Thursday, November 20, 2008

Financial Crunch! Economic Collapse! (Part 2)

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Continued from Financial Crunch! Economic Collapse! (Part 1) posted on 31 July 2008.
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Current Stock Market Crash and the Great DepressionBy: Peter Schiff
Oct 17, 2008
http://www.marketoracle.co.uk/Article6844.html
The current stock market crash has spurred a vital national debate about the causes and catalysts of the Great Depression. The dominant school of thought believes that the stubborn refusal of then president Hebert Hoover to intervene after the stock market crash of 1929, and his preference for free market solutions, led directly to the ensuing decade-long catastrophe.
Through this lens, our leaders assure us that the most recent raft of government measures will prevent another episode of bread lines, Hoovervilles and pencil salesmen. As usual they have it completely wrong. In my view, the Depression was created precisely because Hoover followed the path that our government is now taking.
When the stock market bubble of the Roaring Twenties (which was created as a result of the loose monetary policy of the newly created Federal Reserve) finally popped, Hoover would not allow market forces to correct the imbalances. His policies were aimed at propping up unsound businesses, artificially supporting prices, particularly wages, and providing Federal funds for public works projects. These moves went well beyond the progressive reforms of Teddy Roosevelt, and established Hoover as the most interventionist president ever up to that point. In fact, much of what eventually became the New Deal had its roots in Hoover's policies.
However, at the time, there were those who recommended a different course. Andrew Mellon, the long-serving Secretary of the Treasury whom Hoover had inherited from the prior two Republican Administrations, was labeled by Hoover as a "leave it alone isolationist" who wanted to "liquidate labor, liquidate stocks, liquidate the farmers, and liquidate real estate." Hoover would have none of it. In fact, during his nomination speech for his second term, Hoover bragged "We determined that we would not follow the advice of the bitter liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction."
Hoover chose to ignore the sound advice of his Treasury Secretary (in contrast to today where the current Treasury Secretary Henry Paulson is actually leading the charge over the cliff) and instead used every tool at his disposal to "fix" the problem. As a result, rather than allowing a recession to run its course, with healthy and rapid liquidations of the mal-investments built up during the boom, Hoover inadvertently created what became the Great Depression.
When Roosevelt took office he continued the same failed policies only on a grander scale. The magnitude and the idiocy of many New Deal programs, such as the wage and price setting National Recovery Administration (NRA), compounded the problems. So while Mellon's advice would have caused a sharp but relatively brief economic downturn (which occurred after the Panic of 1907, for example), the Depression plodded on for nearly a decade until the country began gearing up for the Second World War.
In an amazing feat of revisionist history, somehow Hoover's interventionist policies have been completely forgotten. It is taken as fundamental that his inaction led to the Depression and Roosevelt's "heroics" got us out. Unfortunately, since we have learned nothing from history, we are about to repeat the very mistakes that lead to the most dire economic circumstance of the last century.
A major difference however, is that the structure of the U.S economy today is far weaker than it was in the fall of 1929. Years of reckless consumer borrowing and spending, and enormous trade and budget deficits have resulted in a hollowed out industrial base and an unmanageable mountain of debt owed to foreign creditors. Instead of the support of a strong currency backed by gold, the public now must deal with a modern Fed free to print as much money as politicians want. So rather than getting the benefits of falling consumer prices (as happened during the Depression), consumers today will contend with much higher consumer prices, even as the economy contracts.
With Barack Obama now waiting in the wings to conjure a newer New Deal, far larger than even FDR could have imagined, and at a time when we cannot even afford the old one, this will not be your grandfather's Depression. It may be much worse.
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Wallstreet Bailout: Where's the Money Going?By Lynn Stuter
November 18, 2008
NewsWithViews.com
http://www.newswithviews.com/Stuter/stuter130.htm
When the U.S. House of Representatives, led by House Speaker Nancy Pelosi (D-CA), took up President George W Bush’s (R-TX) proposal to bailout Wallstreet – H.R. 3997, the House of Representatives was deluged with phone calls, faxes, and e-mails to representatives, calling on them to defeat the bill; the deluge ran somewhere in the neighborhood of 100-1 against the bailout.
The message from the American people was clear, “do not do this.”
Even though House Speaker Pelosi pulled every dirty trick in the playbook to get the votes needed, H.R. 3997 failed to pass.
The Senate then took H.R. 1424 - a bill passed by the House of Representatives in March 2008 then sent over to the Senate - amended it with the bailout language, including enough earmarks to get the votes needed, passed it and sent it back to the House who also passed it. Like whores, legislators were bought for the taxpayer dollars they would get for their pet projects back home.
All this was done against the will of the American people, the American taxpayers. The message from Washington, DC was clear: “We are Congress; we know better than you lowly taxpayers what you need.” To that end they pledged $700 billion taxpayer dollars to bailing out their Wallstreet buddies.
It is now almost Thanksgiving and how is that bailout going?
Well, let’s see.
Stories have surfaced in the past six weeks about how that bailout money is being spent. Here are a few:
1- After Bailout, AIG Execs Head to California Resort 2- AIG Execs Splurged On English Hunting Trip 3- Reid Unhappy With Bonuses For AIG Execs 4- Fed's Bailout For AIG Swells To More Than $150B 5- Where Is The Bailout Money Really Going? 6- Treasury Head Unveils Revised Bailout Plan From just these few stories, it becomes clear that:
1. Congress had no idea what they were doing when they passed HR 1424. They had no idea what the bill said; they had no idea how the money was really going to be spent; all they really knew was what they were told. 2. HR 1424, while appropriating the money, provided no clear-cut perimeters of how it could be spent. 3. The money is going to banks and companies that don’t need a bailout, they need new top management. 4. What Congress claimed the money was for, and what the money is really for, are entirely different. This past week has brought news that the big three automakers, General Motors, Ford and Chrysler all are asking Congress for a financial bailout. Why not? Congress did it for their Wallstreet buddies; why not for the big three automakers.
But the reception in Washington has been quite different than it was for the Wallstreet bankers and brokers. While Congress put no restrictions on their buddies on Wallstreet, the same isn’t true for the big three automakers. And when it comes to using the Wallstreet bailout money to help stop home foreclosures, that isn’t going to happen either. Why? Is it because the “big three” provide jobs for Americans and mortgages provide homes for Americans? We’ve known for a long time that Congress approves sending American jobs overseas. Why would it be such a stretch that doing anything to help the American taxpayer would be out of the question?
What is very evident, however, is that what Congress claimed, concerning the “impending financial crisis,” wasn’t true. It is also apparent that many in Congress believed what they were told by the White House. Since when has President George W Bush been known to tell the truth about anything?
The American people should be outraged. To that end; the American people should,
1- demand the resignation of every Senator and Representative who voted for H.R. 1424; 2- demand that every penny of the bailout money be returned to the Treasury; 3- demand the prosecution of President George W Bush and Treasury Secretary Henry Paulson under every statute applicable. The American people are suffering with no relief in sight as their jobs disappear, and they have no means by which to put food on the table or a roof over their head. Congress can bailout the rich who don’t need it but does nothing to help those truly suffering.
And it must be noted here that both presidential candidates, John McCain and Barack Obama voted for the bailout. Since then, Barack Obama has become president-elect Obama. His followers believe he is going to help the little guy, redistribute the wealth, spread it around a little.
Really? The bailout was a good example of how Obama will go about redistributing the wealth.
The Wallstreet bailout was a taking of money, from the American taxpayers, and the giving of that money to the rich. We’ve watched them head off to fancy resorts in California, go on hunting trips to England, and give themselves millions of dollars in bonuses.
Many have tried to warn the American people that Barack Hussein Obama is not who he portends to be.
And if they’ve been watching, as he has filled his cabinet positions and posts, those who truly believed the “Yes We Can” mantra should be, about now, getting a feeling of déjà vu; that they’ve been deceived.
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Wall Street Socialism Paves Way for Global Government
By Cliff Kincaid
November 16, 2008
NewsWithViews.com
http://www.newswithviews.com/Kincaid/cliff270.htm
Now that Treasury Secretary Henry Paulson has essentially admitted that his Wall Street bailout plan isn’t working, it’s worthwhile to examine the fawning media coverage he received when he pressured President Bush and Congress into approving it. “This former investment banker may be the right man at the right time,” was one of the headlines over a gushing September 29 Newsweek article by Daniel Gross. Among his attributes, we were told, Paulson was an Eagle Scout.
But as an Eagle Scout myself, I seem to remember that the Boy Scout motto was “Be prepared.” Paulson seems not to be prepared for anything.
As Michelle Malkin, who was opposed to the bailout, puts it in her new column: “The man doesn’t know what the hell he’s doing.”
In a separate Newsweek article in the same issue, Fareed Zakaria said, “In Paulson, America is extremely fortunate to have a man of tremendous intelligence, drive and pragmatism, who will engage in ‘bold and persistent experimentation’ until the job is done.” The article was headlined “Big Government to the Rescue.”
In retrospect, the phrase “persistent experimentation” apparently means making mistake after mistake and not being held accountable for them.
Making Paulson out to be the boy next door, Newsweek included a series of photos apparently taken from the Paulson family album. There was a photo of Paulson as a “college football star,” a photo of the “nature-loving Paulson” holding a hawk, a photo of Paulson on a kayak, and so on.
But there was a bit of hard news in the piece. Paulson, Gross reported, “had always been a Republican?but more a Rockefeller Republican than a DeLay.” This is another way of saying that this Wall Street banker and former CEO of Goldman Sachs is a liberal. A better description would be Wall Street socialist. So how did he end up as Bush’s Treasury Secretary? He was recruited for the job by White House chief of staff Josh Bolten, who, from 1994 to 1999, was Executive Director for Legal & Government Affairs at Goldman Sachs International in London.
“In many ways, Paulson was the ideal person to deal with this mess,” Gross reported at the time. Paulson was “noted for self-discipline, focus on controlling risk and mastery of detail.” Now he comes across as a dummy who not only doesn’t know what he’s doing but isn’t willing to step aside so that someone more knowledgeable can take command.
Meanwhile, President George W. Bush seems even more clueless. He gave a Thursday speech to the Manhattan Institute pretending that American-style capitalism still exists. “I’m a market-oriented guy, but not when I’m faced with the prospect of a global meltdown,” Bush said. He went on to say, “History has shown that the greater threat to economic prosperity is not too little government involvement in the market, it is too much government involvement in the market.”
Does the President realize that he is contradicting himself? Needless to say, none of this inspires confidence. His bizarre comments receive little attention because he is considered a lame duck and Paulson is really running the show.
Now free to speak her mind, Alaska Governor and former GOP vice presidential candidate Sarah Palin has weighed in, telling The Weekly Standard that she is getting tired of Paulson’s changes to the bailout plan. “I think the surprises make the electorate distrust elected officials and their ability to appoint people who are to be looking out for the public’s interest,” she says. This is an understatement. People not only don’t trust the government, they are getting angry at the reckless policies that threaten national bankruptcy and may consign generations of Americans to living under socialism.
However, Bill Kristol, editor of The Weekly Standard, tried to convince House Republicans to vote for the plan that Palin now attacks in the pages of his magazine. Kristol endorsed Paulson’s plan, saying “failing to pass it will exacerbate them [financial problems], and will keep the markets in a state of roiling uncertainty at best, and meltdown at worst.” So what has happened since its passage? As you may have noticed, the markets have continued in uncertainty and we seem to be undergoing a meltdown.
Kristol added at the time that “House Republicans should help pass the bill. I think it’s the only responsible thing to do in terms of the economy. But I also think it’s the only way McCain has a chance to win.” He added that, “Passing the bailout would give McCain a fighting chance to win, which in turn provides the best chance—the only chance—for conservative principles to prevail in the next few years.”
In fact, the best chance for conservative principles to prevail was to follow the conservative principles embodied in the 2008 Republican platform. That document declared, “We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself.”
You may have noticed that McCain, who followed Kristol’s advice and voted for the bailout, went down to defeat on November 4. By the way, most House Republicans voted against the bailout. They have been proven right by events. It would be nice if Kristol would admit the error of his ways. But that is not a practice that is commonplace in conservative or liberal media circles these days.
Similarly, Paulson didn’t really admit that he himself had made a mistake. Instead, he declared on Wednesday that “It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets—our initial focus—would take time to implement and would not be sufficient given the severity of the problem.”
In other words, by the time that the bill had been signed, Paulson knew that the Troubled Asset Relief Program (TARP) that he had proposed wouldn’t work. That is why he quickly changed the plan to use the taxpayer money to buy stakes in banks. Now, “new strategies” are being tried and developed, he says. And it is all being done, of course, at our expense.
One of the new strategies, he indicated, will come out of Saturday’s international financial summit in Washington, D.C. The nations of the world must develop a “shared interest in a solution” on a global level, he says.
Bush, in his speech, called for “leading nations” to “better coordinate national laws and regulations.” He urged the “reform” of international financial institutions such as the IMF and the World Bank so that their “governance structures” come to “better reflect the realities of today’s global economy.”
I think I’m starting to get it. First it was “Big Government to the Rescue.” But since that didn’t work, we now need “Global Government to the Rescue.” We will not only lose our money but the sovereignty of our nation. Our media have been active accomplices in this unfolding catastrophe.
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Hoocoodanode?by CalculatedRisk on 28 November 2008
Earlier today, I saw Greg "Bush economist" Mankiw was a little touchy about a Krugman blog comment. My reaction was that Mankiw has some explaining to do. A key embarrassment for the economics profession in general, and Bush economists Greg Mankiw and Eddie Lazear in particular, is how they missed the biggest economic story of our times.Sure, quite a few people got it right. But those that saw it coming were frequently marginalized. This was a typical response from the right (this is from a post by Professor Arnold Kling) in August 2006:
Apparently, the echo chamber of left-wing macro pundits has pronounced a recession to be imminent. For example, Nouriel Roubini writes,
Given the recent flow of dismal economic indicators, I now believe that the odds of a U.S. recession by year end have increased from 50% to 70%.
For these pundits, the most dismal indicator is that we have a Republican Administration. They have been gloomy for six years now.
Sure Roubini was early (I thought so at the time), but show me someone who has been more right!And this brings me to Krugman's column: Lest We Forget
... Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories? Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world? Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?One answer to these questions is that nobody likes a party pooper. ...There’s also another reason the economic policy establishment failed to see the current crisis coming. The crises of the 1990s and the early years of this decade should have been seen as dire omens, as intimations of still worse troubles to come. But everyone was too busy celebrating our success in getting through those crises to notice.
