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Walter Watts
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Re:We're Fucked - The Coming Economic Crisis
« Reply #60 on: 2008-10-03 19:48:21 »
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Here's an interesting and largely contributory piece of the financial meltdown genesis puzzle.
--Walter
---------------------------------------------------------------------------------------------------------------
The New York Times
October 3, 2008

The Reckoning

Agency’s ’04 Rule Let Banks Pile Up New Debt

By STEPHEN LABATON

“We have a good deal of comfort about the capital cushions at these firms at the moment.” — Christopher Cox, chairman of the Securities and Exchange Commission, March 11, 2008.

As rumors swirled that Bear Stearns faced imminent collapse in early March, Christopher Cox was told by his staff that Bear Stearns had $17 billion in cash and other assets — more than enough to weather the storm.

Drained of most of its cash three days later, Bear Stearns was forced into a hastily arranged marriage with JPMorgan Chase — backed by a $29 billion taxpayer dowry.

Within six months, other lions of Wall Street would also either disappear or transform themselves to survive the financial maelstrom — Merrill Lynch sold itself to Bank of America, Lehman Brothers filed for bankruptcy protection, and Goldman Sachs and Morgan Stanley converted to commercial banks.

How could Mr. Cox have been so wrong?

Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.

One commissioner, Harvey J. Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.

“We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.”

Mr. Goldschmid, an authority on securities law from Columbia, was a behind-the-scenes adviser in 2002 to Senator Paul S. Sarbanes when he rewrote the nation’s corporate laws after a wave of accounting scandals. “Do we feel secure if there are these drops in capital we really will have investor protection?” Mr. Goldschmid asked. A senior staff member said the commission would hire the best minds, including people with strong quantitative skills to parse the banks’ balance sheets.

Annette L. Nazareth, the head of market regulation, reassured the commission that under the new rules, the companies for the first time could be restricted by the commission from excessively risky activity. She was later appointed a commissioner and served until January 2008.

“I’m very happy to support it,” said Commissioner Roel C. Campos, a former federal prosecutor and owner of a small radio broadcasting company from Houston, who then deadpanned: “And I keep my fingers crossed for the future.”

The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it.

After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.

With that, the five big independent investment firms were unleashed.

In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.

Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.

The 2004 decision for the first time gave the S.E.C. a window on the banks’ increasingly risky investments in mortgage-related securities.

But the agency never took true advantage of that part of the bargain. The supervisory program under Mr. Cox, who arrived at the agency a year later, was a low priority.

The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Mr. Cox more than a year and a half ago.

The few problems the examiners preliminarily uncovered about the riskiness of the firms’ investments and their increased reliance on debt — clear signs of trouble — were all but ignored.

The commission’s division of trading and markets “became aware of numerous potential red flags prior to Bear Stearns’s collapse, regarding its concentration of mortgage securities, high leverage, shortcomings of risk management in mortgage-backed securities and lack of compliance with the spirit of certain” capital standards, said an inspector general’s report issued last Friday. But the division “did not take actions to limit these risk factors.”

Drive to Deregulate

The commission’s decision effectively to outsource its oversight to the firms themselves fit squarely in the broader Washington culture of the last eight years under President Bush.

A similar closeness to industry and laissez-faire philosophy has driven a push for deregulation throughout the government, from the Consumer Product Safety Commission and the Environmental Protection Agency to worker safety and transportation agencies.

“It’s a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs,” said Roderick M. Hills, a Republican who was chairman of the S.E.C. under President Gerald R. Ford. “The problem with such voluntary programs is that, as we’ve seen throughout history, they often don’t work.”

As was the case with other agencies, the commission’s decision was motivated by industry complaints of excessive regulation at a time of growing competition from overseas. The 2004 decision was aimed at easing regulatory burdens that the European Union was about to impose on the foreign operations of United States investment banks.

The Europeans said they would agree not to regulate the foreign subsidiaries of the investment banks on one condition — that the commission regulate the parent companies, along with the brokerage units that the S.E.C. already oversaw.

A 1999 law, however, had left a gap that did not give the commission explicit oversight of the parent companies. To get around that problem, and in exchange for the relaxed capital rules, the banks volunteered to let the commission examine the books of their parent companies and subsidiaries.

The 2004 decision also reflected a faith that Wall Street’s financial interests coincided with Washington’s regulatory interests.

“We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing,” said Professor James D. Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).

“Letting the firms police themselves made sense to me because I didn’t think the S.E.C. had the staff and wherewithal to impose its own standards and I foolishly thought the market would impose its own self-discipline. We’ve all learned a terrible lesson,” he added.

In letters to the commissioners, senior executives at the five investment banks complained about what they called unnecessary regulation and oversight by both American and European authorities. A lone voice of dissent in the 2004 proceeding came from a software consultant from Valparaiso, Ind., who said the computer models run by the firms — which the regulators would be relying on — could not anticipate moments of severe market turbulence.

“With the stroke of a pen, capital requirements are removed!” the consultant, Leonard D. Bole, wrote to the commission on Jan. 22, 2004. “Has the trading environment changed sufficiently since 1997, when the current requirements were enacted, that the commission is confident that current requirements in examples such as these can be disregarded?”

He said that similar computer standards had failed to protect Long-Term Capital Management, the hedge fund that collapsed in 1998, and could not protect companies from the market plunge of October 1987.

Mr. Bole, who earned a master’s degree in business administration at the University of Chicago, helps write computer programs that financial institutions use to meet capital requirements.

He said in a recent interview that he was never called by anyone from the commission.

“I’m a little guy in the land of giants,” he said. “I thought that the reduction in capital was rather dramatic.”

Policing Wall Street

A once-proud agency with a rich history at the intersection of Washington and Wall Street, the Securities and Exchange Commission was created during the Great Depression as part of the broader effort to restore confidence to battered investors. It was led in its formative years by heavyweight New Dealers, including James Landis and William O. Douglas. When President Franklin D. Roosevelt was asked in 1934 why he appointed Joseph P. Kennedy, a spectacularly successful stock speculator, as the agency’s first chairman, Roosevelt replied: “Set a thief to catch a thief.”

The commission’s most public role in policing Wall Street is its enforcement efforts. But critics say that in recent years it has failed to deter market problems. “It seems to me the enforcement effort in recent years has fallen short of what one Supreme Court justice once called the fear of the shotgun behind the door,” said Arthur Levitt Jr., who was S.E.C. chairman in the Clinton administration. “With this commission, the shotgun too rarely came out from behind the door.”

Christopher Cox had been a close ally of business groups in his 17 years as a House member from one of the most conservative districts in Southern California. Mr. Cox had led the effort to rewrite securities laws to make investor lawsuits harder to file. He also fought against accounting rules that would give less favorable treatment to executive stock options.

Under Mr. Cox, the commission responded to complaints by some businesses by making it more difficult for the enforcement staff to investigate and bring cases against companies. The commission has repeatedly reversed or reduced proposed settlements that companies had tentatively agreed upon. While the number of enforcement cases has risen, the number of cases involving significant players or large amounts of money has declined.

