal plunder.This is lawlessness. This is disgusting! For home prices to be down a mere 19% since 2006 after doubling and tripling in the Greenspan bubble is nothing more than a market adjustment. What is going on in this country?Mortgage Rescues Fail as Price Drops Spur DefaultsFeb. 13 (Bloomberg) — The Obama Administration wants banks to offer loans with easier terms to more than 2 million borrowers in danger of defaulting on their mortgages, twice as many as 2008. That won’t stem the foreclosure crisis if prices keep falling.A third of owners will walk away when the value of their homes drops 20 percent or more below what they owe, even if they can afford the payments, a situation known as “rational default,” said Norm Miller, director of real estate programs at the University of San Diego School of Business Administration.Obama has committed at least $50 billion in guarantees for lenders that negotiate new mortgage terms, and proposes putting taxpayer funds at risk for half of $444 billion of loans that would be modified this year. Fifty-eight percent of the modifications made during the first quarter of 2008 ended up back in default, according to the U.S. Treasury’s Office of the Comptroller of the Currency. Unless lenders cut principal owed to reflect the current market value of properties, the same thing may happen this year, Miller said.“The biggest reason modifications end up re-defaulting is because they are in markets where prices have continued to go down,” Miller said in an interview. “When people are underwater and don’t see an end to it, a lot of them just walk away, even if they can make their payments, because they don’t want to be wiped out financially.”‘Mod in a Box’The Federal Deposit Insurance Corp. said it expects 2.2 million loans with an average size of $200,000 to be modified this year. It assumes a re-default rate of 33 percent and 1.5 million fewer foreclosures.The FDIC’s two-month-old “Mod in a Box” program, adopted by Citigroup Inc. earlier this month, puts the emphasis on using fixed rates to reduce payments to as low as 31 percent of borrower income. The guidelines can be used to adjust mortgages that have been packaged and sold in securities, FDIC Chairman Sheila Bair said.JPMorgan Chase & Co., Citigroup and Bank of America Corp., recipients of more than $115 billion in government bailout funds, have committed to modifying at least $230 billion of mortgages. JPMorgan and Citigroup said today they will suspend foreclosures until mid-March to give the Obama Administration time to complete details of its loan modification program. Almost one of every five U.S. loans was “underwater” at the end of the third quarter, according to data compiled by analysts at San Francisco- based First American CoreLogic Inc.The new FDIC protocol uses principal deferral –segregating a portion of the loan into an interest-free balloon payment that will keep most homeowners from selling until prices return to pre-bust levels. It doesn’t suggest reducing principal to reflect the current value of the asset securing the mortgage.Prices DownHome prices are down 19 percent nationwide since 2006, according to Denver-based research firm Integrated Asset Services LLC. Prices have dropped by 51 percent in parts of California, the most in the U.S., and by 45 percent in some areas of Florida. Those states also lead the nation in new foreclosures, according to RealtyTrac Inc. in Irvine, California.U.S. Federal Reserve Chairman Ben Bernanke gave a nod of approval to the FDIC guidelines in a Dec. 4 speech. At the same time, he said principal reduction may be needed in some cases.“The available evidence suggests that the homeowner’s equity position is, along with affordability, an important determinant of default rates, for owner-occupiers as well as investors,” Bernanke said. “If that evidence is correct, then principal writedowns may need to be part of the toolkit that servicers use to achieve sustainable mortgage modifications.”Loan ‘Forgiveness’Banks have resisted writing off mortgage principal. In a study that covered 20 percent of all modifications in November, just 10 percent involved the “forgiveness” of a portion of mortgage principal, said Alan White, a law professor whose three- year term on the Federal Reserve Board of Governors Consumer Advisory Council ended in December.The government’s Hope for Homeowners program, created last year to refinance troubled loans into fixed-rate mortgages, has been shunned by lenders in part because it requires them to write down principal to 90 percent of a property’s current value, White said. Lenders have approved only 25 loans under the program, the Department of Housing and Urban Development said Feb. 3. Congress is debating ways to retool it.Erasing part of a mortgage to reflect a home’s current value creates a “moral hazard” that encourages risky investments in the future, said Evan Wagner, a spokesman for IndyMac Federal Bank in Pasadena, California. The subprime lender was taken over by the FDIC last year and was a testing ground for the “Mod in a Box” program.Buyer’s Remorse“We’re trying to make the financial decisions you made when you bought your house more affordable for you, not undo your bad real estate investments,” Wagner said. “When people say, ‘My home is underwater, therefore I can’t afford it,’ what they are saying is they have buyer’s remorse.”James Muise of Billerica, Massachusetts, has seen his home’s value tumble $30,000 below his mortgage in the past 18 months. He got a modification last year that gave him a five-year reduction of interest on the 30-year mortgage he took out in 2007, cutting his monthly payment to $1,800 from $2,500. Still, he is on the edge of default, he said.“I’m working 15 hours of overtime each week and I’m barely able to make the payment on a $280,000 house that has a $310,000 mortgage,” the 50-year-old exterminator said. “When I sit here deciding whether I should pay the heating bill or pay the mortgage, I’m close to handing the keys back to the bank.”Small ChangesMuise was one of 2,200 people who attended a foreclosure prevention event in August at Gillette Stadium in Foxboro, Massachusetts, sponsored by the Federal Reserve Bank of Boston. Only 46 people received principal reductions from the two dozen mortgage companies in attendance, Eric Rosengren, head of the Federal Reserve Bank of Boston, said in a Jan. 8 speech in Newton, Massachusetts.“Small modifications are unlikely to prevent foreclosures,” the Boston Fed chief said in the speech, without endorsing any specific modification method.Only a quarter of the people who attended the Fed-sponsored event got a reduction in monthly payments, and about 50 percent of the cuts were temporary, Rosengren said. Three-fourths of the people who stood in lines that wrapped around the rain-soaked home field of the New England Patriots’s football team left with nothing.“If I walk away from my house, the bank will probably end up selling it as a foreclosure for $180,000 just to get it off their books,” said Muise, the exterminator. “You’d think they’d say, ‘Hey, maybe if we brought Jim’s mortgage down to $250,000 he could survive these tough times and keep paying his loan.’ But I know that’s not going to happen.”

GuestFebruary 17th, 2009 at 7:10 am

Your a fool if you continue paying on an upside down mortgage unless you got money to burn. Why not call the banks bluff a person has nothing to lose except for their credit rating which will undoubtedly have to change. Do you think for one second the banks want everyone with bad credit ratings, I can guarantee they will rewrite the bankruptcy laws and the credit rating system to create qualified borrowers again.There’s no doubt if you were responsible and didn’t borrow lots of money you’ll be on the losing end of this, it may not be right but it’s a fact.

GuestFebruary 17th, 2009 at 12:12 pm

The banks keep playing like they have the upper hand what a joke. I say stiff your banker and default on everything you owe that’s the only revenge you’ll ever get on these banks because they obviously own our government so pi$$ on them walk away from all your debt!

2centsFebruary 16th, 2009 at 11:10 pm

Maj. Tom: Houston … we have a problem!Houston: Copy that Maj. Tom. What seems to be wrong?Maj. Tom: Everything! Most importantly, we’ve lost positive pressure, Sir.Houston: Yes, our data does indeed show that pressure is declining rapidly.Maj. Tom: Do you have any ideas on what needs to be done?Houston: Haven’t a clue, but we’ve got the engineers who designed the sucker back in house and going over the blueprints! Hang in there Maj. Tom.Maj. Tom: 10-4 Houston.Houston: Maj. Tom, they want you to look for the duct tape!Maj. Tom: Ahhh … tell them that we used both the duct tape and the bailing wire on the way up … we don’t have any left.Houston: 10-4Houston: Maj. Tom they have another plan. They want you to open the emergency oxygen valve all the way!Maj. Tom: With all due respect sir, I’m a little puzzled by that request. It seems that that would just use up my last remaining lifeline. … Please verify.Houston: I can confirm that that is the plan. The idea is to get the pressure back up and get the incoming data to show a little better.Maj. Tom: Excuse me, you want the data to look better! I’m peeing my pants and you guys are massaging the data!Houston: Don’t shoot the messenger Maj. Tom.Houston: Maj. Tom, I passed along your concerns. They now see that opening the valve probably was of little value. Quite simply, Maj. Tom, they never considered this issue in the design phase. If it makes you feel any better, I can assure you they all have done pee’d their pants. I saw it with my own eyes.Maj. Tom: Haha, but at least they can go home and wash them. What am I supposed to do?Houston: Maj. Tom, we are seeing dangerously low oxygen levels at this point. The guys have got a can’t fail solution that they are hashing out right now. In the mean time they want you to lay low and rest so as to conserve as much oxygen as possible.Maj. Tom: Roger Houston … laying low.Houston: Maj. Tom, I have an update….Houston: Maj. Tom, I have an update….Maj. Tom: Yes ………… W….h …..a…..t?Houston: They are moments away from finalizing the rescue plan. I’ll get back to you ASAP.Maj. Tom: T….h….a….n…..k…..sHouston: Maj. Tom, you there?Houston: Maj. Tom, you there?Houston: Maj. Tom, you there?Maj. Tom: H……….e………..r………….eHouston: They’re rushing the plan over as we speak!Houston: Hello, Maj. Tom?Houston: Hello, Maj. Tom?Houston: Hello, Maj. Tom?Houston: Maj. Tom … over?Houston: Maj. Tom … over?Houston: Rescue Team … we’ve lost contact.Rescue Team: The plan worked perfectly! There was really no way to save Maj. Tom. It was best to let him down slowly and allow him to go peacefully.Houston: We did our best.Rescue Team: Let’s go get some pizza!Maj. Tom: I’m buy’nRescue Team: Houston that you?Houston: No!Maj. Tom: You SOB’s. I packed extra oxygen and broke out some champagne! It’s amazing what a couple of shakes and a pop of the cork can do in zero g. I got some thrust and I’m turned around and headed your way suckers!Rescue Team: Let’s split!

PeteCAFebruary 16th, 2009 at 11:54 pm

I don’t think you need to overreact. Volatility in the currency markets is going to be the “soup de jour” from here on out. Investors all over the world are freaking out because they cannot figure out a safe place to preserve their wealth.However, anybody who thinks that US Gov’t debt is a great place to park their riches is clearly losing their marbles. So don’t get too excited by all the panics. It will get worse.The current move apparently means that someone thinks that China is going to announce some bad news. Or it could just be hedge funds dropping some investments in Chinese companies (maybe the Chinese are going to announce some user-unfriendly market penalties).PeteCA

GuestFebruary 17th, 2009 at 2:00 am

RED ALERT……FX dislocation in processdo not know what is going on here, and I don’t think I want to.Someone, apparently someone in Asia, wants dollars. A LOT of dollars. There is a forced-liquidation event underway that is massive, it is against all asset classes and it is spreading.It originated at approximately 7:15 CT this evening and originated out of Asia somewhere. All of the primary currency crosses got hit at once – Euro, Pound, Yen – all weakened dramatically against the dollar and it is still going on. The Asian stock markets got walloped at the same time in coordinated waves of forced selling.At the same time the US futures markets got nailed as well, down some six handles on the /ES in a near-vertical drop. While this sounds “not that big” to move these markets in a coordinated fashion like this is a trillion-dollar enterprise – this is not some small company that went bankrupt, or even a large company.There is no news coverage at the present time identifying the source of this but it is not small and contrary to some reports it is not “automatic selling”; this is forced liquidation.Folks, if this translates into Eastern Europe where there are severe instabilities already brewing literally everything in the financial world could come apart “all at once.”The worse news is that if this happens Bernanke will have killed us (in the US) by extending those swap lines all over the planet during the last six months. These will become utterly uncollectable and they are massive, in the many hundreds of billions of dollars.To those who are reading this, I hope if you’re in the markets you are prepared for extreme levels of violence. You must expect that the authorities will try to arrest the destruction if they are able, but you must also be prepared for the possibility that we have reached a “critical mass” point beyond which “duck and cover” is the only winning strategy.Unfortunately.I hope I’m wrong; this is going to be a long night.11:47 PM – It appears that FX has settled down although the equity market damage in Asia remains significant in many areas, with South Korea (one potential flashpoint) being off close to 4%. Europe opens soon with spreadbetter info up around 12:15 CT most mornings; if we get through the euro open without the crosses going nuts again this may remain capped. Watch the Euro crosses in particular; if there is an “ignition” sort of event you won’t miss it (a ~500 pip near-vertical move would not surprise, on top of the 150 pips we’ve already taken tonight.) Last update on this for this evening unless something pops up.