Krugman goes on to argue that the Obama Administration should not put off financial reform; "The time to start preventing the next crisis is now."I agree.But in addition to looking forward, I think certain economists need to do some serious soul searching. Instead of leaving it to us to guess why their analysis was so flawed, I believe the time has come for Mankiw, Kling and many other economists to write a post titled "Why I was wrong".
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Economic rescue could cost $8.5 trillionHeavy spending to battle the financial crisis is unlikely to abate soon. Analysts say next year's deficit could top $1 trillion.
By Jim Puzzanghera
November 30, 2008

Reporting from Washington — With its decision last week to pump an additional $1 trillion into the financial crisis, the government eliminated any doubt that the nation is on a wartime footing in the battle to shore up the economy. The strategy now -- and in the coming Obama administration -- is essentially the win-at-any-cost approach previously adopted only to wage a major war.
And that means no hesitation in pledging to spend previously almost unimaginable sums of money and running up federal budget deficits on a scale not seen since World War II.
Indeed, analysts warn that the nation's next financial crisis could come from the staggering cost of battling the current one.
Just last week, new initiatives added $600 billion to lower mortgage rates, $200 billion to stimulate consumer loans and nearly $300 billion to steady Citigroup, the banking conglomerate. That pushed the potential long-term cost of the government's varied economic rescue initiatives, including direct loans and loan guarantees, to an estimated total of $8.5 trillion -- half of the entire economic output of the U.S. this year.
Nor has the cash register stopped ringing. President-elect Barack Obama and congressional Democrats are expected to enact a stimulus package of $500 billion to $700 billion soon after he takes office in January.
The spending already has had a dramatic effect on the federal budget deficit, which soared to a record $455 billion last year and began the 2009 fiscal year with an amazing $237-billion deficit for October alone. Analysts say next year's budget deficit could easily bust the $1-trillion barrier.
I didn't think we'd see that for a long time," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. "There's a huge risk of another economic crisis, a debt crisis, once we get on the other side of this one."
But the Bush administration and the economic team that Obama is rapidly assembling like a war Cabinet are vowing to spend whatever it takes to avoid a depression; they'll worry about the effect later.
I don't think that there's any way of denying the fact that my first priority and my first job is to get us on the path of economic recovery, to create 2.5 million jobs, to provide relief to middle-class families," Obama told reporters last week.
"But as soon as the recovery is well underway, then we've got to set up a long-term plan to reduce the structural deficit and make sure that we're not leaving a mountain of debt for the next generation."
The mountain is already there, and rising faster than at any time since the 1940s, when the United States was fighting a global war.
Analysts say the current flood of red ink calls into question Obama's ability to launch programs such as middle-class tax cuts and a healthcare overhaul. In 1993, a deficit only a third the size of next year's projected $1 trillion prompted President Clinton to abandoned his campaign pledges of tax cuts.
Once the financial crisis eases, higher interest rates and soaring inflation will be risks. If they materialize, they could dramatically increase the government's borrowing costs to meet its annual debt payments. For consumers, borrowing could become more expensive even as the price of everyday items rise, holding back economic growth.
"We could have a super sub-prime crisis associated with the meltdown of the federal government," warned David Walker, president of the Peter G. Peterson Foundation and former head of the Government Accountability Office.
But even deficit hawks such as Walker acknowledge that the immediate crisis is priority No. 1. Just as with World War II, the government can worry about paying the bills once the enemy is defeated.
"You just throw everything you have at the problem to try to fix it as quickly as you can," said David Stowell, a finance professor at Northwestern University's Kellogg School of Management. "We're mortgaging our future to a certain extent, but we're trying to do things that give us a future."
Washington could wind up spending substantially less than the sum of the commitments. Though the total estimated cost of the government's efforts adds up to $8.5 trillion, only about $3.2 trillion has been tapped, according to an analysis by Bloomberg.
And not all the money committed is direct spending. About $5.5 trillion in loan guarantees and other financial backing by the Federal Reserve is included in the total.
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Mortgage Delinquencies, Foreclosures Rise to Record
By Kathleen M. Howley
http://www.bloomberg.com/apps/news
Dec. 5 (Bloomberg) -- One in 10 American homeowners fell behind on mortgage payments or were in foreclosure during the third quarter as the world’s largest economy shed jobs and real estate prices tumbled.
The share of mortgages 30 days or more overdue rose to a seasonally adjusted 6.99 percent while loans already in foreclosure rose to 2.97 percent, both all-time highs in a survey that goes back 29 years, the Mortgage Bankers Association said in a report today. The gain in delinquencies was driven by an increase of loans with payments 90 days or more overdue.
“Until we see a turnaround in the job situation, we’re not going to see these numbers improve,” said Jay Brinkmann, chief economist of the Washington-based bankers group, in an interview. “We’re seeing more loans build up in the 90-days bucket as lenders work to modify loans and states put in place programs that delay foreclosures.”
The U.S. economy has shed 1.91 million jobs this year, while falling home prices have made it difficult for people who can’t pay their mortgages to sell their property. Payrolls declined in each month of 2008 through November, the Labor Department said today in Washington.
New foreclosures fell to 1.07 percent from 1.08 percent in the second quarter as some states enacted laws to temporarily stop home repossessions and lenders increased efforts to modify the terms of loans, Brinkmann said.
Home Sales Sink“Some servicers keep a loan in a delinquent state until they see customers carrying through on their agreements, and then they’ll switch it to performing,” Brinkmann said.
U.S. home sales and prices began to tumble in 2006 after a five-year boom, dragging the economy into a recession that began in December 2007, according to the National Bureau of Economic Research.
The median home price in the fourth quarter probably will be $190,300, down 19 percent from the record $226,800 in 2006’s second quarter, according to a Nov. 24 forecast by Fannie Mae, the world’s largest mortgage buyer.
Purchases of existing homes in October slid to an annual rate of 4.98 million, lower than forecast, the National Association of Realtors said in a Nov. 24 report. The median price fell 11.3 percent from a year earlier, the most since the group began collecting data in 1968.
Federal Reserve Chairman Ben S. Bernanke yesterday urged using more taxpayer funds for new efforts to prevent home foreclosures, saying the private sector is incapable of coping with the crisis on its own.
Bernanke’s Plans
The Fed chief outlined four possible options, including buying delinquent mortgages and providing bigger incentives for refinancing loans. He called for addressing the “apparent market failure” where lenders aren’t modifying mortgages even in cases where it’s in their own economic interest to do so.
Bernanke’s proposed changes would go beyond those announced last month by Housing and Urban Development Secretary Steve Preston, who oversees the FHA. The agency will change the amount of the loan a lender must forgive and allow banks to extend the payback time of a mortgage.
There were 111.7 million occupied housing units in the U.S. in the third quarter, 68 percent used by owners and the remainder leased by renters, according to the Census Bureau. One in three U.S. homes has no mortgage, the bureau said.
The bankers’ report cites percentages without providing the number of mortgages. The U.S. had $11.3 trillion of outstanding home loans at the end of June, according to Federal Reserve data. Mortgage lending fell to $80.8 billion in the second quarter, down from $764 billion a year earlier, the Fed said.
The Mortgage Bankers report is based on a survey of 45.5 million loans by mortgage companies, commercial banks, thrifts, credit unions and other financial institutions.
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Jim Rodgers: Bank Bailout is 'Horrible Economics'
By Susie Madrak Friday Dec 12, 2008 7:00pm
http://crooksandliars.com/node?page=1
Jim Rogers, who cofounded the Quantum Fund with George Soros, attacks the bank bailout as "wrongheaded" and says most of the major banks are already bankrupt:
"Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt," said Rogers, who is now a private investor.
"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent," he said. "What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics."
[...] Goldman Sachs & Co analysts this week estimated that banks worldwide have suffered $850 billion of credit-related losses and writedowns since the global credit crisis began last year.
But Rogers said sound U.S. lenders remain. He said these could include banks that don't make or hold subprime mortgages, or which have high ratios of deposits to equity, "all the classic old ratios that most banks in America forgot or started ignoring because they were too old-fashioned."
Many analysts cite Lehman's Sept 15 bankruptcy as a trigger for the recent cratering in the economy and stock markets.
Rogers called that idea "laughable," noting that banks have been failing for hundreds of years. And yet, he said policymakers aren't doing enough to prevent another Lehman.
"Governments are making mistakes," he said. "They're saying to all the banks, you don't have to tell us your situation. You can continue to use your balance sheet that is phony.... All these guys are bankrupt, they're still worrying about their bonuses, they're still trying to pay their dividends, and the whole system is weakened."
Yep. The pointless bailout, the one that only postpones the inevitable, is embraced warmly by the Republican party while the one that actually provides a product and employs millions of working-class people is rejected. It's the blue shirts vs. the blue collars.
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Fraudulent "Credit Crisis" Paves Way for Economic Disaster
By Cliff Kincaid
December 16, 2008
NewsWithViews.com
http://www.newswithviews.com/Kincaid/cliff279.htm
Doing the kind of investigative reporting we should expect from the major media, a financial research and consulting firm has released a major analysis of the “credit crisis” that concludes that the claims made by Treasury Department Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke to justify a socialist takeover of the financial industry were demonstrably false.
The analysis, Flawed Assumptions about the Credit Crisis: A Critical Examination of US Policymakers, concludes that the result of the unjustified massive federal intervention in the economy could be similar to the economic crisis in the Weimar Republic of 1922, where disastrous hyperinflation made the currency worthless and threatened the nation’s political system and stability.
The analysis was released by Celent, a Boston-based firm that provides independent information and advice to financial services companies. The 30-page report, made available to Accuracy in Media, does not accuse Paulson and Bernanke of lying about the “credit crisis.” But it does say that “It is startling that many of Chairman Bernanke’s and Secretary Paulson’s remarks are not supported or are flatly contradicted by the data provided by the very organizations they lead.”
Using charts and graphs of data from the Federal Reserve and other agencies, the Celent study says that statements from Paulson and Bernanke about a “credit crisis” affecting businesses, real estate, banks, and state and local governments were just not true.
The report says there is “a contradiction” between what Paulson and Bernanke have said and the reality of the situation, as demonstrated in the official data. It calls these “discrepancies” and says that some of their remarks are “puzzling.”
Asked for comment on why he was able to uncover this information while the major media have not, Octavio Marenzi, founder and CEO of Celent, told AIM, “What we need from the media is more skepticism and more engagement. Too frequently statements are taken at face value. Also, most journalists are under such tight time pressure that they do not have the time to reflect and to dig deeper. They are on a conveyor belt and just trying to keep up with the required level of output.”
Paulson had claimed that, by mid-September, when he persuaded President Bush to go public with demands for Congress to approve a $700-billion bailout plan, the financial system had “seized up,” credit markets had “froze,” and interbank lending had been “substantially reduced.” But none of this was true. “The freezing of the credit markets that Secretary Paulson cites is not visible” in the data, the Celent report shows.
Paulson also made the claim that blue chip industrial companies could not issue longer-term commercial paper. But this claim “finds no support” in the data, the report says.
Bernanke had claimed that businesses were “confronting diminished access to credit” when in fact “the opposite” was true, the study demonstrates.
The suggestion is made that Bernanke and Paulson were acting on behalf of “a particular set of businesses and financial institutions” and exaggerated the problem in order to justify “unprecedented levels of government intervention in the markets.”
It is implied that these firms were certain big banks and companies. But while they may have been having problems raising funds, the credit market in general was “working well,” the report said.
It declares, “Doubtlessly, a number of the leading financial institutions in the US are in serious trouble, as are a number of the leading industrial firms. However, credit difficulties surrounding a specific set of firms is not the same as a problem in the credit markets in the aggregate.”
The study says that, “A clear and cogent analysis of the credit crisis has not been presented by policymakers, despite the fact that unprecedented levels of public funds are being deployed.” As a result, the “massive injection of funds could well exacerbate the problem rather than help.”
The report says the money supply “has recently increased at a pace never seen before in US history” and could signal a pending bout of hyperinflation. It says the increase is “a staggering 74% in only 84 days” and explains, “Previously, this kind of jump would be seen over the course of a decade or more.”
It then concludes by suggesting that the real danger to the U.S. is not a great depression like that of 1929 but a hyperinflationary period comparable to the Weimar Republic in 1922.
While it is possible that Paulson and Bernanke have additional data supporting their hypothesis that there has been a general breakdown in credit markets, Celent says they have not shared this data with the public and there would have to be an explanation of why the data being released to the public is incorrect. Celent is skeptical that any kind of additional and therefore secret data exist. [Read entire article at: http://www.newswithviews.com/Kincaid/cliff279.htm]
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Flawed Assumptions about the Credit Crisis: A Critical Examination of US PolicymakersNew York, NY, USA, December 11, 2008, http://www.celent.com/PressReleases/20081210/WhatCreditCrisis.asp
Report Published by Celent
US policymakers have implemented an unprecedented range of tools to fight the credit crisis. However, it appears that many of their assumptions regarding the nature of the crisis are not supported, or even flatly contradicted, by the available data. Many measures of lending have actually increased during the crisis and are even at record levels.
This reports examines some key assumptions being made by leading US policymakers regarding the credit crisis. In particular, comments made by the two leading policymakers, the chairman of the Federal Reserve, Ben Bernanke, as well as the secretary of the US Treasury Department, Henry Paulson, are compared with publicly available data.
In many cases, it appears that these policymakers’ assumptions regarding the credit crisis are incorrect. Far from seeing a tightening of credit, a number of measures show that credit has expanded, and Celent finds that the lending markets are in surprisingly good health. Data published (in most cases by the Federal Reserve itself) show that:
· Overall lending by US banks is at a record high and has increased during the credit crisis.
· Interbank lending is at record highs and has increased during the credit crisis.
· Consumer credit is at record highs and has increased during the credit crisis.
· Commercial paper markets are operating within their historical norms.
· Lending by banks to businesses is at record highs and has been growing rapidly.
· Municipal bond markets are operating within their historical norms.
· Deposits at banks have shown a substantial increase since the start of the credit crisis.
“It appears that policymakers are making a variety of mistakes regarding the current financial crisis. If that is the case, the policy tools that they are employing may very well be the wrong ones,” Octavio Marenzi, head of Celent and author of the report.
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The 30-page report contains 27 figures. A table of contents is available online.
