Signs of the Economic Apocalypse, 2-11-08

From SOTT.net:





Gold closed at 922.30 dollars an ounce Friday, up 1.0% from $913.50 for the week. The dollar closed at 0.6893 euros Friday, up 2.0% from 0.6756 at the close of the previous Friday. That put the euro at 1.4507 dollars compared to 1.4802 the Friday before. Gold in euros would be 635.76 euros an ounce, up 3.0% from 617.15 at the close of the previous Friday. Oil closed at 91.77 dollars a barrel Friday, up 3.2% from $88.96 for the week. Oil in euros would be 63.26 euros a barrel, up 5.3% from 60.10 at the close of the Friday before. The gold/oil ratio closed at 10.06, down 2.1% from 10.27 for the week. In U.S. stocks, the Dow Jones Industrial Average closed at 12,182.13 Friday, down 4.6% from 12,743.19 at the close of the previous week. The NASDAQ closed at 2,304.85 Friday, down 4.7% from 2,413.36 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.65% Friday, up six basis points from 3.59 for the week.

Stocks fell sharply last week, not just on recession concerns but on something more threatening: worries of corporate defaults. Worries, in other words, that corporate bonds will be worth much less than thought, which would add another layer to the existing credit problems stemming from the subprime mess.

U.S. Stocks Drop on Credit Concern; Banks, Weyerhaeuser Fall

Elizabeth Stanton

Feb. 8 (Bloomberg) -- U.S. stocks retreated, sending the market to its first weekly decline since mid-January, as concern that corporate defaults will increase outweighed gains in technology companies and commodities producers.

Bank of America Corp. and JPMorgan Chase & Co. led banks and brokerages to their steepest weekly drop in six years as indexes of corporate credit risk climbed to records. Weyerhaeuser Co., the largest U.S. lumber producer, fell to a 16-month low in New York after posting a loss. Declines were limited as Amazon.com Inc., Microsoft Corp. and Apple Inc. rose and higher oil and metals prices boosted energy and mining companies.

The Standard & Poor's 500 Index lost 5.62 points, or 0.4 percent, to 1,331.29. The Dow Jones Industrial Average fell 64.87, or 0.5 percent, to 12,182.13. The Nasdaq Composite Index increased 11.82, or 0.5 percent, to 2,304.85. Almost two stocks dropped for every one that rose on the New York Stock Exchange.

“There's going to be more writedowns, more problems,” said Quincy Krosby, who helps manage $330 billion as chief investment strategist at the Hartford in Hartford, Connecticut, during an interview with Bloomberg Television. “It's hard to navigate a market like this.”

The S&P 500 snapped two straight weeks of gains after a report on Feb. 5 showed service industries contracted at the fastest pace since 2001. The index has lost 15 percent since its Oct. 9 record, while the Dow has fallen 14 percent from its all- time high the same day. The Nasdaq has slumped 19 percent since an almost-seven year peak on Oct. 31.

Credit Concern

JPMorgan lost $1.29, or 2.9 percent, to $43.82. Bank of America retreated $1.21, or 2.8 percent, to $42.16. An index of banks and brokerages in the S&P 500 fell 8.6 percent this week, its biggest weekly loss since September 2001.

The costs of insuring various forms of corporate debt against default using derivatives rose to records. Contracts on the benchmark Markit CDX North America Investment Grade Index jumped 5 basis points to 129.59, the highest since the index started in 2004, according to CMA Datavision in New York.

The Markit LCDX Series 9 index of leveraged buyout loan derivatives traded at 91.8, according to broker Phoenix Partners Group, matching the lowest since the latest series began trading in October. Banks sitting on $160 billion of unsold leveraged loans may have to write down more losses after a plunge in the value of the debt, according to Bank of America Corp. analysts.

‘Crunch Is Intensifying’

“It tells you the credit crunch is intensifying,” said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York. “A lot of this paper is sitting on bank balance sheets. There’s further potential for more writedowns, and that constricts the supply of credit in other areas.”

The world’s largest banks and brokerage firms have written down the value of debt and related products on their books by $146 billion since the beginning of 2007, according to data compiled by Bloomberg. The charges stem from the collapse of the U.S. subprime mortgage market.

A U.S. recession is now an even bet as job losses and the housing contraction jeopardize the longest-ever expansion in consumer spending, according to a Bloomberg News survey. The world’s largest economy will expand at a 0.5 percent annual rate during the first quarter, capping the weakest six months since the last economic slump in 2001, according to the median estimate of 62 economists polled from Jan. 30 to Feb. 7.

Weyerhaeuser, a supplier to homebuilders, fell $2.37, or 3.7 percent, to $62.34 after reporting a fourth-quarter loss of $63 million amid the worst housing slump in a quarter century...

The economist Nouriel Roubini, who has been predicting the current crisis for a long time, posted a helpful summary of the dangers we face:

The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster

Nouriel Roubini

Feb 05, 2008

Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting.

To understand the Fed actions one has to realize that there is now a rising probability of a “catastrophic” financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.

That is the reason the Fed had thrown all caution to the wind – after a year in which it was behind the curve and underplaying the economic and financial risks – and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke Fed would be more cautious than Greenspan in reacting to economic and financial vulnerabilities.

To understand the risks that the financial system is facing today I present the “nightmare” or “catastrophic” scenario that the Fed and financial officials around the world are now worried about. Such a scenario – however extreme – has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.

