Signs of the Economic Apocalypse, 9-8-08

From SOTT.net:

Gold closed at 802.80 dollars an ounce Friday, down 4.1% from $835.20 for the week. The dollar closed at 0.7009 euros Friday, up 2.8% from 0.6815 at the close of the previous week. That put the euro at 1.4267 dollars compared to 1.4674 the week before. Gold in euros would be 562.70 euros an ounce, down 1.1% from 569.17 at the close of the previous Friday. Oil closed at 106.23 dollars a barrel Friday, down 8.7% from $115.46 at the end of the week before. Oil in euros would be 74.46 euros a barrel, down 5.7% from 78.68 for the week. The gold/oil ratio closed at 7.56, up 4.6% from 7.23 at the end of the week before. In U.S. stocks, the Dow closed at 11,220.96 Friday, down 2.9% from 11,543.55 at the close of the previous Friday. The NASDAQ closed at 2,255.88 Friday, down 4.9% from 2,367.52 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.70%, down 11 basis points from 3.81 for the week.

Signs of an economic collapse began to pile up again last week, leading to further drops in commodity prices. Oil fell almost 9% and gold fell 4%. The dollar continued to rise against the euro. Job losses continued in the United States and now 9% of houses in the U.S. are behind in payments or in foreclosure. Finally, the U.S. government seized Fannie Mae and Freddie Mac.

US jobless rate soars as foreclosures break new record

Bill Van Auken

6 September 2008

In a stark indication that the crises gripping the US housing market and the financial sector are spreading throughout the economy, unemployment figures for August rose far more sharply than expected, hitting a five-year high.

The official unemployment rate rose to 6.1 percent last month, according to a report released Friday by the Bureau of Labor Statistics. In addition to the net loss of 84,000 jobs last month, the agency revised its figures for June and July, reporting the destruction of an additional 58,000 jobs, pointing to an entire summer dominated by layoffs and economic slump.

Meanwhile the so-called misery index, which adds the unemployment and inflation rates, hit 11.7 percent, the worst figure recorded since mid-1991, as high gas, food and utility prices continue to gouge workers’ paychecks even as layoffs mount.

Also on Friday, the Mortgage Bankers Association issued a report showing that the new foreclosure rate has risen to its highest point in nearly three decades, as falling home prices and tighter credit is forcing more and more people out of their homes. The total number of homes in foreclosure hit 2.75 percent, triple the rate recorded three years ago. Meanwhile, 6.41 percent of all home mortgages were one or more payments overdue, a record high since these figures were first recorded in 1979.

At the same time, existing home sales fell to a 10-year low in the second quarter, while the median price of a single-family house plummeted by another 7.6 percent, the National Association of Realtors reported.

The increase in unemployment and the rising number of foreclosures are clearly trends that are feeding into one another in a vicious downward spiral. Workers having lost their jobs are finding it impossible to meet monthly mortgage payments, and the collapse of home values has wiped out credit for many, leading to falling consumption and new layoffs.

The loss of jobs was spread throughout the economy, with health care, education and government employment virtually alone in resisting the surge of layoffs. Manufacturing companies cut 61,000 workers from their payrolls; business and professional companies eliminated 53,000 jobs, temporary employment—which generally is a leading indicator of future job trends—fell by 36,000 and the retail trade sector cut 19,900 jobs. Construction employment was down just 8,000, reflecting in part the massive bloodletting that has already taken place—558,000 jobs wiped out since the beginning of 2007.

Massive new layoffs are on the horizon. The Air Transport Association reported Friday that US airlines plan to cut at least 36,000 jobs by the end of the year.
Job cuts will continue throughout the auto industry as new vehicle sales slump. The DMAX engine plant in Dayton, Ohio announced this week that it is laying off another 330 workers, on top of 290 jobs cut in July. The plant makes engines for GM trucks. Daimler Trucks North America, meanwhile, has announced plans to cut one of the two shifts at its Mount Holly, North Carolina Freightliner plant, putting 675 workers on the unemployment lines.

The financial sector is also shedding large numbers of jobs. GMAC Financial Services announced this week it will lay off 5,000 workers, while Wachovia Corp. has indicated that it intends to eliminate the jobs of some 7,000 of its employees.

The official figures released Friday were substantially higher than those predicted by economists, who had projected only a 0.1 percent increase over July’s rate of 5.7 percent, with the loss of 75,000 jobs, rather than a 0.4 jump to 6.1 percent and the loss of 84,000 jobs.

The decisive issue in the unemployment figures is the sustained character of the assault on jobs, with unemployment rising for eight months straight—the most protracted such trend in the last 25 years. The result is that 2.2 million more workers have joined the unemployment lines over the past year, for a total of 9.4 million officially counted as out of work.

These figures drastically underestimate the real crisis confronting working people in the US. An alternative measure provided by the Bureau of Labor Statistics, which includes so-called “discouraged workers”—those who have given up actively looking for work—as well as those forced to eke out a living with part-time jobs because they are unable to get full-time work, rose by a tenth of a percentage point to account for fully 10.7 percent of the US workforce.

The latest report on the growth in unemployment elicited widespread acknowledgment that the US economy is gripped by recession.

“The economy has clearly slipped into a jobs recession because the housing meltdown and credit market turmoil has spread to the broader economy,” Steven Wood, chief economist at Insight Economics, wrote after the new figures were released.

Bank of America economist Peter Kretzmer, in a note to investors, wrote, “The rapid rise in the unemployment rate points to a US recession, as such an increase has never occurred outside of one.” The economist said that household surveys have produced data indicating that 1.75 million jobs have been wiped out since April alone.

William Poole, former president of the Federal Reserve Bank of St. Louis, told Bloomberg Television, “It certainly increases the probability that we really are in a recession. It is a weak number, including the [June, July] revisions.”