GuestFebruary 17th, 2009 at 2:01 am

Forex failure continues in PolandPosted by Izabella Kaminska on Feb 16 21:43.It’s getting bleaker by the minute in Eastern Europe. In case you didn’t catch the latest from the Telegraph’s Ambrose Evans-Pritchard, he warned at the weekend how a growing crisis in Eastern Europe could cause nothing less than a total collapse in the West, or as he put it: “If one spark jumps across the euro zone line, we will have global systemic crisis within days.”To make his point Evans-Pritchard quotes Morgan Stanley’s Stephen Jen on the fact that Eastern Europe has borrowed a total of $1,7oobn abroad. Furthermore about $400bn of that debt has to be rolled over this year – a number equivalent to about a third of the region’s GDP.As we outlined a couple of weeks ago, the concern is now greatest not for the retail mortgage sector, which practiced the issuance of foreign-currency based mortgages on a grand scale, but for corporates – which it appears practiced the art of derivative forex exposure on an even grander scale.And so it comes as no surprise on Monday that yet another corporate forex failure has occurred in Poland, this time at Polski koncern Miesny Duda, a Polish meatpacking business. The stock sank to a record low on the news. As Bloomberg reports:More…An unwind is taking form right now, this minute, (9:10PM ET) that may or may not be contained by international Central Bank action.Even if central Europe does not financially implode the world money system today, it is just around the corner.There are so many risks threatening us now that survival of any monetary status quo is doubtful.Protect yourself.It has hit the fan, right now, and all that is thanks to OTC derivative manufacturers and distributors.

GuestFebruary 17th, 2009 at 2:17 am

does this nationalization that Roubini is talking about mean that the government should take over 8000+ banking corporations in U.S. without compensating the share holders?That in other words they would nationalize by law?Would that not mean that anybody having stocks in banks should get out sooner rather than later?

Octavio RichettaFebruary 17th, 2009 at 6:01 am

A great one (A+) from Hussman this week:1. shut down banks failing to meet basic requirements on capital.2. Re-structure mortgage debt: reverse-engineer securitization contribution:1 & 2 go hand-in-hand. The government involvement in 2 will provide a floor/increase the current market value of the toxic securities, improving the capital situation of banks. Those who still do not meet capital requirements after implementing 2, should be wiped out.The foreclosure moratorium at JPM and citi, together with Obama’s Wednesday announcement gives me some hope the government may get it right on its last chance.If, tomorrow, Obi performs as poorly as Timmy last Tuesday; we better run for cover. S&P 600 will be the next stop.With no better argument but lots of faith, I will place my bets behind the President’s last chance to get things right.

Octavio RichettaFebruary 17th, 2009 at 6:13 am

ABREAST OF THE MARKETFEBRUARY 17, 2009, 5:55 A.M. ETMarket’s ‘Hope Balloon’ Loses AirTepid Upturns Haven’t Stopped the Slide; ‘Hard to Make a Cheery Story’By E.S. BROWNINGFinancial markets are supposedly driven by two competing forces: fear and greed. Fear just made another grab for the steering wheel.Disappointment with the government’s planned credit-market bailout and concerns that the $787 billion stimulus plan won’t jolt the economy fast enough snuffed out the budding stock-market rally. Now investors are worried that stocks could fall back to their November lows — and possibly even farther….”The hope balloon is losing air,” says Henry Herrmann, chief executive at Waddell & Reed Financial Inc. in Overland Park, Kan. “It points to how on-edge everybody is and how much emotionalism is still involved.”In late 2008 and earlier this year, Mr. Herrmann’s firm was betting on a revival. It had cut its cash holdings to about 11% on average from about 17%, increasing exposure to stocks. His money managers now have boosted cash back to about 14%. They are a lot more comfortable with safe Treasury bonds than higher-yielding junk bonds.Many money managers, including Mr. Herrmann, still live in hope that any declines from here will be modest, but they also worry that a heavier drop to new lows can’t be ruled out. With the road ahead looking rocky at best, many are turning more defensive.Analysts have been disappointed that market upturns in 2009 have been wimpy, short-lived affairs. The upturns haven’t had the strong trading volume and duration that would signal the investor confidence normally seen at the start of a lasting stock recovery. Instead of ratcheting higher, the Dow keeps slipping downward. That has reinforced the fears of new lows.All of this has thrown a cloud over the optimism at the start of February, when some were betting stimulus plans would move the global economy toward recovery.Investors got a reminder of reality during Treasury Secretary Timothy Geithner’s speech last Tuesday. The speech lacked details of his plan to get lending markets working normally again, and Mr. Geithner stressed in testimony to Congress that there would be no easy solutions. Some investors and analysts also worried that President Barack Obama’s separate stimulus plan mightn’t be able to spend enough money fast enough.”Things are going to take longer, and that means the economy is going to be softer longer. It is hard to make a cheery story out of that,” Mr. Herrmann says.Such doubts were reflected in the market’s moves after Mr. Geithner spoke. Industrial commodities and junk bonds, which some investors had been buying in hopes of an economic upswing, dropped. Gold and Treasury bonds, widely perceived as havens for scared money, rose.Gold futures rose 5.5% over those four unhappy days, finishing Friday at $941.50, just 6% below the New York record finish of $1,003.20 hit last year. The yield of the 10-year Treasury note, which declines as the note’s price rises, slipped to 2.900% from 3.028% late Monday.Copper futures, which had been recovering so far this year, fell 4.5% from Tuesday to Friday. New York oil futures fell 5.2%, wilting beneath the economic worries. And Brazil’s stock market, which had been on the rise because of that country’s clout as a raw-materials exporter, began falling again.”There is a general feeling that we are a ways from the bottom of this recession. In fact, the bottom isn’t in sight,” says Edgar Peters, co-director at investment-management firm First Quadrant LP in Pasadena, Calif.That leaves few people feeling they can see far enough into the future to invest confidently. “There are very few long-term investors now. Everybody is a short-term investor,” Mr. Peters says.Stocks appeared to stabilize on Thursday, as some investors once again began betting that the government’s recovery efforts, notably to slow foreclosures, would keep indexes above their November lows, at least for now.Still, setbacks like last week’s are making it harder for optimistic money managers to persuade weary investors that stocks will rally in the second half of the year and that they should increase their stockholdings in preparation.”I feel a little like Charlie Brown. They keep taking the football away,” says Jim Dunigan, chief investment officer at PNC Wealth Management in Philadelphia, a unit of PNC Financial Services Group Inc.While he has been urging clients to gradually return to stocks in anticipation of better days, he acknowledges that it hasn’t hurt anyone to steer clear of stocks so far.”There still are some clients who are very fearful about the prospect that the recession will get worse or continue,” Mr. Dunigan says. “As long as we keep looking to Washington for something that will move the market, history would tell us we will get disappointed by that.”Write to E.S. Browning at

WhistlewhatFebruary 17th, 2009 at 7:00 am

What about government miscreants who illegally confiscate honest citizens’ income while being tax cheats themselves? I find it depressing that Mike Hamersley gets to confiscate honest citizens’ income while he himself by his own definition is a tax cheat. Misprison, it is a crime not to report a crime. Any U.S. citizen who knows of another who has committed a crime and does not report it to the authorities, is guilty of Misprison and could be subjected to years in prison for the commission of such crime. Therefore I must hereby notify all legal authorities that Mike Hamersley a high level Government official in the bankrupt state of California at the FTB (who is nationally known as a tax shelter fighting crusader) is guilty of tax evasion and conspiracy to commit tax evasion as (he defines it); guilty of theft of honest services; conspiracy to defraud creditors; possibly perjury to the Senate and other government agencies: and violation of 7216, disclosure of confidential taxpayer information to third parties. It is indeed a rather long list.Hamersley testified to the Senate in 2003 that tax fraud involves devising transactions which allow for tax losses and “hiding the true facts from the IRS”. The transcripts are available for all to see. Hamersley also restated the same in his lawsuit against KPMG in 2003 (which is a public document).As one example of Hamersley’s fraud, Hamersley while at KPMG gave advice to a client that tens of millions of tax losses could obtain with a 20% to 30% of success upon IRS audit if the IRS discovered the true facts of the transaction. Presumably, if the IRS did not discover the true facts of the transaction, a higher chance of success upon audit by the IRS would obtain. Hamersley was advising on a series of preplanned asset and stock transfers which involved separating assets from liabilities inside a company, transferring the assets to a foreign company and selling the stock of yet another company to the client’s lawyer for a dollar, all to achieve tens of millions in tax losses and defraud the creditors of the company from which the assets were being stripped. Hamersley’s participation in all these crimes is confirmed in an email by him dated May 24, 2000 prepared by him while working as a tax expert at KPMG.Hamersley also further participated in hiding the true facts of the transaction from the IRS and the creditors by reviewing and approving documents prepared in June of 2000 which gave effect to the transaction back to 19999 (which based on Hamersley’s definition of tax evasion, is a classic case of backdating a fraudulent tax shelter).In fact, the transaction approved by Hamersley is very similar to the one he claimed in his lawsuit against KPMG involving XYZ corporation (which we all now know was Occidental Petroleum) as tax fraud.This of course creates an interesting conundrum for Hamersley, as it is likely he will claim his tax shelters were not fraudulent (not with standing his email which describes the possibility and chances of success upon IRS audit if the IRS discovers the true facts), however, if that is so, then his description of tax fraud to the Senate, other government officials, taxpayers whom he now confiscates income from and all the people he gave speeches to and articles he wrote for are being lied to. In which case, Hamersley is guilty of lying to the Senate and other government officials, perjury; outright theft of income from those taxpayer’s whom he is now confiscating income; theft of honest services from the FTB and those who he gave speeches to or wrote articles for on tax fraud; and most incredibly, conspiracy to defraud creditors by participating in a convoluted scheme to separate valuable assets from liabilities for profit at the creditors expense.Further, Hamersley by giving a so called substantial authority opinion to his client committed outright conspiracy to commit tax evasion under his own definition because his own email discusses the possibility of the IRS determining the true facts and according to Hamersley if a tax is due and owing and you lie to the IRS in any way, that is tax fraud.

