Signs of the Economic Apocalypse, 3-31-08

From SOTT.net:

Gold closed at 936.50 dollars an ounce Friday, up 1.8% from $920.00 for the week. The dollar closed at 0.6330 euros Friday, down 2.4% from 0.6480 at the close of the previous week. That put the euro at 1.5798 dollars compared to 1.5432 the week before. Gold in euros would be 592.80 euros an ounce, down 0.6% from 596.16 at the close of the previous week. Oil closed at 105.08 dollars a barrel Friday, up 3.2% from $101.84 for the week. Oil in euros would be 66.51 euros a barrel, up 0.8% from 65.99 at the close of the week before. The gold/oil ratio closed at 8.91 Friday, down 1.3% from 9.03 for the week. In U.S. stocks, the Dow closed at 12,216.40 Friday, down 1.2% from 12,361.32 at the close of the previous week. The NASDAQ closed at 2,261.18 Friday, up 0.1% from 2,258.11 at last week’s close. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.44%, up 11 basis points from 3.33 for the week.

The past week was the last in the first quarter of 2008. Exciting quarter, huh? Let’s survey the damage. Gold rose 11.1% from $842.70 to $936.50 and ounce in the first quarter. The dollar fell 7.3% from 0.6795 to 0.6330 euros in the first quarter. The euro went from 1.4716 dollars to 1.5798. Gold in euros rose 3.5% from 572.64 to 592.80 euros an ounce. Oil rose 9.3% from $96.16 to $105.08 a barrel. In euros, oil rose 1.8% from 65.34 to 66.51 euros a barrel in the first quarter. The gold/oil ratio rose 1.7% from 8.76 to 8.91. The Dow Jones Industrial Average fell 9.4% from 13,365.87 to 12,216.40 for the quarter, while the NASDAQ fell 18.3% from 2,674.46 to 2,261.18 in the same period. In U.S. interest rates, the yield on the ten-year U.S. Treasury note fell from 4.07 to 3.44%, a drop of 63 basis points.

Here are some charts showing changes over the past three and a quarter years.

The most striking thing about the past quarter is the accelerating drop in the value of the dollar. The steepness of its decline in 2008 (7% against the euro) can be seen in the last chart above. And that is against the euro, a currency with its own problems. Against gold, the dollar dropped 11%, against oil, 9%. That’s in three months.

The Fed was able to buy a little time with its more active stance, stabilizing the dollar for a week by pumping money into the system by, among other things, taking bad assets from financial institutions in exchange for money. Of course this can only work for a short time, because the actions weaken the currency in several ways. But the Fed used the time it bought to begin to re-regulate the financial system. The Fed is now taking over Wall Street (before it just regulated banks):

Treasury regulatory overhaul plan "timely": Fed

Doug Palmer

Mar 29, 2008

WASHINGTON (Reuters) - Upcoming Treasury Department proposals to make the Federal Reserve the chief regulator of U.S. financial markets and give it sweeping new powers won praise on Saturday from the central bank and the head of the Securities and Exchange Commission.

Treasury Secretary Henry Paulson is expected to unveil a blueprint on Monday for fixing gaps in the U.S. financial market regulatory structure that have been exposed by the ongoing subprime mortgage crisis.

Lax regulation has been widely blamed for permitting a flood of inadequately documented loans to be made during the boom years of a U.S. housing market that has since soured and now threatens to drag the economy into a deep recession.

"The Treasury's report presents a timely and thoughtful analysis and is an important first step in the complex task of modernizing our financial and regulatory architecture. We look forward to working with the Congress and others to help develop a policy framework that will enhance financial and economic stability," a Federal Reserve spokeswoman said.

An executive summary of the Treasury proposals says a "market stability regulator" is needed and the Fed best fits that role, suggesting the central bank could use its control over interest rates as well as its ability to provide market liquidity to fulfill its functions.

Step Back And Modernize

When the current regulatory structure was put into place 75 years ago, "our capital markets were in New York and very few people were invested and the number of products was limited," said David Hirschmann, president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness.

The financial world has changed dramatically since then, and over the years there has been a tendency to respond to market crises by adding new layers of regulation, he said.

"It's become clear, I think to all, that the solution at this point is not to simply layer on more layers of regulation on a creaky outdated system, but really to step back and modernize the entire structure," Hirschmann said.

Among its recommendations, Treasury suggests merging the Securities and Exchange Commission, the U.S. markets watchdog, with the Commodity Futures Trading Commission that oversees the activities of the futures market.

The subprime mortgage crisis provides "further evidence, if more were needed, that financial services regulation in the United States needs to be better integrated among fewer agencies, with clearer lines of responsibility," SEC Chairman Christopher Cox said in a statement.

"Just as systemic risk cannot be neatly parceled along outdated regulatory lines, the overarching objective of investor protection can't be fully achieved if it fails to encompass derivatives, insurance, and new instruments that straddle today's regulatory divides," Cox said.

The Same Fallback

Democratic presidential candidate Barack Obama called the plans inadequate.
"There are some good things about consolidating the multiple regulatory agencies," but now that the Fed has opened its discount window to investment banks it should hold them to the same reserve requirements as commercial banks, he said at a campaign stop in Johnston, Pennsylvania.

"If I'm a commercial bank right now I'm still not clear why it is that investment banks are still able to do things I can't do, aren't subject to the same capital requirements and liquidity requirements that I am and yet they've got the same fallback with the Fed," Obama said.

CFTC Commissioner Bart Chilton warned it could be disastrous to hastily consolidate the CFTC and the SEC into one agency because of the different approaches they take to regulatory oversight.

The CFTC has "an entirely different regulatory approach and the data confirms that it works," he said.

"The SEC has a very proscriptive old-style approach to government. Putting those two in the same room doesn't solve any problems. In fact, I think it would create a calamity" unless Congress takes its time and does a thorough overhaul of statutes authorizing the two agencies, Chilton said.

Can such a move restore confidence in the financial system and the U.S. dollar? Of course not. The re-regulation of finance is needed, but is way too late and done by the wrong entity. Notice that it will be the private Federal Reserve Bank and not the U.S. government that will be regulating banks and Wall Street investment firms. And the resources available to the central banks are way too small compared to the magnitude of the problem.

Slip Sliding Away: Bernanke's Next Big Bail Out Plan

Mike Whitney

March 29 / 30, 2008

The Federal Reserve is presently considering an emergency operation that is so risky it could send the dollar slip-sliding over the cliff. The story appeared in the Financial Times earlier this week and claimed that the Fed was examining the feasibility of buying back hundreds of billions of dollars of mortgage-backed securities (MBS) with public money to restore investor confidence and clear the struggling banks' balance sheets. The Fed, of course, denied the allegations, but the rumors abound. Currently the banking system is so clogged with exotic investments, for which there is no market, it can't perform its main task of providing credit to businesses and consumers. Bernanke's job is to clear the credit logjam so the broader economy can begin to grow again. So far, he has failed to achieve his objectives.

Since September, Bernanke has slashed interest rates by 3 per cent and opened various auction facilities (Term Securities Lending Facility, the Term Auction Facility, the Primary Dealer Credit Facility, and the new Term Securities Lending Facility) which have made $400 billion available in low-interest loans to banks and non banks. He has also accepted a "wide range" of collateral for Fed repos including mortgage-backed securities and collateralized debt obligations (CDOs) which are worth considerably less than what the Fed is offering in exchange. But the Fed's injections of liquidity have not solved the basic problem which is the fall in housing prices and the persistent downgrading of mortgage-backed assets that investors refuse to buy at any price. In fact, the troubles are gradually getting worse and spreading to areas of the financial markets that were previously thought to be risk-free. The credit slowdown has also put additional pressure on hedge funds and other financial institutions forcing them to quickly deleverage to meet margin calls by dumping illiquid assets into a saturated market at fire-sale prices. This process has been dubbed the "great unwind".

In the last six years, the mortgage-backed securities market has ballooned to a $4.5 trillion dollar industry. The investment banks are presently holding about $600 billion of these complex debt instruments. So far, the banks have written down $125 billion in losses, but there's a lot more carnage to come. Goldman Sachs estimates that banks, brokerages and hedge funds will eventually sustain $460 billion in losses, three times greater than today. Even so, those figures are bound to increase as the housing market continues to deteriorate and capital is drained from the system.

The Fed has neither the resources nor the inclination to scoop up all the junk bonds the banks have on their books. Bernanke has already exposed about half ($400 billion) of the Central Bank's balance sheet to credit risk. But what is the alternative? If the Fed doesn't intervene, then many of country's largest investment banks will wind up like Bear Stearns; DOA. After all, Bear is not an isolated case; most of the banks are similarly leveraged at 25 or 35 to 1. They are also losing more and more capital each month from downgrades, and their main streams of revenue have been cut off. In fact, many of Wall Street's financial titans are technically insolvent already. The Fed is the only force keeping them from bankruptcy.

Case in point: "Citigroup may write down $13.1 billion of assets including leveraged loans and collateralized debt obligations in the first quarter..... U.S. bank earnings overall will tumble 84 percent in the quarter....``We anticipate further downside to both estimates and stock prices'' because banks will be under pressure to mark down assets to reflect falling market indexes." (Bloomberg News)

…The Fed chairman has simply responded to events as they unfold. The collapse of Bears Stearns came just weeks after the SEC had checked the bank's reserves and decided that they had sufficient capital to weather the storm ahead. But they were wrong. The bank's capital ($17 billion) vanished in a matter of days after word got out that Bear was in trouble. The sudden run on the bank created a risk to other banks and brokerages that held derivatives contracts with Bear. Something had to be done; Rome was burning and Bernanke was the only man with a hose.

