Jared Bernstein: The Shampoo Economy
Our system of borrowing, lending, and financing investments by both businesses and households is a national treasure, one which we have squandered in recent years. Excessive deregulation has thwarted the transparency that is integral to creating appropriate price signals. Risk has been consistently underpriced, contributing to bad underwriting, negligent risk management, and deeply damaging bubbles. When policy makers ignore these dynamics, as they have in recent years, our economy is put at great risk.

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BusinessNewsweek: Seeing Shades Of The 1930s

Economy in hands of Neanderthals
Santa Maria Times - Santa Maria,CA,USA
Anyone who still believes the myth that FDR’s New-Deal policies rescued America from the Great Depression should read Amity Shlaes history of the Great ...
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Bank Failures: What Do They Mean To The Average American?
Blogger News Network - USA
by Sharon Secor in All News, Business News, Economic News Bank failures and bank runs are phrases that hearken back to the era of the Great Depression, ...
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Lessons from the Great Depression
StarNewsOnline.com - Wilmington,NC,USA
More than half the people surveyed for a USA Today/Gallup poll in March said the country was likely to slip into an economic depression in the next two ...
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Bank of China may hold huge US debt: Bank of China Ltd may own about $20 billion of debt issued by Fannie Mae and Freddie Mac, representing two-thirds of total holdings among the six largest Chinese banks, according to CLSA Ltd.

Commercial bankruptcies soar, reflecting widening economic woes: Driven by a sour economy and skittish consumers, U.S. business bankruptcies saw their sharpest quarterly rise in two years, jumping 17 percent in the second quarter of 2008, according to an analysis by McClatchy.

Debt capitalism
self-destructs
With free-market capitalism turned into a gigantic Ponzi scheme, witness troubled mortgage guarantors Fannie Mae and Freddie Mac, the world is witnessing the collapse of the central banking regime that came into being in the US in 1913. At the same time, amid all talk of how to deal with the crisis, not one official voice is heard about the need to increase worker income. - Henry C K Liu

ASIA HAND
Asia's inflationary winners and losers
Rising inflation in Asia threatens the hard-won gains made in the region since its financial crisis of a decade ago. A repeat of that meltdown is unlikely - at least for those countries willing to let their currencies strengthen. - Shawn W Crispin

CREDIT BUBBLE BULLETIN
In short, crisis reaches
bedrock level
The jump in benchmark yields on Fannie Mae mortgage-backed securities last week and the tightening of US rules on shorting large financial stocks are not unrelated. With the mortgage crisis reaching the bedrock of the mortgage credit system, any meaningful tightening in conventional mortgage credit would exacerbate already escalating problems.
Doug Noland looks at the previous week's events each Monday.

Inflation slime
all over
Like a slow build-up of some life-sucking slime, inflation numbers are appearing everywhere and getting more monstrous by the day. Start with an innocuous 1% gain in something like US export prices, you soon have a 45% somewhere else. Doomed? We are freaking doomed!!!
[color="maroon"][/color]

THE MOGAMBO GURU
Riding it out to rock bottom
Against a staggering load of liabilities and liabilities masquerading as assets equivalent to a third of the annual United States GDP, Fannie Mae and Freddie Mac have only US$80 billion in capital. The companies may "ride out the storm", but their investors will probably lose everything.

Toxic Waste Offerings to Offset Big Losses
July 19th, 2008: Freddie Mac new Issue quickly approved by SEC, New offerings to absorb big losses, Gold escapes general pounding in the market, home builders sentiment index is at record low, depression is a real threat still

Feds can't fix Fannie and Freddie
The global economy is at the point of maximum danger
Debt capitalism self-destructs
Given a Shovel, Digging Deeper Into Debt
Trouble at Fannie and Freddie Stirs Concern Abroad
Economist Predicts Worst is Just Ahead

Economic outlook retreats in monthly survey
CNNMoney.com - USA
He said the report showed a fragmented economy, with housing and finance in "a depression" alongside healthy sectors like health care and exports. ...
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Bush, Herbert Hoover, and Memories of the Great Depression
Political Affairs Magazine - New York,NY,USA
Other “opinion makers,” as pundits were then called, believed the economic crisis was not all bad because it would help people return to basic spiritual ...
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More economic casualties loom as backbone of US mortgage
Belfast Telegraph - United Kingdom
He added: “That being said, it does appear to me that we are going to be in a period of slower economic activity that is going to be longer than we've grown ...
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The Perfect Plan for Depression:
OpEdNews - Newtown,PA,USA
It is my opinion that this list represents the most clearly written and concise synopsis of America’s economic situation, that I have ever read; ...
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Quotable
"The whole world is facing a very serious financial crisis. I call it the most serious financial crisis of our lifetime and the financial system is seriously disrupted."

George Soros, April 17, 2007

Critical financial problems spreading - FT (07/21/2008 08:11 PM)

The global economy is at the point of maximum danger - UK Telegraph , Evans-Pritchard (07/21/2008 06:17 AM) Europe's Banks Facing Extra EU120 Billion in Losses - Bloomberg (07/21/2008 05:46 AM)

US Financial & Economic Crisis Heading for Repeat Misery of Japans Lost Decade / Economics / Economic Depression
By: Money_Morning

William Patalon III writes: If you think the "Lost Decade" Japan endured during the 1990s was deep and painful, stick around: As the global financial crisis that was jump-started by the meltdown of the subprime mortgage market continues to unwind, the U.S. economy is headed for a financial Ice Age that will make Japan's 10 wasted years seem like a single chilly night.

Read full article...

Commercial Bankruptcies Soar as BLS Jobs Data Shown as Worthless / Economics / US Economy
By: Mike_Shedlock

The McClatchy Washington Bureau is reporting Commercial bankruptcies soar, reflecting widening economic woes .
Commercial filings for the first half of 2008 are up 45 percent from last year, as the national climate for commerce continues to deteriorate amid rising energy and food costs, mounting job losses, tighter credit and a reticence among consumers to part with discretionary income.

Read full article...