Mr. Cox dismantled a risk management office created by Mr. Donaldson that was assigned to watch for future problems. While other financial regulatory agencies criticized a blueprint by Mr. Paulson, the Treasury secretary, that proposed to reduce their stature — and that of the S.E.C. — Mr. Cox did not challenge the plan, leaving it to three former Democratic and Republican commission chairmen to complain that the blueprint would neuter the agency.

In the process, Mr. Cox has surrounded himself with conservative lawyers, economists and accountants who, before the market turmoil of recent months, had embraced a far more limited vision for the commission than many of his predecessors.

‘Stakes in the Ground’

Last Friday, the commission formally ended the 2004 program, acknowledging that it had failed to anticipate the problems at Bear Stearns and the four other major investment banks.

“The last six months have made it abundantly clear that voluntary regulation does not work,” Mr. Cox said.

The decision to shutter the program came after Mr. Cox was blamed by Senator John McCain, the Republican presidential candidate, for the crisis. Mr. McCain has demanded Mr. Cox’s resignation.

Mr. Cox has said that the 2004 program was flawed from its inception. But former officials as well as the inspector general’s report have suggested that a major reason for its failure was Mr. Cox’s use of it.

“In retrospect, the tragedy is that the 2004 rule making gave us the ability to get information that would have been critical to sensible monitoring, and yet the S.E.C. didn’t oversee well enough,” Mr. Goldschmid said in an interview. He and Mr. Donaldson left the commission in 2005.

Mr. Cox declined requests for an interview. In response to written questions, including whether he or the commission had made any mistakes over the last three years that contributed to the current crisis, he said, “There will be no shortage of retrospective analyses about what happened and what should have happened.” He said that by last March he had concluded that the monitoring program’s “metrics were inadequate.”

He said that because the commission did not have the authority to curtail the heavy borrowing at Bear Stearns and the other firms, he and the commission were powerless to stop it.

“Implementing a purely voluntary program was very difficult because the commission’s regulations shouldn’t be suggestions,” he said. “The fact these companies could withdraw from voluntary supervision at their discretion diminished the mandate of the program and weakened its effectiveness. Experience has shown that the S.E.C. could not bootstrap itself into authority it didn’t have.”

But critics say that the commission could have done more, and that the agency’s effectiveness comes from the tone set at the top by the chairman, or what Mr. Levitt, the longest-serving S.E.C. chairman in history, calls “stakes in the ground.”

“If you go back to the chairmen in recent years, you will see that each spoke about a variety of issues that were important to them,” Mr. Levitt said. “This commission placed very few stakes in the ground.”


Copyright 2008 The New York Times Company

 
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Re:We're Fucked - The Coming Economic Crisis
« Reply #61 on: 2008-10-03 23:26:23 »
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[ Please note this is not the "coming financial crises" of this thread (which is the oncoming 60-180 Trillion Dollar Derivative crises). This is the undignified spectacle of a group of so called adults being  terrified into fouling themselves by the worst administration of any country anywhere, threatening TEOTWAWKI in its own selfish interests, giving way and handing out the largest beanfeast in recorded history to those least deserving in recorded history. The bill is to be paid by the taxpayer. Who has just effectively agreed via his so called representatives to pay triple what his house isn't worth to the same people who ripped him off in the first place.

Let us not forget that industry now makes up a scarce 12% of US income. Much of the rest from the financial services industry. Which has just been nuked by the Idiot in Chief. The Guardian puts it quite nicely. ]


A crisis made in the Oval Office

A financial panic provoked by President Bush was designed to stampede Congress into passing the bail-out for Wall Street


Source: The Guardian
Authors: Dean Baker
Dated: 2008-10-03

This is the first time in the history of the United States that the president has sought to provoke a financial panic to get legislation passed through Congress. While this has proven to be a successful political strategy - after the House of Representatives finally passed the bank bail-out plan [ Hermit : More accurately refered to a beanfeast for buddies ] today - it marks yet another low point in American politics.

It was incredibly irresponsible for George Bush to tell the American people on national television that the country could be facing another Great Depression. By contrast, when we actually were in the Great Depression, President Roosevelt said: "We have nothing to fear, but fear itself."


It was even more irresponsible for President Bush to seize on the decline in the stock market five days later as evidence that his bailout was needed for the economy. President Bush must surely understand, as all economists know, that the daily swings in the stock market are driven by mass psychology and have almost nothing to do with the underlying strength in the economy.

The scare tactics of President Bush, Henry Paulson, the Treasury secretary, and Ben Bernanke, chairman of the Federal Reserve, created sufficient panic, so that by the time of the first vote on the emergency package in Congress, much of the public believed that the defeat of the bail-out may actually have had serious consequences for the economy. Millions of people have changed their behaviour because of this fear, with many pulling money out of bank and money market accounts, and adjusting their financial plans in other ways.

This effort to promote panic is especially striking since the country's dire economic situation is almost entirely the result of the Bush administration's policy failures. First and foremost, the decision of Paulson and Bernanke (and previously Alan Greenspan) to ignore the housing bubble, allowed for the growth of an $8tn bubble, which is now collapsing.

It is the collapse of this bubble - which has already destroyed more than $4tn in housing wealth, and is likely to destroy another $4tn over the next year - that is at the root of the economy's problems. While competent economists were warning of the bubble and the dire consequences of its collapse, the top officials in the Bush administration were celebrating the rise in homeownership rates.

The Bush administration made the crisis even worse by deregulating Wall Street. This led to the huge over-leveraging of financial institutions, which has vastly complicated the country's economic policies. It is especially disturbing that Secretary Paulson personally profited from these policies, earning millions of dollars in compensation from Goldman Sachs during his years there as its chief executive.

The collapse of the housing bubble, while falling short of the magnitude of the Great Depression, is likely to lead to the worst recession since the second world war. Repairing the damage caused by this bubble will be a long and difficult process. Cleaning up the damage to the political system from President Bush's unprecedented fear campaign may prove to be even more difficult.
« Last Edit: 2008-10-04 07:39:12 by Hermit » Report to moderator   Logged

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Re:We're Fucked - The Coming Economic Crisis
« Reply #62 on: 2008-10-09 01:45:59 »
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[Blunderov] Things are bad. Very bad. And they are likely to get worse. So much so that the authorities appear to believe that there is a real possibility of rioting in the streets. Considering how Bush is handing out copious amounts of taxpayer monies to his friends whilst at the same time turfing Joe Sixpack and his family out into the street and repossessing his home and his car, this is not awfully surprising.

globalresearch

<snip>Thousands of Troops Are Deployed on U.S. Streets Ready to Carry Out "Crowd Control"
by Naomi Wolf
Global Research, October 8, 2008
Alternet.org </snip>

[Bl.]This economic train wreck is instant kharma on a grand scale. Heedlessness, hubris and raging greed have all produced this entirely predictable outcome.

