31 December 2008

The way it is.......

"The much touted notion that the US is the preferred destination for private wealth, thus sustaining an out of balance trade deficit through a financial services economy, is rubbish at best, and propaganda at worst. It is rooted in the Dick Cheney nostrum that "Reagan proved that deficits don't matter."

What we have today is a very lopsided vendor financing arrangement, wherein the US is largely supported by China and Japan whose industrial policy currently recommends their support of a US debt that is increasingly unpayable.

If and when China and Japan are no longer able to support the continued growth of US deficit financing, the dollar and the bonds will contract (decrease) in value, and perhaps precipitously, like a house of cards. It is much worse than we had imagined, and more concentrated on these two countries, along with Saudi Arabia, than we had thought.

For now the balance is maintained because of self-interest and fear. But we cannot stress enough the highly artificial nature of the arrangement, and its inherent instability, now that the charade of sustained private investment flow is shown for what it is. There is no economic theory to support this model other than a distorted form of neo-colonial parasitism. Substitute US paper dollars for opium and you get the idea.

Japan and Saudi Arabia are understandable as virtual client states under US military protection, but we struggle with how China was taken into this arrangement which is so potentially destabilizing of their internal political and economic stability.

This is why the world has not developed a sound replacement for the dollar hegemony. It is because if they do, they must navigate around the probability, not possibility, of a collapse of their dollar reserves, and a dislocation of their own export driven economies, much worse than we might have imagined. It is not a matter of economic inventiveness; it has become a matter of will.

Who will be the first to flinch? History shows it is rarely a conscious decision, but rather some incident, an accident, some trigger event, even one so small, that it creates astonishment at the size of the avalanche it unleashes.

To make it clear and simple, this is the first evidence we have seen to suggest that hyperinflation is in fact possible in the US. As you know, we have been strongly adverse to the extremes in outcomes, both in terms of a sustained deflation and a significant hyperinflation.

That has now changed. The dollar is a Ponzi scheme, the waters of debt are overflowing the dam of artificial support, and only a few countries, two of them somewhat unstable, are holding back the deluge."

28 December 2008

The Predator State

WHAT IS THE REAL NATURE of American capitalism today? Is it a grand national adventure, as politicians and textbooks aver, in which markets provide the framework for benign competition, from which emerges the greatest good for the greatest number? Or is it the domain of class struggle, even a “global class war,” as the title of Jeff Faux’s new book would have it, in which the “party of Davos” outmaneuvers the remnants of the organized working class?

The doctrines of the “law and economics” movement, now ascendant in our courts, hold that if people are rational, if markets can be “contested,” if memory is good and information adequate, then firms will adhere on their own to norms of honorable conduct. Any public presence in the economy undermines this. Even insurance—whether deposit insurance or Social Security—is perverse, for it encourages irresponsible risktaking. Banks will lend to bad clients, workers will “live for today,” companies will speculate with their pension funds; the movement has even argued that seat belts foster reckless driving. Insurance, in other words, creates a “moral hazard” for which “market discipline” is the cure; all works for the best when thought and planning do not interfere. It’s a strange vision, and if we weren’t governed by people like John Roberts and Sam Alito, who pretend to believe it, it would scarcely be worth our attention.

The idea of class struggle goes back a long way; perhaps it really is “the history of all hitherto existing society,” as Marx and Engels famously declared. But if the world is ruled by a monied elite, then to what extent do middle-class working Americans compose part of the global proletariat? The honest answer can only be: not much. The political decline of the left surely flows in part from rhetoric that no longer matches experience; for the most part, American voters do not live on the Malthusian margin. Dollars command the world’s goods, rupees do not; membership in the dollar economy makes every working American, to some degree, complicit in the capitalist class.

In the mixed-economy America I grew up in, there existed a post-capitalist, post-Marxian vision of middle-class identity. It consisted of shared assets and entitlements, of which the bedrock was public education, access to college, good housing, full employment at living wages, Medicare, and Social Security. These programs, publicly provided, financed, or guaranteed, had softened the rough edges of Great Depression capitalism, rewarding the sacrifices that won the Second World War. They also showcased America, demonstrating to those behind the Iron Curtain that regulated capitalism could yield prosperity far beyond the capacities of state planning. (This, and not the arms race, ultimately brought down the Soviet empire.) These middle-class institutions survive in America today, but they are frayed and tattered from constant attack. And the division between those included and those excluded is large and obvious to all.

Today, the signature of modern American capitalism is neither benign competition, nor class struggle, nor an inclusive middle-class utopia. Instead, predation has become the dominant feature—a system wherein the rich have come to feast on decaying systems built for the middle class. The predatory class is not the whole of the wealthy; it may be opposed by many others of similar wealth. But it is the defining feature, the leading force. And its agents are in full control of the government under which we live.

Our rulers deliver favors to their clients. These range from Native American casino operators, to Appalachian coal companies, to Saipan sweatshop operators, to the would-be oil field operators of Iraq. They include the misanthropes who led the campaign to abolish the estate tax; Charles Schwab, who suggested the dividend tax cut of 2003; the “Benedict Arnold” companies who move their taxable income offshore; and the financial institutions behind last year’s bankruptcy bill. Everywhere you look, public decisions yield gains to specific private entities.

For in a predatory regime, nothing is done for public reasons. Indeed, the men in charge do not recognize that “public purposes” exist. They have friends, and enemies, and as for the rest—we’re the prey. Hurricane Katrina illustrated this perfectly, as Halliburton scooped up contracts and Bush hamstrung Kathleen Blanco, the Democratic governor of Louisiana. The population of New Orleans was, at best, an afterthought; once dispersed, it was quickly forgotten.

The predator-prey model explains some things that other models cannot: in particular, cycles of prosperity and depression. Growth among the prey stimulates predation. The two populations grow together at first, but when the balance of power shifts toward the predators (through rising interest rates, utility rates, oil prices, or embezzlement), both can crash abruptly. When they do, it takes a long time for either to recover.

The predatory model can also help us understand why many rich people have come to hate the Bush administration. For predation is the enemy of honest business. In a world where the winners are all connected, it’s not only the prey who lose out. It’s everyone who hasn’t licked the appropriate boots. Predatory regimes are like protection rackets: powerful and feared, but neither loved nor respected. They do not enjoy a broad political base.

In a predatory economy, the rules imagined by the law and economics crowd don’t apply. There’s no market discipline. Predators compete not by following the rules but by breaking them. They take the business-school view of law: Rules are not designed to guide behavior but laid down to define the limits of unpunished conduct. Once one gets close to the line, stepping over it is easy. A predatory economy is criminogenic: It fosters and rewards criminal behavior.

Why don’t markets provide the discipline? Why don’t “reputation effects” secure good behavior? Economists have been slow to answer these questions, but now we have a full-blown theory in a book by my colleague William K. Black, The Best Way to Rob a Bank Is to Own One. Black was the lawyer/whistle-blower in the Savings and Loan and Keating Five scandals; he later took a degree in criminology. His theory of “control fraud” addresses the situation in which the leader of an organization uses his company as a “weapon” of fraud and a “shield” against prosecution—a situation with which law and economics cannot cope.

For instance, law and economics argues that top accounting firms will protect their own reputations by ferreting out fraud in their clients. But, as with Enron, Tyco, and WorldCom, at every major S&L control fraud was protected by clean audits from top accountants: You hire the top firm to get the clean opinion. Moral hazard theory shifts the blame for financial collapse to the incentives implicit in insurance, but Black shows that the large frauds were nearly all committed in institutions taken over for that purpose by criminal networks, often by big players like Charles Keating, Michael Milken, and Don Dixon. And there’s another thing about predatory institutions. They invariably fail in the end. They fail because they are meant to fail. Predators suck the life from the businesses they command, concealing the fact for as long as possible behind fraudulent accounting and hugely complex transactions; that’s the looter’s point.

That a government run by people rooted in this culture should also be predatory isn’t surprising—and the link between George H.W. Bush, who led the deregulation of the S&Ls, his son Neil, who ran a corrupt S&L, and Neil’s brother George, for whom Ken Lay sent thugs to Florida in 2000 on the Enron plane, could hardly be any closer. But aside from occasional references to “kleptocracy” in other countries, economic opinion has been slow to recognize this. Thinking wistfully, we assume that government wants to do good, and its failure to do so is a matter of incompetence.

But if the government is a predator, then it will fail: not merely politically, but in every substantial way. Government will not cope with global warming, or Hurricane Katrina, or Iraq—not because it is incompetent but because it is willfully indifferent to the problem of competence. The questions are, in what ways will the failure hit the population? And what mechanisms survive for calling the predators to account? Unfortunately, at the highest levels, one cannot rely on the justice system, thanks to the power of the pardon. It’s politics or nothing, recognizing that in a world of predators, all established parties are corrupted in part.

So, how can the political system reform itself? How can we reestablish checks, balances, countervailing power, and a sense of public purpose? How can we get modern economic predation back under control, restoring the possibilities not only for progressive social action but also—just as important—for honest private economic activity? Until we can answer those questions, the predators will run wild.

James K. Galbraith teaches economics at the Lyndon B. Johnson School of Public Affairs at the University of Texas-Austin. He previously served in several positions on the staff of the U.S. Congress, including executive director of the Joint Economic Committee.

Illustration: Tim Bower

U.S. debt approaches insolvency

In the United States, the danger of debt insolvency is growing, putting at risk the currency reserves of foreign countries, China chief among them. According to new figures published by Bloomberg in recent days (Nov. 25, 2008 [1]), the American government has employed a total of 8.549 trillion dollars to stop the financial crisis. This means a total of about 24-25.4 trillion dollars of direct or indirect public debt weighing on American taxpayers. The complete tally must also include the debt - about 5-6 trillion dollars - of Fannie Mae and Freddie Mac, which are now quasi-public companies, because 79.9% of their capital is controlled by a public entity, the Federal Housing Finance Agency, which manages them as a public conservatorship.

In 2007, public debt in the United States was 10.6 trillion dollars, compared to a GDP (gross domestic product) of 13.811 trillion dollars. In just one year, direct and indirect public debt have grown to more than 100% of GDP, reaching 176.9% to 184.2%. These percentages exclude the debt guaranteed by policies underwritten by AIG, also nationalized, and liabilities for health spending (Medicaid and Medicare) and pensions (Social Security)[2]. By way of comparison, the Maastricht accords require member states of the European Union (EU) to reduce their public debt to no more than 60% of GDP. Again by way of comparison, in one of the EU countries with the largest public debt, Italy, public debt in 2007 was equal to 104% of GDP.

In 2007, 61.82% [3] of America's public debt was held by foreign investors, most of them Asian. So the U.S. public debt held by nonresident foreigners is equal to about 109.39% (113.86%) of GDP. According to a study by the International Monetary Fund, countries with more than 60% of their public debt held by nonresident foreigners run a high risk of currency crisis and insolvency, or debt default. On the historical level, there are no recent examples of countries with currencies valued at reserve status that have lapsed into public debt insolvency. There are also few or no precedents of such a vast and rapid expansion of public debt.

The United States also runs large deficits in its public balance sheet and balance of trade. Families and businesses are also deeply in debt: in 2007, American private debt was equal to a little more than 100% of GDP. At the moment, it is not clear how much of America's private debt has been "nationalized" with the recent bailouts.

