[ECON] July 20-26

[Fredfredson]

Monday, July 21, 2008
Failure to agree trade deal could trigger '1930s-style' disaster

JAMIE SMYTH in Brussels

http://www.irishtimes.com/newspaper/...565490450.html

THE EUROPEAN Commission's Irish-born director general for trade David O'Sullivan has warned that a failure to agree a global trade deal could provoke a 1930s-style Great Depression.

However, he has expressed optimism about the prospect of achieving a breakthrough in long-running World Trade Organisation (WTO) talks, which are due to re-start today in Geneva.

"The odds of a deal are 60-40 [ in favour]," Mr O'Sullivan told The Irish Times, while issuing a stark warning about the "siren voices" of protectionism, which may have been strengthened by the current difficulties experienced by the global economy.

"It is always a battle to make the case for free trade when those who feel they are losing out are often more vociferous than the great majority who benefit.

"There is always a temptation to return to protectionism - as an instrument of policy this is what brought us close to disaster in the 1930s. I hope there is sufficient understanding of this economic reality in the political classes across the world that we won't let ourselves repeat that mistake," he said.

Ministers from at least 30 countries will meet throughout this week in Geneva in an effort to find an acceptable compromise to liberalise world trade in agriculture, industrial products and services by cutting tariffs and trade distorting subsidies. The talks have been dragging on for seven years and key differences remain between the developed economies - the US, EU, Japan and Australia - and developing countries such as Brazil, China and India.

Mr O'Sullivan pinpoints three key issues that need to be resolved this week to lay the basis for a final WTO agreement later in the year: a willingness by the US to cut farm subsidies; the question of opening markets for farm imports; and persuading developing states such as Brazil, India and China to cut tariffs levied on imports of industrial goods.

For states such as Ireland with large agricultural interests, a WTO deal holds the prospect of increased competition from low-cost beef producers such as Brazil.

However, Mr O'Sullivan contends that the EU has done a "very good job of reconciling the need for Europe to open our agricultural markets . . . while at the same time securing firmly our defensive interests in the most sensitive sectors". By according beef as a sensitive product in the EU, imported beef would not benefit from the full tariff cut for agricultural products, he said.

The Irish Farmers Association (IFA) has warned that sensitive product status would not save the industry from feeling the brunt of international competition, estimating that 100,000 jobs would be put at risk in rural communities. The Government has also expressed grave concern over the commission's conduct of the WTO negotiations.

Mr O'Sullivan said a WTO deal concluded now would be better for Irish farmers because it would take into account the 2003 reform of the common agricultural policy (CAP). A delay could persuade other trade blocs to demand extra tariff and subsidy cuts in future while the current deal on the table would not threaten the future of EU agriculture.

He dismissed arguments advanced by the Government and France that this is not the time to open EU agriculture to competition because of concerns over food security.

"The current food crisis demonstrates rather the need for more openness and more access to encourage people to produce efficiently and sell into markets that need food. I find it very paradoxical that at a time of food shortages people think the correct response is to close borders rather than to open them as fully as possible," said Mr O'Sullivan.

He added that a deal this week would provide a positive boost for the world economy.

"It would show that the WTO is capable of playing the same role in the 21st century that the GATT and the WTO played in the second half of the 20th century of building and developing a rules-based multilateral trading system which has been a huge source of prosperity for all countries participating," he said.

"If we are not able to do the deal next week the consensus view is that probably the negotiation will have to be put on the backburner for a year or two and then resumed after the electoral cycle in the US."

© 2008 The Irish Times

[Fredfredson]

The global economy is at the point of maximum danger

By Ambrose Evans- Pritchard
Last Updated: 6:53am BST 21/07/2008

http://www.telegraph.co.uk/money/mai...-mostviewedrss

It feels like the summer of 1931. The world's two biggest financial institutions have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution.

The International Monetary Fund has abdicated into schizophrenia. It has upgraded its 2008 world forecast from 3.7pc to 4.1pc growth, whilst warning of a "chance of a global recession". Plainly, the IMF cannot or will not offer any useful insights.

Its "mean-reversion" model misses the entire point of this crisis, which is that central banks have pushed debt to fatal levels by holding interest too low for a generation, and now the chickens have come home to roost. True "mean-reversion" would imply debt deflation on such a scale that would, if abrupt, threaten democracy.

The risk is that these same central banks will commit a fresh error, this time overreacting to the oil spike. The European Central Bank has raised rates, warning of a 1970s wage-price spiral. Fixated on the rear-view mirror, it is not looking through the windscreen.

The eurozone is falling into recession before the US itself. Its level of credit stress is worse, if measured by Euribor or the iTraxx bond indexes. Core inflation has fallen over the last year from 1.9pc to 1.8pc.

The US may soon tip into a second leg of this crisis as the fiscal package runs out and Americans lose jobs in earnest. US bank credit has contracted for three months. Real US wages fell at almost 10pc (annualised) over May and June. This is a ferocious squeeze for an economy already in the grip of the property and debt crunch.

No doubt the rescue of Fannie Mae and Freddie Mac - $5.3 trillion pillars of America's mortgage market - stinks of moral hazard. The Treasury is to buy shares: the Fed has opened its window yet wider. Risks have been socialised. Any rewards will go to capitalists.

Alas, no Scandinavian discipline for Wall Street. When Norway's banks fell below critical capital levels in the early 1990s, the Storting authorised seizure. Shareholders were stiffed.

But Nordic purism in the vast universe of US credit would court fate. The Californian lender IndyMac was indeed seized after depositors panicked on the streets of Encino. The police had to restore order. This was America's Northern Rock moment.

IndyMac will deplete a tenth of the $53bn reserve of the Federal Deposit Insurance Corporation. The FDIC has some 90 "troubled" lenders on watch. IndyMac was not one of them.

The awful reality is that Washington has its back to the wall. Fed chief Ben Bernanke thought the US could always get out of trouble by monetary stimulus "à l'outrance", and letting the dollar slide. He has learned that the world is a more complicated place.

Oil has queered the pitch. So has America's fatal reliance on foreign debt. The Fannie/Freddie rescue, incidentally, has just lifted the US national debt from German 'AAA' levels to Italian 'AA-' levels.

China, Russia, petro-powers and other foreign states own $985bn of US agency debt, besides holdings of US Treasuries. Purchases of Fannie/Freddie debt covered a third of the US current account deficit of $700bn over the last year. Alex Patelis from Merrill Lynch says America faces the risk of a "financing crisis" within months. Foreigners have a veto over US policy.

Japan did not have this problem during its Lost Decade. As the world's supplier of credit, it could let the yen slide. It also had a savings rate of 15pc. Albert Edwards from Société Générale says this has fallen to 3pc today. It has cushioned the slump. Americans are under water before they start.

My view is that a dollar crash will be averted as it becomes clearer that contagion has spread worldwide. But we are now at the point of maximum danger. Britain, Japan, and the Antipodes are stalling. Denmark is in recession. Germany contracted in the second quarter. May industrial output fell 6pc in Holland and 5.5pc in Sweden.

The coalitions in Belgium and Austria have just collapsed. Germany's left-right team is fraying. One German banker told me that the doctrines of "left Nazism" (Otto Strasser's group, purged by Hitler) had captured the rising Die Linke party. The Social Democrats are picking up its themes to protect their flank.

This is the healthy part of Europe. Further south, we are not far away from civic protest. BNP Paribas has just issued a hurricane alert for Spain.

Finance minister Pedro Solbes said Spain is facing the "most complex" economic crisis in its history. Actually, it is very simple. The country was lulled into a trap by giveaway interest rates of 2pc under EMU, leading to a current account deficit of 10pc of GDP.

A manic property bubble was funded by foreigners buying covered bonds and securities. This market has dried up. Monetary policy is now being tightened into the crunch by the ECB, hence the bankruptcy last week of Martinsa-Fadesa (€5.1bn). With Franco-era labour markets (70pc of wages are inflation-linked), the adjustment will occur through closure of the job marts.

China, India, East Europe and emerging Asia have all stolen growth from the future by condoning credit excess. To varying degrees, they are now being forced to pay back their own "inter-temporal overdrafts".