Start first with the recession that is now enveloping the US economy. Let us assume – as likely - that this recession – that already started in December 2007 - will be worse than the mild ones – that lasted 8 months – that occurred in 1990-91 and 2001. The recession of 2008 will be more severe for several reasons: first, we have the biggest housing bust in US history with home prices likely to eventually fall 20 to 30%; second, because of a credit bubble that went beyond mortgages and because of reckless financial innovation and securitization the ongoing credit bust will lead to a severe credit crunch; third, US households – whose consumption is over 70% of GDP - have spent well beyond their means for years now piling up a massive amount of debt, both mortgage and otherwise; now that home prices are falling and a severe credit crunch is emerging the retrenchment of private consumption will be serious and protracted. So let us suppose that the recession of 2008 will last at least four quarters and, possibly, up to six quarters. What will be the consequences of it?

Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession…

First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth. While the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use “jingle mail” (i.e. default, put the home keys in an envelope and send it to their mortgage bank). Moreover, soon enough a few very large home builders will go bankrupt and join the dozens of other small ones that have already gone bankrupt thus leading to another free fall in home builders’ stock prices that have irrationally rallied in the last few weeks in spite of a worsening housing recession.

Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime (no down-payment, no verification of income, jobs and assets (i.e. NINJA or LIAR loans), interest rate only, negative amortization, teaser rates, etc.) were occurring across the entire spectrum of mortgages; about 60% of all mortgage origination since 2005 through 2007 had these reckless and toxic features. So this is a generalized mortgage crisis and meltdown, not just a subprime one. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy spins into a serious recession. Goldman Sachs now estimates total mortgage credit losses of about $400 billion; but the eventual figures could be much larger if home prices fall more than 20%. Also, the RMBS and CDO markets for securitization of mortgages – already dead for subprime and frozen for other mortgages - remain in a severe credit crunch, thus reducing further the ability of banks to originate mortgages. The mortgage credit crunch will become even more severe.

Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP market has forced banks to bring back on balance sheet these toxic off balance sheet vehicles adding to the capital and liquidity crunch of the financial institutions and adding to their on balance sheet losses. And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing – rather than reducing systemic risk – and making the credit crunch global.

Third, the recession will lead – as it is already doing – to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are dozens of millions of subprime credit cards and subprime auto loans in the US. And again defaults in these consumer debt categories will not be limited to subprime borrowers. So add these losses to the financial losses of banks and of other financial institutions (as also these debts were securitized in ABS products), thus leading to a more severe credit crunch. As the Fed loan officers survey suggest the credit crunch is spreading throughout the mortgage market and from mortgages to consumer credit, and from large banks to smaller banks.

Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up. Some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating regardless of how much realistic recapitalization is provided. Any business that required an AAA rating to stay in business is a business that does not deserve such a rating in the first place. The monolines should be downgraded as no private rescue package – short of an unlikely public bailout – is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products.

Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses. It will also lead to additional losses on their portfolio of muni bonds. The downgrade of the monolines will also lead to large losses – and potential runs – on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. The monolines’ downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system.

Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate. The housing crisis will lead – with a short lag – to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns. The CMBX index is already pricing a massive increase in credit spreads for non-residential mortgages/loans. And new origination of commercial real estate mortgages is already semi-frozen today; the commercial real estate mortgage market is already seizing up today.

Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors’ panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide – an institution that was more likely insolvent than illiquid – has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks’ bankruptcies will add to an already severe credit crunch.

Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans – a good chunk of which were issued to finance very risky and reckless LBOs – is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower). Add to this that many reckless LBOs (as senseless LBOs with debt to earnings ratio of seven or eight had become the norm during the go-go days of the credit bubble) have now been postponed, restructured or cancelled. And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone – not avoid – such bankruptcies and make them uglier when they do eventually occur. The leveraged loans mess is already leading to a freezing up of the CLO market and to growing losses for financial institutions.

Eighth, once a severe recession is underway a massive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%. Also during such distressed periods the RGD – or recovery given default – rates are much lower, thus adding to the total losses from a default. Default rates were very low in the last two years because of a slosh of liquidity, easy credit conditions and very low spreads (with junk bond yields being only 260bps above Treasuries until mid June 2007). But now the repricing of risk has been massive: junk bond spreads close to 700bps, iTraxx and CDX indices pricing massive corporate default rates and the junk bond yield issuance market is now semi-frozen. While on average the US and European corporations are in better shape – in terms of profitability and debt burden – than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a mass of junk bond debt that will soon come to refinancing at much higher spreads. Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely). Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection – possibly large institutions such as monolines, some hedge funds or a large broker dealer – may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay.

Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely the “shadow financial system” (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system – stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can.

Tenth, stock markets in the US and abroad will start pricing a severe US recession – rather than a mild recession – and a sharp global economic slowdown. The fall in stock markets – after the late January 2008 rally fizzles out – will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones. A few long equity hedge funds will go belly up in 2008 after the massive losses of many hedge funds in August, November and, again, January 2008. Large margin calls will be triggered for long equity investors and another round of massive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%.

Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates – TED spreads, BOR-OIS spreads, BOT – Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors’ risk aversion – will massively widen again. Even the easing of the liquidity crunch after massive central banks’ actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks.

Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation.

Based on estimates by Goldman Sachs $200 billion of losses in the financial system lead to a contraction of credit of $2 trillion given that institutions hold about $10 of assets per dollar of capital. The recapitalization of banks sovereign wealth funds – about $80 billion so far – will be unable to stop this credit disintermediation – (the move from off balance sheet to on balance sheet and moves of assets and liabilities from the shadow banking system to the formal banking system) and the ensuing contraction in credit as the mounting losses will dominate by a large margin any bank recapitalization from SWFs. A contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall in asset prices and sharp widening in credit spreads will then be transmitted to most parts of the financial system. This massive credit crunch will make the economic contraction more severe and lead to further financial losses. Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe.