In the early months of next year, when the official data are published, the United States will run a serious risk of insolvency. This would involve, in the first place, a valuation crisis for the dollar. After this, the United States could face a social crisis like that in Argentina in 2001. A crisis in U.S. public debt would likely have a severe impact on the Asian countries that are the main exporters to the United States, China first among them. Chinese monetary authorities, thanks to a steeply undervalued artificial exchange rate, at about 55% of its fair value, have limited imports (including food) and have achieved an export surplus. This has allowed them to accumulate a large stockpile of dollar reserves. In a currency crisis, China risks losing much of the value of its accumulated currency reserves. At the same time, pressure on imports (wheat, other grains, and meat) have led to inflation in the prices of food, the most important expenditure for more than 900 million Chinese. This is nothing more than a small confirmation of the recent statements of the pope, in his message for the World Day for Peace, where the pontiff calls the current financial system and its methods "based upon very short-term thinking," without depth and breadth (nos. 10-12), preoccupied with creating wealth from nothing and leading the planet to its current disaster. [4]

[1] See Bloomberg, 2008, 11-25 16:35:48.130 GMT “U.S. Pledges Top $8.5 Trillion to Ease Frozen Credit (Table)”

[2] In this case, exluding AIG policies, one arrives at a total equal to 429.37 of GDP.

[3] Cf. Economic crisis: US, China and the coming monetary storm

[4] Cf. AsiaNews.it 11/2/2008 Message for Peace 2009: the poor, wealth of the world; Global solidarity to fight poverty and build peace, says Po

24 December 2008

Blomberg on Iceland

Dec. 23 (Bloomberg) -- It was the week before Christmas in Reykjavik, and all through the town Eva Hauksdottir led a band of 60 whistle-blowing, pan-banging, shouting demonstrators.

“Pay your own debts,” they yelled as they visited one bank office after another in Iceland’s capital. “Don’t make the children pay.”

When she isn’t leading one of the almost daily acts of protest in this land devastated by the global financial meltdown, Hauksdottir sells good luck charms made from the claws of ptarmigans, a local bird, and voodoo dolls in the form of bankers. She says she expects to lose her home, worth less than when she bought it two years ago, after the amount she owes jumped more than 20 percent.

Unrest following the end of a five-year economic boom is overshadowing the holidays in a country of 320,000 near the Arctic Circle, where the folklore is filled with magic, trolls and elves. Expansion ended with the collapse of the U.S. subprime mortgage market. The fallout in Iceland may presage civil disruptions elsewhere, as job losses multiply and credit bills come due. Few nations can count themselves safe, says Ian Bremmer, president of the New York-based Eurasia Group, which analyzes political risk for businesses.

“As people have their expectations changed radically, you can have protests come out of nowhere,” even in developed countries, Bremmer said.

‘Maybe Axes’

Riots in Greece this month, sparked by the police shooting of a teenager, became tinged with economic dissension. A group of Kuwaiti equity traders marched on the emir’s office in October to demand the closing of the stock exchange to stem losses. Even in U.S. cities, civil disorder is “conceivable” if unemployment rises above 10 percent from November’s 6.7 percent, Bremmer says.

Hauksdottir, the owner of a Reykjavik witchcraft shop, says over a cup of thyme and juniper tea that only civil disobedience can force banks to stop collecting debts that people can’t pay.

“We’ll use our voices, and then if we have to we’ll use our hands, and maybe axes,” Hauksdottir says.

At Reykjavik’s half-built concert hall, a symbol of the good times that juts from the harbor toward the North Pole, the visitor center is closed to visitors. The principal owner, Landsbanki Islands hf, failed in October. Marketing director Thorhallur Vilhjalmsson says he’s making ends meet on severance pay.

“Iceland right now is like Chernobyl after the blast,” Vilhjalmsson says. “It looks normal, but there’s radiation.”

Kicking Down Doors

The protests may escalate as bills come due and severance pay runs out for those who lost jobs at the three biggest lenders, including Landsbanki, the second-largest, says Stefan Palsson, a historian. He once led the Campaign Against Militarism, opposing NATO bases in the 1960s.

He said he’s surprised ordinary people are backing activists once considered “hooligans.” There was public outrage three years ago when environmentalists poured yogurt over aluminum representatives to protest a new plant.

“Now you have protesters kicking down doors at police stations, and respectable elderly people saying ‘Well, they’re young and full of enthusiasm, and anyway, they’re right!’” he said.

Inflation rose to 18.1 percent this month, and the International Monetary Fund predicts that Iceland’s economy will shrink 9.6 percent next year. The Washington-based global lender of last resort put together a rescue package for the country worth as much as $5.3 billion last month.

No-Debt Ethics

The decline in the krona and surge in prices are creating a triple whammy for borrowers whose home loans are typically linked to inflation or foreign currencies. Households owed more than double their disposable income at the end of 2006, almost twice the level in the U.S., according to the IMF.

Some Icelanders say the easy money of the past decade eroded the island’s traditions. A sheep farmer in the 1934 novel, “Independent People,” by Iceland’s only Nobel laureate, Halldor Laxness, preferred freedom from debt to any material comforts. His motto was: “I don’t owe anyone a penny.”

That philosophy may return, says Birgir Asgeirsson, 63, the priest at Reykjavik’s Hallgrimskirkja Lutheran church.

“I grew up learning that you work for what you get, but kids today just get what they want,” Asgeirsson says. “Now I can hear parents say ‘No, my little boy, it’s not that easy.’”

Gunnlaugur Gudmundsson is an astrologer and chief executive officer of a company that provides horoscope predictions for phone operators such as Vodafone Group Plc. Customer numbers have more than doubled since the crisis broke, he said.

“The classic question used to be, ‘I’m in love with this guy, will he marry me?’” he said at a table strewn with star- charts. “Now the questions are about jobs, and when the good times will return.”

Two-Year Contraction

The answer may be 2011, according to the IMF, which projects two years of economic contraction first.

That may take Iceland back to the income levels of five or 10 years ago, “and we weren’t badly off then,” said Hannes Holmstein Gissurarson, professor of politics at the University of Iceland and a central bank supervisory board member. Banks and politicians were victims of an “external shock,” and weren’t behaving much worse than their counterparts elsewhere, he said.

The difference was one of scale. As governments worldwide pumped money into stricken banks, Iceland couldn’t follow suit. By the end of last year, local banks had accumulated assets almost nine times the size of the country’s $12 billion economy, according to the IMF.

The lack of backup was a “systemic error no one thought of,” Gissurarson said.

‘Cocktail Party’

The Reykjavik concert hall was budgeted at 170 million pounds ($252 million), Vilhjalmsson says. That was more than 2 percent of gross domestic product -- equivalent to a $250 billion project in the U.S. Pointing to miniature models, Vilhjalmsson says the building’s glass shell was designed to refract the low Arctic sun in kaleidoscopic shades.

In midwinter in the world’s northernmost capital the sun appears for just four hours a day, leaving long evenings for Icelanders to figure out how their country got caught up in the global boom-and-bust. Vilhjalmsson has his own version.

“The West is having this great, long cocktail party,” Vilhjalmsson says. “And then, late in the evening, in comes this cute little dwarf, Iceland. And he gets drunk.”

China's inflation-free route from crisis

The structural problem of the Chinese economy can be described in one sentence: China produces from plants financed by foreign investment that operate with low domestic wages for foreign markets that pay with dollars that cannot be used in the domestic economy.

The solution to this structural problem can also be summed up in one sentence: China must finance plants with sovereign credit to produce for the domestic market where consumer purchasing power will come from high wages, with sovereign credit repaid

from increased tax revenue from a vibrant domestic economy.

The adverse impact from the current global financial crisis on the Chinese economy originates from the export sector financed by foreign capital. Foreign markets have abruptly contracted since mid-2007 to cause massive closure of tens of thousands of foreign joint-ventures or wholly owned enterprises, big, medium and small, in the Chinese export sector located along the coastal regions.

Many of these enterprises normally repatriate their profit continually, leaving little or no reserve funds to keep operating in slow periods. At the first sign of financial distress, the absentee owners of these enterprises find it expedient to simply shut down operations and vanish from the local scene, leaving millions of Chinese migrant workers suddenly unemployed with no severance pay or unemployment insurance payments, not even the train fare to return home. The foreign investors just abandon their money-losing factories, in which they hold little equity, for foreclosure by lending institutions.

These bankrupt export enterprises are not likely to reopen as few expect the global financial crisis to recover soon.

Five years ago, in 2003, Premier Wen Jiabao drew national attention by personally demanding back wages owed to a migrant worker by his abusive employer to be paid. In February 2008, the National People's Congress (NPC) accredited the qualification of three rural migrant workers as newly-elected deputies, making them the first group of "spokespersons" for migrant laborers all over the country in the national legislature. This development is a historic breakthrough that will help normalize the gap between urban and rural development and the oppression of migrant workers by unsavory employers, domestic and foreign.

The Central Committee of the Communist Party of China (CPC) issued a landmark policy document on rural reform and development in October 2008, vowing to enhance safeguards of the rights of migrant workers, ensuring them equal wages and benefits, including their children's education, public health and affordable housing as those received by resident citizens.

Since China adopted the reforms and opening-up policy in 1978, the number of migrant workers to the coastal export regions has grown to over 200 million. China has been improving rules and laws to cope with the new changes and to ensure migrant workers' rights. The unjust condition of migrant workers has become a microcosm of worker conditions in the socialist market economy in general. We need to remember that the driving force of the socialist revolution that began in China in 1921 was to eliminate such unjust conditions for workers.

The Dongguan City Association of Enterprises with Foreign Investment estimates that 9,000 of the 45,000 factories in the cities of Guangzhou, Dongguan and Shenzhen - the heart of China's industrial south - are expected to close before the Lunar New Year celebrated in China in late January. That could mean up to 2.7 million workers facing unemployment immediately, the association said. If the trend continues, unemployment can be expected to double every quarter.

The current global financial crisis has accelerated a process already underway to upgrade China's economy from low-tech, labor intensive factory jobs to high-tech manufacture of higher value-added products and high-skill jobs in the service industry sector. The plan to correct the imbalance of development between the coastal regions and the interior regions is tied to China's effort to shift its economy from excessive export dependency toward domestic consumption and development. Yet the pace of restructuring must be further accelerated with the aim of a full-employment economy based on balanced domestic development and consumption within a period of five years.

For China, the only viable strategy is to shift these bankrupt export factories in the coastal regions toward the domestic market. But the domestic market at present is too weak in consumer demand due to low wages to absorb the overcapacity in export. Thus no funds are available in private credit and capital markets to finance urgently needed restructuring of the export sector on a national scale. Market forces are simply not up to the task.

To kick-start a new economic strategy of shifting the Chinese economy from export dependency to domestic construction, the Chinese government needs to establish a Commission to Restructure the Chinese Economy (CRCE) as a special agency in the State Council under the direct control of the office of the premier, with emergency powers to deal with the unemployment fallout from the sudden collapse of the export sector that will soon threaten social stability.

The proposed CRCE should have full authority to formulate and implement a national economic recovery program with appropriate and adequate credit-creation power to finance an urgently needed recovery to provide full employment at high wages. Equally importantly, the CRCE must have full government authority to commit unconditionally to the timely repayment and retirement of this temporary debt created by sovereign credit.