According to the UK Telegraph:

"Bear Stearns had total (derivatives) positions of $13.4 trillion. This is greater than the US national income, or equal to a quarter of world GDP - at least in 'notional' terms. The contracts were described as 'swaps', 'swaptions', 'caps', 'collars' and 'floors'. This heady edifice of new-fangled instruments was built on an asset base of $80bn at best.

"On the other side of these contracts are banks, brokers, and hedge funds, linked in destiny by a nexus of interlocking claims. This is counterparty spaghetti. To make matters worse, Lehman Brothers, UBS, and Citigroup were all wobbling on the back foot as the hurricane hit.

"' Twenty years ago the Fed would have let Bear Stearns go bust,' said Willem Sels, a credit specialist at Dresdner Kleinwort. 'Now it is too interlinked to fail.'"

Bernanke felt he had no choice but to step in and try to minimize the damage, but the outcome was disappointing. Bernanke and Secretary of the Treasury Henry Paulson worked out a deal with JP Morgan that committed $30 billion of taxpayer money, without congressional authority, to buy toxic mortgage-backed securities from a privately-owned business that was failing because of its own speculative bets on dodgy investments. The only people who made out were the investors who were holding derivatives contracts that would have been worthless if Bear went toes up.

Still,the prospect of a system-wide derivatives meltdown left Bernanke with few good options, notwithstanding the moral hazard of bailing out a maxed-out, capital impaired investment bank that should have been fed to the wolves.

It is worth noting that derivatives contracts are a fairly recent addition to US financial markets. In 2000, derivatives trading accounted for less than $1 trillion. By 2006 that figure had mushroomed to over $500 trillion. And it all can be traced back to legislation that was passed during the Clinton administration.

"A milestone in the deregulation effort came in the fall of 2000, when a lame-duck session of Congress passed a little-noticed piece of legislation called the Commodity Futures Modernization Act. The bill effectively kept much of the market for derivatives and other exotic instruments off-limits to agencies that regulate more conventional assets like stocks, bonds and futures contracts.
Supported by Phil Gramm, then a Republican senator from Texas and chairman of the Senate Banking Committee, the legislation was a 262-page amendment to a far larger appropriations bill. It was signed into law by President Bill Clinton that December." ("What Created this Monster" Nelson Schwartz, New York Times)

The Fed chief is now facing a number of brushfires that will have to be put out immediately. The first of these is short term lending rates, which have stubbornly ignored Bernanke's massive liquidity injections and continued to rise. The banks are increasingly afraid to lend to each other because they don't really know how much exposure the other banks have to risky MBS. This distrust has sent interbank lending rates soaring above the Fed funds rate to more than double in the past month alone. So far, the Fed's Term Auction Facility (TAF; under the Term Auction Facility (TAF), the Federal Reserve will auction term funds to depository institutions) hasn't helped to lower rates, which means that Bernanke will have to take more extreme measures to rev up bank lending again. That's why many Fed-watchers believe that Bernanke will ultimately coordinate a $500 billion to $1 trillion taxpayer-funded bailout to buy up all the MBSs from the banks so they can resume normal operations. Of course, any Fed-generated scheme will have to be dolled up with populous rhetoric so that welfare for banking tycoons looks like a selfless act of compassion for struggling homeowners. That shouldn't be a problem for the Bush public relations team.

The probable solution to the MBS mess is the restoration of the Resolution Trust Corp., which was created in 1989 to dispose of assets of insolvent savings and loan banks. The RTC would create a government-owned management company that would buy distressed MBS from banks and liquidate them via auction. The state would pay less than full-value for the bonds (The Fed currently pays 85 per cent face-value on MBS) and then take a loss on their liquidation. "According to Joseph Stiglitz in his book, Towards a New Paradigm in Monetary Economics, the real reason behind the need of this company was to allow the US government to subsidize the banking sector in a way that wasn't very transparent and therefore avoid the possible resistance."

The same strategy will be used again. Now that Bernanke's liquidity operations have flopped, we can expect that some RTC-type agency will be promoted as a prudent way to fix the mortgage securities market. The banks will get their bailout and the taxpayer will foot the bill.

The problem, however, is that the dollar is already falling against every other currency. (On Wednesday, the dollar fell to $1.58 per euro, a new record) If Bernanke throws his support behind an RTC-type plan; it will be seen by foreign investors as a hyper-inflationary government bailout, which could precipitate a global sell-off of US debt and trigger a dollar crisis.

Reuter's James Saft puts it like this:

"It is also hugely risky in terms of the Fed's obligation to maintain stable prices.... it could stoke inflation to levels intolerable to foreign creditors, provoking a sharp fall in the dollar as they sought safety elsewhere." (Reuters)

Saft is right; foreign creditors will see it as an indication that the Fed has abandoned standard operating procedures so it can inflate its way out of a jam. According to Saft, the estimated price could be as high as $1 trillion dollars. Foreign investors would have no choice except to withdraw their funds from US markets and move them overseas. In fact, that appears to be happening already. According to the Wall Street Journal:

"While cash continues to pour into the U.S. from abroad, this flow has been slowing. In 2007, foreigners' net acquisition of long-term bonds and stocks in the U.S. was $596 billion, down from $722 billion in 2006, according to Treasury Department data. From July to December as jitters about securities linked to US subprime mortgages spread, net purchases were just $121 billion, a 65% decrease from the same period a year earlier. Americans, meanwhile, are investing more of their own money abroad." ("A US Debt Reckoning" Wall Street Journal)

$121 billion does not even put a dent the $700 billion the US needs to pay its current account deficit. When foreign investment drops off, the currency weakens. It's no wonder the dollar is falling like a stone.

Some have argued that commodities like gold, wheat and oil have experienced a bubble and will fall in value when the economy goes into recession. These arguments grew a little stronger with the easing of gold prices in the last two weeks. Given the weaknesses of all central banks—they now have to be the holder of last resort of risky assets, commodity inflation and slow growth (stagflation) can coexist. Doug Noland argues that financial assets can crash in value while commodities increase.

End of an Era

Doug Noland

March 28, 2008

The Fed-orchestrated 1998 rescue of Long-Term Capital Management (and the “leveraged speculating community”) proved instrumental in instigating the “golden age” of Wall Street finance. Thursday from the Wall Street Journal (see Speculator Watch above): “Ten years after overseeing a hedge-fund collapse that buckled the world’s financial markets, John Meriwether again is scrambling to stem losses and keep investors from jumping ship. Mr. Meriwether is best known as a founder of Long-Term Capital Management…” Meriwether’s largest hedge fund – profitable in each year since its 1999 launch - is down 28% y-t-d. The fund now surely faces investor redemptions, a problematic “high-water mark” (hedge funds must make up for past losses before they can again collect big performance fees) and a resulting exodus of top talent.

Again this week, we see one of Wall Street’s most “elder leveraged speculators” fall into serious trouble. A strategy that had worked so nicely for almost a decade turned unworkable. While sharply reducing the risk profile and degree of leverage from the LTCM days, Meriwether’s bond fund was nonetheless leveraged 14.9 to 1 (according to Jenny Strasburg’s WSJ article). As was the case with the Peloton fund and others, the most aggressive use of leverage had navigated to the perceived safest (“money-like”) instruments – “His funds’ losing positions have included mortgage securities backed by Fannie Mae and Freddie Mac, trades tied to municipal bonds and triple-A-rated commercial mortgage-backed securities”.

Understandably, most fully expect Wall Street to rebound and the leveraged speculating community to emerge from current turmoil as it did following LTCM – albeit at a more measured pace. Some assume it’s merely a case of our policymakers “playing whack a mole” until they find the requisite instrument(s) to successfully beat down the sources of financial instability. Of course, I view things very differently, instead seeing Meriwether’s predicament as emblematic of an End of an Era - with huge ramifications for both the Financial and Economic Spheres. I would expect it will be quite some time before the marketplace (investors as well as lenders) grants Mr. Meriwether or similar leveraged strategies another shot at financial genius. Indeed, there is mounting evidence supporting the Bursting Hedge Fund Bubble Thesis – from the angle of the quality of underlying assets; from the capacity to leverage; from the ability to retain investors; and from a regulatory perspective. And keep in mind that the historic ballooning in the “leveraged speculating community” has been an absolutely instrumental – and extraordinarily opaque – facet of the Bubble in Wall Street finance and the overall Credit Bubble.

I would argue forcefully that the leveraged speculating community for some years now has assumed the key role of unappreciated marginal source of demand for risk assets – risky debt instruments financing asset inflation, in particular. Over time, Wall Street “alchemy” mastered the process of transforming virtually unlimited risky loans into perceived safe and liquid securities. A sizable – and growing - chunk of these securities were then purchased on leverage by the rapidly expanding speculator community, in the process fueling an increasingly maladjusted U.S. Bubble Economy. We’re now witnessing it all beginning to wind down. End of an Era.

