Late Payments on Consumer Loans Climb to Highest Level Since `92, ABA Says Consumers fell behind on car, credit-card and home-equity loans at the highest level in 15 years during the fourth quarter, another sign the U.S. economy is slowing, according to an American Bankers Association survey.

Stock Futures Retreat After Jobless Claims Beat Forecast; Europe Declines U.S. stock-index futures fell after jobless claims topped economists' forecasts and UBS AG said a slowdown in business spending will hurt sales at Cisco Systems Inc.

Initial Jobless Claims in U.S. Unexpectedly Climbed to Highest Since 2004 The number of Americans filing first-time claims for unemployment benefits unexpectedly increased last week and total benefit rolls rose to the highest level since July 2004.

Soros Sees Additional Declines for Stocks, Dollar After Temporary Reprieve Billionaire George Soros called the current financial crisis the worst since the Great Depression and said markets will fall more this year after a brief rebound.

Rice Climbs to Record, Corn Approaches High After Governments Curb Exports Rice climbed to a record and corn traded near its highest ever on speculation a 3 percent annual increase in global demand for cereals will outstrip supply as governments curb exports to prevent protests.

Bernanke Joined by Geithner, Cox as Congress Seeks More Bear Sale Details Federal Reserve Chairman Ben S. Bernanke and New York Fed President Timothy Geithner will probably be pressed by Congress today for more details on their decision to engineer JPMorgan Chase & Co.'s purchase of Bear Stearns Cos.

Geithner Says Fed Must `Act Forcefully,' Defends Bear's Sale to JPMorgan New York Federal Reserve Bank President Timothy Geithner said capital markets are still ``substantially impaired'' and policy makers and financial industry leaders must ``act forcefully'' to stem the crisis.

Stocks in U.S. Climb, Led by Commodity Producers; Merrill, Monsanto Gain U.S. stocks rose for the third day this week as a rally in commodity producers and Merrill Lynch & Co.'s assurance it has enough capital to weather credit losses overshadowed growing jobless claims and loan delinquencies.

Late Payments on Consumer Loans Climb to Highest Level Since `92, ABA Says Consumers fell behind on car, credit- card and home-equity loans at the highest level in 15 years, another sign the U.S. economy is slowing, according to the American Bankers Association's quarterly survey.

Bill Miller Has `Hideous' First Quarter With Bets on Sprint, Bear Stearns Bill Miller's Legg Mason Value Trust posted the biggest first-quarter drop since opening 26 years ago on losses from longtime holdings such as Sprint Nextel Corp. and newer bets including Bear Stearns Cos.

80,000 Jobs Lost The Associated Press — Employers buffeted by talk of recession slashed 80,000 jobs in March, the most in five years and the third straight month of losses. At the same time, the national unemployment rate rose from 4.8 percent to 5.1 percent, the clearest signal yet that the economy might already be shrinking. 81% Say U.S. on Wrong Track The New York Times — Americans are more dissatisfied with the country’s direction than at any time since the early 1990s, according to a recent poll. In the poll, 81 percent of respondents said they believed “things have pretty seriously gotten off on the wrong track,” up from 69 percent a year ago and 35 percent in early 2002. Late Payments at 15-Year High Bloomberg News — Consumers fell behind on car, credit-card and home-equity loans at the highest level in 15 years, another sign the U.S. economy is slowing, according to the American Bankers Association's quarterly survey. The percentage of loans at least 30 days behind a due repayment rose to 2.65% in the last three months of 2007.

Another bar of golden idiots
The man in the street - or in this case Frank at the bar - just doesn't get it. Not yet. But he will. The fires of inflationary hell will see to that, and before much more booze passes over the counter. With broad money supply growing at an annualized 20% pace as the US Federal Reserve reliquefies non-liquid assets, things are going to get ugly.

Big Labor Goes All In This Election - Kimberly Strassel, Wall Street Journal
Bearing Down on the Fed's Balance Sheet - Randall Forsyth, Barron's
The Wreck of Northern Rock - Richard Tomlinson & Ben Livesey, Bloomberg
The Looming Politics of Food - Alan Beattie, Financial Times
Long Term Perspective on the Euro - Michael Bordo & Harold James, VoxEU
John McCain's Voodoo Health Economics - Paul Krugman, New York Times
Taking Hard Line on Rewriting Bankruptcy Code - E. Glaeser, Boston Globe
Market Manipulation, or Just Business as Usual? - Knowledge@Wharton

Regulatory Failure Behind Bear Stearns Debacle - Floyd Norris, NYT
Making a Case for Bear's Market - Editorial, Wall Street Journal
Meet Alan Schwartz, Welfare Recipient - Dana Milbank, Washington Post
Easy Credit Fix May Be A Fairytale - Gillian Tett, Financial Times
Why Financial Panics Are Causing Real Recessions - Gleckman, Am. Prosp.
Regulating Credit Crisis May Do More Harm Than Good - The Economist

The Fox is in the Hen-House "Hey brother, can you spare $75 billion?" loan program for international investment banks. FED asks for oversight of all financial markets: part of a sweeping overhaul of the government's regulatory structure that Treasury Secretary Henry Paulson will propose. Eligible banks listed.

Henry Paulson's War on the Markets - Terence Corcoran, National Post
Rising Unemployment Needs to Be Addressed - Editorial, NY Times
Job Loss Fears Are Overblown - Donald Luskin, SmartMoney
Job Loss, and Gloomy Days in America - The Economist
Barack Obama's Capital Losses - Editorial, Wall Street Journal
Being Rich Does Make Us Happier - Chrystia Freeland, Financial Times
Electric Car Makers Hit Many Potholes - Ken Bensinger, LA Times
Inside a Home Foreclosure Auction - Chrisopther Palmeri, BusinessWeek
Contrarians, Your Flight Is Boarding Now - Mark Hulbert, MarketWatch
Economy Freezes Amid Media Meltdown - Dan Gainor, Investor's Bus. Daily
Why UBS Should Open Up to Help - Philip Aldrick, Daily Telegraph
The Day $2 Billion Walked Out the Door - Katrina Booker, Fortune

Economic Structure and the "Liquidationist Thesis":
Between Secretary Paulson’s proposal Monday for financial regulation overhaul; Wednesday’s testimony by Federal Reserve Chairman Bernanke on housing and Bear Stearns before Congress’s Joint Economic Committee; the appearance Thursday by Bernanke, New York Fed President Timothy Geithner, Treasury under-secretary Robert Steel, and SEC Chairman Christopher Cox before the Senate Banking Committee; and the later appearance before the same committee by JPMorgan’s CEO Jamie Dimon and Bear Stearns’ CEO Alan Schwartz – there was ample material this week for an entire book delving into critical financial issues of our day. I’ll attempt a couple pages.