A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties – driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities – will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbates the liquidity and credit crunch.

In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century.

Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night? The answer to this question – to be detailed in a follow-up article – is twofold: first, it is not easy to manage and control such a contagious financial crisis that is more severe and dangerous than any faced by the US in a quarter of a century; second, the extent and severity of this financial crisis will depend on whether the policy response – monetary, fiscal, regulatory, financial and otherwise – is coherent, timely and credible. I will argue – in my next article - that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.

It’s a sure sign of a crisis when we learn about institutions that few even knew existed. A case in point is the bond insurers that we have been hearing about quite a bit in recent weeks.

Bonds Unbound

James Surowiecki

February 11, 2008

If the ongoing turmoil in the world’s financial markets has made anything clear, it’s that the list of things that can go wrong in those markets is a very long one. Month after month, it seems, another potentially disastrous problem rises to the surface. The latest looming crisis is the possible implosion of a group of companies called monoline insurers. If you haven’t heard of monoline insurers, don’t worry: until recently, few people, even on Wall Street, were all that interested in them. Yet their problems have become a serious threat to global markets. Rumors that monoline insurers, like M.B.I.A. and Ambac, were in serious trouble helped spark the vast market sell-off that prompted the Federal Reserve’s interest-rate cut two weeks ago, and, only a few days later, rumors of a government-orchestrated bailout of these companies set off a six-hundred-point rally in the Dow.

Monoline insurers do a straightforward job: they insure securities—guaranteeing, for instance, that if a bond defaults they’ll cover the interest and the principal. Historically, this was a fairly sleepy business; these companies got their start by insuring municipal bonds, which rarely default, and initially they confined themselves to bonds with relatively predictable risks, which were easy to put a price on. Unfortunately, a sleepy, straightforward business wasn’t good enough for the insurers. Like everyone else in recent years, they wanted to cash in on the housing and lending boom. In order to expand, they started insuring the complex securities that Wall Street created by packaging mortgages, including subprime ones, for investors. This was a lucrative business—M.B.I.A.’s revenues rose nearly a hundred and forty per cent between 2001 and 2006—but it rested on a false assumption: that the insurers knew how risky these securities really were. They didn’t. Instead, they gravely underestimated how likely the loans were to go bad, which meant that they didn’t charge enough for the insurance they were offering, and didn’t put away enough to cover the claims. They’re now on the hook for tens of billions of dollars in potential losses, and some estimates suggest that they’ll need more than a hundred billion to restore themselves to health.

Obviously, this is bad news for the insurers—at one point, M.B.I.A.’s and Ambac’s stock prices were down more than ninety per cent from their all-time highs—but it’s also very dangerous for credit markets as a whole. This is because of a peculiar feature of bond insurance: insurers’ credit ratings get automatically applied to any bond they insure. M.B.I.A. and Ambac have enjoyed the highest rating possible, AAA. As a result, any bond they insured, no matter how junky, became an AAA security, which meant access to more investors and a generally lower interest rate. The problem is that this process works in reverse, too. If the insurers lose their AAA ratings—credit agencies have made clear that both companies are at risk of this, and one agency has already downgraded Ambac to AA—then the bonds they’ve insured will lose their ratings as well, which will leave investors holding billions upon billions in assets worth a lot less than they thought. That’s why so many people on Wall Street are pushing for a bailout for the insurers. It may be an abandonment of free-market principles, but no one has ever accused the Street of putting principle above profit.

Normally when companies make bad decisions and fail to deliver value, it’s just their workers and investors who suffer. But monoline insurers’ desire to grab as much new business as they could, risks be damned, quickly radiated across global markets and will have huge consequences for millions of people who have never heard of M.B.I.A. or Ambac. The situation illustrates a fundamental paradox of today’s financial system: it’s bigger than ever, but terrible decisions by just a few companies—not even very big companies, at that—can make the entire edifice totter…

The food crisis has also been accelerating recently. Food prices have been rising rapidly and reserve stocks have been falling. A perfect storm of climate disruption, energy cost increases, and demand for biofuels adds yet another threat to the economic and physical well being of people.

Wheat continues to surge above $10 a bushel

Sue Kirchhoff,

USA Today

U.S. wheat prices continued to soar Wednesday as export demand remained robust despite record high prices, with values in the United States rising by the maximum allowed in a trading day and helping to rally corn and soybeans.

Overall, wheat prices have doubled since last June at the Chicago Mercantile Exchange, which owns the Chicago Board of Trade. Prices have been pushed higher by surging world demand and bad weather in some major producing nations.

"For the near-term price, it's still heading higher," says Joe Victor, vice president of marketing at Allendale, a commodity research firm. He says prices will stay elevated until the markets get a better handle on potential production in coming months. "If we have good weather, plenty of plantings, then there's likely a price correction," Victor says. "If it's bad weather … (prices will) continue their upward trends."

There were fresh signs that record high prices for wheat had yet to dent demand from importing nations.

Egypt, one of the world's largest importers of wheat, bought 150,000 tons of the grain, including 25,000 tons from the United States, the world's top exporter of wheat.

"That is such an important factor in the wheat market," says grains analyst Bill Nelson of A.G. Edwards, referring to the purchase by Egypt.

"Egypt is being seen as a proxy for world grain buyers who are, in general, willing to buy grain even at record prices. This is evidence that day after day of record prices are not limiting demand," he says.