If we are lucky, America will start to stabilise before Asia goes down. Should our leaders mismanage affairs, almost every part of the global system will go down together. Then we are in trouble.

[potter]

Predictably the price of gasloine has dropped quite quickly over the past couple of weeks, despite the US being at the apex of the summer holiday and driving season. Any other year except an election year would see soaring gas priices throughout the summer.

Gas pricing will continue to slide until after the election. The public is played like a fine violin and they don't even realise it.....

[ninjalooter1701]

IndyMac will deplete a tenth of the $53bn reserve of the Federal Deposit Insurance Corporation. The FDIC has some 90 "troubled" lenders on watch. IndyMac was not one of them.

Holy shit...So a few more like that and there WON'T be money to fund the FDIC guarantees.

Like I thought...

[potter]

But like Social Security the government will insist that it's well funded and that there is nothing to worry about.

[Fredfredson]

Roubini: Bear Market Only Half Over, But It's Not Armageddon
Posted Jul 22, 2008 11:40am EDT by Aaron Task in Investing, Newsmakers, Recession, Banking
Related: ^DJI, ^SPX, ^IXIC, SPY, DIA, XLF

http://finance.yahoo.com/tech-ticker...Not-Armageddon

One of the most noted skeptics on Wall Street, NYU Professor Nouriel Roubini says the financial system is in "the worst crisis since the Great Depression," and that the bear market in stocks is only half over.

Subprime mortgages are only the tip of the bad-loan iceberg, says Roubini, who expects the "subprime financial system" to ultimately suffer credit-related losses of between $1 trillion and $2 trillion vs. the approximately $330 billion thus far.

Roubini believes the economy slid into recession in the first quarter of 2008 and will remain there until the second quarter of 2009, with "subpar growth" likely to characterize the recovery.

That's the (very) bad news.

The good news is Roubini, who also chairs research firm RGE Monitor, is "not in the Armageddon camp."

The economist sees a "severe recession" that will last 12-to-18 months, but does not foresee the U.S. sliding into a prolonged Japan-like economic malaise. Similarly, while further 20% declines for major averages isn't pretty, it won't be as bad as the bursting of the tech bubble or the Great Depression for stocks, which Roubini sees starting to recover later this year/early next year.

[Fredfredson]

You Know The Banking System's Unsound When...
Mike Mish Shedlock Jul 23, 2008 12:00 pm

25 signs of insolvency.

http://www.minyanville.com/articles/.../index/a/18162

1) Paulson appears on Face the Nation and says "Our banking system is a safe and a sound one." If the banking system were sound, everyone would know it (or at least believe it). There'd be no need to say it.


2) Paulson says the growing number of troubled banks "is a very manageable situation." Here's the reality: There are 90 banks on the list of problem banks. Indymac wasn't one of them - until a month before it collapsed. How many other banks will magically appear on the list a month before they collapse?


3) In a Northern Rock moment, depositors at Indymac pull out their cash. Police had to be called in to ensure order.


4) Washington Mutual (WM), another troubled bank, refused to honor Indymac cashier's checks. It's ironic that customers pulled insured deposits out of Indymac after it went into receivership. It's also ironic that they would then want to deposit those funds in Washington Mutual - the last place one would want to put them.

WaMu eventually decided it would take those checks, but with an 8-week hold. Will Washington Mutual even be around 8 weeks from now?


5) Paulson asked for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae (FNM) and Freddie Mac (FRE)" just days after saying "Financial institutions must be allowed to fail." Paulson's obviously reporting from the 5th dimension; only in some alternate universe would his statements make sense.


6) Former Fed Governor William Poole says Fannie Mae and Freddie Mac losses make them insolvent.


7) Paulson says Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages. Is it possible to have a sound banking system when the only "functioning" part of the mortgage market is insolvent?


8) Bernanke testified before Congress on monetary policy, but didn't comment on either money supply or interest rates. Nowhere in his testimony did he even mention the word "money." The only time "interest rate" appeared was in relation to consumer credit card rates. How can you have any reasonable economic policy when the Fed chairman is deathly scared of interest rates and the money supply?


9) The SEC issued an order to protect those most responsible for naked short selling. As long as the investment banks and brokers were making money, naked shorting was fine and dandy. However, when the bears began using the tactic against the big financials, the existing regulation is suddenly selectively enforced, and with a vengeance.


10) The Fed takes emergency actions twice during options expirations week with regard to the discount window and rate cuts.


11) The SEC takes emergency action during options expirations week regarding short sales.


12) The Fed has implemented an alphabet soup of pawnshop lending facilities, whereby the Fed accepts garbage as collateral in exchange for Treasury bonds. Those new Fed lending facilities are called the Term Auction Facility (TAF), the Term Security Lending Facility (TSLF), and the Primary Dealer Credit Facility (PDCF).


13) Citigroup (C), Lehman (LEH), Morgan Stanley (MS), Goldman Sachs (GS) and Merrill Lynch (MER) all have a huge percentage of Level-3 assets. Level 3 assets are commonly known as "marked to fantasy" assets. In other words, the value of those assets is significantly if not ridiculously overvalued in comparison to what they'd fetch on the open market.

It's debatable if any of the above firms will survive in their present form. Some may not survive in any form.


14) Bernanke openly solicits private equity firms to invest in banks. Is it even remotely normal for a Fed Chairman to undertake such an action?


15) Bear Stearns was taken over by JPMorgan (JPM) days after assuring investors that it had plenty of capital. Fears are high that Lehman will suffer the same fate. Worse still, the Fed w3as forced to guarantee the shotgun marriage between Bear Stearns and JPMorgan by providing as much as $30 billion in capital. JPMorgan is responsible for only the first $500 million. Taxpayers are on the hook for the rest.

Was this a legal action for the Fed to take? Does the Fed care?


16) Citigroup needed a cash injection from Abu Dhabi and a second one from elsewhere. After announcing it wouldn't need more capital, it's raising still more. The latest news: Citigroup will sell $500 billion in assets. To who? At what price?

17) Merrill Lynch raised $6.6 billion in capital from Kuwait and Japan, announced it didn't need to raise anymore - then raised still more capital just a few weeks later.


18) Morgan Stanley sold a 9.9% equity stake to China International. CEO John Mack made a show of not taking his bonus. How generous. Morgan Stanley fell from $72 to $37. Does CEO John Mack deserve a paycheck at all?


19) Bank of America agreed to take over Countywide Financial and twice insisted that Countrywide will add profits. Inquiring minds ask: "How the hell can Countrywide add to Bank of America earnings?" Here's how: Bank of America just announced it won't guarantee $38.1 billion in Countrywide debt. Questions over "fraudulent conveyance" are now surfacing.


20) Washington Mutual agreed to a death spiral cash infusion of $7 billion and accepted an offer of $7.85 when the stock was over $13. WaMu has since plummeted from $40 to a price near $5 after a huge rally.


21) Shares of Ambac (ABK) fell from $90 to $2.50. Shared of MBIA (MBI) fell from $70 to $5. Sadly, the top three rating agencies kept their rating on the pair at AAA nearly all the way down.

No one can believe anything the government sponsored rating agencies say.


22) In a set of moves that looked like panic, the Fed slashed interest rates from 5.25% to 2%. This was the fastest, steepest drop on record. Ironically, Bernanke spoke of inflation concerns the whole way down. The Chairman is clearly unable to tell the truth. He doesn't have to - actions speak louder than words.


23) FDIC Chairman Sheila Bair said the FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits.


24) There's roughly $6.84 trillion in bank deposits, of which $2.60 trillion is uninsured. There's only $53 billion in FDIC insurance to cover $6.84 trillion in bank deposits. Indymac alone will eat up roughly $8 billion of that.


25) Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where's the rest of the loot? The answer is: In off-balance-sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds (where, amazingly, debt's paid back with more debt) and in all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30 to 1 or more. Those loans can't be paid back.

And what can't be paid back will be defaulted on. If you didn't know it before, you do now: The entire US banking system is insolvent.