GuestFebruary 17th, 2009 at 8:33 am

I for one am curious to see what the tax collection for 08 will be. I think the amount owed compared to amount paid will be shocking and will get worse in 09.

GuestFebruary 17th, 2009 at 7:56 am

Question, thank you in advance for any insight.If a bank gets nationalized, are deposits over the FDIC insurance limit honored or wiped out?Or is it a simple yes/no answer?

GuestFebruary 17th, 2009 at 8:10 am

If by “nationalized” you mean a reset where management is dismissed and shareholders are wiped out, why would you think that you could keep your deposits above any insured amount? After all, it was the nationalized bank that was “insuring” your deposit.

Mother of GodFebruary 17th, 2009 at 8:26 am

9 lb plus baby Brennan was born last week. He is my sister’s first grandchild.Society welcomed him with a foreclosure notice laid upon his familiy’s abode three days after he came home.Don’t look away.Look.Either land is the source of all life, all wealth, all possibility to survive – or it’s not. Either Earth is everyone’s birthright – or it’s not. Either every human being has the perfect birthright to a place to put their feet and live their lives – or they don’t.Which is it?We desperately need to stop monkeying around and deal seriously with the fundamental misconceptions our economics is erected upon. Essential error number one is the failure to found our economics on the human right to a place to put your feet.It makes zero rational sense to spend our limited time and energies attempting to re-tool and refuel the semblance of the trappings of the components of the details of the overpayunderpay unlimited-personal-fortunes killer capitalism economic dystem, while actively, studiously ignoring the huge fundamental irrationalities inherent in its core…the very first one being monopoly ownership of the earth itself.We are totally blind if we can’t see that the earth itself is the bottom line! How can it be said that every human being does NOT get born with a birthright to a place to live?? What advantage is there to living in societies if people get LESS benefit by doing so? Society has stripped us all of our birthright sans a nickel’s compensation for that theft – and we go along with it, thinking it can’t be mad if the whole species is doing it.And mine is the lonely voice crying out: Yes! The whole species can be getting it wrong – and they are!For heavensake the Universe is shot through with higher intelligence; how is it only the human species seems impervious to it??Is there no one here who is going to take seriously the zenith importance of the land monopoly? Why do people avoid this point, avoid response to this mother of important points – as if it didn’t demand response? Doesn’t anyone see that understanding the simple and undeniable fact of human birthright-to-land is the key to humanity knowing that extreme injustice has been done and that gives us not only every authentic right but absolute duty to begin deconstructing all personal overfortunes and underfortunes?How long are we going to go on yak yak yakking that some people ought to have less and some people ought to have more, and get down to calculating just what fairpay is.Then we proceed calmly in the direction of fairpay.C’mon, Homey. Don’t look away. Put on your big-picture glasses. Build some mental muscle. Have that big D’oh! moment.

Mother of GodFebruary 17th, 2009 at 2:23 pm

Thank you for listening and for asking. I am temporarily detained by another matter (the doctors thought my husband was having a stroke, but it turns out to be bells palsy and his first experience of high blood pressure – half his face is paralyzed, our daughter is bringing him home from the hospital now – we dodge another bullet). I will post response to you later today, below, or in the next thread if this one ends before I can return.

subgeniusFebruary 17th, 2009 at 8:22 pm

M.O.G – see if you can find a good acupuncturist…I know of several cases of Bell’s palsy cured by it’s application by a skillful practitioner. The sooner they get to work the quicker the results are likely to be.

GuestFebruary 17th, 2009 at 8:28 am

John Williams’ Shadow Government Statistics – Newsletter (Issue No. 49) – February 16, 2009A) Economic contraction is severe enough to consume the $800 billion stimulus package without affected business activity ever breaking above water.B) Too little of the stimulus package addresses the structural issues driving the downturn.C) Even if these structural issues were addressed, it will take a minimum of years for a turnaround in fundamentals.D) Since Obama “will do whatever it takes,” be prepared for another stimulus package.

PeteCAFebruary 17th, 2009 at 8:53 am

Although there are fears about E Europe and Asian banks, it looks like the biggest hit is to emerging market funds right now.S&P500 sitting just under that magic number of 800. If it continues to decline, then it’s reasonable to expect a further significant drop in the US markets. Investors are going to pull the plug … 800 is the last level of support that has a solid basis from technical chart analysis.PeteCA

PeteCAFebruary 17th, 2009 at 10:21 am

That’s actually an important point. I figure that the serious downturn ahead of us is likely to shift analysts back to fundamental analysis of stock values and company profits. It’s been almost a dying art for the last decade (or longer) – but could well come back into fashion. Trouble is … most young market analysts don’t even know how to do fundamental analysis.PeteCA

see.clayFebruary 17th, 2009 at 11:27 am

how do you transofrm quant systems and computer based trading to benjamin graham principles? I learned my ways from graham’s book and started noticing things changing in the early/mid 90’s when the biotech stuff started getting hot to a non value based system. Looking at a majority of equities, none of them appear to be worth anything what they are currently values at from a fundamental basis. Accounting standards are so f’d and the way people invest is all based on garbage sanbagged #’s anyways and manipulation so that it is x/shr – there is nothing fundamentally sound about the current system at all.btw, Really enjoy your posts Pete.

PeterJBFebruary 17th, 2009 at 9:04 am

I have just heard a WSJ economic journalist say that the Obama Stimulus Plan is 5% stimulus and 95% Pork?Is this possible? Even after all this, these people in “leadership” still need to erode the system further for self-agenda? Is this not insanity?Is it not too much to expect a minimum of integrity? Please find your own references to such claims.Ho hum

MorbidFebruary 17th, 2009 at 9:31 am

It’s The ObamaNation Bamelot Wet DreamPsychologically I guess it is some kind of childhood deprivation syndrome that plays out in the adult life. What an ABOMINATION!

blindmanFebruary 17th, 2009 at 10:21 am

pjb,wait just a second! what is this “minimum of integrity” you bring up? isn’t a minimum of integrity just another way of saying “phony bullshit”? i think so.we have that in for pork, americans all over the globe find it stimulating, even when they know it will turn into phony bullshit.integrity would just destroy the current system, as would intelligence, this is the problem we face. so..i am going to go to the library and then thinkabout this further. also this land monopoly idea from above and the idea concerning propagation and expansion of technology physical, financial and conceptual as it advances creating, over time, structural imbalance and lethal backlash imbalance. extreme. integrity?

blindmanFebruary 17th, 2009 at 4:10 pm

and furthermore, i think i appreciate the point of the exercise. as in.. integrity.implying. integration. integer, wholeness. integration of elementsand structures into the system that reflect realcircumstances and conditions as they relate to thetruth concerning the individual and collective human condition in relation to the fullness of the environment. not just one part of an equation, integration of the totality. but this wouldrequire insight into nature, understanding of systems and cycles and relationships beyond the capacity of those currently perceived to be in favorable, advantageous, we should then have principles to guide us but these too have been compromised. and we are left with the prospect of crying over spilled milk and then we can begin.integrity. begins with observation and understanding, a full accounting of the environment and its essential value, its innate intelligence.the lessons of history. our place in these two streams.integrity.

MorbidFebruary 17th, 2009 at 9:46 am

Approaching The Humpty Dumpty ThresholdHumpty Dumpty AnimationIn Case You Are Wondering Who This Is – It’s YOU!Dear Professor,Please feel free to use the humpty dumpty business in any of your economic outlooks – I lay no claim on this verbiage – it belongs to all of mankind.

GuestFebruary 17th, 2009 at 9:59 am

I went into a local Chase bank and the manager came out and talked to me and every customer for like 5 minutes or so, every employee was saying ‘hi’ and smiling it was almost unbelievable.The banks know they’re under attack by the public and they think some b.s. smile and say hi campaign is going to earn them public trust and sympathy while they steal trillions.

PeteCAFebruary 17th, 2009 at 10:18 am

News on Monday am …”SACRAMENTO, Calif. – After a frustrating holiday weekend that failed to yield the one vote needed to end California’s budget stalemate, the state is poised to begin layoff proceedings Tuesday for 20,000 government workers.In addition to the layoffs, the state also plans to halt all remaining public works projects, potentially putting thousands of construction workers out of jobs.”We are dealing with a catastrophe of unbelievable proportions,” said state Sen. Alan Lowenthal, a Democrat from Long Beach and chairman of the Senate transportation committee.”————————————Out here in California we’ve known this has been coming for a long time. It’s been amazing to me just how many Californians have continued to go shopping at the malls this year – like nothing is going on. Looks like we’re about to bite the bullet.By the way … the real disaster at this stage is the California legislature. Crashes in state economies don’t just happen. It takes monumental political stupidity to really bring things to a grinding halt.PeteCA

slfFebruary 17th, 2009 at 10:40 am

“..have continued to go shopping at the malls this year – like nothing is going on.”It’s like that here, too, only not as dire as California. The attitude of my generation simply blows me away–the worst they really remember is the 70s, and the 80s weren’t all that great (economically speaking), and the rest of the recessions barely registered a blip on most of their radars. And I’ll be honest, it’s the same for me–I was a kid & a teen, so I really didn’t pay much attention. But it’s the attitude now, that since none of the earlier recessions really changed things all that much, that this one won’t either. I want to bang my head against a wall, except that I’m sort of already doing that.

MorbidFebruary 17th, 2009 at 11:48 am

CA Budget Increased 40% in Last 4 Years

…the real disaster at this stage is the California legislature. PeteCA

I live in Northern CA so I keep up with the CA Bamelot liberal agenda going on in Sacramento. All they have to do is roll back spending to 2004 levels. But, no – let’s nurture, nurture, nurture… ’till Hell freezes over apparently.I bet in their budget shortfall they have not included decreased tax revenues that will seem like the iceberg the Titanic hit.

GuestFebruary 17th, 2009 at 11:34 am

I keep hearing over and over from the likes of Roubini, Krugman, and others, that what pulled the U.S. out of the Great Depression was massive government spending for WWII. These same experts argue that massive government spending on a similar scale is what is necessary to pull the U.S. (and the rest of the world) out of this recession/depression. What strikes me as a significant difference between then and now is that back in the 30s and 40s, the rate of natural resource extraction, which is fundamental to manufacturing, was at a much lower level than it is today. Additionally, the total amount of natural resources was much greater then than now. We’ve been yanking mineral ore out of the ground, cutting down lumber, pumping aoil, and excavating coal at a rate that is growing exponentially. We are clawing ever more feverishly for natural resources to manufucture goods to rebound the economy. Yet a big unanswered question remains: “Are there enough natural resources left to pull the entire world economy out of recession for the long term?” It’s essentially a question of sustainability and limits to growth. The experts who call for massive public spending to end the recession are dodging more fundamental questions about limits to growth. And just to throw the concept out there, the limit to growth is easily measured – net annual solar radiation. Newtonian physics is pretty clear about the fact that you can’t create energy. The sun is by far the dominant source of energy, although you could throw in the gravitational pull of the moon which drives the tides, and what the heck, geothermal too. Adding all of those energy sources up for the year is a measure of the global energy input. Adding up total energy use gives the global energy output. Thus, if output exceeds input, then we as a global system are in an energy deficit. And you can’t pile up deficits forever…I ramble and I digress

slfFebruary 17th, 2009 at 12:00 pm

Non-economist here, but I read a post from someone once who was of the opinion that it wasn’t merely the massive spending for WWII–it was what the money was spent on, which was technology & production, or at least production for sure. And the fact that after the war, having not had any destruction on our own soil, we were positioned best to capitalize on whatever the world would need in the post-war era. I don’t know if this is a valid opinion, but it made sense to me at the time.What have we invested in now? Almost nada, in my opinion. It is just spending, period. Busy-spending and sopping-up-the-mess-spending (which is such a tremendously sickening waste of capital), to make it look like something’s being done.And you, of course, have a very good point about the non-infinite resources aspect of how things played out then, and how they will play out now.Oh well, we will put the government in charge of the global resources also–according to them, as evidenced by our astounding (and swiftly growing) level of debt, you can pile up deficits forever. As long as everyone else buys into the illusion, then it’s true!!