Economic recovery through shifting from export dependency to domestic development requires coordinated actions by both the state and the private sectors. The government's role is to guide private sector incentives toward a national full-employment plan through tax incentives and regulatory regimes. Government fiscal spending should be limited to funding infrastructure, both physical and social, that cannot be efficiently financed by private or even collective capital. Consumer demand should be enhanced as a priority in a national income policy to quickly raise wage levels in parallel with a well-funded social security program, to eliminate the need for over-saving out of concern for emergency health expenses and provision for old-age security.

The CRCE would be responsible for launching immediately a massive work-creation program to achieve in-place national full employment with minimal relocation of population. This program can be financed outside of the government's fiscal budget by a pre-financing regime through the use of work-creation certificates, a form of special-purpose money specially designed to facilitate job-creation in the socialist market economy.

Under the pre-financing regime, the State Council will authorize the CRCE, with full support of the Finance Ministry, to issue work-creation certificates that mature every three months and are renewable up to five years. These certificates would be distributed by the CRCE to local public works agencies and participating financial institutions that lend to private enterprises engaged in the job-creation in the program to shift export enterprises toward the domestic market.

Firms that need cash to participate in job-creation projects ordered by local public works agencies and private enterprises approved by the CRCE can draw on work-creation certificates against the accounts of local public works agency or industrial customers of the participating financial institutions.

The financial institutions accepting the work-creation certificates can treat such certificates as commercial paper that can be discounted at commercial banks, which in turn can discount them at the People's Bank of China, the central bank. The process would provide the needed liquidity to facilitate the payment of wages outside the range of the government's fiscal budget.

The CRCE would undertake to redeem one fifth of all work-creation certificates issued through the central bank as the economy and tax revenue recover and expand. As collateral for the certificates, the Finance Ministry would deposit in the central bank a corresponding amount of tax vouchers good for paying taxes. As the Ministry of Finance redeems work-creation certificates, the tax vouchers would be returned to the Finance Ministry.

It is important that the government must stand firmly behind the commitment to redeem the work-creation certificates in order to protect their financial integrity. New series of five-year work-creation certificates can be issued as needs.

Credit creation outside of the government's fiscal budget for the purpose of job creation poses no threat of inflation. It is a more responsible alternative to tax increases to support a balanced budget. The fiscal cost of redeeming work-creation certificates will be offset by the corresponding decrease in welfare subsidy costs due to unemployment. As fiscal surplus accumulates from full employment at rising wages, the surplus can be used to reduce taxes and increase fiscal spending on upgrading physical and social infrastructure. This approach is the shortest route to full employment at rising wages while shifting the economy from export dependency toward domestic development.

Since the export market is and will always be small compared to the full potential of the Chinese domestic market, profitability of productive enterprises can be sustained through an economy of scale to reduce unit cost. Such unit cost reduction can be achieved by rising productivity made possible by expanding sales volume in the domestic market. Exports then will only have to pay for the cost of needed imports to maintain a balanced trade.

As industrial enterprises tap the growing domestic market, aggregate sales revenue will support wage rises as the portion of profit previously reserved by middleman foreign distributors and importers can now be use to support higher wages which in turn will strengthen domestic consumer demand. Some upward movement of prices should be allowed to adjust the price gap between agricultural produce and manufactured products to raise farm income.

A government price policy should be instituted to prevent destructive cut-throat price competition and below-cost dumping in both profitable and unprofitable markets. Excess profit should be taxed to prevent over-investment in profitable sectors. Of special importance is to narrow the gap of wholesale and retail prices for farm produce to increase the net income of farmers while holding down consumer prices.

To keep the 10 million migrant workers currently being laid off by the export sector employed at an annual wage level of the equivalent of US$10,000 (68,490 yuan), a work-creation certificate program of $100 billion is needed. To keep the 10 million college graduates from unemployment, another work-creation certificate program will be needed worth $100 billion. This is well within the financial capability of the Chinese economy as it amounts to only 20% of the over US$2 trillion in foreign exchange currently held by China. It is important to understand that this amount is not fiscal spending, but sovereign credit that will be repaid as the economy develops.

China does not have to accept the fate of financial crises made in the US, if Chinese policymakers have the courage to think independently. To eliminate poverty, China must first eliminate a poverty of creative ideas among its policymaking circles overwhelmed by wholesale acceptance of voodoo neo-liberal market fundamentalism propaganda.

Henry C K Liu is chairman of a New York-based private investment group. His website is at http://www.henryckliu.com

Prius: It’s Not Just a Car, It’s an Emergency Generator

Prius: It’s Not Just a Car, It’s an Emergency Generator
By Kate Galbraith
Which would you rather have in a winter emergency? (Photos: Toyota (top); Daniel Steger/OpenPhoto.net)

The Prius has a new use, and it does not involve driving. The Harvard Press — which serves the Massachusetts town of Harvard as opposed to the university — reported that the car’s battery helped keep the lights on for some locals during the recent ice storms.

The newspaper reports that John Sweeney, a resident who lost power, “ran his refrigerator, freezer, TV, woodstove fan and several lights through his Prius, for three days, on roughly five gallons of gas.”

Said Mr. Sweeney, in an e-mail message to The Press: “When it looked like we were going to be without power for awhile, I dug out an inverter (which takes 12v DC and creates 120v AC from it) and wired it into our Prius.”

According to the newspaper, “the device allowed the engine to run every half hour, automatically charging the car battery and indirectly supplying the required power.” (The Times reported on a similar venture last year.)

In fact, this development, which comes at a tough time for Toyota, which makes the Prius, may not be as strange as it sounds. Mr. Sweeney’s tinkering is along the lines of the “smart grid” technology that many utility executives and other experts say lies in our future. The idea is that the battery of an electric car — a plug-in, in most smart-grid scenarios — can feed power to the electricity grid when the grid needs it.

Even President-elect Barack Obama has endorsed this idea, as seen toward the end of this YouTube clip in which he said: “We’re going to have to have a smart grid if we want to use plug-in hybrids — then we want to be able to have ordinary consumers sell back the electricity that’s generated.”

Mr. Sweeney, out of necessity, got there first.

The Way of the Warrior

These are the Precepts of Musashi, that personify the Way of Bushido. It is precious and commendable knowledge: Accept everything just the way it is; Do not seek pleasure for its own sake; Do not, under any circumstances, depend on a partial feeling; Think lightly of yourself and deeply of the world; Be detached from desire your whole life long; Do not regret what you have done; Never be jealous; Never let yourself be saddened by a separation; Resentment and complaint are appropriate neither for oneself or others; Do not let yourself be guided by the feeling of lust or love; In all things have no preferences; Be indifferent to where you live; Do not pursue the taste of good food; Do not hold on to possessions you no longer need; Do not act following customary beliefs; Do not collect weapons or practice with weapons beyond what is useful; Do not fear death; Do not seek to possess either goods or fiefs for your old age; Respect Buddha and the gods without counting on their help; You may abandon your own body but you must preserve your honour; Never stray from the Way.


Two fund managers walk into a bar

And sit next to a table of surgeons and overheard their conversation

The surgeons are discussing who makes the best patients to
operate on.

The first surgeon says, "I like to see accountants on my
operating table, because when you open them up, everything
inside is numbered,"

The second responds, "Yeah, but you should try electricians.
Everything inside them is color-coded,"

The third surgeon says, "No, I really think librarians are the
best; everything inside them is in alphabetical order."

The fourth surgeon chimes in: "You know, I like construction
workers. They always understand when you have a few parts left
over at the end and when the job takes longer than you said
it would."

But the fifth surgeon, Dr. Morris Fishbein, shuts them all
up when he observes: "The Fund Managers" are the easiest to operate
on. There's no guts, no heart, no balls and no spine. Plus
the head and butt are interchangeable."

23 December 2008

Bottom in for Oil ~ Captain Hook

Most financial commentators, even the well-known and respected ones, just don't get it. They don't understand what's happening in macro-conditions because they fail to accept the understanding that sentiment, as measured by speculator betting practices in the various options markets populating the landscape, is the single most important driver of prices in our mature fiat currency based financial markets. What this means is no matter how much money and bailouts our bureaucracy sponsors, until the collect mind changes, as measured by rising open interest put / call ratios on the major US indexes, meaning the speculators are becoming more pessimistic, in general, prices will keep falling. Of course this can change, and corrections (higher at present) will occur, however if you are waiting for unbridled monetary and fiscal largesse to result in hyperinflation with declining numbers of bearish equity market speculators to squeeze, you are likely in for a disappointment.

Does this mean that deflationists like Mike Shedlock are right, and that we are in a formal state of deflation at the moment? No, as a matter of fact, it does not. As outlined in our opening statement it simply means that en mass equity speculators don't see a percentage in getting short the various markets at current levels because they see prices moving higher, no matter how much they fall. It in no way means money supply is contracting, which is the formal definition of deflation, and the only one that would matter if equity bulls were to turn bearish. (i.e. falling prices do not constitute deflation.) Easily the best example of this at the moment is found in crude oil (and commodities), considering the stock market appears to have turned higher in earnest now. Are we in a state of deflation because crude oil prices are falling?

Here, it's important to note stocks have turned higher due to selling exhaustion and seasonal influences, not because speculators have turned predominantly bearish, as measured in still low open interest put / call ratios (see attached above) on the major US indexes. What this means is if speculative betting practices in these markets do not fundamentally change as the bounce in stocks matures into next year, any strength witnessed between now and then will be exactly that, a bounce, destined to fail once negative cyclical / seasonal influences are in a position to exert themselves once again. You will remember from our previous studies on this subject matter, history suggests this likely bounce could last into April of next year at which time the secular bear market will reassert itself.

In getting back to our crude example now, where prices have not turned higher due to selling exhaustion just yet, making a discussion on this subject matter here more pertinent, again, as mentioned above, it's important to realize why oil prices remain subdued so that correspondingly, we will know what to look for on the way up as well. This is very important moving forward because even though commodity prices have crashed with the larger equity complex in 2008, this does not mean the prices of these commodities can't run all the way back up to the highs (and beyond) under the right conditions. Is such an outcome possible if the stock market is to turn lower on a secular basis again next year, implying the credit cycle is still contracting long-term?

You bet it's possible under the right conditions, which is a lesson in history. First and foremost, and the reason I spent so much time explaining it above, one must realize we are not in a state of deflation, which I admit is challenging with all the confusing talk out there. Naturally then, if this true, we must necessarily be in a state of inflation to some degree, with currency hyperinflation the most excited condition therein. We are of course not there right now, however it's possible we are could be at some point if the Fed decides to devalue the dollar ($). And here's the kicker in terms of why commodity prices could run right back to the highs, with crude oil the exemplar due to it's importance to us, pictured below. If a $ devaluation were to occur concurrent to speculators becoming convinced such an outcome is not possible, which is not a stretch considering the drubbing commodity prices have just undergone, then the fuel for a short squeeze would be in place (put / call ratios on the energies would rise), and the 'wall of worry' would do the rest. (See Figure 1)


Bank of China furious at Deutsche debt move

Investors in bank debt are threatening to boycott lenders that follow Deutsche Bank in breaking an unwritten rule and failing to exercise a call option on subordinated debt.

In a co-ordinated action, angry bond investors are writing to bank treasurers and investor relations heads telling them that any failure to exercise a call option will be considered a breach of trust that could cause all the issuer's debt to be shunned.