It is today analytically imperative to differentiate the authorities’ focus on stabilizing marketplace liquidity from the Unfolding Bursting of the Wall Street Bubble. Our policymakers may be exerting meaningful impact on the former, yet the latter remains largely out of their control - and certainly thus far impervious to their actions. Especially when it comes to the key marketplace for agency securities, policymaker efforts are directed at sustaining perceived “moneyness” - through both governmental support (tacit guarantees and Fed liquidity operations) and a renewed bid for mortgages by the GSEs (Fannie, Freddie, and the FHLB). And while such efforts have important ramifications with regard to accommodating the ongoing de-leveraging process (and averting Credit system implosion), they are at the same time completely inadequate when it comes to generating sufficient new Credit to sustain U.S. Financial and Economic Bubbles. “Moneyness” will definitely not be retained in non-agency securitizations, especially as the economy falters.

Debt problems are accelerating and expanding from mortgages to home equity, auto, Credit card, student loans, small business finance, munis and corporate Credits. At the same time, Wall Street has been significantly tightening lending requirements for the leveraging of all types of debt instruments. While the focus has been on mortgage Credit, recent deterioration in other types of loans – and, importantly, the leveraged holders of large amounts of this debt – have major consequences for Credit Availability throughout the Economic Sphere. Housing markets and foreclosures are obviously major issues. Not commonly recognized is the now virtually across the board tightening in Credit throughout the securitization markets (consumer, student, muni, corporate, etc.), exerting more expansive headwinds upon the U.S. economy than even the tightening in mortgages (that predominantly impacted transactions and home prices).

February California median home prices declined $20,550 to $409,240. Median prices are now down $67,140 in two months and a stunning $179,730 since August. Prices are down 32% from June’s high, and are now even 13% below the level from three years ago. Granted, these median prices are impacted by the dearth of sales at the upper-end. Yet it’s clear that the California market is in the midst of an historic crash. The Credit standing of Golden State households, businesses, and various governmental agencies now deteriorates virtually by the day. I would argue the explosion over the past three years in “private-label” mortgages, Wall Street balance sheets, hedge fund assets, and California home prices were all part of the same Bubble. This Bubble inflated largely outside the banking system and outside GSE finance – and will now prove stubbornly unaffected by policy maneuvers.

Some argue rather forcefully that we’re now immersed in “debt deflation.” I understand the basic premise, but to examine double-digit growth in Bank Credit, GSE “books of business” and money fund assets provides a different perspective. To be sure, our Credit system continues to provide sufficient Credit to finance massive Current Account Deficits. And it is this ongoing outflow of dollar liquidity that stokes both indomitable dollar devaluation and global Credit excess. Many contend that inflationary pressures are poised to wane as the U.S. economy weakens. I’ll suggest that inflation dynamics will prove much more complex and uncooperative. There is further confirmation of this view - that the bursting of the Wall Street finance Bubble will have a significantly greater impact on asset prices than on general consumer pricing pressures.

The analysis gets much more challenging in the commodities markets. The simple view holds that commodities are just another Bubble waiting their turn to burst. This thinking gained greater acceptance last week, with the sharp reversal of prices and unwind of speculative positions. And it goes without saying that major speculative excess has developed throughout the commodities complex ("par for the course"). I am as well sympathetic to the view that liquidations by the leveraged speculating community could lead to some major price instability. Yet it’s my sense that there really is much more to the commodities story – and inflation, more generally – that is not widely appreciated.

The bursting of the Wall Street finance and U.S. Credit Bubbles marks an End of an Era. But the start of a deflationary spiral? Importantly, these bursting Bubbles are in the process of consummating the demise of the dollar as the world’s functioning “reserve currency” and monetary standard. Examining global markets, I note the ongoing strength of currencies in China, Russia, Brazil, and India, for example. Considering mounting financial and economic imbalances in all these economies – not too mention histories of less than exemplary monetary management – I can state categorically that these are fundamentally very weak currencies. Today, however, it’s all relative to the sickly dollar. In the face of rampant domestic Credit growth, these currencies nonetheless attract endless global finance and appreciate.

When it comes to Ending of Eras, I am increasingly fearful that we are falling deeper into a precarious period devoid of a functioning global currency regime necessary to discipline Credit excess and restrain mounting inflationary pressures. And as long as dollar liquidity inundates the world economy, domestic Credit systems across the globe enjoy the extraordinary capacity to inflate domestic Credit and use this new purchasing power for the benefit of their citizens and economies. And, in particular because of their enormous populations, as long as the Chinese and Indian Credit system enjoy the freedom to inflate at will there will remain significant upside pricing pressure for energy, food, and various goods and commodities in limited supply – hedge fund speculative excess and/or bust notwithstanding.

I throw this analysis out as food for thought. I am increasingly of the mind that commodities should be differentiated from U.S. financial assets when it comes to the consequences from the bursting of the Wall Street finance and leveraged speculating community Bubbles. Prices will likely remain hyper-volatile but (unBubble-like) well-supported by underlying fundamental factors. Similarly, I believe general inflationary pressures may likely prove more significantly influenced by runaway global Credit excesses than by the Wall Street and U.S. asset price busts. If this proves to be the case, perhaps the greater risk is a bursting of the Treasury Market Bubble. It may take some time, but an enormous supply of government debt is in the offing and – let’s face it – these instruments will become only less appealing over time. It also begs the question as to the advisability of aggressive Fed rate cuts. They are having little influence on the bursting Wall Street Bubbles but possibly huge effects on global inflationary forces. Little wonder the ECB is so hesitant to lower rates.

Some people see the re-regulation as a way for the globalists to make their final move. First, George Ure:

The really astute financial observer would notice, along in here somewhere, that the newest game by the central banksters is to buy up (by holding as 'security') bad loans to get a little control their multiple (naughty) children banks. In fact, I'd argue with the Fed taking (pretty much anything) as loan security, and this morning's report that the "Bank of England may join securities buy-up plan" that what's going on at a global scale is one of the most important precursors to one-world government. A single universal bank. Seems to me that's what's coming, although by fits and starts.

…In order for a New World Order to really own everything on earth, all these disparate little banks around are a terrible nuisance. Let's just buy them up, setting off a portfolio-saving inflation along the way, and centralize control! Hey - makes perfect sense, right? We'll make an almost unnavigable set of rules, force everyone to clear through a clearinghouse the same way, and then gradually let the markets forces drive everything into the hands of the few (the rich).

OK, so it may turn out to be a little slower than One Worlders would like, but nevertheless, the concentration/consolidation (and shotgun marriages orchestrated by regulators) seem to be the fad of the year in financial circles. About all we can do is watch.

But more than the regulation, the collapse of the dollar may be exactly what is needed to implement the plan. Here’s Richard Cook:

Is an International Financial Conspiracy Driving World Events?

Richard C. Cook

March 27, 2008

"They make a desolation and call it peace." -Tacitus

Was Alan Greenspan really as dumb as he looks in creating the late housing bubble that threatens to bring the entire Western debt-based economy crashing down?

Was something as easy to foresee as this really the trigger for a meltdown that could destroy the world’s financial system? Or was it done, perhaps, "accidentally on purpose"?

And if so, why?

Let’s turn to the U.S. personage that conspiracy theorists most often mention as being at the epicenter of whatever elite plan is reputed to exist. This would be David Rockefeller, the 92-year-old multibillionaire godfather of the world’s financial elite. The lengthy Wikipedia article on Rockefeller provides the following version of a celebrated statement he allegedly made in an opening speech at the Bilderberg conference in Baden-Baden, Germany, in June 1991:

"We are grateful to the Washington Post, the New York Times, Time magazine, and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years. It would have been impossible for us to develop our plan for the world if we had been subject to the bright lights of publicity during these years. But the world is now more sophisticated and prepared to march towards a world government which will never again know war, but only peace and prosperity for the whole of humanity. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in the past centuries."

This speech was made 17 years ago. It came at the beginning in the U.S. of the Bill Clinton administration. Rockefeller speaks of an "us." This "us," he says, has been having meetings for almost 40 years. If you add the 17 years since he gave the speech it was 57 years ago—two full generations.

Not only has "us" developed a "plan for the world," but the attempt to "develop" the plan has evidently been successful, at least in Rockefeller’s mind. The ultimate goal of "us" is to create "the supranational sovereignty of an intellectual elite and world bankers." This will lead, he says, toward a "world government which will never again know war."

Just as an intellectual exercise, let’s assume that David Rockefeller is as important and powerful a person as he seems to think he is. Let’s give the man some credit and assume that he and "us" have in fact succeeded to a degree. This would mean that the major decisions and events since Rockefeller gave the speech in 1991 have probably also been part of the plan or that they have at least represented its features and intent.

Therefore by examining these decisions and events we can determine whether in fact Rockefeller is being truthful in his assessment that the Utopia he has in mind is on its way or has at least come closer to being realized. In no particular order, some of these decisions and events are as follows:

The implementation of the North American Free Trade Agreement by the Bill Clinton and George W. Bush administrations has led to the elimination of millions of U.S. manufacturing jobs as well as the destruction of U.S. family farming in favor of global agribusiness.

Similar free trade agreements, including those under the auspices of the World Trade Organization, have led to export of millions of additional manufacturing jobs to China and elsewhere.

Average family income in the U.S. has steadily eroded while the share of the nation’s wealth held by the richest income brackets has soared. Some Wall Street hedge fund managers are making $1 billion a year while the number of homeless, including war veterans, pushes a million.