From a Dr. Bernanke reponse: “One of the prevailing theories at the time of the Depression was the so-called ‘liquidationist thesis” – who said basically “let’s let the system return to normal. Let’s liquidate banks; let’s liquidate labor.” This was Andrew Mellon, the Treasury Secretary. It was partly on the basis of that theory that the Federal Reserve stood by and let a third of the banks in the country fail, which created the money supply to drop sharply, and caused prices to fall rather sharply, and led ultimately to the severity of the financial crisis. I think financial instability, which was not addressed by government or anyone else, was a major contributor, both to the Depression in the U.S. and abroad. I believe the difference today is that we will address financial issues and try to maintain the integrity and stability of our financial system. We will not let prices fall at 10% a year. We will act as needed to keep the economy growing and stable. So, I think there are some very significant differences between the thirties and today, and we learned a great deal from that episode.” April 2, 2008, before Congress’s Joint Economic Committee.


Not surprisingly, Chairman Bernanke invokes a notable policy error - committed in the heat of an extraordinarily difficult (post-Bubble) early-1930s period - as justification for government measures to sustain today’s U.S. Bubble Economy. Bernanke and the “Friedmanites” just love to pillory Andrew Mellon and the “liquidationists” (and would gladly throw in Hayek and Mises). They avoid (like the plague), however, the much more pertinent policy debate that transpired throughout the Roaring Twenties.


Mr. Mellon was among a group of elder statesman that had become increasingly concerned throughout the decade by the Wall Street speculative boom and its inevitable consequences. The son of a banker, his family’s wealth was nearly lost in the Panic of 1873. Actively involved in banking and business from the age of 17, he had witnessed first hand the consequences of the recurring booms and busts that were the impetus behind the creation of the Federal Reserve in 1913. Blaming Mr. Mellon and the “liquidationists” for the Great Depression – as opposed to the extraordinary financial excesses and failed policies of the Bubble period - does disservice to history as well as to sound analysis.


There were astute thinkers during the twenties who believed the economy was being severely distorted from a protracted inflationary period that had commenced during the (first) World War. Although it was not manifesting in consumer prices (because of new technologies, products, overheated investment, etc.), excessive money and Credit were fueling dangerous inflationary Bubbles in asset prices – particularly in real estate and the stock market. The astute recognized the boom as a period of acute financial and economic instability. Certainly, the great “Austrian” economists appreciated clearly how Credit and speculative excess had come to grossly distort incomes, corporate profits, relative prices and investment. The underlying structure of both the financial and economic systems was being corrupted.


Importantly, during that fateful period a group of seasoned thinkers (businessmen, policymakers, and economists) believed adamantly that policies endeavoring to sustain the distorted pricing mechanisms and structures - and the resulting inflated and maladjusted U.S. economy - were both inadvisable and doomed for failure. As such, so-called “liquidation” was a central facet of the unavoidable (post-inflationary boom) adjustment period for the highly distorted financial, labor and product markets. Profligate borrowing, spending, and leveraged speculation would come to their eventual end, requiring reallocation of both financial and real resources. It was only a matter of the degree of excess and the proportional adjustment.


To further inflate an unsustainable boom with additional cheap Credit guaranteed only more problematic financial fragility, economic imbalances/maladjustment and resulting onerous adjustment periods. The astute were adamantly against the (Benjamin Strong) Federal Reserve’s efforts to actively manage the economy (and markets) in the latter years of the twenties, fearing that to prolong the reckless Wall Street debt and speculation orgy was to invite disaster (the “old timers” had witnessed many!). History proved them absolutely correct, yet Historical Revisionism to varying extents has been determined to disregard, misrepresent, and malign their views and analytical focus. Bernanke’s analytical framework of the causes of the Great Depression is seriously flawed.


Regrettably, all the best efforts by the Federal Reserve and Washington politicians to sustain the U.S. Bubble Economy are doomed to failure. It’s not that they are necessarily the wrong policies. More to the point, the basic premise that our economy is sound and growth sustainable is misguided. We’ve experienced a protracted and historic Credit inflation and it will simply be impossible to keep asset prices, incomes, corporate cash flows, and spending levitated at current levels. The type and scope of Credit growth required today has become infeasible. The risk intermediation requirements are too daunting. Sustaining housing inflation and consumption levels has become unachievable. And the underpinnings of our currency have turned too fragile.


I’m all for long-overdue legislative reform. Who isn’t? But I’ll say I heard nothing this week that came close to addressing the key underlying issues. We have longstanding societal biases that place too much emphasis on housing and the stock market, while we operate with ingrained policymaking biases advocating unregulated finance underpinned by aggressive activist central banking and government market intervention. In a 20-year period of momentous financial innovation, our combination of “biases” proved an overly potent mix. And it is worth noting that Wall Street security/dealer balance sheets expanded three-fold in the eight years since the repeal of the (Depression-era) Glass-Steagall Act.


The focus at the Fed and in Washington is to sustain housing, the stock market, and inflated asset prices generally – to bankroll the consumption- and services-based Bubble Economy. Bernanke believes that if financial company failures can be averted - and with the recapitalization of the U.S. financial sector as necessary - sufficient “money” creation will preclude deflationary forces from gaining a foothold. He assures us the Fed will not allow double digit price declines, despite the reality that such price moves have already engulfed real estate markets. To be sure, prolonging current financial instability increases the likelihood of significant price level instability going forward. And while the federal government “printing presses” will be working overtime going forward, it is also apparent that a key facet of Washington’s strategy is to “subcontract” the task of “printing” to Fannie, Freddie, the FHLB, the banking system, and “money funds” – sectors that today still retain the capacity to issue “money”-like debt instruments with the explicit or implied stamp of federal government (taxpayer) backing.


Basically, the strategy is to substitute government-backed debt for the now discredited Wall Street-backed finance. I’m the first one to admit that this desperate undertaking stopped financial implosion in its tracks. However, the problem with this whole approach – because of our “societal,” financial, and policymaking biases – is that our Credit system will just be throwing greater amounts of (government-supported) debt on top of already fragile Credit Structures underpinned largely by home mortgages. Wall Street-backed finance buckled specifically because this (“Ponzi Finance”) debt structure was untenable the day increasing amounts of speculative Credit were no longer forthcoming. The underlying inventory of houses doesn’t have the capacity to generate debt service – only the mortgagees taking on greater amounts of debt.


The underlying Economic Structure is now THE serious issue. The last thing our system needs right now is trillions more mortgage debt, although it would work somewhat to sustain consumption and our “services-based” Bubble Economy. The inherent problem with a finance, housing, consumption, and “services”-dictated Economic Structure is that it inherently generates excessive debt backed by little of real tangible value or economic wealth-creating capacity. System fragility is unavoidable. It may appear an “economic miracle,” but for only as long as increasing amounts of new finance are forthcoming. At the end of the day, one is left with an extremely fragile Structure both financially and economically.