US Financial
Break Point Soon
By Bob Chapman
The International Forecaster
7-20-8 Something is going to break, and soon. Banks are insolvent and failing by the hundreds if not thousands. Hedge funds are on the edge of oblivion. Only a tiny percentage of toxic waste losses in real estate and other asset classes of collateral, which will eventually amount to over $1.4 trillion in the US alone, has to date been recognized by the lying bankster fraudsters. Bonds are producing negative rates of return even based on ludicrously understated official rates of inflation (until this month, when we finally got some data bordering on the truth). Credit markets are frozen, and few can get financing at favorable rates. Banks won't even lend to one another because they do not trust each other's financial statements, which are all bogus.
Our financial system is unregulated, opaque and rife with fraud as our Treasury Secretary suggests we hand the reins over to the Fed, the very organization which is the driving force behind our myriad of woes. The fractional reserve multiplier is not working and bank's have had to resort to the commodity markets to make profits, thus driving up food and oil prices and the cost of raw materials. Food riots are breaking out due to the ethanol scam.
Consumers are tapped out, are in debt up to their eyeballs, are being laid off by the hundreds of thousands, are being pounded by hyperinflation and crazy gas prices and are defaulting on consumer debts across the board at ever-increasing rates. Civil unrest and the potential for revolution are everywhere. A quadrillion dollar caldera of notional principal for credit default and interest rate swaps bubbles, smolders and churns, waiting to erupt into a world-economy-killing cataclysm.
Fannie and Freddie are imploding, and gargantuan government bailouts to save these owners or insurers of over half the mortgages in the US will drive us to higher rates of inflation and levels of direct taxation that are simply unheard of. These higher levels of inflation and taxation are not as far out in the future as most would think. That is because Paulson and Bernanke, who are oblivious to moral hazards because they are sociopaths, are now trying to dump what will be trillions in losses caused by endless banking scams on an ignorant and unsuspecting citizenry.
Rising interest rates due to increased risk and hyperinflation are just around the corner, and double digit interest rates will lock up the real estate markets in a cryogenic state as occurred in the early 1980s. We have gone from being the largest creditor nation in the world to the largest debtor nation in a matter of a few decades as our manufacturing industry and economy have been gutted by free trade, globalization, off-shoring, outsourcing and both legal and illegal immigration.
Bubble after asset bubble have been created and destroyed by a malevolent Fed trying to push us toward a one world government, economy and religion as powered by megalomaniacal, satanic trillionaires who have destroyed our middle class, our Constitution and our moral standards in order to drive us into their version of the ideal Platonic society where we all get to become their feudal indentured servants and slaves. Our trade and budget deficits continue to mount with profligate spending on endless wars for profit and pork-loaded legislation. Our nation is bankrupt. Our gold reserves have been stolen, swapped, leased or otherwise compromised. Our Congress, our Executive Branch, or military and our covert agencies are loaded with traitors and perverts who are driving us into a police state complete with a Gestapo and an SS. We torture, maim and kill for fun and profits. We make the Roman Empire at its most decadent look like Shangri-La.
Entire article ... Freddie Mac new Issue quickly approved by SEC, New offerings to absorb big losses, Gold escapes general pounding in the market, home builders sentiment index is at record low, depression is a real threat still After the markets closed on Friday, the announcement came that Freddie Mac plans to sell $5.5 billion dollars worth of new common and/or preferred shares to private investors, when its current market cap is only 6 billion. Of course, they had to register the new issue with the SEC and get its approval in order to do this, and on Friday, they filed with the SEC, which quickly approved the new issuance. This was no surprise of course because the SEC and Freddie are run by the same kind of people. Freddie recently got caught up on their SEC filings after years of what really amounted to total noncompliance due to what you might call some "major accounting issues" even though technically they were granted an exemption from filing because of their GSE status.
So, even before the Treasury injects equity into Freddie by purchasing new issues of its shares with monetized treasury bonds created out of thin air, and/or before Freddie borrows from the Fed on treasury collateral which consists of those same ethereally created treasuries, the elitists plan to draw in new sucker-dupes so that both the current shareholders and new shareholders alike can get blasted with a huge dilution of their stock value. We ask who the suicidal maniacs are who would venture to buy these new issues?
First, note how the timing of this announcement, which came after markets closed on Friday as just noted above, was the same time frame used for the news about the IndyMac Bank closure. This kind of timing manipulation is used by the elitists whenever they wish to prevent market panic, allow a cooling off period before markets reopen and/or keep as many people from seeing or hearing the announcement as possible as they get underway with their weekends.
You can bet your sweet bippy that if precious metals have any bad news, if that were even possible at this point, it would make front page news on Monday just before markets opened. So much for a free press. Instead we get the inane, people's bane, fane-stream media. If Thomas Jefferson were alive today he would be absolutely disgusted at the goings on in our government and in our press right now. In fact, he would most likely call for a revolution! Ron Paul is our Thomas Jefferson, and the elitists are quaking in fear at the revolution in thinking which Dr. No has bravely engendered with his presidential campaign.
Next, note how much US government and Freddie officials obviously believe Freddie to be undercapitalized after claiming outright only days ago that both Freddie and Fannie were and are adequately capitalized. Among those claiming adequate capitalization before this announcement was none other than our beloved Treasury Secretary, Hanky Panky Paulson, on loan from Goldman Sachs, and Senator Chris Dodd from Connecticut, elitist bootlicker and Chairman of the Senate Banking Committee. From their mouths to God's ears. These reprobates give serpents a bad name. If they had been with Adam and Eve in the Garden of Eden, who knows what perverse lies they might have sold to our progenitors? You think we have problems now? We would probably have the Adam and Eve First National Bank. Can you just imagine? These two pieces of work are truly unbelievable. Buck-Busting Ben and Cheney the Wienie round out the new Rat Pack of liars and scalawags.
Then look at what will happen to the price of Freddie's shares. The Freddie share price closed way down at $5.26 on Tuesday based on all the scary bailout news, but ended the week with a price of $9.18 when new sucker-dupes jumped in based on government and fane-stream media hype about a potential bottom in the real estate markets and the patently false and misleading earnings reports of Wells Fargo and Citigroup which left investors with the impression that Freddie and Fannie might not be in as much trouble as everyone thought. Short-covering was another major factor which accounted for the higher share price.
The potential for the new proposed Freddie issue was enhanced by the increased stock price because the higher price allowed more capital to be raised using fewer shares, but the new shareholders and old shareholders alike could find themselves owning stock worth substantially less because of the resulting dilution and mounting overall losses from a tanking real estate market, which Freddie admits! Can you believe it? All those new shareholders could end up with an instant haircut! And that does not even take into account the potential for the purchase of new Freddie shares by the Treasury in a bailout situation, which is inevitable! Sometimes we wonder if we are still conscious or whether we have been hooked up to the Goldilocks Matrix pod where everything turns out juuust riiight. As the Mogambo Guru might say: "Hahaha! Morons! Hahaha!"
Somehow, with over a trillion dollars of mystery off-balance-sheet toxic waste assets, Citigroup coughs up only $2.5 billion in losses for the second quarter. Can we suggest that we are more than a little skeptical of this figure? Enough said. The same pathological lies will also be spewed forth for all the other banking fraudsters this quarter. After all, we have incumbents that have to be reelected to keep the Illuminist scam wagon rolling down the road. We recoil in disgust at such unmitigated arrogance in financial reporting. Can you imagine the potential liability of the CPA's involved in this mess? How do these people sleep at night? They probably sleep just fine, because they are all sociopaths, or they wouldn't be working for these elitist institutions.
Gold has been implacable this week. The cartel's best efforts have yielded little more than a brief tamping down of gold below 1,000. Despite the best efforts of the Illuminati, gold is still trading over $950 and silver is still over $18. Despite an $18 dollar per barrel takedown of oil from peak to trough this week, the largest such decline ever, and phony dollar rallies galore, gold is still more than $100 per ounce over its recent lows. The resource stocks have been pounded mercilessly with naked shorting, yet are still maintaining the same levels as two weeks ago on July 3. Lease rates are negative or near zero for both gold and silver, but no one wants to lease gold or silver for subsequent sale due to the potential to get vaporized if any untoward event occurs, such as more bank failures or the outbreak of a war or conflict. The naked shorts of the SLV shares and illegal rationing of Silver Eagles by the US Mint are barely keeping silver from exploding to new highs.
This resiliency in the precious metals has many facets and reasons for support. The CPI and PPI are at 26 and 27-year highs. The Fed pumps $500 billion monthly into the banking system just to keep it from freezing up. M3 rages at 17% to 18%, thus locking in years of hyperinflation no matter what the Fed does. The Fed has no credible way of cutting rates or even threatening to cut them as the ECB hikes to levels that are more than double the Fed funds rate.
The dollar is quickly reaching new all-time lows against the euro and has recently scraped up against its all-time lows this past week on the USDX. It is headed for 67 to 68. This presents the potential for establishing a dollar carry trade, which would take the dollar quickly to new lows. All major stock market exchanges around the globe are in Bear Market Territory, having plunged to 20% or more from their most recent highs. Various Arab nations are threatening to break dollar pegs. Wars and threats of wars abound everywhere in Georgia, Kosovo, Iraq, Iran, Syria, Lebanon and North Korea. Inflation is raging worldwide, which means that populations across the globe are quite literally being taxed to death by their governments. This just simply cannot continue.
Something is going to break, and soon. Banks are insolvent and failing by the hundreds if not thousands. Hedge funds are on the edge of oblivion. Only a tiny percentage of toxic waste losses in real estate and other asset classes of collateral, which will eventually amount to over $1.4 trillion in the US alone, has to date been recognized by the lying bankster fraudsters. Bonds are producing negative rates of return even based on ludicrously understated official rates of inflation (until this month, when we finally got some data bordering on the truth).
Credit markets are frozen, and few can get financing at favorable rates. Banks won't even lend to one another because they do not trust each other's financial statements, which are all bogus. Our financial system is unregulated, opaque and rife with fraud as our Treasury Secretary suggests we hand the reins over to the Fed, the very organization which is the driving force behind our myriad of woes. The fractional reserve multiplier is not working and bank's have had to resort to the commodity markets to make profits, thus driving up food and oil prices and the cost of raw materials. Food riots are breaking out due to the ethanol scam. Consumers are tapped out, are in debt up to their eyeballs, are being laid off by the hundreds of thousands, are being pounded by hyperinflation and crazy gas prices and are defaulting on consumer debts across the board at ever-increasing rates. Civil unrest and the potential for revolution are everywhere. A quadrillion dollar caldera of notional principal for credit default and interest rate swaps bubbles, smolders and churns, waiting to erupt into a world-economy-killing cataclysm.
Fannie and Freddie are imploding, and gargantuan government bailouts to save these owners or insurers of over half the mortgages in the US will drive us to higher rates of inflation and levels of direct taxation that are simply unheard of. These higher levels of inflation and taxation are not as far out in the future as most would think. That is because Paulson and Bernanke, who are oblivious to moral hazards because they are sociopaths, are now trying to dump what will be trillions in losses caused by endless banking scams on an ignorant and unsuspecting citizenry.
Rising interest rates due to increased risk and hyperinflation are just around the corner, and double digit interest rates will lock up the real estate markets in a cryogenic state as occurred in the early 1980s. We have gone from being the largest creditor nation in the world to the largest debtor nation in a matter of a few decades as our manufacturing industry and economy have been gutted by free trade, globalization, off-shoring, outsourcing and both legal and illegal immigration. Bubble after asset bubble have been created and destroyed by a malevolent Fed trying to push us toward a one world government, economy and religion as powered by megalomaniacal, satanic trillionaires who have destroyed our middle class, our Constitution and our moral standards in order to drive us into their version of the ideal Platonic society where we all get to become their feudal indentured servants and slaves.
Our trade and budget deficits continue to mount with profligate spending on endless wars for profit and pork-loaded legislation.
Our nation is bankrupt. Our gold reserves have been stolen, swapped, leased or otherwise compromised. Our Congress, our Executive Branch, or military and our covert agencies are loaded with traitors and perverts who are driving us into a police state complete with a Gestapo and an SS. We torture, maim and kill for fun and profits. We make the Roman Empire at its most decadent look like Shangri-La.
The greatest depression of all time looms at our doorsteps. The barbarians are at the gates, but no one notices or cares. It is nothing short of surreal. Those without gold or silver will make great sport for the barbarians, who also happen to like the "barbaric relic" known as gold, because they are more intelligent than the average US citizen.
Large specs have become wise to the manipulations of the PPT in suppression of precious metals and maintain protective derivatives against such manipulations. The next wedding and jewelry seasons in India, the Orient and the Middle East are upon us. Open interest for August gold on the COMEX has gone up over 100,000 contracts in the past month, and there are already 112,500 contracts of open interest for December futures as everyone tools up for a big fall rally. The number of contracts of open interest on Goldman's COMEX gold shorts are at record lows. We still have two weeks before August contracts get rolled over at the end of July, and then all hell will break loose. So take your positions now in gold and silver, or turn green with envy as the rest of us make magnificent profits. It may be now or never. After the elections, there will be a no-holds-barred unraveling of the system, assuming we even have elections, and there is no telling how fast and how high gold and silver could rocket. If you stay on the sidelines, you could miss the whole thing.
If you were wondering about the stock rallies, don't. The yen went wimpy right on cue to support stock markets just as oil was taken down in record fashion to further support stock markets and to suppress precious metals. Since Wednesday, the carry traders have gotten back into it with a reduction of the value of the yen by two yen per dollar and by three and one half yen per euro. Add in the Fed's out-of-control repo pool for funding, the PPT's usual manipulative efforts and the pathological lies shown in banks' financial statements, the drop in oil to support the dollar, and the rally mystery is solved. Elementary, my dear Watson.
Note that this was options expiration week, so most of the rally was powered by a short-covering rally ignited by the PPT to drain value from protective derivatives carried by large specs to protect themselves from the PPT. Fortunately for us, most of the specs probably got out when the Dow hit 10,800. Specs should short oil over 140 and a Dow over 12,000. Note that dollars chased from bonds, treasuries and money markets back into foreign stocks usually causes the dollar to weaken. Since this did not happen, it is a clear sign of intervention by the PPT, which will soon subside since they simply cannot keep this pace up for very long in such a gargantuan forex market. Gold and silver are headed much higher, and will now regroup for the final assault on $1,000 for gold and $21 for silver that will take us to new heights and more unexplored territory.
The home builders' sentiment index fell two points in July to record-low 16, with all three components of the survey also dropping to historic lows, the National Association of Home Builders reported Wednesday. At 16, the NAHB/Wells Fargo housing market index shows that only one-in-six home builders has a positive view of the market. New subdivisions have become ghost towns, with current sales dropping off and with the traffic of prospective buyers drying up in recent months. Few builders anticipate any improvement in sales in the next six months.