The housing bubble has led to a huge inflation of real estate prices in the U.S. Millions of homes are falling into the hands of the bankers through foreclosure. The cost of land and rentals has further decimated family agriculture as well as small business. Rising property taxes based on inflated land assessments have forced millions of lower-and middle-income people and elderly out of their homes.

The fact that bankers now control national monetary systems in their entirety, under laws where money is introduced only through lending at interest, has resulted in a massive debt pyramid that is teetering on collapse. This "monetarist" system was pioneered by Rockefeller-family funded economists at the University of Chicago. The rub is that when the pyramid comes down and everyone goes bankrupt the banks which have been creating money "out of thin air" will then be able to seize valuable assets for pennies on the dollar, as J.P. Morgan Chase is preparing to do with the businesses owned by Carlyle Capital. Meaningful regulation of the financial industry has been abandoned by government, and any politician that stands in the way, such as Eliot Spitzer, is destroyed.

The total tax burden on Americans from federal, state, and local governments now exceeds forty percent of income and is rising. Today, with a recession starting, the Democratic-controlled Congress, while supporting the minuscule "stimulus" rebate, is hypocritically raising taxes further, even for middle-income earners. Back taxes, along with student loans, can no longer be eliminated by bankruptcy protection.

Gasoline prices are soaring even as companies like Exxon-Mobil are recording record profits. Other commodity prices are going up steadily, including food prices, with some countries starting to experience near-famine conditions. 40 million people in America are officially classified as "food insecure."

Corporate control of water and mineral resources has removed much of what is available from the public commons, and the deregulation of energy production has led to huge increases in the costs of electricity in many areas.

The destruction of family farming in the U.S. by NAFTA (along with family farming in Mexico and Canada) has been mirrored by policies toward other nations on the part of the International Monetary Fund and World Bank. Around the world, due to pressure from the "Washington consensus," local food self-sufficiency has been replaced by raising of crops primarily for export. Migration off the land has fed the population of huge slums around the cities of underdeveloped countries.

Since the 1980s the U.S. has been fighting wars throughout the world either directly or by proxy. The former Yugoslavia was dismembered by NATO. Under cover of 9/11 and by utilizing off-the-shelf plans, the U.S. is now engaged in the military conquest and permanent military occupation of the Middle East. A worldwide encirclement of Russia and China by U.S. and NATO forces is underway, and a new push to militarize space has begun. The Western powers are clearly preparing for at least the possibility of another world war.

The expansion of the U.S. military empire abroad is mirrored by the creation of a totalitarian system of surveillance at home, whereby the activities of private citizens are spied upon and tracked by technology and systems which have been put into place under the heading of the "War on Terror." Human microchip implants for tracking purposes are starting to be used. The military-industrial complex has become the nation’s largest and most successful industry with tens of thousands of planners engaged in devising new and better ways, both overt and covert, to destroy both foreign and domestic "enemies."

Meanwhile, the U.S. has the largest prison population of any country on earth. Plus everyday life for millions of people is a crushing burden of government, insurance, and financial fees, charges, and paperwork. And the simplest business transactions are burdened by rake-offs for legions of accountants, lawyers, bureaucrats, brokers, speculators, and middlemen.

Finally, the deteriorating conditions of everyday life have given rise to an extraordinary level of stress-related disease, as well as epidemic alcohol and drug addiction. Governments themselves around the world engage in drug trafficking. Instead of working to lower stress levels, public policy is skewed in favor of an enormous prescription drug industry that grows rich off the declining level of health through treatment of symptoms rather than causes. Many of these heavily-advertised medications themselves have devastating side-effects.

This list should at least give us enough to go on in order to ask a hard question. Assuming again that all these things are parts of the elitist plan which Mr. Rockefeller boasts to have been developing, isn’t it a little strange that the means which have been selected to achieve "peace and prosperity for the whole of humanity" involve so much violence, deception, oppression, exploitation, graft, and theft?

In fact it looks to me as though "our plan for the world" is one that is based on genocide, world war, police control of populations, and seizure of the world’s resources by the financial elite and their puppet politicians and military forces.

In particular, could there be a better way to accomplish all this than what appears to be a concentrated plan to remove from people everywhere in the world the ability to raise their own food? After all, genocide by starvation may be slow, but it is very effective. Especially when it can be blamed on "market forces."

And can it be that the "us" which is doing all these things, including the great David Rockefeller himself, are just criminals who have somehow taken over the seats of power? If so, they are criminals who have done everything they can to watch their backs and cover their tracks, including a chokehold over the educational system and the monopolistic mainstream media.

One thing is certain: The voters of America have never knowingly agreed to any of this.

At some point soon, to maintain power and the value of its currency, the United States will have to come up with gold to support its currency, and who knows whether it has any left. Everything else has been looted, why not that? In other words, how much is actually in Fort Knox? Any that it has may have been pledged many times over. Paul Craig Roberts explains what happens to a world power when it runs out of money:

A Bankrupt Superpower: The Collapse of American Power

Paul Craig Roberts

March 18, 2008

In his famous book, The Collapse of British Power (1972), Correlli Barnett reports that in the opening days of World War II Great Britain only had enough gold and foreign exchange to finance war expenditures for a few months. The British turned to the Americans to finance their ability to wage war. Barnett writes that this dependency signaled the end of British power.

From their inception, America's 21st century wars against Afghanistan and Iraq have been red ink wars financed by foreigners, principally the Chinese and Japanese, who purchase the US Treasury bonds that the US government issues to finance its red ink budgets.

The Bush administration forecasts a $410 billion federal budget deficit for this year, an indication that, as the US saving rate is approximately zero, the US is not only dependent on foreigners to finance its wars but also dependent on foreigners to finance part of the US government's domestic expenditures. Foreign borrowing is paying US government salaries--perhaps that of the President himself--or funding the expenditures of the various cabinet departments. Financially, the US is not an independent country.

The Bush administration's $410 billion deficit forecast is based on the unrealistic assumption of 2.7% GDP growth in 2008, whereas in actual fact the US economy has fallen into a recession that could be severe. There will be no 2.7% growth, and the actual deficit will be substantially larger than $410 billion.

Just as the government's budget is in disarray, so is the US dollar which continues to decline in value in relation to other currencies. The dollar is under pressure not only from budget deficits, but also from very large trade deficits and from inflation expectations resulting from the Federal Reserve's effort to stabilize the very troubled financial system with large injections of liquidity.

A troubled currency and financial system and large budget and trade deficits do not present an attractive face to creditors. Yet Washington in its hubris seems to believe that the US can forever rely on the Chinese, Japanese and Saudis to finance America's life beyond its means. Imagine the shock when the day arrives that a US Treasury auction of new debt instruments is not fully subscribed.

The US has squandered $500 billion dollars on a war that serves no American purpose. Moreover, the $500 billion is only the out-of-pocket costs. It does not include the replacement cost of the destroyed equipment, the future costs of care for veterans, the cost of the interests on the loans that have financed the war, or the lost US GDP from diverting scarce resources to war. Experts who are not part of the government's spin machine estimate the cost of the Iraq war to be as much as $3 trillion.

The Republican candidate for President said he would be content to continue the war for 100 years. With what resources? When America's creditors consider our behavior they see total fiscal irresponsibility. They see a deluded country that acts as if it is a privilege for foreigners to lend to it, and a deluded country that believes that foreigners will continue to accumulate US debt until the end of time.

The fact of the matter is that the US is bankrupt. David M. Walker, Comptroller General of the US and head of the Government Accountability Office, in his December 17, 2007, report to the US Congress on the financial statements of the US government noted that "the federal government did not maintain effective internal control over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of September 30, 2007." In everyday language, the US government cannot pass an audit.

Moreover, the GAO report pointed out that the accrued liabilities of the federal government "totaled approximately $53 trillion as of September 30, 2007." No funds have been set aside against this mind boggling liability.

Just so the reader understands, $53 trillion is $53,000 billion.

Frustrated by speaking to deaf ears, Walker recently resigned as head of the Government Accountability Office.

As of March 17, 2008, one Swiss franc is worth more than $1 dollar. In 1970, the exchange rate was 4.2 Swiss francs to the dollar. In 1970, $1 purchased 360 Japanese yen. Today $1 dollar purchases less than 100 yen.

If you were a creditor, would you want to hold debt in a currency that has such a poor record against the currency of a small island country that was nuked and defeated in WW II, or against a small landlocked European country that clings to its independence and is not a member of the EU?

Would you want to hold the debt of a country whose imports exceed its industrial production? According to the latest US statistics as reported in the February 28 issue of Manufacturing and Technology News, in 2007 imports were 14 percent of US GDP and US manufacturing comprised 12% of US GDP. A country whose imports exceed its industrial production cannot close its trade deficit by exporting more.

The dollar has even collapsed in value against the euro, the currency of a make-believe country that does not exist: the European Union. France, Germany, Italy, England and the other members of the EU still exist as sovereign nations. England even retains its own currency. Yet the euro hits new highs daily against the dollar.

Noam Chomsky recently wrote that America thinks that it owns the world. That is definitely the view of the neoconized Bush administration. But the fact of the matter is that the US owes the world. The US "superpower" cannot even finance its own domestic operations, much less its gratuitous wars except via the kindness of foreigners to lend it money that cannot be repaid.