Yet as long as Wall Street “alchemy” was capable of creating sufficient “money” to fuel the boom - and the world was content in accumulating (increasingly suspect) dollar claims - our Bubble Economy Structure remained viable. It is, these days, increasingly not viable. The wholesale and open-ended government backing of U.S. mortgage debt - and financial sector liabilities more generally - will prove a decisive blow to already shaken dollar confidence. And it is today’s reality that the massive scope of Credit growth necessary to sustain the current Bubble Structure will correspond to Current Account Deficits and dollar outflows that will prove (as we’re already witnessing) only more destabilizing in markets and real economies around the world.

Government backing of our debt does not substitute for a sound Economic Structure. And it is the current Structure that is incapable of the necessary economic output to satisfy domestic needs and to generate sufficient exports to exchange for our huge appetite for imported goods and energy resources. Today’s “services”-based economy will no longer suffice. Examining today’s job data, one sees that 93,000 “goods producing” jobs were lost in March after dropping 92,000 in February and 69,000 in January. At the same time, Education, Health, Leisure and Hospitality jobs increased 178,000 during the first quarter. Yet it is more obvious than ever that we need to consume less and produce much more.


Back to the “liquidationists.” It is my view that our economy will require a massive reallocation of resources. We will be forced to create much less non-productive (especially mortgage and asset-based) Credit in the Financial Sphere, while producing huge additional quantities of tradable goods in the Economic Sphere. In our expansive “services” sector, there will no choice but to “liquidate” labor and redirect its efforts. Throughout finance, there will be no alternative than to “liquidate” bad debt, labor and insolvent institutions – again in the name of a necessary redirecting of resources. After an unnecessarily protracted boom, there will be scores of enterprises that will prove uneconomic in the new financial and economic backdrop. “Liquidation” will be unavoidable, policymaker hopes and dreams notwithstanding.


From this evening's vantage point, recent extraordinary government measures to “back” U.S. finance appear likely to delay the adjustment process – what I will be referring to as a “depression.” This reprieve, however, comes with a cost. It will ensure significantly greater damage to the core of our monetary system, as well as requiring a more onerous real economy “liquidation” with the inevitable onset of the more serious phase of the unfolding crisis.

http://www.prudentbear.com/index.php/Credi...bleBulletinHome

CREDIT BUBBLE BULLETIN
Liquidation is only
solution to crisis
The latest US strategy of substituting government-backed debt for Wall Street-backed finance is blind to the fact that the underlying economic structure is now the serious issue. There is no choice but to "liquidate" bad debt, labor and insolvent institutions as part of a massive reallocation of resources. Only this will resolve the credit crisis.
Doug Noland reviews the previous week's events each Monday.

Demythologizing central bankers
The exalted status of the world's central bankers, bloated by self-congratulation and the economic boom of the past 25 years, is scheduled for demotion as demands grow for a return to true full employment with diminished income inequality. How we write history really does matter. - Thomas I Palley

Two Views on the Financial Crisis - Sebastian Mallaby, Washington Post
Skeptics Abound Amid Market Rebound - Jacqueline Thorpe, National Post
The Cleansing Power of Recessions - Larry Kudlow, RealClearPolitics
Recession Unlikely, Next 60 Days Crucial - A. Kaletsky, Times of London
America's Problem with Bankruptcy - James Surowiecki, New Yorker
Learning to Live with Volatility - Laszlo Birinyi, Forbes

• U.S. Economy
  • Job Loss Fears Overblown
  • Unemployment Needs Attention
  • Gloomy Days in the States
  • Undue Haste on the Economy
  • Recession Only a Possibility
  • Economy Has Me Optimistic

Transcripts & Videos
Bill Gross: A Bailout is Coming - Erin Burnett, CNBC
End of Beginning of Credit Crisis? - Gillian Tett, Financial Times
Labor Sec'y Elaine Chao Talks Unemployment - Kelsey Hubbard, WSJ
George Soros Comments on Uncertain Markets - Bloomberg



Research Reports
Week Ahead for U.S. Financial Markets - Joseph Brusuelas, IDEA
Dollar is a Good Buy, Not Goodbye - Marc Chandler, Brown Brothers
Rearranging the Deck Chairs - Bob Eisenbeis, Cumberland Advisors
Employment Report Signals Recession - Bear Stearns

Soros predicts end of the road for cheap and easy borrowing


Credit Cost Hikes Know No Boundaries


Idle cars signal a downturn

WILLIAM D. COHAN
The Big Brokers Blew It. They Should Bear the Cost The Washington Post — Once upon a time on Wall Street, in the days when investment banks were small private partnerships, a simple but ingenious idea kept bankers and traders accountable for their actions: the collective-liability clauses in their partnership agreements. A mistaken trade here or bad advice there, and all the partners suffered.

Commentary: Boom to bust
Washington DC (UPI) Apr 04, 2008 - Borrowing $2 billion to $3 billion a day from other countries to maintain the world's highest standard of living, based on conspicuous consumption, in an age of growing world shortages, while fighting two wars whose costs will soon ring up a $1 trillion tab, is tantamount to living on borrowed time. Valium and Tylenol sales are up, and Viagra down, in the banking world. So far, the subprime ... more

JARED BERNSTEIN
Three Months of Job Losses=Recession Talking Points Memo — It is often the case that the official recession is declared to have started at or near the payroll employment peak. Thus, there’s a good chance that the recession will ultimately be recognized to have begun in December or January.

MAX KEISER
Fixing Wall Street is Easy: Raise Margin Requirements The Huffington Post — To reign in "weapons of mass financial destruction," the Fed must raise margin requirements. It's cheaper than bailing out banks and it's "deflationary," which means cheaper energy and food. SCOTT THILL
Over the Top Fed Actions Feed Conspiracy Thinking AlterNet — By rewarding the criminals and screwing the victims, the Federal Reserve's behavior feeds into rumors and conspiracy about its true function.

Large-Scale Action Needed To Tackle Credit Crisis - George Magnus, FT

The Fed Is Blameless on Housing Bubble - Alan Greenspan, Financial Times
A New Job Description for the Fed - Robert Shiller, New York Times
Has Moment Come to Replace the Dollar? - Kenneth Rogoff, Proj. Syndicate

US jobless figures: The specter of a new depression Friday’s Labor Department report, revealing that US payrolls were cut by 80,000 jobs in March and that 232,000 jobs have been lost in the past three months, can only mean new levels of social misery and raises the specter of a severe economic slump, perhaps the deepest since the Great Depression of the 1930s.

Markets Bounce Back From Bear Stearns Panic; Is the Worst Over?
by: J.D. Steinhilber posted on: April 07, 2008 The second quarter started with a bang in the equity markets. The S&P 500 rallied 4.2% last week, cutting its year-to-date losses to 6.7%, and its percentage decline from the October 2007 peak to 13%. Having closed last week at 1370, the S&P 500 is approaching major resistance at 1385-1400, a level that turned back prior rally attempts in January and February. If we happen to break through this resistance zone, sentiment would undoubtedly turn a lot more positive on a shorter-term basis and the rally may well extend towards its next major resistance area at 1440-50.