Fed charts tricky course as clouds gather
By Krishna Guha in Washington

Published: July 15 2008 19:04 | Last updated: July 16 2008 07:31

Ben Bernanke's testimony on Tuesday set out in sobering detail the "numerous difficulties" facing the US economy and the dilemma confronting the Federal Reserve as it seeks to balance risks to both growth and inflation.

The Fed chairman made it clear that the downside risk of a still worse than anticipated outcome on growth – which the Fed in its last statement said had "diminished somewhat" – has not gone away.


Fed seems focused on inflation over growth - Jul-22

Editorial comment: Monetary minefield - Jul-16

Goodbye capitalism - Jul-15

The Short View: Fed rate outlook - Jul-15

In depth: Fannie Mae and Freddie Mac - Jul-10

In-depth: US downturn - Feb-20
Indeed with ongoing financial market stress, falling house prices, a weakening labour market and energy price rises that have sapped real incomes, he said Fed policymakers see the risks to growth as "skewed to the downside".

But the "upside risks to the inflation outlook have intensified" with a "sharp pick-up in inflation" driven by commodity prices and an increase in some measures of inflation expectations.

The two risks are pulling the Fed in opposite directions. Mr Bernanke said helping financial markets return to more normal functioning "will continue to be a top priority of the Federal Reserve" because of the importance of well-functioning markets to growth.

But at the same time, he said it was a "critical responsibility" of the Fed to prevent high levels of overall inflation from becoming embedded in inflation expectations and wage and price-setting behaviour.



"Accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge," Mr Bernanke said. In layman's terms, the Fed is between a rock and a hard place.

His comments overall suggest that the Fed is steering slightly towards the inflation risk, even with no intention of raising interest rates soon, unless forced to by a further deterioration in inflation expectations.