[Francois Cellier]

From Reuters

Huge oil trading loss sinks energy trader SemGroup

By Robert Campbell
Tue Jul 22, 2008 7:40pm EDT


NEW YORK (Reuters) - SemGroup LP declared bankruptcy on Tuesday after $3.2 billion in oil trading losses torpedoed the formerly 12th-largest private U.S. company.

The Tulsa-based company racked up the massive losses as oil prices ran up record gains, undercutting short crude futures positions SemGroup bought to hedge against its 500,000 barrel-per-day trading business.

To meet obligations, SemGroup plans to sell off oil and natural gas gathering, transportation, and storage assets worth an estimated $6.14 billion that were purchased in a whirlwind of acquisitions since it was founded in 2000.

"We have determined that the best way to maximize value for our creditors is to undertake a sales process that will transition our valuable businesses to well-established companies," Terry Ronan, SemGroup's acting chief executive, said in a statement.

SemGroup took a $2.4 billion loss on July 16 after it transferred its New York Mercantile Exchange oil futures trading account to Barclays Plc, converting what they called "loss contingencies" into an actual loss.

Included in the NYMEX loss was $290 million owed to SemGroup by a trading company owned by co-founder and former chief executive Thomas Kivisto, who was placed on administrative leave on July 17.

Securities legislation limits publicly traded company executives from extensive dealings with their firms, but experts said privately held companies have more flexibility.

"They can't do anything illegal. But there is no particular disclosure to anyone apart from any contractual agreements that they may have with investors," said Kenneth Froewiss, a professor of finance at New York University.

SemGroup had engaged in regular hedging transactions with BOK Financial Corp, where Kivisto had been a board member since 2006 before resigning on July 16. As of the end of 2007, SemGroup had hedged 21 million barrels of crude oil with BOK, which had a fair value of negative $130 million.

As of the end of March, this position was worth negative $88 million, said BOK spokesman Jesse Boudiette, who declined to comment on BOK's current exposure to SemGroup saying the bank would not speak publicly about individual clients.

Since going public just over a year ago, SemGroup Energy's stock has lost 72 percent of its value, most of that in the past five trading days. The stock closed at $22.69 on July 16, the day before Semgroup Energy disclosed SemGroup LP was having liquidity issues, and ended Tuesday at $8.28.


BIG LOSSES

SemGroup, ranked the No. 12 private U.S. company by Forbes.com in a 2007 article, also took $850 million in losses on July 17 when its over-the-counter hedging program was marked to market. It listed liabilities of $7.53 billion in its bankruptcy filing, including $3.1 billion of total debt $2 billion of secured debt and $594 million in unsecured notes.

SemGroup's financial difficulties were disclosed by its publicly traded affiliate SemGroup Energy Partners LP last week, when it warned that a liquidity crisis at its parent could lead to bankruptcy.

SemGroup Energy Partners management said it was confident the partnership could survive despite SemGroup's bankruptcy and would seek new business from third parties. The company's board has also authorized management to consider a sale or merger.

SemGroup Energy Partners also warned it was not ready to say if it would make a cash distribution to unitholders in the second quarter, though its management believes parent SemGroup will continue to use its fee-based assets to maintain operations while in bankruptcy.

[Fredfredson]

GM, Ford `On the Verge of Bankruptcy,' Altman Says (Update2)

By Greg Miles and Caroline Salas

http://www.bloomberg.com/apps/news?p...efer=worldwide

July 22 (Bloomberg) -- General Motors Corp. and Ford Motor Co., the two biggest U.S. automakers, have about a 46 percent chance of default within five years, according to Edward Altman, a finance professor at New York University's Stern School of Business.

``Both are in very serious shape and the markets reflect that,'' Altman, the creator of the Z-score mathematical formula that measures bankruptcy risk, said in an interview with Bloomberg Television. The model shows that these companies are ``on the verge of bankruptcy,'' he said.

The Z-scores for GM and Ford give both a bond rating equivalent to a CCC ranking, though GM is in slightly worse condition than Ford, Altman said. GM reported a $38.7 billion loss in 2007, the biggest in its 100-year history, and hasn't posted a profit since 2004. The scores are based on the companies' finances at the end of the first quarter.

Moody's Investors Service said July 15 it may cut GM's Caa1 senior unsecured debt rating because the Detroit-based automaker's plan to raise at least $15 billion by suspending its dividend, cutting management payroll by 20 percent and selling assets may not be enough to offset losses. Standard & Poor's also said in June it may lower GM's B rating. Altman said the plan to raise $15 billion may improve GM's outlook.

Ford, based in Dearborn, Michigan, is rated Caa1 by Moody's and B by S&P, which said in June that Ford's rating may also be cut.

Ability to Refinance

``The thing that triggers a default in almost all cases is running out of cash and not being able to refinance,'' Altman said in an interview prior to his television appearance. ``You're not going to go bankrupt as long as you can refinance short-term liabilities. You will go bankrupt if you can't.''

In 2005, Altman said GM had a 47 percent chance of default within five years.

GM Chief Executive Officer Rick Wagoner said in an interview July 15 that the company has the ability to raise cash, and he called bankruptcy ``a bad idea.'' Ford has said it had access to $40.6 billion in funds as of March 31, including credit lines.

GM's $3 billion of 8.375 percent bonds due in 2033 rose 0.5 cent today to 58.5 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 14.6 percent, or 994 basis points more than similar-maturity Treasuries. A basis point is 0.01 percentage point.

``I would not put money with GM right now because the downside is so great relative to the upside, relative to the yield,'' said Altman, speaking in New York. ``Your downside is probably 60 percent on the debt. The risk reward ratio is pretty poor.''

[Fredfredson]

Hmmm...


Zimbabweans battle money shortages as collectors buy hundred billion dollar notes on eBay

The Associated Press
Published: July 23, 2008

http://www.iht.com/articles/ap/2008/...Money-Woes.php

HARARE, Zimbabwe: Amid Zimbabwe's mind-boggling hyper inflation, a new 100 billion dollar bank note has more value as a novelty item on eBay than on the streets of the capital.

The note, launched this week, is worth enough to buy a loaf of bread — if you can find one on Zimbabwe's depleted store shelves. Meanwhile on eBay, the bill was on offer for nearly US$80.

Notes in the millions of dollars are useful only as toilet paper and it's cheaper to light a fire with low denomination bills than with newspaper.

In the political and economic turmoil since disputed March 29 elections, prices have risen almost daily. Factories and businesses have shut down amid empty order books and chronic shortages of gasoline, power, water and spare parts for equipment repairs.

President Robert Mugabe and opposition leader Morgan Tsvangirai signed an agreement Monday to hold talks about power-sharing to end the crisis and restore economic stability. But the news failed to move the exchange rate, since little cash is available.
Today in Africa & Middle East
Arrest warrant looming, Sudanese president goes on tour
Veto leaves provincial Iraqi elections in limbo
Obama meets with Israeli and Palestinian leaders

House prices and lottery prizes are quoted in quadrillions — that's with 15 zeros. Zimbabweans says it's only a matter of time before big ticket items will be priced in the quintillions, which have 18 zeros.

Official inflation is quoted at 2.2 million percent but independent finance houses say it's closer to 12.5 million percent.

One major commercial bank said its automated teller machines are not configured to dispense multi-zero withdrawals and freeze in what it called a "data overflow error." Software writers are busy writing programs to try to overcome the problem.

Urgent electronic transfers in trillions also take several days as electronic accounting systems grapple with transactions in 12 zeros.

Bank transfers command a special rate. A hundred billion dollars is worth US$5 at the official rate, US$1 at the black market rate — but just 30 U.S. cents in a transfer because by the time the funds are processed the Zimbabwe currency can be expected to be worth a lot less.

Shops have dropped six zeros from price tags, adding them again after totals are tallied at tills.

Zimbabwe has 27 denominations of bills and no coins. Lower value bills — 10 million Zimbabwe dollars — are all but obsolete, even in brick-sized bundles. Beggars and street urchins rarely bother to pick up such bills dropped on the street.