Friday’s dismal unemployment and foreclosure figures came at the end of the worst week for the world financial markets since the aftermath of the terrorist attacks on New York City and Washington seven years ago.

The Dow Jones Industrial average eked out a 32-point advance Friday after falling nearly 350 points, or 3 percent, the day before—the worst losses in two months. The sell-off was attributed to the release of the initial projection of a 5.7 percent unemployment rate, combined with dismal retail sales figures and rampant rumors that a major hedge fund, Atticus Capital, with $14 billion in investments, was on the brink of collapse.

While the Atticus executives insisted that the rumors were false and that the fund had substantial cash reserves, the fears that major hedge funds will go under are well founded. Many of them had invested heavily in the commodity bubble, which has been rapidly deflating with the recent fall in oil and food prices.
Asian stock markets, which fell every day this week, suffered sharp losses Friday, with the Hang Seng index in Hong Kong falling 2.2 percent, Tokyo’s Nikei down 2.75 percent, the Shanghai A-share market dropping 3.3 percent and Australia’s market down 2.1 percent. Similar percentage losses were recorded on all of the major European markets.

Meanwhile, the manager of the world’s largest bond fund warned Friday that the US economy faced a “financial tsunami” unless the government intervenes to buy up assets being dumped by banks and finance houses.

“Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,” Bill Gross of California-based Pacific Investment Management Co. wrote in a statement on the company’s web site. “If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the US Treasury.” Specifically, he called for the federal government to stem the foreclosure tide by issuing subsidized loans and buying up properties.

Gross’s statement reflects growing fears within financial circles that the worst of the credit crisis is still to come and could produce a catastrophic global collapse.

In the face of the rapidly deepening economic crisis, the White House issued a sanguine statement that simply ignored the job losses and rise in foreclosures, pointing instead to earlier figures showing an increase in the gross domestic product. “The level of growth demonstrates the resilience of the economy in the face of high energy prices, a weak housing market and difficulties in the financial markets,” the White House said.

While this is obviously cold comfort to the millions forced onto the unemployment lines or facing the loss of their homes, the attempt by the candidates of the two major parties to turn the latest figures into political hay offered little more.

Republican candidate John McCain acknowledged that “Americans are hurting and we must act to create jobs.” He vowed to enact a “Jobs for America” program, which appeared to involve little more than job training schemes, tax cuts for business and advocacy of free trade.

Democratic candidate Barack Obama issued a predictable statement accusing his rival McCain of preparing “more of the same” and continuing the Bush administration’s tax cuts for the rich. He pledged instead to institute an exceedingly modest tax cut for “middle-class families” plus a $50 billion fund to aid state budgets.

There is no reason to believe such paltry promises will be realized. Even they were, they would prove entirely inadequate to stem the tide of layoffs or stabilize the crisis-ridden financial system. The Democratic Party is incapable of advancing any serious alternative to the policies of the Bush administration, tied as it is to the interests of Wall Street and corporate America.

The continuing housing crisis led the U.S. government to take over the two Government Sponsored Enterprises, Fannie Mae and Freddie Mac in order to prevent a collapse of the world financial system.

Officials announce takeover of mortgage giants

September 7, 2008

Alan Zibel and Martin Crutsinger

WASHINGTON (AP) -- The Bush administration, acting to avert the potential for major financial turmoil, announced Sunday that the federal government was taking control of mortgage giants Fannie Mae and Freddie Mac.

Officials announced that the executives and board of directors of both institutions had been replaced. Herb Allison, a former vice chairman of Merrill Lynch, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac.

Treasury Secretary Henry Paulson says the historic actions were being taken because "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."

The huge potential liabilities facing each company, as a result of soaring mortgage defaults, could cost taxpayers tens of billions of dollars, but Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious.

"A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance," Paulson said.

Both companies were placed into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie.

The Federal Reserve and other federal banking regulators said in a joint statement Sunday that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans."

The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.
Paulson said that it would be up to Congress and the next president to figure out the two companies' ultimate structure.

"There is a consensus today ... that they cannot continue in their current form," he said.

Paulson and James Lockhart, director of the Federal Housing Finance Agency, stressed that their actions were designed to strengthen the role of the two mortgage giants in supporting the nation's housing market. Both companies do that by buying mortgage loans from banks and packaging those loans into securities that they either hold or sell to U.S. and foreign investors.

The companies own or guarantee about $5 trillion in home loans, about half the nation's total.

Lockhart said that both Fannie and Freddie would be allowed to increase the size of their holdings of mortgage-backed securities to bolster the housing industry as it undergoes its worst downturn in decades.

Lockhart said in order to conserve about $2 billion in capital the dividend payments on both common and preferred stock would be eliminated. He said that all lobbying activities of both companies would stop immediately. Both companies over the years made extensive efforts to lobby members of Congress in an effort to keep the benefits they enjoyed as government-sponsored enterprises.

Both Paulson and Lockhart were careful not to blame Daniel Mudd, the CEO of Fannie Mae, or Freddie Mac CEO Richard Syron for the companies' current problems. While both men are being removed as the top executives, they have been asked to remain for an unspecified period to help with the transition.

The problem is that each time they do something like this, the obligations of the already vastly overstretched U.S. government increase. In this takeover plan the U.S. Treasury will purchase mortgage securities.

U.S. Rescue Seen at Hand for 2 Mortgage Giants

Stephen Labaton and Andrew Ross Sorkin

September 6, 2008

WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said.

The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.

The drastic effort follows the bailout this year of Bear Stearns, the investment bank, as government officials continue to grapple with how to stem the credit crisis and housing crisis that have hobbled the economy. With Bear Stearns, the government provided guarantees, and the bulk of its assets were transferred to JPMorgan Chase, leaving shareholders with a nominal amount.

Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year.