The May futures contract for Chicago soft red winter wheat, used in cakes and crackers, jumped by the daily limit of 30 cents to an all-time high of $10.50 a bushel. The nearby March contract rose its 30-cent daily limit to a high of $10.33. Wheat prices briefly jumped to more than $10 a bushel in December.

Minneapolis Grain Exchange March spring wheat also rose by the daily limit to $14.93 a bushel, the highest price for any U.S. wheat futures contract. High-protein spring wheat, prized by millers and bakers for its quality, is forecast to have the smallest surplus in at least 30 years, and harvest doesn't start till August. The Minneapolis Exchange will raise the daily trading limit to 40 cents, beginning Feb 12.

Trading on Tuesday was influenced by a Canadian government report showing the wheat supply in that nation plummeting 30% from December 2006 to December 2007. The sharp drop was mainly caused by a more than 20% dip in wheat production last year.

The U.S. Department of Agriculture expects the U.S. wheat surplus this year to be the smallest in 60 years. Despite higher prices, U.S. plantings of winter wheat rose only about 4% from last year. Farmers had been expected to increase plantings by far more.

Prices for corn, soybeans and other grains have also surged in recent months. That helped push U.S. food inflation up to 4.9% in 2007 from 2.1% in 2006. The impact has been far greater in less-affluent nations, where people spend more of their income on food.

Merrill Lynch analysts in a recent report said the rate of what they call "agflation" could slow if economic growth cools. But costs will remain elevated. "Longer term, however, we remain convinced that agflation will be an important issue for consumers and policymakers alike," the Merrill Lynch report said.

The following chart from Doug Nolan’s Credit Bubble Bulletin shows wheat prices over the past five years:


I Guess soon we won’t have to worry about the obesity crisis anymore.

Signs of the Economic Apocalypse, 11-12-07

From SOTT.net:

Gold closed at 834.70 dollars an ounce Friday, up 3.2% from $808.50 at the close of the previous week. The dollar closed at 0.6814 euros Friday, down 1.2% from 0.6894 at the close of the previous Friday. That put the euro at 1.4676 dollars compared to 1.4504 the Friday before. Gold in euros would be 568.71 euros an ounce, up 2.0% from 557.43 for the week. Oil closed at 96.32 dollars a barrel, up 0.4% from $95.93 at the close of the week before. Oil in euros would be 65.63 euros a barrel, down 0.8% from 66.14 for the week. The gold/oil ratio closed at 8.67 Friday, up 2.8% from 8.43 at the end of the week before. In U.S. stocks, the Dow closed at 13,042.74 Friday, down 4.2% from 13,595.10 for the week. The NASDAQ closed at 2,627.94 Friday, down 6.9% from 2,810.38 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.21% Friday, down ten basis points from 4.21 for the week.

The dollar continued to fall last week, and losses accelerated in the stock market last week. In the United States the Dow fell 4% and the NASDAQ nearly 7%. Gold gained another 3% in dollars and 2% in euros. The only bright spot was oil, which gained only four tenths of a percent in dollars and lost nearly eight tenths of a percent in euros.

The U.S. Federal Reserve Board seems to have lost control of the situation.The Fed’s usual remedy, pumping money into the system, is making the disease worse. The reason is that the Fed creates money by lending it to banks who lend it to everyone else. The problem is that everyone except speculators are all borrowed out, so the speculators have more cheap money to speculate with unproductively via hedge funds. That has kept stock prices from collapsing but has done nothing to fix the underpinnings of the crisis. According to Mike Whitney,

The charade cannot go on forever. And it won't. Rate cuts do not address the underlying problem which is bad investments. The debts must be accounted for and written off. Nothing else will do. That doesn't mean that Bernanke will suddenly decide to stop savaging the dollar or flushing hundreds of billions of dollars down the investment bank toilet. He probably will. But, eventually, the blow-ups in the housing market will destabilize the financial system and send the banks and over-leveraged hedge funds sprawling. Bernanke's low interest "giveaway" will amount to nothing.

The deregulation of the financial industry during the past 25 years caused this mess. And it was completely foreseeable. But the people who pushed it through knew they could make unimaginable amounts of money on the boom caused by lack of regulation and, it they are smart or connected enough, get out while they are ahead leaving the rest of us to pick up the tab. Pam Martens uses the example of Citigroup to illustrate the problem:

The Toxic Giant and It's Own Black Hole
Wall Street Metes Out Street Justice to Citigroup

By Pam Martens

November 6, 2007

After years of receiving slaps on the wrists by regulators for helping insolvent companies hide the true state of their finances from investors, Citigroup's day of reckoning has arrived in the form of "street" justice.

Wall Street colleagues are publicly challenging the adequacy of Citigroup's capital, its accounting practices, and its own black hole-Cayman Islands debt structures. Some of the oldest Wall Street firms are also refusing to pony up billions for a grand scheme endorsed by the U.S. Treasury, ostensibly to unfreeze debt markets. Wall Street firms see it as a bail out of Citigroup and just one more free ride from the Feds.

Citigroup has been repeatedly charged in investor lawsuits with creating off balance sheet structures to hide the debt of large U.S. firms such as Enron. In each case, it has been allowed to pay millions to regulatory bodies and billions to private plaintiffs to settle the charges without an admission of guilt and avoid a public trial. These trials, however, might have provided critical transparency and an early warning to the public and its colleagues on Wall Street.