The US will never repay the loans. The American economy has been devastated by offshoring, by foreign competition, and by the importation of foreigners on work visas, while it holds to a free trade ideology that benefits corporate fat cats and shareholders at the expense of American labor. The dollar is failing in its role as reserve currency and will soon be abandoned.

When the dollar ceases to be the reserve currency, the US will no longer be able to pay its bills by borrowing more from foreigners.

I sometimes wonder if the bankrupt "superpower" will be able to scrape together the resources to bring home the troops stationed in its hundreds of bases overseas, or whether they will just be abandoned.

The dollar collapse and the fall of the American Empire will no doubt work to the globalists benefit. They can introduce the North American Union and the Amero. When the world abandons the dollar with a rush to the exits, what will the U.S. government come up with? Nothing, it’s all been taken private, including now financial regulation. All the “security” firms, mercenary firms, military contractors, and prison companies will still be there. All the weapons will still be there, but they will be in private hands. The globalists don’t need national governments anymore.

Signs of the Economic Apocalypse, 3-24-08

From SOTT.net:

Gold closed at 920.00 dollars an ounce Thursday (markets were closed Friday for Good Friday), down 8.6% from $999.50 for the week. The dollar closed at 0.6480 euros last week, up 1.5% from 0.6382 at the close of the previous Friday. That put the euro at 1.5432 dollars compared to 1.5670 the Friday before. Gold in euros would be 596.16 euros an ounce, down 7.0% from 637.84 at the close of the previous week. Oil closed at 101.84 dollars a barrel Thursday, down 8.1% from $110.06 for the week. Oil in euros would be 65.99 euros a barrel, down 6.4% from 70.24 at the close of the week before. The gold/oil ratio closed at 9.03, down 0.6% from 9.08 for the week. In U.S. stocks, the Dow Jones Industrial Index closed at 12,361.32 Thursday, up 3.4% from 11,951.09 at the close of the previous week. The NASDAQ closed at 2,258.11 last week, up 2.1% from 2,212.49 at last week’s close. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.33 Thursday, down 11 basis points from 3.44% for the week.

Looking back on last week, it is safe to say that the Fed’s odd rescue of Bear Stearns was a success. The price of gold fell the most it has in any week since 1990, almost 9%. The dollar gained on the euro. Oil was down 8%. The Dow rose 3.4%. Not to say there isn’t a whole lot to criticize in the Bear Stearns action. Don Harrold does a great job of that here if you haven’t seen it yet. But it did what it was supposed to do: stop the bleeding.

Now what? Were the recent run-ups in the prices of commodities (gold, other metals, oil, wheat, corn, etc.) just another bubble or were they part of a longer term trend? Will commodity prices go down as the world enters a recession, or will we suffer stagflation (higher prices and low growth)? By “just another bubble” I mean that it could be that the higher prices for commodities represent the lower value of all world currencies, that currencies were inflated by easy credit and there are more dollars, euros, yen, etc. chasing the same amount of commodities and that when a crash comes, we will see a deflationary reduction in commodity prices. Or, it could be that we are reaching limits in the production of commodities, that there is a limited amount of gold, oil, arable land, etc. and that economic growth in Asia means higher prices.

Deflation or Inflation? Money for Nothing

Kenneth Couesbouc

March 21, 2008

The harder they come, the harder they fall one and all.
-- Jimmy Cliff.

There are currently two contradictory forecasts for the times to come, deflation and inflation. Are rising commodity prices mere speculation, a bubble amongst bubbles that will burst as bubbles do? Will the credit crunch lead to a liquidity crisis that must push prices down? Or is legal tender losing its face-value? Is OPEC to blame for the rising price of crude oil, or should the major central banks be held responsible for flooding the market with "money for nothing"?

Trading in commodities is always a speculative business, as it demands a continual anticipation of future prices. But this also applies to stocks and real estate. And these, as shown by recent events, can inflate without inflating currency. However, the price of stocks and real estate only affects the price of stocks and real estate, whereas the price of commodities affects the price of just about everything else. It is also true that company shares and land are practically eternal, whereas commodities are destined to enter the production/consumption process. A barrel of oil is not continuously coming back on the market to be bought and sold. At some stage its value is determined once and for all (without, of course, prejudicing the price of future barrels of oil). Commodities and their value are destined to be consumed and must be produced again. Company shares (as long as the company exists) and land (a part of the Earth's surface) cannot be consumed. Their market value may fluctuate but their material existence persists unchanged. The persistence of stocks and real estate allows the formation of speculative bubbles that drain money from other employment, but do not otherwise affect the prices on the market. Whereas inflated commodity prices inflate all other prices.

The direct effect of a liquidity crisis is that banks hesitate in lending to each other and to the world at large. This means that the biggest banks will take control of the smaller fry, probably after substantial government bail-outs (vis. Bear Stearns). The next to suffer are the market operators on the stock exchange and in real estate, who need regular injections of extra credit to keep their buoyancy. Then come home-buyers, car-buyers, buyers of sofas and TVs, right down to the ordinary overdraft. Less liquidity means less buying power all round. Will this bring prices down generally, or will it reduce spending to the essentials of life, at whatever price? A shrinking demand for non-essential goods and services will push the weak to the wall, and the big companies will swallow the small.

Like the Roman god Janus, money is two-faced. It can be the intermediary of exchange and it can be the finality of exchange. As K. Marx explained long ago, the perpetual chain of exchanges, commodity - money - commodity - money - C - M - C - M - etc., is made up of two separate series of events. One is C - M - C, and the other is M - C - M. The first series concerns the exchange of goods and services, with money as their intermediary. The second series concerns the exchange of money, with goods and services as its intermediary. Selling the produce of labour to buy the produce of different labour is a consequence of the division of labour. Buying the produce of labour to sell it again at a profit is a consequence of the monetary system. Through the intermediary of money, goods and services are exchanged for consumption (productive or not). Use and exchange value changes hands, and the intervening money is a simple formality. Whereas buying to sell at a profit means that the object of the exchange between money and more money is of secondary importance and that, ultimately, everything is bought and sold.

Buying to sell instead of selling to buy means available credit instead of available goods and services, capital instead of labour. It is no longer the product of labour that is sold to buy the product of other labours. It is labour that is bought, and its product is sold at a profit. And the question arises of the nature of profit. Is labour bought at less than its value, or is the product of labour sold at more than its value? This is a moot-point. But the value of a product is the sum of the values that go into its production, and its market price must cover this plus profit. Profit is the difference between the market price and the production costs. This means that profit depends on a market price that is superior to the value of the product. And profit increases as the gap between price and value widens. If the market price of a product is unchanged (if supply matches demand), and its value is reduced by productivity gains (new technology), or by reducing the price of labour (outsourcing), then profit will increase accordingly. But the exchanges on the market are exchanges of value that do not take into account the difference between an excessive and an insufficient price of labour. The value of labour is the price paid for it. Profit means that the market price is in excess of value, and that the currency measuring the price is devalued. And the larger the profit margin, the more currency is devalued.

…The price of non-renewable commodities is entering a new phase. So far, abundance has been the rule, and this may still be true. But the growth curve of supply has been crossed by the growth curve of demand, which is much steeper. Market prices are but a reflection of this new relation, where the planet's resources are pushed to the limit. However, demand must be solvent, and increasing demand depends on increasing amounts of liquidity. And that seems to be in contradiction with the present situation. Unless liquidity is being drained onto the commodity market, thereby accentuating the lack of liquidity elsewhere. Either demand for commodities slackens and the world economy stagnates or recedes, or this demand is sustained by credit and banks will fall like dominoes. Or, and this is the case so far, central banks change their status of ultimate lenders to that of primary lenders. Instead of backing short term discounting and inter-bank lending, central banks are doing the lending themselves at a bargain rate. This is not quite the same as printing larger and larger denomination bank-notes, because credit returns to the creditor, whereas bank-notes stay in circulation. But the principle is the same. The loans granted by central banks will have to be renewed and increased. Renewed to keep the banks afloat, and increased to compensate the liquidity drawn on to the commodities market. And also to compensate the liquidity that is withdrawn to be consumed. As rising commodity prices are passed on to the consumer, the credit squeeze forces him to fall back on his savings. He too needs cash and must sell his stocks and bonds, maybe even his life insurance or his home. This also must be compensated by central bank loans.

It seems that 2008 will be an up and down year, as central banks regularly intervene on a weekly, monthly and quarterly basis with increasing amounts of credit. The real test will come when governments try to fill their abysmal budget deficits by borrowing on the money market. With banks on the verge of asphyxiation and savings being spent on consumption, this will be difficult and costly and will depend on more central bank lending. Handing out swaths of money at close to zero interest, backed by little or no collateral, may be different from printing bank-notes but the result will be just as inflationary. So inflation wipes out debts and borrowing can increase again, drawing growth along with it. Inflation will greatly alleviate government, corporate and all fixed interest debts. But the holders of these debts will loose out. So will wage earners and fixed incomes in general. And the consequence of these recurrent inflationary peaks is always proportionate to the size of the debt. With inflation, the amount of value destroyed is necessarily a percentage of the total sum of all values.

What does Couesbouc mean when he says that central banks are becoming primary lenders? It means the Fed now is lending money directly to to investment firms, rather than what they traditionally did as ultimate lenders, lend money to banks and their own national governments.

Investment firms tap Fed for billions

Jeannine Aversa

March 20, 2008

WASHINGTON (AP) - Big Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans, the central bank reported Thursday.