…The declines in the housing and financial markets apparently forced the administration’s hand. With foreign governments increasingly skittish about holding billions of dollars in securities issued by the companies, no sign that their losses will abate any time soon, and the inability of the companies to raise new capital, the administration apparently decided it would be better to act now rather than closer to the presidential election in two months.

Just five weeks ago, President Bush signed a law to give the administration the authority to inject billions of dollars into the companies through investments or loans. In proposing the legislation, Treasury Secretary Henry M. Paulson Jr. said that he had no plan to provide loans or investments, and that merely giving the government the authority to backstop the companies would provide a strong shot of confidence to the markets. But the thin capital reserves that have kept the two companies afloat have continued to erode as the housing market has steadily declined and the number of foreclosures has soared.

As their problems have deepened — and the marketplace has come to expect some sort of government rescue — both companies have found it difficult to raise new capital to absorb future losses. In recent weeks, Mr. Paulson has been reaching out to foreign governments that hold billions of dollars of Fannie and Freddie securities to reassure them that the United States stands behind the companies.

In issuing their quarterly financial statements last month, the two companies reported huge losses and predicted that home prices would fall more than previously projected.

The debt securities the companies issue to finance their operations are widely owned by mutual funds, pension funds, foreign governments and big companies…

The meetings reflected the reality that senior administration officials did not believe they could wait for some kind of financial tipping point, as happened with Bear Stearns, which was saved from insolvency in March by government intervention after its stock plummeted and lenders withheld their capital.

Instead, Mr. Paulson has struggled to navigate through potentially conflicting goals — stabilizing the financial markets, making mortgages more widely available in a tightening credit environment, and protecting taxpayers from possibly enormous losses…

It appears likely that Paulson’s ship will hit all three rocks. He can only stabilize the financial markets for so long. Who will to buy houses when values plummet and jobs are cut? And, the costs of all the bailouts will paid by taxpayers.

Signs of the Economic Apocalypse, 7-28-08

From SOTT.net:

Gold closed at 926.80 dollars an ounce Friday, down 3.4% from $958.00 for the week. The dollar closed at 0.6371 euros Friday, up 0.9% from 0.6312 at the close of the previous week. That put the euro at 1.5697 dollars compared to 1.5842 the week before. Gold in euros would be 590.43 euros an ounce, down 2.4% from 604.72 at the close of the previous week. Oil closed at 123.41 dollars a barrel Friday, down 4.4% from $128.82 for the week. Oil in euros would be 78.62 euros a barrel, down 3.4% from 81.32 at the close of the Friday before. The gold/oil ratio closed at 7.51 Friday, up 0.9% from 7.44 for the week. In U.S. stocks, the Dow closed at 11,371.92 Friday, down 1.1% from 11,496.57 at the close of the previous Friday. The NASDAQ closed at 2,310.79 Friday, up 1.2% from 2,282.78 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.09%, unchanged for the week.

Gold and oil were down sharply last week. Over the last two weeks, oil fell 17.5% on lower probability of war in Iran and growing evidence of a serious global economic downturn. It may be that the commodities bubble will be short-lived and that we are shifting back to risk of deflation due to collapse in demand.

Bad news in the U.S. housing sector continued to pile up. Foreclosures have doubled from a year ago and existing housing sales hit a ten-year low:

U.S. Economy: Sales of Existing Homes Decline to 10-Year Low

Bob Willis

July 24 (Bloomberg) -- Sales of previously owned U.S. homes fell in June to the lowest level in a decade as tumbling real- estate prices and consumer confidence signal no end in sight to a housing recession now in its third year.

Resales dropped 2.6 percent to a lower-than-forecast 4.86 million annual rate from a 4.99 million pace the prior month, the National Association of Realtors said today in Washington. The median home price dropped 6.1 percent from June of last year.

The housing slump may deepen further after mortgage rates climbed to the highest in a year this month and turmoil engulfed Fannie Mae and Freddie Mac, which account for more than two- thirds of new home-loan financing. A record 18.6 million homes stood empty in the last three months as the industry's recession reverberated through communities, separate figures showed today.

The NAR report “is, unfortunately, not telling us about an end” to the slide, said David Resler, chief economist at Nomura Securities International Inc. in New York. “Housing is going to be a non-contributor, if not a drag, on the overall economy.”

The Standard & Poor's Supercomposite Homebuilding Index dropped 4.9 percent to 480.61 at 10:33 a.m. in New York. By comparison, the Standard & Poor's 500 Stock Index lost 0.6 percent, to 1,274.06.

Economists forecast home resales would fall to a 4.94 million pace, according to the median of 77 projections in a Bloomberg News survey. Estimates ranged from a 4.79 million pace to 5.1 million rate.

Jobless Claims

The Labor Department earlier today reported that first-time claims for unemployment benefits rose last week to the highest in almost four months, a sign the slowing economy is weakening the labor market. Applications increased by 34,000 to 406,000 in the week ended July 19.

Compared with a year earlier, existing home sales were down 16 percent in June. Purchases are down by about a third from a record of 7.25 million reached in September 2005.

The number of previously owned unsold homes on the market at the end of June rose to 4.49 million from 4.482 million in May. The total represented 11.1 months' supply at the current sales pace. The agents' group has said that a five-to-six month's supply reflects a balanced market.

“The biggest problem is that we've not yet seen inventories come down,” Paul Puryear, managing director of Raymond James & Associates Inc. in St. Petersburg, Florida, said in an interview with Bloomberg Radio yesterday. The housing market isn't likely to recover until at least 2009 or 2010, he said.

Property Types

Sales of existing single-family homes declined 3.2 percent to an annual rate of 4.27 million. Purchases of condos and co-ops increased 1.7 percent to a 590,000 pace.

The median sales price fell to $215,100 from $229,000 in June 2007. The median cost of a single-family home decreased 6.7 percent to $213,800, while that of condominiums and co-ops fell 2.2 percent to $224,200.