But next year, Citigroup will face trials in both Italy and the U.S. in two separate actions for creating off balance sheet structures that plaintiffs contend were significant contributors to the bankruptcy of the giant Italian milk company, Parmalat. Citigroup named one of these structures Buconero, Italian for "black hole." Another structure Citigroup set up for Parmalat sold commercial paper, backed by fake invoices, to U.S. money market funds. Citigroup contends it was "the victim" in all matters related to Parmalat.

The U.S. trial, set for May of 2008 in a New Jersey State Court, is not being brought by a U.S. prosecutor, but an Italian trustee for Parmalat, Enrico Bondi.
Dave Serchuk, a reporter for Securities Week at the time, reported in its February 2, 2004 issue that Citigroup had bundled essentially worthless Parmalat debt and sold it in the form of asset backed commercial paper to what U.S. investors thought were among the safest and most liquid investments: money market funds. Unfortunately, the incendiary Parmalat/Citigroup money market story failed to get picked up by mainstream media.

Now, once again, one of the most troubling aspects of the current Citigroup debacle that has gone unreported is the extent to which these opaque and convoluted debt instruments managed by Citigroup, called CDOs (collateralized debt obligations), got dumped into Cayman Islands SIVs, transmuted into AAA-rated commercial paper, landed in the so-called safe money market funds in the U.S., including an astonishing amount at Citigroup's competitor, Merrill Lynch.

According to Standard & Poor's Structured Finance research reports, Citigroup is managing the following Structured Investment Vehicles (SIVs), incorporated in the Cayman Islands and not consolidated on Citigroup's balance sheet: Centauri Corp., Beta Finance Corp., Sedna Finance Corp., Five Finance Corp., and Dorada Corp. (1) In addition, according to press reports, Citigroup created two more SIVs as recently as November 2006: Zela Finance Corp. and Vetra Finance Corp. (2) These SIVs contain approximately $80 Billion in what is increasingly being viewed as toxic debt.

Knowing the history of Citigroup and knowing the safety and liquidity requirements for money market funds, how did one of the oldest and most sophisticated firms on the street, Merrill Lynch, end up with a boatload of this SIV paper in its various money markets? The most troubling of its money market exposure as of its July 31, 2007 filing with the SEC is its Citigroup managed SIV commercial paper positions in what one would think would be the safest of all its money market funds, the Merrill Lynch Retirement Reserves Money Fund. Merrill's SEC filing shows $52.9 Million in Beta Finance, $53 Million in Five Finance, $10 Million in Sedna Finance, and $10.7 Million in Zela Finance. (3)

In a research report written by Meredith Whitney for CIBC World Markets on October 31, 2007, there is a key clue to why Citigroup has finally lost the confidence of the street: "While Citigroup has stated that it will not consolidate the assets of these 7 SIVs, it will continue to provide liquidity. As such, Citigroup's assets would increase as it extends short term funding to SIVs. With a bigger asset base, or denominator, Citigroup's capital ratios would decline. While not specifically disclosed, we know that part of the 6% sequential increase in Citigroup's 3Q07 total assets was from the addition of commercial paper issued to SIVs." (Translation: it can't find a new sucker to roll over its maturing SIV commercial paper; it has become the sucker of last resort along with its balance sheet.)

Citigroup's ignoble beginning foreshadowed its sorry state today. It is the Frankenbank created back in 1998 out of the body parts of Travelers Insurance, Salomon investment bank, Smith Barney brokerage, and retail banking giant Citibank, with the brain of Wall Street titan, Sandy Weill, implanted firmly to run a confidence game of unprecedented proportions. (Mr. Weill retired from the firm a few years ago after it made him a billionaire.)

Citigroup's creation required the repeal of depression-era investor protection legislation (Glass-Steagall Act) put in place to prevent stock brokerages and investment banks that are prone to high risk, speculation and collapse from merging with commercial banks that hold deposits earmarked for safety by a frequently gullible public.

I recently found in my files from that time a letter addressed to me from one Robert Frierson, Associate Secretary of the Board of Governors of the Federal Reserve System. The letter is dated September 23, 1998. It is one of those quixotic examples of the relics of "we the people" government struggling for air in the "we the corporations" era.

The letter is formal and polite and on watermarked paper with a faint outline of our Nation's capital silhouetted underneath its ominous text. The letter advises me that Frankenbank is going to move forward but my testimony had been considered.

The letter was a followup to the public testimony I gave against the merger on Friday, June 28, 1996 at the Federal Reserve Bank of New York. Galen Sherwin, then President of the National Organization for Women in New York City (now a civil rights lawyer for the New York Civil Liberties Union) and I, then a naively optimistic civil rights litigant against one of Weill's firms, had planned to simply protest outside the building during the testimony by Sandy Weill sycophants. Instead, we were pleasantly surprised to be courteously ushered inside, giant protest signs and all, and afforded a slot to speak on one of the panels. (Both the Federal Reserve's typed transcript of the testimony and my hastily hand scribbled remarks are permanently archived on the web site of this peculiar institution.) (4)

Here is an excerpt of what I had to say nine years and 90 Citigroup market manipulations ago:

"It is amazing how soon we forget. It was just 60 years ago that 4,835 of America's banks went broke and closed their doors, leaving shareholders and depositors destitute. The underlying reason that this happened was the lack of moral courage by our regulators and elected representatives to just say no to powerful money interests. Instead of just saying no, Washington handed the banks the equivalent of an ATM card to the Fed's discount window to speculate in stocks ... We also want to remember that the political dynamics that created the backdrop for the banking meltdown in the '30s grew from a corrupt, cozy culture between Wall Street and Washington ... We can hardly look to the safekeepers of the public trust when they are falling over themselves to reap campaign windfalls from Wall Street. Washington and regulators are quick to criticize moral hazard when it is on foreign shores. Let's look at the moral hazard incubating at Travelers and Smith Barney. In 1996, when the SEC and the Justice Department found that Smith Barney was one of 24 firms fleecing their own customers through six or more years of price fixing, no one went to jail. Within the last two years, when a special prosecutor found that Smith Barney had bribed the former U.S. agricultural secretary, again, no one went to jail. The firm is currently under investigation by various municipalities for the fraudulent markup of treasury securities, and that, in fact, is enough to hold up this merger, since a criminal charge against a primary dealer of treasury securities would lend its taint to one of America's major money center banks ... ."