Members of Celent's research services can download the report electronically by clicking on the icon to the left. Non-members should contact info@celent.com for more information.
About CelentCelent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally experienced analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is part of Marsh & McLennan Companies [NYSE: MMC].
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Fed slashes rates to near zeroBy Krishna Guha in Washington
Published: December 16 2008 19:27 Last updated: December 17 2008 01:11
http://www.ft.com/cms/s/0/96a7c1d2-cba0-11dd-ba02-000077b07658.html?nclick_check=1The Federal Reserve moved deeper into uncharted waters on Tuesday, heralding further unconventional measures to support the economy as it slashed interest rates from 1 per cent to virtually zero.
In a historic statement, the US central bank said it would target a record low interest rate, expressed as a range of between zero and 0.25 per cent. It said it expected to keep rates at ultra-low levels “for some time” and vowed to use “all available tools to promote the resumption of sustainable growth and to preserve price stability”.
The Fed’s action came as the eurozone purchasing managers’ survey showed the 15-country bloc on course to report its worst quarter on record, adding to pressure on the European Central Bank to follow the Fed’s lead and cut rates further.
The Fed said it “stands ready” to step up its planned purchases of securities issued by Fannie Mae and Freddie Mac, the mortgage giants now under government control. It also said it was “evaluating the potential benefits of purchasing longer-term Treasury securities”.
The aggression of the statement caught the markets by surprise. Mohamed El-Erian, chief executive at Pimco, the bond fund manager, said it was “an incredibly strong public declaration that the Fed will throw everything it has in attempting to stabilise the financial and economic situation”.
US stocks and Treasury bonds surged after the central bank’s move, while the dollar slumped against the euro and the yen. The S&P 500 closed up 5.1 per cent, while the yield on 30-year Treasuries touched an all-time low of 2.82 per cent.
The yield on 10-year bonds fell below 2.30 per cent, the lowest level since 1954.
The statement came as US data showed prices fell a record 1.7 per cent in November – with no rise even in core prices excluding energy and food – raising fears about deflation. Housing starts also fell further.
The US central bank laid out a strategy that aims to drive down actual borrowing costs for households and companies. It seeks to do so by supporting demand for such loans, reducing the risk spreads on them. At the same time, it wants to keep government bond yields low.
This means expanded credit and outright asset purchase programmes, likely to be funded, at least for now, by expanding reserves and therefore the money supply. Jan Hatzius, chief US economist at Goldman Sachs, called this “quantitative easing”. But a senior Fed official said its policy was different from the quantitative easing pursued in post-bubble Japan. The Fed policy is driven by its credit operations whereas Japan targeted bank reserves.
The Fed said the outlook for economic activity had “weakened further” and acknowledged that “inflationary pressures have diminished appreciably”.
The decision to set a range for interest rates reflects an admission that the US central bank cannot tightly control the actual rate that prevails in the market in current conditions.
Barack Obama, president-elect, told reporters that the fact that the Fed had no more room to cut rates underscored the case for a big fiscal stimulus. “We are running out of the traditional ammunition that’s used in a recession, which is to lower interest rates,” he said. “They’re getting to be about as low as they can go.”
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U.S. Throws Lifeline to DetroitBy JOHN D. MCKINNON and JOHN D. STOLL
December 20, 2008
http://online.wsj.com/article/SB122969367595121563.html
WASHINGTON -- The Bush administration said it would lend $17.4 billion to General Motors Corp. and Chrysler LLC, buying them a few weeks of financial relief but leaving the biggest decisions about the industry's future to President-elect Barack Obama.
Under the White House plan, the companies are required to extract enough financial concessions from workers, suppliers, dealers and other stakeholders to demonstrate their long-term viability by the end of March.
President George W. Bush makes comments on the auto industry Friday morning.
The deal's ambitious targets for the companies include replacing two-thirds of their debt with stock; using more stock instead of cash to fund retiree health-care obligations; eliminating much-criticized union "jobs banks" that pay laid-off auto workers; and establishing wage structures and workplace rules that are more competitive with foreign rivals.
But all those targets are nonbinding, and the agreement appeared to be much more porous than legislation that the administration and Democratic congressional leaders failed to pass earlier this month.
The loan package also requires the administration to drain what remains in the first half of the Treasury Department's $700 billion bailout fund, originally intended to aid the financial industry. Treasury Secretary Henry Paulson said lawmakers should release the final $350 billion "to support financial-market stability," a request likely to set up another battle with Congress.
Investors cheered the auto rescue, with GM shares climbing almost 23%, or 83 cents, to $4.49 in 4 p.m. New York Stock Exchange trading. Ford Motor Co. -- which is in better financial health and isn't seeking immediate aid -- saw a more modest gain of about 4%, or 11 cents, to close at $2.95.
Chrysler isn't publicly traded, but private-equity firm Cerberus Capital Management LLC, which owns a majority of the auto maker, said in a statement it is pleased with the White House's move, and believes it will lead "to the restructuring of Chrysler automotive's debt and labor agreements."
But the bailout is just the first step in what could be a long and painful revamping of the three Detroit companies during a recession. The loans may not keep them out of bankruptcy court in the long run as U.S. car sales have plunged to 1982 levels, consumer spending has fallen and buyers continue to have trouble obtaining vehicle financing.
In a note to clients, J.P. Morgan auto analyst Himanshu Patel said the Treasury Department's plan has a "nebulous threshold for determining viability by March 31," and he believes this "gray language could just as easily be used by the next administration to justify forcing a car maker into bankruptcy" or liquidation. He said of the three Detroit auto makers, Chrysler appears the most likely candidate for a near-term bankruptcy.
The deal adds the two storied Detroit giants to the long list of prominent American corporate names to receive federal bailouts in recent weeks -- and comes nearly 30 years after Chrysler once before was propped up by Washington.
The auto agreement provides the government with nonvoting stock warrants in GM and Chrysler, adding those ownership stakes to the government's rapidly expanding portfolio that includes much of the American banking industry, American International Group Inc., Fannie Mae and Freddie Mac.
The deal's generous terms in the short run reflect the precarious state of the U.S. and global economies and a U.S. government caught between two administrations -- as well as outgoing President George W. Bush's worries about the risk of deepening the downturn in the final days of his administration. [Read entire article at: http://online.wsj.com/article/SB122969367595121563.html]
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With economy in shambles, Congress gets a raise
By Jordy Yager
Posted: 12/17/08
A crumbling economy, more than 2 million constituents who have lost their jobs this year, and congressional demands of CEOs to work for free did not convince lawmakers to freeze their own pay.
Instead, they will get a $4,700 pay increase, amounting to an additional $2.5 million that taxpayers will spend on congressional salaries, and watchdog groups are not happy about it.
“As lawmakers make a big show of forcing auto executives to accept just $1 a year in salary, they are quietly raiding the vault for their own personal gain,” said Daniel O’Connell, chairman of The Senior Citizens League (TSCL), a non-partisan group. “This money would be much better spent helping the millions of seniors who are living below the poverty line and struggling to keep their heat on this winter.”
However, at 2.8 percent, the automatic raise that lawmakers receive is only half as large as the 2009 cost of living adjustment of Social Security recipients.
Still, Steve Ellis, vice president of the budget watchdog Taxpayers for Common Sense, said Congress should have taken the rare step of freezing its pay, as lawmakers did in 2000.
“Look at the way the economy is and how most people aren’t counting on a holiday bonus or a pay raise — they’re just happy to have gainful employment,” said Ellis. “But you have the lawmakers who are set up and ready to get their next installment of a pay raise and go happily along their way.”
Member raises are often characterized as examples of wasteful spending, especially when many constituents and businesses in members’ districts are in financial despair.
Rep. Harry Mitchell, a first-term Democrat from Arizona, sponsored legislation earlier this year that would have prevented the automatic pay adjustments from kicking in for members next year. But the bill, which attracted 34 cosponsors, failed to make it out of committee.
“They don’t even go through the front door. They have it set up so that it’s wired so that you actually have to undo the pay raise rather than vote for a pay raise,” Ellis said.
Freezing congressional salaries is hardly a new idea on Capitol Hill.
Lawmakers have floated similar proposals in every year dating back to 1995, and long before that. Though the concept of forgoing a raise has attracted some support from more senior members, it is most popular with freshman lawmakers, who are often most vulnerable.
In 2006, after the Republican-led Senate rejected an increase to the minimum wage, Democrats, who had just come to power in the House with a slew of freshmen, vowed to block their own pay raise until the wage increase was passed. The minimum wage was eventually increased and lawmakers received their automatic pay hike.
In the beginning days of 1789, Congress was paid only $6 a day, which would be about $75 daily by modern standards. But by 1965 members were receiving $30,000 a year, which is the modern equivalent of about $195,000.
Currently the average lawmaker makes $169,300 a year, with leadership making slightly more. House Speaker Nancy Pelosi (D-Calif.) makes $217,400, while the minority and majority leaders in the House and Senate make $188,100.
Ellis said that while freezing the pay increase would be a step in the right direction, it would be better to have it set up so that members would have to take action, and vote, for a pay raise and deal with the consequences, rather than get one automatically.
“It is probably never going to be politically popular to raise Congress’s salary,” he said. “I don’t think you’re going to find taxpayers saying, ‘Yeah I think I should pay my congressman more’.”
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Swiss gold bullion in huge demand as trust in banks divesSwiss gold refiners are having great difficulty in keeping up with demand for gold bullion leading to long delivery times as investors wary of other stores of wealth.Author: Arnd Wiegmann and Lisa JuccaPosted: Wednesday , 17 Dec 2008
http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=75294&sn=Detail
MENDRISIO/ZURICH, Switzerland (Reuters) -
Sealed off by grey concrete walls and barbed wire, the workmen in protective glasses and steel-toed boots at this smelter cannot work fast enough to meet demand from the nervous rich for gold.
This refinery near Lake Lugano in the Alps is running day and night as people worried about recession rush to switch their assets into something that may hold its value.
"I have been in the gold business for 30 years and I have never experienced anything like this," said Bernhard Schnellmann, director for precious metal services at the refiner Argor-Heraeus, one of the world's three largest.
"Production has dramatically increased since the middle of the year. We cannot cope with demand," said Schnellman, wearing a gold watch on his wrist.
Spot gold hit a record $1,030.80 an ounce on March 17. It fell below $700 in late October, partly because investors sold their holdings to cover losses in equity and bond markets hit by the credit crisis, and is now around $830 an ounce.
The trigger for the price to rise again could come from a much weaker dollar, making gold cheaper for holders of other currencies, and a renewed aversion to paper assets as governments and central banks pump large amounts of cash into the economy, stoking inflation.
Smoke billows as the molten gold, like glowing butter, is poured. To cool it, the worker drops it into water. It hisses as it hits. Once hardened in moulds, the gold bars are embossed with the refinery's seal. Workers wearing white gloves stack them into boxes like domino pieces.
Though Switzerland is not a gold miner, it is home to some of the world's largest refineries, which process an estimated 40 percent of all newly mined gold.
Argor-Heraeus is part-owned by the Austrian Mint and a subsidiary of Germany's Commerzbank. Commercial and central banks are its chief customers and it says it processes some 350-400 tonnes of gold and 350 tonnes of silver per year.
Customers buying gold bars, which can weigh more than 10 kg each, have to wait roughly a month, taking into account the year-end holiday season.
For those buying coins or ingots, which can fit into the palm of a hand, the delay is six to eight weeks. A year ago, these small products could be had within a couple of days.
Worries about the banking system globally have boosted worldwide demand for physical gold, the Gold Council said.
"Many (people) are afraid of leaving their money in banks," said Sandra Conway, managing director at ATS Bullion in London, which sells bullion and gold coins to institutions and the retail market.
"It's difficult to quantify, but I would say our turnover over the last three months has certainly doubled compared to the previous three months," she said. [Read entire article at: http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=75294&sn=Detail]
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Fed Hides Destination of $2 Trillion in Bailout Money
Fails to comply with congressional demands for transparency, underscoring age-old problem of top down socialism and letting the fox guard the henhousePaul Joseph Watson
Tuesday, November 11, 2008
http://www.prisonplanet.com/fed-hides-destination-of-2-trillion-in-bailout-money.html
The Federal Reserve is facing a lawsuit after it failed to comply with congressional demands for transparency and disclose the destination of at least $2 trillion dollars in bailout funds, underscoring once again the failure of top down socialism and the folly of trusting the foxes to guard the henhouse.
“The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral,” reports Bloomberg.
“Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn’t require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.”
Bloomberg has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a separate lawsuit in an effort to find out where the money has gone.
President elect Barack Obama, who in a September 22 campaign speech promised to “Make our government open and transparent so that anyone can ensure that our business is the people’s business,” refused to comment on the story when contacted by Bloomberg, which is no surprise considering the fact that the man who guaranteed “change” has indicated he will not only follow the Bush administration policy of a socialized financial system, but radically expand it.
The Fed’s secrecy on the issue of where the bailout money is going underscores the age-old problem with top down socialism as a tool of re-shaping the economic landscape. The promise to fairly re-distribute the wealth, with full accountability, to achieve a solution that will ultimately benefit everyone, is trumped by the cold reality of the fact that corrupt elites, once the taxpayers have been suckered into believing the lie, merely hoard all the money for themselves and don’t redistribute it to anyone apart from their own inner circle of cronies.
Indeed, the banks have admitted that they are hoarding cash and will keep on doing so while bigwigs reward themselves with fat bonuses as the real economy sinks deeper into the toilet.
But what else could we have expected upon hearing that ex-Goldman Sachs executive Neel Kashkari was appointed by Paulson to dole out the ill-gotten gains of the bailout to the rest of the corporate crooks?
Kashkari: A man you can trust.
If you let the fox guard the henhouse then he’s going to eat the chickens.
In this case, the Fed and the gaggle of bastard banker children sucking on its teat, gobbled up $5 trillion plus in taxpayers’ money and then figuratively stuck the middle finger up when questions were asked about where that money was going.
Meanwhile, the bailout has had no effect whatsoever, increasing the severity of the financial downturn and allowing the same elite to exploit the crisis as a pretext for centralizing control of the world economic system and creating a new world order and a single global currency.
