US stocks open to China savers
Chinese can now invest their cash in US stocks under a deal signed this week. Such purchases might look attractive, given recent declines in Shanghai-listed equities, and will help channel some of China's vast US dollar holdings into the private sector rather than being parked in US government securities. But look for a trickle rather than a flood of funds. - Richard Komaiko

Trillions to go, and buyers wanted
Collapse of the US housing boom requires effectively squeezing US$12 trillion out of the sector. Is it coincidental that Joe Public can now buy Treasury paper in $100 chunks, down from $1,000 previously? Is that because someone must come up with the cash as foreigners tire of bankrolling US profligacy? Are we doomed? Yes!

THE MOGAMBO GURU
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. (Apr 8, '08)

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 …)

GE Profit Drops 12%, Misses Estimates, as Credit Freeze Forces Writedowns General Electric Co. reported its first decline in quarterly profit since 2003, missing analyst estimates with a 12 percent drop in earnings as a freeze-up in credit markets blocked asset sales and forced it to write down the value of investments.

U.S. Stock Futures Decline After General Electric Reduces Earnings Outlook U.S. stock-index futures declined after General Electric Co. reported first-quarter profit that trailed analysts' estimates and cut its 2008 forecast.

Frontier Air Files for Bankruptcy Protection, Fourth U.S. Failure in Month Frontier Airlines Holdings Inc., the U.S. discount carrier that serves 70 destinations from Denver, filed for bankruptcy, becoming the fourth U.S. airline to seek court protection in less than a month.

Auction Market Shrinks by $51 Billion as Borrowers Escape 71% Failure Rate The auction-rate securities market is shrinking by at least 15 percent, or $51 billion, as U.S. municipal borrowers refinance to escape higher costs and closed- end funds begin to bail out investors.

Washington Mutual Earnings Forecast Cut by Goldman; Short Sell Recommended Washington Mutual Inc.'s full-year loss will be wider than first estimated, according to Goldman Sachs Group Inc. analysts, who recommended selling the shares short. The lender declined 6 percent in early trading.

Consumer Sentiment in U.S. Probably Dropped to 16-Year Low on Loss of Jobs Confidence among U.S. consumers sank to a 16-year low this month as the labor market continued to weaken and gasoline prices rose, economists said ahead of a private report today.

Fed Weighs Contingency Plans


UK House prices: disaster ahead


IMF Sees US Falling Into Recession


Are you upside down in your home?

09-Apr-2008 Credit losses could approach $1 trillion: IMF

09-Apr-2008 Long commutes, gas prices crimping American Dream

09-Apr-2008 Fed members worried about deep recession

The Fed’s Money Well Spent - Alice Rivkin, New York Times
Expect Another Quarter-Point Cut from Fed - Tim Duy, Economist's View
Do Fed's Inflation Figures Need an Overhaul? - Robert Lenzner, Forbes
GE Brings Bad Things To Light - Steven Sears, Barron's
America's War-Torn Economy - Joseph Stiglitz, Project Syndicate
Political Institutions' Impact on Trade Flows - Kris James Michener, VoxEU
Isn't Trade a Deal That Benefits Both Sides? - Andrew Leonard, Salon
Doha Must Include Free Trade in Services - S. Crean & S. Schwab, WSJ

It's a Crisis, And Ideas Are Scarce - Floyd Norris, New York Times
How To Jump-Start the U.S. Economy - L. McQuillan & H. Abramyan, Forbes
Solutions Abound, But Sacrifice Is Needed - Lester Thurow, LA Times
The Questions Greenspan Didn't Ask - Colin Barr, Fortune
Mr. Greenspan, You Are Hardly Blameless - Editorial, IBD
The Case for a Central Bank ‘Dual Mandate’ - S. Brittan, Financial Times
Better Insurance for a Better America - Furchtgott-Roth/Brown, American
President Bush's Most Lasting Legacy - Veronique de Rugy, Reason
Doom and Gloom for America's Airline Industry - The Economist
Is It a Bull, Bear or Cowardly Lion Market? - J. Mauldin, Frontline Thoughts
The Rise of the Mega-Region - Richard Florida, Wall Street Journal
Google's Wireless Gamble - Edward Robinson & Ari Levy, Bloomberg

Soros: Credit Crunch Is "Biggest Financial Crisis Of My Lifetime" George Soros has always been a controversial figure. But he is becoming more so with a new, dire forecast for the world economy. Mr. Soros has always been a controversial figure. But he is becoming more so with a new, dire forecast for the world economy. Last week he rushed out a book, his 10th, warning that the financial pain has only just begun. Predicts that dollar will no longer be world's currency soon.

<h2 class="post-title">New Trouble in Auction-Rate Securities</h2> February 15, 2008, 7:15 am

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Some well-heeled investors got a big jolt from Goldman Sachs this week: Goldman, the most celebrated bank on Wall Street, refused to let them withdraw money from investments that they had considered as safe as cash.

The investments at issue are so-called auction-rate securities, instruments at the center of the latest squeeze in the credit markets.

Goldman, Lehman Brothers, Merrill Lynch and other banks have been telling investors the market for these securities is frozen — and so is their cash.

The banks typically pitch these securities to corporations and wealthy individuals as safe alternatives to cash, investors said. The bonds are, in fact, long-term securities. But the banks hold weekly or monthly auctions to set the interest rates and give holders the option of selling the securities.

Only this week almost 1,000 of these auctions failed. The banks also refused to support the auctions, leaving many investors wondering when they will get their money back.

“Investors have lost confidence in the liquidity of these instruments,” G. David MacEwen, the chief investment officer for fixed income at American Century Investments, a mutual fund company, told The New York Times. “These types of instruments depend on new investors showing up to own the securities.”

The $330 billion auction-rate market is dominated by municipalities and other tax-exempt institutions like the Port Authority of New York and New Jersey, which had issued some auction securities and had its interest rate soar to 20 percent on Wednesday. Closed-end mutual funds, student loan companies and corporations also issue such securities.

A failed auction does not mean the securities go into default, because the issuer continues to pay interest at the higher rate, or “fail rate.”

The market, however, has a troubled history. In 2006, the Securities and Exchange Commission reached a $13 million settlement with 15 investment banks, and the industry agreed to impose a voluntary code of conduct for the auction-rate market.

The S.E.C. investigation centered on how bidding was conducted for these securities. Critics complain that investment banks have the upper hand in bidding because they can bid after seeing what other investors have bid.

Brokerage firms are not legally obligated to make a market in auction securities, or give clients a price even if there is not one in the market. But clients who are unable to sell are likely to argue that they were wrongly put into long-term securities when their intention was to buy shorter-term debt.

“If these were pitched as cash equivalents, if that is what the broker said they were, the banks may be held responsible for losses and clients’ inability to get their money out,” Jacob H. Zamansky, a securities lawyer who represents individual investors, told The Times.

The situation is an awkward one for investment banks and brokers that have had to tell clients that their cash is frozen until at least the next auction — if not longer. One affluent New Jersey family has sued Lehman Brothers for the declining value of its cash in auction-rate securities. Lehman has said it acted properly.

Money managers, chief executives and individual investors have been swept up by the latest turmoil in the credit markets. One wealthy investor said Goldman Sachs had sold him auction-rate securities and had described the instruments as equivalent to cash.

“It’s a moral outrage,” the investor told The Times. “Their pitch was, keep your cash with us, we get a higher rate.”

This year, Bristol-Myers Squibb, the drug maker, took a $275 million write-off on money it had invested in auction-rate securities that it was unable to sell because of failed auctions.

Analysts say the biggest investors in auction-rate securities are individuals and corporations because money market funds cannot own the bonds. Many bond fund managers also shy away from the securities because of the uncertainty.

But the failed auctions do have one upside: the securities are resetting to rates that are far higher than those on other types of bonds.

Mr. MacEwen of American Century told The Times that his firm was considering buying auction-rate bonds for the first time because the rates have been reset to an attractive level.

“A lot of the municipalities or the closed-end funds that underlie this are high quality,” Mr. MacEwen said. “Whether its 20 percent or 5 percent, that looks like a good purchase if you are willing to forgo the liquidity.”