Deutsche stunned the debt market last week by choosing not to redeem €1bn (£932m) of subordinated lower tier 2 bonds because to do so was cheaper than refinancing. But though the move saved Germany's biggest bank up to €150m, it caused fury among buyers of the debt who worked on the assumption that bonds would always be redeemed at their first call date.

The letter, seen by The Independent, said a bank's decision not to call debt would be taken to mean "the institution is in such difficulty that it is an impossibility to call the instrument or the institution feels that it is in such a strong position that it can afford to alienate itself from the support of a wide portion of the fixed-income institutional investor community".

Bank of China, a major buyer of bank debt, has gone further in its communication with issuers. The giant Chinese lender's Hong Kong operation has told banks that "any non-call by a given institution will result in that institution's debt (not just lower tier 2 but senior and tier 1 as well) being ineligible for future investment consideration".

Bank of China added that Deutsche Bank had also been removed from consideration as a counterparty for any credit derivative transaction in future.

The bank is writing to all of Britain's banks, along with lenders elsewhere in Europe.

The bond buyers are stressing to issuers that they cannot afford to become debt-market pariahs when their capital buffers against losses are under threat from a global downturn and they may need to raise more capital. Without being able to issue debt, which counts as lower-grade tier 1 and tier 2 capital, institutions would be forced to seek costly new equity, angering their shareholders.

"Non-call may indeed save you some money today but it will seriously impact your capital structure options in the future," Bank of China warned. "Being only left with severely dilutive equity to raise capital is not in anyone's interest."

Deutsche Bank will be hoping that other banks follow its lead, giving it safety in numbers. The wave of threats from investors is intended to stop others opting to join Deutsche, and is the most hard-line response yet to the breaking of the debt-market code.

Refusing to call the debt means that the hybrid notes effectively become longer term and more risky than the investor originally assumed. Deutsche's decision caused the entire subordinated debt class to be repriced last week.

22 December 2008

Greg Peel of Fnarena on Gold

Could Comex Default On Its Gold Exposure?
FN Arena News - December 17 2008

By Greg Peel

The greatest amount of gold traded in the world at any time is traded on the Commodities Exchange (Comex) in New York in the form of gold futures contracts. Despite the importance and popularity of gold as a tradable commodity, a proxy currency and a hedge against inflation, the actual trade of physical gold on any given day represents a tiny amount when compared to that of "real" commodities such as oil and base metals. Thus beyond the vaults of the world's central banks, the largest positions in gold remain "on paper".

Indeed the volume of gold traded in paper form in any given session can exceed the amount of gold in existence. Add in the fact that gold miners often sell their gold production forward without any particular guarantee of what that production will prove to be, in order to fund mining operations (the simplest form of "gold hedging"), and that holders of gold "lend" metal just as pension funds "lend" shares for short selling, and it all adds up to a booming global trade in gold that represents a significant multiple of the actual gold any market participant can get his hands on.

Under normal market circumstances, a "paper" promise of gold delivery is sufficient within a market that is happy to exchange cash rather than physical metal to settle the difference between buy and sell prices. This is what Comex futures are really all about. But these are not "normal" market circumstances. We are currently experiencing the greatest financial meltdown since the Great Depression.

The financial meltdown has led to banks refusing to lend to each other for fear of never seeing the money again. It has led to the Fed cutting its funds rate to zero and the Treasury printing presses running 24/7 to "re-flate" the US economy at the expense of the value of the US dollar. In such circumstances, concerned investors turn to gold as the last reliable store of wealth. Gold pays no return, but it exists as a physical commodity one can see and touch. It is a safe haven from the paper IOUs of the financial markets, and a hedge against those financial markets defaulting.

If that's the case, then why would anyone feel confident in the current circumstances to hold their wealth in gold in the form of another paper IOU?

The reality is that very few are. As FNArena has been reporting for several months now, the world is currently undergoing a gold rush. A rush to obtain actual, physical metal, that is. So sudden and extensive has been this rush is that the usual suppliers of gold cannot keep up with demand.

The situation as it now stands is as such (as reported by Adrian Douglas of the Market Force Analysis newsletter): The Perth Mint has suspended all orders for bullion products; the US Mint is rationing supply of gold coins; retail gold dealers are sold out and only small quantities of precious metals are available; and "coin-melt" gold bars are showing up on the wholesale market, which Douglas describes as representing "the bottom of the barrel". Beyond the retail market, the traditional major gold shorts on the Tokyo Commodities Exchange have covered their positions and gone quiet, and European central banks are selling only a fraction of their Washington Agreement quotas.

What this means is that there is a much greater demand for physical gold than paper gold prices imply. Real gold is trading at a large premium to Comex gold prices, meaning investors are eschewing the lower prices offered for gold IOUs and paying up for the see-and-touch metal. It shows that gold investors, like everybody else in the current financial markets, have become wary of counterparty risk. If I buy gold in futures form from a counterparty that doesn't actually have any gold, how can I be sure he even has the cash to pay me if the gold price rises?

Douglas notes that this "disconnect" between the physical and paper gold markets began in July when one or possibly two US banks sold short 10% of the annual global gold supply and 20% of the silver supply. One might be drawn to ask: Why on earth would you do that? One reason might be simply to raise much needed cash, and to do so with an expectation of a rally in the US dollar. In July gold peaked at around US$970/oz and has since been to US$700/oz on the US dollar rally.

Another reason might be one which represents the main accusation of the Gold Antitrust Action Committee (GATA), which is that the US government has long sought to supress the price of gold (and thus support the US dollar) by indirectly selling huge amounts into the futures market using the "bullion banks" as agents. The Treasury lends gold from its vault to the banks and then settles out any losses in cash. What this means - and there is a wealth of evidence and testimony to support the accusation - is that the amount of gold being held by the US government and actually "owned" by the US government is much less than the International Monetary Fund accounts suggest. It means there is a lot less gold being held by central banks than the market has been led to believe.

The nature of futures contracts is that they expire at a given date. At that point the seller must deliver physical gold to the buyer. However as noted above, the trade in gold futures far, far outstrips that of the actual amount of gold in existence for the very reason that hardly anyone ever takes delivery of physical gold. Some 97% or so of futures contracts are either closed out for cash settlement before expiry or "rolled over" into the next month's contract. Thus paper gold trading can be perpetuated as a cash-only market.

But what if, this time, the buyers of paper gold demanded delivery? Judging by the current extraordinary demand for physical gold, it would be no surprise if many did. You could either sell the physical delivery into the physical market at a much higher price than the futures market is currently dictating or simply hold the gold because that's the asset you wanted in the first place.

The result would be a short gold squeeze, and the price of gold would go through the roof. Comex is the guarantor of settlement and would have to default. However dealers are dismissive of such a possibility, Douglas notes, given there are currently 8.5m ounces of gold being held in the Comex inventory and the average inventory amount over the past five years - without any default occurring - has been only 6m ounces.

But Douglas points out that Comex also holds gold for customers wishing to simply store it on the exchange. The reality is that gold available to dealers on delivery demand is only 2.846m ounces, not 8.5m. In December to date delivery notices have been sent for 1.26m ounces of gold, or 44% of that which is actually available for delivery. And as Douglas notes, "this assumes that the gold registered to dealers is totally unencumbered, which is not necessarily a good assumption in the fuzzy accounting world of Wall Street".

December gold futures expire on the 29th.

The number of open positions in gold futures has actually reduced by 50% since leveraged investors have been forced to sell to raise cash. This has been another reason why (apart from a stronger US dollar) gold hit US$700/oz even as the US government was pledging trillions in bail-out funds. But one presumes those still holding positions open must not be leveraged and may well decide to hold for physical delivery. Indeed, a possible gold squeeze is currently the talk of the town, making it even more likely gold investors will hold out for the real stuff. Paper will not be any good to them if the counterparties cannot pay.

So how much might gold really be worth? asks Douglas, pointing out that the 1980 price peak in today's dollars was US$2500/oz.

It's all well and good to predict a surge in the price of gold, but if you can't get your hands on physical gold and you can't trust the paper market, what can you do about it?

"When precious metals are not available in bullion form," says Douglas, "the next best thing for investors will be [to buy shares in] the companies that dig them out of the ground".

New tipping-point in March 2009: 'When the world becomes aware that this crisis is worse than the 1930s crisis'

LEAP/E2020 anticipates than the unfolding global systemic crisis will experience in March 2009 a new tipping point of similar magnitude to the September 2008 one. According to our team, at that period of the year, the general public will become aware of three major destabilizing processes at work in the global economy, i.e.:

• the length of the crisis
• the explosion of unemployment worldwide
• the risk of sudden collapse of all capital-based pension systems

A whole range of psychological factors will contribute to this tipping point: general awareness in Europe, America and Asia that the crisis has escaped from the control of every public authority, whether national or international; that it is severely affecting all regions of the world, even if some are more affected than others (see GEAB N°28); that it is directly hitting hundreds of millions of people in the “developed” world; and that it is only worsening as its consequences reveal throughout the real economy. National governments and international institutions only have three months left to prepare themselves to the next blow, one that could go along severe risks of social chaos. The countries which are not properly equipped to cope with a surge in unemployment and major risks on pensions will be seriously destabilized by this new public awareness.

In this 30th issue of the GEAB, the LEAP/E2020 team describes these three destabilizing processes (two of them are described in this public announcement) and gives recommendations to cope with the surge in risks. In addition, this issue also provides the opportunity to make an objective assessment of the reliability of LEAP/E2020's anticipations and specifies a number of methodological aspects of the analytical process used. In 2008, LEAP/E2020's success rate reaches 80%, and even 86% when it comes to strictly socio-econimic anticipations. In a year of major upheavals, our teal ise altogether quite proud of this result.

The crisis will last at least until the end of 2010

Evolution of the US money base and indications of related major US crisis periods (1910 – 2008) - Source: Federal Reserve Bank of Saint Louis / Mish’s Global Economic Analysis
As we already explained in GEAB N°28, the crisis will affect in different ways the different regions of the world. However, and LEAP/E2020 wishes to be very clear on that aspect, contrary to the dominant stance today (coming from those experts who denied the fact that a crisis was coming up three years ago, who denied that it was global two years ago, and who denied the fact that it was systemic six months ago), we anticipate that the minimum duration of the decanting phase of the crisis is 3 years (1). It shall be finished neither in spring 2009, nor in summer 2009, nor at the beginning of 2010. It is only towards the end of 2010 that the situation will start stabilizing again and improving a little in some regions of the world, i.e. Asia and the Eurozone, as well as in countries producing energy, mineral and food commodities (2). Elsewhere, it will continue; in particular in the US and UK, and in all the countries depending on their economy, were the duration could approximate a decade. In fact these countries should not expect any real return to growth before 2018.

Moreover no one should imagine that the improvement at the end of 2010 will correspond to a return of high growth. The recovery will take long. For instance, stock markets will take a decade to return to levels comparable to 2007, if they ever return to that. Remember that it took twenty years before Wall Street resumed its 1920 levels. Well, according to LEAP/E2020, the present crisis is deeper and longer than in the 1930s. The general public will gradually become aware of the long-term aspect of this crisis in the coming three months and this situation will immediately trigger two tendencies carrying with them socio-economic instability: fear of the future and enhanced criticism towards leaders.