This may be partly owing to the time lag since the June Fed policy meeting. Then policymakers submitted their economic projections, but since then financial markets have taken a sharp turn for the worse.



Mr Bernanke marked the projections to market with an extended discussion of the risks to growth. But his remarks on inflation remained quite hawkish under the conditions.

He said: "We must be particularly alert to any indications, such as an erosion of longer-term inflation expectations, that the inflationary impulses from commodity prices are becoming embedded in the domestic wage and price-setting process."

The Fed's attention to inflation, meanwhile, means the market has to worry more about growth risk, because the central bank will not use monetary policy to combat those risks.

However, Mr Bernanke made it clear that the Fed stance could shift quite rapidly – either towards more rapid than envisaged rate increases or even potentially towards renewed consideration of rate cuts – if the economic and financial data break in one direction.

As things stand, the Fed has been surprised by the strength of consumption in the first half of this year. But Mr Bernanke said some of the decent current quarter growth was probably pulled forward from the second half, and said he was "looking at the rest of the year being probably positive, but certainly not robust".

He said housing was still the "central issue in the economic situation". Home construction was likely to bottom out in late 2008 or early 2009, but house prices could continue to decline, warning that there was some evidence of a downward spiral in which falling prices drive foreclosures which in turn push down house prices.

Mr Bernanke said his concern about US banks was not that many of them would go bankrupt, but that their need to husband capital, shrink balance sheets and deleverage could impair their "ability to extend the credit which our economy needs to keep growing". The Fed chairman said the delevering process "is going to continue".

Copyright The Financial Times Limited 2008

Nightmare on Wall Street: Washington Can't Bail out the Sea of Red Ink

Bill Moyers, Bill Moyers Journal

Corporate Accountability and WorkPlace: Author Bill Greider explains to Moyers that the magic of the "free market" is coming to a close.

US Dollar Final Decent - Dangers 2008-2009 Part2 - 17th July 08

US Government to Intervene to Prevent US Dollar Collapse - 17th July 08

President Bush Has been a Disaster for the US Economy

United States Unfolding Financial and Economic Nightmare

http://www.marketoracle.co.uk/Article5562.html

Fannie and Freddie Rescue Could Result in a Run on the US Dollar - 20th July 08

Global Financial Crisis Worst Since 1930's Depression

Commercial Bankruptcies Soar as BLS Jobs Data Shown as Worthless
http://www.marketoracle.co.uk/Article5537.html

Part 2 talks about the world post the USD centric world economy. It looks out 1 to 3 years ahead. Part 1 talked about the immediate dangers to the world from a Middle East war, food and energy shortages, and inflation. It looked into late 08 and 09.This part talks about what would happen should the USD begin a final decent to far lower values.

We are now a full year into the credit implosion that started with the collapse of two Bear Stearns hedge funds in Summer of 07. So many dimensions of the world economy have changed dramatically for the worse since that pivotal event…

We can outline many aspects of a disintegrating world economy since Summer 07. But one huge dimension seems to stand out, the dim prospects for the USD going into 09. As we know, the USD has become the key currency to the world economy since WW2. There are several reasons, but one was that the USD was used to stabilize the European currencies during WW2. Following that war, the US became the center of a burgeoning world consumer economy. What happens when the USD is no longer the center to the world economy? That means the end of roughly a century of US economic and currency dominance. That is our discussion.

Since the end of WW2, what was once a boon to the world economy, the USD, is now in a catch 22. The vast interlinked world economy based on a consumer bubble that we are all used to, that generated unprecedented wealth, is going through a radical transformation as the USD falters. The demise of a consumer bubble based on credit since WW2 is faltering, and the USD is suffering from abuses in the credit system and in the US fiscal situation. The pillar of world commerce since WW2 is faltering. All those James Bond movies you saw celebrated the post WW2 world that grew out of the world USD prosperity bubble (the lifestyle u saw in those movies).

In part one of Dangers, Danger period 2008 and 2009, we discussed some ominous dangers that emerged in 2007 and 2008, and will continue to get worse in 2009. These included the US/Israel- Iran nuclear showdown, the threat of a world financial sell off initiated from a collapsing world credit system, rising world inflation, and rising food and energy prices.

This second part of this ‘Danger’ piece discusses the other main danger, that the USD is faltering, and into 09 has a risk of a major breakdown, if not outright collapse. We have all heard this before, but the difference with now vs the past years is that the US is faced with unprecedented financial disasters that could be putting the final straws on the USD camel’s back.

The implications of a serious USD breakdown to the world economy and financial system are staggering, particularly if you consider that this entire world financial system we are immersed in, from East to West, grew from/with the USD economy in a 50 year world consumer and finance bubble that has built since WW2.

Deconstructing that 50 year economic bubble/system will cause massive economic disruption in the world. The problems the central banks and the world economies are facing, as we speak, to deal with the problems the USD is having now are all related to the shaking of what I call the ‘world USD economic system’. The onset of the world credit crisis in Summer of 07 was the beginning of this latest phase.

Shadow banking system down

The new credit securities markets referred to as the shadow banking system have imploded. This was the practice of creating credit of all types and then selling it as securities to big investors. This new USD centered way of financing worldwide housing and other credit grew to be 50% of all new credit from 2000 roughly. The collapse of these diverse credit securities led to a severe tightening of credit worldwide, as lenders had to pull back drastically to raise capital they lost in the last year. This credit collapse is affecting all the Western nations, from the US all the way to the emerging Eastern EU economies, and will also affect all the major Asian economies by 09 as well.

At the same time, inflation has exploded in only one year, not only in the Western economies but in Asia, and the commodity economies such as the Mid East to Australia. Inflation is 10% and higher in most of the big world economic zones. That level is not tolerable without a severe reduction in living standards for everyone.

USD at risk this time

The last time the entire world economy had this kind of economic paralysis was in the 1930s during the Great Depression. At that time, the USD was not on the verge of a collapse. This time the USD is on the verge of a collapse, or at least a major devaluation. That means that the US has far less latitude to do fiscal stimulus and bailouts to combat the present economic emergency spreading over the world. The US can only go so far this time with economic stimulus.

Rising inflation is putting pressure on the US trade partner economies which forces them to raise interest rates, and that causes competition to the USD, while the US has to keep rates low to fend off a total financial and economic meltdown. This is boxing in not only the US economy, but our trade partner’s economies and central banks as well. It is very clear that the gigantic financial losses in the US since Summer 07 have spread all over the world as they have become sort of tied at the hip with the US economy, the USD being the world’s main trade currency for the last 50 years.

There are a lot of aspects to presently emerging world stagflation. But, compared to previous Western recessions, there is now a combined Western Bank crisis and, this time, the prospect of a very shaky USD.

In the last great world depression in the 1930s, the big difference from today was that the USD was strong, and even gold backed…and destined to become the world trade currency of the 20th century (20th century was the 1900s). The 21st century is the century of – what, the first global government?

That is not the case today. The USD is not strong. That is going to be a real problem for the world going into 2009. Thus, we have a second major difficulty the world has to overcome, what to do about the USD, to avoid a total financial disaster into 09. The world’s economic weakness right now is only a foretaste of what is to come from a weak USD. A weak and possible collapsing USD means a weak/collapsing world economy.

What this USD situation means today is that the US, with all of Bernanke’s willingness to use inflationary methods to combat debt deflation, is constrained by the problems that heavy inflationary methods will create for the USD going into 2009. Because the US economy is so central to the rest of the world, what limits the US limits the rest of the central banks and their economies. If the USD were not the world reserve currency, most of these problems would be confined to the US economy.