GuestFebruary 17th, 2009 at 12:39 pm

Look at all the Liberals spending our new rescue money on Pork in Washington today, I also have nothing good to say about the republicans either, they wasted their share of our money as well. There is nothing we can do about it, I have written my representatives as many of you have and it still passed we had better get ready for massive taxes and more government programs than we have ever seen in Americas life time. One other note: I talk with many small business owners on a regular basis they are holding steady on any new hires as well as purchasing new product lines. They are in agreement that when the tax increases begin they intend on liquidating inventory and closing shop, most of these people are nearing retirement age and do not want to go thru the tax increases that is legal theft to their business’s. This would be a good time for small business owners to take the profit and retire.

GuestFebruary 17th, 2009 at 12:48 pm

which raises the question, why can’t government lower their expenses, increase efficiency of operations, reduce staff, reduce services as every other organization is doing so?

AnonymousFebruary 17th, 2009 at 1:05 pm

The reality is, what are all these laid off govt employees going to do? Join the growing swell of non-productive people who depend on those that produce.If you ain’t producing, then at least go back to the farm!

CaponeFebruary 17th, 2009 at 1:11 pm

Stimulus Bill to link Sodom and Gomorrah via express rail…this from cnn cafferty article…Eight billion dollars for high-speed rail lines, including a proposed line between Las Vegas and Los Angeles. This little bit of second story work wasn’t even in the House version of the bill.what is about to happen will force man to look inside himself and to beg for mercy, to ask what did we all do to deserve this ? what better way to draw an analogy than to look at the story of Sodom and Gomorahh. The story goes Lot’s wife was warned when leaving the city to not look back lest she be turned into a pillar of salt. The leaders of the United States of America rather than looking forward to new real true sources of production for the nation are indeed linking the 2009 AD Sodom / Las Vegas to Gomorrah / LA/California. The end will be the same and the end is near.Do not take revenge, dear friends, but leave room for God’s wrath. For it is written, “Vengeance belongs to me. I will pay them back, declares the Lord.”

PeteCAFebruary 17th, 2009 at 1:43 pm

That being the case … do you think the rail link should maybe go somewhere else then? How about connecting Los Angeles to Telluride, Colorado. I’ve heard that Telluride is quite nice during apocalyptic annihilations, and they give good hotel discounts for pillars of salt.PeteCA

CaponeFebruary 17th, 2009 at 1:53 pm

for cities which produce something other than sin/gambling and media pollution/plastic reproductions of human flesh, it may be useful to have a rail around the loop with one line from N/S/E and West coming in instead of having everyone drive everywhere. this is common sense and logical and would actually create a project in MANY major cities at a perfect time for such a project AND create logical, useful infrastructure.

GloomyFebruary 17th, 2009 at 1:39 pm

“GOLD HAS BECOME THE WORLD’S SECOND RESERVE CURRENCY”’s%20%60Second%20Reserve%20Currency’&clipSRC=mms://… and eventually it will become the world’s only reserve currency. The gold standard will return, like it or not.

2centsFebruary 17th, 2009 at 1:49 pm

I have reposted my following post from 2009-02-11 19:55:36I have said in the past that the bad assets need to be segregated and left with the current share/bond holders. The good assets need to be aggregated and the bank recapitalized with a proportion of this being vested with the same share/bondholders on a book value ratio (as of say Aug 1, 2007) of good to bad assets. (I tried to search for my earlier post, but it’s not easy on RGE. I think it was during a dialog with MA maybe he can recall it.)Anyhow, I see that Brad Setser has entertained similar thinking:

There is perhaps a third option: handing the toxic assets over to the banks’ existing equity investors and the banks long-term unsecured creditors, assigning the deposits to the remaining “good” bank and recapitalizing the new bank with public funds.

Also, over at Willem Buiter has voice a similar proposal.

Under the Soros proposal, some additional capital might have to be injected into the ‘side pockets’, presumably by the state. Under my new good banks proposal, the new good banks would take on the (guaranteed or insured) deposits of the legacy bad banks (which would lose their banking licenses) and would buy the good assets of the legacy banks. Should deposits exceed good assets, the state would have to make up the difference initially with government debt on the balance sheet of the new good banks. Should deposits be less than good assets, the new good banks would be able to borrow from the sovereign to finance the acquisition of the good assets from the legacy bad banks. This would cleanse bank balance sheets and transform them into good banks but leave them undercapitalized. Soros suggests that $1 trillion of the estimated $1.5 trillion required to recapitalise the existing banking system should be directed to the cleansed banks. Soros believes or hopes that some of the money required to capitalise the new, cleansed banks could come from the private sector. Under my proposal, and that of Stiglitz, the state would initially capitalise the new banks on its own.

It seems that nationalization is a ways off yet and based on the plan presented by Geithner yesterday. Currently, I see the “bank review” i.e. “stress test” as being the administration’s preferred tunnel to the other side. First they will continue to provide an environment where the banks can earn fat margins with steep yield curves. Given an adequate amount of time this will mathematically work. The question just becomes how bad is it and how long will it take?Second, since things are pretty bad and the time frame for the above process to complete appears to be rather long, they will use the review/stress test to speed things up a bit. Theoretically speaking, there are three possible outcomes of these “reviews.”• The banks are in really bad shape — this is not going to happen! They haven’t said this to date and they aren’t about to admit it down the road.• The banks are overall in good shape – this is not going to happen! It isn’t true and if they did say this people would feel betrayed about all the shenanigans that already have gone on. Also, people would expect quick improvements and since that isn’t possible, this outcome is close to zero odds.• Some banks are okay, but others are in trouble – Bingo! We have a winner. Unfortunately, while largely true, it won’t come out quite the way you expect. Because the basic premise rings true and is believable, this is the sound bite that will ring out. Underneath, the bigger banks will be shored up by smaller banks labeled as failing. The criteria will be such that it is proportionally much harder for smaller banks to appear as healthy. Consequently, many viable assets will then be handed over to the larger banks.This will shorten the recovery, lessen the direct taxpayer burden, but will ultimately create impossible to save entities in the future. The only way to fix that is to nationalize the big banks and marginal smaller banks and then divvy them up and spin them back out as smaller but healthier institutions.Update: Please see this post over @ nakedcapitalism with William Black

By way of background, William Black is a former senior bank regulator, best known for his thwarted but later vindicated efforts to prosecute S&L crisis fraudster Charles Keating. He is currently an Associate Professor of Economics and Law at the University of Missouri – Kansas City.More germane for the purpose of this post, Black held a variety of senior regulatory positions during the S&L crisis.He managed investigations with teams of examiners reporting to him, redesigned how exams were conducted, and trained examiners.Via e-mail, he has confirmed our suspicions about the bank stress tests announced by Treasury Secretary Timothy Geithner: they simply cannot be adequate, given the number and experience of the staff, and perhaps as important, their relationship with the banks (see detailed comments below).I also asked him about the fact that bank examiners examine banks (duh) and would not have much (any?) experience in the capital markets operations or sophisticated products that the big investment bank, now banks, participated in. Goldman and Morgan Stanley ought to be subject to these exams; Citi, JP Morgan, and Bank of America have large capital markets operations. These firms are where the biggest risks and exposures lie. Do the examiners what to look for in a even the low-risk operations, like repo desks, much the less derivatives and proprietary trading books? He agreed (as presented below) that it was a near certainty that this was beyond their skill level.Now this begs the question: why has the Treasury Secretary set in motion an obviously bogus process? It suggests the result is pre-ordained.One possibility is that even a very quick and dirty look at many of the big banks’ books will reveal them to be in very bad shape. In fact, the inadequate staffing could be part of the private conversation: “You know we didn’t send in enough bodies to do this right, and even using your numbers, which we can assume in some cases will be flattering, you look like a goner.”But all of Geithner’s actions to date are inconsistent with him taking a tough stand. Having a lot of people party to a process that finds that some of the big banks are in trouble would be hard to keep secret (to my knowledge, none of these people have high level security clearances. Government employees and contractors in those cohorts do keep their mouths shut). So I think it is more likely that the banks will get scorecards that show them to be in various stages of peril, but none will be found to be terminal. (They can’t be given a clean bill of health, that would call the whole rationale of the TARP and its various injections into question, and also would put Geithner at considerable risk if any bank declared OK fell over in less than 12 months).But even the designation of “sick but not ready to be hospitalized” carries with it risk to the Administration. If the banks get sicker than anticipated, how can they explain it? They can’t say, “oh, things got worse than we contemplated”. The whole point of a stress test is to anticipate worst case scenarios. And it is pretty certain a fair number of the big banks will be on such large-scale life support by year end that it will be hard to make a case not to put them in receivership.Whatever statement Geithner puts out about the results of the stress test is likely to come back to haunt him, as did Colin Powell’s “there are WMD in Iraq” speech before the UN did. And Powell had a better reputation going into Iraq than Geithner has in prosecuting his war.From William Black:There are no real stress tests going on.1) If you did a real stress test, as Geithner explained them, you wouldn’t just have a $2 trillion hole — you’d impose regulatory capital requirements of 50%. (FYI, the regulators have the power to set HIGHER individual capital requirements based on unusually large risks at a particular bank.)Yves here. By implication, the results of anything approaching a true stress test, plus reasonable regulatory responses, would dictate radical action. We have not seen any corresponding groundwork laid for that sort of thing. Back to Black:2) You can’t conduct a meaningful stress test without reviewing (sampling) the underlying loan files and it seems likely that the purchasers of securitized instruments (not just mortgages) do not even have the loan file data. Moreover, loss ratios vary enormously depending on the issuer, so even a bank that originates (or has purchased a bank that originates) similar product cannot simply take its own loss rate and extrapolate it to the measure the risk on the value of securitized credit instruments.3) The regulators are overwhelmed because of personnel cuts (particularly heavy among their best, most experienced examiners that had worked banks that had engaged in sophisticated frauds. Buyouts were common, because more experienced examiners appear more expensive. This isn’t true when you consider effecitiveness and productivity, but management didn’t care about that. Treat what I write after the colon as hearing from me at my most serious and thoughtful: it is vastly more difficult to examine a bank that is engaged in accounting control fraud. You can’t rely on the bank’s books and records. It doesn’t simply take more, far more, FTEs — it takes examiners with experience, care, courage, and investigative instincts and abilities. Very few folks earning $60K are willing to get in the face of the CEO and CFO making $25 million annually and tell them that they are running a fraudulent bank and they are liars. FYI, this is one of the reasons why having “resident examiners” never works. The examiners don’t even get to marry the natives. They get to worship God’s annoited. Effective examination is good for you, but it is very unpleasant, ala a doctor’s finger up your rectum. It requires total independence.So, the examination force doesn’t have remotely the numbers or the relevant experience and mindset to examine the largest banks with the greatest problems.Yves here. Black is not using the fraud word lightly. He believe that we have Enron-level accounting fraud happening, now, in the financial services industry. And we have asked repeatedly, why has there been no investigation of fraud at Lehman? There was a $100 billion plus hole in its balance sheet, meaning a substantial negative net worth, when its financial statements presented a completely different picture. Back to Black:4) As Geithner describes the process, NO ONE can conduct reliable “stress testing.” It inherently requires testing everything in every way any and all aspects of everything could conceivably interact. It also doesn’t provide any meaningful output that can be operationalized (unless you want to force an enormous rise in minimum regulatory capital requirements, which he obviously doesn’t want to do).5) Examiners certainly can’t A) do the stress testing that Geithner describes or B) evaluate the reliability of a large bank’s proprietary stress test. If they were serious about constructing reliable stress tests, which they aren’t, you’d require their analytics to be made public. You’d have the industry fund independent investigations by rocket scientists chosen by a committee selected by the regulators of the soundness of the analytics. You’d also have the industry fund competitions to rip them apart (a bit like we hire legit hackers to test security by trying to defeat it) and show where they produce absurd results. The geeks would have a field day (that would probably last a decade). There are probably zero examiners that have the modeling skills required to evaluate the most sophisticated stress test models. The concept that there are 100 examiners with these skills, suddenly freed up from all other duties, assigned to CONDUCT stress tests is a lie.6) It is, however, possible to use even the less experienced examiners to conduct a far more useful examination of the quality and value of nonprime loans. My nightmare scenario which I fear is often true is that A) because the biggest originators of nonprime loans were mortgage bankers, B) because every large mortgage banker that specialized in nonprime loans went bankrups, C) because many of them went into Chapter 7 liquidations and even those that went into Chapter 11’s had little incentive to hang on to files on mortgage loans they had sold to other entities — the loan files on many nonprime loans may no longer exist. (My fervent prayer is that the loan servicers have tapes with copies of the underlying loan files, but I fear that this prayer will not be answered.) Under this nightmare scenario it will be extraordinarily hard to determine loan quality and losses and very hard to foreclose against borrowers that can afford attorneys (admittedly a minority) and that claim fraud in the inducement.Yves again. Remember, aside from the discussion of the bank’s risk models, he is still framing the stress test in terms of more or less traditional banking activities, that is, that most of the assets that need examining are loans. I asked for how he thought the examiners would fare with more complicated products, like CDOs, CDS, and derivatives. His comments:Yes, few examiners understand more exotic products. In my experience, nobody understands all the products. I certainly don’t, and if I did I’m sure my knowledge would be out of date within weeks.The problem is compounded by the fact that understanding how the product is actually used (CDS is a good example) v. how its proponents picture it as being used is essential. Understanding its sensitivity to credit and interest rate risk is well beyond the ken. Understanding the liquidity risks and interaction effects is out of the question.Examiners rarely know that financial risks are not normally distributed, but have far fatter tails. (Nor do they understand why this makes truncating the VAR a recipe for disaster.) Examiners rarely understand that any econometric analysis undertaken during the expansion phase of a bubble will invariably find the strongest positive correlation with the worst possible business practices (because those practices maximize accounting fraud).We were, 15 years ago, able to get some strong capital markets people and give them advance training. We sent them out on exams, they impressed the industry — and they were promptly hired away from us at substantial raisesSome countries have found ways around this problem, but they don’t translate well to America. In Japan, the most prestigious jobs are in the top ministries, so they get and hang on to good people. In Singapore, Lee Kwan Yew felt he had to depart from the typical corrupt Asian government norm for Singapore to prosper. Top government bureaucrats are paid like top private sector professionals (think law firm partners). They are well enough paid (or have the prospects of being well enough paid) so as to have an incentive not to screw it up (tough internal audits also help).