"To the Bunkers!": Central banks slash rates in emergency "midnight" meeting

by Mike Whitney

Global Research, October 9, 2008

Stocks fell sharply across Europe and Asia on Wednesday following another down day on Wall Street where the Dow Jones lost 508 points and the S&P 500 slipped below the 1,000 mark for the first time since 2003. Japan's benchmark index, the Nikkei, lost nearly 10 percent while shares in London at one point slumped more than 7 percent. Trading was suspended in Indonesia and Russia where stocks fell 10 percent each on opening.

According to Bloomberg News: "The Federal Reserve, European Central Bank, Bank of England, Bank of Canada and Sweden's Riksbank cut interest rates in an emergency coordinated bid to ease the economic effects of the financial crisis."
 
The move by the Fed's Open Market Committee (FOMC) brings the Fed's Fund rate down to 1.5 percent, 500 basis points below the current rate of inflation.

Following yesterday's 508 point bloodbath, President George Bush tried to calm jittery investors about the turmoil in the markets. He said, "I know that the days are dim right now for a lot of folks. But I firmly believe tomorrow is going to be brighter."

Just hang in there.

The present crisis, which has its roots in the unsupervised expansion of credit in the United States, has spread from subprime mortgages and toxic securities, to the entire global financial system, where it has roiled equities markets and is now threatening to do incalculable damage to the US and European banking systems.

Yesterday, Fed chairman Ben Bernanke announced plans to pump an estimated  $1 trillion of short-term loans (commercial paper) into the financial system to head off a growing liquidity squeeze. Unlike, Treasury Secretary Paulson's $700 billion bailout, which was opposed by over 200 economists, Bernanke's plan targets the source of the problem and could actually succeed. (ed: Commercial paper is a low-cost source of cash for companies to meet short-term financial needs. It's cheaper than tapping a line of credit at a bank)  The Fed will start providing businesses and financial institutions with the short-term credit they need to maintain normal day-to-day operations. The Fed is invoking emergency powers under its "unusual and exigent circumstances" clause in order to avert an even larger shock to the financial system beyond the wreckage in the stock market and hundreds of bank closures that are expected into 2010. Providing unsecured loans directly to businesses is controversial, but necessary. If these corporations and financial institutions fail just because they cannot roll over their short term debt, the overall damage to the economic system could be devastating

In yesterday's speech, Fed chairman Bernanke gave a gloomy summary of present economic conditions:
 
"Economic activity had shown signs of decelerating even before the recent upsurge in financial-market tensions. As has been the case for some time, the housing market continues to be a primary source of weakness in the real economy as well as in the financial markets. However, the slowdown in economic activity has spread outside the housing sector. Private payrolls have continued to contract, and the declines in employment, together with earlier increases in food and energy prices, have eroded the purchasing power of households. This sluggishness of real incomes, together with tighter credit and declining household wealth, is now showing through more clearly to consumer spending. Indeed, since May, real consumer outlays have contracted significantly. Meanwhile, in the business sector, worsening sales prospects and a heightened sense of uncertainty have begun to weigh more heavily on investment spending as well."

The US is caught in a deflationary downdraft that could have catastrophic long term effects.  That's why Bernanke has pulled out all the stops and doubled the Fed's loans (via auction facilities) to banks to $900 billion while allowing financial institutions to use mortgage-backed securities and other dodgy structured investments as collateral. The Fed has also started paying interest on reserve balances held at the central bank. This helps to push down the overnight lending rate below the Fed Funds rate which helps to reliquify the banks. 

John Ryding, chief economist of RDQ Economics LLC in New York, called the practice, "stealth easing", another attempt to flood the markets with credit and get the economy moving. Will it work?

Bernanke has a good idea of the nearly-insurmountable challenges in front of him. Apart from the faltering banking system, the collapse in real estate, and the unwinding of trillions of dollars of counterparty bets via derivatives contracts; Bernanke faces the sudden capitulation in consumer spending. The US consumer is tapped out on credit card debt, student loans, car loans and home mortgages. Retail spending is falling and likely to get worse. Bernanke's plan to recapitalize the banking system ignores the larger issue that less people will be applying for loans and that less credit will be flowing through the system. Slower growth is inevitable. The sudden change in spending patterns is evident everywhere. Personal savings are increasing, home equity withdrawals are down (to nearly zero) and the new reality of "living within one's means" is becoming the prevailing ethos. America is hunkering down. 

“Big discounts fail to lure shoppers,” reports the Wall Street Journal . Restaurants are empty. Shopping malls are not even attracting strollers and gawkers – let alone people with money to spend. Auto lots are so quiet the salesmen take turns pretending to be customers – just to keep their skills at-the-ready. Even the private jet business is in a tailspin." (The Daily Reckoning)

Personal consumption is down, unemployment is rising, manufacturing is slowing, and commodities have taken a record plunge in the last few weeks. The telltale signs of deflation are everywhere.

According to economist Asha Bangalore at Northern Trust:

"The July-August data point to a possible drop in consumer spending during the third quarter. If the forecast is accurate, it would be the first quarterly decline since fourth quarter of 1991. Given the importance of consumer spending in GDP, a drop in consumer spending in the third quarter raises the probability of a contraction in real GDP in the third quarter."

9 out of 10 Americans now believe the country is headed in the "wrong direction" economically, while, according to CNN/Opinion Research Corp. poll, which surveyed more than 1,000 Americans over the weekend, a majority of people now "believe another economic depression is likely" and that we will experience "25% unemployment rate, widespread bank failures and millions of Americans homeless and unable to feed their families."

The good news is that inflationary pressures have eased. The bad news is...well...everything else.

From the Fed's 7 AM, October 8, 2008, Press Release, "Joint Statement by Central Banks":

"Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation."

The United States is headed into another Great Depression and has probably dragged the rest of the world along with it. The global financial system will look very different by the time we reach the other end of the tunnel.


Mike Whitney is a frequent contributor to Global Research
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Re:We're Fucked - The Coming Economic Crisis
« Reply #63 on: 2008-10-09 18:39:37 »
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"I fear we may be at that moment just before the tsunami hits — when the birds take flight and the insects stop chirping because their acute senses can feel what is coming before humans can." -- Thomas Friedman
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Re:We're Fucked - The Coming Economic Crisis
« Reply #64 on: 2008-10-09 21:46:19 »
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i am terrified now..for the first time. an uneasy feeling sits in the pit of my stomach.

where does one move assets at this time of crisis...the whole world is sitting on top of a ticking shitbomb.
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Re:We're Fucked - The Coming Economic Crisis
« Reply #65 on: 2008-10-10 00:11:31 »
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[Mermaid] where does one move assets at this time of crisis...the whole world is sitting on top of a ticking shitbomb.

[Hermit] If not rhetorical:
Assets: Coins. Small gold and silver coins would be best. Liquidity rules. Gold wire is also good. It is easy to conceal and easy to measure out a given length. Having a good jewelers scale and scope as well as larger scales may be useful too. Traders can profit in any situation by intermediating needs.