Purchases decreased in three of four regions, led by a 6.6 percent decline in the Northeast. Sales rose 1 percent in the West, which also showed a 17 percent drop in the median price, the biggest of any region.

The glut of homes may be even greater because not all foreclosed properties are counted by the Realtors group. The group only includes foreclosures that have been listed on the multiple listings service…

Since the U.S. economy has been propped up this decade by war and housing, the pain from the collapse of the housing bubble and the rise in energy prices is spreading to any sector affected by consumer spending:

Commercial bankruptcies soar, reflecting widening economic woes

Tony Pugh McClatchy Newspapers

Sat, Jul. 19, 2008

WASHINGTON — Driven by a sour economy and skittish consumers, U.S. business bankruptcies saw their sharpest quarterly rise in two years, jumping 17 percent in the second quarter of 2008, according to an analysis by McClatchy.

Commercial filings for the first half of 2008 are up 45 percent from last year, as the national climate for commerce continues to deteriorate amid rising energy and food costs, mounting job losses, tighter credit and a reticence among consumers to part with discretionary income.

From April through June, 15,471 U.S. businesses called it quits, according to data from Automated Access to Court Electronic Records, an Oklahoma City bankruptcy management and data company.

States that saw the biggest increase in filings were Delaware, Montana, Oregon, Maryland and Connecticut, suggesting that the economic gloom is spreading beyond large population centers.

It was the 10th straight quarter that business bankruptcy filings have increased. Nearly 29,000 companies filed in the first half of 2008.

Another 60,000 to 90,000 others probably have closed, because roughly two to three businesses fold for every one that files for bankruptcy, said Jack Williams, resident scholar at the American Bankruptcy Institute.

The vast majority of these failed companies are among the nation's 23 million small businesses, with fewer than 100 employees. Their fortunes have tumbled as the national economic downturn has deepened.

"The climate is turning desperate for small businesses," said George Cloutier, founder of American Management Services, a consulting firm that helps small companies increase profits. "They are in crisis, and, as these numbers show, it's getting worse and worse."

Larger enterprises typically have more capital to weather downturns, but many of them also are reeling from the sputtering economy.

"I've been doing this for 36 years, and this is clearly the worst I've ever seen," said Harding Dawahare, the president of the Lexington, Ky.-based Dawahare's clothing store chain, which employs more than 400 people.

It was 1907 when Dawahare's Syrian immigrant grandfather, Serur Dawahare, began packing his mules with bags of fabric and linens and peddling his goods door to door to coal miners in Eastern Kentucky.

From those modest beginnings, Dawahare's grew to a 32-store clothing chain with outlets throughout Kentucky and a few stores in Tennessee and West Virginia.

However, Harding Dawahare did the unthinkable recently and filed for bankruptcy after amassing more than $9 million in debts. He said his problems began after a tough year in 2006, but it was the 2007 holiday season that did him in.

"We had a great third quarter, but if you don't have a good fourth quarter, you're not gonna make it. And that's essentially what happened. The economy tanked in late November and it never came back, and we just couldn't overcome it."

More than 20 percent of the newly shuttered businesses were in California, which logged 3,141 bankruptcies in the second quarter.

Texas fielded the next highest number of bankruptcies with 1,168, followed by Michigan with 702 and Florida with 635. New York was next, with 618 petitions, and Colorado had 547.

Commercial bankruptcy filings reported by Automated Access to Court Electronic Records are typically higher than official government figures due to a more thorough reading of the petitions.

Robert Lawless, a law professor at the University of Illinois and a bankruptcy expert, has researched and written about the federal government's underreporting of business bankruptcies. He estimates that roughly one in seven people who file for consumer bankruptcy do so in connection with their businesses.

Tom Clements' pet shop in Tampa, Fla., started seeing steep declines in business in April of last year.

"We didn't know what it was at the time, so we were trying to work through it," Clements said.

But as sales stayed flat for the next 15 months, Clements, 62, realized that the economy was forcing customers to make tough choices. "Obviously a puppy isn't something that everybody has to have."

With listed assets of about $2,605, Clements filed for Chapter 7 bankruptcy in June, owing more than $260,000 for back taxes, a property lease, auto leases, unpaid inventory, dog food, phone service, advertising, pest control, waste removal and other services.

"I absolutely loved that business," Clements said wistfully. "It's the kind of business where people were happy. You come, get a puppy or a dog, you go home happy. Unfortunately, I'm not a philanthropist."

Clements said the lingering debt and the money he invested had jeopardized his and his wife's retirement.

"That's why I wouldn't ever consider going back into something like that again," he said.

Williams of the bankruptcy institute said that because bankruptcies were lagging economic indicators, they probably would "continue to increase at least for the next year to 18 months at the rate that we're seeing right now."

Cloutier wants the federal government to create a $10 billion emergency-loan fund to help struggling small businesses avoid bankruptcy. Williams is skeptical.

"I think most of the business problems are not simply market-driven, they're operational. So there's a mix. Throwing more money at a poor operation means you just spent more money, but the operation is still poor."

Jodi and Steven Carbaugh of Waynesboro, Pa., ended up in bankruptcy court after they tried to expand their Cupo' Joe coffee shop in Greencastle, Pa.

In 2006, the couple used their home as collateral to buy a nearby Amish-owned bakery. "Big mistake," Jodi Carbaugh said.

As their debt increased, the couple tried to juggle four business-related loans and their home mortgage as well as pay vendors, employees, utilities and insurance. At the same time, business at the coffee shop began to slow.

Some 70 miles outside Washington, the Cupo' Joe was a favorite morning launching pad for residents who drive to work in the nation's capital. But as gas prices increased, Jodi Carbaugh noticed that business began to wane, falling 40 percent since last year.