Not all auction-rate securities with failed auctions are resetting to very high rates. The penalty rates are governed by the terms of the bond, and in some cases they are tied to short-term interest rates like the London interbank offered rate, which has been falling for much of the year as the Federal Reserve has cut its benchmark interest rate.

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<h2 class="post-title">3 Firms Are Asked for Data on Auction-Rate Shares</h2> March 31, 2008, 7:41 am

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The top securities regulator in Massachusetts has subpoenaed Merrill Lynch, UBS Securities and Banc of America Investment Services for information relating to their sales of auction-rate preferred shares.

Auction-rate preferred securities were often sold as an alternative to money-market funds, but have stopped trading because of the credit crisis.

Officials at UBS Securities, meanwhile, confirmed that the firm would begin marking down the value of these securities and auction-rate notes held in clients’ accounts, to reflect the fact that they cannot be sold. Until Friday, client statements had valued the securities at their cost to investors. UBS said the values could drop by as much as 20 percent.

Some $330 billion worth of auction-rate securities have been issued by municipalities, nonprofit entities and closed-end mutual funds. They are debt obligations and take the form of either notes or preferred shares.

Some investors who hold these securities say their brokers assured them that the shares were safe. That is because every seven days, investors could sell their shares at an auction that also determined the rate of interest they would receive. As the credit crisis deepened in recent months, however, these auctions started failing because investors wanted to sell but no one wanted to buy.

William F. Galvin, Massachusetts’ secretary of the commonwealth, said in a statement Friday: “Within the last couple of weeks, my office has received many calls from people who thought they were investing in safe, liquid investments only to find that they had, in fact, purchased auction market securities that are now frozen and they cannot get their money.”

Merrill Lynch, UBS and Banc of America Investment Services, a Bank of America unit, all declined to comment.

Marten Hoekstra, head of wealth management for the Americas at UBS, in reference to the bank’s decision to mark down the value of the securities in clients’ accounts, said it was “in the best interests of our clients to provide them full transparency regarding their accounts.”

“Given current market dislocation, this is the next logical step for any committed wealth manager,” he said. The firm is working with others in this market to bring it back to normal as soon as possible, Mr. Hoekstra added.

Mr. Galvin is focusing on preferred shares issued by closed-end funds, a $65 billion market. He said he wanted to determine whether brokers informed their clients of liquidity risks and to examine the role that the investment banks might have played in the events that led the market to freeze up.

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1. 
   The Write-Down Guessing Game - Mergers, Acquisitions, Venture [b]...[/b]
   Apr 1, 2008 ... What about auction rate securities that brokers misrepresented as cash equivalents?
   Over $300 billion are frozen indefinitely because of the ...
   
   http://dealbook.blogs.nytimes.com/2008/04/...cut-by-goldman/

Spread the Wealth and Give Workers a Raise
Want to Save the Economy?

By MIKE WHITNEY

Insolvency's dark shadow hangs over Wall Street. One major player, Bear Stearns, has already gone under, and from the looks of it, another investment giant may be on the way down. It's getting ugly out there. The so-called TED spread*, which measures the reluctance of banks to lend to each other, has begun to widen ominously suggesting that the money markets think another dead body will be floating to the surface any day now.

The ongoing deleveraging of financial institutions and the persistent downgrading of assets has the Fed in a tizzy. Bernanke has backed himself into a corner by stretching the Fed's mandate to include everyone on Wall Street with a mailing address and a begging bowl. Now he's taken on the even larger task of fixing the plumbing that keeps credit flowing between the various investment banks. Good luck. There's plenty of more pain ahead. The IMF expects the final tally will be $945 billion, that means $3 trillion in lost loans for the banks. Bernanke better pace himself; this mess could last for years.

The US subprime fiasco has spiraled into what the IMF is calling "the largest financial shock since the Great Depression." America's capital markets are on the fritz. The corporate bond market is frozen, the banks are buckling from their losses, and the housing market is in a shambles. No one is buying and no one is lending. Private equity deals are off 75 per cent from last year and no one will touch a mortgage-backed security (MBS) with a ten foot pole. The mighty wheel of modern finance is grinding to a standstill and no one's quite sure how to rev it up again.

The US consumers are feeling the pinch, too. Credit cards are maxed out, student loans overdue, car payments in arrears, and mortgages entering foreclosure. Also, wages haven't kept pace with production and and the home-equity ATM has been shut down. Now that the credit tap has been turned off; the American worker is hurting, but no one is offering a bailout or a even helping hand; just a few table-scraps from Bush's "surplus package". 500 bucks will just about fill the tank of a normal-sized SUV. A new survey from the Pew research Center "Inside the Middle Class-Bad Times Hit the Good Life", shows that working families are in debt up to their ears and that fewer Americans "believe they are moving forward" than anytime in the last half century. The study also shows that most people believe "it's harder to maintain a middle class life style" and that "since 1999, they have not made economic gains." Average families are struggling just to make ends meet.

That's why so many people bought homes when they should have opened savings accounts. They were duped into speculating on housing so they could get a chunk of money. It looked like a good way to overcome stagnant wages and crappy hours. The cheer-leading TV pundits offered assurances that "housing prices never go down". It was all baloney. Now 15 million homeowners are upside-down on their mortgages and the very same experts are scolding workers for fudging the facts on their income disclosure forms. It's all backwards.

No wonder consumer confidence has dropped to record lows. Working people don't need lectures on saving money; they need a raise. The big-wigs at Bear Stearns are still dining on crab-cakes at the Four Seasons while the working folk are just trying to make their way through Greenspan's nuclear winter living on beef jerky and Big Gulps. Where's the justice?

Volumes have been written about the current crisis; subprime-this, subprime that. Everything that can be said about collateralized debt obligations (CDOs) credit default swaps(CDS) and mortgage-backed securities (MBS) has already been said. Yes, they are exotic "financial innovations" and, no, they are not regulated. But what difference does that make? There's always been snake oil and there have always been snake oil salesmen. Greenspan simply raised the bar a notch, but he's not the first huckster and he won't be the last. What really matters is underlying ideology; that's the root from which this economy-busting hydra sprung. 30 years of trickle down, supply-side gibberish; 30 years of idol worship for the waxy-haired reactionary, Ronald Reagun; 30 years of unrelenting anti-labor, free market, deregulated orthodoxy which inflated the biggest equity-Zeppelin in history.

Now the bubble is hissing out of the blimp and the escaping gas is wreaking havoc across the planet. There are food riots in Haiti, Egypt, and Kuwait. Wherever the local currency is pegged to the falling dollar, inflation is soaring and trouble is brewing. Also, European banks are listing from the mortgage-backed garbage they bought from brokerages in the US and need central bank bailouts to stay afloat. It's just more fallout from the subprime swindle. Finance ministers in every capital in every country are getting ready for a 1930's-type typhoon that could send equities crashing and food and energy prices rocketing into the stratosphere. And it can all be traced back to the wacko doctrines of neoliberalism. These are the theories that guide America's "screw-thy-neighbor" monetary policies and spread financial turmoil to every city and hamlet around the world.

The present stewards of the system are incapable of fixing the problem because they represent the interests of the people who benefit most from the disruptions. Paulson's latest "blueprint" for the financial markets is a good example; a more pro-business, self-serving scheme has never been put to paper. Gary North sums it up in his article "Really Stupid Loans":

"With the Federal Reserve System's latest proposal, presented to the public by Secretary of the Treasury Henry "Goldman Sachs" Paulson, the Fed is asking the United States government to make it the Great Protector of Capital....The new proposals will centralize power over finance in the hands of an agency that is officially run by the government but in fact is run by agents of the largest fractional reserve banks. ...Regulation by tenured staff economists will not make the system less fragile. It will make it more top-heavy and less flexible..

"Some version of this plan will probably pass in the next Congress. No matter whether it does or does not, the direction is the same: toward an economy controlled by the federal government in conjunction with titular private ownership of the means of production, that is, toward fascism."

(Gary North, "Really Stupid loans" lewrockwell.com)

The whole point is to put the markets in the Fed's control so that when the next financial crisis arises (from the next swindle) the Fed can bailout the bankers and hedge fund managers without consulting Congress.