The lending is part of a major effort by the Fed to help a financial system in danger of freezing.

Those large firms averaged $13.4 billion in daily borrowing over the past week from the new lending facility. The report does not identify the borrowers.

The Fed, in a bold move Sunday, agreed for the first time to let big investment houses get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, got under way Monday and will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s.

Goldman Sachs, Lehman Brothers and Morgan Stanley said Wednesday they had begun to test the new lending mechanism.

On Wednesday alone, lending reached $28.8 billion, according to the Fed report.

The Fed created a way for financially strapped investment firms to have regular access to a source of short-term cash. This lending facility is seen as similar to the Fed's "discount window" for banks. Commercial banks and investment companies pay 2.5 percent in interest for overnight loans from the Fed.

Investment houses can put up a range of collateral, including investment-grade mortgage backed securities.

The Fed, in another rare move last Friday, agreed to let JP Morgan Chase secure emergency financing from the central bank to rescue the venerable Wall Street firm Bear Stearns from collapse. Two days later, the Fed back a deal for JP Morgan to take over Bear Stearns.

Thursday's report offered insight on how much credit was extended to Bear Stearns via JP Morgan through the transaction the Fed approved last Friday. Average daily borrowing came to $5.5 billion for the week ending Wednesday.

Separately, the Fed said it will make $75 billion of Treasury securities available to big investment firms next week. Investment houses can bid on a slice of the securities at a Fed auction next Thursday; a second is set for April 3.

The Fed will allow investment firms to borrow up to $200 billion in safe Treasury securities by using some of their more risky investments as collateral.

By allowing this, the Fed is hoping to take pressure off financial companies and make them more inclined to lend to people and businesses.

The housing collapse and credit crunch have led to record-high home foreclosures and forced financial companies to rack up multibillion losses in complex mortgage investments that turned sour.

In the past day and weeks, the Fed has taken extraordinary moves aimed at making sure that problems in credit and financial markets do not sink the economy.

One of the things this new lending means is that the Fed will begin to regulate investment firms like they have regulated banking. This is generally a good thing and long overdue. The repeal of the Glass-Steagall Act in 1999, which separated commercial banking from investment banking, opened up a whole world of unregulated credit. That will always lead to a speculative bubble then a crash.

Partying Like It’s 1929

Paul Krugman

March 21, 2008

If Ben Bernanke manages to save the financial system from collapse, he will — rightly — be praised for his heroic efforts.

But what we should be asking is: How did we get here?

Why does the financial system need salvation?

Why do mild-mannered economists have to become superheroes?

The answer, at a fundamental level, is that we’re paying the price for willful amnesia. We chose to forget what happened in the 1930s — and having refused to learn from history, we’re repeating it.

Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931.

This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure.

As the decades passed, however, that lesson was forgotten — and now we’re relearning it, the hard way.

To grasp the problem, you need to understand what banks do.

Banks exist because they help reconcile the conflicting desires of savers and borrowers. Savers want freedom — access to their money on short notice. Borrowers want commitment: they don’t want to risk facing sudden demands for repayment.

Normally, banks satisfy both desires: depositors have access to their funds whenever they want, yet most of the money placed in a bank’s care is used to make long-term loans. The reason this works is that withdrawals are usually more or less matched by new deposits, so that a bank only needs a modest cash reserve to make good on its promises.

But sometimes — often based on nothing more than a rumor — banks face runs, in which many people try to withdraw their money at the same time. And a bank that faces a run by depositors, lacking the cash to meet their demands, may go bust even if the rumor was false.

Worse yet, bank runs can be contagious. If depositors at one bank lose their money, depositors at other banks are likely to get nervous, too, setting off a chain reaction. And there can be wider economic effects: as the surviving banks try to raise cash by calling in loans, there can be a vicious circle in which bank runs cause a credit crunch, which leads to more business failures, which leads to more financial troubles at banks, and so on.

That, in brief, is what happened in 1930-1931, making the Great Depression the disaster it was. So Congress tried to make sure it would never happen again by creating a system of regulations and guarantees that provided a safety net for the financial system.

And we all lived happily for a while — but not for ever after.

Wall Street chafed at regulations that limited risk, but also limited potential profits. And little by little it wriggled free — partly by persuading politicians to relax the rules, but mainly by creating a “shadow banking system” that relied on complex financial arrangements to bypass regulations designed to ensure that banking was safe.

For example, in the old system, savers had federally insured deposits in tightly regulated savings banks, and banks used that money to make home loans. Over time, however, this was partly replaced by a system in which savers put their money in funds that bought asset-backed commercial paper from special investment vehicles that bought collateralized debt obligations created from securitized mortgages — with nary a regulator in sight.

As the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players in this system seemed to offer better deals than conventional banks. Meanwhile, those who worried about the fact that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned.

In fact, however, we were partying like it was 1929 — and now it’s 1930.

The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.

Mr. Bernanke and his colleagues at the Fed are doing all they can to end that vicious circle. We can only hope that they succeed. Otherwise, the next few years will be very unpleasant — not another Great Depression, hopefully, but surely the worst slump we’ve seen in decades.

Even if Mr. Bernanke pulls it off, however, this is no way to run an economy. It’s time to relearn the lessons of the 1930s, and get the financial system back under control.

It is clear that the game has changed in the financial capitals of the world. To one degree or another we will see closer regulation of financial markets, if only because there was hardly any regulation at all in the last decade.

The four ‘new sheriffs’ of Wall Street

Francesco Guerrera, Krishna Guha and Gillian Tett

March 21 2008

The Federal Reserve and Treasury are playing a dominant day-to-day role in overseeing Wall Street following this week’s rescue of Bear Stearns, raising the prospect that the central bank might be given more permanent authority over securities firms.

Bankers say the greater authority is a direct consequence of the Fed’s extraordinary decisions to extend a $30bn credit line to help JPMorgan Chase’s takeover of Bear and to lend emergency funds to securities houses for the first time in more than 70 years.

“There is a new sheriff in town,” said a senior banker. “The Bear situation changed everything: people saw death before their eyes. The Fed and Treasury are in charge now and are not going to let go”.

Under a regulatory regime dating back to the 1930s, the Fed oversees commercial banks, but investment banks are primarily regulated by the Securities and Exchange Commission.

But as the credit crunch deepened, Ben Bernanke, Fed chairman, Tim Geithner, president of the New York Fed, Hank Paulson, Treasury secretary, and Robert Steel, his number two, have been in unusually close contact with Wall Street executives.

People close to the situation said the Fed and Treasury feared further problems among securities firms could destabilise the financial system and expose US taxpayers to sizeable losses on the new Fed loans.

Their stance has triggered talk of new financial services legislation, with bankers and politicians, including Barney Frank, House financial services committee chairman, asking whether investment banks should be regulated by the SEC or the Fed.

An extension of the Fed’s powers to investment banks might force them to reduce risk and leverage in order to comply with the tougher requirements faced by deposit-taking banks.

However, any change would require legislative action, which looks increasingly difficult ahead of the November presidential election, and could be even more problematic under a new Administration.

The SEC said different agencies were functioning as “equal partners at the regulatory forefront”.

Whatever happens it is clear that we have reached the end of an era. The end of both the neoliberal era and the era of U.S. hegemony.

Signs of the Economic Apocalypse, 3-17-08

From SOTT.net:

Gold closed at 999.50 dollars an ounce Friday, up 2.6% from $974.20 for the week. The dollar closed at 0.6382 euros Friday, down 2.0% from 0.6512 at the close of the previous Friday. That put the euro at 1.5670 dollars compared to 1.5356 the Friday before. Gold in euros would be 637.84 euros an ounce, up 0.5% from 634.41 at the close of the previous week. Oil closed at 110.06 dollars a barrel Friday, up 4.4% from $105.47 for the week. Oil in euros would be 70.24 euros a barrel, up 2.3% from 68.68 at the close of the Friday before. The gold/oil ratio closed at 9.08 Friday, down 1.8% from 9.24 for the week. In U.S. stocks, the Dow closed at 11,951.09 Friday, up 0.5% from 11,893.69 at the close of the previous week. The NASDAQ closed at 2,212.49 Friday, unchanged from the end of last week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.44%, down ten basis points from 3.54 for the week.

The big news, amid a lot of big news, last week was the collapse of the Carlyle Fund and Bear Stearns. The Carlyle Fund, a hedge fund affiliated with the notorious Carlyle Group, a private equity firm run by the Anglo-American power elite, collapsed on Wednesday. Bear Stearns, one of the older and larger Wall Street brokerage firms, only avoided collapse by a massive bailout using the Fed’s own money. These events, particularly the Bear Stearns bailout had insiders in a deep panic, since there may simply not be enough money to bail out all the essentially bankrupt financial institutions.

This big rescue may be just the beginning

Tom Petruno

Los Angeles Times

March 15, 2008

Throughout Wall Street's history, major financial system upheavals often have culminated with the spectacular failure of a marquee name.

That was the case in December 1994, when Orange County filed for bankruptcy protection after getting caught on the wrong side of a sharp jump in interest rates.

In September 1998, the Federal Reserve helped arrange a bailout of the giant investment fund Long-Term Capital Management after it neared collapse from bad bets in wildly swinging markets.

In those and similar instances the big-name debacles marked the peak of the financial system crises, not the start of something worse.