But one recent day in Marondera town outside Harare, traffic stopped and business came to a halt when someone — apparently upset by the dizzying rate of inflation — started throwing 50-billion-dollar notes from a moving car. Residents scrambled to collect the money.

The biggest bakery in Harare shut down this month and sent 1,200 workers home on forced leave because flour stocks recently ran out. For years, the bakery donated free loaves every week to a home for the handicapped and charity-run hostels.

One Internet provider has invited customers to pay their fees in gasoline coupons that hold their value.

A 58-year-old Harare financial director who asked not to be identified said his monthly salary is paid in local money which converts to US$50 at the bank rate. When available at his local sports club, a hamburger costs the equivalent of US$12. He hasn't eaten out in a year.

A cup of coffee at a government-owned five-star hotel was 130 billion Zimbabwe dollars, or US$5.30 this week. A waitress at the hotel said she earns 100 billion Zimbabwe dollars, US$4 a month.

A German company stopped shipments of bank note paper to the central bank's printers this month as the European Union looked to strengthen sanctions. The release of new money slowed as the central bank said it was looking to Indonesia and Malaysia to supply the specialized paper.

The daily grind for Zimbabweans to survive in the economic meltdown has won them a rating as the world's unhappiest people in the World Values Survey of the Michigan Institute for Social Research.

Zimbabweans were slightly unhappier than Armenians and Moldovans, also victims poverty and "the legacies of authoritarian rule," the researchers said.

Dereck Nhamo, who manages a warehouse, says he wants to join the teeming ranks of unemployed because he can't afford to work any longer.

Nhamo earns less than his bus fare to the warehouse in Harare but adds to his monthly income by selling firewood collected on weekends in outlying woodlands.

"It doesn't make sense to go to work any more," Nhamo said.

[potter]

Originally Posted by Fredfredson

GM, Ford `On the Verge of Bankruptcy,' Altman Says (Update2)

By Greg Miles and Caroline Salas

http://www.bloomberg.com/apps/news?p...efer=worldwide

July 22 (Bloomberg) -- General Motors Corp. and Ford Motor Co., the two biggest U.S. automakers, have about a 46 percent chance of default within five years, according to Edward Altman, a finance professor at New York University's Stern School of Business.

``Both are in very serious shape and the markets reflect that,'' Altman, the creator of the Z-score mathematical formula that measures bankruptcy risk, said in an interview with Bloomberg Television. The model shows that these companies are ``on the verge of bankruptcy,'' he said.

The Z-scores for GM and Ford give both a bond rating equivalent to a CCC ranking, though GM is in slightly worse condition than Ford, Altman said. GM reported a $38.7 billion loss in 2007, the biggest in its 100-year history, and hasn't posted a profit since 2004. The scores are based on the companies' finances at the end of the first quarter.

Moody's Investors Service said July 15 it may cut GM's Caa1 senior unsecured debt rating because the Detroit-based automaker's plan to raise at least $15 billion by suspending its dividend, cutting management payroll by 20 percent and selling assets may not be enough to offset losses. Standard & Poor's also said in June it may lower GM's B rating. Altman said the plan to raise $15 billion may improve GM's outlook.

Ford, based in Dearborn, Michigan, is rated Caa1 by Moody's and B by S&P, which said in June that Ford's rating may also be cut.

Ability to Refinance

``The thing that triggers a default in almost all cases is running out of cash and not being able to refinance,'' Altman said in an interview prior to his television appearance. ``You're not going to go bankrupt as long as you can refinance short-term liabilities. You will go bankrupt if you can't.''

In 2005, Altman said GM had a 47 percent chance of default within five years.

GM Chief Executive Officer Rick Wagoner said in an interview July 15 that the company has the ability to raise cash, and he called bankruptcy ``a bad idea.'' Ford has said it had access to $40.6 billion in funds as of March 31, including credit lines.

GM's $3 billion of 8.375 percent bonds due in 2033 rose 0.5 cent today to 58.5 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 14.6 percent, or 994 basis points more than similar-maturity Treasuries. A basis point is 0.01 percentage point.

``I would not put money with GM right now because the downside is so great relative to the upside, relative to the yield,'' said Altman, speaking in New York. ``Your downside is probably 60 percent on the debt. The risk reward ratio is pretty poor.''

Heres' yer next taxpayer bailout......

[Fredfredson]

Credit Cards: The Next Financial Crisis?

To Make Up For New Losses, Card Companies Raise Interest Rates, Lower Limits

By ALICE GOMSTYN

ABC NEWS Business Unit

http://abcnews.go.com/print?id=5444545

July 25, 2008 —

Paul Takhar has $50,000 in credit card debt. The California man said that since his real estate business went south, he's relied on his credit cards to survive. But lately, making payments has grown tougher because the interest rate on one of his cards has increased.

He said he tried to negotiate for a lower rate, but had no luck.

"I'm going to try to make the payments as long as I can," he said. "I'm struggling."

Takhar's experience is not unique.

With banks limiting home equity lines, gas and food bills on the rise, and homeowners struggling to make their mortgage payments, some Americans are turning to credit cards to make ends meet. Many, however, are finding their cards more expensive to use as credit card companies increasingly raise interest rates, lower credit limits and cancel inactive accounts.

It's all happening, some industry watchers say, for a good reason: The companies are trying to avert a crisis.

In the first three months of the year, commercial banks in the U.S. took losses on 4.7 percent of their credit card loans, up from 3.9 percent the year before, according to the Federal Reserve.

In the last two weeks, major credit card players like American Express, Capital One, Citigroup and Bank of America have all reported larger losses from unpaid card bills. American Express saw second-quarter profits from its U.S. credit card business fall a stunning 96 percent from $580 million in the spring of 2007 to $21 million this year. (Overall, the company reported $655 million in second-quarter profits.)

"The credit card companies have really found themselves in a huge, huge hole," said Robert Manning, the director of the Center for Consumer Financial Services at the Rochester Institute of Technology.

Manning argues that banks themselves, not credit card users, should shoulder much of the blame for rising delinquencies and defaults. As the financial slump took hold, he said, banks started relying on their profitable credit card arms to compensate for losses in other divisions such as mortgage lending.

This practice, he said, came at a price -- revenues were being bolstered, in the short term, by drives to offer higher credit limits and more credit cards to higher-risk borrowers.

Credit card lending became "a bit too aggressive," said John Ulzheimer, the president of consumer education for Credit.com, a credit card information site. "People were getting credit vehicles maybe they should not have been getting. Those bad issuances of cards are, in many cases, coming home to roost right now."


Sink or Scramble?
Manning said it was important to note the distinction between companies like Mastercard and Visa and banks. While Mastercard and Visa are prominent card names, they're largely marketing operations that don't actually extend credit. That falls to financial institutions like American Express, Capital One, Citibank and Bank of America, which issue Mastercard and Visa cards, among others.

Analysts agree that credit card troubles alone likely won't be enough to topple any one bank in the same spectacular fashion that subprime mortgage losses led to the collapse of Bear Stearns.

But Ron Ianieri, the chief market strategist for the investor education company Options University, said that for banks already suffering from other financial woes, more trouble on the credit card front "could be enough to be the straw that breaks the camel's bank."

"I don't think a credit card crisis would be strong enough to collapse a bank under normal conditions, but these aren't normal conditions," he said. "These banks are teetering right now as it is. One more push -- it doesn't have to be a big push -- and it could knock them off the top."

Analysts like Ulzheimer, however, don't see the need to ring any alarm bells and neither, apparently, do the banks.

"We obviously do not know the extent of the current downturn, but the position of our company today is financially sound and competitively strong," American Express CEO Ken Chenault said in a Monday conference call on the company's earnings.

A similar message came from Richard D. Fairbank, the CEO of Capital One, which saw its second-quarter earnings plummet to $452.9 million from $750.4 million last year.

"We remain well-positioned to navigate the near-term economic challenges and to deliver strong shareholder value," he said in a statement last week.

Ulzheimer said that, unlike their mortgage divisions, banks' credit card arms can move quickly to reign in their losses by raising card holder's interest rates and lowering their credit limits.