Locations:
South America is good
Cuba is good
New Zealand might be good if China doesn't get greedy.
If Europe does not get drawn into conflict, Switzerland may still be good.
Dubai is exposed, could easily get caught up in the MidEast implosion
North America, most of the Middle East and Asia would not be a good idea. Neither starvation nor war are good for assets and both are significantly more likely there than most places.
Africa is seldom a good idea. Too many people, not enough assets to go around.
Within the US:
Northern NY may be better than most places.
Iowa is better than further North (fuel is likely to become unavailable). It is also better than further West where the water crisis is likely to make life untenable.

Note that the following is still not the derivitives bomb. But still ought to be cause for terror.



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ALERT

RGE Monitor

October 9, 2008

On Thursday, October 09, 2008, Nouriel Roubini – Chairman of RGE Monitor and Professor of Economics at the NYU Stern School of Business – lays out his latest views on the global economic and financial crisis and the urgent necessary actions that need to be undertaken globally.

Nouriel Roubini: The world is at severe risk of a global systemic financial meltdown and a severe global depression

The U.S. and advanced economies’ financial systems are now headed towards a near-term systemic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system, i.e. those non-banks (broker dealers, non-bank mortgage lenders, SIV and conduits, hedge funds, money market funds, private equity firms) that, like banks, borrow short and liquid, are highly leveraged and lend and invest long and illiquid, and are thus at risk of a run on their short-term liabilities; and now a roll-off of the short term liabilities of the corporate sectors that may lead to widespread bankruptcies of solvent but illiquid financial and non-financial firms.

On the real economic side, all the advanced economies representing 55% of global GDP (U.S., Eurozone, UK, other smaller European countries, Canada, Japan, Australia, New Zealand, Japan) entered a recession even before the massive financial shocks that started in the late summer made the liquidity and credit crunch even more virulent and will thus cause an even more severe recession than the one that started in the spring. So we have a severe recession, a severe financial crisis and a severe banking crisis in advanced economies.

There was no decoupling among advanced economies and there is no decoupling but rather recoupling of the emerging market economies with the severe crisis of the advanced economies. By the third quarter of this year global economic growth will be in negative territory signaling a global recession. The recoupling of emerging markets was initially limited to stock markets that fell even more than those of advanced economies as foreign investors pulled out of these markets; but then it spread to credit markets and money markets and currency markets bringing to the surface the vulnerabilities of many financial systems and corporate sectors that had experienced credit booms and that had borrowed short and in foreign currencies. Countries with large current account deficits and/or large fiscal deficits and with large short-term foreign currency liabilities and borrowings have been the most fragile. But even the better performing ones – like the BRICs club of Brazil, Russia, India and China – are now at risk of a hard landing. Trade and financial and currency and confidence channels are now leading to a massive slowdown of growth in emerging markets with many of them now at risk not only of a recession but also of a severe financial crisis.

The crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity where excessive leveraging and bubbles were not limited to housing in the U.S. but also to housing in many other countries and excessive borrowing by financial institutions and some segments of the corporate sector and of the public sector in many and different economies: an housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression.

At this point the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the U.S. and advanced economies contraction would be short and shallow – a V-shaped six month recession – has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the U.S. and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown, the probability that the outcome could become a decade long L-shaped recession – like the one experienced by Japan after the bursting of its real estate and equity bubble – cannot be ruled out.

And in a world where there is a glut and excess capacity of goods while aggregate demand is falling, soon enough we will start to worry about deflation, debt deflation, liquidity traps and what monetary policy makers should do to fight deflation when policy rates get dangerously close to zero.

At this point the risk of an imminent stock market crash – like the one-day collapse of 20% plus in U.S. stock prices in 1987 – cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown.

This disconnect between more and more aggressive policy actions and easings, and greater and greater strains in the financial market is scary. When Bear Stearns’ creditors were bailed out to the tune of $30 bn in March, the rally in equity, money and credit markets lasted eight weeks; when in July the U.S. Treasury announced legislation to bail out the mortgage giants Fannie and Freddie, the rally lasted four weeks; when the actual $200 billion rescue of these firms was undertaken and their $6 trillion liabilities taken over by the U.S. government, the rally lasted one day, and by the next day the panic had moved to Lehman’s collapse; when AIG was bailed out to the tune of $85 billion, the market did not even rally for a day and instead fell 5%. Next when the $700 billion U.S. rescue package was passed by the U.S. Senate and House, markets fell another 7% in two days as there was no confidence in this flawed plan and the authorities. Next, as authorities in the U.S. and abroad took even more radical policy actions between October 6th and October 9th (payment of interest on reserves, doubling of the liquidity support of banks, extension of credit to the seized corporate sector, guarantees of bank deposits, plans to recapitalize banks, coordinated monetary policy easing, etc.), the stock markets and the credit markets and the money markets fell further and further and at accelerated rates day after day all week, including another 7% fall in U.S. equities today.

When in markets that are clearly way oversold, even the most radical policy actions don’t provide rallies or relief to market participants. You know that you are one step away from a market crash and a systemic financial sector and corporate sector collapse. A vicious circle of deleveraging, asset collapses, margin calls, and cascading falls in asset prices well below falling fundamentals, and panic is now underway.

At this point severe damage is done and one cannot rule out a systemic collapse and a global depression. It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster. Urgent and immediate necessary actions that need to be done globally (with some variants across countries depending on the severity of the problem and the overall resources available to the sovereigns) include:
  • another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;
  • a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;
  • a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;
  • massive and unlimited provision of liquidity to solvent financial institutions;
  • public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
  • a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;
  • a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;
  • an agreement between lender and creditor countries running current account surpluses and borrowing, and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.


At this point anything short of these radical and coordinated actions may lead to a market crash, a global systemic financial meltdown and to a global depression. The time to act is now as all the policy officials of the world are meeting this weekend in Washington at the IMF and World Bank annual meetings.
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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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Re:We're Fucked - The Coming Economic Crisis
« Reply #66 on: 2008-10-10 00:15:58 »
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normally...(on instinct), i'd gravitate towards gold. 1 oz royal canadian mint..the maple leaf..is in short supply. gold is simply not available...if you can believe it. either, everyone is buying or the sellers are sitting on it hoping that it will go up.

(the one i patronise are small jewelers who sell coins...i only trust the canadian mint/maple leaf..maybe the american eagle..but i have never brought it before)
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Re:We're Fucked - The Coming Economic Crisis
« Reply #67 on: 2008-10-10 00:57:52 »
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Quote from: Blunderov on 2008-10-09 01:45:59   
Personal consumption is down, unemployment is rising, manufacturing is slowing, and commodities have taken a record plunge in the last few weeks. The telltale signs of deflation are everywhere.


[Blunderov] The crisis is so wide and deep that it is beginning to spawn a new language.