The risk of sudden collapse of all capital-based pension systems
Finally, among the various consequences of the crisis for dozens of millions of people in the US, Canada, UK, Japan, Netherlands and Denmark in particular (3), there is the fact that, from the end of the year 2008 onward, news about major losses on the part of the organizations in charge of managing the financial assets supposed to finance pensions will multiply. The OECD anticipates that pension funds will lose 4,000 billion USD in 2008 only (4). In the Netherlands (5) as well as in the United Kingdom (6), monitoring organizations recently blew the whistle asking for an emergency contribution reappraisal and a State intervention. In the United States, growing numbers of announcements call for contribution increases and benefit reductions (7), knowing that it is only in a few weeks time that most of these funds will start calculating their total losses (8). Most of them are still deluding themselves about their capacity to build up again their capital after the markets turn around. In March 2009, when pension fund managers, pensioners and governments will become simultaneously aware of the fact that the crisis is there to last, that it coincides with the « baby-boomer » generation’s age of retirement and that the markets will not resume their 2007 levels until many long years (9), chaos will flood this sector and governments will reach the moment when they will be compelled to nationalize all these funds. And Argentina, who took this decision a few months ago already, will appear a pioneer.

All the trends described above are already at work. Their combination and the public becoming aware of the consequences they could entail, will result in the great collective psychological trauma of Spring 2009, when everyone will realize that we are all trapped into a crisis worse than in the 1930s and that there is no possible way out in the short-term. The impact on the world’s collective mentalities of people and policy-makers will be decisive and modify significantly the course of the crisis in its next stage. Based on greater disillusion and fewer beliefs, social and political instability will settle down worldwide.

Finally, this GEAB N°30 presents a series of 13 questions & answers designed to enhance savers'/investors'/decision-makers' capacity to understand and anticipate the next stages of the global systemic crisis:
1. Is this crisis different from the previous crises which affected capitalism?
2. Is this crisis different from the 1930s crisis?
3. Is the crisis as serious in Europe or Asia as in the USA?
4. Are the current actions undertaken by public authorities worldwide sufficient to curb the crisis?
5. What are the major risks still weighting on the world financial system? And are all savings equal in front of the crisis?
6. Is the Eurozone a true protection shield against the worst aspects of the crisis and what should the Eurozone do to improve its protection status?
7. Is the Bretton Woods system (in its 1970s last version) currently collapsing? Should the Euro take the place of the Dollar?
8. What can be expected from the next G20 meeting in London?
9. Do you think that deflation is right now the biggest threat to economies worldwide?
10. Do you think that the Obama administration will be able to prevent the USA from sinking into what you called the ‘Very Great US Depression’?
11. In terms of currencies, beyond your anticipation of the Dollar resuming its collapse in the very next months, do you think that the UK Pound and the Swiss Franc are still currencies with an international status?
12. Do you think that the CDS market is about to implode in the coming months? And what could be the consequences of such a phenomenon?
13. Is there a ‘US Treasury Bonds Bubble” about to burst?


(1) It can be useful to read on this crisis a very interesting contribution by Robert Guttmann published in the 2nd half of 2008 on the website Revues.org, supported by the Maison des Sciences de l'Homme Paris-Nord.

(2) As a matter of fact, commodities have already started contributing to boost the market of international sea transport. Source: Financial Times, 12/14/2008

(3) It is in those countries that capital-based pension systems were most developed (see GEAB N°23) but is also the case of Ireland. Source: Independent, 11/30/2008

(4) Source: OECD, 11/12/2008

(5) Source: NU.NL, 12/15/2008

(6) Source: BBC, 12/09/2008

(7) Sources: WallStreetJournal, 11/17/2008; Phillyburbs, 11/25/2008; RockyMountainNews, 11/19/2008

(8) Source: CNBC, 12/05/2008

(9) Not to mention the effect of an explosion of the US T-Bond bubble on pension funds. See Q&A, GEAB N°30.


Russ Winter nails the gooses at GaveKal

The latest in misconceived bullish theories to come down the pike was espoused in this week’s Barrons, by GaveKal. A centerpiece of their theory is the “net worth” of American “households”, derived from the Federal Reserve Z1 report. In 3Q, 2006 the Fed reported that US households held $67.1 trillion in assets against liabilities of $13.0 trillion, for a net worth of $54.1 trillion. GaveKal goes on to assure us that based on this supposed solid balance sheet, the US will have little difficulty with borrowing from these foreigners, and servicing trillion dollar plus annual twin deficits.

GaveKal also recommends a concept called “platform companies”, which is code for outfits that best outsource American jobs to “safe” production locales like China and Thailand, who then pollute the global environment and fail to account for the negative externalities (true costs) of their production. Connecting the dots, the reader is left with the peculiar slash and burn notion that the US can just eat its young by outsourcing jobs to foreign polluters, while failing to invest in capex and just merrily borrowing from foreigners against its Bubble induced “wealth.”

Scientists now say 30% or more of the mercury settling into U.S. ground soil and waterways comes from other countries – in particular, China.

What GaveKal doesn’t get into at all is who holds all this fictitious American wealth? Readers of this blog already know the answer to that. It’s in the hands of plutocrats and the elite. Therefore for purposes of my counterpoint to the “bountiful wealth” theory, I am just going to acknowledge from the get go that about 10% of American households are doing fabulously indeed, at least for the moment. The next 10% may be doing well, sort of, but increasingly that’s subject to debate. It’s the bottom 80% that I worry about and will focus on here. Further I advance the following question: can the US economy stay solvent and strong by depending on transitory Bubble “wealth” and the income of the top 10%, especially as “platform companies” jettison the jobs of the other 90%?
more here

Finance leaders remain pessimistic

The whole credit creation system and the shadow banking system that sustained it has collapsed. There is absolutely no prospect for better news next year... and the news reflects it.

Monday December 22, 2008, 8:52 am

International finance leaders delivered a grim forecast for 2009 on Sunday, warning next year could be even worse than this one despite a slew of government stimulus plans.

International Monetary Fund chief Dominique Strauss-Kahn predicted a "very dark" 2009 which could be worse than expected if states failed to take sufficient action to fight the crisis, facing economies big and small.

"Our forecasts are already very dark, but they will be even darker if not enough fiscal stimulus is implemented," he told BBC radio in London, predicting recession for advanced economies and decreasing growth for emerging ones.

"I can see that some measures have been announced, but I'm afraid it won't go far enough," he said.

The IMF has called for global fiscal stimulus of about two per cent of GDP, equivalent to roughly $US1.2 trillion ($A1.76 trillion).

The governor of the Bank of Spain was even more pessimistic, warning the world faced a "total" financial meltdown unseen since the Great Depression of the 1930s.

"The lack of confidence is total," Miguel Angel Fernandez Ordonez said in an interview with Spain's El Pais newspaper.

He noted that the inter-bank lending market was not functioning, spawning "vicious" cycles with economic activity among consumers, businesses, investors and banks essentially frozen.

"There is almost total paralysis from which no-one is escaping," he added.

Still, there was fresh movement to stop the meltdown, with a decision by US president-elect Barack Obama to boost by 500,000 jobs a three-million-job creation goal to kickstart the world's biggest and ailing economy.

Vice president-elect Joseph Biden also confirmed the Obama team was working on a second economic stimulus package which could top $US1 trillion ($A1.46 trillion) according to some media reports.

"What we're doing is putting together what we think will be the economic package that will do two things. One, stem the haemorrhaging of the loss of jobs, and begin to create new jobs," Biden told ABC television's This Week programme.

"At the same time, we provide continuing liquidity for the financial markets."

Biden put no firm figure to the package that would follow the $US700 billion ($A1.03 trillion) Wall Street rescue deal inked by President George W Bush in October - and which has failed to reverse the plummeting US economy.

"There's going to be real significant investment, whether it's $US600 billion ($A879 billion) or more, or $US700 billion ($A1.03 trillion). The clear notion is, it's a number no-one thought about a year ago," he said.

Japan, too, took another step to jumpstart its moribund economy, drafting a record Y88.55 trillion ($A1.45 trillion) budget for fiscal year 2009 - up 6.6 per cent from the initial budget for this fiscal year.

The increase reflects an emergency economic package that Prime Minister Taro Aso announced earlier this month in a fresh bid to stave off a prolonged recession in the world's second-largest economy.

In Europe, the Irish government said it was injecting 5.5 billion euros ($A11.47 billion) to recapitalise three major banks: Anglo Irish Bank, Bank of Ireland and Allied Irish Banks.

The government's move follows revelations last week that Anglo Irish's chairman and former chief executive, Sean FitzPatrick, failed to disclose an 87 million euros ($A181.46 million) loan from the bank. He resigned on Thursday.

The Luxembourg subsidiary of embattled Icelandic bank Kaupthing got a rescue offer from a group of Arab investors, the Luxembourg government has confirmed.

"Besides the signature of the Belgian state, this agreement needs the acceptance of the creditor banks," the government said in a statement Saturday about the offer.

Kaupthing Luxembourg was placed in suspension of payments in October following the near collapse of Iceland's once-booming financial sector under the weight of the worldwide credit crunch. Deposits in both Luxembourg and Belgium have been frozen ever since.

At least one German banker, however, thinks the doom-and-gloom forecasts are overblown.

"Some compare the situation to that of 1929, others talk about the worst crisis in near memory," said Wolfgang Sprissler, head of the German bank HypoVereinsbank (HVB) in an interview with the Sueddeutsche Zeitung to appear Monday.

"It bothers me that the institutes in their studies try to outdo each other with more pessimistic scenarios," he said, adding that what is needed is signs of "optimism".



By Linda Monk

The Crash of 2008, which is now wiping out trillions of dollars of
our people's wealth, is, like the Crash of 1929, likely to mark the
end of one era and the onset of another.

The new era will see a more sober and much diminished America .

The "Omnipower" and "Indispensable Nation" we heard about in all
the hubris and braggadocio following our Cold War victory is

Seizing on the crisis, the left says we are witnessing the failure
of market economics, a failure of conservatism.

That is absolute nonsense!

What we are witnessing is the collapse of Gordon Gecko ("Greed Is
Good!") capitalism. We are witnessing what happens to a prodigal
nation that ignores history, and forgets and abandons the
philosophy and principles that made it great.

A true conservative (Rep or Dem) cherishes prudence and believes in
fiscal responsibility, balanced budgets and a self-reliant
republic. He/she believes in saving for retirement and a rainy day,
in deferred gratification, in not buying on credit what you cannot
afford, in living within your means.

Is that really what got Wall Street and us into this mess -- that
we followed too religiously the gospel of Robert Taft and Russell

"Government must save us!" cries the left, as ever. Yet, who got us
into this mess if not the government -- the Fed with its easy
money, Bush with his profligate spending, and Congress and the SEC
by liberating Wall Street and failing to step in and stop the
drunken orgy? For years, we Americans have spent more than we
earned. We save nothing. Credit card debt, consumer debt, auto
debt, mortgage debt, corporate debt -- all are at record levels.
And with pensions and savings being wiped out, much of that debt
will never be repaid. Our standard of living is inevitably going
to fall.

Foreign countries and foreigners themselves will not forever buy
our bonds or lend us more money if they rightly fear that they will
be paid back, if at all, in cheaper dollars. We are going to have
to learn to live again within our means.