This happens, he said, when companies realize -- thanks, in part, to monthly credit report reviews -- that a cardholder's ability to make his or her monthly payments may have been jeopardized.

"They have the ability to modify the terms almost on the fly when they see you are more of or less of a risk," he said.

He said companies are also increasingly moving to cancel unused -- and thereby, unprofitable -- accounts to eliminate the costs of maintaining those accounts.

Not all banks pursue the same strategies. A Capital One spokeswoman told ABC News that the company hasn't raised interest rates for any customers since last July.


Interest Rate Rants
Some bottom-line conscious moves have met with blowback. Bank of America came under fire for raising interest rates above 20 percent for some its customers earlier this year. Critics cried that the rate increases were arbitrary and that those slapped with the increases included customers with a history of on-time payments.

Bank of America spokeswoman Betty Riess told ABC News that, last year, 94 percent of the bank's customers saw their interest rates drop or stay the same.

When interest rate hikes do take place, she said, they are decided on a case-by-case basis. She noted that the bank takes into account "external credit criteria"  such as how many loans a person has taken out elsewhere and whether they've defaulted with other lenders  in determining a rate increase.

The bank's careful calculations are of little comfort to customers like Paul Takhar, who has a Bank of America card.

"I think they're taking advantage of the situation. Their interest rates are ridiculous to begin with," he said. Ulzheimer says that, overall, Credit.com has recently been "buried" in complaints from disgruntled credit card customers.

More are likely to come  Ulzheimer said he expects banks will be grappling with credit card woes for a least another year.

In the meantime, banks should consider reducing how much they expect delinquent credit card holders to pay back  that's Manning's take. He says that banks stand to recoup more that way.

"It makes a lot more sense to come up with a repayment plan of 50 percent rather than 80 percent and push people into bankruptcy," he said.

[Fredfredson]

A long rant, from RENSE so Caveat Emptor.

US Financial Break Point Soon

Posted on: July 21, 2008

By Bob Chapman
The International Forecaster

http://www.idahoexaminer.com/columns...eak-point-soon

Something is going to break, and soon. Banks are insolvent and failing by the hundreds if not thousands. Hedge funds are on the edge of oblivion. Only a tiny percentage of toxic waste losses in real estate and other asset classes of collateral, which will eventually amount to over $1.4 trillion in the US alone, has to date been recognized by the lying bankster fraudsters. Bonds are producing negative rates of return even based on ludicrously understated official rates of inflation (until this month, when we finally got some data bordering on the truth). Credit markets are frozen, and few can get financing at favorable rates. Banks won’t even lend to one another because they do not trust each other’s financial statements, which are all bogus.

Our financial system is unregulated, opaque and rife with fraud as our Treasury Secretary suggests we hand the reins over to the Fed, the very organization which is the driving force behind our myriad of woes. The fractional reserve multiplier is not working and bank’s have had to resort to the commodity markets to make profits, thus driving up food and oil prices and the cost of raw materials. Food riots are breaking out due to the ethanol scam.

Consumers are tapped out, are in debt up to their eyeballs, are being laid off by the hundreds of thousands, are being pounded by hyperinflation and crazy gas prices and are defaulting on consumer debts across the board at ever-increasing rates. Civil unrest and the potential for revolution are everywhere. A quadrillion dollar caldera of notional principal for credit default and interest rate swaps bubbles, smolders and churns, waiting to erupt into a world-economy-killing cataclysm.

Fannie and Freddie are imploding, and gargantuan government bailouts to save these owners or insurers of over half the mortgages in the US will drive us to higher rates of inflation and levels of direct taxation that are simply unheard of. These higher levels of inflation and taxation are not as far out in the future as most would think. That is because Paulson and Bernanke, who are oblivious to moral hazards because they are sociopaths, are now trying to dump what will be trillions in losses caused by endless banking scams on an ignorant and unsuspecting citizenry.

Rising interest rates due to increased risk and hyperinflation are just around the corner, and double digit interest rates will lock up the real estate markets in a cryogenic state as occurred in the early 1980s. We have gone from being the largest creditor nation in the world to the largest debtor nation in a matter of a few decades as our manufacturing industry and economy have been gutted by free trade, globalization, off-shoring, outsourcing and both legal and illegal immigration.

Bubble after asset bubble have been created and destroyed by a malevolent Fed trying to push us toward a one world government, economy and religion as powered by megalomaniacal, satanic trillionaires who have destroyed our middle class, our Constitution and our moral standards in order to drive us into their version of the ideal Platonic society where we all get to become their feudal indentured servants and slaves. Our trade and budget deficits continue to mount with profligate spending on endless wars for profit and pork-loaded legislation. Our nation is bankrupt. Our gold reserves have been stolen, swapped, leased or otherwise compromised. Our Congress, our Executive Branch, or military and our covert agencies are loaded with traitors and perverts who are driving us into a police state complete with a Gestapo and an SS. We torture, maim and kill for fun and profits. We make the Roman Empire at its most decadent look like Shangri-La.
Entire article …

Freddie Mac new Issue quickly approved by SEC, New offerings to absorb big losses, Gold escapes general pounding in the market, home builders sentiment index is at record low, depression is a real threat still

After the markets closed on Friday, the announcement came that Freddie Mac plans to sell $5.5 billion dollars worth of new common and/or preferred shares to private investors, when its current market cap is only 6 billion. Of course, they had to register the new issue with the SEC and get its approval in order to do this, and on Friday, they filed with the SEC, which quickly approved the new issuance. This was no surprise of course because the SEC and Freddie are run by the same kind of people. Freddie recently got caught up on their SEC filings after years of what really amounted to total noncompliance due to what you might call some “major accounting issues” even though technically they were granted an exemption from filing because of their GSE status.

So, even before the Treasury injects equity into Freddie by purchasing new issues of its shares with monetized treasury bonds created out of thin air, and/or before Freddie borrows from the Fed on treasury collateral which consists of those same ethereally created treasuries, the elitists plan to draw in new sucker-dupes so that both the current shareholders and new shareholders alike can get blasted with a huge dilution of their stock value. We ask who the suicidal maniacs are who would venture to buy these new issues?

First, note how the timing of this announcement, which came after markets closed on Friday as just noted above, was the same time frame used for the news about the IndyMac Bank closure. This kind of timing manipulation is used by the elitists whenever they wish to prevent market panic, allow a cooling off period before markets reopen and/or keep as many people from seeing or hearing the announcement as possible as they get underway with their weekends.

You can bet your sweet bippy that if precious metals have any bad news, if that were even possible at this point, it would make front page news on Monday just before markets opened. So much for a free press. Instead we get the inane, people’s bane, fane-stream media. If Thomas Jefferson were alive today he would be absolutely disgusted at the goings on in our government and in our press right now. In fact, he would most likely call for a revolution! Ron Paul is our Thomas Jefferson, and the elitists are quaking in fear at the revolution in thinking which Dr. No has bravely engendered with his presidential campaign.

Next, note how much US government and Freddie officials obviously believe Freddie to be undercapitalized after claiming outright only days ago that both Freddie and Fannie were and are adequately capitalized. Among those claiming adequate capitalization before this announcement was none other than our beloved Treasury Secretary, Hanky Panky Paulson, on loan from Goldman Sachs, and Senator Chris Dodd from Connecticut, elitist bootlicker and Chairman of the Senate Banking Committee. From their mouths to God’s ears. These reprobates give serpents a bad name. If they had been with Adam and Eve in the Garden of Eden, who knows what perverse lies they might have sold to our progenitors? You think we have problems now? We would probably have the Adam and Eve First National Bank. Can you just imagine? These two pieces of work are truly unbelievable. Buck-Busting Ben and Cheney the Wienie round out the new Rat Pack of liars and scalawags.

Then look at what will happen to the price of Freddie’s shares. The Freddie share price closed way down at $5.26 on Tuesday based on all the scary bailout news, but ended the week with a price of $9.18 when new sucker-dupes jumped in based on government and fane-stream media hype about a potential bottom in the real estate markets and the patently false and misleading earnings reports of Wells Fargo and Citigroup which left investors with the impression that Freddie and Fannie might not be in as much trouble as everyone thought. Short-covering was another major factor which accounted for the higher share price.