Paulson's plan is a power-play; nothing more. The investment Mafia wants to take over the whole financial system lock, stock and barrel. They want to liquidate the SEC and any other government watchdog and put the investment banks, hedge funds and brokerages on the honor system. It's the end of transparency and accountability which, of course, are already in short supply.

Currently, Paulson and Bernanke are expanding the balance sheets of the Government Sponsored Enterprises (GSEs) so that Fannie Mae and Freddie Mac will underwrite 85 per cent of all mortgages while FHA will cover 10 per cent more. The mortgage industry is being nationalized to save banking fellowship while the taxpayer is on the hook for another $4.4 trillion of dodgy loans. Paulson doesn't care if the taxpayer gets stuck with the bill. What bothers him is the prospect that, somewhere along the line, workers will demand higher wages to keep pace with inflation. Then all hell will break loose. Paulson and Co. would rather see the economy perish in a deflationary holocaust than add another farthing to a working person's salary. He and his ilk take class warfare seriously; that's why they are winning. But their strategy also creates problems. When wages don't keep pace with production, demand decreases and the economy falters. That's what's happening now and Paulson knows it. Workers are over-extended and can't buy the things they make. They barely have enough to feed the kids and fill the tank for work. Consumer spending (which is 72 per cent of GDP) is nose-diving at the very same time the Fed's equity bubble is exploding.

Neoliberalism has a twenty-year record of producing the very same economic calamities. Why is this crisis different? Why should the US be spared the same predatory treatment as the many other victims of the global corporate oligarchy? After the Fed's equity bubble bursts, the corporate vultures will swoop down and buy up vital resources and industries for pennies on the dollar.

Economist Michael Hudson anticipated many of the present-day developments in the financial markets in an amazingly prescient interview in CounterPunch in 2003 called "The Coming Financial Reality":

Michael Hudson: "Free enterprise under today's financial conditions threatens to bring about an unprecedented centralization of planning, not in the hands of government but by the financial conglomerates and money managers. Whatever government planning power is destroyed becomes available for them to appropriate, with plenty of vigorish left for the politicians whose campaigns they back and who will "descend from heaven" into high-paying private-sector jobs, Japanese style, after having performed their service for the new regime.

Question: The financial regime is nothing but parasites?

Michael Hudson: "The problem with parasites is not merely that they siphon off the food and nourishment of their host, crippling its reproductive power, but that they take over the host's brain as well. The parasite tricks the host into thinking that it is feeding itself.

"Something like this is happening today as the financial sector is devouring the industrial sector. Finance capital pretends that its growth is that of industrial capital formation. That is why the financial bubble is called 'wealth creation,' as if it were what progressive economic reformers envisioned a century ago. They condemned rent and monopoly profit, but never dreamed that the financiers would end up devouring landlord and industrialist alike. Emperors of Finance have trumped Barons of Property and Captains of Industry." (Michael Hudson, "The Coming Financial Reality", counterpunch, interviewed by Standard Schaefer.)

Bingo. Hudson not only explains how finance capitalism is inserting itself into the governmental power structure but, also predicts that "industrial capital formation" -- which is the production of things that people can really use to improve their lives -- will be replaced with complex debt-instruments and derivatives that add no tangible value to people's lives and merely serve to expand the wealth of an entrenched and increasingly powerful investor class.

Finance capitalism has "devoured landlord and industrialist alike" and created a galaxy of seductive liabilities which masquerade as assets. Derivatives contracts, for example, represent over $500 trillion of unregulated counterparty transactions; a "shadow banking system" completely disconnected from the underlying "real" economy, but large enough to send the world into a agonizing depression for years to come.

The goal should be to dismantle this corrupt Ponzi-system, which merely wraps debt in a ribbon, and rebuild the economy on a solid foundation of productive labor, worker solidarity and and above all the redistribution of income and hence purchasing power away from the system which now flow to the top two or three per cent.

Political power has to be taken from the financial mandarins or the disparity of wealth will continue to grow and democracy will wither. We've already seen our main institutions -- the courts, the congress, the media, and the presidency -- polluted by the steady flow of corporate contributions which only serve the narrow interests of elites.

Henry Liu expands on this idea in his excellent article "A Panic-stricken Federal Reserve":

"In the 1920s, the wide disparity of wealth between the rich and the average wage earner increased the vulnerability of the economy. For an economy to function with stability on a macro scale, total demand needs to equal total supply. Disparity of income eventually will result in demand deficiency, causing over-supply. The extension of credit to consumers can extend the supply/demand imbalance but if credit is extended beyond the ability of income to sustain, a debt bubble will result that will inevitably burst with economic pain that can only be relieved by inflation.....More investment normally increases productivity. However, if the rewards of the increased productivity are not distributed fairly to workers, production will soon outpace demand. The search for high returns in a low demand market will lead to consumer debt bubbles with wide-spread speculation .... Today, outstanding consumer credit besides home mortgages adds up to about $14 trillion, about the same as the annual GDP. "

Voila. A strong economy requires a strong workforce and an equitable distribution of wealth. When money is concentrated in too few hands, the political system atrophies and becomes unresponsive to the needs of its people. That's when the nation's laws and institutions are reshaped to reflect the ambitions of rich and powerful.

The financial system is doing exactly what it was designed to do, it is crumbling from the decades-long trickle-down experiment. Social programs have been gutted, civil infrastructure is in tatters, legal protections have been savaged, and workers rights have been trounced. Is it any wonder why we're embroiled in an unwinnable war and the financial system is on its last legs?

The only way to break the stranglehold of Wall Street's financial Politburo is to level the playing field through greater wealth distribution. That's the best way to rekindle democracy and make America the land of opportunity again. And it all starts with giving America's workers a raise.

*Initially, the TED spread was the difference between the interest rate for the three month U.S. Treasuries contract and three month Eurodollars contract as represented by the London Inter Bank Offered Rate (LIBOR). However, since the Chicago Mercantile Exchange dropped the T-bill futures, the TED spread is now calculated as the difference between the T-bill interest rate and LIBOR. The TED spread is a measure of liquidity and shows the flow of dollars into and out of the United States (Wikipedia).

Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com
http://www.counterpunch.org/whitney04122008.html

Credit Default Swaps: Evolving Financial Meltdown and Derivative Disaster Du Jour
by Dr. Ellen Brown
Global Research, April 11, 2008


Author's website www.webofdebt.com/

When the smartest guys in the room designed their credit default swaps, they forgot to ask one thing - what if the parties on the other side of the bet don't have the money to pay up? Credit default swaps (CDS) are insurance-like contracts that are sold as protection against default on loans, but CDS are not ordinary insurance.

Insurance companies are regulated by the government, with reserve requirements, statutory limits, and examiners routinely showing up to check the books to make sure the money is there to cover potential claims. CDS are private bets, and the Federal Reserve from the time of Alan Greenspan has insisted that regulators keep hands off.

The sacrosanct free market would supposedly regulate itself. The problem with that approach is that regulations are just rules. If there are no rules, the players can cheat; and cheat they have, with a gambler's addiction. In December 2007, the Bank for International Settlements reported derivative trades tallying in at $681 trillion - ten times the gross domestic product of all the countries in the world combined. Somebody is obviously bluffing about the money being brought to the game, and that realization has made for some very jittery markets.

“Derivatives” are complex bank creations that are very hard to understand, but the basic idea is that you can insure an investment you want to go up by betting it will go down. The simplest form of derivative is a short sale: you can place a bet that some asset you own will go down, so that you are covered whichever way the asset moves.

Credit default swaps are the most widely traded form of credit derivative. They are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff if the company defaults within a certain period of time, while the “protection seller” collects periodic payments for assuming the risk of default.

CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to speculate on market changes. In one blogger's example, a hedge fund wanting to increase its profits could sit back and collect $320,000 a year in premiums just for selling “protection” on a risky BBB junk bond. The premiums are “free” money - free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims. And there's the catch: what if the hedge fund doesn't have the $100 million? The fund's corporate shell or limited partnership is put into bankruptcy, but that hardly helps the “protection buyers” who thought they were covered.