I know that was a long quote, but I inserted the whole thing because I think it stresses how the lies are piling up even with the change in administration. This comes from a guy who has done this work and unequivocally says that the stress test is a sham!Most importantly, he basically says that if you are going to be foreclosed on and had a secularized loan then get a lawyer because there is a fairly reasonable chance there is no case because the paperwork has vaporized. Why sign a loan modification and create new valid papers when you might be better off via the first process. Here’s an excellent reference to the paperwork fiasco.

2centsFebruary 17th, 2009 at 1:57 pm

Now here is an oxymoron a politician who knows what his job is.

“Our state has been spending beyond its means for many years now,” said Assemblyman Chuck DeVore, an Orange County Republican. “We’re asking the taxpayers of California for too much of their own money to cover over a problem of our own making.”

Now that’s the type of change I can believe in!

GloomyFebruary 17th, 2009 at 2:42 pm

ITS GOING TO BE A SPECTACULAR SHOWDefault, failed sovreign bond auctions, devaluations. These are thethe big news items which are going to come down the pike. And were not just talking about the little guys here, but probably everyone in the end. Great Britain will be one of the first to go as well as some of the weaker Euro players which will likely take down the Eurozone generally. But other countries will need to devalue to keep competitive, including Japan and the good ol’ insolvent USA. Everything else going on is just a prelude to the big meltdown extravaganza.

CaponeFebruary 17th, 2009 at 2:56 pm

1 The LORD is my shepherd, I shall not be in want.2 He makes me lie down in green pastures,he leads me beside quiet waters,3 he restores my soul.He guides me in paths of righteousnessfor his name’s sake.4 Even though I walkthrough the valley of the shadow of death, [a]I will fear no evil,for you are with me;your rod and your staff,they comfort me.5 You prepare a table before mein the presence of my enemies.You anoint my head with oil;my cup overflows.6 Surely goodness and love will follow meall the days of my life,and I will dwell in the house of the LORDforever.

CaponeFebruary 17th, 2009 at 3:44 pm

ok. i am a stubborn technical historian who has chosen the strongest stock in the dow to short. it is still only 15% off high with dow nearly 50% down. it is 370% above its 2003 lows while the overall market tests them here again… it is one of the main reasons we are not printing levels much lower in the DOW overall…in 87, all stocks normalized to around same % from high on day of crash. this time around, we had / have manipulation – oh well… we’ll see. this has left me along with my poorly aggressive leveraged too early moves to be in a bad financial position when i have seen this chaos coming for a long time…still employed, still trying to work out, pray, etc…you?

YankeeFebruary 17th, 2009 at 3:45 pm

Gloomy, et al.I am Gloomier than ever. Capone – that ‘I shall not be in want.’ should be resonating, but I am afraid, it is not – yet.I see gold is breaking out.My company is shitteous and I am probably out of work next month.All- we need to rise up and take back our country. I want clawbacks of ALL WS bonuses of the last 10 years. I want the people responsible for this to be put in jail – all of them, not just a few scapegoats. We need to let these toxic companies die a quick death. I used to joke about leaving the country. I would seriously think about it if I actually thought someplace was better. I think any industrialized nation is screwed.Thanks, Wall Street!

GloomyFebruary 17th, 2009 at 3:54 pm

Hang in there. Here’s a little story for you. My grandfather (who had little money) managed to start a women’s dress store in a small town in Indiana in the heart of the great depression. He was so successful that he retired 20 years later in fine style. Find a little crack on the edge of the cliff to put your roots down in. You are smarter than 99% of the people out there. You can do it.

PeteCAFebruary 17th, 2009 at 4:53 pm

YankeeSorry about the jobs prospects. But think essentials. Even in a depression, people need essentials. Food, water, electricity, shelter, gasoline. If you can get involved in providing these items in your neighborhood – your chances of survival are going to increase.PeteCA

YankeeFebruary 17th, 2009 at 5:30 pm

Thanks guys, I am not sure FIRE jobs – financial, insurance, real estate – will come back anytime soon – at least in decent #s. I am looking to a new industry that interests me…I do have my own well for water – what I do want to get is a solar set up like Medic. I can’t store gas because I would freak out that I was sitting on a disaster waiting to happen. But I DID buy a reliable scooter which gets about 100mpg. I own my house outright, but am concerned with how high property taxes will go. Can’t afford solar right now. Hopefully I get it while the panel prices go down, but before hyperinflation and devaluation of the $.I never grew up with a tinfoil hat, but mine is now [b]extra shiny.[/b]

MorbidFebruary 17th, 2009 at 3:30 pm

What the World Hates…

Life only avails, not the having lived. Power ceases in the instant of repose; it resides in the moment of transition from a past to a new state, in the shooting of the gulf, in the darting to an aim. This one fact the world hates; that the soul becomes; for that forever degrades the past, turns all riches to poverty, all reputation to shame, confounds the saint with the rogue, shoves Jesus and Judas equally aside. Self Reliance in The Writings of Ralph Waldo Emerson, Emerson, p. 158.

GuestFebruary 17th, 2009 at 8:38 pm

Amen. Amen… I like you, Capone.I have been there – in three deep, dark periods and one involved the stock market. But the longest hovered for years, and then one day, a way came, an uncanny way not even fathomed in my dreams – and, oh, the difference it made, not just for me but for others — a difference that could not have happened except at that hour… And, then, I heard this old song, by Jim Reeves…and I marveled…He will open up the doorway you never knew was there,He will show you many things you knew not hour,He will let you know he listens to your every prayer,He will save you by the mercy of His love.He will guide you through life battles, He will give you power.He will answer when you call Him night or day,He will shine His light upon you in the darkest hour…He will love you and go with you all the way.He will take you by the hand and lead you as you would a childDown the straight and narrow aisle to satan’s mill.He will take you when the time is right and in just a little whileHe will love you and go with you all the way.He will give you life eternalHe willHe will…he will, s.

David W. DeitchFebruary 17th, 2009 at 3:06 pm

Nationalization is important and a good thing, but not as important as writing down the toxic assets. If we nationalize the banksand takeover a lot of worthless assets the basic problem remains. The American people should not be stuck rescuing the lousy investmentsof the financial sector no matter who owns the banks.

2centsFebruary 17th, 2009 at 3:24 pm

David,The idea should be to take (yes as in commandeer) the viable assets and leave the rest to the current bondholders & shareholders to do with what they see fit! Those same bond/shareholders would also get a small fraction of the nationalized entity when it is spun back out, but the other crap is theirs to deal with.