Paul McFedries [mail@wordspy.com]


--------------------------------------------------------------------------------

trashout n. The disposal of the entire contents of an abandoned house. Also: trash-out; trash out.

Example Citations:
"They didn't have the money to get a moving van, so they took what they could throw in the car and took off," says a local man, whose business — clearing out abandoned houses — is booming. "We don't even know where they went."

Clearing out a house is called a trashout. But people leave behind much more than trash. They leave computers, printers, flat-screen TVs, new furniture, children's toys — all the stuff that used to be so easy to buy on credit. Charities don't want it, and so it all goes in the dumpster.
—Margaret Wente, "America's house of cards — make that, credit cards," The Globe and Mail, October 4, 2008

They left family photos scattered across a bed, next to a Bible and a toddler's floppy-eared hat. Their marriage license rests on a dresser. And a diploma from Duluth High is tucked unceremoniously into a closet still stocked with clothes.

Scott Johnson tries not to wonder what went wrong inside this three-bedroom home near Lawrenceville. His job is to landfill everything, from the leather couches to the "What Color Is It?" baby book.

He's the "trash out" man.

That's the common term — banks use the more polite "property preservation" — for clearing out and cleaning up foreclosed homes.
—Brian Feagans, "Debris hints at foreclosures' toll," The Atlanta Journal - Constitution, August 13, 2008

Earliest Citation:
His first stop of the day was once a state-of-the-art trash-out, filled with debris dating back to 1919, the year its last resident moved in.
—Robin Chotzinoff, "Yo vermin! Hey trash-outs! Dave Emge is on the warpath. Clean up your act!," Denver Westword, January 19, 1994

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« Last Edit: 2008-10-10 01:04:36 by Blunderov » Report to moderator   Logged
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Re:We're Fucked - The Coming Economic Crisis
« Reply #68 on: 2008-10-10 08:41:30 »
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[Blunderov] More about derivatives. And escaping fat cat plutocrats who are taking your money and heading for the hills as fast as they can.

'We're all debt slaves trapped in a death spiral'
October 10, 2008

By Joseph Edozien

The package sold to the American congress by treasury secretary Henry Paulson will not prevent the breakdown of the financial system based in New York and London.

The breakdown is terminal.

Sooner or later, by one winding path or another, we are entering a new epoch of world history.

This unravelling is global because of the intercontinental reserve currency status of the dollar, fronting also for the euro and the pound sterling.

The financial system of today is now at the limits of its self-sustainable expansion as a self-made credit bubble. It is insolvent, bankrupt. We have here an insolvency death spiral being disguised as a temporary liquidity shortage. And it threatens to bankrupt the entire inter-linked Western-centric central banking system of the world.

The American and British investment banking system is no longer a financial intermediary in the true sense of the term, but has rather become a credit conjurer: creating more credit on the basis of credit as collateral in a manner delinked from real production requirements and solely to generate paper profits to keep the system itself going.

To survive the natural limits and inherently slower pace of real economics, the lending system must now make loans secured by other loans that are themselves based on yet other underlying loans.

People blame this "financial magic" on greed, but it is more correct to blame it on the nature of the beast of interest-bearing money creation itself.

Compound interest, interest on interest, is exponential, meaning explosive, in character and therefore demands infinite room for expansion. This is unsustainable because an infinite space for growth cannot be contained in an evidently finite world.

For a time, this compound interest-driven monetary growth can be sustained, when it outstrips the possibilities of real economic production, in towers of debt built on debt.

At the "real-world" base of this tower of credit upon credit are working people living beyond their means, having been seduced by easy credit based on insecure incomes and now trapped on an endless work treadmill to meet their credit obligations.

A subtle form of "debt slavery" for ordinary people is what keeps the system working at its base. And we need this debt for houses, cars, furniture, appliances, and so many other contrivances of modern life that advertising, and our own materialism, tells us we must have.

As the grim leveller of globalisation and forced overproduction in the face of insufficient consumption places downward pressure on mass wage levels and incomes, the foundation of the "tower" begins to crack and buckle and the whole tower starts teetering. Each level of the tower then falls in an unstoppable cascade as the floor beneath it buckles, sways, cracks and sinks.

In one word, the hidden problem, the cat among the pigeons, is "derivatives".

Financial "derivatives" are so called because they are financial securities based on other financial securities, usually many levels away from the real collateral on which financial securities normally depend.

Since these financial derivatives are in effect based on statistical predictions about market movements and changes in the values of other financial instruments, they lose their value and become negatively priced when the bets on which they are based turn out wrong.

In the aggregate, these bets assume that perpetual economic growth is the reality.

In conditions of contraction or stagnation, the bets turn out wrong and can pull down the whole structure.

Credit default swops, which brought down the world's largest insurer, AIG, are only one type of derivative.

They are merely the now most visible tip of a most gargantuan iceberg.

There are many other types of complex financial derivatives that are all ultimately "financial casino" gambles on the creditworthiness of underlying financial securities of various sorts, all of which have become dangerously remote from real-world collateral.

The financial derivatives shadow economy behind the scenes of world finance is now well over 30 times the size of the world's real economy. But it is ultimately linked to the ability of the world's real economy, the people who struggle to make ends meet, to service the underlying debt at the base of the global credit tower.

That underlying debt is the day-to-day debt that you and I now struggle with in increasing difficulty. Our struggles are now reverberating upwards as the downward pressure from above makes our ability to meet our obligations that much harder. We are all now being squeezed by the debt monster growing like a Frankenstein out of the control of the too-clever-by-half debt conjurers who created this financial freak.

When the debt repayment ability of the financial slaves at the real-world base of the credit tower becomes challenged, the shadow economy comes tumbling down. And what is lost are ultimately two things: the debt-based lubricant of the real economy and the confidence of economic participants in the transparency and efficacy of the financial system within which they do business.

When people lose their faith in finance, this becomes an existential threat to the whole system and its masters since the system is in the end a system of blind faith: a confidence trick.

This is why, when the wily masters of high finance become "victims" of their own misdeeds, governments rush in to save them with a speed and urgency we do not see when millions of ordinary citizens suffer blows from hurricanes, tsunamis, floods, and other disasters not of their own making.

We have to ask: "Who really is being saved?" Is it us, the real victims of usury-based finance, or is it the usurious systems and their masters who are being saved by extending our debt slavery? This is a reasonable question to ask. It is a question about economic justice.

In sum: the innocent will once again pay for the sins of the guilty.

In the name of saving the financial system of our jobs and pensions, you and I are now being asked, in truth, to save our financial masters from themselves in a manner that will only extend and entrench our debt slavery to them.

We - at least, for now, our brethren in the United States - are being tricked by being asked to hand over our tax wallets with the threat of a financial gun pointed straight at our livelihoods and our pensions. We are being told, in effect: "Hand over your taxpaying ability, no questions asked, or we'll shoot down your job and your pension." This indeed is robbery of the most brazen kind.