"People had to spend more money to buy gas to get to D.C. instead of buying lattes and specialty breads," Carbaugh said. At the same time, food prices spiked. A case of eggs tripled to $60 and a 50-pound bag of flour went from about $20 to more than $50.

"The price of goods increased so drastically that we couldn't ask folks to pay what it cost to make the products," Carbaugh said.

Their fortunes bottomed out in June, when they filed for Chapter 13 bankruptcy protection.

"We worked as hard as we could for as long as we could," Carbaugh said of their failed ventures. " . . . Some of life's lessons aren't so easily learned, but we learned our lesson."

The result is a lot of personal pain and shattered lives. In the Boston area last week a woman committed suicide before her house was going to be reposessed.

US housing slump “without precedent”: foreclosures up 121 percent over 2007

David Walsh

26 July 2008

Foreclosures in the US continued to climb in the second quarter of 2008, experts acknowledge that the current housing slump is “without precedent” in the modern era, and the resulting stress is taking both an economic and emotional toll: a 53-year-old Massachusetts woman committed suicide July 22 only hours before her family’s home was to be put up for auction.

In the three-month period April through June, some 740,000 foreclosure filings were recorded in the US, an increase of 14 percent over the first quarter and 121 percent over the same period in 2007. According to RealtyTrac, one in every 171 US households received a filing, which includes notices of default, auction sale notices and bank repossessions.

The banks took back some 220,000 homes in the second quarter (and 370,000 in the first six months of the year) and there are presently 18.6 million homes in the country standing empty, the highest number in history. The number of vacant houses has jumped nearly 7 percent in the last year.

California’s Central Valley “remains ground zero” for foreclosure filings, as CNNMoney notes, with one in every 25 houses in Stockton affected, for example. Riverside-San Bernardino, east of Los Angeles, had the second highest rate with one filing for every 32 households. Las Vegas, Nevada and Bakersfield and Sacramento, California were the others among the top five regions.

California as a whole witnessed another 203,000 foreclosures; Nevada had the highest rate, one in every 43 households. Phoenix, Arizona saw a 534 percent increase in foreclosures in the first half of 2008. Its west and southwest sides had increases of 700 percent or more.

Outside the Sun Belt, Detroit is suffering the most of any major center, with one filing for every 66 homes in the second quarter. In Ohio, Toledo (one in 92), Akron (one in 93) and Cleveland (one in 108) have also been hit very hard.

RealtyTrac, the Irvine, California-based data company, reported that 48 of the 50 states and 95 of 100 major city regions witnessed year-over-year increases in foreclosure activity.

The firm has doubled the projected number of foreclosures in 2008 to about 2.5 million.

Previously foreclosed homes are now making up a growing percentage of existing home sales in some areas. In San Joaquin and Merced counties in California, seven in ten existing-home sales in the second quarter involved properties that had experienced foreclosure in the previous year. Foreclosed houses and condominiums made up 41 percent of existing-home sales in California in April, May and June.

The National Association of Realtors reported Thursday that sales of existing homes in June were lower than expected and had hit their lowest level in a decade. Sales by homeowners declined last month to a yearly rate of 4.86 million, down 2.6 percent from the 4.99 million annual rate in May. This is slowest pace since the first three months of 1998.

The existing home sales rate is down 15.5 percent from June 2007. Economists had predicted sales at an annual rate of 4.95 million.

The median price for a house sold in June 2008 was down 6.1 percent from one year earlier.

Despite lower house prices, mortgages rates are increasing, so that “the total mortgage price is under upward pressure,” notes CNNMoney, further discouraging sales. The 30-year fixed rate mortgage rose to 6.63 percent in the week ending July 24, up from 6.26 percent the week before.

Bill Gross, manager of the world’s largest bond fund at Pacific Investment Management, estimates that as many as 25 million US homeowners risk owing more than the values of their homes, a condition known as “negative equity.” This will lead to further foreclosures and widespread financial hardship. The bill currently being passed in Congress may assist at most 400,000 homeowners, according to the claims of its own advocates. In any event, Brian Bethune, an economist at Global Insight, points out that while the bill “has some very positive elements ... it would be very easy to negate those elements if mortgage rates keep rising.”

Gross of Pacific Investment estimates that financial firms have already suffered $467 billion in credit losses and asset writedowns. He argues that a total of $5 trillion worth of mortgage loans are in “risky asset” categories, and that “nearly [$1 trillion] of cumulative losses will finally mark the gravestone of this housing bubble.” If financial firms write down this massive amount, it will result in sharply reduced bank lending and produce a fire sale of assets.

A special commentary prepared by the Wachovia Bank’s Economics Group, “How Far Will Housing Prices Fall?” released July 14, revealed the current perplexity of the banking and financial experts. The report noted: “We are repeatedly asked how far housing prices will fall and when home prices will bottom out. The answers to these questions are complicated. The current housing slump is without precedent, both in terms of breadth and magnitude.”

According to the National Association of Realtors, the authors explain, the median price for an existing home “has fallen 6.8 percent over the past year and has been down on a year-to-year basis for the past 22 months. Prior to the recent string of declines, the median price of an existing home had never declined for more than two months in a row, except once back in 1990.”

Wachovia’s analysts tentatively estimate that housing prices will ultimately have dropped anywhere from 22 to 29 percent from their peak in 2005, a massive decline in the value of the only significant asset most American families own.

Impending foreclosure led to suicide

Knight Ridder’s Washington bureau noted July 20, “For many homeowners, the deep housing slump feels like a drop off a skyscraper. Every time another 15 floors have passed, there seems to be more room to fall.”

It seems to safe to predict that the suicide of Carlene Balderrama in Taunton, Massachusetts, southwest of Boston, will not be the last such tragedy produced by the housing slump.

The distraught woman, mother of one son, shot herself Tuesday afternoon after sending a fax to her mortgage company alerting them of her intention. The company was planning to sell her foreclosed home at 5 pm.