Also see:
Fed Refuses to Disclose Recipients of $2 Trillion
By Mark Pittman
http://www.bloomberg.com/apps/news?pid=20601109&sid=apx7XNLnZZlc
Dec. 12, 2008 (Bloomberg)
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Secrecy Worsens Wall Street MessBy Brent Budowsky
December 17, 2008
http://www.consortiumnews.com/2008/121708a.html
Editor’s Note: With multiple scandals sweeping Wall Street, it might seem like an odd time for anyone to say “trust me” when it comes to spending trillions of dollars in bailout money, but that’s basically what the Bush administration and the Federal Reserve are telling the public.In this guest essay, Brent Budowsky examines how secrecy has contributed to the crisis – and is now threatening a resolution:
The public is angry – and that anger is rising.
The dangers to our economy are escalating while confidence, trust and credibility are collapsing for both government and business institutions.
Whatever else Wednesday's mammoth action by the Fed suggests, we know this: After $8 trillion of support for financial institutions by multiple federal agencies, the Federal Reserve Board has concluded that the program has not worked, and much more is needed.
I emphasize this: I do not oppose bailouts; I oppose bailouts that are poorly managed, poorly structured and, far too often, conducted with secrecy.
I have warned since 2007 about the cascading financial crisis that would spread from sector to sector, bank to bank, and consumer to consumer. I have called, repeatedly, for direct action to benefit real people such as a temporary freeze on foreclosures.
What I continue to most strongly oppose are top-down bailouts, where $8 trillion goes to financial institutions that continue to raise their interest rates and cut credit lines for even their most creditworthy consumer and business customers.
As for disclosure, the banks and investment houses must be far more direct, comprehensive and honest in disclosing information to Congress, to regulators, to the public, and to investors.
In olden days, markets were based on prices applied to entities with ascertained value and trading was done as the value of those very ascertainable assets would rise and fall.
Today we have a new, and in my view vile, phenomenon: the securitization of everything, where clusters of mortgages, credit card accounts, etc. are bunched together and traded like Nasdaq stocks.
This removes the value proposition and makes these securitized instruments impossible to value, and they are traded based on whims, rumors and mindless speculation until some dumb slob is the last guy buying overvalued and bubbled assets.
This last guy is the slob holding the bag at the end, and now the bag is being handed to taxpayers.
Also, this securitization de-links the original buyer from the original seller, which makes rational renegotiation impossible. The guy or gal who took out the mortgage no longer deals with the bank that sold it; that bank has sold it to someone else, who sold it to someone else, who sold it to someone else.
This makes renegotiation of terms impossible in many cases, forcing some preventable foreclosures, which further destroys the housing market in foreclosed communities, and which multiplies ultimate losses, which multiplies ultimate bailouts.
The second problem, in brief, is that financial institutions invented and began trading financial derivative instruments that were not based on the value of the original asset, or even on the value of the securitized basket of assets, but were valued on alleged value in "hedging" the risk.
Yet if we can’t intelligently value the original asset, or the securitized combination of assets, we cannot value the hedge, i.e., the derivative instruments.
In principle, we need to restore the relationship between the actual asset and the value the market determines for that asset.
While I have one of those fancy degrees from one of those great schools that are in vogue today, I am old-fashioned. I believe, simply, that we should emphasize trading what we can value, with full disclosure of what the assets are, and full understanding of what tradable assets such as securitized baskets of assets and derivatives are.
Today, far too many of these instruments remain secret. Far too many financial CEOs don’t even understand the complex assets their firms are trading (and losing money from, and seeking bailouts for).
Regulators such as the Securities and Exchange Commission have failed so dismally they’re almost farcical. Congress can barely understand the complexities of these assets, let alone policy. And Treasury and the Fed are dumping huge amounts of money, $8 trillion and counting, into the very institutions that caused the problem in ways that neither the public, the Congress, consumers, investors or even regulators understand.
And now we read stories such as the ridiculous $50 billion Ponzi scheme of Mr. Madoff that only proves the failure of financial, regulatory and political institutions to serve the people who are the boss and who pay for the bailouts.
Truth, justice, integrity and common sense begin with disclosure. As Justice Brandeis said, “sunshine is the best disinfectant.”
I would add that secrecy is the enemy of common sense and integrity and the friend of corruption and incompetence. This is why I vehemently oppose the Federal Reserve keeping secret how at least $2 trillion of the bailout has been used and this is why I support the Freedom of Information Act challenge by Bloomberg business news seeking disclosure.
There are surely valid reasons for selective non-disclosure, but these cases should be rare, and keeping secret $2 trillion of spending is ridiculous, absurd and anti-democratic.
This is the public's money, and the public has a right to know. This is one of the most vital and urgent and expensive financial policies in world history, literally, and the leaders in Congress and the banking committees have a need, and right, to know.
Show me $2 trillion of secretly spent money and I will show you trouble, bad news and probably mismanagement.
Show me $2 trillion of secretly spent money and I will show you public outrage, and public backlash, and public rage at a time of national economic hardship that will only increase with time.
Show me $2 trillion of secretly spent money and I will show a policy outcome that by definition will probably be irrational in a nation where our very democracy is based on informed public debate, and the checks and balances of a government the Founders deliberately constructed with divided powers.
Finally, for now, I have a warning about, and am increasingly troubled by, practices that are more akin to a banana republic than the world's greatest democracy.
Trillions of dollars are thrown around like monopoly money. Titans of Wall Street trade financial instruments that even they do not understand. Even an incredible, gigantic, $50 billion Ponzi scheme victimizes investors who are supposed to be experts, while the SEC is so incompetent it is the moral equivalent of criminal negligence.
Let’s stop the practices that have taken us into this abyss and start with the honest, full, effective, responsible and comprehensive disclosure that is the precondition to cleaning up this multitrillion-dollar morass.
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Where'd the Bailout Money Go? Shhhh, It's a SecretWhere'd the bailout money go? $350 billion later, banks won't say how they're spending itBy Matt Apuzzo, Associated Press Writer
December 22, 2008
It's something any bank would demand to know before handing out a loan: Where's the money going?
But after receiving billions in aid from U.S. taxpayers, the nation's largest banks say they can't track exactly how they're spending the money or they simply refuse to discuss it.
"We've lent some of it. We've not lent some of it. We've not given any accounting of, 'Here's how we're doing it,'" said Thomas Kelly, a spokesman for JPMorgan Chase, which received $25 billion in emergency bailout money. "We have not disclosed that to the public. We're declining to."
The Associated Press contacted 21 banks that received at least $1 billion in government money and asked four questions: How much has been spent? What was it spent on? How much is being held in savings, and what's the plan for the rest?
None of the banks provided specific answers.
"We're not providing dollar-in, dollar-out tracking," said Barry Koling, a spokesman for Atlanta, Ga.-based SunTrust Banks Inc., which got $3.5 billion in taxpayer dollars.
Some banks said they simply didn't know where the money was going.
"We manage our capital in its aggregate," said Regions Financial Corp. spokesman Tim Deighton, who said the Birmingham, Ala.-based company is not tracking how it is spending the $3.5 billion it received as part of the financial bailout.
The answers highlight the secrecy surrounding the Troubled Assets Relief Program, which earmarked $700 billion — about the size of the Netherlands' economy — to help rescue the financial industry. The Treasury Department has been using the money to buy stock in U.S. banks, hoping that the sudden inflow of cash will get banks to start lending money.
There has been no accounting of how banks spend that money. Lawmakers summoned bank executives to Capitol Hill last month and implored them to lend the money — not to hoard it or spend it on corporate bonuses, junkets or to buy other banks. But there is no process in place to make sure that's happening and there are no consequences for banks who don't comply. [Read entire article at: http://abcnews.go.com/Business/wireStory?id=6508158]
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15 corporate chieftains each top $100 million in 5 yearsAt MDC, Larry Mizel's compensation was $110.5 millionBy Mark Maremont, John Hechinger and Maurice Tamman, The Wall Street Journal
Posted: 11/21/2008 12:30:00 AM MST
http://www.denverpost.com/business/ci_11036514
The credit bubble has burst. The economy is tanking. Investors in the U.S. stock market have lost more than $9 trillion since its peak a year ago.
But in industries at the center of the crisis, plenty of top officials managed to emerge with substantial fortunes.
Fifteen corporate chieftains of large homebuilding and financial-services firms each reaped more than $100 million in cash compensation and proceeds from stock sales during the past five years, according to a Wall Street Journal analysis. Four of those executives, including the heads of Lehman Brothers Holdings Inc. and Bear Stearns Cos., ran companies that have filed for bankruptcy protection or seen their share prices fall more than 90 percent from their peak.
Larry Mizel, chairman and chief executive of Denver-based MDC Holdings, was 15th on the list, with compensation of $110.5 million.
The study, which examined filings at 120 public companies in such sectors as banking, mortgage finance, student lending, stock brokerage and homebuilding, showed that top executives and directors of the firms cashed out a total of more than $21 billion during the period.
The issue of compensation and other rewards for corporate executives is front-and-center in the wake of the financial meltdown. Congress has held several hearings attacking Wall Street chieftains and others for perceived excesses given the state of their companies and the economy. America's boardrooms also are wrestling with the issue, trying to formulate pay plans that give proper long- term incentives.
Some experts say huge paydays inevitably coincide with economic booms. In the tech bubble of the late 1990s, more than 50 individuals each made more than $100 million from selling shares just prior to the crash. Many had just founded companies that had never turned a profit.
"The system tends to reward people for participating in bubbles," says Roy C. Smith, a finance professor at New York University's business school.
Smith, a former partner of Goldman Sachs Group Inc., says almost nobody anticipated the recent collapse.
Still, some firms are taking action to change their compensation systems. This week, Goldman Sachs, which recently received government funds, said its top brass would forgo bonuses for this year. Swiss banking giant UBS AG said it would hold some future compensation for executives in escrow and pay it out only for strong long-term performance.
Many executives highlighted in the Wall Street Journal study defended their compensation, noting that the cash they took out was tied to strong financial results and that shareholders flourished along with them.
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Execs got $1.6B before bailout
AP study looks at CEO pay at troubled banksBy Frank Bass and Rita Beamish, Associated Press
Published: December 22, 2008
http://deseretnews.com/article/1,5143,705272221,00.html
Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses and other benefits last year, an Associated Press analysis reveals.
The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance but still forked over multimillion-dollar executive pay packages.
Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.
The total amount given to nearly 600 executives would cover bailout costs for 53 of the 116 banks that have so far accepted tax dollars to boost their bottom lines.
Rep. Barney Frank, chairman of the House Financial Services committee and a long-standing critic of executive largesse, said the bonuses tallied by the AP review amount to a bribe "to get them to do the jobs for which they are well-paid in the first place."
"Most of us sign on to do jobs and we do them best we can," said Frank, a Massachusetts Democrat. "We're told that some of the most highly paid people in executive positions are different. They need extra money to be motivated!"
The AP compiled total compensation based on annual reports that the banks file with the Securities and Exchange Commission. The 116 banks have so far received $188 billion in taxpayer help. Among the findings:
• The average paid to each of the banks' top executives was $2.6 million in salary, bonuses and benefits.
• Lloyd Blankfein, president and chief executive officer of Goldman Sachs, took home nearly $54 million in compensation last year. The company's top five executives received a total of $242 million.
This year, Goldman will forgo cash and stock bonuses for its seven top-paid executives. They will work for their base salaries of $600,000, the company said. Facing increasing concern by its own shareholders on executive payments, the company described its pay plan last spring as essential to retain and motivate executives "whose efforts and judgments are vital to our continued success, by setting their compensation at appropriate and competitive levels." Goldman spokesman Ed Canaday declined to comment beyond that written report.
The New York-based company on Dec. 16 reported its first quarterly loss since it went public in 1999. It received $10 billion in taxpayer money on Oct. 28.
• Even where banks cut back on pay, some executives were left with seven- or eight-figure compensation that most people can only dream about. Richard D. Fairbank, the chairman of Capital One Financial Corp., took a $1 million hit in compensation after his company had a disappointing year, but still got $17 million in stock options. The company, based in McLean, Va., received $3.56 billion in bailout money on Nov. 14.
• John A. Thain, chief executive officer of Merrill Lynch, topped all corporate bank bosses with $83 million in earnings last year. Thain, a former chief operating officer for Goldman Sachs, took the reins of the company in December 2007, avoiding the blame for a year in which Merrill lost $7.8 billion. Since he began work late in the year, he earned $57,692 in salary, a $15 million signing bonus and an additional $68 million in stock options.
Like Goldman, Merrill got $10 billion from taxpayers on Oct. 28.
The AP review comes amid sharp questions about the banks' commitment to the goals of the Troubled Assets Relief Program, a law designed to buy bad mortgages and other troubled assets. Last month, the Bush administration changed the program's goals, instructing the Treasury Department to pump tax dollars directly into banks in a bid to prevent wholesale economic collapse.
The program set restrictions on some executive compensation for participating banks, but did not limit salaries and bonuses unless they had the effect of encouraging excessive risk to the institution. Banks were barred from giving golden parachutes to departing executives and deducting some executive pay for tax purposes.
Banks that got bailout funds also paid out millions for home-security systems, private chauffeured cars and club dues. Some banks even paid for financial advisers. Wells Fargo of San Francisco, which took $25 billion in taxpayer bailout money, gave its top executives up to $20,000 each to pay personal financial planners.
At Bank of New York Mellon Corp., chief executive Robert P. Kelly's stipend for financial planning services came to $66,748, on top of his $975,000 salary and $7.5 million bonus. His car and driver cost $178,879. Kelly also received $846,000 in relocation expenses, including help selling his home in Pittsburgh and purchasing one in Manhattan, the company said.
Goldman Sachs' tab for leased cars and drivers ran as high as $233,000 per executive. The firm told its shareholders this year that financial counseling and chauffeurs are important in giving executives more time to focus on their jobs.
JPMorgan Chase chairman James Dimon ran up a $211,182 private-jet travel tab last year when his family lived in Chicago and he was commuting to New York. The company got $25 billion in bailout funds.
Banks cite security to justify personal use of company aircraft for some executives. But Rep. Brad Sherman, D-Calif., questioned that rationale, saying executives visit many locations more vulnerable than the nation's security-conscious commercial air terminals.
Sherman, a member of the House Financial Services Committee, said pay excesses undermine development of good bank economic policies and promote an escalating pay spiral among competing financial institutions — something particularly hard to take when banks then ask for rescue money.
He wants them to come before Congress, like the automakers did, and spell out their spending plans for bailout funds.
"The tougher we are on the executives that come to Washington, the fewer will come for a bailout," he said.