What can we do? We can first of all try to understand what is being asked of us before we do it. For if it is done there, it will eventually be done in other "theres", and perhaps even here. What happens in the US usually eventually spreads around the world. The American collapse will trigger corresponding aftershocks here within a year or two at most.
 


The American taxpayer is being asked to buy, at some fictional value, bad debt that is unpriceable because it has negative value. The American taxpayer is being asked to buy unredeemable liabilities as if they were genuine assets.

Thus, a fiscal contagion is being unloaded from fleeing plutocrats onto the backs of unsuspecting citizens who have nowhere financially to run and hide.

In the American system, it is true that the taxpayer will ultimately hold the bag of bad stones, but it will be a bigger and heavier bag than he is being told. First of all, the money to "buy" these bad stones is not there. It will be created by issuing government securities to borrow the money to buy those bad stones. This money will be borrowed in the name of the American taxpayer from the very same people who ultimately now own the bad stones.

Why? Because the US treasury will borrow the money from the US central bank, which will issue the money as a loan. But the interest on this loan will not be paid to the American public, but to those who collectively "own" the Federal Reserve Bank, and that is not the American people, but ultimately the very banking system that is the entity that is being "bailed out" or "rescued" from itself.

In other words, ordinary citizens, through the borrowing power of the American state, will be forced to borrow from the debt conjurers to "buy" the bad debt held by those self-same debt conjurers. Most of this bad debt, by an astronomical margin, is not even bad loans to ordinary citizens, but bad loans made among the plutocratic financiers themselves. For example, investment banks loan billions to hedge funds, which then use the billions to make private equity mega-deals worth multiples of the billions they borrowed.

If the public "bailout" of these usurious plutocrats were not so devious, one would marvel at the brazenness of the "rescue". It is cynical in the extreme and it is appalling.

"Innocent citizens, in the form of your government, borrow more from me to save me from the bad debts on my books which I borrowed from my friends to make more money for myself while the getting was good, and after I've salted away my personal profits.

"If you don't borrow more from me now to save your job and pension, and save me from myself and my friends, you will have to pay more later while losing your job and your pension in a financial system collapse of my own making. Your money or your livelihood!"

This is the old technique of socialising the losses, having privatised the profits.

Even if such a scheme passes the confused and frightened citizen smell test, it would only set up an even more spectacular crash later.

The basic problem, debt based on debt to multiple levels of debt creation, has by no means been solved. It is a "solution" of the same nature as the problem. We solve the "debt problem" by creating yet more debt, eventually leading to higher taxes, higher prices, lowered social security, lost pensions, and lost jobs for ordinary citizens.

All that has been accomplished, at best, is to delay the inevitable financial and economic collapse, and at ultimately even greater cost and vastly more widespread pain.

Moreover, the $700-billion total cost figure being floated is a pure fiction. It is a number with no basis. At the very least, although it is not presented as such, it is merely an initial down payment.

Given the truly epic size of the bad derivates pyramid, certainly well over $1 000 trillion at the very least, any such "rescue" will end up costing in the region of $10 trillion at the very least if it is to have anything more than a temporarily delaying and purely psychological impact.

More likely, it will take in the region of $100 trillion to save the derivatives pyramid and keep it from deflating catastrophically. This system is not saveable, no matter what anyone says.

And the last people we should look to for reassurance are the financial casino gamblers who created the problem in the first place. They must know that $700bn is insufficient and is an arbitrary figure. Their thought must be to lure the ill-informed taxpayer into their bad gamble and then keep him there once he is caught and has no way to escape the trap. They will then keep incrementally raising the price of the "bailout" to the taxpayer, each time being "shocked" at the "unexpected" increase in cost.

The main effect of this financial breakdown on people in the real economy will be a painful shortage of money as there will be a severe contraction in credit for real economic transactions. It will simply be harder to get loans to do anything productive. This will lead to a self-reinforcing downward spiral of cost-cutting across the real economy.

There will be a great depression, centred mostly in the US and Europe. And it will be a long depression of at least one to two decades, culminating in new currencies of the same basic nature as the old and usurious or in new types of currency and exchanges. Or there will be a large and destructive war, the conditions for which are being laid now.

It all depends on the gullibility of the public and whether fear and pain lead the grassroots to compliance in their own financial dispossession or to a liberating and active search for new and better ways of economic and financial organisation.

It is time for the public to take a keen and informed interest in its own economic destiny, given that public power lies in knowledge.

Ignoring the avaricious wolf at our door will not make him go away.

We will need gentleness of soul so we don't rip each other apart in our frustration and pain from broken material lives and dreams during the coming times of turbulence.

There will be no escape as the beast is everywhere and we were all complicit in our own entrapment. We will also need openness of mind and heart so we, the financially dispossessed, and we will be financially dispossessed, can find ways to work together to create functional living alternatives at the grassroots level where we all meet and live.

We have just been handed a once-in-a-millennium opportunity to make high finance serve the public interest, on our terms, rather than the other way around, as has been the case.

We must seize this unusual moment to make finance the servant rather than the master of our lives.


Edozien is chair of the SA New Economics network.

This article was first published in the Cape Times

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Re:We're Fucked - The Coming Economic Crisis
« Reply #69 on: 2008-10-10 11:52:29 »
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An interesting article. It is along the lines of articulating why I have been suggesting - for several years now - that we urgently need to redefine value back to what it meant when the people of the ancient world started building stone granaries, collecting crops and distributing them equitably. Then the vast effort expended in the building of the granaries - many of which have outlasted everything else created by these cultures - paid off by keeping the food clean, preserving it from competitors and providing a way to tide over bad periods and ensure a seed supply even over years with crop failures. Collaboration and community effort  created wealth that could be distributed where none had existed before. The Chinese with their massive dam and canal projects, and the Moors when they built q'anats to bring deserts to life, reinvented the same phenomenon. These projects, like modern day national and transnational electric grids, or road and railway systems, are often too large and sometimes take too long to return a profit, for individuals or even companies to invest in them. Yet when established, they benefit everyone. In the 1100s to 1200s this concept was rediscovered by the Albigensians and Waldensians - who rapidly become the wealthiest people in Europe (and the target for a rather nasty crusade, but that is another story). Throughout the recovery from the waves of plagues that swept through Europe in the late Middle to Early Modern Age, monasteries engaged in massive wealth creation (though like religions throughout recorded history, they tended not to share the fruits with those putting in the effort to grow and harvest them). Even in Russia and China, where the death of the feudal system and subsequent collectivization was accompanied by unbelievable brutality and devastating destruction, poverty alleviation and growth rates created wealth, for those surviving, previously beyond the dreams of avarice. Somehow America seems to have  lost track of this when selfishness became a virtue at the start of the age of surplus energy. Lost track of it to the extent that it sometimes seems as if the USA's most effective export is in fact selfishness.

Now as we come to the end of this momentary lapse of reason we probably owe it to ourselves to attempt to rediscover the value of cooperation given that it was regarded as a virtue for many, many more years than selfishness has been.