AnonymousFebruary 17th, 2009 at 3:24 pm

There is a simpe solution to all of our problems and its starts with trickle up not trickle down. With one simple solution all of our problems go away and the economy recovers in 3-6months. The government needs to send out a form that everyone can list all of their debts on. Then every taxpayer gets a 500,000.00 credit to use to pay off all of the mortages, car loans, credit cards and any other debt they mave have. So now we have no financial crisis, no toxic loans. Everyone without a home can now afford one. All the vacant houses dissapear , there is a huge demand for new housing, all the constrution workers, now have jobs, you get additional tax credits for purchasing solar panels, wind turbines, hybred cars and an additional tax credit for buying an american car. You tax the money given,minus the spending on debt, you cancel all credit cards for 90 days, and make everyone reapply based on real earnings and basically you have a do over for everyone, not just selected segments of the econmy and the addition funds beyond personal debt immediatley jump start the economy. and guess what you don’t have to nationalize the banks, or the cr companies or anyone else.

ex VRWCFebruary 17th, 2009 at 4:08 pm

Here is a variant of your idea. I got flamed for it before, but if you want some kind of a debt jubilee, this at least offers a way to do it that can be fairly and universally applied.The Real Estate Readjustment RebateMany economists and politicians are calling for mortgage modification programs of various kinds. The reasoning behind these programs is that home mortgage writedowns and debt overhang will continue to be a drag on the banking sector and the economy until house prices bottom. Therefore they are in effect attempts to stop the housing bubble correction or accelerate it. All of these programs share traits. They all:-Propose that US Government funds be used to reduce mortgage principal amounts, either temporarily or permanently-Propose that banks write down the value of mortgages, with the government also sharing some of the costs-Seek to keep people in their homesThe plans differ in their ideas of who takes the cost, and how much the homeowner might owe when the home is sold, as well as on other details. But all of the plans basically ask the government to benefit two groups – insolvent homeowners and insolvent banks. There are many problems with this approach. It ushers in moral hazard. It provides stimulus to those who are barely making it, which is not likely to spill over into the real economy as much as it could.The Real Estate Readjustment Rebate proposed here is an attempt to target the home value problem from a different perspective. The reasoning is that if Federal Stimulus is being proposed to correct these problems, it should be targeted at both the good borrowers as well as the bad, it should be targeted at the worst hit areas, and it should be targeted at correcting imbalances. The basic points of this plan are:-Each locale in the US will establish a percentage decline, peak to trough, that it’s residential real estate market is projected to endure. This decline should be tied to the long term pre-bubble home price trendline.- For each household (up to a certain upper limit), a stimulus will be applied, in the form of a government check or tax rebate, in the amount of a percentage of the current valuation of the residence or commercial dwelling they live in (be it a home or an apartment) equivalent to this peak to trough adjustment. For a $250,000 home in Phoenix where the market has dropped 30% will receive a $75,000 stimulus. It does not matter what the home was sold for, or what kind of mortgage is on the home, the stimulus is entirely based on valuation.- If the home has one or more mortgages, the stimulus must be applied to the mortgages as part of an adjustment, and the mortgage lenders expected to share some portion of the cost of the adjustment. A modified mortgage will be created for the adjusted value.- If the home has no mortgage or the stimulus amount pays the mortgage off, the excess stimulus money must next be applied to other debts. Once these are retired, the excess belongs to the household to do with what they please.- If the resident is a renter, some percentage of the stimulus amount is offered to the renter. This keeps long-term responsible renters, who are in general responsible members of the economy, from missing put on the stimulus.- If there is a landlord or property owner and no renter, the percentage of the stimulus after the bank’s share accrues to the bank, allowing the home to be sold for less. Or, optionally, these situations could be targeted toward first time homeowners.This plan has several advantages. It targets solvent and insolvent homeowners and renters alike. The solvent are likely to wisely use or invest their stimulus, reflecting their already frugal lifestyle. This should help constrain a mass return to rampant consumerism. The insolvent get a chance to adjust to the new lower valuations with some chance of establishing a better financial future. The plan is also designed to target the worst hit communities with the most stimulus, where the local governments are likely to be facing the most fiscal stress. The plan also attempts to influence home prices to return to their pre-bubble trendline, thereby attempting to establish the ‘right’ price for the home. The plan is also easy to apply on a uniform basis, and can use existing property tax valuations as its basis.This is not meant to advocate government dollars as the answer to the home valuation problem. It is unclear whether more government stimulus is really doable with the current deficit and the current Treasury market situation. The main reason I propose this is because I believe, if the government is hell bent on stimulus, it should not just be targeted at the insolvent, but instead should target the economy at large. Most other plans involve unresolvable moral hazard and target only the insolvent, which is a bad idea. At least this idea does not leave the economically responsible bearing the burdens of the economically irresponsible. That is the sole reason I propose it.

economicminorFebruary 17th, 2009 at 4:31 pm

There is a third group that is maybe more important than the homeowners or the banks and that is the group holding the MBS. These are the big pension plans, insurance companies, FCB, private equity funds and SWF.There is a good reason why the government does not want some of these to bear the costs and want to transfer the costs to the taxpayers. Many of the pension funds will end up on the taxpayers no matter what. The issue is which area of government is most able to handle this. The Obama administration and Congress obviously think it is them and the US taxpayer. Mark to market would make most pension funds insolvent and would cause a new run of dominoes. They are trying to prevent this by their readjustment acts. I just don’t think it can work but they have to try as once the pension funds and insurance companies go down, this show is over.

PeterJBFebruary 17th, 2009 at 3:31 pm

Speaking about frenzied Necrophilia:”The UN and the World Bank are lobbying for a portion of the billions of dollars allocated to bailing out the West’s banking systems to be diverted to prevent 400 million people sinking into poverty across Asia in the wake of the global economic crisis.” UN will spend its share (higher salaries and allowances for its “heroes”, new suits, shoes, cars, drugs, expenses, hotels, friends and relatives, etc., etc.,[but not on parking fines]) on itself while tearfully “attempting” er, trying to raise further funds albeit predicatively unsuccessfully – too bad – sniff, sniff,and, the World Bank er, doesn’t distribute funds; it pretends and stalls and fills the pockets of the well connected slicks and insiders, er, staff.But, it all fits today’s strategy of “leadership”.Ho diddly hum

MorbidFebruary 17th, 2009 at 3:46 pm

The Five Step Program Towards Ultimate Healing

Five discrete stages, a process by which people allegedly deal with grief and tragedy.

1. Denial: – “I feel fine.”; “This can’t be happening, not to me!“2. Anger: – “Why me? It’s not fair!” “How can this happen, I hate this world!“3. Bargaining: – “Just let me live to see my children graduate.”; “I’ll do anything, can’t you stretch it out? A few more years.” I will give my life savings if...”‘4. Depression: – “I’m so sad, why bother with anything?”; “I’m going to die . . . What’s the point?“5. Acceptance: – “It’s going to be okay.”; “I can’t fight it, I may as well prepare for it. Goodbye cruel world.”I have reached # 4 – Anybody else at this stage – Misery loves company.

PeterJBFebruary 17th, 2009 at 3:57 pm

I’m at #6Its time for great opportunity,A time to change the guard (prison wardens and thieves)Its a time for wonderful clean and peaceful prosperityIts a time for intellect and integrityIts a time for great technological advancementIts the time for us to reach for the stars and beyond.Its a time to leave the Dark Ages behind us and become what we are; ManAnd, the view is good up here;-)Ho hum

MorbidFebruary 17th, 2009 at 4:18 pm

It’s A WHITE SWAN Eventpjb,I “hear” you. In another place, in another time – as all good stories go…I too hoped for a GOLDEN AGE – for all.I don’t know what you are smoking “down under” but it is obvious that you are inhaling. :-)I am too much a realist – I’m waiting for the other shoe to drop for when this much shit gets going it attracts all kinds of additional shit besides. And then there is the totally unexpected that also just so happens to pile on – that dreaded BLACK SWAN Event which has yet to materialize.

PeterJBFebruary 17th, 2009 at 4:33 pm

As one who picked up the cat by the tail AND, learned the lesson, I know that all is possible,however, I understand that mileage does vary, but keep the faith… after all, there is only everything to gain. As it has been said: ‘cast off the old clothes’ or, IOW, be like a snake and shed the skin.We perceive life as irrational but belief it to be rational; our belief is incorrect.Ho hum

MorbidFebruary 17th, 2009 at 5:52 pm

As One Who Picked Up Poisonous Snakes……I too learned many lessons – especially that life goes on.The deepest lesson I learned the last time when fooling around with those snakes is that MAN is only the latest experiment in evolution. When it was just swords and cannons life could safely recover. But with NUKEs in the mix in our time in history to sort out a new pecking order – I don’t rule out the dino experience. How is that for shedding the old skin and letting evolution have some room to conduct more experiments?It seems to me a Darwin Award for the Human Experiment is in order.

A Darwin Award is a tongue-in-cheek “honor” named after evolutionary theorist Charles Darwin. Awards have been given for people who “do a service to Humanity by removing themselves from the Gene pool”, i.e., lose the ability to reproduce either by death or sterilization in a stupid fashion. According to Wendy Northcutt, author of the Darwin Award books: “The Awards honor people who ensure the long-term survival of the human race by removing themselves from the gene pool in a sublimely idiotic fashion.”

GuestFebruary 17th, 2009 at 4:43 pm

I’ve gotten to stage 5, once they put the foreclosure notice on your door a huge sense of relief comes over you once you take the plunge and stop paying your debt you feel free! Then you start making a new plan but one with a stronger foundation. Also it reorients your priorities once you let go you realize it’s people you love not money so you focus more on being of service to your family and friends you also realize your greatest asset is your self not your possessions. Walking away from debt is way more liberating than people realize. There should be no shame we’re all trying to the best of our abilities and monetary success is no measure of worth!

slfFebruary 17th, 2009 at 6:29 pm

I was there back in sept/oct and lost about 10 lbs. I might be somewhere in #5 now, although I haven’t completely embraced the “I can’t fight it” part.

blindmanFebruary 17th, 2009 at 8:59 pm

m,ftw, it is your personal illusion. you are perfectlyentitled to project this expectation on the world, the environment, if you choose to. the environment may not cooperate. that is right, life, zen. but.. you, you will conform to your conception and projection perfectly. natural freedom, life..etc…..the question is are you aware of your impact on the environment?.acceptance does not equate to goodbye. perhaps hello. yes. hello!.as for me, conscious is good. all i ask, i’m perfectly happy to work out the rest of the details!as possibilities become evident or not..bad company.? just free. who could ask for more?healing? from what? self inflicted injury and toxification. life.and the beat goes on…and it is almost spring, detoxification season.3 day fast. y not?

economicminorFebruary 17th, 2009 at 4:20 pm

I float back and forth between 3 and 5, pretty much skipping #4 for the most part. I have had a few episodes with 4 but very mild. When I was younger, #2 & #4 would have had much more relevance in my life but no longer. There is no one to really be angry with as this is human nature at its finest.I guess some could be mad at GOD for making us in his image and allowing us to have free will but that to seems senseless.Life goes on.Will there be a rally tomorrow?

ex VRWCFebruary 17th, 2009 at 4:27 pm

You will hit number 4 what things touch you more personally, in my experience.@PeterJB “Its time to leave the Dark Ages behind us” Unfortunately, I think we have to go through them first. I realize in some places and at some historical times we have in ways, but I think so much more is ahead…@e “Will there be a rally tomorrow” I misread your comment at first. I sped read it, and my brain came up with Will there really be a tomorrow? Maybe that is a better question.