The S&P 500 (SPY) has now rallied over 100 points since the Bear Stearns (BSC)-related panic lows on March 17. The markets are trading as though the worst of the crisis has passed and that newly installed government measures will prevent the sort of systemic, domino-like collapse threatened by the Bear Stearns episode.

Volatility has abated, as reflected by the nearly 40% decline in the VIX volatility index over the past three weeks. Importantly, stocks have been able to break the downside momentum and have demonstrated an ability to hold onto gains rather than promptly give them back, which had been the pattern through most of the first quarter. This resilience was on display last week; the stock market shrugged off Chairman Bernanke's implicit acknowledgment that the economy is in recession, as well as Friday's dismal employment report (the March employment survey showed a loss of 80,000 jobs, following revised losses of 76,000 jobs in both February and January).

We continue to believe that the burden of proof is on the bullish case, and that this rally should be viewed as countertrend until additional constructive evidence accumulates. However, we should be open to the possibility that the bear market lows are in place, and speculate upon the conditions that would underpin a bullish stock market scenario.


In our estimation, the bullish case is predicated on the assumption that the economy will experience only a mild recession, and that a modest contraction has already been discounted by share prices. History shows that bear markets end in the midst of recessions. It is a truism of the stock market that by the time a recession is finally recognized fully in the media, most of the bear market damage to stocks is typically done. If this turns out to be a mild recession, lasting perhaps only two to three quarters, without a sharp fall-off in employment and consumption, then the bear market may be largely over.

If the recession is more severe, accompanied by significant further drops in housing prices, employment, and consumer spending, then the stock market rally that began three weeks ago will turn out to be a bear market rally driven by the fact that stock market sentiment in the first quarter reached its most negative levels since the bear market bottom in 2003. (Contrary opinion analysis tells us that when the overwhelming majority is bearish, that side of the boat has gotten overly crowded, and price will move in the opposite direction from the one expected by the consensus).

Among this things we will be watching closely in the weeks ahead will be (1) action in the Treasury bond market, and (2) housing market data as we move into the important spring selling season. The Treasury market is currently priced for a severe rather than a mild recession, and for a continuation of the credit crisis since Treasuries have benefited from enormous "flight to safety" buying in the credit markets. If this recession is going to be mild, and if the stock market outlook is turning more positive, then we should in fairly short order see a downward reversal in government bond prices.

Housing will remain a focal point because it is the source of much of the stress in the economy and the credit markets. In light of the wide range of government stimulus and relief measures aimed at housing that have been enacted, there is a growing view that a housing market bottom is just around the corner.

Such optimists cite the fact that homebuilding stocks appear to have bottomed (homebuilding stocks are the best performing industry group thus far in 2008), and that affordability has greatly improved through the combination of price declines, Fed rate cutting, and a variety of government relief measures, the most recent of which was last week's Foreclosure Prevention Act of 2008, which, among other things, would help distressed homeowners and allow government agencies to buy foreclosed properties.

Our view has been that housing prices have considerably further (i.e. as much as 10%) to fall to clear excess inventory and bring pricing closer to historical relationships with household income levels. Our view of government intervention is that it will mostly delay, rather than prevent, this adjustment process. However, we may have to modify this view if the government resorts to the direct purchase or insurance of hundreds of billions of dollars of mortgages. For the time being, the upcoming spring selling season will provide important information about the current state of the housing market.

Now We Know the Real Reasons For the Credit "Crisis"
by Clif Droke


I've purposely kept my comments concerning the credit crisis at a minimum since it began dominating the daily news headline. My reasoning for this is because I knew the crisis was overblown and overstated in the press and that there had to be a very good reason for it. The only problem is I didn't know exactly what the reason was.

Time tells all, however, and I knew that sooner or later the truth must out!

One thing experience has taught is that every notable market crash, panic, bear market or financial crisis is the result of careful planning and forethought by the monetary authorities. With trillions of dollars at stake, nothing happens without their tacit or explicit approval and there is simply no such thing as a crisis that happens by "coincidence." For happenstance to be allowed to run its course in with trillions in derivates out there would be certain death for the financial system. As the economist Dr. Stuart Crane was fond of saying, "Things [in the monetary world] don't just happen to happen. They happen because they were planned to happen."

Another thing Dr. Crane used to say was that you can always tell the underlying reason for any crisis by waiting to see what the results of that crisis are. In the final analysis, the results, as he pointed out, are in what the crisis fomenters expected to yield as the fruit of their labors. And it's no coincidence that in every case, a financial crisis always yields the following results:

1.) Greater consolidation within the banking and financial industry with the smaller players being merged into the bigger players, or else swept away;
2.) Greater regulator powers for the monetary authorities.

There has never been an exception to this outcome in the history of U.S. financial crises.

Well, lo and behold, the results of this latest financial crisis are starting to become apparent. The following news article was published over the weekend and it points very conclusively to one of the main reasons for the late crisis. I quote the following article in part:

Treasury Dept. Seeks New U.S. Power to Keep Markets Stable

By Edmund L. Andrews

WASHINGTON -- The Treasury Department will propose on Monday that Congress give the Federal Reserve broad authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.

The proposal is part of a sweeping blueprint to overhaul the country's hodge-podge of regulatory agencies, which many specialists say failed to recognize rampant excesses in mortgage lending until after they triggered what is now the worst financial calamity in decades.

According to a summary provided by the administration, the plan would consolidate what is now an alphabet soup of banking and securities regulators into a trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms.

While the plan could expose Wall Street investment banks and hedge funds to greater scrutiny, it avoids a call for tighter regulation. The plan would not rein in practices that have been implicated in the housing and mortgage meltdown, like packaging risky subprime loans into securities carrying AAA ratings.

The Fed would also be given some authority over Wall Street firms but only when an investment bank's practices posed a threat to the financial system over all."

I nearly fell over when I saw the following paragraph in this news article:

"Under the proposal, the S.E.C. would merge with the Commodity Futures Trading Commssion, which regulates exchange-traded futures for oil, grains, currencies and the like."

The SEC merging with the CFTC??? So much could be said about this but I'll hold off on commenting until more details become available.

The article continues, "Yet another proposal in the blueprint would, for the first, time create a national regulator for insurance companies, an industry that is now regulated by state governments. Administration officials argue that a national system would eliminate inefficiencies of having 50 different state regulators, who have jealously guarded their powers and are likely to fight any encroachment by the federal government."

The proof is always in the pudding, and there are more than a few figgy surprises in this one. It does at least validate what I've long suspected was a manufactured crisis, which flies in the face of the commonly held belief that the crisis was unavoidable or else systemic and beyond the control of the financial authorities. Nonsense! The authorities had this "crisis" under their control the whole time and the latest revelations only serve to underscore this fact.