The USD is probably at a limit of stress at this moment, with interest rates at 2% and the ever present need for our trade partners to send about $700 billion a year to us to buy US bonds of all sorts. Bernanke will cut the ground from the USD if he tries any further rate cuts. Our trade partners who are basically subsidizing the USD for their own reasons will balk. Not only that, but inflation in the US in some areas in already more than 10%, such as in food and energy. Any further rate cuts to combat the present financial disaster in the US will only allow an inflation explosion.(Yes, the USD is indeed the world reserve currency, but now that seems funny. It wasn’t funny during and in the 50 years after WW2.)

If the US persists in trying to ‘bail out’ ‘everything’ the USD will collapse. Our treasury officials and the Fed are well aware of this fact. The USD is at an extremity, right now. We are at the limits of unlimited USD expansion since WW2. The US is at a crossroads with the USD system. If the US Treasury and Fed try to bail everything out, the 50 year world prosperity Jig since WW2 is up. I already heard talk by Bernanke that the Fannie Freddie mess might be nationalized.

The bailouts are not just the US. Now, every major economy is talking about massive bailouts. Their currencies will all suffer, and this post WW2 world prosperity boom is just about done for. They are going to bail out their banks, stock markets, bond markets, and economies by debasing all their currencies because they don’t have the political guts to endure a serious world recession. China too….the final result will be horrific.

What would be the outcome if the USD world financial / economic system fell apart?

Supposing the USD devalued by over 50 to 70% in a year’s time, after endless attempts to save a collapsing world consumer credit economy, we may see:

• First of all, the savings of the US would drop drastically in value. That means everything from savings accounts to pensions would lose much purchasing power, and prices of every necessity would skyrocket. Second, our major trade partner’s economies would have to do massive readjustments. They are not in a good position to do that. We can take the present rapidly spreading economic weakness of the EU zone as an example. Asia will not escape either. They will desperately try to keep their currencies from strengthening too much at first as the USD falls. This is why the USD seems to have 9 lives. These attempts to debase along with the USD allow the USD to stay higher than it would.
  
• World inflation will spiral out of control, lowering standards of living. Other major currencies such as the Euro and Yen will be heavily pressured as well. Until the world figures out how to actually delink from an imploding US economy, they will suffer along with the US’s fate. So far, the delink theory has been shown to be completely wrong. Why? Because the world economy is tied at the hip to the USD (The delink theory is that other strong economies of Asia or the EU will be able to carry the world economy even if the US economy falls apart. So far, that has been completely discredited in this latest world economic slowdown).
  
• Big geopolitical turmoil as regimes combat out of control food and fuel prices.
  
• A war in the Middle East over oil. The Iran / Israel situation might also be called a proxy war/struggle over Mid East influence for China, the US, Russia, the EU, and Asia because energy is so expensive.
  
• A very possible period of insurrection, riots, shortages, and chaos in large US cities. I also believe that the EU and China and India are at risk for this too.
  
• A 10 year world economic depression, that China in particular cannot tolerate, as the world economy readjusts out of necessity into a totally new form, one that is less global and probably more warlike.
• Debt deflation where a rapidly dropping USD effectively wipes out outstanding debts, while the population struggles merely to exist.
  
• Vast bank failures in the US and major Western economies, and likely China as well.
  
• Efforts of world central banks to ‘bail out’ ‘everything’ resulting in their currencies falling drastically in value while inflation skyrockets, until either they learn better, or have hyperinflation and their own currency collapses after the USD falls apart. In effect they will have to either ‘let go’ of the USD or suffer the same fate.
  
• Stock markets at 10% of where they are now in 3 or 4 years if the USD actually lets go by 50% or more in 09 (nominal stock prices might actually stay higher but the devaluation of the currencies would effectively cut the purchasing power in half anyway.)
  
• Prices of most essentials effectively 4 times higher, worldwide.
  
• Big increases in energy and food prices causes many other sectors of world economies to fall apart, as all ‘money’ is used merely to survive.
  
• Gold at $3000to $5000 plus and oil at $300 plus putting a further huge crimp on world economic growth. Obviously if the USD did a real collapse, say to 10% of its purchasing power now over several years, gold is over $10,000 and in some areas you will buy a decent house for one ounce of gold. Oil will be traded/priced in other currencies, and probably rationed in the US at a cost of $20 or more a gallon. In this case, the present world economy that depends on cheap transportation totally devolves.b
• Globalization becomes de-Globalization, and China either figures out how to migrate to its own domestic demand or faces a huge collapse of their export economy.
  
• Severe world currency restrictions and foreign exchange controls. You won’t be able to move your money out of your country. Likely restrictions of withdrawals to monthly limits from bank accounts as governments attempt to deal with currency chaos.
  
• Rationing of necessities as the world economy enters paralysis and governments have no choice.
  
• One bright spot for all, the return of employment to local instead of outsourcing. Production and consumption returns to local economies, as it should have been all along. That is a long 20 year process and involves a severe deep economic depression until the world economies/economy is rebuilt from scratch compared to what it is now. Debt repudiation on a massive scale as the world emerges from the ashes (hopefully not real ashes…)
  
• Many new governments worldwide after revolutions during economic collapses and or wars. Democracies falter worldwide, and more authoritarian governments appear to deal with the chaos as the democracies enter paralysis.
  

In case you think these outcomes are exaggerated, these are the things that happened after the French Revolution, the fall of the Roman Empire, The fall of the Spanish Empire, the Fall of Byzantium, the fall of the British Empire… etc. The fall of the US economic system, the world USD system, and the US as a superpower won’t be any different. Also, a lot of these outcomes happened during and after the Great Depression of the 1930’s. That all happened commensurate with the decline and fall of the British Empire and Pound that dominated world economies for 200 years, and eventually led to the USD system taking prominence after WW2 and the USD was used to stabilize the European currencies during the war.

How we reached a USD tipping point

After WW2, the US emerged as the dominant world economy and manufacturing power. Because the USD ended up being used to stabilize European currencies during the war, after the war was won the US had a lot of economic clout. Eventually, after running a bunch of fiscal deficits with the Vietnam and Korean and cold wars, the USD started to have pressure to let go of its gold standard. Once the gold standard was abandoned, the recipe was created for the US to use and inflate the USD for any and everything. The US congress happily obliged. This resulted in a world consumer and economic bubble that leads us to our present times. This lead to a simulative USD world economic bubble. The result is our present indebted world economy and its imminent bankruptcy.

The rest of the world economies will try to devalue along with the USD. At some point they will be forced to let go, or they face the fate of the USD losing 50% to 90% of its value.

What will any saver in the world do?

• First of all, your currencies, retirements, bonds and annuities will be severely devalued. Your savings will be severely downgraded in purchasing power. The world governments clearly will not act until they are forced to, as they are weakened. They are going to debase your money to try to delay the inevitable economic retrenchment in a post USD centered world.
  
• Your primary objective might be to save any wealth you have. You will have to try to keep enough liquid wealth, cash, various currencies to be able to pay bills. You will have to reduce your financial expenses.
  
• You will have to try to keep wealth in paid off assets, such as non bubble real estate (yes that still exists in most parts of the world) and also maybe in gold or other precious metals. You will have to plan on currency restrictions if things get bad, and limited monthly withdrawals on your accounts, regardless of how much they have in them. You are going to experience your financial accounts being restricted and or frozen in some institutions.
  
• You are going to have to plan on some place you can live in if you lose your income, or that income is drastically reduced in purchasing power… preferably some modest property that is paid off.
  
• People will have to deal with fuel and food shortages and high costs.
  
• People are going to have to give up the idea of getting investment returns since risk is out of sight, and merely keeping what money/wealth they have is most important.
  