Up through World War II, we followed the Hamiltonian idea that
America must remain economically independent of the world in order
to remain politically independent. But this generation decided that
was yesterday's bromide and we must march bravely forward into a
Global Economy, where we all depend on one another.

American companies morphed into "Global Companies" and moved plants
and factories to Mexico , Asia, China , and India , and we began
buying more cheaply from abroad what we used to make at home:
shoes, clothes, bikes, cars, radios, TVs, planes, computers, etc.
As the trade deficits began inexorably to rise to 6 percent of GDP,
(gross domestic product), we began vast borrowing from abroad to
continue buying from abroad.

At home, propelled by tax cuts, war in Iraq and an explosion in
social spending, surpluses vanished and deficits reappeared and
began to rise.
The dollar began to sag and sink, and gold began to soar. Yet,
still, the promises of the politicians come.

Barack Obama will give us national health insurance and tax cuts
for all but that 2 percent of the nation that already carries 50
percent of the federal income tax load. John McCain was going to
cut taxes, expand the military, move NATO into Georgia and Ukraine,
confront Russia and force Iran to stop enriching uranium or "bomb,
bomb, bomb," with Joe Lieberman as wartime consigliore.

Who are we kidding?

What we are witnessing today is how empires end. The last
Superpower is unable to defend its borders, protect its currency,
win its wars, or balance its budget. Medicare and Social Security
are headed for the cliff with unfunded liabilities in the tens of
trillions of dollars.

What we are witnessing today is nothing less than a Katrina-like
failure of government, of our political class, and of democracy
itself, casting a cloud over the viability and longevity of the
system that has made this country the most envied in the entire

Notice who is managing the crisis. Not our elected leaders. Nancy
Pelosi says she had nothing to do with it. Congress is paralyzed
and heading home. President Bush is nowhere to be seen. Hank
Paulson of Goldman Sachs and Ben Bernanke of the Fed chose to bail
out Bear Sterns but let Lehman go under. They decided to
nationalize Fannie and Freddie at a cost to taxpayers of hundreds
of billions, putting the U. S. government behind $5 trillion in
mortgages. They decided to buy AIG with $85 billion rather than see
the insurance giant sink beneath the waves.

Unelected financial elite is now entrusted with the assignment of
getting us out of a disaster into which an unelected financial
elite plunged the nation. We, the People, are unfortunately just

What the Greatest Generation, (the WWII generation), handed down to
us -- the richest, most powerful, most self-sufficient republic in
history, with the highest standard of living any nation had ever
achieved -- the baby boomers, oblivious and self-indulgent to the
end, have frittered it all away.

How do WE THE PEOPLE put the villains who are responsible under
oath and sit them down at public hearings to determine whose necks
should meet the guillotine? Hypocritically, those who had oversight
responsibility such as Senator Chris Dodd [Chairman of the Senate
Banking Committee] and Barney Frank [Chairmen, House Financial
Services Committee] who helped get us into this mess are on every
TV channel voicing their righteous indignation and pompously
sitting on their elevated platform glaring down at those they are
chastising and grilling, trying to pass the blame to others. They
are disgusting.

WE THE PEOPLE should be on the elevated platform in judgment and
execution of the likes of Chris Dodd, Barney Frank and the rest of
the band of thieves and conspirators who are responsible for the
financial collapse of the USA .

To name just a few of the culprits:

Henry Paulson Jr, Secretary of the Treasury
Alan Greenspan & Ben Bernanke -- Chairman Federal Reserve
Christopher Cox, SEC Chairman.

But not to worry -- YOUR PUBLIC SERVANTS who fear being voted out
of office will take their self-awarded Golden Parachute
Congressional Retirement, give WE THE PEOPLE the finger one last
time and head for their safe havens as the World Citizens they are.

However, before they waddle off into the sunset, they will go on
record one last time denouncing corporate greed, lavish salaries,
and bonuses for their key felons at Fannie May, Freddie Mac, Lehman
Brothers & AIG.
Meanwhile, WE THE PEOPLE fiddle while Rome burns and are too lazy,
too ignorant, and too indifferent to vote the scum out of office.

India, China can't compensate for lost US spending

AP Business Writer

They were supposed to keep the good times going: Prakash Shetty, caught recently thumbing through "Singh is King" DVDs at a mall in India, and Zhu Xiaolin, who enjoys cute Adidas sportswear and Body Shop cosmetics in China.

But how far can Shetty and Zhu, both 26, and other Asian consumers go to save the groaning global economy? Just how many Buicks, Barbie dolls, Wrangler jeans, waffle fries, kiwi lip balms and plastic thingamajigs are they willing or able to buy?

Not enough, it turns out.

Much has been made of the power and promise of Indian and Chinese consumers. Each country has a rapidly growing economy, rising incomes and more than a billion people — many of whom have yet to burn through a single credit card or experience the joys a washing machine can bring.

China will be the world's third-largest consumer market by 2025 and India will be No. 5, ahead of Germany, McKinsey & Co has predicted. As U.S. sales swooned this year, emerging markets were the sole bright spot on many balance sheets.

But such heraldry obscures a painful bit of math: U.S. consumers still buy more than five times as much as Indian and Chinese shoppers combined. And despite rambunctious growth, revenues from India and China have barely softened the blow of declining sales in the developed world — even for companies that have chased after rupees and yuan most aggressively.

From Adidas to General Motors Corp., companies that have plunged into India and China are finding that these markets are, by and large, still too small to make up for the slowdown in the U.S. and other rich countries. Moreover, India and China are not immune to the global crunch. Declining exports, particularly in China, and tight credit have cooled spending growth, despite the favorable long-term trends.

Chinese consumer spending is projected to reach $1.3 trillion this year, according to Euromonitor International, a market research firm. That would approach France's $1.4 trillion but pales in comparison to America's $9.9 trillion. Indian consumers will spend $660 billion, or about half of China's.

In October, Americans spent $102.8 billion less than they did in September. That one month drop is nearly two and a half times more than Indian consumer spending is expected to grow this entire year.

"In dollar terms they can't offset," said Arvind K. Singhal, chairman of Technopak Advisors Pvt. Ltd., a retail consulting firm based in New Delhi.

It's not that Indian and Chinese shoppers aren't eager. Take Shetty. Trim and gregarious, he just got promoted to assistant manager at the Leela Kempinski, a luxury hotel in Mumbai where rooms were going recently for $280 a night. After he got the news, he handed his mom a fistful of cash, bought a television set, two cell phones (one for his dad), a stack of DVDs, a $700 gold necklace for his fiance and a couple of new outfits for himself.

"You feel great when you buy new clothes," he said, fending off a small crowd at the DVD rack of Big Bazaar, a popular discount shop.

His appetite for shopping helps explain why growing markets such as India and China "may make up for some of the stagnation you have in more mature markets," said Jan Runau, a spokesman for Adidas Group AG. By the end of this year, China is expected to surpass Japan as the second largest market for Adidas worldwide, after the U.S.

But, Runau cautioned that once other countries entered the recession, India and China would be affected: "They can't make up for everything."

Dell Inc., the world's second largest PC maker, saw revenues grow 48 percent in India and 18 percent in China in the third quarter, but global sales still fell 3 percent to $15.2 billion.

The two markets contribute about 5 percent of the company's revenues, while the U.S. accounts for half.

"It's starting to have a meaningful impact on Dell's results, but it's not enough to offset what's going on in the United States," said Steve Felice, president of Dell Asia Pacific and Japan.

GM's North American revenues fell $4.1 billion in the third quarter to $22.5 billion; the drop alone was almost as much as its total Asian sales of $4.8 billion. Add in the $1.3 billion slide in European sales, which totaled $7.5 billion, and it is clear that Asia can't save the company, teetering as it awaits federal assistance.

"We need to turn around our North American business. There is no choice," GM President Fritz Henderson said in September, at the opening of a new factory in Pune, a growing Indian manufacturing hub outside Mumbai.

For Vodafone Group Plc, the world's biggest mobile phone service provider by sales, India and China are "absolutely vital," said company spokesman Simon Gordon. "That's where the growth is."

But over 70 percent of Vodafone's sales still come from Europe. In the first half of this fiscal year, India accounted for just 6 percent of the group's 19.9 billion pound in revenues and less than 1 percent of adjusted operating profits. Vodafone does not operate in China, though it owns a 3.21 percent stake in China Mobile.

During that period, the company posted a 35 percent fall in net profit, despite adding 10.5 million new customers in India and growing India revenues by 41 percent.

Now, the economies of India and China are themselves slowing. Their stock markets have plunged, businesses and households are finding it harder to access credit, and fears of job losses have shaken consumer confidence.

Lower export growth in China is spilling over into consumer spending, as workers fret about pay and job security.

Zhu, who works at an export company in Shanghai, has been trolling the Internet for shopping deals, because she is not getting a bonus this year.

"Companies that can't manage to sell their export items are selling online at very low prices," she said. "It doesn't mean I don't like shopping in stores, but I can't afford that right now."

Despite government efforts to spur domestic spending, many Chinese remain frugal, concerned about saving for health care and retirement.

"Consumer demand is not going to be the answer to disappearing exports," said Robert Lawrence Kuhn, chairman of Kuhn Global Capital LLC and a longtime adviser to the Chinese government. "China's domestic consumption is necessary but not sufficient to stabilize China, much less the world."

India relies less on exports. They account for about 20 percent of the Indian economy, versus 35 percent in China.

Still, the global financial crisis has hit the Indian stock market and sparked a nasty credit crunch. Many consumers are unable to get loan approvals or afford the high interest rates. That, plus lingering inflation, has hurt consumer confidence and crimped growth.

Gibson Vedamani, chief executive of the Retailers Association of India, says overall retail sales in India will likely grow 8 to 10 percent this year, down from about 30 percent last year.

Sales of basic items such as food and clothes, which account for most Indian spending, have held up far better than credit-driven purchases, such as homes and cars.

"We are not seeing a slowdown on basic products," said Kishore Biyani, chief executive of the Future Group, India's largest retailer, whose holdings include discounter Big Bazaar. He's still hiring and plans to expand total floor space from 11 million to 16 million square feet by June next year.

Most Indians won't set foot in Biyani's sweeping 16 million square feet for years, however. The masses still struggle, parceling out their rupees at the hot, hectic mom-and-pop shops that dominate the landscape.

"We won't buy from the mall," said Suraj Buralkar, 21, who dropped out of school and started driving a taxi to help support his parents and three siblings. "The mall is too expensive for us."

Still, Buralkar, like many in this hopeful country, is on his way. Earning just 3,200 rupees ($67) a month and working overtime to satisfy his gnawing desire for stuff, he saved enough to pluck a pair of jeans, at 1,300-rupees ($27), or one-third of his monthly income, from one of India's teeming roadside bazaars.


AP Business Writer Elaine Kurtenbach contributed to this report from Shanghai and AP Researcher Monika Mathur from New York.