Discussion abounds concerning the Fed's contribution to the credit crisis when, during the final years of Greenspan's reign as Chairman, credit expansion was ballooning at a parabolic rate. This is the reason most commonly ascribed to creating the credit problem and it gives one the erroneous impression that the simple act of credit expansion is a recipe for guaranteed disaster in itself. Yet what few commentators ever discuss is that credit expansion is a two-part process: while unmitigated credit growth may set up a future crisis, it is only when the Fed starts tightening the spigot and money contracts that the problems actually begin. Tight money is the real culprit here.

Consider the insights provided many years ago by Dr. Crane on how the Fed creates financial crises:

"In March 1929 there was a little meeting in New York. After that meeting, Bernard Baruch sells out [of stocks], the Rockefellers sell out, the Kennedys sell out, all of the big bankers sell out. The big people were out [of the stock market] by August. Then the Federal Reserve cut the money supply four times in a month. There were four drastic reductions in the money supply.

"Then one day in October the banks called all of their loans on all of their margins at the same minute. Every bank in the money desk - and these were call loans, callable on demand. People had their stock on margin, borrowing 90%. Now they went to the banks and the banks weren't lending, they were calling. They run to the market and everyone's trying to sell. The banks had shut the money off. The call desks were closed. The money desk shut down....and all these people were running around trying to sell because they had to sell 10% down and they were wiped out. All of the people who weren't on the inside were gone."

Some things never change, it would seem.

A commonly heard statement among confused investors is, "I don't understand it! A few weeks ago, investors greeted bad news with selling and the major averages went lower. Now, bad news is greeted with buying and the indices completely ignore the bad news!"

The answer to this conundrum is simple. How the stock market responds to news (good or bad) is determined by internal momentum. When the market's main internal momentum gauges are up (as reflected in the rate of change of the number of stocks making net new highs), the market is more likely to respond to good news favorably and to ignore negative news. When the internal momentum is downward trending (as it was in December-January), the market is vulnerable to bad news.

The market's internal momentum structure is changing and is one reason why investors who are basing their investment decisions on the financial climate that prevailed in the previous few months are in for a lot of frustration. In the month of April we'll be looking at how the shift in market internal momentum will affect us and how we can profit from it.




Clif Droke
ClifDroke.com

If America Declines, Don't Expect Anyone to Talk About It

Kevin Phillips, Viking Press

Is our political system too far gone to even discuss the predicaments of the volatile dollar, run-amok debt and Middle East disasters?

Did Liberals Cause the Sub-Prime Crisis?
Robert Gordon
April 7, 2008 | web only
Conservatives blame the housing crisis on a 1977 law that helps-low income people get mortgages. It's a useful story for them, but it isn't true.

An Unfamiliar (Economic) Game
Howard Gleckman
April 3, 2008 | web only
Wall Street has become addicted to taking enormous risks and sticking taxpayers with the bill. As a result, financial panics are causing real recessions and returning us to the 19th century.

What Obama Could Teach the Treasury Secretary About the Economy
Robert Kuttner
April 4, 2008 | web only
Treasury Secretary Henry Paulson wants to expand the Fed's powers to bail out struggling investment banks. Obama understands that this would only encourage damaging speculation.

Looking 'Round the Corner
Christopher Chantrill
What do you think? Is the mortgage meltdown over? More

Bankrupt approach
to judgement day
United States bankruptcy judges can alter terms between parties in corporate law and of contracts involved in defaults on second homes, yachts and investment properties. But things are not so easy for subprime losers, and it will stay that way thanks to implacable Republican opposition. - Julian Delasantellis

Pain relief needed
As the United States slides into recession, the government reaction has been largely limited to helping firms that led the country down the slippery path - big investors and banks. What is missing are macro-economic measures that recognize and alleviate the pain of those suffering the most. Earnings have to be raised and debt levels cut. - Max Fraad Wolff

The de-flattening of the world
Globalization never did quite flatten the world, as Thomas L Friedman argued, although Western workers have learned it can hurt pay and job security. Big bumps remain and are growing, as economies damage their own interests with numerous new barriers - from export restrictions and agriculture subsidies to immigration controls and Internet censorship. - Martin Hutchinson

The government genie flips a coin
The awesome power of a fiat currency makes anything possible - negative interest rates, tax rebates, tax cuts and increased government spending all at the same time! Even a negative lease rate for gold! Weirder and wonderfully weirder. But all the US Federal Reserve is doing right now is fighting for another day of economic reprieve.

Andre Gunder Frank on Uncle Sam and his shrinking dollar

[b]Jon Nadler[/b][b] , [/b]Senior Analyst Kitco Bullion Dealers Montreal[/size]Good Morning,

Gold prices eased into a lower trading channel of from $915 to $926 during the overnight hours, as participants observed an additional rise in the US dollar (72.34 on the index) and a bit of a profit-taking slippage in oil prices. The trade was also mindful of jewelry fabrication demand starting to put the brakes on once again in the wake of higher prices. News that market analysts expect a US approval of the IMF's plan to sell 403.3 tonnes of its gold reserves was not playing too much of a direct role in the current decline. Still, the IMF announcement's net result is that more gold will come into the market in due course. Whether it will be mopped up by central banks or investment demand or find a home with fabricators is not known at this time. The sales are expected to be conducted in an orderly fashion and spread out over time.

New York spot gold opened $7 lower, quoted at $913.20 per ounce as players awaited figures on the retail chain index and pending home sales data. There was not much else in the way of immediate directional drivers on the scene at the moment. Silver lost 32 cents to open at $17.73 while platinum reversed yesterday's gains, dropping $17 to $2017.00 per ounce. Palladium fell $1 to $452.00 per ounce. Risks of probing lower levels in metals remain in place as the markets try to find direction in the wake of recent drops. For the moment, the action will continue to be dollar and US economic news-driven until either ECB or G-7 signals are intercepted as to where next on the currency and interest rate scene. The rate cut expectation fever in the US has calmed somewhat, with markets now giving 64% odds to a quarter-point cut at month's end. Gold needs to retain its string of recent closes above $900 as the first order of business.

We have (for months now) heard that the US slowdown will not affect the rest of the world, especially Asia, which has been regarded as a region that could withstand any storm as it grows and grows. Surprise. Not only is the regional situation worsening, but it is doing so at a rate which has many pondering as to whether a common currency could offer some relief. [b]MSN[/b] reports that:

"Asia is hit badly by the current recession in the United States. Investors are shying away, stock markets are down, thousands are losing jobs. In this scenario, there is once again talk of evolving a common currency for Asia for safeguarding its financial stability. But there are many hurdles on its way. One is the `hegemony' of stronger states. Smaller Southeast Asian states feel threatened by China's growing economic power and Japan's isolationist economic policy. They also question whether the currencies of Australia and New Zealand should be included with India. Japan is not too comfortable with China's emergence and the fact that the yen may be overshadowed by the yuan. India too has been so far cool to the proposal for a common ASEAN currency, holding that it would require more coordinated efforts on the parts of all the participants and removal of many political and technical obstacles.