The potential for the new proposed Freddie issue was enhanced by the increased stock price because the higher price allowed more capital to be raised using fewer shares, but the new shareholders and old shareholders alike could find themselves owning stock worth substantially less because of the resulting dilution and mounting overall losses from a tanking real estate market, which Freddie admits! Can you believe it? All those new shareholders could end up with an instant haircut! And that does not even take into account the potential for the purchase of new Freddie shares by the Treasury in a bailout situation, which is inevitable! Sometimes we wonder if we are still conscious or whether we have been hooked up to the Goldilocks Matrix pod where everything turns out juuust riiight. As the Mogambo Guru might say: “Hahaha! Morons! Hahaha!”
Somehow, with over a trillion dollars of mystery off-balance-sheet toxic waste assets, Citigroup coughs up only $2.5 billion in losses for the second quarter. Can we suggest that we are more than a little skeptical of this figure? Enough said. The same pathological lies will also be spewed forth for all the other banking fraudsters this quarter. After all, we have incumbents that have to be reelected to keep the Illuminist scam wagon rolling down the road. We recoil in disgust at such unmitigated arrogance in financial reporting. Can you imagine the potential liability of the CPA’s involved in this mess? How do these people sleep at night? They probably sleep just fine, because they are all sociopaths, or they wouldn’t be working for these elitist institutions.

Gold has been implacable this week. The cartel’s best efforts have yielded little more than a brief tamping down of gold below 1,000. Despite the best efforts of the Illuminati, gold is still trading over $950 and silver is still over $18. Despite an $18 dollar per barrel takedown of oil from peak to trough this week, the largest such decline ever, and phony dollar rallies galore, gold is still more than $100 per ounce over its recent lows. The resource stocks have been pounded mercilessly with naked shorting, yet are still maintaining the same levels as two weeks ago on July 3. Lease rates are negative or near zero for both gold and silver, but no one wants to lease gold or silver for subsequent sale due to the potential to get vaporized if any untoward event occurs, such as more bank failures or the outbreak of a war or conflict. The naked shorts of the SLV shares and illegal rationing of Silver Eagles by the US Mint are barely keeping silver from exploding to new highs.
This resiliency in the precious metals has many facets and reasons for support. The CPI and PPI are at 26 and 27-year highs. The Fed pumps $500 billion monthly into the banking system just to keep it from freezing up. M3 rages at 17% to 18%, thus locking in years of hyperinflation no matter what the Fed does. The Fed has no credible way of cutting rates or even threatening to cut them as the ECB hikes to levels that are more than double the Fed funds rate.

The dollar is quickly reaching new all-time lows against the euro and has recently scraped up against its all-time lows this past week on the USDX. It is headed for 67 to 68. This presents the potential for establishing a dollar carry trade, which would take the dollar quickly to new lows. All major stock market exchanges around the globe are in Bear Market Territory, having plunged to 20% or more from their most recent highs. Various Arab nations are threatening to break dollar pegs. Wars and threats of wars abound everywhere in Georgia, Kosovo, Iraq, Iran, Syria, Lebanon and North Korea. Inflation is raging worldwide, which means that populations across the globe are quite literally being taxed to death by their governments. This just simply cannot continue.

Something is going to break, and soon. Banks are insolvent and failing by the hundreds if not thousands. Hedge funds are on the edge of oblivion. Only a tiny percentage of toxic waste losses in real estate and other asset classes of collateral, which will eventually amount to over $1.4 trillion in the US alone, has to date been recognized by the lying bankster fraudsters. Bonds are producing negative rates of return even based on ludicrously understated official rates of inflation (until this month, when we finally got some data bordering on the truth).

Credit markets are frozen, and few can get financing at favorable rates. Banks won’t even lend to one another because they do not trust each other’s financial statements, which are all bogus. Our financial system is unregulated, opaque and rife with fraud as our Treasury Secretary suggests we hand the reins over to the Fed, the very organization which is the driving force behind our myriad of woes. The fractional reserve multiplier is not working and bank’s have had to resort to the commodity markets to make profits, thus driving up food and oil prices and the cost of raw materials. Food riots are breaking out due to the ethanol scam. Consumers are tapped out, are in debt up to their eyeballs, are being laid off by the hundreds of thousands, are being pounded by hyperinflation and crazy gas prices and are defaulting on consumer debts across the board at ever-increasing rates. Civil unrest and the potential for revolution are everywhere. A quadrillion dollar caldera of notional principal for credit default and interest rate swaps bubbles, smolders and churns, waiting to erupt into a world-economy-killing cataclysm.
Fannie and Freddie are imploding, and gargantuan government bailouts to save these owners or insurers of over half the mortgages in the US will drive us to higher rates of inflation and levels of direct taxation that are simply unheard of. These higher levels of inflation and taxation are not as far out in the future as most would think. That is because Paulson and Bernanke, who are oblivious to moral hazards because they are sociopaths, are now trying to dump what will be trillions in losses caused by endless banking scams on an ignorant and unsuspecting citizenry.

Rising interest rates due to increased risk and hyperinflation are just around the corner, and double digit interest rates will lock up the real estate markets in a cryogenic state as occurred in the early 1980s. We have gone from being the largest creditor nation in the world to the largest debtor nation in a matter of a few decades as our manufacturing industry and economy have been gutted by free trade, globalization, off-shoring, outsourcing and both legal and illegal immigration. Bubble after asset bubble have been created and destroyed by a malevolent Fed trying to push us toward a one world government, economy and religion as powered by megalomaniacal, satanic trillionaires who have destroyed our middle class, our Constitution and our moral standards in order to drive us into their version of the ideal Platonic society where we all get to become their feudal indentured servants and slaves.

Our trade and budget deficits continue to mount with profligate spending on endless wars for profit and pork-loaded legislation.
Our nation is bankrupt. Our gold reserves have been stolen, swapped, leased or otherwise compromised. Our Congress, our Executive Branch, or military and our covert agencies are loaded with traitors and perverts who are driving us into a police state complete with a Gestapo and an SS. We torture, maim and kill for fun and profits. We make the Roman Empire at its most decadent look like Shangri-La.

The greatest depression of all time looms at our doorsteps. The barbarians are at the gates, but no one notices or cares. It is nothing short of surreal. Those without gold or silver will make great sport for the barbarians, who also happen to like the “barbaric relic” known as gold, because they are more intelligent than the average US citizen.

Large specs have become wise to the manipulations of the PPT in suppression of precious metals and maintain protective derivatives against such manipulations. The next wedding and jewelry seasons in India, the Orient and the Middle East are upon us. Open interest for August gold on the COMEX has gone up over 100,000 contracts in the past month, and there are already 112,500 contracts of open interest for December futures as everyone tools up for a big fall rally. The number of contracts of open interest on Goldman’s COMEX gold shorts are at record lows. We still have two weeks before August contracts get rolled over at the end of July, and then all hell will break loose. So take your positions now in gold and silver, or turn green with envy as the rest of us make magnificent profits. It may be now or never. After the elections, there will be a no-holds-barred unraveling of the system, assuming we even have elections, and there is no telling how fast and how high gold and silver could rocket. If you stay on the sidelines, you could miss the whole thing.

If you were wondering about the stock rallies, don’t. The yen went wimpy right on cue to support stock markets just as oil was taken down in record fashion to further support stock markets and to suppress precious metals. Since Wednesday, the carry traders have gotten back into it with a reduction of the value of the yen by two yen per dollar and by three and one half yen per euro. Add in the Fed’s out-of-control repo pool for funding, the PPT’s usual manipulative efforts and the pathological lies shown in banks’ financial statements, the drop in oil to support the dollar, and the rally mystery is solved. Elementary, my dear Watson.