Ms. Sherwin testified regarding the private justice system at Weill's Salomon Smith Barney that barred employees from accessing the nation's courts as a condition of employment. That system was successfully transplanted to the merged behemoth Citigroup and helps to explain how transparency vanished at what Ms. Sherwin predicted to the Fed in 1998 would "grow into a bloated corporate tyrant."

In the end, all Ms. Sherwin and I had for our efforts was a letterhead souvenir from the Fed and a web site archive reminding us we tried.

We were trumped by a stream of sycophants, nonprofits receiving money from the subject under scrutiny.

Here's a representative example of what the Fed considered against our testimony. Note that this doctor admits he has "no special credentials in business economic matters" and then proceeds to urge the most dangerous financial merger in the history of the world because he likes Sandy Weill, whose name, by the way, is engraved on the building he enters each day to receive a pay check."My name is Alberto Gotto. I am the provost for Federal Affairs at Cornell University and the dean of the Joan and Sanford I. Weill Medical College in New York City. Here as the dean of the medical college in New York City, practicing physician and medical educator, I have no special credentials in business economic matters, but I do want to speak about an area in which I do have special and particular knowledge, and that concerns the excellent corporate citizenship of the Travelers Group and its Chairman and CEO Sanford I. Weill." (5)

The Bush administration would like to spin the current Wall Street crisis as the product of millions of hapless poor people with bad credit ("subprime") defaulting on their mortgages. Thus, it's been dubbed "the subprime mess" in headlines spanning the globe. That poor people were tricked into unconscionable mortgages predestined for foreclosure by a Citigroup subsidiary, CitiFinancial, and other predatory lenders, is but a symptom of the real disease and crisis. (6)

The Citigroup debacle rises from the same ideology creating endless reports on failures of Federal agencies to perform their oversight roles in protecting the American people with the taxes we give them to do just that. Viewed collectively, one can only conclude that the Bush administration has reengineered these taxpayer supported agencies to stand down on corporate malfeasance with a mantra of corporate profits before people and the flimsy overt pretext that free markets will handily function in the place of regulators with subpoena power.

After millions of lead paint infested toys slipped by the Consumer Product Safety Commission, dangerous drugs were rubberstamped by the Food and Drug Administration (FDA), (only to be recalled after hundreds of thousands of injuries, including death), FEMA, the Department of Defense and Attorney General's office discredited for political cronyism, along comes the Citigroup hubris as the poster child crying out for timely enforcement of rules and regulations.

Citigroup's 10k filing with the SEC states that as a bank holding company it is subject to examination by the Board of Governors of the Federal Reserve. Having failed to heed the warnings nine years ago, perhaps the Fed will listen now and hold that long overdue examination.

Pam Martens worked on Wall Street for 21 years; she has no securities position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire.

(1) Standard & Poor's on Citigroup's SIVs
(2) Citigroup creates two more SIVs in November 2006
(3) Merrill Lynch's holdings of Citigroup SIVs as of 7/31/2007 in one money market.
(4) Pam Martens' and Galen Sherwin's testimony to the Federal Reserve Board against the merger creating Citigroup. See Panel 25.
(5) Alberto Gotto's testimony to the Federal Reserve. See Panel 20.
(6) Anita Hill reports in this Boston Globe article how CitiFinancial preyed on the uneducated and minorities.
See additional Congressional testimony here

There was some dark irony last week, with the news that the new personal bankruptcy law in the United States that prohibits individuals from getting out from under credit card debt has caused more problems for banks than the old system by driving foreclosures:

Bankruptcy Law Backfires as Foreclosures Offset Gains

Kathleen M. Howley

Nov. 8 (Bloomberg) -- Washington Mutual Inc. got what it wanted in 2005: A revised bankruptcy code that no longer lets people walk away from credit card bills.

The largest U.S. savings and loan didn't count on a housing recession. The new bankruptcy laws are helping drive foreclosures to a record as homeowners default on mortgages and struggle to pay credit card debts that might have been wiped out under the old code, said Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank.

“Be careful what you wish for,'' Westbrook said. “They wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures.”

Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. spent $25 million in 2004 and 2005 lobbying for a legislative agenda that included changes in bankruptcy laws to protect credit card profits, according to the Center for Responsive Politics, a non-partisan Washington group that tracks political donations.

The banks are still paying for that decision. The surge in foreclosures has cut the value of securities backed by mortgages and led to more than $40 billion of writedowns for U.S. financial institutions. It also reached to the top echelons of the financial services industry.

Prince Exits

Citigroup Chief Executive Officer Charles O. “Chuck” Prince III stepped down this week after the country's biggest bank by assets said it may have $11 billion of writedowns on top of more than $6 billion in the third quarter. Stan O'Neal was ousted as CEO of Merrill Lynch & Co., the world's largest brokerage, after an $8.4 billion writedown. Both firms are based in New York.