To the extent that CDS are being sold as “insurance,” they are looking more like insurance fraud; and that fact has particularly hit home with the ratings downgrades of the “monoline” insurers and the recent collapse of Bear Stearns, a leading Wall Street investment brokerage. The monolines are so-called because they are allowed to insure only one industry, the bond industry. Monoline bond insurers are the biggest protection writers for CDS, and Bear Stearns was the twelfth largest counterparty to credit default swap trades in 2006.¹ These players have been major protection sellers in a massive web of credit default swaps, and when the “protection” goes, the whole fragile derivative pyramid will go with it. The collapse of the derivative monster thus appears to be both imminent and inevitable, but that fact need not be cause for despair. The $681 trillion derivatives trade is the last supersized bubble in a 300-year Ponzi scheme, one that has now taken over the entire monetary system. The nation's wealth has been drained into private vaults, leaving scarcity in its wake. It is a corrupt system, and change is long overdue. Major crises are major opportunities for change.

The Wall Street Ponzi Scheme

The Ponzi scheme that has gone bad is not just another misguided investment strategy. It is at the very heart of the banking business, the thing that has propped it up over the course of three centuries. A Ponzi scheme is a form of pyramid scheme in which new investors must continually be sucked in at the bottom to support the investors at the top. In this case, new borrowers must continually be sucked in to support the creditors at the top. The Wall Street Ponzi scheme is built on “fractional reserve” lending, which allows banks to create “credit” (or “debt”) with accounting entries. Banks are now allowed to lend from 10 to 30 times their “reserves,” essentially counterfeiting the money they lend. Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.² The problem is that banks create only the principal and not the interest necessary to pay back their loans, so new borrowers must continually be found to take out new loans just to create enough “money” (or “credit”) to service the old loans composing the money supply. The scramble to find new debtors has now gone on for over 300 years - ever since the founding of the Bank of England in 1694 - until the whole world has become mired in debt to the bankers' private money monopoly. The Ponzi scheme has finally reached its mathematical limits: we are “all borrowed up.”

When the banks ran out of creditworthy borrowers, they had to turn to uncreditworthy “subprime” borrowers; and to avoid losses from default, they moved these risky mortgages off their books by bundling them into “securities” and selling them to investors. To induce investors to buy, these securities were then “insured” with credit default swaps. But the housing bubble itself was another Ponzi scheme, and eventually there were no more borrowers to be sucked in at the bottom who could afford the ever-inflating home prices. When the subprime borrowers quit paying, the investors quit buying mortgage-backed securities. The banks were then left holding their own suspect paper; and without triple-A ratings, there is little chance that buyers for this “junk” will be found. The crisis is not, however, in the economy itself, which is fundamentally sound - or would be with a proper credit system to oil the wheels of production. The crisis is in the banking system, which can no longer cover up the shell game it has played for three centuries with other people's money.

The Derivatives Chernobyl

The latest jolt to the massive derivatives edifice came with the collapse of Bear Stearns on March 16, 2008. Bear Stearns helped fuel the explosive growth in the credit derivative market, where banks, hedge funds and other investors have engaged in $45 trillion worth of bets on the credit-worthiness of companies and countries. Before it collapsed, Bear was the counterparty to $13 trillion in derivative trades. On March 14, 2008, Bear's ratings were downgraded by Moody's, a major rating agency; and on March 16, the brokerage was bought by JPMorgan for pennies on the dollar, a token buyout designed to avoid the legal complications of bankruptcy. The deal was backed by a $29 billion “non-recourse” loan from the Federal Reserve. “Non-recourse” meant that the Fed got only Bear's shaky paper assets as collateral. If those proved to be worthless, JPM was off the hook. It was an unprecedented move, of questionable legality; but it was said to be justified because, as one headline put it, “Fed's Rescue of Bear Halted Derivatives Chernobyl.” The notion either that Bear was “rescued” or that the Chernobyl was halted, however, was grossly misleading. The CEOs managed to salvage their enormous bonuses, but it was a “bailout” only for JPM and Bear's creditors. For the shareholders, it was a wipeout. Their stock initially dropped from $156 to $2, and 30 percent of it was held by the employees. Another big chunk was held by the pension funds of teachers and other public servants. The share price was later raised to $10 a share in response to shareholder outrage, but the shareholders were still essentially wiped out; and the fact that one Wall Street bank had to be fed to the lions to rescue the others hardly inspires a feeling of confidence. Neutron bombs are not so easily contained.

The Bear Stearns hit from the derivatives iceberg followed an earlier one in January, when global markets took their worst tumble since September 11, 2001. Commentators were asking if this was “the big one” - a 1929-style crash; and it probably would have been if deft market manipulations had not swiftly covered over the approaching catastrophe. The precipitous drop was blamed on the threat of downgrades in the ratings of two major monoline insurers, Ambac and MBIA, followed by a $7.2 billion loss in derivative trades by Societe Generale, France's second-largest bank. Like Bear Stearns, the monolines serve as counterparties in a web of credit default swaps, and a downgrade in their ratings would jeopardize the whole shaky derivatives edifice. Without the monoline insurers' traiple-A seal, billions of dollars worth of triple-A investments would revert to junk bonds. Many institutional investors (pension funds, municipal governments and the like) have a fiduciary duty to invest in only the “safest” triple-A bonds. Downgraded bonds therefore get dumped on the market, jeopardizing the banks that are still holding billions of dollars worth of these bonds. The downgrade of Ambac in January signaled a simultaneous downgrade of bonds from over 100,000 municipalities and institutions, totaling more than $500 billion.³

Institutional investors have lost a good deal of money in all this, but the real calamity is to the banks. The institutional investors that formerly bought mortgage-backed bonds stopped buying them in 2007, when the housing market slumped. But the big investment houses that were selling them have billions' worth left on their books, and it is these banks that particularly stand to lose as the derivative Chernobyl implodes.⁴

A Parade of Bailout Schemes

Now that some highly leveraged banks and hedge funds have had to lay their cards on the table and expose their worthless hands, these avid free marketers are crying out for government intervention to save them from monumental losses, while preserving the monumental gains raked in when their bluff was still good. In response to their pleas, the men behind the curtain have scrambled to devise various bailout schemes; but the schemes have been bandaids at best. To bail out a $681 trillion derivative scheme with taxpayer money is obviously impossible. As Michael Panzer observed on SeekingAlpha.com:

As the slow-motion train wreck in our financial system continues to unfold, there are going to be plenty of ill-conceived rescue attempts and dubious turnaround plans, as well as propagandizing, dissembling and scheming by banks, regulators and politicians. This is all happening in an effort to try and buy time or to figure out how the losses can be dumped onto the lap of some patsy (e.g., the taxpayer).

The idea seems to be to keep the violins playing while the Big Money Boys slip into the mist and man the lifeboats. As was pointed out in a blog called “Jesse's Café Americain” concerning the bailout of Ambac:

It seems that the real heart of the problem is that AMBAC was being used as a "cover" by the banks which originated these bundles of mortgages to get their mispriced ratings. Now that the mortgages are failing and the banks are stuck with them, AMBAC cannot possibly pay, they cannot cover the debt. And the banks don't wish to mark these CDOs [collateralized debt obligations] to market [downgrade them to their real market value] because they are probably at best worth 60 cents on the dollar, but are being held by the banks on balance at roughly par. That's a 40 percent haircut on enough debt to sink every bank involved in this situation . . . . Indeed for all intents and purposes if marked to market banks are now insolvent. So, the banks will provide capital to AMBAC . . . [but] it's just a game of passing money around. . . . So why are the banks engaging in this charade? This looks like an attempt to extend the payouts on a vast Ponzi scheme gone bad that is starting to collapse . . . .⁵

The banks will therefore no doubt be looking for one bailout after another from the only pocket deeper than their own, the U.S. government's. But if the federal government acquiesces, it too could be dragged into the voracious debt cyclone of the mortgage mess. The federal government's triple A rating is already in jeopardy, due to its gargantuan $9 trillion debt. Before the government agrees to bail out the banks, it should insist on some adequate quid pro quo. In England, the government agreed to bail out bankrupt mortgage bank Northern Rock, but only in return for the bank's stock. On March 31, 2008, The London Daily Telegraph reported that Federal Reserve strategists were eyeing the nationalizations that saved Norway, Sweden and Finland from a banking crisis from 1991 to 1993. In Norway, according to one Norwegian adviser, “The law was amended so that we could take 100 percent control of any bank where its equity had fallen below zero.”⁶ If their assets were “marked to market,” some major Wall Street banks could already be in that category.