Note that this was options expiration week, so most of the rally was powered by a short-covering rally ignited by the PPT to drain value from protective derivatives carried by large specs to protect themselves from the PPT. Fortunately for us, most of the specs probably got out when the Dow hit 10,800. Specs should short oil over 140 and a Dow over 12,000. Note that dollars chased from bonds, treasuries and money markets back into foreign stocks usually causes the dollar to weaken. Since this did not happen, it is a clear sign of intervention by the PPT, which will soon subside since they simply cannot keep this pace up for very long in such a gargantuan forex market. Gold and silver are headed much higher, and will now regroup for the final assault on $1,000 for gold and $21 for silver that will take us to new heights and more unexplored territory.

The home builders’ sentiment index fell two points in July to record-low 16, with all three components of the survey also dropping to historic lows, the National Association of Home Builders reported Wednesday. At 16, the NAHB/Wells Fargo housing market index shows that only one-in-six home builders has a positive view of the market. New subdivisions have become ghost towns, with current sales dropping off and with the traffic of prospective buyers drying up in recent months. Few builders anticipate any improvement in sales in the next six months.

[Fredfredson]

Crisis and Conflicts – the Legacy of Central Banking

by Jacob Steelman

http://www.lewrockwell.com/orig9/steelman1.html

We are in yet another financial crisis and involved in yet another war. How long will it last? Who will be the winners and who will be the losers? What can we do about it? The politicians, bureaucrats and experts all have a view on how to solve the problem now and how to prevent the problem from re-occurring in the future. For the most part they propose more of the same statist solutions that brought us to this point in the first place. In a speech given Tuesday July 9, 2008 at an FDIC forum on mortgage lending held in Arlington, Virginia Federal Reserve Chairman Ben Bernanke called for more Fed responsibility and regulatory authority over the financial industry. Then within a week after making that statement the Fed and the US Treasury nationalized Fannie Mae and Freddie Mac, the nation’s two largest funders of residential mortgages.

Few if any place the blame where it belongs – government intervention in the private economy and society – and fewer still call for drastic scaling back and elimination of government laws, regulations and spending. Virtually no one advocates getting rid of the central bank monopoly of the Federal Reserve System in the United States or central banks in other countries which are one of the primary causes of our financial crisis as well as our international conflicts.

The establishment is beginning to question whether or not a private system makes more sense then the current system. In an article published in the Financial Post November 8, 2007, Benn Steil, Director of International Economics for the Council on Foreign Relations, says that private money is a real possibility if the United States does not "return to long term fiscal discipline."

As for the United States, it needs to perpetuate the sound money policies of former Federal Reserve chairmen Paul Volcker and Alan Greenspan and return to long-term fiscal discipline. This is the only sure way to keep the United States' foreign creditors, with their massive and growing holdings of dollar debt, feeling wealthy and secure. It is the market that made the dollar into global money – and what the market giveth, the market can taketh away. If the tailors balk and the dollar fails, the market may privatize money on its own.

Mr. Steil goes to on to say

…private gold banks already exist, allowing account holders to make international payments in the form of shares in actual gold bars. Although clearly a niche business at present, gold banking has grown dramatically in recent years, in tandem with the U.S. dollar's decline. A new gold-based international monetary system surely sounds far-fetched. But so, in 1900, did a monetary system without gold. Modern technology makes a revival of gold money, through private gold banks, possible even without government support. (See the complete article in Steil, Benn "The End of National Currency.")

While it is arguable whether or not the monetary policies of Messrs. Volcker and Greenspan were sound (many point the finger of blame at Greenspan for today’s financial problems), it is wishful thinking to believe for one second that government and their financier, their central banks, will maintain long-term (or even short-term) discipline in spending and creating money. Their track record to date is relatively poor. The appetite of politicians, bureaucrats and governments for expansion of power and spending is too great to resist and the bureaucrats at central banks are all too ready to accommodate the demands of the government and the politicians. It is the reason the World’s economy has been on a course toward economic disaster since the flood gates of fiat currency (paper money and electronically created money) were opened in 1913 with the passage of the Federal Reserve Act in the United States.

The creation of money and management of the monetary system should be returned to a free (free from government intervention) private marketplace in the United States and other countries. Our property, our wealth and our lives should not be entrusted to government bureaucrats who bow and bend to special interests rather than satisfy private consumers’ demands. Let the private free market determine what consumers want, what will be money and how the monetary system will function as the private market does with other products and services provided in the private marketplace. We would not think of the government providing our groceries so why do we allow the government to provide and manage something as important as our monetary system? It is time to privatize money and close down government sponsored central banks in the United States and other countries and end the government monopoly of creating and managing the monetary system which has brought the world financial system to near collapse and allowed the previous century to be one of the bloodiest in the history of mankind.

Just as many of the businesses and assets of the state and state-owned enterprises have been privatized around the world as political leaders accept the obvious – state ownership and operation of business is inefficient and is not capable of meeting consumer demands in a growing globalized economy. So why not privatize money and banking? Historically money and the monetary system have been private (using gold, silver and other precious commodities) with periods of government intervention to bail out less reputable bankers engaged in fractional reserve banking and fiat credit creation.

It was not until the Twentieth Century that the world abandoned almost entirely private money in favor of a government-sponsored central-bank-operated monetary system consisting of numerous national fiat currencies (paper currency with little or no backing by tangible assets such as gold) and fractional reserve requirements (banks having less than 100% of their demand deposit reserve requirements). Not surprisingly we have had one central-bank-created crisis after another in the Twentieth Century – the Great Depression which began in 1929 and lasted well over 10 years, the devaluation of the US Dollar in 1971, the Latin American crisis in the 1980s, the American stock market collapse in 1987, the American savings and loan crisis of the late 1980s, the Asian crisis in the 1990s as well as the Russian and Turkish crises, the dot com crisis of 2000 and now the sub-prime crisis which began in 2007 as well as many other lesser-known financial crises, not to mention a history of international and regional wars in the Twentieth Century made possible through central bank credit expansion.

Historically banks and bankers were entrusted with the storage of an individual’s or company’s money (usually gold) just as grain silos were entrusted with a farmer’s grain harvest. The depositors were issued pieces of paper (receipts) evidencing the quantity of money being deposited with and held by the bank. The receipts were then used as substitutes for the gold on deposit to make payments for goods and services. The banks were obligated to have 100% of the depositors' money available on demand (demand deposits) and insulated from liability (the money on deposit belonged to the depositor not the bank) in the event of a bank's insolvency. These are called demand deposits. In addition banks borrowed money in the form of time deposits and the depositors became creditors of the borrowing bank. When bankers began to issue receipts evidencing more on deposit (demand deposits) than had been deposited at the bank (fractional reserve banking) without approval of the depositor, the bank had in effect borrowed the depositor’s money without the permission of the depositor and used it for the purposes of the bank or the banker. When the unauthorized borrowing became evident to all or many of the depositors the bank most likely collapsed as all the depositors sought to demand the gold on deposit at the bank.

With the advent of the Federal Reserve System, fractional reserve banking became systemic and the norm in the United States, and banks were no longer required to have 100% reserve backing for demand deposits (banks have less than 10% reserves). The unauthorized borrowing by the bank was made legal. As many Americans found out during the Great Depression in the 1930s and during the savings and loan crisis in the late 1980s, banks simply did not have reserves sufficient to cover all the money deposited in demand deposit accounts. Rather than identify the cause of the problem and implement the cure by eliminating the Federal Reserve and fractional reserve banking, the politicians and the bureaucrats in 1933 came up with another government program and agency – the Federal Deposit Insurance Corporation (FDIC) which would ensure a fraction of the deposits at banks in the banking system in the event of a bank’s insolvency. But the FDIC is not capable of insuring all the demand or other deposits on deposit at the nation’s banks either.

No end of money has been available to finance through fiat currency the huge expansion of governments around the world for social welfare programs and to finance one of the bloodiest centuries in our history – two world wars, countless regional wars including the Korean conflict, the Vietnam war, the Gulf war, the war in Bosnia, wars in Africa, the Afghanistan wars involving the former Soviet Union and now involving the countries of Europe, the United States, Australia and other nations, the war in Iraq and the international war on terror. The list goes on and on in country after country. Such a huge waste of human life and unnecessary destruction of human society and property. Had the citizens of any of the countries involved been asked to vote on financing these wars through payment of substantially higher taxes (rather than the stealth taxation of central bank fiat credit and the resulting inflation) or substantially higher prices for goods and services (resulting from inflation of the money supply) what would have been the obvious answer? No truly private free market monetary system would have been capable of defying such consumer reaction.