Morgan Stanley, the second-biggest securities firm, said in a statement today that subprime losses will cut fourth-quarter earnings by $2.5 billion. The New York-based bank said it lost $3.7 billion in the two months through Oct. 31 as prices for securities linked with home loans to risky borrowers sank further than traders expected.

Even as losses have mounted, banks have seen their credit card businesses improve. The amount of money owed on U.S. credit cards with payments more than 30 days late fell to $7.04 billion in the second quarter from $8.37 billion two years earlier, according to data compiled by Federal Deposit Insurance Corp.

In the same period, the dollar volume of repossessed homes owned by insured banks doubled to $4.2 billion, the federal agency said. New foreclosures rose to a record in the second quarter, led by defaults in subprime adjustable-rate mortgages, according to the Mortgage Bankers Association in Washington.

‘Let the House Go’

People are putting their credit card payments ahead of their mortgages, said Richard Fairbank, chief executive officer of Capital One Financial Corp., the largest independent U.S. credit card issuer. Of customers who are at least three months late on their mortgage payments, 70 percent are current on their credit cards, he said.

“What we conclude is that people are saying, ‘Honey, let the house go,”‘ but keep the cards, Fairbank said Nov. 5 at a conference in New York sponsored by Lehman Brothers Holdings Inc.

The new bankruptcy code makes it harder for debtors to qualify for Chapter 7, the section that erases non-mortgage debt. It shifted people who get paychecks higher than the median income for their area to Chapter 13, giving them up to five years to pay off non-housing creditors.

No Help Left

The court-ordered payment plans fail to account for subprime loans with adjustable rates that can reset as often as every six months, said Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys. Two-thirds of debtors won’t be able to complete their payback plans, according to the Center for Responsible Lending.

“We have people walking away from homes because they can’t afford them even post bankruptcy,” said Sommer, a Philadelphia- based bankruptcy attorney. “Their mortgage rates are resetting at levels that are completely unaffordable, and there’s nothing the bankruptcy process can do for them as it now stands.”

Four million subprime borrowers with limited or tainted credit histories will see their mortgage bills increase by an average 40 percent in the next 18 months, according to the National Association of Consumer Advocates in Washington. About 1.45 million of those will end up in foreclosure by the end of 2008, said Mark Zandi, chief economist at Moody’s Economy.com, a research firm and unit of Moody’s Corp. in New York.

Lenders began the process of seizing properties on 0.65 percent of U.S. mortgages in the second quarter, a record in a quarterly Mortgage Bankers study that goes back 35 years. The percentage of subprime borrowers making late payments increased to 14.82, a five-year high, from 13.77.

Bankruptcies Increase

Personal bankruptcies rose 48 percent to 391,105 in the first half of 2007 from a year earlier and Chapter 13 filings accounted for more than one-third of those, according to the American Bankruptcy Institute. In the first half of 2005, they were just 24 percent of the total.

Bad mortgages slashed Washington Mutual’s profit by 72 percent in the third quarter from a year earlier, the Seattle-based thrift said Oct. 17. Income from credit card interest rose 8.8 percent to $689 million in the period, helping to offset a loss the bank warned on Oct. 5 would be 75 percent.

Washington Mutual shares tumbled the most in 20 years yesterday after New York Attorney General Andrew Cuomo said the thrift had pressured real estate appraisers to assign inflated values to properties. Its dividend yield fell to 11 percent and the company traded at 0.74 price-to-book value.

Citigroup’s third-quarter earnings fell 57 percent on mortgage losses. Bank of America stopped so-called warehouse lending to mortgage brokers after its profit declined 32 percent in the same period.

‘Unintended Consequence’

JPMorgan reported profit growth of 2.3 percent in the quarter, the smallest in more than two years, after reducing the value of leveraged loans and collateralized debt obligations, investment packages of mortgages, by $1.64 billion.

Washington Mutual spokeswoman Libby Hutchinson in Seattle, JPMorgan spokesman Thomas Kelly in New York and Bank of America spokesman Terry Francisco in Charlotte, North Carolina, declined to comment on the bankruptcy law.

“The law had an unintended consequence of taking away a relief valve that mortgage borrowers used to have,” said Rod Dubitsky, head of asset-backed research for Credit Suisse Holdings USA Inc. in New York. “It’s bad for the mortgage borrowers and bad for subprime investors because it means more losses.”

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was the biggest overhaul to the code in more than a quarter of a century. The old law, the Bankruptcy Reform Act of 1978 that was signed by President Jimmy Carter, had loosened requirements for debt forgiveness.

Lobbying Effort

Financial companies began a coordinated lobbying campaign for bankruptcy reform in 1998 when the American Financial Services Association, a trade group representing credit card companies, joined the American Bankers Association to form the National Consumer Bankruptcy Coalition.

Campaign contributions from the coalition and its members totaled more than $8.2 million during the 2004 election that gave Bush his second term in office. Two-thirds of the donations were given to Republicans who supported the bankruptcy changes, according to the Center for Responsive Politics.

The group, later renamed the Coalition for Responsible Bankruptcy Laws, has since disbanded. Its members included Washington Mutual, JPMorgan, Bank of America, Citigroup, MasterCard Inc., and Morgan Stanley.

Ford Motor Co., General Motors and DaimlerChrysler also were members. They won provisions in the new code that changed the way car loans are treated in bankruptcy.

Reform the Reform

Congress may soon take action to “reform the bankruptcy reform,” Zandi said. The House Judiciary Committee is working on legislation to let bankruptcy judges restructure home loans by lowering interest rates and reducing mortgage balances to reflect current market value.