PeterJBFebruary 17th, 2009 at 4:39 pm

@PeterJB “Its time to leave the Dark Ages behind us” Unfortunately, I think we have to go through them first. I realize in some places and at some historical times we have in ways, but I think so much more is ahead…… the Dark Ages are those of the mind; it’s personal…a depression is a personalized recession and Dark Ages are personalized depression.It’s all in the attitude.Ho hum

economicminorFebruary 17th, 2009 at 5:48 pm

Yeah I do know but I am hoping to avoid #4 if I can. It is a very unpleasant number. Like I said, in the past I have had some very personal relationships with it.Still, to the important things… Will there be a rally tomorrow? After the great fall today there was a lot of sideways consolidation which usually indicates exhaustion but the S&P did close on its lows…Any speculation?

ex VRWCFebruary 17th, 2009 at 7:06 pm

Maybe some short term rally based on Obama talking about mortgage rescue — but this could be short circuited by overnight developments in Asia and Europe.A wash – I don’t look for one, but market prediction is not really my gig. I definitely don’t see any long term (3 -6 months) market rally potential, however, IMHO.Then there’s what the ‘pros’ say on CNBC. “Market in bottoming process”.Come to think of it, I am probably as qualified and accurate as they are to make these calls, huh?

tutterfrutFebruary 17th, 2009 at 4:35 pm

I’m at #5 looking for a self sufficient(energy/food) farmproject in Southern France. Hoping to profit from some #4 before we get a ‘black swan event’ that would smash me right back to #2.

tutterfrutFebruary 18th, 2009 at 12:37 am

Nope, I’m in Belgium. Northern neighbour of France. Valencia and Almeria is in Spain, southern neighbour of France.

GuestFebruary 17th, 2009 at 4:57 pm

Professor,Could you also do a thorough analysis of the insurance companies.The way I understand is that: Some Financial institutions were levered uptp 40:1That is putting 2.5 on 100 and then, supposing a house costed 100, with a 10 percent appreciation in price, making 10 on 2.5…or 300 percent profit. When the prices went down, the losses were magnified, thus leading to the curent crisis.But this hedge fund manager testifying in congress (Paulson) said that they saw it coming and they insured for the drop in prices (or something like that). He said, on something that was 100, the insurance premium was 1. That would be like a put option in that if the price of the house went below 100, the insurance would cover the losses.So, if this is right, and if a substantial amount of these were insured, then with a 10 percent decrease in home prices, insurance companies stand to lose 10 for the 1 they got…That is like a whole lot more than the financials, could the insurance companies be the next tsunami?

economicminorFebruary 17th, 2009 at 5:52 pm

I also understand that they purchased AAA MBS bonds as good as cash to be used for annuities and for cash reserves in property investment….

PeteCAFebruary 17th, 2009 at 5:08 pm

An important move by the US markets today, as the S&P500 sailed downwards below that 800 level. That’s going to make a lot of people think twice before they invest serious $$ back in. And very possibly it will trigger sell stops in a variety of investment portfolio’s.It’s possible the market could bounce (upwards). A lot of prognosticators are calling for this move. But more and more it looks like the hope for a startling turnaround (tied to stimulus plan) is diminishing fast. We are now reaching a new phase of the Credit Crisis where the huge steps being taken by the G7 central banks are being offset by the total global losses (due to rapid asset price deflation).We’ve got the USA, Japan and the UK now going to zero interest rate policies (ZIRP … or close to it) and also printing money (“quantitative easing”) to stem bank losses. So … now three major economies in the western hemisphere have essentially cratered.In addition, Russia and E. Europe are teetering on collapse. Ireland and Spain are in dire straits. And the Balkan countries are hanging on by their fingernails (if that).This is a recipe for global collapse, and it is evading all the efforts of the G7 banks. Investors sense that the world is near a tipping point. Who’s going to risk making serious investments in this kind of atmosphere?The idea that US consumers are suddenly going to go on a hallucinatory spending binge seems very far fetched. On the other hand, the idea that we’re going to see a much larger spike in global unemployment levels does not seem unrealistic at all. This is why the Obama stimulus plan is not making much headway with the markets right now – in my opinion.PeteCA

CHRIS DAVISFebruary 23rd, 2009 at 1:40 am

Clearly this is the end of the world as we now know it. The last recession. No one will get a new job. All capital misallocations will be permanent. No OECD banks will be shored up. No central bank balance sheets will be expanded. No deposit guarantees will be honored: there will be a run on every bank. The CPI will stubbornly refuse to collapse, no, it will reverse course and go up!!Bonuses to fabulously unproductive financial services personnel will be increased by government edict!!

ex VRWCFebruary 17th, 2009 at 6:59 pm

PeteCA,Back on Europe with your thinking cap, please. With what Roubini is posting now, looking as the CEE meltdown, what do you see for the prospects of the EU/IMF really being to do anything? Does this mark the transmission of the crisis (through Austria, say) to Western Europe? Are we at that point yet? Do you see the IMF wielding ‘special powers’ to print money to try to stabilize? Or do we see the IMF at a tipping point, where it can no longer do anything?I feel the CEE crisis transmitting now to Europe is the reason we saw FX dislocations overnight. I think soon bond market dislocations are going to happen in Europe. How far does the instability grow before we get more Russian agression into this mix? How will the EU populations react to being asked to bail out CEE? Remember, Roubini has been warning about CEE for some time now – it has only gotten worse.

PeteCAFebruary 17th, 2009 at 9:42 pm

Lots of interesting points there. Europe is headed for a real “stress test”. Will the EU hang together when things get tough? I expect the bank (ECB) to be more stingy than the Fed … I doubt they will go into quantitative easing. Sure hope not. My thoughts are – watch the Germans. They had a strong economic position, and now their reserves are effectively bailing out countries with very loose financial policies. Not a popular situation inside Germany. Little wonder that German citizens are buying gold.I have been more than surprised that the Russians have not been more aggressive in creating new world crises. Putin and Medvedev said that they did not want to go back to the behavior of the old days. The USA always scoffs at these remarks, but it does appear that the Russians have been much more restrained than they would have formerly (under the Soviet Union). They are losing tremendous potential income because of the current low oil prices. It must really chafe Putin that the US futures markets are determining the oil price – the whole pricing mechanism is completely screwed up. Of course, the Russians are going full steam ahead with the completion of the nuclear reactor in Iran (to Israel’s chagrin). This action could lead to a new middle east crisis sooner or later.IMF? Let’s face it … there are probably a dozen third world countries whose economies are not much better than Iceland’s. How can the IMF bail all these guys out??? Included in the risk list is our “dear ally” Pakistan … the same country that is slowly losing a struggle against the Taliban. It’s difficult to see how the USA can expect stability in Pakistan, with things eroding both politically and economically.There’s enough fallout from the Credit Crisis to forment a dozen new wars around the world today.PeteCA

GuestFebruary 17th, 2009 at 10:24 pm

How can Ben keep bailing out some with paper and destroying the value of others with the same paper? His electronic money machine is more dangerous than a loose cannon. And, where does the IMF get most of its paper? Ben and past actions of the Fed have destroyed all faith in the dollar as a dependable reserve currency — at home and abroad. In that Ben gets his orders every minute from London, i.e. the Rothschild Connection, I’m beginning to believe that Dr. Paul Hein is right — this financial destruction is deliberate. But, IMO, the fiat money machine is totally out of control, wreaking unintended havoc. Nations are tipping, and teetering and tumbling.I believe, at last, “they’ve” lost and we will win. I agree with PeterJB. “It’s a time for great opportunity, A time to change the guard (prison wardens and thieves)…” But there is and will be tremendous “collateral damage.” Humpty Dumpty’s had a great fall! And all TPTB will never put Humpty together again! A new world dawns.

CHRIS DAVISFebruary 23rd, 2009 at 1:33 am

Would you have preferred a complete collapse of the commercial paper market?Or, how about a sharp increase in mortgage rates? Or maybe just a total banking crash? Ever been through one of those? No? Want to go to Iceland and then come back and tell us what it’s like?

David in SeattleFebruary 17th, 2009 at 5:19 pm

Wielding A Tin Cup And A Gun:Look ahead a few weeks, or at most a few months, to the time when President Obama has to send his Treasurer over to Asia to ask them to fund most of his $US 2.5 TRILLION budget deficit for this fiscal year. All of Asia, including China, says no. Geo-politically, this is already feared. The evidence is simply that the first foreign trip that Secretary of State Lady Hillary will make is to – Asia! She is not going to Europe or anywhere else on this trip. She is going to where the money is, to ask to borrow it.Here, the global pivot is structural. The fact is that Asia could help the US to fund its budget deficit by stripping themselves of more than half of all their foreign exchange reserves this year. But what about NEXT year? They cannot do that and the Asians know it. The structural point is that there is a forward time horizon in front of the US of only ONE year to resolve its own budget deficit problems as well as its now unrepayable external debts and. That year is THIS year – 2009. The Asians know this too, as does Japan, Russia and the European Union. What they fear is that a financial collapse of the US will hurt them. If Asia lends to the US, it will crash next year, If Asia does not, the US will crash THIS year.Three Global Deflations:As analysed in earlier issues of The Privateer, these are the global share market crash, the real estate crash and the commodities crash. All three are still unfolding with more falls to come as the accelerating global factory shutdown cuts in under these vast markets with the unemployment which is now climbing in all industrialised countries. We are now on the verge of the fourth deflation. That is the global bond market crash as exploding government budget deficits will act to force interest rates higher – typically the exact opposite of what is “wanted” – followed by huge leaps in commercial interest rates.Crowded Out By Political Borrowing:Climbing interest rates for government bonds can now be observed in the US. Commercial rates of interest in the US have already moved upwards rather drastically in the past few weeks. Here, a phenomenon known as “crowding out” raises its head. When governments increase the quantity of bonds they unload on the market, they decrease the available funds for all other participants who then have to offer a higher rate of interest on their bond offerings until they reach the limits of what they can afford to pay. At that point, such business and private borrowers are “crowded out”.US yields on investment-grade corporate bonds, for example, stood at 8.24 percent on January 22 compared with 6.45 percent at the start of 2008, according to data compiled by the Fed. That, in gearing terms, is an increase of 27.75 percent in the costs to US businesses which are trying to borrow.Bond Prices Yield To Interest Rates And A Steepening Yield Curve:On December 26 last year, the difference in yield between US Treasury two-year and ten-year debt paper stood at 1.25 percent. By February 5, this “spread” had blown out to 1.95 percent. This “steepening” of the yield curve and the rising rates are now having their effect. Investors are fleeing US Treasuries. While the Dow was down 8.1percent on the year so far as of February 5, the US 30-year Treasury bond was down about 10 percent.These are the losses so far this year! In terms of capital, the entire US bond market is much bigger than the US stock market. It should be clear that massive losses have already been taken by holders of US bonds of all descriptions. Across the world and in the US, when current US bond holders revalue their portfolios they will see this fall of more than 10 percent on their holdings.Caught In The US Headlights:In the face of all this, buyers of US bonds are only backing off so far. But there is an invisible point ahead where accumulating losses on US bonds, government and commercial, will become too much to bear. At that point, a global cascade sell-off of US bonds is in prospect. This is the danger point! Once a sell-off begins, US bond prices of all descriptions will fall in value, and the inverse will also happen. US bond market rates of interest rates will be soaring upwards. The losses will be astronomical as everybody from central banks to private holders of US bonds see their investments slaughtered. When the dust clears, this event will be seen as not only the greatest bond crash in history, but also as the greatest DEFLATION of them all, putting the three earlier ones completely in the shade.The US Is The Ignition Point For The Global “Bond Fire”:The US bond market sell-off now in prospect is certain to ignite sell-offs in nations with high government debts funded by their earlier bond issues. Just as the share markets worldwide all joined up together in their crash and the real estate and commodities markets did likewise, so a US bond market sell-off could act as the ignition point for a worldwide conflagration of the present bond markets. From there, it is a short and inevitable step to chaos in the world’s monetary system.This was originally posted by Bill Buckler of The Privateer

CHRIS DAVSFebruary 23rd, 2009 at 1:29 am

Wrong, wrong, wrong — pick up your Samuelson at the bookstore and go back to Econ and turn the the “Systemic Banking Failure” chapter. There will be no bond crash, because the consumer, who is tapped out, will be drastically increasing his savings rate to 10% from zero right when all these bonds are going to be sold.