Benjamin Franklin's Solution

Nationalization has traditionally had a bad name in the United States, but it could be an attractive alternative for the American people and our representative government as well. Turning bankrupt Wall Street banks into public institutions might allow the government to get out of the debt cyclone by undoing what got us into it. Instead of robbing Peter to pay Paul, flapping around in a sea of debt trying to stay afloat by creating more debt, the government could address the problem at its source: it could restore the right to create money to Congress, the public body to which that solemn duty was delegated under the Constitution.

The most brilliant banking model in our national history was established in the first half of the eighteenth century, in Benjamin Franklin's home province of Pennsylvania. The local government created its own bank, which issued money and lent it to farmers at a modest interest. The provincial government created enough extra money to cover the interest not created in the original loans, spending it into the economy on public services. The bank was publicly owned, and the bankers it employed were public servants. The interest generated on its loans was sufficient to fund the government without taxes; and because the newly issued money came back to the government, the result was not inflationary.⁷ The Pennsylvania banking scheme was a sensible and highly workable system that was a product of American ingenuity but that never got a chance to prove itself after the colonies became a nation. It was an ironic twist, since according to Benjamin Franklin and others, restoring the power to create their own currency was a chief reason the colonists fought for independence. The bankers' money-creating machine has had two centuries of empirical testing and has proven to be a failure. It is time the sovereign right to create money is taken from a private banking elite and restored to the American people to whom it properly belongs.


NOTES


¹ “Credit Swap Worries Go Mainstream,” nakedcapitalism.com (February 17, 2008); Aline van Duyn, “CDS Sector Weighs Bear Stearns Backlash,” Financial Times (London) (March 16, 2008).

² See Ellen Brown, “Dollar Deception: How Banks Secretly Create Money,” webofdebt.com/articles (July 3, 2008).

³ “Monoline Insurance,” Wikipedia.

⁴ Jane Wells, “Ambac and MBIA: Bonds, Jane's Bonds,” CNBC (February 4, 2008).

⁵ “Saving AMBAC, the Homeowners, or the Banks?”, Jesse's Café Americain (February 25, 2008).

⁶ Ambrose Evans-Pritchard, “Fed Eyes Nordic-style Nationalisation of US Banks,” International Business Editor (March 31, 2008).

⁷ See Ellen Brown, Web of Debt (Third Millennium Press, 2008), chapter 3.

US banks Citigroup and Merrill Lynch reveal fresh $15bn loss
Not Employed rate - 13.1%

CREDIT BUBBLE BULLETIN
The Greenspan episode
Alan Greenspan had barely quit his US Federal Reserve Board chair before the credit crisis, first in the shape of the subprime mortgage crisis, broke on the world. Yet the man more responsible for credit and asset bubbles than anyone else in history continues to deny that his were years of misrule.
Doug Noland reviews the previous week's events each Monday.

The capture of Keynesianism
The United States central bank and government have wrapped themselves in the cloak of John Maynard Keynes as they attempt to claw their way out of the present financial mess - but only after helping to obliterate the structural policies that are an essential element of Keynesian economics. - Thomas I Palley

Government spending burns the toast
With the US financial sector in a Deeper and Deeper hole and folk get Drummed out of their jobs as Debt-burdened companies go bust, tax revenues are also going Down, even as the government spends ever more of that tax money. That means the increasingly ubiquitous D also stands for "Default", "Darkness" and "Despair". Aaagh!

US Federal Reserve says that credit crisis is not over yet


Housing Woes in U.S. Spread Around Globe


Majority not buying homes, poll shows


US banks Citigroup and Merrill Lynch reveal fresh $15bn loss

Nothing for Families and Retirees

A Trillion Dollar Rescue for Wall Street Gamblers
By MICHAEL HUDSON

If the move to a Unitary Executive of unfettered presidential power frightens you, America's radical right turn to Unitary Finance should compound your fears--and your debts as well. The financial events of the last two weeks of March 2008 demonstrate that the "economic royalists" and "money changers" whom Franklin Delano Roosevelt (FDR) drove from the temple of finance have returned to mismanage our economy into dire straights of unprecedented risk--debt creation, euphemized as "leveraging" and "wealth creation."

The few checks and balances that remain in the way of the financial sector's increasingly centralized planning, especially at the state level, are being swept aside under the guise of "saving the system." Few Wall Street beneficiaries who use this phrase explain just what the system is. For starters, its political managers are industry lobbies appointed to high managerial and planning positions in the public agencies that are supposed to regulate these industries. Their idea of financial planning is to put a trillion dollars in government agency funds and credit guarantees at risk. This agency funding was supposed to be used to help average American families obtain housing and health care, and to protect their savings and provide for their retirement. Instead, it is being mobilized to support the economy's bankers and financial managers. Indeed, the past few weeks have seen seemingly trillions of dollars committed for war making and bank support.

The banking system's free creation of credit, doubling each five years or so for the economy at large, threatens to culminate in debt peonage for many American families and also for industry and for state and local governments. The economic surplus is being quickly absorbed by a combination of debt service and government bailouts for creditors whose Ponzi schemes are collapsing right and left, from residential to commercial real estate and corporate takeover loans to foreign bubble-economy credit.

This is the context in which to view the past few weeks' financial turmoil surrounding Bear Stearns, JPMorgan/Chase and the rapidly changing debt landscape. "The system" that the Treasury, Federal Reserve and the New Deal agencies captured by the Bush Administration is trying to save is an economy-wide Ponzi scheme. By that I mean that the business plan is for creditors to lend debtors enough money for them to pay the interest costs so as to keep current on their loans.

For the past few years this system has depended on asset prices for real estate, stocks and bonds to be inflated by enough to enable debtors to pledge these assets as collateral at a higher market price for more and more new loans. But now that the real estate bubble has burst (and indeed, as stock prices sink), the problem is how to bail out the tip of our economic iceberg that has sunk into negative equity--a condition in which the debts attacked to property exceed its market value. Someone must take a loss--but whom?

Normally, it is the banker or investor who takes the loss. But they are now supposed to be "rescued." This is being presented as a return to stability. But it was a system that never was stable to begin with. In fact, for the rescue to work, most Americans will have to own less and owe more, while being told that all this is the path to wealth creation--as if it were their wealth, not that of their creditors. The Bear Stearns/JPMorgan Chase/monoline insurance giveaway to "save the financial system" provides a vivid illustration of how Unitary Finance has developed a parasitic relationship with American labor in its role as pension contributor, consumer and homeowner. The system being subsidized enables the FIRE sector to direct and live off the productive efforts of others--people who make real things and provide real services.

Saving Wall Street with a trillion-dollar bailout of bad mortgage debt

The bailout started on Sunday, March 16. The government and JPMorgan Chase had reason to be embarrassed about the negotiations, for the details trickled out on the Federal Reserve or Treasury websites and Mr. Paulson's speeches went far beyond just Chase and Bear Stearns. It turned out that on the same Sunday on which he had negotiated the $30 billion Fed bailout, Mr. Paulson started a frenetic ten days orchestrating actions by the Treasury, Federal Reserve, and other government agencies to earmark a trillion dollars to re-inflate financial markets for mortgage holders and their associated creditors and speculators. Behind the scenes, as matters turned out, the Bush Administration was mounting a financial surge: It decided to throw everything its mortgage financing agencies could muster to prevent property markets from collapsing on its watch.

The surge of support for the mortgage and real estate markets was headed by the two largest U.S. mortgage holders and packagers: the government-sponsored National Mortgage Association (FNMA) and Freddie Mac. These two agencies were created to develop tradable markets for mortgages that banks traditionally had kept on their own books by buying home mortgages from the banks and mortgage brokers that originated them. This created a vast new demand for mortgages by making them marketable in large packages for institutional investors such as pension and mutual funds. Being implicitly government-guaranteed, Fannie Mae and Freddie Mac were able to borrow at fairly low interest rates, and sell mortgages at a premium. Demand for these packaged mortgage securities provided an enormous new source of lending. It also turned banks into mortgage originators rather than mortgage holders.