• You must toughen yourselves, regardless of your age or position in life.
  

If you do these things, you may survive without terrible hardship. But you will find some kind of hardship regardless, because that is what these kinds of times cause for anyone on the planet. You are going to have to tell your loved ones to do the same too. Families will most likely have to live together to survive. You are going to have to tell loved ones ‘no’ at some point if they insist on remaining in the same level that USED to be. This is all happening as we speak.

Then, hopefully, the world regains its economic footing. This all happened worldwide in the 1930’s depression, and it lasted 10 long years.

The PrudentSquirrel Newsletter is our financial and gold commentary. We have been tracking these issues for all of 2008 for subscribers. We will continue closely monitoring these issues this Summer, and rest of the year, in the weekly subscriber newsletter and with subscriber alerts.

I had one potential subscriber ask me if the newsletter has much more content than these public articles, ie, if it was worth subscribing. The answer is that the public articles have less than 10% of our research and conclusions that subscribers see, not to mention the subscriber email alerts of important breaking financial news. We have anticipated many significant market moves in the last year, such as imminent drops in world stock markets within days of them happening, and big swings in the gold markets within days of them occurring. We have also made a number of good calls on big currency swings, such as with the USD, the Euro and the Yen.

We invite you to stop by our site and have a look.

Christopher Laird

Editor in Chief

www.PrudentSquirrel.com

Not Your Grandma's Depression

This isn't so funny anymore. Intimations of a July banking collapse rumbled though the Internet this weekend while mainstream news orgs like The New York Times and CNN pulled their puds over swift boats and Amy Winehouse's performance technique. Something is happening, and you don't know what it is, do you Mr. Jones...? to quote the master.
What's happening is that American society is sliding into a greater depression than the one Grandma lived through. On the technical side, there has been unending controversy as to whether we're gripped by inflation or deflation. It's certainly deceptive. Food and gasoline prices are rising faster than the rivers of Iowa. But the prices of assets, like houses, stocks, jet-skis, GMC Yukons and pre-owned Hummel figurines are cratering as America turns into Yard Sale Nation.
We're a very different country than we were in 1932. In that earlier crisis of capital, few people had any money but our society still possessed fantastic resources. We had plenty of everything that our land could provide: a treasure trove of mineral ores and the equipment to refine it all, a wealth of oil and gas still in the ground, and all the rigs needed to get at it, manpower galore (and of a highly disciplined, regimented kind), with fine-tuned factories waiting for orders. We had a railroad system that was the envy of the world and millions of family farms (even despite the dust bowl) owned by people who retained age-old skills not yet degraded by agribusiness. We had fully-functional cities with operating waterfronts and ten thousand small towns with local economies, local newspapers, and local culture.
We had a crisis of capital in the 1930s for reasons that are still debated today. My own guess is a combination of a bad debt workout that sucked "money" into a black hole (since money is loaned into existence, but vanishes if the loans are not systematically paid back) plus a gross saturation of markets, meaning that every American who had wanted to buy a car or an electric toaster had done so and there was no one left to sell to. (The first round of globalism -- 1870 - 1914 -- had shut down after the fiasco of World War One.)
Our debt problems today are of a magnitude so extreme that astronomers would be hard pressed to calculate them. By any rational measure our society is comprehensively bankrupt. From the federal treasury down to the suburban cul-de-sacs so much loaned money is either not being paid back, or is at risk of never being paid back, that the suckage of presumed wealth has passed through an event horizon out of the known universe into some other realm of space-time, never to be seen again in this realm. This would seem to be the very essence of monetary deflation -- money defaulted out-of-existence.
This condition is partly disguised by both the loss of credibility of US currency and real-world scarcities of oil and food, but the upshot will be something at least twice as bad as the Great Depression of the 1930s: people with no money in a land with no resources (with manpower that has no discipline), hardly any family farms left, cities that are basket-cases of bottomless need, comatose small towns stripped of their assets and social capital, an aviation industry on the verge of death, and a railroad system that is the laughingstock of the world. Not to mention the mind-boggling liabilities of suburbia and the motoring infrastructure that services it.
The banks have been doing their death dance for an entire year now, pretending that their problems are those of mere "liquidity" (i.e. cash-on-hand) rather than insolvency (no cash either on hand or in the vault and nothing else to sell to raise cash except worthless "creative" securities that nobody would ever buy). But the destruction of money (resulting from loans not paid back) is now so intense that the game of pretend has reached its terminal point. The question for the moment is exactly who and what will be crushed as these institutions roll over and die.
Complicating matters is a global oil predicament that is really not hard to understand, but which the organs of news and opinion have obdurately failed to explicate for an anxious public. Call it Peak Oil. There are only a few elements of it you need to know. 1.) that demand has now permanently outstripped supply; 2.) that new discoveries are too meager to offset consumption; 3.) That under under the circumstances, the systems we rely on for daily life are crumbling. I've called this situation The Long Emergency.
Our chances of mitigating this, and of continuing our current way-of-life is about zero. I've tried to promote the idea that rather than waste remaining resources in the futile attempt to sustain the unsustainable (i.e. come up with "solutions" to keep suburbia running), that we should begin immediately making other arrangements for daily life -- mainly by downscaling and re-scaling everything from farming to commerce to the way we inhabit the landscape -- but my suggestions have proven unpopular even among the "environmental" elites, who are too busy being entranced by new-and-groovy ways to keep all the cars running.
So where we are at now is the equivalent of standing in the slop by the ocean shore under a gathering hundred-foot-high wave that is about to come crashing down on our heads. Since I sure don't know everything, I can't say how this will all play out in the months ahead, especially with the presidential election coming at the exact moment that voters will be turning on their furnaces for the cold and dark winter beyond. I would venture to say that so far our society as a whole has done a piss-poor job of comprehending the situation. But there is still the possibility, with four months of politicking left, that the nature of our predicament can be articulated in a way that few can fail to understand, the way Mr, Lincoln articulated the terms of the Civil War on the eve of its fateful outbreak.

http://jameshowardkunstler.typepad.com/clu...depression.html

GM, Ford `On the Verge of Bankruptcy,' Altman Says (Update2)
By Greg Miles and Caroline Salas

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

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

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

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

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

Ability to Refinance

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

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

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

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

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

To contact the reporters on this story: Greg Miles in New York at gmiles1@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net

United States Unfolding Financial and Economic Nightmare: Nearly every major bank, brokerage and lender you can name is up to its eyeballs in leveraged investments whose value is going up in smoke. They're borrowing hundreds of billions from the Fed. They're raising billions more from investors, diluting their shares. They're selling massive amounts of assets — scrambling any way they can to raise cash to survive.

Video Interview on Tech Ticker: Roubini: "Bear Market Only Half Over, But It's Not Armageddon"
Jul 22, 2008
This morning I gave a video interview at Yahoo Finance's Tech Ticker; this video interview elaborated on my latest detailed article about "The Coming Systemic Bust of the US Banking System: Dead Stocks Rallying".

The first part "Roubini: Bear Market only Half Over, But It's Not Amageddon" of this three-part video interview can be found here.

The second part "Roubini: Nationalize Housing or Worsening Slump Leads to Massive Bank Failures" is here .

And the third part "'They're All Toast': Roubini Says Brokers, Even Goldman, Can't Stay Independent" is here.
...