GuestFebruary 17th, 2009 at 8:48 pm

Christ was a jew and thus was not “white” nor “black”, that’s for sure. More like a middle eastern skin tone, I would say.But I do not think color was such a big deal to people back in those days as it unfortunately seems to be nowadays.

MorbidFebruary 17th, 2009 at 6:12 pm

I just posted the following above – but after reading Hayes’s post I see it also fits in here – given Obi’s Shakespearian tragedy Freudian “slip.”As One Who Picked Up Poisonous Snakes……I too learned many lessons – especially that life goes on.The deepest lesson I learned the last time when fooling around with those snakes is that MAN is only the latest experiment in evolution. When it was just swords and cannons life could safely recover. But with NUKEs in the mix in our time in history to sort out a new pecking order – I don’t rule out the dino experience. How is that for shedding the old skin and letting evolution have some room to conduct more experiments?It seems to me a Darwin Award for the Human Experiment is in order.

A Darwin Award is a tongue-in-cheek “honor” named after evolutionary theorist Charles Darwin. Awards have been given for people who “do a service to Humanity by removing themselves from the Gene pool”, i.e., lose the ability to reproduce either by death or sterilization in a stupid fashion. According to Wendy Northcutt, author of the Darwin Award books: “The Awards honor people who ensure the long-term survival of the human race by removing themselves from the gene pool in a sublimely idiotic fashion.”

MorbidFebruary 17th, 2009 at 7:56 pm

g,I “hear” you. I am biased. I’m at stage #4 hoping to get to stage #5 in the ultimate healing process, i.e., ACCEPTANCE! Tough job for my psyche to come to grips with that a life of hard work is going up in smoke. Sorry to all for being “so off topic.”Guest, could you pick a handle so we know what summarizes your “nature?” Thanks.

jugglingcdosFebruary 17th, 2009 at 7:52 pm

“The tragedy is, they know what’s going to happen to them,” he says. “They sense it—but they do nothing about it.”Klaatu San..

FEDupFebruary 17th, 2009 at 8:22 pm

WELL SURPRISE, SURPRISE: GM needs another $30 billion in loans! Is it any wonder that we do not trust these corporate giants or the oversight of our own government? They keep changing the game every time we turn our heads. If this is any indication of the deception about the true liabilities of corporate America, we are headed towards a nasty decade long depression. There just is no way we can keep taking on this kind of debt without severe consequences!

slfFebruary 17th, 2009 at 10:34 pm

Not that it makes it any better, but I was under the impression that it was $30B total, including what they were working with since they were last at congress’ table begging for taxpayer scraps. I might have misunderstood, though. Doesn’t change my opinion of the situation–I still think whatever they ask for, in loans or whatever else, won’t be enough. They’ll be back for more. Who is going to be buying enough new cars to keep them afloat in the near and foreseeable future?

GuestFebruary 17th, 2009 at 11:06 pm

Obama—President Of Special InterestsBy Paul Craig RobertsFebruary 16, 2009 — The Bush/Obama bailout/stimulus plans are not going to work. Both are schemes hatched by a clique of financial insiders. The schemes will redistribute income and wealth from American taxpayers to the shyster banksters, who have destroyed American jobs, ruined the retirement plans of tens of millions of Americans, and worsened the situation of millions of people worldwide who naively trusted American financial institutions. The ongoing theft has simply been recast. Instead of using fraudulent financial instruments, the banksters are using government policy.Michael Hudson captures the nature of the heist in CounterPunch (February 12):”When it comes to cleaning up the Greenspan Bubble legacy by writing down homeowner mortgage debt, the Treasury proposal offers homeowners $50 billion – just [half of one percent] of the $10 trillion Wall Street bailout to date, and less than half the amount given to AIG to pay its hedge fund speculators on their derivative gambles. The Treasury has handed out $25 billion to each and every big bank, so just two of these banks alone got as much as the reported one-quarter of all homeowners in America suffering from Negative Equity on their homes and in need of mortgage renegotiation. Yet today’s economic shrinkage cannot be reversed without a recovery in consumer demand. The economy has lost the ‘virtual wealth’ in higher-priced homes and the stock market, and must rely on after-tax earnings. But I see little concern for wage earners in the Treasury plan. Without debt relief, consumer spending and business investment will not recover.”The big money men cannot conceive of anyone’s suffering except the mega-rich. If billions are not at stake, what is the problem? How can a family losing its house bring down the economy?There was a time in America when the interests of elites were connected to those of ordinary Americans. Henry Ford said that he paid his workers good wages so they could buy his cars.Today American corporations pay foreign workers low wages so CEOs can pay themselves multi-million dollar “performance” bonuses.Congress has had a parade of CEOs, ranging from Bill Gates of Microsoft and IBM brass on down the line, to testify that they desperately need more H-1B work visas for foreign employees as they cannot find enough American software engineers and IT workers to grow their businesses. Yet, all the companies who sing this song have established records of replacing American employees with H-1B workers who are paid less.Just the other day, Microsoft, IBM, Texas Instruments, Sprint Nextel, Intel, Motorola, and scores of other corporations announced thousands of layoffs of the qualified American engineers who “are in short supply.”IBM has offered to help to relocate its “redundant” but “scarce” American engineers to its operations in India, China, Brazil, Mexico, the Czech Republic, Russia, South Africa, Nigeria, and the United Arab Emirates at the salaries prevailing in those countries.. [IBM Offers To Move Laid Off Workers To India, By Paul McDougall, InformationWeek, February 2, 2009]On January 28, USA Today reported: “In 2007, the last full year for which detailed employment numbers are available, 121,000 of IBM’s 387,000 workers [31%] were in the U.S. Meanwhile, staffing in India has jumped from just 9,000 workers in 2003 to 74,000 workers in 2007.”In order to penetrate and to serve foreign markets, US corporations need overseas operations. There is nothing unusual or unpatriotic about this. However, many US companies use foreign labor to manufacture abroad the products that they sell in American markets. If Henry Ford had used Indian, Chinese, or Mexican workers to manufacture his cars, Indians, Chinese and Mexicans could possibly have purchased Fords, but not Americans.Senators Charles Grassley and Bernie Sanders offered an amendment to the Troubled Asset Relief Program (TARP) bill that would prevent companies receiving bailout money from discharging American employees and replacing them with foreigners on H-1B visas.The U.S. Chamber of Commerce, no longer an American institution, and immigration advocates, such as the American Immigration Lawyers Association, immediately went to work to defeat or to water down the amendments. Senator Grassley’s attempt to prevent American corporations from replacing American workers with foreigners on H-1B work visas in the midst of the most serious economic crisis since the Great Depression was met with outrage from the U.S. Chamber of Commerce, an organization concerned solely with the multi-million dollar bonuses paid to American CEOs for reducing labor costs by offshoring American jobs or by replacing American employees with foreign guest workers.On January 23 Senator Grassley wrote to Microsoft CEO Steve Ballmer:”I am concerned that Microsoft will be retaining foreign guest workers rather than similarly qualified American employees when it implements its layoff plan. As you know, I want to make sure employers recruit qualified American workers first before hiring foreign guest workers. For example, I cosponsored legislation to overhaul the H-1B and L-1 visa programs to give priority to American workers and to crack down on unscrupulous employers who deprive qualified Americans of high-skilled jobs. Fraud and abuse is rampant in these programs, and we need more transparency to protect the integrity of our immigration system.”Last year, Microsoft was here on Capitol Hill advocating for more H-1B visas. The purpose of the H-1B visa program is to assist companies in their employment needs where there is not a sufficient American workforce to meet their technology expertise requirements. However, H-1B and other work visa programs were never intended to replace qualified American workers. Certainly, these work visa programs were never intended to allow a company to retain foreign guest workers rather than similarly qualified American workers, when that company cuts jobs during an economic downturn.”It is imperative that in implementing its layoff plan, Microsoft ensures that American workers have priority in keeping their jobs over foreign workers on visa programs.”My point is that during a layoff, companies should not be retaining H-1B or other work visa program employees over qualified American workers. Our immigration policy is not intended to harm the American workforce. I encourage Microsoft to ensure that Americans are given priority in job retention. Microsoft has a moral obligation to protect these American workers by putting them first during these difficult economic times.”Senator Grassley is rightly concerned that recession layoffs will shield increased jobs offshoring and use of H-1B workers. On February 13, Pravda reported that “America has begun the initial steps to final outsourcing of its last dominant industry”–oil/gas and oil/gas services. Pravda reports that “as with other formerly dominant industries, such as light manufacturing, IT, textiles,” recession is “used as the knife to finally do in the workers.”According to Pravda, “IT is a prime example. The companies used the bust to lay off hundreds of thousands of tech workers around the US and Britain, citing low profits or debt. The public as a whole accepted this, as part of the economic landscape and protests were few, especially with a prospect of the situation turning around. However, shortly after the turn around in the economy, it became very clear that there would be no turn around in the IT employment industry. Not only were companies outsourcing everything they could, under the cover of the recession, they had shipped in tens of thousands of H-1B work visa-ed workers who were paid on the cheap.”It is rare to find US Representatives and Senators, such as Grassley, who will take a stand against powerful special interests. Some do so inadvertently, forgetting that patriotism is no longer a characteristic of the American business elite. Hoping to stimulate American rather than foreign businesses, the House version of the economic stimulus bill, the American Recovery and Reinvestment Act of 2009, required that funds provided by the bill cannot be used to purchase foreign-made iron, steel, and textiles.The Senate provision was more sweeping, mandating that all manufactured goods purchased with stimulus money be American-made.The U.S. Chamber of Commerce, the National Association of Manufacturers, Caterpillar, General Electric, other transnational corporations, and editorial writers whose newspapers are dependent on corporate advertising set out to defeat the buy-American requirement. As far as these anti-American organizations are concerned, the stimulus bill has nothing to do with American jobs or the American economy. It only has to do with the special interest appetites that have the political power to rip off the American taxpayers. [See Manufacturing & Technology News, February 4, 2009]Senator John McCain is their man. “Protectionism!” exclaimed the man the Republicans wanted as president. McCain said the buy-American provision would cause a second Great Depression. U.S. Chamber of Commerce President Thomas Donohue said that buying abroad was “economic patriotism.”The American economic elite are hiding their treason to the American people behind “free trade.”I want to say this as clearly as it can be said. The offshoring of American jobs is the antithesis of free trade. Free trade is based on comparative advantage. Jobs offshoring is an activity in pursuit of lowest factor cost—an activity that David Ricardo, the originator of the free trade theory, described as the betrayal of one’s own country in pursuit of “absolute advantage.”The “free market” shills on the payroll of the U.S. Chamber, NAM, and in economics departments and think tanks that are recipients of grants from transnational corporations are whores aligned with elites who are destroying the American work force.Obama has appointed to his National Economic Council blatant apologists for the offshoring of American jobs.Possibly Obama loves the country that elevated him to its highest office. But his administration is populated with people whose loyalty does not extend beyond elites to the American people.

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