******
Executive Pay Limits May Prove Toothless
Loophole in Bailout Provision Leaves Enforcement in Doubt
By Amit R. Paley, Washington Post Staff Writer
Monday, December 15, 2008, http://www.washingtonpost.com/wp-dyn/content/article/2008/12/14/AR2008121402670.html
Congress wanted to guarantee that the $700 billion financial bailout would limit the eye-popping pay of Wall Street executives, so lawmakers included a mechanism for reviewing executive compensation and penalizing firms that break the rules.
But at the last minute, the Bush administration insisted on a one-sentence change to the provision, congressional aides said. The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.
Now, however, the small change looks more like a giant loophole, according to lawmakers and legal experts. In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future. Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives.
"The flimsy executive-compensation restrictions in the original bill are now all but gone," said Sen. Charles E. Grassley (Iowa), ranking Republican on of the Senate Finance Committee.
The modification reflects how the rapidly shifting nature of the crisis and the government's response to it have led to unexpected results that are just now beginning to be understood. The Government Accountability Office, the investigative arm of Congress, issued a critical report this month about the financial industry rescue package that said it was unclear how the Treasury would determine whether banks were following the executive-compensation rules.
Michele A. Davis, spokeswoman for the Treasury, said the agency is working to develop a policy for how it will enforce the executive-compensation rules. She would not say when the guidance would be issued or what penalties it might impose. But she said the companies promised to follow the rules in contracts with the department.
The final legislation contained unprecedented restrictions on executive compensation for firms accepting money from the bailout fund. The rules limited incentives that encourage top executives to take excessive risks, provided for the recovery of bonuses based on earnings that never materialize and prohibited "golden parachute" severance pay. But several analysts said that perhaps the most effective provision was the ban on companies deducting more than $500,000 a year from their taxable income for compensation paid to their top five executives.
That tax provision, which amended the Internal Revenue Code, was the only part of the law that contained an explicit enforcement mechanism. The provision means the IRS must review the pay of those executives as part of its normal review of tax filings. If a company does not comply, the IRS can impose a tax penalty. The law did not create an enforcement mechanism for reviewing the other restrictions on executive pay.
If a firm violates the executive-compensation limits, department officials said, the Treasury could seek damages, go to court to force compliance, or even rescind the contracts and recover the bailout money. "We therefore have all the remedies available to us for a breach of contract," Davis wrote in an e-mail.
Legal experts said those efforts could be complicated if the Treasury outlines the penalties after companies have received bailout money. David M. Lynn, former chief counsel of the Securities and Exchange Commission's division of corporation finance, said courts have sometimes placed limits on the government's ability to impose penalties if there was no fair warning.
"Treasury might find its hands tied down the road," said Lynn, who is also co-author of "The Executive Compensation Disclosure Treatise and Reporting Guide."
Congressional leaders are also concerned that the Treasury might simply choose not to enforce the rules or be unwilling to impose financial penalties that could further weaken a firm and send the economy deeper into a tailspin.
The Bush administration at first opposed any restrictions on executive pay, congressional aides said. The original three-page bailout proposal presented to lawmakers in September contained no mention of such limits. "Treasury was pretty clear that they thought doing this exec-comp stuff would limit the effectiveness of the program," said a Democratic congressional aide involved in the negotiations, who, like others interviewed for this story, spoke on condition of anonymity. "They felt companies might not take part if we put in these rules."
Congressional leaders disagreed. By the morning of Saturday, Sept. 27, the final day of marathon negotiations on the bill, draft language relating to taxes and containing the enforcement provision applied to all companies participating in the bailout programs, Democratic and Republican congressional aides said. But then Treasury Secretary Henry M. Paulson Jr. and his deputies began pushing for the compensation rules to differentiate between companies whose assets are purchased at auction and those whose assets or equity are purchased directly by the government, the aides said.
Congressional leaders from both parties thought Paulson wanted the distinction for extraordinary cases like American International Group, which the government seized in September. He wanted to be able to push executives out of companies that the government controlled and have the flexibility to bring in strong new executives, said one senior congressional aide.
"The argument that they were making at the time is that the direct investment was going to be used only in circumstances where the company was AIGed, so to speak," said a senior Democratic congressional aide.
Davis, the Treasury spokeswoman, confirmed that the Treasury pushed to place fewer restrictions on executives at companies receiving capital infusions, but she gave a different explanation. She said many of those firms are more stable and are being encouraged to participate in the bailout to strengthen the overall system. "The provisions for failing institutions should come with more onerous conditions than those for healthy institutions whose participation benefits the entire system," she said.
Lawmakers agreed to the Treasury's request that the measure apply only to executives at companies whose assets were bought by the government through auctions. In the executive-compensation tax section, a new sentence saying that eventually was inserted.
Meanwhile, Paulson repeatedly told lawmakers that he did not plan to use bailout funds to inject capital directly into financial institutions. Privately, however, his staff was developing plans to do just that, Paulson acknowledged in an interview.
Although lawmakers hailed the rules as unprecedented new limits on executive pay, several were unhappy that the law was not stricter.
Under pressure from Congress, the Treasury issued regulations in October on executive compensation and applied the tax-deduction limits to all companies receiving bailout funds, although the legislation did not require it for firms that received direct capital injections. But the Treasury failed to issue guidelines requiring the IRS or any other agency to enforce the rules, and it also failed to explain how the restrictions would be enforced.
The Treasury's regulations also instructed firms to disclose more compensation information to the Securities and Exchange Commission. But officials at the SEC do not think they have the authority to force companies to disclose the kind of pay information required by the bailout law, according to people familiar with the matter, though they hope companies will cooperate. John Nester, an SEC spokesman, declined to comment.
Senators on the Finance Committee have expressed concern to Paulson and are now considering whether they should amend the law to apply the enforcement mechanism to all firms participating in the bailout.
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Federal Reserve sets stage for Weimar-style hyperinflation
By F. William Engdahl, Online Journal Contributing Writer
Dec 16, 2008, 00:22
http://onlinejournal.com/artman/publish/article_4136.shtml
The Federal Reserve has bluntly refused a request by a major US financial news service to disclose the recipients of more than $2 trillion of emergency loans from US taxpayers and to reveal the assets the central bank is accepting as collateral. Their lawyers resorted to the bizarre argument that they did so to protect ‘trade secrets.’ Is the secret that the US financial system is de facto bankrupt?
The latest Fed move is further indication of the degree of panic and lack of clear strategy within the highest ranks of the US financial institutions. Unprecedented Federal Reserve expansion of the Monetary Base in recent weeks sets the stage for a future Weimar-style hyperinflation, perhaps before 2010.
On November 7, Bloomberg filed suit under the US Freedom of Information Act (FOIA) requesting details about the terms of 11 new Federal Reserve lending programs created during the deepening financial crisis.
The Fed responded on December 8 claiming it’s allowed to withhold internal memos as well as information about ‘trade secrets’ and ‘commercial information.’ The central bank did confirm that a records search found 231 pages of documents pertaining to the requests.
The Bernanke Fed in recent weeks has stepped in to take a role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program (TARP). The difference between a Fed bailout of troubled financial institutions and a Treasury bailout is that central bank loans do not have the oversight safeguards that Congress imposed upon the TARP. Perhaps those are the ‘trade secrets’ the hapless Fed Chairman, Ben Bernanke, is so jealously guarding from the public.
Defining a Very Great Depression
That means once banks begin finally to lend again, perhaps in a year or so, that will flood the US economy with liquidity in the midst of a deflationary depression. At that point or perhaps well before, the dollar will collapse as foreign holders of US Treasury bonds and other assets run. That will not be pleasant as the result would be a sharp appreciation in the Euro and a crippling effect on exports in Germany and elsewhere should the nations of the EU and other non-dollar countries, such as Russia, OPEC members and, above all, China not have arranged a new zone of stabilization apart from the dollar.
The world faces the greatest financial and economic challenges in history in coming months. The incoming Obama administration faces a choice of literally nationalizing the credit system to insure a flow of credit to the real economy over the next five to 10 years, or face an economic Armageddon that will make the 1930s appear a mild recession by comparison.
Leaving aside what appears to have been blatant political manipulation by the present Bush administration of key economic data prior to the November election in a vain attempt to downplay the scale of the economic crisis in progress, the figures are unprecedented. For the week ended December 6, initial jobless claims rose to the highest level since November 1982. More than 4 million workers remained on unemployment, also the most since 1982, and, in November, US companies cut jobs at the fastest rate in 34 years. Some 1,900,000 US jobs have vanished so far in 2008.
As a matter of relevance, 1982, for those with long memories, was the depth of what was then called the Volcker Recession. Paul Volcker, a Chase Manhattan appendage of the Rockefeller family, had been brought down from New York to apply his interest rate ‘shock therapy’ to the US economy in order as he put it, ‘to squeeze inflation out of the economy.’ He squeezed far more as the economy went into severe recession, and his high interest rate policy detonated what came to be called the Third World Debt Crisis. The same Paul Volcker has just been named by Barack Obama as chairman-designate of the newly formed President’s Economic Recovery Advisory Board, hardly grounds for cheer.
The present economic collapse across the United States is driven by the collapse of the $3 trillion market for high-risk subprime and Alt-A home mortgages. Fed Chairman Bernanke is on record stating that the worst should be over by end of December. Nothing could be further from the truth, as he well knows. The same Bernanke stated in October 2005 that there was ‘no housing bubble to go bust.’ So much for the predictive quality of that Princeton economist. The widely-used S&P Schiller-Case US National Home Price Index showed a 17 percent year-year drop in the third quarter, trend rising. By some estimates it will take another five to seven years to see US home prices reach bottom. In 2009, as interest rate resets on some $1 trillion worth of Alt-A US home mortgages begin to kick in, the rate of home abandonments and foreclosures will explode. Little in any of the so-called mortgage amelioration programs offered to date reach the vast majority affected. That process, in turn, will accelerate as millions of Americans lose their jobs in the coming months.
John Williams of the widely-respected Shadow Government Statistics report recently published a definition of depression, a term that was deliberately dropped after World War II from the economic lexicon as an event not repeatable. Since then all downturns have been termed ‘recessions.’ Williams explained to me that some years ago he went to great lengths interviewing the respective US economic authorities at the Commerce Department’s Bureau of Economic Analysis and at the National Bureau of Economic Research (NBER), as well as numerous private sector economists, to come up with a more precise definition of ‘recession,’ ‘depression’ and ‘great depression.’ His is pretty much the only attempt to give a more precise definition to these terms.
What he came up with was first the official NBER definition of recession: Two or more consecutive quarters of contracting real GDP, or measures of payroll employment and industrial production. A depression is a recession in which the peak-to-bottom growth contraction is greater than 10 percent of the GDP. A Great Depression is one in which the peak-to-bottom contraction, according to Williams, exceeds 25 percent of GDP.
In the period from August 1929 until he left office, President Herbert Hoover oversaw a 43-month long contraction of the US economy of 33 percent. Barack Obama looks set to break that record, to preside over what historians could likely call the Very Great Depression of 2008-2014, unless he finds a new cast of financial advisers before Inauguration Day, January 20. Required are not recycled New York Fed presidents, Paul Volckers or Larry Summers types. Needed is a radically new strategy to put virtually the entire United States economy into some form of an emergency ‘Chapter 11’ bankruptcy reorganization where banks take write-offs of up to 90 percent on their toxic assets, in order to save the real economy for the American population and the rest of the world. Paper money can be shredded easily. Not human lives. In the process it might be time for Congress to consider retaking the Federal Reserve into the Federal government as the Constitution originally specified, and make the entire process easier for all. If this sounds extreme, revisit this article in six months. [Read entire article at: http://onlinejournal.com/artman/publish/article_4136.shtml]
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The Madoff EconomyBy PAUL KRUGMAN
December 19, 2008
http://www.nytimes.com/2008/12/19/opinion/19krugman.html?_r=1&partner=rss&emc=rss&pagewanted=all
The revelation that Bernard Madoff — brilliant investor (or so almost everyone thought), philanthropist, pillar of the community — was a phony has shocked the world, and understandably so. The scale of his alleged $50 billion Ponzi scheme is hard to comprehend.
Yet surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?
The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s not just a matter of money: the vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole.
Let’s start with those paychecks. Last year, the average salary of employees in “securities, commodity contracts, and investments” was more than four times the average salary in the rest of the economy. Earning a million dollars was nothing special, and even incomes of $20 million or more were fairly common. The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.
But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.
Consider the hypothetical example of a money manager who leverages up his clients’ money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while — say, as long as a housing bubble continues to inflate — he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.
O.K., maybe my example wasn’t hypothetical after all.
So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. And while Mr. Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.
We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.
But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.
At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way. From Bush administration officials like Christopher Cox, chairman of the Securities and Exchange Commission, who looked the other way as evidence of financial fraud mounted, to Democrats who still haven’t closed the outrageous tax loophole that benefits executives at hedge funds and private equity firms (hello, Senator Schumer), politicians have walked when money talked.
Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?
Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.
Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.
After all, that’s why so many people trusted Mr. Madoff.Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we’re looking at now are the consequences of a world gone Madoff.
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Ten people who predicted the financial meltdownTimes Online
October 12, 2008
http://timesbusiness.typepad.com/money_weblog/2008/10/10-people-who-p.html#more
The financial events of recent weeks have filled many of us with shock and panic. Surely no one could have predicted that we would be in this mess? Well, actually, they did. Here are ten people who saw the financial meltdown coming...
1. Vince Cable - deputy leader of the Liberal DemocratsHere is a question Mr Cable’s posed to Gordon Brown, then Chancellor, during Treasury Questions back in November 2003: “The growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level. What action will the Chancellor take on the problem of consumer debt?”
Mr Brown did not answer how he would solve the problem, merely replying that: “We have been right about the prospects for growth in the British economy, and the hon. Gentleman (Mr. Cable) has been wrong.”
2. Christopher Wood – chief strategist of CLSA, a broking firm in the Asia-Pacific Market.In October 2005 Mr Wood wisely declared: "Investors should sell all exposure to the American mortgage securities market." In an interview in 2007, he said: "Some institutions have been behaving like leveraged speculators rather than banks… The UK economy is heading for a sharp shock. It just remains to be seen how bad."
3. Founders of www.stock-market-crash.net – website aimed at investors
The writers of this site claim that predicting crashes is, in fact, easy: “One of the greatest myths of all time is that market crashes are random, unpredictable events. The lead up to a market crash is often years in the making. Certain warning signs exist, which characterize the end of a bull market and the start of a bear market. By learning these common warning signs, you can liquidate your investments and prosper by shorting the market.”