Some argue that it is impossible to replicate the euro experience because Europe had sorted out the question of hegemony long before the question of a single currency was mooted. The ideal preconditions that existed in Europe prior to the introduction of the euro either don't exist in Asia or are only emerging. There were several factors that bound the European nations together. They included high trade interdependencies, Common acceptance of basic political and social values, fairly even economic development and comparable living standards. Even with common objectives, it took half a century for Europe to achieve a single currency."

The article in [b]India Syndicate[/b] goes on to extol the virtues of a single currency system for the region:

[size="2"]"The benefits of an eventual single currency are numerous. It will increase market transparency by making prices more easily comparable. Cross-border transactions will also become more attractive as market operators will no longer be exposed to exchange-rate risks, and costs associated with currency conversion will be eliminated. Moreover, single currency will go a long way in promoting political union in Asia. But it will be a long-drawn-out process. Europe has worked towards political and economic integration for over 50 years before the birth of a single European currency in 2001."

To which we might add that all of that is fine, except for the small number of vocal critics of the Euro who have not minced words in calling the single currency "an experiment" and one that could fail for a number of reasons, within less than twenty years of its debut. Hmmm...for the moment, the euro appears to be doing not too badly, eh?

Look for volatility but thus far the scale is on the small side for today. Let's see what the economic data begets.

Happy Trading.

Direct: 1 (514) 875-4820 ext. 1360US & Canada Toll Free: 1 (877) 839-8036 E-mail: jnadler@kitco.com

Washington Mutual Gets $7 Billion Infusion From TPG-Led Group, Posts Loss Washington Mutual Inc., the largest U.S. savings and loan, will receive $7 billion from a group led by David Bonderman's TPG Inc. to replenish capital as it confronts more losses tied to subprime mortgages.

Stocks in U.S. Decline as Alcoa Profit Misses Estimates; Europe, Asia Fall U.S. stocks fell the most in seven days after the first companies to report quarterly earnings disappointed investors and Washington Mutual Inc. was forced to slash its dividend in a $7 billion bailout.

Pending Home Resales in U.S. Fall More Than Forecast as Buyers Reconsider The number of Americans signing contracts to buy previously owned homes declined more than forecast in February, indicating the U.S. real-estate recession will extend into a third year.

First Marblehead Falls as Its Student-Loan Guarantor Files for Bankruptcy First Marblehead Corp., a U.S. arranger of securities backed by student loans, lost a third of its value after its guarantor of private student loans filed for bankruptcy protection.

Morgan Stanley's Mack Sees `Difficult Year' as Debt-Market Crisis Spreads Morgan Stanley Chief Executive Officer John Mack said the credit crisis will last ``a couple of quarters'' longer as it spreads to commercial real estate, European lenders with subprime holdings and U.S. midsized banks.

Citi, Wells Fargo May Fuel Recession by Slowing Lending After Downgrades Bank holding companies including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. have the thinnest safety cushion against losses in seven years.

Fed Up: Bernanke Joins G-7 to Stem Global Financial Meltdown
by Mike Whitney / April 8th, 2008

In a recent interview with the New York Times, former Secretary of the Treasury Paul O’ Neill was asked how the problems with subprime mortgages could lead to a financial crisis of global proportions. O’ Neill said, (Full article …)

The bust begins
Housing-market woes spread to Britain

Why Paulson's Economic Plan Won't Work - The New Republic

Bottom? What Bottom?
- Robert Lenzner, Forbes

Fannie and Freddie mac are being bandied about as potential saviours of the US
housing market, an idea that is a total joke because they already are going to
face their own huge losses anyway...

But Goldman just put a sell rating on them

"April 8 (Bloomberg) -- Fannie Mae and Freddie Mac shares will tumble to $16 or
less, Goldman Sachs Group Inc. says. At Lehman Brothers Holdings Inc., analysts
are telling their clients the shares will soar to $45 or more.

The dueling reports today demonstrate the split views on Wall Street about the
ability of the government-chartered mortgage-finance companies to weather credit
losses from their home-loan portfolios.

Fannie Mae rose 35 cents to $30.20 at 9:51 a.m. in New York Stock Exchange
composite trading. Freddie Mac climbed 11 cents to $26.71. Both had plunged more
than 45 percent in the past year as losses on subprime mortgages spread to the
$5 trillion of home- loan debt the companies own or guarantee.

Goldman Sachs analysts led by James Fotheringham, who reiterated their ``sell''
recommendation, predict credit losses at the companies will ``increase
rapidly.''

http://www.bloomberg.com/apps/news?pid=206...&refer=home

IMF Issues Gloomy Assessment of Markets- APThe International Monetary Fund on Tuesday released a gloomy assessment of the global financial system, saying the credit crisis has worsened over the past six months and threatens economic growth.

Fed Officials Economic Contraction in First Half as `Likely,' Minutes Show Federal Reserve officials anticipated that the economy would shrink in the first half of the year, with some concerned about ``a prolonged and severe economic downturn,'' as they cut interest rates last month.

Fed Officials Worried About Recession - AP - 7 minutes ago
Worries about a deep recession -- not a shallow one -- drove Federal Reserve policymakers to slash a key interest rate last month, meeting minutes show.

Guest Commentary, by Tom Au

Here Come the Modern 1930s
March 26, 2008
[b]Thomas Au is author of “A Modern Approach to Graham & Dodd Investing.” and a columnist for TheStreet.com[/b]

Former Fed Chairman Alan Greenspan, one of the major architects of the current crisis finally “fessed up” the other day when he referred to the current crisis as the “most wrenching since the end of the Second World War.” But the end of the Second World War marked the start of the boom times in America (at least for those who lived to tell the tale) so he must really be referring to the crisis since the beginning of the Second World War, which would be the late 1930s. And this decade is basically where we’re now at.

The modern 1930s are the logical consequence of the “New Economy” of the past decade, just as the original was a logical consequence of the “Roaring Twenties.” In each case, technology and leverage combined to create a potent but ultimately poisonous brew of wildly inflated asset prices. In essence, greedy CEOs (and investment managers) said, “we brought you the new economy, please cash us out now.” And a gullible American public affirmed this by bidding up prices to insane levels, expecting to share, rather than subsidize, the wealth of the selling shareholders. First the tech companies, then the financial intermediaries were then caught in traps of their own making, and escaped as sorely crippled entities, if they survived at all. But by this time, the more privileged players had “taken their money and run.”