Let me try to explain what I mean in very concrete terms through an example.

On the one hand, when most houses in the MidWest have an insulation value of about R25, they require about $3000 per house in fuel (at last year's fuel prices) to make it through a year with a mild winter. As there are about 20 million houses like this, that is about $60 Billion  going up the chimney - each year. In addition, it means that generating capacity needs increasing (to counter the rapidly approaching end to the use of natural gas use for generation) and the failing infrastructure (which wastes over 75% of the energy put into it) requires massive overhauling using money we don't have and courtesy of our profligacy likely won't have again. Of course, the cost of energy is going to soar and eventually people will die when they can no longer afford the things needed to sustain them. This cost is not visible in current models which presume infinite growth forever - or at least till Jeeezuz comes.

On the other hand, rebuilding the housing stock in the form of "linear cities" which have building efficiencies so high that they require (cheap) ventilation to cool them even in depths of winter, and unlike the current housing stock would be designed for indefinite lives, would cost perhaps $60,000 per house to establish. Building this would create a massive boom in most economic activities (resulting in more people having more money to afford more things), and given careful design and the inclusion of some renewable capacity, might reduce energy costs to perhaps $240 per year per house at current prices - and the $2760/year savings could go towards the rebuild. More significantly, not needing to build new power stations or infrastructure and not  contributing further to a massive surge in greenhouse gas emissions will pay the balance.

I could draw hundreds of such examples, it is after all largely what we work on these days, but the model advocated here can be reduced to the fact that any society is wealthier when more people have access to what they need to live comfortably. The flatter the distribution is and the more efficient resource distribution becomes, the better off every member of that society.

Contrast this to current systems where items are only regarded as valuable when they are scarce. Under such a regime a war may be rationalized as being a good thing, because it makes things more scarce and thus more valuable. The proposed redefinition of value to its original meaning can be seen to remove most of the impetus to war - outside of clashing belief systems. Given that a global rebuild, based on improving efficiencies and distributing the availability of resources can work in practically every area of the globe - with a commensurate lessening of the pressures to war, this might save some $2 to $4 Trillion per year in military related expenditure alone or in excess of $1200/person per year. Sufficient to provide universal access to fresh water, health care, adequate nutritious food and basic education. And that is before taking energy savings and a massive reduction in greenhouse gas emissions into account.

I'm still waiting to have the flaws in this thinking shown to me.

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Re:We're Fucked - The Coming Economic Crisis
« Reply #70 on: 2008-10-10 14:38:34 »
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Quote from: Hermit on 2008-10-10 11:52:29   

I'm still waiting to have the flaws in this thinking shown to me.

[Blunderov] I think the Hermit will have to wait for rather a long time. Perhaps Godot will arrive in the meantime.

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Re:We're Fucked - The Coming Economic Crisis
« Reply #71 on: 2008-10-11 07:58:21 »
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Red Alert: The G-7 -- Geopolitics, Politics and the Financial Crisis


Source: STRATFOR
Dated: 2008-10-11

The finance ministers of the G-7 countries are meeting in Washington. The first announcements on the meetings will come this weekend. It is not too extreme to say that the outcome of these meetings could redefine how the financial markets work, certainly for months and perhaps for a generation. The Americans are arguing that the regime of intervention and bailouts be allowed to continue. Others, like the British, are arguing for what in effect would be the nationalization of financial markets on a global scale. It is not clear what will be decided, but it is clear that this meeting matters.

The meetings will extend through the weekend to include members of the G-20 countries, which together account for about 90 percent of the global economy. This meeting was called because previous steps have not freed up lending between financial institutions, and the financial problem has increasingly become an economic one, affecting production and consumption in the global economy. The political leadership of these countries is under extreme pressure from the public to do something to solve — or at least alleviate — the problem.

Underlying this political pressure is a sense that the financial class, people who run global financial institutions, have failed to behave responsibly and effectively, and have therefore lost their legitimacy. The expectation, reasonable or not, is that the political system will now supplant these managers and impose at least a temporary solution. The finance ministers therefore have a political mandate, almost global in scope, to act decisively. The question is what they will do?

That question then divides further into two parts. The first is whether they will try to craft a single, global, integrated solution. The second is the degree to which they will take control of the financial system — and inter-financial institution lending in particular. (A primary reason for the credit crunch is that banks are currently afraid to lend — even to each other.) Thus far, attempts at solutions on the whole have been national rather than international. In addition, they have been built around incentivizing certain action and increasing the available money in the system.

So far, this hasn’t worked. The first problem is that financial institutions have not increased interbank lending significantly because they are concerned about the unknowns in the borrower’s balance sheet, and about the borrowers’ ability to repay the loans. With even large institutions failing, the fear is that other institutions will fail, but since the identity of the ones that will fail is unknown, lending on any terms — with or without government money — is imprudent. There is more lending to non-financial corporations than to financial ones because fewer unknowns are involved. Therefore, in the United States, infusions and promises of infusion of funds have not solved the basic problem: the uncertain solvency of the borrower.

The second problem is the international character of the crisis. An example from the Icelandic meltdown is relevant. The government of Iceland promised to repay Icelandic depositors in the island country’s failed banks. They did not extend the guarantee to non-Icelandic depositors. Partly they simply didn’t have the cash, but partly the view has been that taking care of one’s own takes priority. Countries do not want to bail out foreigners, and different governments do not want to assume the liabilities of other nations. The nature of political solutions is always that politicians respond to their own constituencies, not to people who can’t vote for them.

This weekend some basic decisions have to be made. The first is whether to give the bailouts time to work, to increase the packages or to accept that they have failed and move to the next step. The next step is for governments and central banks to take over decision making from financial institutions, and cause them to lend. This can be done in one of two ways. The first is to guarantee the loans made between financial institutions so that solvency is not an issue and risk is eliminated. The second is to directly take over the lending process, with the state dictating how much is lent to whom. In a real sense, the distinction between the two is not as significant as it appears. The market is abolished and wealth is distributed through mechanisms created by the state, with risk eliminated from the system, or more precisely, transferred from the lender to the taxing authority of the state.

The more complex issue is how to manage this on an international scale. For example, American banks lend to European banks. If the United States comes up with a plan which guarantees loans to U.S. banks but not European banks, and Europeans lend to Europe and not the United States, the integration of the global economy will very quickly shatter, leading to significant limitations on international trade, currency convertibility and so on. You will nationalize economies that can’t stand being purely national.

At the same time, there is no global mechanism for managing radical solutions. In taking over lending or guarantees, the administrative structure is everything. Managing the interbank-lending of the global economy is something for which there is no institution. And even with coordination, finance ministries and central banks would find it difficult to bear the burden — not to mention managing the system’s Herculean size and labyrinthine complexity. But if the G-7 in effect nationalize global financial systems and do it without international understandings and coordination, the consequences will be immediate and serious.