4. Henry Weingarten - astrologerMr Weingarten is head of the Astrologers Fund, a New York firm that advises businesses on the basis of planetary movements. He forecast a major economic downturn in March 2007 – so hopefully his clients took note.
His website claims he has in fact made numerous successful predictions about worldwide financial affairs, including “both Mexican 1995 crises, the first 1995 dollar crisis, the 1998 oil collapse and 1999 recovery, and the decline of the Euro after its 1999 birth.”
5. Nouriel Roubini - economics professorAka Dr Doom, Dr Roubini is an economics professor at New York University. On September 7, 2006, at an International Monetary Fund meeting, he announced that a crisis was brewing. He said that the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession.
Homeowners would default on mortgages, trillions of dollars of mortgage-backed securities would unravel worldwide and the global financial system would shudder to a halt. These developments, he said, would cripple major financial institutions like Fannie Mae and Freddie Mac.
As Mr Roubini stepped down, his host said: “I think perhaps we will need a stiff drink after that.” They do now.
6. Nikolai Kondratiev - Russian Marxist economistIn the early 1920s, Mr Kondratiev proposed a theory that Western capitalist economies have long term (50 to 60 years) cycles of boom followed by depression. These business cycles are now called "Kondratiev waves", or grand supercycles. He predicted an imminent dip, and he was proved right with the Wall Street Crash in 1929.
The current crisis may mean he is about 10 years out – but, still, not a bad prediction for a man who died in 1938.
From the archive: William Rees-Mogg on Kondratiev (1980)
7. Founders of Housepricecrash.co.uk – property websiteHousePriceCrash.co.uk was established in October 2003 after its founders predicted “one of the potentially biggest economic boom bust events in living memory” was coming. Its aim, apparently, is to provide a “counterbalance to the huge amounts of positive spin the housing market receives in the main media”.
Whist there is not currently a lot of positive news about the housing market to counter, the site does provide a plethora of information, statistics and forums for those interested in the great house price crash.
8. Lord Oakeshott - Liberal Democrat Treasury spokesmanHe may not have predicted the entire financial meltdown, but he did warn the Government of the possible collapse of Icelandic banks back in July. He said last week: “"Alarm bells were ringing all over about the Icelandic banks and the Treasury must have been blind and deaf not to hear them."
In a written question to the government in July, he asked: "What steps [have] the United Kingdom financial authorities taken to satisfy themselves, independently of the Icelandic financial authorities, of the solvency and stability of Icelandic banks taking deposits in the United Kingdom?”
Lord Davies, for the Government, replied that there was no concern about the liquidity or capital base of Icelandic banks operating in the UK.
9. Stephen Roach - senior executive at Morgan StanleyIn November 2004, Mr Roach predicted an “economic Armageddon”, in part due to the record US current account, trade and government deficits. His outlook was largely dismissed at the time.
Having being proved right, he recently went on to accuse central banks of being “asleep at the switch” in failing to stop the escalating crisis. “The lack of monetary discipline has become a hallmark of unfettered globalization,” he said.
10. Ron Paul - Republican CongressmanBack in September 2003, Mr Paul told a House Financial Services Committee that: “Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market.
“This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions.” Of course, if we are going to give Mr Paul credit, than we should also highlight the efforts of Peter Schiff, his economic advisor and long-time economic hawk.
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The Ten Biggest Stock Market Crashes of All TimePosted by MAtherton
April 14, 2008
http://timesbusiness.typepad.com/money_weblog/2008/04/the-ten-biggest.html
Some investors might think they have had a rough ride on the stock market over the past seven or eight months. But the recent share price gyrations pale into insignificance when compared with the biggest stock market falls of all time.
10) Wall Street 1901-03: -46%The market was spooked by the assassination of President McKinley in 1901, coupled with a severe drought later the same year.
9) Wall Street 1919-21: -46%There were fears that the new automobile sector was becoming overheated and that car ownership had reached saturation point.
8) Wall Street 1906-07: -48%Markets took fright after President Theodore Roosevelt had threatened to rein in the monopolies that flourished in various industrial sectors, notably railways.
7) Wall Street 1937-38: -49%This share price fall was triggerd by an economic recession and doubts about the effectiveness of Franklin D Roosevelt's New Deal policy.
6) London 2000-2003: -52%The UK took sixth place in the table with a 52 per cent market fall between 2000 and 2003 as investors suffered the consequences of the collapse of the technoogy bubble
5) Hong Kong 1997-98: -64%The Hong Kong stock market’s heavy fall in 1997-1998 came as investors deserted emerging Asian shares, including a very overheated Hong Kong stock market
4) London 1973-74: -73%Next came the UK stock market’s 73 per cent drop in 1973 and 1974. set against the backdrop of a dramatic rise in oil prices, the miners’ strike and the downfall of the Heath government.
3) Japan 1990-2003: -79%In third place, with a 79 per cent decline, was the Japanese stock market, which suffered a protracted slide in price from 1990 to 2003 as a share and property price bubble burst and turned into a deflationary nightmare.
2) US Nasdaq 2000-2002: -82%The second biggest collapse came from the technology-rich US Nasdaq index, which fell by 82 per cent following the bursting of the dot.com bubble in 2000
1) Wall Street 1929-32: -89%The Wall Street Crash heads the list, with the US stock market falling by 89 per cent between 1929 and 1932. The bursting of the speculative bubble led to further selling as people who had borrowed money to buy shares had to cash them in in a hurry when their loans wre called in.
David Shwartz, the stock market historian, says: “The very big stock market crashes are invariably triggered by a series of different events which unfold one after the other. For example the biggest UK stock market slump in 1973-74 was started by the fear of stagflation, but was then fuelled by the dramatic rise in oil prices of late 1973, followed by the Miners’ strike and the downfall of the Heath government. One heavy blow is not enough to produce a market crash. It requires several different blows to bring a market to its knees.”
(This list only includes stock market crashes in industrialised economies.)
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Ten mind-boggling statistics from the credit crunchBy James Charles
December 19, 2008
http://timesbusiness.typepad.com/money_weblog/2008/12/post.html#more
It's been a year of mindboggling statistics and silly money, of soaring debts, collapsing stock prices and astounding events.
When Northern Rock collapsed last year, did you think, "We're going to have to nationalise the rest of them too". No, me neither.
I also bet you didn't work out that the part-nationalisation of our banking sector would cost you at least £8,000 in taxes. And this is just the beginning.
Here are some other surprising, dispiriting and utterly disturbing statistics from the financial credit crunch which has ravaged our financial sector, broken the back of our economy and produced a recession that could be the worst for many generations.
1. £500,000,000,000
...or around £8,000 each. £500 billion is a conservative estimate of what taxpayers, you and me included, are paying for Gordon Brown's plan to bail out the UK banking system. The three-part package includes committing up to £50 billion of taxpayer funds for a part-nationalisation of Lloyds TSB, HBOS and Royal Bank of Scotland (RBS), which is now 57 per cent owned by you and me.
The Bank of England will pump at least £200 billion into the money markets to encourage banks to lend to each other again, which should help lower the costs of new mortgages. And the Government is also making a further £250 billion available for banks over the next three years to guarantee medium-term debt which is of dubious quality. This should also help restore confidence and get banks lending to each other again.
£500 billion is a staggering amount of money, equivalent to 4,000 brand new hospitals (at £125 million each), 16 new high speed rail links between London, the north of England and Scotland or 37,000 Jamie Oliver-approved free school meals for each and every pupil in the UK. Instead, they'll be eating turkey twizzlers.
2. £20,000,000,000This is the amount of taxpayer cash that has gone into the coffers of the Royal Bank of Scotland, a bank which was the pride of Scotland until the suffix "troubled" was permanently attached to its name. This is the equivilent of £333 each. You have Sir Fred Goodwin, the former chief executive of the much-maligned firm, to thank for this. Royal Bank of Scotland made £7.5 billion in net profits in 2007, the year before the banking bubble popped. Last month Tom McKillop, chairman of RBS, apologised for the right royal mess the firm was in.
3. £1,800,000,000,000
£1.8 trillion is the cost to the global economy of the credit crunch. Such a vast number is difficult to grasp, but in the same report, the Bank of England valued the UK economy, the fifth biggest in the world, at £7 trillion. So it has so far cost about a quarter of the value of our entire economy.
4. 0.4 per centThe drop in retail sales last month compared to a year ago, according to the British Retail Consortium. This doesn't sound like much, but a predicted fall next year of just 4 per cent will produce the worst conditions on the high street since 1965, according to research by Verdict, a retail consultancy. Major retailers are collapsing into administration, including Woolworths, Pier and MFI, and more are expected to follow in the next 12 months, as consumers shut their wallets, bury their purses and consider making half their Christmas presents.
This won't just create less choice on the high street. The retail sector employed 3.2 million people last year, so problems on the high street spell huge problems for the economy at large.
5. £50,000This is the amount which will have been wiped off the value of your house by the end of next year, according to the Centre for Economics and Business Research (CEBR), an optimistically-minded think tank. It predicts that average prices will fall by 25 per cent and not return to their peak until 2013. The average home in the UK, which hit £200,000 in August 2007, will fall to £149,000 by 2009. Capital Economics, the consultancy, has said that prices could fall by 35 per cent, peak to trough, although it also forecast a tentative recovery in 2010.
6. £50,000,000Executive pay at the five biggest banks exceeded £50 million in the last five years, according to a report by the Labour Research Department. Sir Fred Goodwin, the head of RBS, was paid a basic salary of £3.5 million last year. Between 2003 and 2007, Goodwin got £15.5million in basic pay and cash bonuses. Eric Daniels, of Lloyds TSB, pocketed £10.2million and HBOS chief executive Andy Hornby earned £6.9million, according to annual reports.
Another number to remember is 59.9p: the lowest share price this year of Halifax Bank of Scotland, 92 per cent less than the highest point in the year. Stocks in the embattled mortgage giant, which is set to be taken over by rival Lloyds TSB have plummeted since trading at almost £11.60 last year.
7. £2.5millionThe cost of celebrating Christmas at Britain's nationalised banks. Lloyds TSB, which is accepting about £5.5 billion from taxpayers to shore up its broken balance sheet, is to spend around £2.5 million on Christmas parties for its 100,000 UK employees, or around £25 a head. Meanwhile, HBOS is hosting a "luxury dinner and dance" at the Birmingham NEC for 1,500 mortgage workers, with free hotel rooms thrown in. Meanwhile, Royal Bank of Scotland (RBS) is spending £1 million on parties for its 100,000 staff. RBS also spent more than £300,000 entertaining 40 senior employees and 30 partners recently.
Alex Neil MSP, an SNP member representing central Scotland, reflected the mood north of the border when he said the bank was "playing with fire". He added: "I don't want to be a party pooper, but spending £1m on Christmas parties when so many pensioners have lost their savings as a result of the RBS share collapse is obscene."
8. £1,500,000,000,000This is the amount of debt which Britons have to pay back. £1.5 trillion is the amount we owe in the form of mortgages, credit cards, personal loans and store cards. This equates to roughly £4.5 billion washing machines or 7.5 million three-bedroom houses.
The average household in the UK with personal, unsecured debt, such as personal loans or credit cards, owe £22,190. If you include mortgages, the average household debt is £59,715.
However evidence suggests that we can't afford to pay it back. About 120 properties were repossessed every single day in the UK last month and the situation is expected to get worse as growing numbers of households struggle to meet their mortgage commitments. The Council of Mortgage Lenders says 200,000 homeowners will have missed at least three mortgage repayments by the end of the year.
Auction houses are reporting a huge jump in the number of repossessed homes on their books. Allsops, one of the largest, recently held an auction with 996 lots, compared to 227 in the same month last year.
The bad news continues. The number of homeowners trapped in negative equity is expected to soar to 2 million by 2010.
9. $2,900,000,000Last year's pay cheque for George Soros, the second-highest-paid hedge fund manager in the world. Mr Soros is the chairman of Soros Fund Management and was estimated to be worth about $8.8 billion by Forbes magazine last year. This could clear the credit card debt of almost 300,000 struggling Americans.
The average American household owed $2,966 on their credit card in 1990 compared to $9,840 in 2007. The average American male earned $32,000 last year, according to figures from the US Census, and last month more than 533,000 Americans lost their jobs, the largest amount in 34 years.
10. $52,000......every minute. This is how much cash GM, or General Motors, is losing as a result of the economic meltdown in the US. Note that this eclipses the average annual American salary. This collapse in profitability has forced the world's biggest carmaker to go cap-in-hand to the US government and it has been joined by Ford and Chrysler, which are facing similar loses. The US carmarkers are asking for £23 billion in taxpayers cash.
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American Express Will Get $3.39 Billion in TARP FundsBy Ari Levy
http://www.bloomberg.com/apps/news?pid=20601087&sid=afjV5RFxHw1s&refer=home
Dec. 23 (Bloomberg) -- American Express Co., the credit- card company that’s converting into a bank, will get $3.39 billion of fresh capital from the U.S. rescue fund to ensure its survival as the recession heads into a second year.
American Express joins more than 190 regional banks, commercial lenders, insurers and card issuers seeking at least $75 billion from the second phase of the Treasury’s bailout plan for financial firms. Faced with rising defaults by cardholders, the New York-based firm won Federal Reserve approval to become a commercial bank last month and announced in a statement today it gained access to the $700 billion Troubled Asset Relief Program.
“The ability to avail themselves of government funding takes the dire scenarios off the table,” said Richard Shane, an analyst at Jefferies & Co. in San Francisco. Shane, who initiated the shares with an “underperform” rating in November, said today he expects “significant losses” in the loan portfolio.
The Treasury’s Troubled Asset Relief Program will buy preferred shares that pay annual dividends of 5 percent for the first five years and 9 percent in following years, American Express said. The company will also sell warrants that entitle the Treasury to buy common stock of up to 15 percent of the preferred purchase.
American Express rival Capital One Financial Corp. has preliminary approval for $3.6 billion from the U.S. and Discover Financial Services asked for $1.2 billion. Discover, based in Riverwoods, Illinois, was awarded bank holding company status last week.
Card CompaniesCard issuers, along with securities firms including Goldman Sachs Group Inc., insurers like Hartford Financial Services Group Inc. and commercial lender CIT Group Inc., sought status as bank holding companies to tap the government’s rescue fund. CIT said today its request for $2.33 billion won preliminary approval.