Anyone who knows economics, in particular the Austrian economists, and knows the history of banking knows the inevitable result of credit expansion perpetuated by central banks especially the central bank of the world’s largest economy – a continual international financial crisis and expansion of government. The great worldwide depression of the thirties, the Nixon devaluation of 1971, the stagflation of the seventies, the American savings and loan crisis of the late 1980s, the Latin American and Asian crisis of the nineties, the bursting of the dot com bubble in 2000 and now the sub-prime crisis are just a few of the better-known financial crises of the Twentieth and Twenty-First Centuries. Unless there is a change we are sure to have more financial crisis and more wars.

In his treatise on the subject entitled Money, Bank Credit and Economic Cycles, Jesus Huerta De Soto describes in detail the history of banking from ancient Greece to modern day bankers. In example after example down through the ages he describes the attributes of the reputable banks and bankers who maintained 100% reserves of demand deposits and the less reputable banks and bankers, who often with the assistance of government central banks, sail close to the edge using fractional reserve banking and central bank printing presses to artificially inflate the supply of money. The less reputable bankers frequently encouraged by the state to inflate almost always ended up insolvent and sought state protection. As de Soto says

When bankers first began using their depositors’ money, they did so shamefacedly and in secret,.... At this time bankers were still keenly aware of the wrongful nature of their actions. It was only later, after many centuries and vicissitudes, that bankers were successful in their aim to openly and legally violate the traditional legal principle, since they happily obtained the governmental privilege necessary to use their depositors’ money (generally by granting loans, which initially were often given to the government itself).

The state central bank always makes things worse as they expand (inflate) the money supply which inevitably causes the economy to collapse. Asset values and the prices of goods and services rise vis-à-vis the fiat currency as it falls in value. For example in August 2007 when the malinvestments (in particular what is referred to as the sub-prime investments) caused by the credit expansion became obvious, asset values began to immediately correct and fall temporarily (except US real estate values which continued to fall as a result of massive loan defaults resulting from the sub-prime fallout), stopped only by the actions of the Federal Reserve in coordination with other central banks which made more money available to the financial system to prevent financial institutions from going into insolvency. In other words the central bank policy was to continue with the action that caused the problem in the first place and not allow the correction (which is required to eliminate the malinvestments) to occur. Not surprisingly the prices of international commodities continued to skyrocket as a result of the central banks’ actions while the politicians avoided reality by blaming the speculators.

While there are any number of excuses to explain the financial crisis, the failure of the banking system and the contraction of the economy, it is only the Austrian economists who provide a real understanding and explanation of the cause of the problem – government central bank fractional reserve banking, the inevitable fiat currency expansion (inflation) which follows and the just as inevitable correction (recession or depression) which follows the inflation. It is only the Austrian economists who provide the solution – return to private money and private banking in a free market without government intervention and without government central banking.

July 25, 2008

Jacob Steelman [send him mail] is President of International Ventures Group, a global investment, finance and development company located in Sydney, Australia.

Copyright © 2008 LewRockwell.com

[Fredfredson]

US faces longer bear market
Jul 25, 2008 12:48 PM

http://tvnz.co.nz/view/page/536641/1943303

Major US stock indexes, already trapped in bear territory, face a tougher road to recovery, as more Americans crack into their nest eggs to withdraw cash to cope with rising economic pressures.

The Dow Jones industrial average and the Standard & Poor's 500, which have fallen 20% or more from their closing highs of last October, qualifying them as bear markets, have taken big hits from the drastic slowdown in housing and credit as well as record oil prices.

The troubles hanging over the US economy and the stock market are deep enough that a sharp rally this spring and a brief summer rebound have done little to reverse the damage. For the year so far, the Dow is down 14.4%, the S&P 500 is off 14.7% and the Nasdaq Composite Index is also down 14%.

Even worse, stocks that have dropped to where they are seen as compelling buys get battered further by renewed fears over the stability of the banking system.

"Every time the 'long only' guys tip their toes in the water, they get whacked - it's been absolutely tough," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages US$22 billion.

The whacking isn't going away anytime soon, however.

Baby boomers are adding another layer of anxiety for money managers looking for a sustainable stock market recovery during the year's second half. That's because boomers, born after World War II in the economic expansion between 1946 and 1964, are increasingly withdrawing funds from their defined contribution plans as the housing debacle gets worse.

Breaking the piggy banks

In a recent survey conducted by the AARP of more than 1,000 respondents aged 45 and older, almost 25% of individuals between the ages of 45 and 64 are prematurely withdrawing from their 401(k) retirement plans and other investments.

And the Vanguard Group, the fund company that's popular among retail investors because of its low fees, points to another worrisome sign: Last December, so-called "hardship withdrawals" shot up 22% from a year earlier.

The increase in hardship withdrawals at Vanguard suggests "rising economic pressures on financially vulnerable households, possibly related to the national crisis in subprime and adjustable rate mortgages," said William Nessmith and Stephen Utkus, authors of a Vanguard report on this alarming trend.

For years, as home values skyrocketed, people used their houses as glorified ATMs, pulling out money for all sorts of reasons. The trend helped support continued economic growth and recovery from the tech-telecom recession of 2001.

Although the Vanguard report didn't hone in on boomers per se, some members of that famous generation are struggling financially under the strain of sinking home prices, skyrocketing food and gasoline prices and a weak job market.

Boomers are now caught in the crossfire: According to a Harvard University study, boomers make up the single largest group of home owners - 34% of all home owners.

Putting the importance of American home owners to the US economy into perspective, US Federal Reserve Chairman Ben Bernanke warned earlier this year that consumers were bearing the brunt of the effects of the current downturn because housing wealth had been tied strongly to spending and their homes were their biggest assets.

Empty ATMs and desperate boomers

Vanguard said that both the number of cash withdrawals and their dollar value have grown in recent years for the defined contribution plan.

But Vanguard's Nessmith and Utkus added that the absolute level of withdrawals remains quite low even though the percentage rate of change is high.

Charles Schwab & Co, the largest US discount broker, also has seen a similar trend. The percentage of Americans lowering the amount they are saving with regular contributions to their 401(k) plans is climbing. In the first quarter of 2008, 7.1% lowered their contribution rate - up from 5.8% in the year-ago period, according to Charles Schwab data.

"It certainly doesn't help matters that people are freaking out and taking their money," said Brian Gendreau, an investment strategist in New York for ING Investment Management Americas.

"This will help to contribute to a longer drawn-out down market," Gendreau said.

During volatile periods, investors are told not to make panicky decisions and to stay well diversified. But the bursting of the credit and housing bubble has hit Americans to such an extent that they may have no choice but to dip into their savings.

So far this year, US equity funds have suffered withdrawals of roughly US$52.7 billion, by far the worst first half for the group since EmergingPortfolio.com Fund Research in Cambridge, Massachusetts, began tracking them in 2000.

"It's money chasing returns ... it happens on the way up and it happens on the way down," Gendreau said.

All told, Mohamed El-Erian, co-chief executive officer of California-based Pacific Investment Management Co., or Pimco, which oversees US$812 billion in assets, said in an interview that the American consumer will continue to be under duress.

"In the absence of significant new and targeted capital," El-Erian said, "the current dynamics in the housing markets will force further asset disposals which, in turn, will push prices lower, causing yet another round of sales and foreclosures."

Nationwide, more than 8,000 properties enter foreclosure each day.

The broad consequences of the credit and housing crisis have been nothing short of stunning.

This week, American Express Co said that its most affluent cardholders, also known as "superprime Cardmembers," spent less on discretionary purchases in the second quarter, contributing to unexpectedly weak earnings.

"It just shows that no one is insulated from the crisis," said Paul Hickey, co-founder of Bespoke Investment Group in Mamaroneck, New York. "This shows that even the best of the best aren't doing so hot."