In this Nov. 18, 2008, file photo, women enjoy their ice cream at a mall in Bangalore, India. From Adidas to General Motors, companies that have plunged into India and China are finding that these markets are, by and large, still too small to make up for the slowdown in the U.S. and other rich countries. Moreover, India and China are not immune to the global crunch. Declining exports, particularly in China, and tight credit have cooled spending growth, despite the favorable long-term trends. (AP Photo/Aijaz Rahi, file)

A woman shops at a mall in Mumbai, India. From Adidas to General Motors, companies that have plunged into India and China are finding that these markets are, by and large, still too small to make up for the slowdown in the U.S. and other rich countries. Moreover, India and China are not immune to the global crunch. Declining exports, particularly in China, and tight credit have cooled spending growth, despite the favorable long-term trends. (AP Photo/Rajanish Kakade)

In this Nov. 19, 2008, file photo, a man looks at a washing machine at a shopping mall in Mumbai, India. From Adidas to General Motors, companies that have plunged into India and China are finding that these markets are, by and large, still too small to make up for the slowdown in the U.S. and other rich countries. Moreover, India and China are not immune to the global crunch. Declining exports, particularly in China, and tight credit have cooled spending growth, despite the favorable long-term trends. (AP Photo/Rajanish Kakade)

An attendant waits for customers in a department store in Beijing, Friday, Nov. 14, 2008. Much has been made of the power and promise of Indian and Chinese consumers, but companies are finding that these markets are, by and large, still too small to make up for the slowdown in the U.S. and other rich countries. Declining exports, particularly in China, and tight credit have cooled spending growth, despite the favorable long-term trends. (AP Photo/Greg Baker)

Chinese women walk through a quiet Beijing shopping mall Monday, Nov. 17, 2008. Much has been made of the power and promise of Indian and Chinese consumers, but companies are finding that these markets are, by and large, still too small to make up for the slowdown in the U.S. and other rich countries. Declining exports, particularly in China, and tight credit have cooled spending growth, despite the favorable long-term trends. (AP Photo/Greg Baker)

ADVANCE FOR DEC. 22; graphic shows total consumer expenditure for selected countries; 2 c x 3 5/8 in; 96.3 mm x 92.075 mm

Bush to blame for mortgage mess...NYT

White House Philosophy Stoked Mortgage Bonfire

“We can put light where there's darkness, and hope where there's despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.” — President Bush, Oct. 15, 2002

WASHINGTON — The global financial system was teetering on the edge of collapse when President Bush and his economics team huddled in the Roosevelt Room of the White House for a briefing that, in the words of one participant, “scared the hell out of everybody.”

It was Sept. 18. Lehman Brothers had just gone belly-up, overwhelmed by toxic mortgages. Bank of America had swallowed Merrill Lynch in a hastily arranged sale. Two days earlier, Mr. Bush had agreed to pump $85 billion into the failing insurance giant American International Group.

The president listened as Ben S. Bernanke, chairman of the Federal Reserve, laid out the latest terrifying news: The credit markets, gripped by panic, had frozen overnight, and banks were refusing to lend money.

Then his Treasury secretary, Henry M. Paulson Jr., told him that to stave off disaster, he would have to sign off on the biggest government bailout in history.

Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in.

“How,” he wondered aloud, “did we get here?”

Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, “faced with the prospect of a global meltdown” with roots in the housing sector he so ardently championed.

There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.

But the story of how we got here is partly one of Mr. Bush's own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.

“There is no question we did not recognize the severity of the problems,” said Al Hubbard, Mr. Bush's former chief economics adviser, who left the White House in December 2007. “Had we, we would have attacked them.”

Looking back, Keith B. Hennessey, Mr. Bush's current chief economics adviser, says he and his colleagues did the best they could “with the information we had at the time.” But Mr. Hennessey did say he regretted that the administration did not pay more heed to the dangers of easy lending practices. And both Mr. Paulson and his predecessor, John W. Snow, say the housing push went too far.

“The Bush administration took a lot of pride that homeownership had reached historic highs,” Mr. Snow said in an interview. “But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost.”

For much of the Bush presidency, the White House was preoccupied by terrorism and war; on the economic front, its pressing concerns were cutting taxes and privatizing Social Security. The housing market was a bright spot: ever-rising home values kept the economy humming, as owners drew down on their equity to buy consumer goods and pack their children off to college.

Lawrence B. Lindsay, Mr. Bush's first chief economics adviser, said there was little impetus to raise alarms about the proliferation of easy credit that was helping Mr. Bush meet housing goals.

“No one wanted to stop that bubble,” Mr. Lindsay said. “It would have conflicted with the president's own policies.”

Today, millions of Americans are facing foreclosure, homeownership rates are virtually no higher than when Mr. Bush took office, Fannie and Freddie are in a government conservatorship, and the bailout cost to taxpayers could run in the trillions.

As the economy has shed jobs — 533,000 last month alone — and his party has been punished by irate voters, the weakened president has granted his Treasury secretary extraordinary leeway in managing the crisis.

Never once, Mr. Paulson said in a recent interview, has Mr. Bush overruled him. “I've got a boss,” he explained, who “understands that when you're dealing with something as unprecedented and fast-moving as this we need to have a different operating style.”

Mr. Paulson and other senior advisers to Mr. Bush say the administration has responded well to the turmoil, demonstrating flexibility under difficult circumstances. “There is not any playbook,” Mr. Paulson said.

The president declined to be interviewed for this article. But in recent weeks Mr. Bush has shared his views of how the nation came to the brink of economic disaster. He cites corporate greed and market excesses fueled by a flood of foreign cash — “Wall Street got drunk,” he has said — and the policies of past administrations. He blames Congress for failing to reform Fannie and Freddie. Last week, Fox News asked Mr. Bush if he was worried about being the Herbert Hoover of the 21st century.

“No,” Mr. Bush replied. “I will be known as somebody who saw a problem and put the chips on the table to prevent the economy from collapsing.”

But in private moments, aides say, the president is looking inward. During a recent ride aboard Marine One, the presidential helicopter, Mr. Bush sounded a reflective note.

“We absolutely wanted to increase homeownership,” Tony Fratto, his deputy press secretary, recalled him saying. “But we never wanted lenders to make bad decisions.”

A Policy Gone Awry

Darrin West could not believe it. The president of the United States was standing in his living room.

It was June 17, 2002, a day Mr. West recalls as “the highlight of my life.” Mr. Bush, in Atlanta to unveil a plan to increase the number of minority homeowners by 5.5 million, was touring Park Place South, a development of starter homes in a neighborhood once marked by blight and crime.

Mr. West had patrolled there as a police officer, and now he was the proud owner of a $130,000 town house, bought with an adjustable-rate mortgage and a $20,000 government loan as his down payment — just the sort of creative public-private financing Mr. Bush was promoting.

“Part of economic security,” Mr. Bush declared that day, “is owning your own home.”

A lot has changed since then. Mr. West, beset by personal problems, left Atlanta. Unable to sell his home for what he owed, he said, he gave it back to the bank last year. Like other communities across America, Park Place South has been hit with a foreclosure crisis affecting at least 10 percent of its 232 homes, according to Masharn Wilson, a developer who led Mr. Bush's tour.

“I just don't think what he envisioned was actually carried out,” she said.

Park Place South is, in microcosm, the story of a well-intentioned policy gone awry. Advocating homeownership is hardly novel; the Clinton administration did it, too. For Mr. Bush, it was part of his vision of an “ownership society,” in which Americans would rely less on the government for health care, retirement and shelter. It was also good politics, a way to court black and Hispanic voters.

But for much of Mr. Bush's tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put homeownership increasingly out of reach for first-time buyers like Mr. West.

So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.

Concerned that down payments were a barrier, Mr. Bush persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs.

And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away, as Mr. West did. Many economic experts, including some in the White House, now share that view.

The president also leaned on mortgage brokers and lenders to devise their own innovations. “Corporate America,” he said, “has a responsibility to work to make America a compassionate place.”

And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.

“This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,” said L. William Seidman, who advised Republican presidents and led the savings and loan bailout in the 1990s. “To make the market work well, you have to have a lot of rules.”

But Mr. Bush populated the financial system's alphabet soup of oversight agencies with people who, like him, wanted fewer rules, not more.

Like Minds on Laissez-Faire

The president's first chairman of the Securities and Exchange Commission promised a “kinder, gentler” agency. The second was pushed out amid industry complaints that he was too aggressive. Under its current leader, the agency failed to police the catastrophic decisions that toppled the investment bank Bear Stearns and contributed to the current crisis, according to a recent inspector general's report.

As for Mr. Bush's banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina's attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.”

The president did push rules aimed at forcing lenders to more clearly explain loan terms. But the White House shelved them in 2004, after industry-friendly members of Congress threatened to block confirmation of his new housing secretary.

In the 2004 election cycle, mortgage bankers and brokers poured nearly $847,000 into Mr. Bush's re-election campaign, more than triple their contributions in 2000, according to the nonpartisan Center for Responsive Politics. The administration did not finalize the new rules until last month.

Among the Republican Party's top 10 donors in 2004 was Roland Arnall. He founded Ameriquest, then the nation's largest lender in the subprime market, which focuses on less creditworthy borrowers. In July 2005, the company agreed to set aside $325 million to settle allegations in 30 states that it had preyed on borrowers with hidden fees and ballooning payments. It was an early signal that deceptive lending practices, which would later set off a wave of foreclosures, were widespread.

Andrew H. Card Jr., Mr. Bush's former chief of staff, said White House aides discussed Ameriquest's troubles, though not what they might portend for the economy. Mr. Bush had just nominated Mr. Arnall as his ambassador to the Netherlands, and the White House was primarily concerned with making sure he would be confirmed.

“Maybe I was asleep at the switch,” Mr. Card said in an interview.

Brian Montgomery, the Federal Housing Administration commissioner, understood the significance. His agency insures home loans, traditionally for the same low-income minority borrowers Mr. Bush wanted to help. When he arrived in June 2005, he was shocked to find those customers had been lured away by the “fool's gold” of subprime loans. The Ameriquest settlement, he said, reinforced his concern that the industry was exploiting borrowers.

In December 2005, Mr. Montgomery drafted a memo and brought it to the White House. “I don't think this is what the president had in mind here,” he recalled telling Ryan Streeter, then the president's chief housing policy analyst.

It was an opportunity to address the risky subprime lending practices head on. But that was never seriously discussed. More senior aides, like Karl Rove, Mr. Bush's chief political strategist, were wary of overly regulating an industry that, Mr. Rove said in an interview, provided “a valuable service to people who could not otherwise get credit.” While he had some concerns about the industry's practices, he said, “it did provide an opportunity for people, a lot of whom are still in their houses today.”

The White House pursued a narrower plan offered by Mr. Montgomery that would have allowed the F.H.A. to loosen standards so it could lure back subprime borrowers by insuring similar, but safer, loans. It passed the House but died in the Senate, where Republican senators feared that the agency would merely be mimicking the private sector's risky practices — a view Mr. Rove said he shared.

Looking back at the episode, Mr. Montgomery broke down in tears. While he acknowledged that the bill did not get to the root of the problem, he said he would “go to my grave believing” that at least some homeowners might have been spared foreclosure.

Today, administration officials say it is fair to ask whether Mr. Bush's ownership push backfired. Mr. Paulson said the administration, like others before it, “over-incented housing.” Mr. Hennessey put it this way: “I would not say too much emphasis on expanding homeownership. I would say not enough early focus on easy lending practices.”

‘We Told You So'

Armando Falcon Jr. was preparing to take on a couple of giants.