Together, Fannie Mae and Freddie Mac bought more than three-fourths of all U.S. mortgages issued in the fourth quarter of 2007, bringing their holdings to $1.4 trillion. However, the fact that their capital base was under $70 billion--for a 20 to 1 debt-leveraging ratio--led investors to sell their stock steadily over the past year. Rather than insisting that Fannie Mae and Freddie Mac rebuild their capital position, the Office of Federal Housing Enterprise and Oversight (OFHEO) did just the opposite. It reduced their capital requirements from 30 percent to 20 percent, and encouraged them to use this increased leverage to pour an extra $200 billion to the nation's mortgage market. Limits on the size of mortgage loans that these two agencies could make were raised sharply in order to help re-inflate the troubled high-cost California and New York property markets in particular.

Designed to bring temporary relief, this maneuver threatened to further destabilize matters by simply kicking the can down the road. The same applied to the Federal Housing Administration (FHA), set up in 1934 as part of the New Deal. Its insurance fund of about $20 billion backs some 3.8 million mortgage loans totaling $365 billion, for an 18:1 debt-leverage ratio. On Monday, March 24, it promised $400 billion in new mortgage credit insurance. This means that government agencies can use their capital to lend much more money to prospective homebuyers. The FHA, Fannie Mae and Freddie Mac also will be on the line for any losses, "socializing the risk" to a higher degree than ever before.

What was so worrisome about this strategy was that the FHA already was in financial straits as a result of its subprime loans. For the first time in its history it was running a deficit. Over a third of the loans it insured were made by home sellers to new buyers to cover their down payment--enabling homes to be bought without any down payment at all. (Traditionally, 20 percent has been the norm.) This was a brand-new market, barely existing in 2000 on the eve of the Greenspan-Bush real estate bubble. The Secretary of the Housing and Urban Development Agency (HUD), Alphonso R. Jackson, told a Senate committee: "These types of loans have pushed F.H.A. to the brink of insolvency." And now it was to double its activities to prop up the real estate and mortgage market.

The Federal Housing Finance (FHF) board dutifully did its part to increase the system's debt leverage. It doubled the ability of the 12 regional Federal Home Loan Banks (FHLB) to leverage their purchase of mortgage securities, from three times their capital to six times, twice the existing debt/equity ratio. The aim was to help them serve their clients, the nation's eight thousand savings banks, S&Ls, credit unions and insurance companies, finance the purchase of $160 to $200 billion new mortgage-backed securities issued by Fannie Mae and Freddie Mac. The target was for these two agencies to buy up about half a trillion dollars worth of mortgage securities from the private sector this year.

The Federal Home Loan Banking system also announced plans to start offering its own "monoline" mortgage insurance against the looming economic downturn at prices way below what private-sector insurance writers were willing to match. The aim is to shore up the nation's crumbling mortgage-insurance coverage at taxpayer expense. Again, the concept of a "free market" is being subjugated in order to socialize the losses for the FIRE sector's big players. The situation is much like the government insurance of beachfront properties against flood damage, paying for a chronically losing proposition at public expense. Of course, a disproportionate number of the owners of those beachfront properties also come from the campaign-contributing class.

Gillian Tett of the Financial Times noted that this mortgage insurance subsidy is "likely to trigger further debate about how policymakers are turning to state, or quasi-state, entities to stabilise the financial sector" by addressing "an absence of the market." Instead of shaping the market along less risky, less debt-leveraged lines, it was now another case of the government socializing financial risk at below-market rates. John Price, chairman of the Federal Home Loan Bank board, claimed that this "is what Government State Enterprises are for.'" In view of the fact that private insurers would charge higher rates, But the government's present plan being coordinated by Treasury Secretary Paulson seeks to avoid letting markets work in a way that would raise costs to Wall Street and hence leave less revenue for homeowners to pledge for debt service. This policy is presented sanctimoniously as lowering the price at which the financial sector "serves" the economy, not as putting it at risk.

The most amazing moves were still to come. On March 11 the Federal Reserve created a new Term Securities Lending Facility to extend $200 billion in loans to primary bond and securities dealers against their holdings of mortgages and other packaged securities as collateral. The aim was to rapidly re-inflate mortgages that the free market was pricing as junk, as low as 20 percent of face value.

Then came the double bombshell. In a true showing of the green on St. Patrick's Day, March 17, the Fed extended nearly unlimited credit to non-bankers for the first time since the Great Depression. It accepted their toxic mortgages as collateral--dubious assets that "the market" was refusing to touch. So much for "market-based" solutions when it comes to high finance! For the first time since the 1930s, non-banks could borrow from the Fed's loan window against their junk mortgages, apparently at full face value. It was too late for Bear Stearns, but other investment bankers and brokerage houses saw the green lifeline as the Fed opened its discount window to non-bankers, that is, to investment bankers such as Lehman Brothers, in contrast to commercial bankers that are regulated by the Fed.

The volume of credit seemed to be unlimited, collateralized by mortgage-backed securities that "the marketplace" was pricing around the levels Third World loans were selling at after Mexico's 1982 insolvency. Labor economist Tom Palley wrote in his March 26 blog: "These subsidies are a travesty. Goldman Sachs, Lehman Brothers and Morgan Stanley are extraordinarily profitable. They also have been the drivers of the worst trends in the American economy over the past generation, pushing excessive CEO pay that has spread like a cancer throughout corporate America, even reaching into universities and non-profits. Additionally, they have pedaled the shareholder value paradigm that has pushed companies to emphasize short-term gain over long-term investment, and contributed to ripping up America's social contract. Meanwhile, their business model has promoted speculation that is behind repeated asset and commodity price bubbles."

It is to support this business model that the Fed and Treasury officials seem to be making up new rules on a daily basis--rules that receive only a superficial or perfunctory review by Congress. Critics point out that investment bankers are not subject to Federal Reserve oversight or other regulation. Perhaps even this does not really matter in view of the Fed's extreme non-regulatory mode ever since Alan Greenspan's four-term Chairmanship. Even more important, of course, is the fact that the Fed's new clients, investment banks and brokerage houses, do not serve the middle-class depositors in need of special protection for their life savings. The financial investments being saved from adverse market conditions are ultimately speculative in character.

It seems a biting irony that the institutions now being mobilized to bail out Wall Street creditors--the Federal Home Loan Banks to pump credit into the mortgage market, the Federal Housing Administration to insure mortgage loans, Fannie Mae and Freddie Mac to buy and package mortgages for bulk resale to institutional investors--were created to help homebuyers, not their creditors and speculators. But bailing out speculators and high finance has now becoming their primary function. This shift has turned America's housing, mortgage and banking agencies upside down. Wall Street of course has welcomed the capture of these New Deal and post-1945 institutions. But their doctrinaire ideology has accused Glass-Steagall, Social Security, and most recently Sarbanes-Oxley regulations by the Securities and Exchange Commission (SEC) as leading down the road to serfdom.

Politically, such bailouts require an ostensibly humanitarian cover story. They need to be presented as a subsidy not to banks and other wealthy creditors, but to debtors. This means that the "ideal" (that is, most smoothly hypocritical) bailout takes the form of new credit to pay banks and other bondholders and mortgage holders enough to keep the debt bubble afloat. That means enough more credit to keep it growing, at least by the amount of interest that must be paid.

The result is a true road to debt peonage. It is much more destructive--and certainly more real--than the imaginary road to serfdom that Hayek and other anti-government ideologues envision. While these free-enterprise boys wring their hands and denounce government power, their sponsors realize full well that when government steps back, the financial sector moves in to fill the vacuum. The banks and money managers become society's planners and resource allocators--in their own short-term interest. This interest leads them to oppose laws protecting, labor, consumers and debtors. This means that the "freedom" at issue is a one-way favoritism for employers, monopolistic privilege and creditors. What these vested interests mean by the "road to serfdom" is an economy managed by hands other than their own, an economy protecting the workers, consumers and debtors whom they seek to victimize.

No money left for Social Security and health insurance after the real estate bailout?