Taunton Police Chief Raymond O’Berg read a portion of the fax to the media: “By the time you foreclose on my house I’ll be dead.” In a suicide note, she asked her family to use the life insurance money to pay off the debt.

Horribly, Balderrama’s husband, a plumber, arrived home from work to discover police with his wife’s corpse, unaware of the impending auction. “He told us she handled all the finances,” Police Chief O’Berg said. “He had no idea the house was being foreclosed on.” Potential buyers also arrived while the dead woman’s body was still inside the home.

The media reports that since John Balderrama bought the $232,000 three-bedroom house in Taunton in 2002, he had attempted to file for bankruptcy three times, and the mortgage company had twice launched foreclosure proceedings. Balderrama was earning about $95,000 a year as a plumber. He said that in her suicide note his wife explained “that it got overwhelming for her.”

O’Berg told the media, “It is a tragedy ... There’s victims all around in this ... Something’s wrong with the system when you have working people being foreclosed on.” The housing crunch, the police chief said, “is inflicting real pain on middle-class America. Put yourself in her shoes. You handle the finances, and you’re hiding everything from family. It’s a lot of pressure.”

WHSM television reported, “Neighbors said it is a sign of the times.”

Bruce Marks, chief executive of the Neighborhood Assistance Corporation of America, told the Boston Globe that it was not uncommon for homeowners to contemplate suicide when they were not able to keep up their mortgage payments.

“What gets us so angry is that people blame themselves,” Marks observed to the newspaper. “They can’t see past their sense of responsibility to see the responsibility and the predatory nature of these lenders. The fact of the matter is, unless something dramatic happens, there’s going to be more and more people like her taking their lives.”

Emails from readers posted by the Taunton Call about the episode provide some indication of popular sentiment.

Wrote one reader: “My heart goes out to this family. How tragic that she felt that she needed to take her life. Mortgage companies are so heartless that I am sure they still care more about auctioning off this house than the family of this poor woman. I am sure buyers will be lined up tomorrow. What a very sad sign of the times!”

Another commented: “I have pleaded in the past with my mortgage company to work with me on my rates because I was stupid not to read the whole 10 thousand pages when I bought my house and now I’m stuck with a mortgage that will go up every 6 months. I’m on my way to foreclosure and I don’t know where to go as a single parent with 3 kids. A mortgage company shouldn’t feel sorry for people, but have a heart if someone is trying the hardest to pay the mortgage—then give them a little time.”

A third wrote: “Most people who read this article will probably say to themselves ‘of course they foreclosed the house, it’s the law, they had too.’ The sad truth is that they are right because that is how the world works. This article should be an eye-opener to anyone who reads it. It clearly shows how disgusting and ridiculous the system of government we live under is. Just the fact that people are driven to suicide simply because of ‘financial pressure’ is horrible. In America people are supposed to have a right to life, liberty and the pursuit of happiness, but this story revokes all those rights. Situations like these disgrace the good intentions that the fathers of this country once fought for. I see this as banks (and other money collecting companies) having the right to take from clients even when it may result in death.”

Signs of the Economic Apocalypse, 12-31-07

From sott.net:

Gold closed at 842.70 dollars an ounce Friday, up 3.3% from $815.40 for the week. The dollar closed at 0.6795 euros Friday, down 2.3% from 0.6954 at the close of the previous week. That put the euro at 1.4716 dollars compared to 1.4380 the Friday before. Gold in euros would be 572.64 euros an ounce Friday, up 1.0% from 567.04 at the close of the previous Friday. Oil closed at 96.16 dollars a barrel Friday, up 3.1% from $93.31 for the week. Oil in euros would be 65.34 euros a barrel, up 0.7% from 64.89 at the close of the Friday before. The gold/oil ratio closed at 8.76 up 0.2% from 8.74 at the close of the previous week. In U.S. stocks, the Dow Jones Industrial Average closed at 13,365.87 Friday, down 0.6% from 13,450.65 the week before. The NASDAQ closed at 2,674.46 Friday, down 0.7% from 2,691.99 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.07 Friday, down ten basis points from 4.17 for the week.

Even though today is the last day of 2007, let’s take last week as the last week of the year and look at the quarterly and annual numbers. Gold rose 12.4% from $750.00 for the quarter and 31.9% from $638.80 for the year. The dollar fell 3.1% from 0.7009 for the quarter and 11.5% from 0.7576 for the year. The euro rose from 1.4267 for the quarter and from 1.3200 for the year. Gold in euros rose 8.9% from 525.69 for the quarter and 18.3% from 483.94 for the year. Oil rose 17.7% from $81.66 for the quarter and 57.5% from $61.05 for the year. Oil in euros rose 14.2% from 57.23 and 41.3% from 46.25 for the year. The gold/oil ratio fell 4.8% from 9.18 for the quarter and 19.4% from 10.46. In the U.S. stock market the Dow fell 5.2% from 14,066.01 for the quarter and rose 7.2% from 12,463.15 for the year. The NASDAQ fell 4.0% from 2,780.32 for the quarter and rose 10.7% from 2,415.29 for the year. The yield on the ten-year U.S. Treasury note fell 15.0% from 4.68 for the quarter and 15.5% from 4.70 for the year.

Here are some charts:

The most striking change of the past year in the markets is the sharp rise in gold (32%) and oil prices (57.5%) and the 11.5% drop in the value of the dollar against the euro. The past year also saw the end of economic optimism in the media as the housing bubble finally burst. The consequences of the collapse in housing prices have not fully played out. The aftershocks in the credit system will likely shape the economy in 2008. Looking ahead, it looks likely that 2008 will differ from 2007 far more significantly than 2007 differed from 2006.