The G-7 is looking hard for a solution that will not require this level of intrusion, both because they don’t want to abolish markets even temporarily, and more important, because they have no idea how to manage this on a global scale. They very much want to have the problem solved with liquidity injections and bailouts. Their inclination is to give the current regime some more time. The problem is that the global equity markets are destroying value at extremely high rates and declines are approaching historic levels.

In other words, a crisis in the financial system is becoming an economic problem — and that means public pressure will surge, not decline. Therefore, it is plausible that they might choose to ask for what FDR did in 1933, a bank holiday, which in this case would be the suspension of trading on equity markets globally for several days while administrative solutions are reached. We have no information whatsoever that they are thinking of this, but in starting to grapple with a problem of this magnitude — and searching for solutions on this scale — it is totally understandable that they might like to buy some time.

It is not clear what they will decide. Fundamental issues to watch for are whether they move from manipulating markets through government intrusions that leave the markets fundamentally free, or do they abandon free markets at least temporarily.

Another such issue is whether they can find a way to do this globally or whether it will be done nationally. If they do go international and suspending markets, the question is how they will unwind this situation. It will be easier to start this than to end it and state-controlled markets are usually not very attractive in the long run. But then again, neither is where we are now.

This report may be forwarded or republished on your Web site with attribution to www.stratfor.com.
« Last Edit: 2008-10-11 08:04:55 by Hermit » Report to moderator   Logged

With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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Re:We're Fucked - The Coming Economic Crisis
« Reply #72 on: 2008-10-11 11:44:25 »
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Quote:
[Hermit]I'm still waiting to have the flaws in this thinking shown to me.

ah.....ummm; ah.....ummm....throat still not quite clear ..... ahhhh..ummmpgh.

Down on one knee; sensing the impending beheading....

The technical suggestions are sound, possibly need some flushing out from a engineering / design perspective 'The flaw" to me is that ;
;
human beings in groups any larger then 3, are self serving self destructive useless pieces of shit and all of our collective history to me underscores this, so a technical solution to an inherent design flaw in the species would seem to be nonstarter.

Would a real sentient being take the most readily available highest energy content fuel like oil and make disposal water bottles and 4 wheel boats to commute 1 person to work each day a species life time goal. Consitainly put psychopaths in charge of every group larger then 3 people and give them weapons of mass distruction and all our wealth and say do what ever you want.

"My KINGDOM for a rest button for mother earth."

Fritz
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Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains -anon-
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Re:We're Fucked - The Coming Economic Crisis
« Reply #73 on: 2008-10-11 16:03:29 »
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Quote from: Hermit on 2008-10-10 11:52:29   

<snip>An interesting article. It is along the lines of articulating why I have been suggesting - for several years now - that we urgently need to redefine value back to what it meant when the people of the ancient world started building stone granaries, collecting crops and distributing them equitably. </snip>

[Blunderov] Yes. The notion of the "invisible hand" assumes that all greed will even itself out and the result will be a fair and efficient distribution of resources. ("Fairness" as the ultimate product of "greed"? Gold from lead? Bullshit detectors should have been going off ever since this notion was first posited!)This assumption has been horribly repudiated not only by recent events but also by the consistent cycles of boom and bust which it historically produces. If this system is the best we can come up with we are in dreadful trouble.

http://www.dissidentvoice.org/2008/10/capitalism-without-rules/

Capitalism Without Rules

by James Keye / October 11th, 2008

What would capitalism without rules look like? What “invisible hand” guides capitalism’s actions and to what result?

There is an invisible hand guiding the physical world to all the forms and processes of our “world.” It is the in the laws that control the rates, that set the proportional relations of the various forces. But this fundamental reality is only metaphor for other “invisible hands” in evolution, social relations or economics. Appeal to invisible hands in these situations are no more than the failure to illuminate the designs of process.

The appeal of capitalism exists largely in its making acceptable the concentration of wealth and in its religion-like faith in a common, generally negative human attribute as a positive guiding principle: human greed. Capitalism is a social and economic design that gives great freedom to the most greedy. Greed and wealth concentration are intellectually supported under the argument that the invisible hand of greed will design the best possible distribution of wealth based on the most efficient use of resources. And it denies that humans have the power, or should have the power, to control wealth and resources.

This ‘leave it to the market’ argument overtly suggests that we should not trust other people to control the process of wealth distribution while hiding the fact that the very most acquisitive and ruthless of us are doing exactly that under the cover of ‘the market.’ Trillions of dollars of wealth have been taken by the tax and credit system over the last 8 years (and for many years before) and “redistributed” to the economic elite, a polite term for the greedy sociopaths at the core of these economic actions. This is being done primarily with war, the healthcare (sic) system and the credit system.

The “bailout” of Wall Street is not a bailout at all. Embezzling is slow. To get big bucks in a hurry requires a robbery and a robbery requires the hold-up note. All the planning can be done in secret, but with a robbery there comes the moment when intentions must be made clear: “Fill this bag. I have a gun in my pocket.” We have just been through such a moment, with the note written in all capitalism, so most people missed its true meaning.

“Fill this bag. If you don’t your lives will be ruined and children’s lives will be ruined.” In capitalism the note reads: “The Market has been damaged by excessive attempts of foolish people to regulate it and so trillions of dollars must be given to the managers who are guided by the True Invisible Hand to save us from a great depression, social unrest and civil war.”

What this boils down to is that capitalism, as an economic process, seeks to remove the rules that guide economic behavior, and as economic capitalism melds into political capitalism, what ever form of governance was in place is replaced with fascism. This has been the major movement of historical process in competition with democratization. Global corporations have championed democracy as a way to gain deep power in government, to take control of taxation, reduce political restraints from popular autocrats and manipulate political process.

Capitalism restrained by democratic socialism, capitalism used as resource distributing economic device and not as a religion is a functional design. But it is a little like having a gorilla guarding your house; he might at any moment realize his power to take over the whole place.

This is what has happened and, I fear, that we will see the full effect of capitalism without rules for the next many years. It will look a lot like other times in history when the powerful separate from and dominate the great middle by reducing them to servitude. Only this time we are facing an ecological end of track. How the elite will handle this reality as it manifests more and more clearly will, I suspect, not be pretty.

James Keye is the nom de plume of a biologist and psychologist who after discovering a mismatch between academe and himself went into private business for many years. His whole post-pubescent life has been focused on understanding at both the intellectual and personal levels what it is to be of the human species; he claims some success. Email him at: jkeye1632@gmail.com. Read other articles by James, or visit James's website.

This article was posted on Saturday, October 11th, 2008 at 7:00am and is filed under Capitalism, Economy/Economics.
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Re:We're Fucked - The Coming Economic Crisis
« Reply #74 on: 2008-10-11 18:01:53 »
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Quote from: Fritz on 2008-10-11 11:44:25   


"My KINGDOM for a rest button for mother earth."

Fritz


I like that plea!


Walter
<plaintively pleading  alongside Fritz>
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No one gets to see the Wizard! Not nobody! Not no how!
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