But this time around, with Friday's surprise announcement that the Fed would temporarily inject its own money into tottering brokerage giant Bear Stearns Cos., many Wall Street pros say they have little confidence that the move is a prelude to better times for beleaguered markets and the economy.

Indeed, some experts say Bear Stearns' woes warn of potentially larger calamities that will severely test the Fed, the economy and, ultimately, taxpayers as the government gets more deeply involved in fixing the markets' troubles."

We will lose, in some form, several major financial institutions before this is over," said veteran economist Allen Sinai of Decision Economics Inc. in New York.

The heart of the problem is that the nation is living through an unwinding of a 25-year-long, consumer-led borrowing binge. Bear Stearns was a key player in financing that binge, most notably in high-risk mortgages.

Wall Street in recent years designed ever more creative ways to transform loans into bonds and sell them to investors who were hungry for interest income. That alchemy reached its zenith with sub-prime mortgages -- loans to people with dubious credit.

Even as investors poured hundreds of billions of dollars into sub-prime-mortgage bonds from 2003 to 2006, there were ample warnings that many borrowers were vastly overstretched.

But it wasn't until housing prices began to implode last year, and mortgage defaults rocketed, that banks, brokerages and investors came to realize they had gone too far.

Now, with the U.S. financial system already overburdened with debt, many investors simply don't want to take a chance on owning more of it -- unless it's the direct obligation of the U.S. Treasury.

In market parlance, debt is leverage."

We have far too much leverage in the system, and we're now in the process of de-leveraging," said Tom Atteberry, a money manager at investment firm First Pacific Advisors in Los Angeles. "We think there's a lot more to go."

That mentality is widespread, and it is feeding on itself: Investors don't want to pay current market prices for mortgage-backed bonds and other debt because they worry that more borrowers will have trouble making payments. That further shuts down lending, making credit tighter and squeezing more borrowers.

Banks and brokerages already have written down the value of many of the mortgage securities they hold, to account for rising delinquencies. But there still is no sense that the housing market has reached a bottom, so there is no way for investors to know how much worse delinquencies will get."

The only true solution would be to get home prices up," said Jeffrey Gundlach, chief investment officer of Los Angeles-based money manager TCW Group. "

But the fundamentals are moving in the opposite direction."

At times like this the focus for Wall Street firms primarily is on surviving. No bank or brokerage will lend to a peer, even in routine daily transactions, if there is any doubt at all that the borrower can repay. Failure then can become assured once rumors start about a firm.

In January, after rumors swirled that it was running out of capital, Countrywide Financial Corp., the largest U.S. mortgage lender, quickly struck a deal to sell itself to Bank of America Corp.Wall Street's propensity to abandon its own has sunk all sorts of financial institutions over the last century. In 1984 the government had to rescue Continental Illinois, then the seventh-largest bank, once creditors pulled the plug. Brokerage Drexel Burnham Lambert Inc. failed in 1990 after its funding lines were cut.

But the current crisis is far larger in scope than those. Because so many banks, brokerages and investors were involved in financing the recent real estate boom -- the biggest housing bubble ever, by many accounts -- the growing problem of mortgage defaults infects nearly every corner of the financial system.

By shaking markets' confidence to the core, the housing bust also has made investors skittish about debt securities that have no direct connection to housing. In recent weeks, for example, demand has evaporated for certain kinds of municipal bonds.

What's more, financial institutions are tied to one another in ways that didn't exist 20 years ago. Using so-called derivative securities, banks, brokerages and investors in effect make bets with one another about each other's solvency. Those particular contracts, known as credit-default swaps, often are used as insurance policies against market turmoil."

These institutions all are linked by a derivatives market that none of us could map out on a piece of paper," said Charles Geisst, a finance professor at Manhattan College and a Wall Street historian.

One ever-present risk is that the inability of one party in a credit-default swap to pay another could trigger a domino effect throughout the financial system.

Still, the primary concern at the moment remains the withering value of mortgage-backed bonds.

Gundlach, whose firm manages tens of billions of dollars in mortgage securities, estimates that losses on mortgage bonds across the economy might total $1 trillion by the time the delinquency wave has crested and lenders write down loans to levels borrowers can afford.

Although the Fed is almost certain to continue cutting short-term interest rates, that won't fix the markets' problems, Gundlach asserts. It might even make things worse: As the Fed's cuts lower rates on adjustable-rate mortgages, he says, investors become less interested in buying bonds backed by those loans."

So the bonds' prices drop more," Gundlach says, "because investors analyze the risk to be even higher."

To be sure, some investors believe the extreme level of fear on Wall Street means there is tremendous long-term potential in lower-valued bonds and stocks."

There are plenty of attractively priced opportunities" in markets, said Russell Read, chief investment officer at the $235-billion-asset California Public Employees' Retirement System. "We're not on the sidelines at all. We're buying."

But many other investors clearly are in no hurry to step up. And that raises the potential for more declines in markets and deeper troubles for financial institutions.

Across Wall Street, there is a widespread belief that the Fed's use of its own capital to shore up Bear Stearns is just the first step toward an eventual government bailout of the housing market."

The history of major financial crises is that the government is going to come in at some point," said Richard Sylla, a professor of financial history at New York University.

The next several days should be crucial.

Banks, Fed to take stocks on rocky ride

Kristina Cooke

Mar 14, 6:50 PM ET

NEW YORK (Reuters) - The rocky ride in U.S. stocks looks set to intensify next week with the survival of one of the biggest investment banks in doubt and regulators rapidly burning through options to limit more damage to the financial system.

All eyes will again be on Bear Stearns come Monday for any further word about the condition of the fifth-largest U.S. investment bank, which on Friday had to get emergency funding as fallout from the global credit crisis took its toll.

Bear Stearns is among four major Wall Street firms reporting earnings next week.

But the Federal Reserve's policy-setting meeting on Tuesday will be the focus of the holiday-shortened week. The U.S. stock market will be closed for Good Friday on March 21.

U.S. interest-rate futures on Friday showed more than a 50 percent chance that the central bank will cut its benchmark fed funds rate target by 100 basis points -- or 1 percent -- to revive an economy that many say is already in recession.

"Most of the focus will be on the Federal Reserve next week. Will the Fed cut rates? And if so, how much? And most importantly, what will the statement that accompanies the decision say?" said Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, New York. "Frankly, the Fed said it all in their bailout of Bear Stearns."

Market participants have questioned the effectiveness of the U.S. central bank's efforts. On Tuesday, March 11, the Fed teamed up with other central banks to get up to $200 billion in fresh funds to cash-starved markets. The market rallied sharply for its best day in five years, but most of those gains were erased by the end of the week.

Then on Friday, Bear Stearns said a cash crunch forced it to turn to the Federal Reserve and JPMorgan Chase for emergency funds. That revived investors' fears about the depth and breadth of the credit crunch. Bear's stock tumbled as much as 50 percent on Friday to a session low at $28.42, its lowest since October 1998.
The 28-day emergency line of funding for Bear Stearns came just days after Bear, which has been hard hit by its heavy exposure to the faltering U.S. mortgage market, had dismissed market rumors of a cash crunch and said it was still a healthy player in the global web of trading and finance.

That heightened concerns that there may be other banks facing liquidity issues.

Moment Of Truth For Banks

More clarity about the extent of write-downs could come when four big U.S. investment banks report earnings next week.

Bear Stearns is first out of the block on Monday, which also happens to be St. Patrick's Day. Bear moved up its earnings release, which was initially scheduled for Thursday. The change in schedule may indicate that Bear plans to make a significant disclosure, said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.

"Speculation is rising that Bear Stearns could be the subject of a takeover or 'takeunder' over the weekend -- possibly with JPMorgan Chase," she added.

Lehman Brothers and Goldman Sachs will report earnings on Tuesday, followed by Morgan Stanley on Wednesday.

On Friday, Lehman's stock was the second-biggest decliner among investment banks, falling 14.6 percent, or $6.73, to close at $39.26 on the New York Stock Exchange.

Forecasts and stock prices have come down sharply for all the big banks, as the credit crunch spreads across almost every market -- the contagion effect that Wall Street executives last year assured analysts was not happening.

S&P 500 Feels Bear's Breath

With Friday's slide, the S&P 500 was close to falling into a bear market. If it drops further next week, it could cross a threshold that normally indicates a bear market, which would be a drop of 20 percent off its October closing high. The Nasdaq turned bearish last month.

It was a wild week, starting with Monday's revelations that a federal probe showed New York Gov. Eliot Spitzer was "Client 9" who patronized a call girl working for a prostitution ring that charged rates of $1,000 an hour and up. That triggered a "schadenfreude festival" on Wall Street, where Spitzer had ferociously prosecuted wrongdoing during his years as New York attorney general. On Wednesday, the TVs on most trading desks were tuned in to watch live broadcasts of Spitzer's resignation as governor.

By Friday, the governor's scandal seemed like a faded memory when news broke about Bear Stearns' liquidity crisis. At the closing bell, the Dow Jones industrial average was down 194.65 points, or 1.60 percent, to end at 11,951.09, while the Standard & Poor's 500 index was down 27.34 points, or 2.08 percent, at 1,288.14, and the Nasdaq composite index was down 51.12 points, or 2.26 percent, at 2,212.49.