Elite management of the economy has deteriorated so much in the past year that the political scene in the United States seems to be in a process of creative disintegration with the appearance of more than one grass-roots populist movement cutting across traditional ideological lines. The first was a constitutionalist, nativist movement surrounding the presidential candidacy of Ron Paul. The second is an evangelical, economic-populist movement following the candidacy of Mike Huckabee. Ron Paul’s campaign has drawn much support from the libertarian right and left because of it’s emphasis on the Bill of Rights and a dismantling of the U.S. Empire. Mike Huckabee’s campaign has sliced the Republican coalition down the middle by running and anti-corporate, anti-economic elite campaign appealing to religious conservatives. Both candidates seem to have disturbed the elite and both have had some of there more divisive proposals brought forward by the mainstream, corporate media to blunt their momentum.

Huckabee's Rise Drives Wedge Between Wall Street, Evangelicals

Matthew Benjamin

Dec. 27 (Bloomberg) -- Wealthy Republicans have a new political nightmare that may be scarier than Hillary Clinton: Mike Huckabee.

The former Arkansas governor has surged in Republican presidential-preference polls, winning the support of Christian fundamentalists while peppering his campaign rhetoric with jabs at the financial industry. He calls himself the candidate who isn't a “wholly owned subsidiary” of investment banks, decries large executive-pay packages and says the party needs to shift its focus from Wall Street to Main Street.

In doing so, he threatens the uneasy if effective coalition Republicans have counted on for three decades: abortion opponents and other social-issue activists supplying foot soldiers, proponents of tax cuts and business-friendly regulatory policies putting up the money and getting the biggest economic benefits.

“Huckabee puts this long-simmering feud between the social-conservative wing and the country-club and business crowd into starker contrast,” said Stuart Rothenberg, publisher of the nonpartisan Rothenberg Political Report in Washington.

Polls show Huckabee, 52, leading in the first Republican electoral contest, the Jan. 3 Iowa caucuses. In national polls, he is within striking distance of former New York Mayor Rudy Giuliani.

Backlash

The stronger he gets in the polls, the stronger the intra- party backlash against him. “He's sort of a populist, and that doesn't sell too well on Wall Street,” said David Hedley, a retired managing director at Donaldson Lufkin & Jenrette who raised at least $100,000 for George W. Bush in the 2000 presidential election.

The Club for Growth, a Washington-based group that advocates tax and spending cuts, has mounted a campaign against Huckabee in Iowa and South Carolina, which holds its Republican primary on Jan. 19. The group said Dec. 14 it is doubling advertising purchases and urged taxpayers to call Huckabee and challenge him on his tax policy.

The group says Huckabee's tax increases while governor from 1996 to 2007 far surpassed reductions, with the average tax burden for state residents increasing 47 percent during his tenure.

“Mike Huckabee is not an economic conservative,” said Pat Toomey, a former Pennsylvania congressman and the club's president. “He's the only Republican in the field who really is truly a big-government liberal.”

‘Huckacide’

The Wall Street Journal editorial page has repeatedly attacked Huckabee in recent weeks, and the National Review magazine warned Republicans against committing “Huckacide.”

“These guys don't like Huckabee because he's not one of them,” said Ed Rollins, the Huckabee campaign chairman. “They have enjoyed the reins of power a long time, and he's a threat.”

Rollins, who ran Ronald Reagan's re-election campaign in 1984, recalls that some economic conservatives were initially suspicious of him too: “Ronald Reagan wasn't one of them, and he also had raised taxes to fix problems.”

After Huckabee finished second in an August Iowa straw poll, he said in an interview that his biggest asset going into the contest “was the negative attack ads that the Club for Greed, excuse me, the Club for Growth was running.”

‘Extraordinary Disconnect’

Huckabee said he represents Republican voters who feel estranged from the party. “There's an extraordinary disconnect between people who have sort of had a traditional leadership role in the Republican Party and the folks on Main Street,” he said. “There's a difference between Wall Street Republicans and Main Street Republicans.”

For the moment, the shots at Wall Street are helping Huckabee among Republican voters, said Costas Panagopolous, director of the Center for Electoral Politics and Democracy at Fordham University in New York. “In rural America and most of the country, Wall Street is a big, bad bogeyman, and he's tapping into this perception.”

Chuck Hurley, president of the Iowa Family Policy Center, a nonprofit pro-family organization in Des Moines, said that “it wouldn't surprise me that there's some antipathy for the Goldman Sachs bonuses among rank-and-file stockholders in rural Iowa.” Hurley has endorsed Huckabee, though his organization remains neutral…

The expatriate journalist David Seaton finds himself fascinated by Huckabee lately. Seaton cites Martin Wolf of the Financial Times in a piece he wrote on limits to economic growth and concludes:

Martin Wolf is the chief economist of the Financial Times and a wonderful journalist. In his work: at international conferences, and over a thousand dinner tables and at countless coffee sessions, he comes into daily contact with some of the most wealthy and powerful men and women in the world and those that serve them. Wolf hears them speak and most of all picks up their body language, their silences and vibrations. His article on "limits", which I am quoting abundantly is the cri de coeur of a man who, though not wealthy and powerful himself, knows the ways of the wealthy and powerful as no other does...

If we examine what Martin Wolf is saying logically, not even really reading between the lines, this supremely informed man is declaring that he knows that, before they ever pay Scandinavian like income taxes, drive small cars and wear sweaters around the house on cold winter days, the elites of the United States will create a police state and go to war endlessly to dominate the resource rich areas of the world. Hyperbole? Examine George W. Bush's presidency in that light and perhaps Dubya may not really be as dumb as he looks.. Or maybe he is more like what May West said about Ronald Reagan, "dumb but willing."