The American public may justifiably be puzzled by how the government can seem to come up trillions of dollars for foreign wars and banker bailouts, but so little for them. The United States is spending an estimated $3 trillion for an illegal war that has made us less safe, and $1 trillion so far to rescue bankers in a way that is destabilizing the economy. But it can't seem to secure health care or retirement security for all Americans. On Tuesday, March 25, fresh from providing a trillion dollars to underwrite the financial and real estate sector, Mr. Paulson revived the Bush Administration's pretense that there is no money to pay Social Security. Yet "fixing" Social Security--if indeed there is a problem (which is no means certain)--would be relatively easy. Merely restoring the Bush tax cuts for the top 1% of Americans (those earning over $414,000 a year) to the high 30-percent tax rates of the 1990s (nowhere near approaching the 94% top marginal rate of the 1940s, or even the 70-percent rates of the 1970s) would provide 46% more than the Congressional Budget Office's estimate of the Social Security shortfall. The Administration does not acknowledge such inconvenient truths, or do the reporters who simply pass on its handouts to the mass media.

The claim that there is no prospective funding to meet the government's Social Security and Medicare obligations was rendered blatantly incredible in the last week of March, which saw the five-year anniversary of the Bush Administration's war in Iraq. As its death toll to U.S. soldiers reached 4,000, newspaper accounts across the country reported the calculations by Nobel Prize winner Joseph Stiglitz that the war's cost has reached the $3 trillion mentioned above, taking into account its legacy of interest charges and medical treatment for the more than 25,000 troops that had been wounded or had post-traumatic and other psychiatric stress disorders. (Mr. Stiglitz recently updated his analysis to say $3 trillion is a conservative number.)

Five years, four thousand lives, and three trillion dollars for the war--but no money for Social Security and Medicare! Did Mr. Paulson not feel just a little bit discomfort in claiming with seeming urgency that Social Security funding would be exhausted in just over another thirty years, by 2041? Medicare is supposed to be in even worse shape, having accumulated enough wage set-asides to last only until 2019, due largely to rising health costs--which the Bush Administration refused to control by negotiating prices with the drug companies, among others.

The historical road to serfdom is that of debt peonage to a financial oligarchy concentrating wealth in its own hands. Contemporary anti-government "libertarianism" creates a vacuum that the financial sector moves to fill. The problem for society at large is that finance finds its major gains to lie not in raising living standards, but in promoting a free lunch for its customers--while turning corporate profits, monopoly rent-seeking and real estate price gains into a flow of interest to itself, by advancing the credit to finance the purchase of these assets and privileges.

There is only one way to reverse this evolution toward debt peonage. That is to scale back existing mortgages, especially for properties with negative equity, to reflect the plunge in property values today--admittedly under distress conditions, but nonetheless real constraints on the debtor's ability to pay. Once the principal was reduced to realistic levels, adjustable-rate mortgages would be replaced by fixed-rate mortgages.

The problem with this solution is that to the financial institutions, the housing crisis is not their problem. Their blame-the-victim attitude holds it to be the mortgage holders' problem--and now increasingly the taxpayers' problem. This perspective on how to resolve the housing crisis can only succeed by creating a populist rhetoric for public officials to use in promoting financial interests as if all this is in the best interest of homeowners and other debtors.

Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world's first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich's Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

Crisis? What crisis?

Wealthy Americans with little blue pills, fast cars and hippie chicks know life is still good amid the worst financial mess since the Great Depression. Their cash still helps private equity groups do funny-money deals with the likes of Citigroup, raising cheers among the commentariat. But if you think that means the crisis is over, think again. - Julian Delasantellis

THE BEAR'S LAIR
The degradation of accounting
The folly of fair value accounting, which helped to drive up executive bonuses based on illusory values, is increasingly exposed by the US financial crisis. Goldman Sachs now has "assets" for which no market exists valued at twice the firm's capital. That route leads to insolvency. - Martin Hutchinson

A blow for Asian wealth funds
Germany's decision to introduce controls on investments in the country by sovereign wealth funds, mostly based in Asia and the Middle East, indicates a victory for European protectionists and a stand against the globalization so recently pressed for by advanced economies.

Cursing the loss of purchasing power
Bond prices and the number of jobs lost to the United States economy climb ever upwards while home values and company earnings pick up speed in the other direction. As the Fed floods the system with fool's gold, that spells misery all round, unless you hold the real stuff.

Wealth Does Breed Nastiness

by Amanda Marcotte - 4:22 AM

A Rundown Of Our Economic Woes

by Evan Robinson - 4:21 AM

Politicians Won't Properly Discuss Trade - The Economist

Dollar Weakens As Market Digests G7 Meeting - BBH
Retail Sales Rise 0.2% in March - Bear Stearns
Mortgage Crisis: Which "Inning?" - John Hussman, Hussman Funds
More Inflation: On Its Way - Wesbury & Stein, FT Advisors

Wanna Fix the Economy? Give Workers a Raise
by Mike Whitney / April 15th, 2008

The bright new financial system, with all its talented participants, with all its rich rewards, has failed the test of the marketplace. (Full article …)

When the Fed Goes into the Investment Business
by Rodrigue Tremblay / April 13th, 2008

The power to determine the quantity of money… is too important, too pervasive, to be exercised by a few people, however public-spirited, if there is any feasible alternative. There is no need for such arbitrary power… Any system which gives so much power and so much discretion to a few men, [so] that mistakes — excusable or not — can have such far reaching effects, is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic — this is the key political argument against an independent central bank. (Full article …)

Let Them Eat Ethanol!
by Sharon Smith / April 11th, 2008

Wall Street millionaires have spent months mourning their losses from once ridiculously over-valued investments. Yet these same free market cheerleaders remain blissfully unaware of the magnitude of the crisis facing the real victims of the unfolding global meltdown they so enthusiastically enabled. (Full article …)

Mortgage Defaults in U.S. Climbed 57% Last Month as Repossessions Doubled U.S. foreclosure filings jumped 57 percent and bank repossessions more than doubled in March from a year earlier as adjustable mortgages increased and more owners gave up their homes to lenders.

Manufacturing in New York Area Unexpectedly Grows on New Orders, Shipments A measure of manufacturing in New York state unexpectedly showed growth in April as new orders and shipments improved.

Producer Prices Climb Almost Twice as Much as Forecast on Fuel, Food Costs Prices paid to U.S. producers rose almost twice as much as forecast in March, reflecting higher fuel and food costs that threaten a pickup in inflation.

Treasuries Drop After Producer Prices Report Stokes Concern Over Inflation Treasuries fell as a government report showed wholesale prices rose almost double the pace forecast, while New York manufacturing unexpectedly grew, fanning concern that inflation will accelerate.

U.S. lenders freeze home equity credit lines The lending institutions and mortgage originators got the United States into this credit mess, but American consumers, taxpayers and those companies' shareholders who will end up shouldering most of the costs. Reeling from losses on their wretched loan decisions, lenders are preventing borrowers with pristine credit and significant equity in their homes from tapping into credit lines for which they paid so dearly.

US credit rating under threat
By Aline van Duyn in New YorkMonday Apr 14 2008 16:10The US government's need to provide financial backing to the state-sponsored mortgage financiers that dominate the US housing market could pose a risk to the country's triple-A credit rating, Standard & Poor's, the credit rating agency, said on Monday.

In the event of a deep and prolonged US recession, S&P said the potential costs of propping up government-sponsored enterprises (GSEs) like Fannie Mae (NYSE:FNM) and Freddie Mac, which have implicit government backing, could cost the US government up to 10 per cent of GDP.

The costs of supporting broker-dealers like Bear Stearns in a dire economic situation would be much lower, at below 3 per cent of GDP, S&P said.