Standard & Poor’s cut American Express’ long-term debt rating last week and at least three equity analysts this month have recommended selling the shares as higher unemployment and a decline in consumer spending threaten earnings.
American Express fell 46 cents to $17.96 at 4:15 p.m. in composite trading on the New York Stock Exchange. The shares have lost about two-thirds of their value this year.
American Express Chief Financial Officer Daniel Henry said in October that that company had $24 billion of debt maturing over the next 12 months. While the lender would probably have been able to pay that off, gaining access to TARP removes any concern, said Shane from Jefferies.
Longer-term, the increased regulatory oversight that banks face and the higher capital levels they have to maintain may require American Express to scale back its lending, reducing profit, Shane said.
“It means potentially lower leverage going forward and potentially diminished returns,” he said.
To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net.
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China Blasts U.S. Economic Policy, Expresses Doubt in Financial System
By Jason Simpkins, Associate Editor, Money Morning
Thursday, December 4th, 2008
http://www.moneymorning.com/2008/12/04/china-blasts-us-economic-policy-expresses-doubt-in-financial-system/
China blasted U.S. economic policy yesterday (Thursday) at the Strategic Economic Dialogue, a two-day summit engineered to address long-term issues between the two countries. Chinese authorities have grown more fervent, and more explicit, with their criticism of the U.S. financial system over the past year, evidence of a shift in the balance of power between the nations.
"Over-consumption and a high reliance on credit is the cause of the U.S. financial crisis," said Zhou Xiaochuan, governor of the Chinese central bank. "As the largest and most important economy in the world, the U.S. should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits."
This kind of lecture was a deviation from past meetings, which were dominated by U.S. calls for China to better manage its fiscal policies. However, the global financial turmoil that has emanated from the collapsing U.S. housing market has left the United States without a pulpit on which to stand.
"One result of the crisis is that the U.S. no longer holds the high ground to lecture China on financial or macroeconomic policies," Eswar Prasad, a senior fellow at the Brookings Institution, told the Financial Times. "This may actually help turn their relationship into a more equal partnership with less posturing on both sides."
Indeed, U.S. Treasury Secretary Henry Paulson, who in the past used summits like these to press Beijing to open its financial system and appreciate its currency, was noticeably more humble in representing the United States yesterday.
"International cooperation and coordination have been robust and we appreciate the responsible role China has played in the crisis," he said.
Meanwhile, Wang Qishan, vice premier and leader of the Chinese delegation called on the United States to "take the necessary measures to stabilize the economy and financial markets as well as guarantee the safety of China’s assets and investments in the U.S."
Wang’s remarks followed those of Lou Jiwei, chairman of China’s $200 billion sovereign wealth fund, China Investment Corp. (CIC), who said Wednesday that his firm lacks the confidence to invest in the United States, particularly U.S. financial institutions.
"Right now we don’t have the courage to invest in financial institutions because we don’t know what problems we will put ourselves into," Lou said at a conference in Hong Kong. "My confidence should come from government policies. But if they are changing every week, how can you expect that to make me confident?"
CIC has lost about $6 billion of the $8 billion it invested in Morgan Stanley (MS) and The Blackstone Group LP (BX) last year. More importantly, however, China last month overtook Japan as the largest holder of U.S. government debt. And according to the Financial Times, officials have privately admitted that they are concerned about the value of the holdings.
Concerned with China’s overexposure to the United States, central bank governor Zhou said policymakers should no only address the country’s slowing economy, but "restructure the development model" and prepare "for a worst-case scenario," the FT reported.
However, Chinese officials also say that any large-scale unwinding of U.S. holdings would be counterproductive, as the value of U.S. bonds and the dollar would subsequently plummet.
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They Did It On Purpose: The Housing Bubble & Its Crash were Engineered by the U.S. Government, the Fed & Wall Streetby Richard C. Cook
Global Research, October 23, 2008
http://www.globalresearch.ca/index.php?context=va&aid=10654
During the Clinton administration, the government required the financial industry to start expanding the frequency of mortgage loans to consumers who might not have qualified in the past.
When George W. Bush was named president by the Supreme Court in December 2000, the stock market had begun to decline with the bursting of the dot.com bubble.
In 2001 the frequency of White House visits by Alan Greenspan increased.
Greenspan endorsed President Bush’s March 2001 tax cuts for the rich. More such cuts took place in May 2003.
Signs of recession had begun to show in early 2001. The stock market crashed after 9/11. The U.S. invaded Afghanistan in October 2001 and Iraq in March 2003.
The Federal Reserve began cutting interest rates, and by 2002 a home-buying frenzy was underway. Fannie Mae and Freddie Mac went along by guaranteeing the increasing number of mortgage loans.
According to a mortgage broker this writer interviewed, word began to come down through the mortgage banks to begin falsifying mortgage applications to show more borrower income than borrowers actually possessed
Banks that wrote mortgages began to offload them when Wall Street packaged them into mortgage-backed securities that were sold around the world as bonds to investors.
Risk-analysts at the leading credit-rating agencies, such as Standard and Poor’s, Moody’s, and Fitch, gave their highest ratings to mortgage-backed securities whose risks were later acknowledged to be grossly underestimated.
Mortgage companies, with Alan Greenspan’s endorsement, began to offer more Adjustable Rate Mortgages (ARMs), loans that would reset at much higher rates in future years.
Mortgage brokers fed the growing bubble by telling people they should buy now because housing prices would keep going up and they could resell at a profit before their ARMs escalated.
Huge amounts of money began to flow into the economy from mortgages and home equity loans and from capital gains on resale of inflating property.
Meanwhile, in the world of investment securities, the Securities and Exchange Commission greatly reduced the amount of their own capital investors were required to bring to the table, resulting in a huge increase in bank leveraging of speculative trading.
George W. Bush was reelected in 2004 at the height of the housing and investment bubbles. By 2005 the housing bubble was accounting for half of all U.S. economic growth and yielding huge tax revenues to all levels of government.
Despite the tax revenues from the bubbles the Bush administration was running huge budget deficits from expenditures on the wars in Afghanistan and Iraq .
ABC News reports that during this time risk analysts at Washington Mutual, one of the nation’s largest banks, were told to ignore high risk loans because lending had to be maximized. Those who objected were disciplined or fired.
State attorneys-general moved to investigate mortgage fraud but were blocked from doing so by orders of the Treasury Department’s Comptroller of the Currency. There was no federal agency that was charged with regulating mortgage fraud.
In February 2006, Ben Bernanke replaced Alan Greenspan as Federal Reserve Chairman and held interest rates steady. Homeowners began to default as ARMs reset.
The housing bubble began to collapse in 2006-2007, with the economy showing early signs of a recession and the stock market starting to decline by August 2007. Home prices began to plummet in most markets, with millions of homeowners owing more on their homes than their new appraisals.
Homeowners began to default, with over four million homes going to foreclosure from 2006-2008. In many cases, homeowners simply walked away, dropping off the keys to their houses at the bank.
The U.S. economy shed 60,000 jobs in August 2008. In a year, Wall Street had cut 200,000 jobs. State and local governments began to cut budgets and jobs.
The “toxic debt” from the collapse of the housing bubble brought about a full-scale crash of the U.S. financial system by September 2008. The stock market immediately fell, with 40 percent of its value—$8 trillion—now having been lost in a year. $2 trillion of the losses were in retirement savings.
The crash of the U.S. economy began to reverberate around the world with bankers and the IMF warning of an onrushing global recession.
Massive bailouts by the U.S. Treasury Department and the Federal Reserve failed to stem the tide of the crashing markets. By late October 2008 the recession has begun to hit in force.
As the situation worsened, big banks like J.P. Morgan Chase received government capitalization even as they were buying up banks that were failing. J.P. Morgan Chase paid $1.9 billion for Washington Mutual with assets of over $300 billion.
The U.S. government joined with the nations of Europe in planning a series of economic summits to explore global financial solutions. President Bush will host the first summit in Washington , D.C. , on November 15, after the U.S. presidential election.
The U.S. military shifted combat troops from Iraq to the U.S. to contain possible civil unrest.
Most major retail chains began to close stores and lay off employees even as the Christmas season approached.
The Washington Post reported on October 23, 2008: “Employers are moving to aggressively cut jobs and reduce costs in the fact of the nation’s economic crisis, preparing for what many fear will be a long and painful recession.”
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Credit crunch to intensify, Bank of England warns
The credit crunch is likely to intensify in the coming months, with banks planning to continue rationing the amount they lend out to customers, new figures have revealed.By Edmund Conway, Economics Editor
02 Jan 2009
http://www.telegraph.co.uk/finance/economics/4075493/Credit-crunch-to-intensify-Bank-of-England-warns.html
Britain's major lenders have tightened credit availability significantly in the past three months, and intend to make borrowed cash even harder to get hold of in the coming quarter, according to a survey from the Bank of England. The development comes in spite of the Government's insistence when it bailed out three of the UK's biggest lenders in October that they would raise mortgage availability back to 2007 levels.
Economists have said the UK is trapped in a so-called negative feedback loop, with the economy slumping further as banks restrict mortgage and other loan availability in an effort to repair their balance sheets. This in turn causes further defaults, which causes more damage to their accounts, and worsening the vicious cycle.
The Bank's Credit Conditions Survey shows that lenders reduced the availability of secured credit such as mortgages to households in the three months to mid-December 2008, adding: "A further decline was expected over the next three months."
The survey also revealed that banks are the demand for credit from both households and companies fell in the fourth quarter, while defaults and losses increased.
Lenders are already withholding the full extent of the Bank of England's recent interest rate cuts - to the irritation of both customers and the Government - and the survey indicates that they are likely to continue doing so in the coming months.
Nationwide announced that it will not pass on further rate cuts to customers with its tracker mortgages.
In November the average cost of a two-year fixed-rate mortgage fell by less than half the 1.5pc interest-rate cut that month.
Although the survey is likely to increase pressure on the Bank to cut rates further, it also reignites suspicion that the Government will have to intervene to resolve the mortgage market's current malaise.
Howard Archer, UK economists at IHS Global Insight said: "The credit conditions survey intensifies pressure on the Bank of England to slash interest rates further.
"We expect the Bank's Monetary Policy Committee to reduce interest rates by at least a further 75 basis points from 2pc to 1.25pc next Thursday.
"While an even bigger cut could well occur, we suspect that the MPC may well decide to moderate the pace at which it is cutting interest rates as they near zero and to allow the previous large cuts more time to feed through and have a significant effect .
"Further out, we expect interest rates to fall to a low of 0.5pc in the second quarter of 2009 and then stay there for the rest of the year. However, it is far from inconceivable that interest rates could come all the way down to zero."
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Steel industry hopes for big stimulus shotBy Louis Uchitelle
The New York Times
http://seattletimes.nwsource.com/html/businesstechnology/2008581699_steel020.html
The steel industry, having entered the recession in the best of health, is emerging as a leading indicator of what lies ahead. As steel production goes, and it is now in collapse, so will go the national economy.
That maxim once applied to the Big Three car companies. Now they are losing ground in good times and bad, and steel has replaced autos as the industry to watch for an early sign that a severe recession is beginning to lift.
The industry itself is turning to government for orders that, until the collapse, came from manufacturers and builders.
Its executives are waiting anxiously for details of President-elect Obama's stimulus plan and adding their voices to pleas for a huge public investment program — up to $1 trillion over two years — that will lift demand for steel to build highways, bridges, power grids, schools, hospitals, water-treatment plants and rapid transit.
"What we are asking," said Daniel R. DiMicco, chairman and CEO of Nucor, a giant steelmaker with a Seattle plant, "is that our government deal with the worst economic slowdown in our lifetime through a recovery program that has in every provision a 'buy America' clause."
Economists in the Obama camp said the proposals to Congress will include significant infrastructure spending that draws on heavy industry.
New spending should provide an immediate jolt to the steel business, which has already gone through the painful makeover now demanded of the Big Three.
Mills were closed, companies were consolidated, hundreds of thousands lost their jobs and the survivors agreed to concessions. As a result, productivity shot up and so did profits, to record levels in the first nine months of this year.
But then the recession hit in force.
Steel goes into nearly everything made in America, and as construction and manufacturing wound down, so did steel output, plunging 50 percent since September.
The steel industry's collapse closely tracks the alarming late-autumn swoon in the national economy, as the housing bust and the credit crisis converted a mild downturn into "a severe one that has much further to run," says Nigel Gault, chief domestic economist at IHS Global Insight.
Through August, steel production was actually up slightly for the year. The decline came slowly at first, then with a rush in November and December.
By late December, output was down to 1.02 million tons a week from 2.1 million tons Aug. 30, the American Iron and Steel Institute reported. The price of a ton of steel is also down by half since summer.
"We are making our steel at four mills instead of six," said John Armstrong, a spokesman for U.S. Steel, explaining that two mills were recently idled and the four still operating are at less than full capacity.
"The third quarter was one of the best in U.S. Steel's history," Armstrong added. "And it has been a very precipitous drop from there."
The cutback has been particularly hard on workers at the big integrated mills like those at U.S. Steel and Arcelor Mittal USA, with their blast furnaces and coke ovens converting coal and iron ore into steel.
Nucor "minimills"
Operated at less than full capacity, these mills are less efficient than the equally large "minimills," like Nucor, whose electric arc furnaces can be operated efficiently at lower speeds.
So the plant closings have been mostly at the integrated mills, whose 50,000 workers — roughly 40 percent of the nation's steelworkers — are represented by the United Steelworkers of America. The union says that by early this year it expects 20,000 workers to be laid off.
Ten thousand already are. Kathleen Loepker, a millwright and mechanic, is among the most recent to join their ranks. She was laid off Dec. 19 from the U.S. Steel plant in Granite City, Ill., which shut down, putting more than 2,000 people out of work.
With nearly 30 years seniority, Loepker, 48, has worked through bankruptcies, union concessions and consolidations that saw her mill acquired by U.S. Steel in 2003.
Her income is tied more to incentive bonuses than in the past. On layoff, she is collecting $20 an hour, which is 80 percent of her base pay of $25.12 an hour.
That base pay, rather than rising significantly, is fattened by incentive bonuses tied to amounts of steel produced and to profits. It had been averaging an additional $7 an hour — money now gone until the mill reopens.
"No one knows when that will happen," said Loepker. "The company tells us the end of March, but they don't know either. The uncertainty has everyone fearful."
Not since the 1980s has American steel production been as low as it is today. Those were the Rust Belt years when many steel companies were failing and imports of better-quality, lower-cost steel were rising.