For the week, the Dow Jones industrial average managed to finish with a gain of 0.48 percent, thanks to Tuesday's huge rally. But the Standard & Poor's 500 index slipped 0.40 percent for the week and the Nasdaq was unchanged -- right to the penny.

Since the end of February, the Dow has fallen 2.57 percent and the S&P 500 has dropped 3.19 percent, while the Nasdaq has declined 2.60 percent.

For the year so far, the Dow has lost 9.90 percent, the S&P 500 has dropped 12.27 percent and the Nasdaq has tumbled 16.58 percent.

Recession Now?

Among the week's key economic data will be the U.S. Producer Price Index on Tuesday, which will get plenty of attention due to concerns about rising inflation even as the economy slows. Economists polled by Reuters expect February core PPI to rise 0.2 percent.

On Friday, a government report unexpectedly showed February's Consumer Price Index, another top inflation gauge, was unchanged. While that leaves more room for the Federal Reserve to cut interest rates, analysts were skeptical about the tame inflation picture painted by the data because prices of oil, gold and other commodities are at record highs.

Wall Street will get some other economic data next week that could give more clues about the U.S. economy's health, with industrial production and capacity utilization due Monday and February housing starts set for Tuesday.

Weekly jobless claims and the Federal Reserve Bank of Philadelphia survey of regional business activity for March will round out the economic week on Thursday.

As the numbers pour in, Wall Street will have one question on its mind, said Johnson of Johnson Illington Advisors.

"The question is: Did the economy enter a recession in February? We will get an answer to that question when we see the industrial production and housing numbers," he said.

News just came in that Bear Stearns will be bought by JPMorgan Chase for $2 a share:

JPMorgan to buy Bear for $2 a share

Joe Bel Bruno and Madlen Read

March 16, 2008

NEW YORK (AP) - Just four days after Bear Stearns Chief Executive Alan Schwartz assured Wall Street that his company was not in trouble, he was forced on Sunday to sell the investment bank to competitor JPMorgan Chase for a bargain-basement price of $2 a share, or $236.2 million.

The stunning last-minute buyout was aimed at averting a Bear Stearns bankruptcy and a spreading crisis of confidence in the global financial system sparked by the collapse in the subprime mortgage market. Bear Stearns was the most exposed to risky bets on the loans; it is now the first major bank to be undone by that market's collapse.

The Federal Reserve and the U.S. government swiftly approved the all-stock buyout, showing the urgency of completing the deal before world markets opened. The Fed also essentially made the takeover risk-free by saying it would guarantee up to $30 billion of the troubled mortgage and other assets that got the nation's fifth-largest investment bank into trouble.

"This is going to go down in very historic terms," said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners. "This is about credit being overextended, and how bad it is for major financial institutions and for individuals. This is why we're probably heading into a recession."

JPMorgan Chase & Co. said it will guarantee all business — such as trading and investment banking — until Bear Stearns' shareholders approve the deal, which is expected to be completed during the second quarter. The acquisition includes Bear Stearns' midtown Manhattan headquarters.

JPMorgan Chief Financial Officer Michael Cavanagh did not say what would happen to Bear Stearns' 14,000 employees worldwide or whether the 85-year-old Bear Stearns name would live on after surviving the Great Depression, two World Wars and a slew of recessions. He told analysts and investors on a conference call that JPMorgan was most interested in buying Bear Stearns' prime brokerage business, which completes trades for big investors such as hedge funds.

At almost the same time as the deal for control of Bear Stearns was announced, the Federal Reserve said it approved a cut in its lending rate to banks to 3.25 percent from 3.50 percent and created another lending facility for big investment banks. The central bank's official meeting is on Tuesday. Before the emergency move to lower the discount rate, which is the rate at which banks lend each other money, the Fed was widely expected to again cut its headline rate by as much as a full point to 2 percent.

"Having taking Bear Stearns out of the problem category, and the strong action by the Federal Reserve, we would anticipate the market will behave quite differently on Monday than it was Thursday or Friday," Cavanagh said.

Some analysts expected it to be a brutal day for global stocks, nevertheless. Shortly after the news broke, Japan's benchmark Nikkei stock index plunged more than 3 percent in morning trading.

A bankruptcy protection filing of Bear Stearns could have heightened anxiety in world financial markets amid a deepening credit crunch. So far, global banks have written down some $200 billion worth of securities slammed amid the credit crisis — more write-downs could come. Last week, a bond fund controlled by private equity firm Carlyle Group faltered near collapse because of investments linked to mortgage-backed securities.

JPMorgan's acquisition of Bear Stearns represents roughly 1 percent of what the investment bank was worth just 16 days ago. It marked a 93.3 percent discount to Bear Stearns' market capitalization as of Friday, and roughly a 98.8 percent discount to its book value as of Feb. 29.

"The past week has been an incredibly difficult time for Bear Stearns," Schwartz said in a statement. "This represents the best outcome for all of our constituencies based upon the current circumstances."

Wall Street analysts say the bid to rescue Bear Stearns was more than just saving one of the world's largest investments banks — it was a prop for the U.S. economy and the global financial system. An outright failure would cause huge losses for banks, hedge funds and other investors to which Bear Stearns is connected.

After days of denials that it had liquidity problems, Bear was forced into a JPMorgan-led, government-backed bailout on Friday. The arrangement, the first of its kind since the 1930s, resulted in Bear getting a 28-day loan from JPMorgan with the government's guarantee that JPMorgan would not suffer any losses on the deal…

So what did the U.S. president say during this time of crisis? Let’s just say he’s no Franklin Roosevelt.

George Speaks, Badly

Gail Collins

March 15, 2008

Watching George W. Bush address the New York financial community Friday brought back many memories. Unfortunately, they were about his speech right after Hurricane Katrina, the one when he said: “America will be a stronger place for it.”

“You’ve helped make our country really in many ways the economic envy of the world,” he told the Economic Club of New York.

You could almost see the thought-bubble forming over the audience: Not this week, kiddo.

The president squinched his face and bit his lip and seemed too antsy to stand still. As he searched for the name of King Abdullah of Saudi Arabia (“the king, uh, the king of Saudi”) and made guy-fun of one of the questioners (“Who picked Gigot?”), you had to wonder what the international financial community makes of a country whose president could show up to talk economics in the middle of a liquidity crisis and kind of flop around the stage as if he was emcee at the Iowa Republican Pig Roast.

We’re really past expecting anything much, but in times of crisis you would like to at least believe your leader has the capacity to pretend he’s in control. Suddenly, I recalled a day long ago when my husband worked for a struggling paper full of worried employees and the publisher walked into the newsroom wearing a gorilla suit.

The country that elected George Bush — sort of — because he seemed like he’d be more fun to have a beer with than Al Gore or John Kerry is really getting its comeuppance. Our credit markets are foundering, and all we’ve got is a guy who looks like he’s ready to kick back and start the weekend.

This is not the first time Bush’s attempts to calm our fears redoubled our nightmares. His first speech after 9/11 — that two-minute job on the Air Force base — was so stilted that the entire country felt like heading for the nearest fallout shelter. After Katrina, of course, it took forever to pry him out of Crawford, and then he more or less read a laundry list of Goods Being Shipped to the Flood Zone and delivered some brief assurances that things would work out.

O.K., so he’s not good at first-day response. Or second. Third can be a problem, too. But this economic crisis has been going on for months, and all the president could come up with sounded as if it had been composed for a Rotary Club and then delivered by a guy who had never read it before. “One thing is certain that Congress will do is waste some of your money,” he said. “So I’ve challenged members of Congress to cut the number of cost of earmarks in half.”

Besides being incoherent, this is a perfect sign of an utterly phony speech. Earmarks are one of those easy-to-attack Congressional weaknesses, and in a perfect world, they would not exist. But they cost approximately two cents in the grand budgetary scheme of things. Saying you’re going to fix the economy or balance the budget by cutting out earmarks is like saying you’re going to end global warming by banning bathroom nightlights.

Bush pointed out — as if the entire economic world didn’t already know — that Congress has already passed an economic incentive package that will send tax rebate checks to more than 130 million households. “A lot of them are a little skeptical about this ‘checks in the mail’ stuff,” he jibed. Jokejoke. Winkwink.

Then, after a run through of “ideas I strongly reject,” Bush finally got around to announcing that he was going to “talk about what we’re for. We’re obviously for sending out over $150 billion into the marketplace in the form of checks that will be reaching the mailboxes by the second week of May.

“We’re for that,” he added.

Once the markets had that really, really clear, Bush felt free to go on to the other things he was for, which very much resembled that laundry list for Katrina (“400 trucks containing 5.4 million Meals Ready to Eat — or M.R.E.’s ... 3.4 million pounds of ice ...”) This time the rundown included a six-month-old F.H.A. refinancing program, and an industry group called Hope Now that offers advice to people with mortgage problems.

And then, finally, the nub of the housing crisis: “Problem we have is, a lot of folks aren’t responding to over a million letters sent out to offer them assistance and mortgage counseling,” the president of the United States told the world.

But wait — more positive news! The secretary of Housing and Urban Development is proposing that lenders supply an easy-to-read summary with mortgage agreements. “You know, these mortgages can be pretty frightening to people. I mean, there’s a lot of tiny print,” the president said.

Really, if he can’t fix the economy, the least he could do is rehearse the speech.

Here is how the audience reacted, caption courtesy of Watertiger of the Dependable Renegade blog:

"What? The? F***?"