Probably without meaning to, the Los Angeles Times aptly summed things up with an article headlined “A New Great Depression? It’s Different This Time.” The aptness is if you interpret the headline as “The Depression is Different This Time” as opposed to “Things Are Different This Time.” The details will naturally differ from those of the 1930s, but the substance will remain the same. But the paper dismisses the popping of asset bubbles in housing and stocks as merely “disturbing parallels.” Working together, the Fed (and the modern J.P. Morgan) “saved” Bear Stearns, the modern Bank of the United States, thereby preventing a collapse of the banking system. International trade remains robust, at least for now. So things don’t seem to bad, at least to the Times.

But are things really that different almost 80 years later? For instance, the popping of major asset bubbles almost defines a recession by itself. And one can argue that the 1930s collapse of the banking system is the consequence, or reflection of the real economy, rather than its cause. So saving one insolvent institution isn’t going to prevent the unraveling of the rest of the system early in the new century. And yes, the international situation is okay, but that’s just because America is the cause, rather than the recipient, of global economic problems this time around; falling stock prices abroad are saying that foreign GDP growth will soon collapse as a result of America’s troubles.

In deciding whether or not we are headed toward depression, one needs to look at the substance of economic events, as opposed to the form. Some examples of the substance: 1) A post-war record level of home foreclosures headed to 1930s levels fueled by a similarly record collapse of home prices. 2) Several major “runs on banks” as investors begin to wake up to the fact that a lot of what passes for collateral is in fact worth very little. 3) A panicked Fed trying to head off a financial panic by simultaneously lowering interest rates and injecting money into the system.

And what’s worse, we are only in the early stages of the crisis. Last year, 2007, was the year that the mortgage market unwound. This year, 2008, will feature the collapse of major financial institutions, starting, but not ending, with Bear Stearns. Next year, 2009, will be the year when the problems make their way to the rest of the U.S. economy, including the still-buoyant industrial sector. By 2010, the recession (or worse) will be global.

Some take comfort in the fact that we haven’t yet seen soup lines, or 25% unemployment. But soup lines are merely an unnecessary (and hopefully unrepeated) appendage of the above. And anecdotal evidence suggests that many welfare agencies are now stretched to the absolute limit, meaning that new soup lines will appear if the system is tested just a bit more. And unemployment hasn’t risen because companies have so far chosen to cut health care and pension contributions rather than lay off workers. One can easily get to the 1930s 25% unemployment with a 0% headline unemployment rate—by assuming that half the work force will be “temps” working half time without fringe benefits.

But perhaps one of the better definitions of the modern 1930s was given in a previous article on this site—a two decade pullback in the American standard of living to the 1980s (the original took American consumption back to the 1910s). Such a pullback seems inevitable from the deleveraging and loss of wealth that is now taking place. Moreover, such a retreat would last for an extended period of time. That’s because we had the best of all possible worlds (relative to the true state of the global economy) for most of the past decade and half. The next decade and half will probably see the worst of all such worlds.

http://www.prudentbear.com/index.php/GuestCommentaryHome

he Debt Shuffle
http://www.portfolio.com/news-markets/top-...ffle?print=true

by Jesse Eisinger Mar 20 2008
Wall Street cheered Lehman's earnings, but there are questions about its balance sheet.

Bear Stearns collapsed for two reasons. It had a short-term funding crisis where lenders pulled their loans and customers pulled their cash. But it also had a longer-term leverage problem. Last week's crisis didn't happen in a vacuum; that leverage eventually led to the collapse in confidence.

After the collapse, Wall Street's attention naturally turned to the other investment banks, especially Lehman Brothers, perceived as the most vulnerable. So, investors were thrilled when Lehman topped earnings expectations on Tuesday—as the firm took pains to reassure the markets that it has plenty of cash to ride out the turbulence.

Yet aside from a smattering of attention here and there, investors and the media mostly overlooked the balance sheet. In other words, they forgot what happened mere hours earlier with Bear Stearns. Wall Street's short-term memory is notoriously lousy, but this must set a record. (Could Jimmy Cayne be sharing his stash with his hedge fund buddies?)

What actually happened to Lehman's balance sheet in the first quarter? Assets rose. Leverage rose. Write-downs were suspiciously minuscule. And the company fiddled with the way it defines a key measure of the firm's net worth. Let's look at the cautionary flags:

Lehman's balance sheet isn't shrinking, as we'd expect.

Lehman finished the first quarter was total assets of $786 billion, up almost 14 percent from the previous quarter and 40 percent from a year earlier. Other financial institutions are taking down their exposure right now amid the market turmoil to be prudent. Lehman says it wants to. It is not.

Lehman got more leveraged, not less.

The investment banks "gross" leverage hit 31.7 times equity, up from the fourth quarter and way up from last year's 28.1. According to Brad Hintz, an analyst with Bernstein Research, Lehman's leverage reached its highest point since 2000. Lehman, like all the investment banks, prefers to look at net leverage, excluding hedges, and that went down. And the firm says that the asset rise was mainly a result of increases in short-term items that have low risk. But we've heard a lot of that lately across the financial world. It's quite simple: The more leverage Lehman has, the less room assets have to fall to wipe out its equity.

Lehman includes debt in its calculation of equity. Say what?

It's always worrisome when a company changes a key definition of a closely watched measure of financial performance. In a note in its earnings release, Lehman said it has a new definition of "tangible equity," or the hard assets that it has left over after subtracting its liabilities. This is a measure of net worth, the yardstick by which investment banks are valued. Lehman's new definition allows for a higher portion of long-term subordinated borrowings (which it calls "equity-like") in tangible equity. Previously, it had a cap on the percentage of "perpetual preferred stock," a form of equity-like debt that doesn't have a maturity date, in its equity. Now, it doesn't have a cap. Think of it this way: If you borrow money from your parents to make your down payment on your house and they don't expect to get paid back right away (at least not before you pay your mortgage off) is it equity in your house? No, it's a loan. And Lehman hasn't borrowed from mommy and daddy.

Lehman says it is merely conforming to the Securities and Exchange Commission's definition of tangible equity and had contemplated making the change for a while. And the firm says the change didn't result in any difference to its net leverage ratio.

Lehman reaped substantial earnings gains because investors thought it is more likely to go bankrupt.

For several quarters, all the investment banks have been taking gains on their liabilities. Say you owe $100 to your friend. But you run into severe problems and your friend starts to figure you can only afford to pay back $95. If you were an investment bank, the magic of fair value accounting dictates that you could get to reduce your liability. What's more, that $5 gain gets added to earnings. Because investors thought Lehman was more likely to default, its liabilties fell in value and Lehman garnered earnings from this. How much did Lehman win through losing? $600 million in the quarter. How much was its net income? $489 million.

Lehman and all the other investment banks are following the accounting rules on this, but that $600 million is hardly the stuff of quality earnings. Indeed, Bernstein's Hintz called the bank's earnings quality "weak."

Lehman's write-downs seem tiny.