Foreign producers no longer have an advantage over the refurbished American companies. Indeed, imports, which represent about 30 percent of all steel sales in the United States, also are hurting as customers disappear.
Lobbying Obama
The industry, in response, is lobbying the Obama transition team for infrastructure projects that would require big amounts of steel. Mass-transit systems are high on the list and so is bridge repair.
"We are sharing with the president-elect's transition team our thoughts in terms of the industry's policy priorities," said Nancy Gravatt, a spokeswoman for the American Iron and Steel Institute.
The Obama team has not revealed details of the president-elect's soon-to-be-announced recovery plan other than to indicate most of the package will probably go into infrastructure spending rather than tax breaks.
"If the president-elect really follows through, he'll fund a lot of mass-transit projects," said Wilbur L. Ross Jr., the Wall Street deal maker who put together the steel conglomerate known today as Arcelor Mittal USA.
"All the big cities have these projects ready to go."
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Cash-strapped states weigh selling roads, parksMartiga Lohn, Associated Press Writer
Sat Dec 27, 2008
http://news.yahoo.com/s/ap/20081227/ap_on_re_us/meltdown_selling_assets
ST. PAUL, Minn. – Minnesota is deep in the hole financially, but the state still owns a premier golf resort, a sprawling amateur sports complex, a big airport, a major zoo and land holdings the size of the Central American country of Belize.
Valuables like these are in for a closer look as 44 states cope with deficits.
Like families pawning the silver to get through a tight spot, states such as Minnesota, New York, Massachusetts and Illinois are thinking of selling or leasing toll roads, parks, lotteries and other assets to raise desperately needed cash.
Minnesota Gov. Tim Pawlenty has hinted that his January budget proposal will include proposals to privatize some of what the state owns or does. The Republican is looking for cash to help close a $5.27 billion deficit without raising taxes.
GOP lawmakers are pushing to privatize the Minneapolis-St. Paul International Airport and the state lottery. Both steps require a higher authority — federal legislation in the case of the airport, a voter-approved constitutional amendment for the lottery. But one lawmaker estimated an airport deal could bring in at least $2.5 billion, and the lottery $500 million.
Massachusetts lawmakers are considering putting the Massachusetts Turnpike in private hands. That could bring in upfront money to help with a $1.4 billion deficit, while also saving on highway operating costs.
In New York, Democratic Gov. David Paterson appointed a commission to look into leasing state assets, including the Tappan Zee Bridge north of New York City, the lottery, golf courses, toll roads, parks and beaches. Recommendations are expected next month.
Such projects could be attractive to private investors and public pension funds looking for safe places to put their money in this scary economy, said Leonard Gilroy, a privatization expert with the market-oriented Reason Foundation in Los Angeles.
"Infrastructure is more attractive today than ever," Gilroy said. "It's tangible. It's a road. It's water. It's an airport. It's something that is — you know, you hear the term recession-proof."
Unions don't like privatization deals out of fear that worker wages and benefits will be squeezed as private operators try to boost their profit by streamlining services.
Taxpayers, too, can lose out if the arrangements don't work — and sometimes even if they do, said Mark Price, a labor economist with the Keystone Research Center in Harrisburg, Pa. Higher tolls on privatized roads can push drivers onto state-operated roads, wearing them down faster and raising public costs over time.
"You're privatizing some profits in this process and socializing some losses," Price said.
Selling or leasing public assets can produce an immediate infusion of cash for the state, while foisting the tough decisions, such as raising tolls, onto private operators instead of the politicians.
"The downsides are often after they leave office," said Phineas Baxandall, a researcher with the consumer-oriented U.S. Public Interest Research Group in Boston.
Some states struck major privatization deals well before the economic crisis hit.
Indiana, for example, brought in $3.8 billion in 2006 by leasing the Indiana Toll Road for 75 years. Chicago stands to collect $2.5 billion by leasing Midway Airport, if the federal government approves, and has raised an additional $3.5 billion since 2005 through deals for the Chicago Skyway toll road, parking ramps and parking meters.
But in September, investors walked away from a $12.8 billion bid to lease the Pennsylvania Turnpike for 75 years after legislators failed to act on the deal. And Texas lawmakers uneasy over a proposed private toll road system approved a two-year moratorium on such contracts last year.
David Fisher, who managed Minnesota's state-owned properties a few years ago under former Gov. Jesse Ventura, warned that the state has a hard time finding buyers for properties such as old mental institutions.
Fisher said some public properties belong in private hands, such as Giants Ridge Golf & Ski Resort, a top-rated getaway in Biwabik, and Ironworld, a museum and library in Chisholm. Both are owned and subsidized by Iron Range Resources, a state agency.
"Certainly those things could be privatized, I think without harm to the state, but I don't know that you could find the right buyer," Fisher said.
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Merrill Lynch says rich turning to gold bars for safetyMerrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or "paper" proxies.By Ambrose Evans-Pritchard
09 Jan 2009
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4177766/Merrill-Lynch-says-rich-turning-to-gold-bars-for-safety.html
Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. "People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs," he said, referring to exchange trade funds listed in London, New York, and other bourses.
"They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands," he said.
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Rich investors are spurning gold exchange traded funds in favour of krugerrands.
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Merrill predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June.
The metal should do well whatever happens. If deflation sets in and rocks the economic system it will serve as a safe-haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value. "It's win-win either way," said Mr Dugan.
He added that deflation may prove the greater risk in coming months. "It's very difficult to get the deflation psychology out of the human brain once prices start falling. People stop buying things because they think it will be cheaper if they wait."
Merrill expects global inflation to hover near zero, with rates of minus 1pc in the industrial economies. This means that yields on AAA sovereign bonds now at 3pc will offer a real return of 4pc a year, which is stellar in this grim climate. "Don't start selling your government bonds," Mr Dugan said, dismissing talk of a bond bubble as misguided.
He warned that the eurozone was likely to come under strain this year as slump deepens. "There is going to be friction as governments in the south start talking politically about coming out of the euro. I don't see the tensions in Greece as a one-off. It is a sign of social strain in countries that have lost competitiveness."
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World in mad rush for Gold coinsCommodity Online, 17 January 2009
http://www.commodityonline.com/news/World-in-mad-rush-for-Gold-coins-14128-3-1.html
NEW DELHI: Forget equities and other investment options, the world is now in a mad rush for gold coins. If reports emerging from all corners are any indication, gold coins have witnessed a surge in demand following the global recession. According to analysts, investors are set to make a dash for gold coins now because of the slowdown. According to a gold coin dealer in US, he has witnessed a sharp increase in people purchasing gold as a result of the economic recession.
David Bernhardt of Engle’s Coin Shop in Indianapolis told TV channels that more customers have been buying $950 US Mint gold bullion coins in a bid to diversify their investments. Many people in Indiana are putting their money into gold rather than stocks and bonds.
Data from the US Mint indicated that almost 1.2 million gold coins were sold last year, nearly triple the number purchased in 2007.
The mint reported last autumn that supplies of many gold coins were depleted as a result of an upsurge in demand.
Meanwhile, Royal Canadian Mint has launched its first gold coin designs for 2009, including a coin commemorating the opening of Canada’s first commercial coal mine in Port Morien, Cape Breton in 1720 and the tenth anniversary of Nunavut, the country’s newest territory.
Generally, gold bullion coins come in 1 oz, 1/2 oz, 1/4 oz, 1/10 and 1/20 oz. sizes. Most countries have one design that remains constant each year; others have variations each year, and in most cases each coin is dated. A 1/10th oz bullion coin is about the same size as a U.S. dime. A 1 oz. gold bullion coin is about the size of a US half dollar.
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Economic Jihad: $700 Billion Bail-Out Aids Oil Rich Arab Sheikhs
By Paul Williams, Wednesday, January 14, 2009 http://canadafreepress.com/index.php/article/7570
Oh, you Muslims everywhere, sever the ties of their nation, tear them apart, ruin their economy, [and] instigate against their corporations.—Blind Sheikh Abdel Rahman, principal architect of the 1993 bombing of the World Trade Center
Shares in Citigroup plummeted today to $5.07 - - their lowest level since the banking giant began receiving massive transfusions of cash from U.S. taxpayers. The company, according to the Wall Street Journal, is expected to post fourth-quarter losses in excess of $10 billion.
The deteriorating condition is expected to cause Citigroup to sell its stake in Smith-Barney retail brokerage to Morgan Stanley.
To most readers, such news is economic gibberish that is more apt to evoke a yawn rather a cry of alarm.
Yet the situation within Citigroup is a tell-tale sign that Americans no longer are in control of their destiny and that the future of the country will not be controlled by President-Elect Barack Obama but rather by oil-rich Arabs.
Citigroup which presents itself - - along with Well Fargo, J.P. Morgan Chase, and the Bank of America - - as one of the four leading financial institutions within the land of the free and the home of the brave.
It has convinced U.S. government officials - - including Treasury Secretary Henry Paulson, President George W. Bush, and House Speaker Nancy Pelosi - - that its demise would wreck havoc for middle class Americans and financial devastation for lending agencies throughout the country.
On the basis of this argument, Citigroup has become the principal beneficiary of the $350 million that has been spent under the Troubled Asset Relief Program. The megabank, thus far, has received $45 billion from Uncle Sam - - $20 billion in November and $25 billion in October. And now the firm is crying out for an additional transfusion of billions more in order to become financially solvent.
Sure, it’s nice for Americans to help Americans and to take preventive measures against a full-scale depression.
But the $45 billion shelled out to Citigroup may do little to aid the plight of Main Street Americans.
The firm is not owned by U.S. bankers and businessmen but rather by the Abu Dhabi Investment Authority, a sovereign wealth consortium of oil-rich Middle Eastern countries, who gained control of the megabank in November 2007. Presently, the largest single shareholder is Prince al-Waleed bin Talal of Saudi Arabia.
Prior to this buy-out by Abu Shabi, Citigroup was the First National Bank of New York, an American firm that pioneered the use 24-hour ATMs and the country’s largest issuer of credit and charge cards.
Within a year of the take-over, the firm ran into a swamp of quicksand as a result of poor management and troubled mortgages in the form of collateralized debt obligation.
Why do the economic eggheads in Washington care if a consortium of rich sheikhs go belly-up?
The answer lies in the fact that the only standard for U.S. currency remains oil. In 1971, President Richard Nixon eliminated the gold standard (the Bretton Woods System) in order to offset rampant inflation and a growing trade deficit. Nixon believed that such a measure was prudent since the gold coverage of the paper dollar deteriorated from 55% to 22% in 1970. He did not believe this drastic measure would cause the dollar to free-fall since its value remained linked to a tangible commodity: oil. The dollar remained the fiat currency for petro trading and, therefore, retained intrinsic value.
This would be all well and good as long as the Arab nations required U.S. military support for protection.
But the need for protection, thanks in part to the removal of Iraqi dictator Saddam Hussein, is no longer a pivotal factor in Arab economics. And U.S. officials, including Bush and Obama, realize that a decision by OPEC to deal in euros would result in a valueless currency and an economic plight from which there would be scant chance of recovery.
“The Arabs have us over a barrel,” financial analyst Patrick Walsh maintains. “Should they decide like the Iranians and the Venezuelans to trade in euros, the trillions shelled out for the bail-out will have little or no impact on the recession and will only serve to further devalue the dollar.”
How has the $45 billion already allocated to Citigroup been spent? Perhaps it has served to prevent members of the Abu Dhabi Investment Authority from losing their harems or to enable them to sustain multi-million dollar losses in Monte Carlo. Or, better yet, maybe it has enabled the United States to retail its vassal status before the leaders of OPEC.
Small wonder the $700 billion is provided to banking firms, such as Citigroup, without accountability.
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Worst Economic Collapse Ever!
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The U.S. Economy is being Marched to the Gallows
Predictions of hyperinflation, dollar decline and civil unrestBy Andrew Hughes
URL of this article: www.globalresearch.ca/index.php?context=va&aid=11818
Global Research, January 16, 2009
The upcoming Financial Stimulus package courtesy of the new Economic dream team has left numerous economists and analysts quaking in their boots.
We are seeing predictions of hyperinflation, the destruction of the dollar, the flight of U.S. creditors, the prospect of widespread civil unrest and a descent in to a Greater Depression.
Small business owners have stood up and discredited the tax incentives that were meant to convince them to ignore market reality and open the door to new employees. The measures that supposedly address the enormous foreclosure problem seem to change from day to day and only work to the advantage of the banks. Obama and Bush have just signed off on an additional $20 Billion in cash and $118 Billion in asset guarantees for Bank of America which already received $25 Billion last year and is now choking on Merrill Lynch's losses. The President Elect and his new Stimulus Czars are not paying attention and are proceeding to continue the same destructive formula adopted by Paulson.
The media bombardment is in overdrive to convince the public that herein lies the path to salvation. First we had the guarantee that three million jobs would be created out of thin air only to be bumped up to four million. These are nice round media friendly numbers which have no basis in reality. With each passing day the sands are shifting on exactly how the money will be spent.
Ben Bernancke' s speech at the London School of Economics on January 13, confirmed that the emphasis has now shifted to bailing out the banks one more time by buying more toxic assets to clean up their collapsing balance sheets. After seeing $8.2 Trillion vanish in to Insurance, Banking and a moribund auto industry with absolutely no concrete result except for the tightening of credit, the increasing losses of Big Banking and the GM chairman having to queue for his airline ticket, the Fed, backed by Obama, continues to beat the dead horse.
The scariest aspect of this is the speed at which this 18 wheeler disaster is being driven toward the rabbits in the headlights. We haven't yet seen any senators or reps being threatened with the imposition of martial law, but we have seen Obama treathen to veto his own fellow democrats if they do not rubber stamp the proposals he has been instructed to deliver. Nobody has even taken a vote yet and already the gloves are off. Bailout Bill One and the Patriot Act were pushed just as hard. The only legislation that gets the hard sell seems to involve either stealing the taxpayer's money or their rights.
Judging by his actions so far, Obama has done absolutely nothing but continue the transfer of wealth from the American taxpayer to his Wall St. campaign contributors.
There has been absolutely zero positive impact on the real economy as the increasingly horrific indicators continue to mount and the prospect of an unprecedented Depression continues to rise over the horizon. Economic reality was left on the back burner and the capital that could have paid for Obama's fantastical "stimulus" plan 5 times over has been wasted on the imploding financial sector, who no doubt will be back for more.
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