And here are the Tech Ticker stories that came with that three-part video interview:

Bear Market only Half Over, But It's Not Amageddon Posted Jul 22, 2008 11:40am EDT by Aaron Task in Investing, Newsmakers, Recession, Banking Related: ^DJI, ^SPX, ^IXIC, SPY, DIA, XLF One of the most noted skeptics on Wall Street, NYU Professor Nouriel Roubini says the financial system is in "the worst crisis since the Great Depression," and that the bear market in stocks is only half over.Subprime mortgages are only the tip of the bad-loan iceberg, says Roubini, who expects the "subprime financial system" to ultimately suffer credit-related losses of between $1 trillion and $2 trillion vs. the approximately $330 billion thus far.Roubini believes the economy slid into recession in the first quarter of 2008 and will remain there until the second quarter of 2009, with "subpar growth" likely to characterize the recovery.That's the (very) bad news.The good news is Roubini, who also chairs research firm RGE Monitor, is "not in the Armageddon camp."The economist sees a "severe recession" that will last 12-to-18 months, but does not foresee the U.S. sliding into a prolonged Japan-like economic malaise.Similarly, while further 20% declines for major averages isn't pretty, it won't be as bad as the bursting of the tech bubble or the Great Depression for stocks, which Roubini sees starting to recover later this year/early next year. ...

Roubini: More than $1 Trillion is Needed to Resolve the Housing Crisis
Posted Jul 22, 2008 05:42pm EDT by Aaron Task in Newsmakers, Recession, Banking Related: FNM, FRE, XLF, WM, WB, WFC, BAC Treasury Secretary Hank Paulson has been putting on a full-court press in the last 24 hours, making the case for his plan to shore-up Fannie Mae and Freddie Mac."I would rather not be in the position of asking for extraordinary authorities to support the GSEs," Paulson said in a speech Tuesday in NYC. "But I am playing the hand that I have been dealt. There is a need to support efforts that strengthen Fannie and Freddie's ability to continue to play their important role in financing mortgages and in our capital markets more broadly."The timing of Paulson's speech -- and various and sundry media appearances -- is not coincidental. This week, Congress is expected to vote on housing legislation that includes Paulson's plan, which a GAO report said is likely to cost the government $25 billion.

But $25 billion -- or even the GAO's worst-case $100 billion estimate -- pales in comparison to the cost of doing nothing, says Nouriel Roubini, NYU professor and chairman of RGE Monitor."We have to find a solution where government intervention prevents a disorderly outcome" in the housing market that leads to a "systemic banking crisis," Roubini says.The housing bill, which earmarks $300 billion to backstop mortgages after lenders agree to lower mortgage payments, is "a step in the right direction" but "doesn't do enough," he says, predicting the government will ultimately need to spend more than $1 trillion.Roubini's main concern stems from a view that the "housing recession is not bottoming by any standards," in contrast to hopeful comments from Paulson on Fox News and Barron's last weekend.The economist believes U.S. home prices will ultimately fall 30% from their peak -- vs. 18% to date according to the S&P Case-Shiller Index -- "before bottoming out some point in 2010."In the interim, the negative wealth effect of declining home values and increase in "underwater" mortgages will lead to more Americans walking away from their homes. Such "jingle mail" threatens to ultimately cost $1 trillion in credit losses, wiping out 75% of the capital of U.S. financial institutions, Roubini warns. It is that "disorderly" outcome Roubini says the government cannot afford to let happen. With "the charade" that Fannie and Freddie weren't already government agencies over, he believes a nationalization of the 50% of mortgages not owned or guaranteed by Fannie and Freddie will be necessary, and the Frank-Dodd Bill is a small step down that road.

From Roubini's view, nationalizing housing avoids the government having to nationalization the entire banking system, making it the lesser of two evils.

They are All Toast: Roubini Says Brokers, Even Goldman, Can't Stay Independent Posted Jul 22, 2008 05:09pm EDT by Aaron Task in Investing, Newsmakers, Recession, Banking Related: GS, LEH, MS, MER, JPM, BAC, C http://www.rgemonitor.com/blog/roubini

The broker/dealer business model is "inherently unstable" and the four remaining major firms will not be independent in a few years, says Nouriel Roubini, economics professor at NYU's Stern School and chairman of RGE Monitor.Embattled Lehman Brothers is likely to seek a buyer "within months," Roubini says. Lehman Brothers ceasing to be independent is not such a shocking outcome, but Roubini ultimately sees a similar outcome for Goldman, Merrill Lynch, and Morgan Stanley.The problem, he says, is that broker/dealers use the same model as banks -- borrow short and lend long -- only they borrow on even shorter timeframes, use more leverage, and don't have the kind of government backstop banks enjoy.In the wake of Bear Stearns' demise, which showed how brokers are vulnerable to a "run on the bank" if they can't get overnight funding, the Fed temporarily opened its discount window to brokerage firms. But making that option permanent means submitting to the same kind of regulation and capital requirements as banks; that, in turn, means a very different business model -- and much lower profitability -- for Wall Street firms, whose current business model is "not viable," he says.With U.S. financial giants like JPMorgan, Citigroup, and Bank of America dealing with internal issues, the most likely buyers are international financial firms or sovereign wealth funds, Roubini says. But unlike in 2007, foreigners are not going to settle for preferred shares, and non-voting rights next time around.That raises the questions: Is America ready for (true) foreign ownership of major financial institutions? And do we have a choice?

Can the FDIC Handle the Coming Banking Bust?

Which Kind of Banks Are on the FDIC List? What Are The Early-Warning Indicators?

A Depression? Hardly
Washington Post, United States - 4 hours ago
By Robert J. Samuelson The specter of depression stalks America. You hear the word repeatedly. Are we in a depression? If not, are we headed for one? ...

John McCain's Disaster Economics

Frank Rich, The New York Times

Election 2008: If voters got a fair presentation of John McCain's economic plan, the idea of him winning the White House would cause mass panic.


Nightmare on Wall Street: Washington Can't Bail out the Sea of Red Ink

Bill Moyers, Bill Moyers Journal

Corporate Accountability and WorkPlace: Author Bill Greider explains to Moyers that the magic of the "free market" is coming to a close.

Shorts and Fannies: A Brief History
Robert Kuttner
July 22, 2008 | web only
Scratching your head trying to understand just what short-selling is and why it threatens banks; or what exactly Fannie Mae is, and how it might be dragging down a housing sector? Founding Editor Robert Kuttner explains.

Related: Read Dean Baker's weekly column on the economic collapse, The Meltdown Lowdown.

The Meltdown Lowdown
Inflation surges, Fannie and Freddie get away with reckless incompetence, and Obama proposes a subsidy for tax accountants.

Dean Baker | July 17, 2008 | web only

Inflation: The Latest Import

Inflation is likely to inch up over the course of the year, with higher import prices being a major cause. The problem is higher-than-high oil prices -- all imports cost more because of the drop in the dollar. Non-oil import prices are up 7.3 percent from June 2007 to June 2008. Over the last three months, they have been rising at a 12.1 percent annual rate.

Most of this has not shown up yet in the consumer price index (CPI). While the June CPI jumped by 1.1 percent, bringing its annual rate of increase over the quarter to 7.9 percent, this was mostly an oil and food story. The core CPI (which excludes food and energy) rose 0.3 percent in June and has risen at an annual rate of just 2.5 percent for the quarter. But, higher import prices eventually will show up in the core measure also.

But the bad news on import prices is actually good news for the economy. Higher import prices will lead people to buy more domestically produced goods, thereby reducing the trade deficit. It ain't pretty, but that is the only way to get the trade deficit down to a sustainable level. The lower dollar also makes our exports cheaper for people in other countries, thereby causing them to buy more U.S. exports.

However, the big question is how will the Fed respond to the news that rising import prices are pushing inflation higher? The correct response is to grin and bear it. We set ourselves up for this hit when the Clinton administration consciously pursued a high-dollar policy in the late 1990s. This policy produced short-term gains in the form of cheap imports but was clearly unsustainable over the long term. The Clinton crew rightly bet that it would be gone when it was time to pay the bill.