Lehman finished the quarter with $87.3 billion of real estate assets. These include residential mortgages and commercial real estate paper. The bank only wrote these assets down by 3 percent. And its Level III assets —the hardest to value portion of these instruments—were written down by only the same percentage. The indexes and publicly traded instruments and companies that serve as proxies for these securities generally fell more than that in the quarter. Lehman points out that took larger gross write-downs and then made money through hedges, for a smaller net number.

Lehman remains exposed to lots of dodgy mortgages, including a group labeled: "Prime and Alt-A." Prime mortgages represent loans to good quality borrowers; Alt-A loans go to borrowers a mere step up from subprime, and represent an area with almost as many problem loans as subprime. The total amount of such mortgages on Lehman's balance sheet was $14.6 billion in the first quarter and it actually rose from $12.7 billion in the previous quarter. Is this the time to be increasing exposure to questionable mortgages? More ominously, only $1 billion of that figure is prime and the rest is Alt-A, according to Hintz's estimate.

The picture emerging is that of an investment bank that is dancing as fast as it can. If Lehman can keep piling up more assets, and if these assets come back, Lehman comes out a big winner. But if it didn't properly mark down those assets during these bad times, the investment bank's returns —and therefore its profitability—will be much lower in the future.

And that's the good case. If the assets do not recover, then time is against the firm.

There is a larger, monetary policy issue here. The Federal Reserve has announced that it will lend to investment banks for the first time since the Depression, acting as a lender of last resort. At the very least, regulators should be demanding that the investment banks bring down their leverage and reduce their risk. Are the regulators sending a stern-enough message to Lehman? If so, it's not getting through.

See our in-depth coverage of Bear Stearns' collapse.

Fed sees economy getting worse<
Minutes from central bank's last meeting show fear of 'severe and protracted downturn'; some members worry economy could shrink in first half of year.

Some members of the Federal Reserve are worried about the possibility of a "severe and protracted downturn" in the U.S. economy that could last into next year, according to the minutes of the central bank's latest meeting released Tuesday.

The Fed said its staffers now expect the nation's gross domestic product (GDP) to shrink in the first half of this year, the clearest signal yet from the central bank that its members think the economy could be close to entering a recession -- if it hasn't already. Many Fed policymakers indicated that a downturn in the economy in the first half of the year "now appeared likely."

The minutes from the March 18 meeting show that some Fed policymakers are concerned the problems in the "housing sector had deepened and that considerable uncertainty surrounded the outlook for housing."

The release of the minutes come a week after Fed Chairman Ben Bernanke said during Congressional testimony that a "recession was possible." He also said that real GDP might grow slightly in the first half of the year but conceded that it could also contract.

The National Bureau of Economic Research is the official arbiter of when recessions begin and end and the NBER often does not declare an official recession until months after a downturn begins. But a common shorthand definition for a recession is two consecutive quarters of declines in GDP.

The Fed's forecasts for the rest of the year and next year are perhaps more worrisome, however. According to the minutes, the Fed said its staff is projecting only a slow rise in GDP in the second half of this year. It also said there is a risk that the economic slump could continue all the way into 2009.

The minutes pointed to the uncertainty in the battered housing and financial markets as the reason that the downturn could extend into next year.

"Several participants noted that the problems of declining asset values, credit losses, and strained financial market conditions could be quite persistent, restraining credit availability and thus economic activity for a time and having the potential subsequently to delay and damp economic recovery," the Fed said.

Fed members also conceded that even with its policy of aggressive rate cuts, the Fed may not be equipped to deal with more problems in these markets.

The Fed cut its key federal funds rate by three-quarters of a point at the March 18 meeting, its sixth rate cut since September.

The Fed has been cutting rates in an effort to keep the U.S. economy from falling into recession following the meltdown of the subprime mortgage market and resulting credit crunch.

Pessimism surprises Fed watchers

Fed watchers said they were taken aback by the new, grimmer view of the economy presented in the minutes, especially since some on Wall Street have been expressing hope that the worst may be over following the Fed's rescue of embattled investment bank Bear Stearns.

"They were more blunt, more pessimistic than I thought they would be," said David Wyss, chief economist with Standard & Poor's.

The Fed agreed to lend up to $29 billion to JPMorgan Chase last month to help it buy Bear Stearns and keep it from bankruptcy. There was no indication of any debate about this unprecedented move in the minutes.

John Silvia, chief economist for Wachovia, also said he was surprised by the Fed's tone. But he said he does not expect the Fed to cut rates aggressively at the conclusion of a two-day meeting later this month.

He's forecasting a quarter of a percentage point cut in the federal funds rate -- to 2%. Others on Wall Street also thinks a quarter-point cut is the most likely outcome after the Fed wraps up its meeting on April 30 as well. According to futures trading on the Chicago Board of Trade, investors are pricing in a 100% chance of a quarter-point cut but only a 44% chance of a half-point cut.

But that's up from only a 20% chance of a half-point cut as recently as last week. And Silvia thinks another cut at the Fed's meeting in June is now possible as the Fed continues to weigh concerns about the slowdown with fears of rising commodity prices and a weak dollar.

"I think that the committee is going to drag its feet. There are enough people on there concerned about the inflation risks longer term," said Silvia.

To that end, despite the growing belief that the economy is already in recession, the presidents of the Dallas and Philadelphia Federal Reserve Banks voted against cutting rates by three-quarters of a point last month, a rare amount of dissent on the central bank.

First Published: April 8, 2008: 2:14 PM EDTRead the Fed's minutes

U.S. Economic Growth to Stall Through June as Spending Cools, Survey Shows Economic growth in the U.S. will come to a halt in the first six months of 2008 as consumer spending cools, a Bloomberg News survey showed.

Citigroup Holds Talks to Sell $12 Billion of Leveraged Loans, Person Says Citigroup Inc. is in talks to sell $12 billion of loans at a loss to Apollo Management LP, Blackstone Group LP and TPG Inc. as part of an effort to shrink the bank's balance sheet, a person briefed on the matter said.

Mortgage Applications Index Rises 5.4% as Home Purchases, Refinancing Grow Mortgage applications in the U.S. rose last week as purchases and refinancing increased.

Fed May Slow Pace of Rate Cuts in Face of Shrinking Economy, Housing Slump Federal Reserve officials signaled they will slow the pace of interest-rate cuts even as they concluded ``some contraction in economic activity'' is likely.

NYSE Volume Drops to Lowest This Year as Investors `Wait and See' Earnings Trading on the New York Stock Exchange dropped to the lowest level this year, a sign that changing profit forecasts are making investors reluctant to buy or sell stocks before companies report first-quarter results.

The Black Death of
financial collapse
The US subprime mortgage disease that has now infected the whole global economy is the consequence of failing to be eternally vigilant against the chicaneries of Wall Street and the damage these can cause to Main Street. The world, from Iceland to New Zealand, is ill-prepared for the events now unfolding. James Cumes looks at Australia's part of the global picture.