Banks including Washington Mutual, Citigroup and Wells Fargo & Co. sent a letter to the committee opposing the change, saying such restructurings should be done privately.

Countrywide Financial Corp., the largest U.S. lender, said last month that it will modify $16 billion worth of adjustable-rate mortgages. Washington Mutual said in April that it will spend $2 billion giving discounted rates to help customers with subprime loans refinance at better terms.

So far, most lenders have been reluctant to change loan agreements. About 1 percent of mortgages that reset in January, April and July were modified, according to a Sept. 21 Moody’s Investors Service report that surveyed 16 subprime lenders that account for 80 percent of the market.

Congress probably will approve at least a limited measure to permit loan modifications, said Westbrook, the University of Texas law professor.

“They are going to have to figure out some way to address the problem,” Westbrook said. “I don’t think our economy or our consciences can handle the number of foreclosures we’ll see if they do nothing.”

Not surprisingly the gloom is spreading and not even the mainstream media can pretend that the economy is healthy. The following pathetic attempt is the best they can do:

Foreign Cash Could Boost Housing Market

Stephen Bernard

Foreign Cash Could Provide Much Needed Relief for U.S. Housing Market Thanks to Weak Dollar

NEW YORK (AP) -- The weakening dollar has caused many problems for consumers, but it may also be providing the fuel for one unintended -- and very welcome -- benefit: a rally in the struggling housing market driven by foreign investors.

For an individual or developer trying to sell a home, interested buyers are just as likely to already have a place in London or Paris as they are to be first-timers new to the market.

"European investment is likely to pick up," said Mark Vitner, chief economist for Charlotte, N.C.-based Wachovia Corp. "Now is the time to come over and take advantage."

The theory goes that foreign investors step in and replace first-time home buyers who have been squeezed out of the housing market during the recent downturn. These new investors in turn allow current homeowners to sell and trade up to larger homes.

That will help restart owners moving up the housing ladder, a process that had been key to economic growth in recent years.

Some mortgage brokers are already seeing a boost in inquiries about buying property from overseas. Dan Green, a certified mortgage planning specialist and author of TheMortgageReports.com, said the number of inquiries he's received from outside the U.S. is probably five to 10 times larger than it was a year ago.

A boost in the number of homebuyers would provide needed relief for the beleaguered housing market.

Home sale prices fell every month in 2007 through August, according to the S&P/Case-Shiller index. Existing home sales have declined for eight straight months through September, according to the National Association of Realtors.

As the housing market has plummeted, the dollar has also sunk to record lows compared to other currencies, such as the euro, meaning more spendable cash in the U.S.

"The dollar is on sale," said Susan Wachter, a professor of real estate at the Wharton School at the University of Pennsylvania.

Today, a foreign buyer would need only 34,100 euros to make a $50,000 down payment on a house. At the beginning of the year, the same buyer would have needed 37,920 euros to make the same down payment.

The influx of foreign investors can help set a floor for the real estate market, Green said.

Because lending guidelines have been so restricted in recent months due to rising delinquencies and defaults, it is more difficult for U.S. customers to get a home loan. First-time homebuyers are especially being squeezed right now, Green said, and that is where the foreigners can provide support.

For investors from countries like Ireland, the exchange rate is providing a boost in spending power, said Phillip Hegarty, the sales director for Castleroc Estates, a Dublin, Ireland-based firm that works with Irish investors to buy residential and commercial real estate in the United States.

"It's an enticing investment," Hegarty said.

Hegarty said there is plenty of demand for investment in locations like Chicago and New York, and often that demand exceeds supply.

But New York and Chicago are not the only locations likely to provide popular options for foreign investors. Places like Florida and California are likely to see a surge in foreign investment.

"In a market with great turmoil, (the weak dollar) is one factor supporting some key markets," Wachter said of the weakening dollar.

Wachter said markets like Miami and San Francisco, which are under pressure from the U.S. slowdown, are increasingly being supported by foreign investors.

To think that investors and speculators from other countries could actually prop up a housing market of a population of three hundred million is absurd. It might help a bit in a few wealthy enclaves, but anything more is absurd. Housing is driven ultimately by people who need to live in it. Those are the people to whom speculators end up selling. Notice that the article takes an unlikely hypothetical and treats it as if it is happening and as if it is way more widespread than it could ever be.

The bottom line is the crash we have been expecting for several years is happening NOW. Ran Prieur puts it this way,

November 8. Two fun questions on yesterday’s big post. First, Kat writes:
“You keep saying how close the crash is, and I just wanted to know how much time you think I’d have left to buy some land.”

First, the crash is not close -- we are in the crash. This is what the crash looks like -- not roving gangs storming your house to steal canned food, but trains breaking down and roofs leaking and unemployed people moving in with family and employed people cynically going through the motions. Ten thousand little breakdowns, and adjustments to breakdowns, will slowly build up until you find yourself eating dandelions and sorting out your pre-1982 pennies to sell the copper. But there will not be one day when everything is different.

Second, you have all the time in the world to get land -- but you might not be buying it. Maybe you’ll buy 200 gallons of high fructose corn syrup while it’s still subsidized to keep poor people sick, and ferment and distill it into 120 proof alcohol, and trade seven kegs for five acres of clearcut. Or you’ll get a job in the "fell off a truck" economy to save money to buy a farm at a foreclosure auction, or you’ll know someone who already has land and needs helpers, or you’ll squat an abandoned house with a quarter acre lawn, turn it into gardens, and when the owning bank notices you and threatens to call in Blackwater, you’ll slip out in the night and do the same thing somewhere else. There’s no hurry -- the land is not going anywhere.