The Fed can try to temporarily prop up the dollar with high interest rates and squeeze inflation out of the system by using high unemployment to keep wages down, but that will only delay the inevitable adjustment process. The inflation hawks should have been yelling about the overvaluation of the dollar back in 1997. If the dollar had never been allowed to reach the unsustainable levels that caused the trade deficit to explode, it would not be falling now.

Bailing Out Fannie and Freddie: What Will We Get?

Congress and the Fed are chasing after Fannie Mae and Freddie Mac with buckets full of money to ensure that the mortgage giants stay in business. Given the huge political fights that we must have to get a few billion for child care or children's health care, it might be worth asking a few questions before we give hundreds of billions of dollars of loan guarantees to these institutions. While everyone agrees that it would be a disaster to allow Fannie and Freddie to go under, "saving" them can mean very different things.

First, one point should be very clear: The wreckage facing Fannie and Freddie was entirely preventable. It also is real. It is not a psychological phenomenon as some are now claiming. These institutions face bankruptcy because they are looking at tens of billions of dollars of bad loans, an amount that far exceeds their capital.

Both Fannie and Freddie insured millions of mortgages that were issued on homes purchased at bubble-inflated prices. In many cases, these mortgages are now deep underwater, with people owing 20 percent to 30 percent more than the value of their homes.

This situation invites defaults and leads to large losses when defaults take place. Furthermore, with the housing crash wiping out mortgage insurers, Fannie and Freddie will, with increasing frequency, be taking the full hit from these loans, rather than sharing the losses with a mortgage insurer. Many of the mortgages that Fannie and Freddie bought required that the homeowner take out mortgage insurance as a condition of the loan (homebuyers are often required to buy mortgage insurance if they do not make a down payment of 10 percent to 20 percent). If the mortgage insurer is bankrupt, Fannie and Freddie are liable for the full loss on mortgages they hold or guarantee.

This collapse was entirely foreseeable. (I first warned that the housing bubble could bring down Fannie and Freddie in 2002.) The folks at Fannie and Freddie insisted on ignoring the evidence of a housing bubble and made loans that helped to fuel it. The fact that Fannie and Freddie face bankruptcy due to their own mismanagement should affect the terms of their bailout.

No. 1 on my list is a real cap on executive compensation. How about a limit of $2 million total annual compensation (that counts salary, bonus, stock options, everything)? That should certainly be plenty for people who arguably should be unemployed.

Cutting executive compensation is not just vengeance. The country has seen a massive upward redistribution of income over the last three decades. As a result, most workers have seen little benefit from the economy's growth over this period. While market forces were not generally responsible for this upward redistribution (the main cause was government policies), in this case the hand (or handout) of government is very clear.

Left to the market, Fannie and Freddie would be out of business, and their executives would be unemployed. If the government decides to intervene to prevent their collapse then it certainly has a right to set pay caps for the folks who wrecked the companies.

This should be a standard practice in all of the bank bailouts. For example, when Fed Chairman Ben Bernanke arranged the takeover of Bear Stearns and promised to protect the other investment banks, he should have imposed serious pay caps as a quid pro quo for the Fed's generosity. As it was, he just handed more money (in the form of extremely valuable credit guarantees) to some of the richest people in the country.

The condition of keeping Fannie and Freddie in business should also be that the stockholders get wiped out. That is supposed to be what happens to the shareholders in a bankrupt company, at least in a free-market economy. The country has absolutely zero interest in propping up the share prices of Fannie and Freddie. Unfortunately that seems to be a central part of the current bailout plan.

Instead, Fannie and Freddie should be taken over and run in receivership until their books are in order and the crisis is over. At that point, we can have a serious debate about whether it would be helpful for them to again be partially private institutions, or whether they should remain fully public.

In some cases -- for example, guaranteed student loans -- the private sector doesn't add any obvious value, just expense. If it is clear that there would be value added from having Fannie and Freddie return to their prior status, then we can go this route. But we should not privatize them just for ideological reasons. If the secondary mortgage market can be most efficiently supported through public institutions, then the reformulated Fannie and Freddie can remain public institutions for the indefinite future.

Obama's Capital Gains Tax Break for Small Businesses and Tax Accountants

In an effort to show that he supports small businesses, Sen. Obama came out with a proposal last week for a zero capital gains tax rate for small businesses and start-ups. Tens of millions of voters will be reassured by his commitment to help those struggling to start a business on their own.

By contrast, policy-wonk types will be inclined to ask questions like, "What capital gains does someone who starts a restaurant or shoe store have?" The answer is, ordinarily, "none." However, if you give them a zero tax rate, all sorts of income will suddenly appear as capital gains. Any good accountant should be able to make much of the profit, or even the salary of the owner, appear as a capital gain for tax purposes. For example, the business owner can leave money in a subsidiary that is then sold as a separate enterprise, when the subsidiary really is just a portion of the owner's salary that exists as a corporation only on paper. Such creative bookkeeping doesn't do anything to help the economy and probably won't do much to help small businesses, but it is certainly good news for tax accountants.

"Mental Recession," What Is In Their Heads?

After Federal Reserve Board Chairman Ben Bernanke warned of bad economic times ahead, President Bush held a news conference in which he urged Americans to calm down and "take a deep breath." Many will no doubt be trying to hold that breath until he leaves office.

In the same vein, former Sen. Phil Gramm, who is taking time off from his job as a lobbyist to help Sen. McCain's presidential bid, told The Washington Times last week that the country is suffering from a "mental recession." Gramm then complained that we "sort of have become a nation of whiners." After some initial hesitance, the McCain campaign disavowed Gramm's comments.

This one raised all sorts of fascinating questions. Since McCain is running for president, and if we are a nation of whiners, then does McCain intend to court the whiner vote? Can we expect to see the formation of a "Whiners for McCain" group? And, most important, will mental recessions be covered under Sen. McCain's health-care plan?

I'm not quite sure that Sen. Gramm's comment will help McCain get elected, but it is probably better than traveling the country calling Social Security's financing mechanism a disgrace.

Early Estimates of Bailout Range to $100 Billion
New York Times: The budget office said there was a better than even chance that the rescue package would not be needed before the end of 2009 and would not cost taxpayers any money. But the office also estimated a 5 percent chance that the mortgage companies, Fannie Mae and Freddie Mac, could lose $100 billion, which would cost taxpayers far more than $25 billion.

The House is expected to act this week on housing legislation that includes the proposed rescue plan. Legislative language has not been finalized, but the Congressional Budget Office said its estimates were based on the plan by the Treasury Department and that it did not expect significant changes in the final bill.

Read more

Will The Dollar Lose Its Reserve Status? - Marc Flandreau, VoxEU

The Huge Threat to the U.S. Economy
- Jim Jubak, MSN Money

Moody's Economy.com: Rising Household Debt, Defaults Straining US Economy - Market Watch from Dow Jones (07/23/2008 10:05 AM)

Collapse of loan market, change in rules have families scrambling - Boston Globe (07/23/2008 05:40 AM)

Record home losses in California - LA Times (07/23/2008 05:28 AM) A Mortgage Rescue Strains Calculations - NY Times (07/23/2008 05:41 AM) Moody's: More firms found with weakest liquidity - San Diego UT (07/23/2008 05:45 AM) County foreclosures soar in June - San Diego UT (07/23/2008 05:43 AM)

Quotable
"If we lose confidence in the ability and the willingness of the Fed to deal with inflationary pressures and sustain confidence in the