Read More - Page 2

Financiers to study reasons for turmoil
Gerald Corrigan, the former president of the New York Federal Reserve, has teamed up with leading Wall Street investors and big banks to study the crisis gripping financial markets. writeDate( 1208208313000, 'Grey', 'Apr-14', 9999999999999); - Apr-14


Squeeze hits US student loans
Tens of thousands of US students may face problems paying their college bills this year as the student loan market becomes the latest victim of the credit crisis writeDate( 1208207787000, 'Grey', 'Apr-14', 9999999999999); - Apr-14

Enough with the Interest Rate Cuts - Martin Feldstein, Wall Street Journal
Alan Greenspan's Follies - Stephen Roach, Foreign Policy
Why Financial Regulation Is Both Difficult & Essential - Martin Wolf, FT
Regulating Securities Industry Is a Bad Idea - Peter Wallison, AEI
Wall Streeter Converts to a Fan of Regulation - Landon Thomas, NY Times
April 15: Time To Render Unto Caesar - Randall Forsyth, Barron's
The Charmed Life of Amazon's Jeff Bezos - Josh Quittner, Fortune
In Which Inning of Mortgage Crisis Are We? - J. Hussman, Hussman Funds

Melting a Grammy for gold
Anyone who still thinks these are normal times is either on holiday outside the solar system or hasn't opened their mail recently. Things are so abnormal that amid the worst crisis since the Great Depression, US stocks are priced way above normal when they should be way below normal. It's time for some heavy metal lyrics; better still, make that precious metal music.

MOGAMBO GURU
Cursing the loss of purchasing power
Bond prices and the number of jobs lost to the United States economy climb ever upwards while home values and company earnings pick up speed in the other direction. As the Fed floods the system with fool's gold, that spells misery all round, unless you hold the real stuff. (Apr 15, '08)

Crisis? What crisis?
Wealthy Americans with little blue pills, fast cars and hippie chicks know life is still good amid the worst financial mess since the Great Depression. Their cash still helps private equity groups do funny-money deals with the likes of Citigroup, raising cheers among the commentariat. But if you think that means the crisis is over, think again. - Julian Delasantellis (Apr 15, '08)

JPMorgan Profit Falls 50% on $5.1 Billion of Bad-Loan Reserves, Writedowns JPMorgan Chase & Co., the third- biggest U.S. bank, said profit fell 50 percent, matching analysts' estimates, after $5.1 billion of writedowns and provisions linked to home-equity loans, financing for leveraged buyouts and subprime mortgages.

Housing Starts in U.S. Dropped More Than Forecast in March to 17-Year Low Housing starts in the U.S. dropped more than twice as much as forecast in March to a 17-year low, signaling that declining construction will keep eroding economic growth this year.

Industrial Production in U.S. Unexpectedly Climbed 0.3% in March, Fed Says Industrial production in the U.S. unexpectedly rose the most since November last month, helped by an increase at utilities and demand for business equipment.

Wells Fargo Profit Drops; Shares Rise as Earnings Beat Analysts' Estimates Wells Fargo & Co., the biggest bank on the U.S. West Coast, said first-quarter profit fell less than analysts estimated as the company limited losses from the decline in California home prices. The bank rose 7.5 percent in New York trading.

Coca-Cola Net Rises to $1.5 Billion as Latin American, Russian Sales Gain Coca-Cola Co., the world's largest soft-drink maker, posted first-quarter profit that rose more than analysts estimated as sales in Latin America and Russia advanced.

Welch Says GE Chief Immelt Has `Credibility Issue' Following Earnings Miss General Electric Co. Chief Executive Officer Jeffrey Immelt ``has a credibility issue'' after the Fairfield, Connecticut-based company missed first- quarter profit estimates and he cut its annual forecast, retired GE chairman and CEO Jack Welch said on CNBC.

Protect Your Wealth from Wall Street Liars
Stock-Markets / Market Manipulation Apr 16, 2008 - 03:33 AM By: Jim_Willie_CB



Few seem to remember that Wall Street is not a non-profit community driven by altruism or any sense of service. They would gladly cheat you out of your entire life savings if their actions were legal, or at least not prosecuted. In the last two to three years, the lies, deception, misdirection, false reporting, corruption, and grand fraud will be the topic of historical accounts for decades. When returning on my flights from another successful Cambridge House gold conference, this in Calgary Alberta , many thoughts came to mind, jotted down while gazing at the natural beauty made up from cloud blankets with a sun guarding its lot. The sun and clouds care not at all about economic landscapes underneath, even if in turmoil. Whenever travels take me across national borders, nationalism, idealism, culture, and dreams come to mind. It seems pursuit of truth, clarity, and integrity has become negotiable, one and all in the United States . Its people are being stripped of so much. Perhaps this layout will be helpful. Routinely such matters are covered in the Hat Trick Letter reports. Gold & silver continue to do well to protect individuals and their wealth. Banks are no longer safe, an astonishing conclusion. Bonds are not safe, and neither are money market funds!!!


USGOVT ECONOMIC STATISTICS

It all starts with outright doctoring on a chronic basis by the USGovt, to the point that the vast majority understands and accepts the practice. Therein lies the foundation for the system extending the institutionalized dishonesty of the nation, carried further by Wall Street as it endorses the doctored statistics routinely. The fish rots from the head down, Wall Street being the blood system, the economy the torso. Put your full faith in accurate economic statistical gathering with the Shadow Govt Statistics crew led by John Williams. No, not the man of Boston Pops musical fame, the other guy. The Gross Domestic Product has been running negative in growth except for a couple quarters five or six years ago, now about minus 2.3% or so.

The Consumer Price Index has been accelerating lately, now at 11.8% and still climbing. People do eat food, and people do require energy, so please no need to remove them from calculations. The unemployment rate has been also rising lately, now at 9.8% or so. If out of work, then unemployed, that simple, so no need to talk about participation or discouraged workers by the goofy methods in the Bureau of Labor Statistics. The Birth-Death Model is another colossal fraud. Good thing few know what it is. The lies can choke a horse. Motive is clear, to present a picture of strength to sell stocks and government bonds. If the real CPI was widely known to be over 10%, both USTreasurys would suffer declines and gold would be pushed to the heavens.


USDOLLAR REBOUNDING… NOT !!!

The USDollar has been trying to rebound for a month. Past USDollar charts offered in my analysis have entirely focused upon weekly charts. The daily chart over just the past six months is highly revealing. In the last two months, the 20-day moving average has served as stiff upside resistance. The stochastix show difficulty in staying above the 50 midline, a sign of weakness in the rebound attempt. With growing federal deficits, widening trade deficits, an underwater banking capital core, and rising homeowner negative equity, the US financial fundamentals resemble a banana republic on four primary pillars , unworthy of any currency rebound. The pair of 20-day and 50-day moving averages are still declining. Look for a breakdown to 70 and below in the next several weeks. The downtrend is stronger than any newly formed basis for a bottom bounce. The impact on gold will be to send it over the 1000 level again, this time as floor support for the summer advances. The next USFed rate cut could be the impetus. A game of chicken is being played by the Euro Central Bank, which refused to cut rates since last summer.


OIL PRICE WILL FALL AS USECONOMY SLOWS

Nice thought, but the US is not the engine of global growth anymore. Asia and the Middle East are the wealth centers, where trade surpluses accumulate. Whatever slack in US demand, Asian demand will grab it. Besides, incremental growth in Brazil , Russia , India , and China (the BRIC nations) is associated on a decreasing level with their exports to the US . The crude oil price is surely determined by equilibrium in supply & demand, however, the entire curves are altered by the falling USDollar. Wall Street cannot seem to admit in its mouthpieces that the USDollar will keep the crude oil price high, and demand from growing emerging economies will prevent much of any price drop from a weaker USEconomy. The entire claim smacks of US arrogance. With the crude oil price hitting $114 per barrel, will Wall Street firms drop their 2008 call for relaxation back to the 80-90 level? Doubtful. Sponsored (ordered?) attacks of hedge funds with cutbacks in credit and margin calls did nothing to bring down the crude oil price.

US BANKS HAVE SEEN THE WORST NEWS

This is not even close to being true, addressed in a previous recent article. Housing prices are accelerating down, driven by some degree of capitulation on price. The high level of inventory continues to be aggravated by more home foreclosures. Anecdotal evidence supports this, as February prices were a quantum level lower. Hired home processors working on the behalf of bankers and lenders simply gave up. They want to move inventory, period. Again, the point must be repeated until it happens. The Exploding ARMs, the prime adjustable rate mortgages with negative amortization option features, they will begin failing this summer as they reset. When the rising loan limit is hit, the monthly payment doubles or triples! The phenomenon of walking away from mortgages has worsened lat