A soft-spoken Texan, Mr. Falcon ran the Office of Federal Housing Enterprise Oversight, a tiny government agency that oversaw Fannie Mae and Freddie Mac, two pillars of the American housing industry. In February 2003, he was finishing a blockbuster report that warned the pillars could crumble.

Created by Congress, Fannie and Freddie — called G.S.E.'s, for government-sponsored entities — bought trillions of dollars' worth of mortgages to hold or sell to investors as guaranteed securities. The companies were also Washington powerhouses, stuffing lawmakers' campaign coffers and hiring bare-knuckled lobbyists.

Mr. Falcon's report outlined a worst-case situation in which Fannie and Freddie could default on debt, setting off “contagious illiquidity in the market” — in other words, a financial meltdown. He also raised red flags about the companies' soaring use of derivatives, the complex financial instruments that economic experts now blame for spreading the housing collapse.

Today, the White House cites that report — and its subsequent effort to better regulate Fannie and Freddie — as evidence that it foresaw the crisis and tried to avert it. Bush officials recently wrote up a talking points memo headlined “G.S.E.'s — We Told You So.”

But the back story is more complicated. To begin with, on the day Mr. Falcon issued his report, the White House tried to fire him.

At the time, Fannie and Freddie were allies in the president's quest to drive up homeownership rates; Franklin D. Raines, then Fannie's chief executive, has fond memories of visiting Mr. Bush in the Oval Office and flying aboard Air Force One to a housing event. “They loved us,” he said.

So when Mr. Falcon refused to deep-six his report, Mr. Raines took his complaints to top Treasury officials and the White House. “I'm going to do what I need to do to defend my company and my position,” Mr. Raines told Mr. Falcon.

Days later, as Mr. Falcon was in New York preparing to deliver a speech about his findings, his cellphone rang. It was the White House personnel office, he said, telling him he was about to be unemployed.

His warnings were buried in the next day's news coverage, trumped by the White House announcement that Mr. Bush would replace Mr. Falcon, a Democrat appointed by Bill Clinton, with Mark C. Brickell, a leader in the derivatives industry that Mr. Falcon's report had flagged.

It was not until 2003, when Freddie became embroiled in an accounting scandal, that the White House took on the companies in earnest. Mr. Bush decided to quit the long-standing practice of rewarding supporters with high-paying appointments to the companies' boards — “political plums,” in Mr. Rove's words. He also withdrew Mr. Brickell's nomination and threw his support behind Mr. Falcon, beginning an intense effort to give his little regulatory agency more power.

Mr. Falcon lacked explicit authority to limit the size of the companies' mammoth investment portfolios, or tell them how much capital they needed to guard against losses. White House officials wanted that to change. They also wanted the power to put the companies into receivership, hoping that would end what Mr. Card, the former chief of staff, called “the myth of government backing,” which gave the companies a competitive edge because investors assumed the government would not let them fail.

By the spring of 2005 a deal with Congress seemed within reach, Mr. Snow, the former Treasury secretary, said in an interview.

Michael G. Oxley, an Ohio Republican and then-chairman of the House Financial Services Committee, had produced what Mr. Snow viewed as “a pretty darned good bill,” a watered-down version of what the president sought. But at the urging of Mr. Card and the White House economics team, the president decided to hold out for a tougher bill in the Senate.

Mr. Card said he feared that Mr. Snow was “more interested in the deal than the result.” When the bill passed the House, the president issued a statement opposing it, effectively killing any chance of compromise. Mr. Oxley was furious.

“The problem with those guys at the White House, they had all the answers and they didn't think they had to listen to anyone, including the Treasury secretary,” Mr. Oxley said in a recent interview. “They were driving the ideological train. He was in the caboose, and they were in the engine room.”

Mr. Card and Mr. Hennessey said they had no regrets. They are convinced, Mr. Hennessey said, that the Oxley bill would have produced “the worst of all possible outcomes,” the illusion of reform without the substance.

Still, some former White House and Treasury officials continue to debate whether Mr. Bush's all-or-nothing approach scuttled a measure that, while imperfect, might have given an aggressive regulator enough power to keep the companies from failing.

Mr. Snow, for one, calls Mr. Oxley “a hero,” adding, “He saw the need to move. It didn't get done. And it's too bad, because I think if it had, I think we could well have avoided a big contributor to the current crisis.”

Unheeded Warnings

Jason Thomas had a nagging feeling.

The New Century Financial Corporation, a huge subprime lender whose mortgages were bundled into securities sold around the world, was headed for bankruptcy in March 2007. Mr. Thomas, an economic analyst for President Bush, was responsible for determining whether it was a hint of things to come.

At 29, Mr. Thomas had followed a fast-track career path that took him from a Buffalo meatpacking plant, where he worked as a statistician, to the White House. He was seen as a whiz kid, “a brilliant guy,” his former boss, Mr. Hubbard, says.

As Mr. Thomas began digging into New Century's failure that spring, he became fixated on a particular statistic, the rent-to-own ratio.

Typically, as home prices increase, rental costs rise proportionally. But Mr. Thomas sent charts to top White House and Treasury officials showing that the monthly cost of owning far outpaced the cost to rent. To Mr. Thomas, it was a sign that housing prices were wildly inflated and bound to plunge, a condition that could set off a foreclosure crisis as conventional and subprime borrowers with little equity found they owed more than their houses were worth.

It was not the Bush team's first warning. The previous year, Mr. Lindsay, the former chief economics adviser, returned to the White House to tell his old colleagues that housing prices were headed for a crash. But housing values are hard to evaluate, and Mr. Lindsay had a reputation as a market pessimist, said Mr. Hubbard, adding, “I thought, ‘He's always a bear.' ”

In retrospect, Mr. Hubbard said, Mr. Lindsay was “absolutely right,” and Mr. Thomas's charts “should have been a signal.”

Instead, the prevailing view at the White House was that the problems in the housing market were limited to subprime borrowers unable to make their payments as their adjustable mortgages reset to higher rates. That belief was shared by Mr. Bush's new Treasury secretary, Mr. Paulson.

Mr. Paulson, a former chairman of the Wall Street firm Goldman Sachs, had been given unusual power; he had accepted the job only after the president guaranteed him that Treasury, not the White House, would have the dominant role in shaping economic policy. That shift merely continued an imbalance of power that stifled robust policy debate, several former Bush aides say.

Throughout the spring of 2007, Mr. Paulson declared that “the housing market is at or near the bottom,” with the problem “largely contained.” That position underscored nearly every action the Bush administration took in the ensuing months as it offered one limited response after another.

By that August, the problems had spread beyond New Century. Credit was tightening, amid questions about how heavily banks were invested in securities linked to mortgages. Still, Mr. Bush predicted that the turmoil would resolve itself with a “soft landing.”

The plan Mr. Bush announced on Aug. 31 reflected that belief. Called “F.H.A. Secure,” it aimed to help about 80,000 homeowners refinance their loans. Mr. Montgomery, the housing commissioner, said that he knew the modest program was not enough — the White House later expanded the agency's rescue role — and that he would be “flying the plane and fixing it at the same time.”

That fall, Representative Rahm Emanuel, a leading Democrat, former investment banker and now the incoming chief of staff to President-elect Barack Obama, warned the White House it was not doing enough. He said he told Joshua B. Bolten, Mr. Bush's chief of staff, and Mr. Paulson in a series of phone calls that the credit crisis would get “deep and serious” and that the only answer was big, internationally coordinated government intervention.

“You got to strangle this thing and suffocate it,” he recalled saying.

Instead, Mr. Bush developed Hope Now, a voluntary public-private partnership to help struggling homeowners refinance loans. And he worked with Congress to pass a stimulus package that sent taxpayers $150 billion in tax rebates.

In a speech to the Economic Club of New York in March 2008, he cautioned against Washington's temptation “to say that anything short of a massive government intervention in the housing market amounts to inaction,” adding that government action could make it harder for the markets to recover.

Dominoes Start to Fall

Within days, Bear Sterns collapsed, prompting the Federal Reserve to engineer a hasty sale. Some economic experts, including Timothy F. Geithner, the president of the New York Federal Reserve Bank (and Mr. Obama's choice for Treasury secretary) feared that Fannie Mae and Freddie Mac could be the next to fall.

Mr. Bush was still leaning on Congress to revamp the tiny agency that oversaw the two companies, and had acceded to Mr. Paulson's request for the negotiating room that he had denied Mr. Snow. Still, there was no deal.

Over the previous two years, the White House had effectively set the agency adrift. Mr. Falcon left in 2005 and was replaced by a temporary director, who was in turn replaced by James B. Lockhart, a friend of Mr. Bush from their days at Andover, and a former deputy commissioner of the Social Security Administration who had once run a software company.

On Mr. Lockhart's watch, both Freddie and Fannie had plunged into the riskiest part of the market, gobbling up more than $400 billion in subprime and other alternative mortgages. With the companies on precarious footing, Mr. Geithner had been advocating that the administration seize them or take other steps to reassure the market that the government would back their debt, according to two people with direct knowledge of his views.

In an Oval Office meeting on March 17, however, Mr. Paulson barely mentioned the idea, according to several people present. He wanted to use the troubled companies to unlock the frozen credit market by allowing Fannie and Freddie to buy more mortgage-backed securities from overburdened banks. To that end, Mr. Lockhart's office planned to lift restraints on the companies' huge portfolios — a decision derided by former White House and Treasury officials who had worked so hard to limit them.

But Mr. Paulson told Mr. Bush the companies would shore themselves up later by raising more capital.

“Can they?” Mr. Bush asked.

“We're hoping so,” the Treasury secretary replied.

That turned out to be incorrect, and did not surprise Mr. Thomas, the Bush economic adviser. Throughout that spring and summer, he warned the White House and Treasury that, in the stark words of one e-mail message, “Freddie Mac is in trouble.” And Mr. Lockhart, he charged, was allowing the company to cover up its insolvency with dubious accounting maneuvers.

But Mr. Lockhart continued to offer reassurances. In a July appearance on CNBC, he declared that the companies were well managed and “worsts were not coming to worst.” An infuriated Mr. Thomas sent a fresh round of e-mail messages accusing Mr. Lockhart of “pimping for the stock prices of the undercapitalized firms he regulates.”

Mr. Lockhart defended himself, insisting in an interview that he was aware of the companies' vulnerabilities, but did not want to rattle markets.

“A regulator,” he said, “does not air dirty laundry in public.”

Soon afterward, the companies' stocks lost half their value in a single day, prompting Congress to quickly give Mr. Paulson the power to spend $200 billion to prop them up and to finally pass Mr. Bush's long-sought reform bill, but it was too late. In September, the government seized control of Freddie Mac and Fannie Mae.

In an interview, Mr. Paulson said the administration had no justification to take over the companies any sooner. But Mr. Falcon disagreed: “They absolutely could have if they had thought there was a real danger.”

By Sept. 18, when Mr. Bush and his team had their fateful meeting in the Roosevelt Room after the failure of Lehman Brothers and the emergency rescue of A.I.G., Mr. Paulson was warning of an economic calamity greater than the Great Depression. Suddenly, historic government intervention seemed the only option. When Mr. Paulson spelled out what would become a $700 billion plan to rescue the nation's banking system, the president did not hesitate.

“Is that enough?” Mr. Bush asked.

“It's a lot,” the Treasury secretary recalled replying. “It will make a difference.” And in any event, he told Mr. Bush, “I don't think we can get more.”