At this juncture, the elites of the Republican Party begin to separate from the middle class and working class base and the only way to keep them on board would be endless war and endless fear. Terror and paranoia may be the key to 2008 election. What moldy old Marxists used to call, "false consciousness". The Republican Party, to use another worn but useful Marxist term, has entered into contradiction with itself and using Wolf's analysis as our text, is clearly going to tear itself apart…

And,

It is a timeworn, but evergreen cliché, that keeping working class white people from realizing how much they have in common with working class black people is one of the secrets of American capitalism's stunning success... And Huckabee is playing with that. He is against tax breaks for the rich, he attacks Bush's "arrogance". The Cato Institute gave him an "F" as governor of Arkansas, because of his taxing and spending on education and he calls the ultraconservative political action committee, "Club for Growth" the "Club for Greed". He even makes positive noises about the environment.

What is Huckabee after?

My reading is that he wants to take control of the political and social juice of the American Evangelical movement and that includes the black Evangelicals too... The mind boggles.

It should be remembered that Southern Evangelical Protestantism is resentful and anti-elitist before it is anything else. It is against any "expert" opinion. They feel that these "experts" look down on them with contempt and they are probably right...

Both poor white people and poor black people face this kind of contempt all their lives. The Evangelicals love for creationism and the literal reading of scripture is because the Bible trumps the "experts"... any hick quoting the good book is superior to a PhD from MIT quoting Darwin. The same psychology holds true for "Rapture" enthusiasts, they will be saved, taken directly up to heaven and all the people who have ever treated them so shabbily here on earth will suffer indescribable torment and humiliation, which the chosen will be able to watch from heaven. It is interesting to note that Tim LaHaye the author of the "Left Behind" series has enthusiastically endorsed Huckabee. This has all the signs of being a "movement", not just another primary campaign.

I titled this post, "Huckabee tickles my inner Lenin" and what I mean is this:

The entire American economy is based on making people feel bad about themselves, making them feel poor, ugly, sick, helpless, stupid, inadequate and then offering to sell them something to relieve the pain of rejection and failure. What, despite all its grotesque fanaticism, is truly healthy about all this Evangelical, rapture, mishegoss is that it is a real rebellion against the basic, inhuman tool of the system... Its unhappiness factory.

What these political movements signify is that people in the United States may actually be beginning to connect the dots, may be seeing the connection between trillions spent on global conquest and the crumbling infrastructure at home, between the vast sums of money controlled by a few and the impoverishment of the middle class. The problem is that religion is more of a problem and less healthy of a response than Seaton acknowledges. And, if religion doesn’t work, the elite seem willing to institute global war and global lockdown to maintain their position.

The solution won’t come from the normal political process. The corporate elite publish the polls, count the votes, and report on the elections. They have proven that they will steal the vote if they have to. The elite wasn’t very happy with Franklin Roosevelt during the last depression and it doesn’t look like they want another one this time. It may be that they may now think that fascism was premature in the 1930s, that the technology was not sufficiently developed.

If the mainstream media now acknowledges the probability of a recession in 2008, you can bet that an actual depression is much more likely than anyone is willing to let on. In the 1930s the rural areas were the hardest hit. Now it may be the suburbs:

Tent city in suburbs is cost of U.S. home crisis

Dana Ford

Friday December 21 2007

ONTARIO, Calif., Dec 21 (Reuters) - Between railroad tracks and beneath the roar of departing planes sits "tent city," a terminus for homeless people. It is not, as might be expected, in a blighted city center, but in the once-booming suburbia of Southern California.

The noisy, dusty camp sprang up in July with 20 residents and now numbers 200 people, including several children, growing as this region east of Los Angeles has been hit by the U.S. housing crisis.

The unraveling of the region known as the Inland Empire reads like a 21st century version of "The Grapes of Wrath," John Steinbeck's novel about families driven from their lands by the Great Depression.

As more families throw in the towel and head to foreclosure here and across the nation, the social costs of collapse are adding up in the form of higher rates of homelessness, crime and even disease.

While no current residents claim to be victims of foreclosure, all agree that tent city is a symptom of the wider economic downturn. And it's just a matter of time before foreclosed families end up at tent city, local housing experts say.

"They don't hit the streets immediately," said activist Jane Mercer. Most families can find transitional housing in a motel or with friends before turning to charity or the streets. "They only hit tent city when they really bottom out."

Steve, 50, who declined to give his last name, moved to tent city four months ago. He gets social security payments, but cannot work and said rents are too high.

"House prices are going down, but the rentals are sky-high," said Steve. "If it wasn't for here, I wouldn't have a place to go."

'Squatting In Vacant Houses'

Nationally, foreclosures are at an all-time high. Filings are up nearly 100 percent from a year ago, according to the data firm RealtyTrac. Officials say that as many as half a million people could lose their homes as adjustable mortgage rates rise over the next two years.

California ranks second in the nation for foreclosure filings -- one per 88 households last quarter. Within California, San Bernardino county in the Inland Empire is worse -- one filing for every 43 households, according to RealtyTrac.

Maryanne Hernandez bought her dream house in San Bernardino in 2003 and now risks losing it after falling four months behind on mortgage payments.

"It's not just us. It's all over," said Hernandez, who lives in a neighborhood where most families are struggling to meet payments and many have lost their homes.

She has noticed an increase in crime since the foreclosures started. Her house was robbed, her kids' bikes were stolen and she worries about what type of message empty houses send.

The pattern is cropping up in communities across the country, like Cleveland, Ohio, where Mark Wiseman, director of the Cuyahoga County Foreclosure Prevention Program, said there are entire blocks of homes in Cleveland where 60 or 70 percent of houses are boarded up.

"I don't think there are enough police to go after criminals holed up in those houses, squatting or doing drug deals or whatever," Wiseman said.

"And it's not just a problem of a neighborhood filled with people squatting in the vacant houses, it's the people left behind, who have to worry about people taking siding off your home or breaking into your house while you're sleeping."

Health risks are also on the rise. All those empty swimming pools in California's Inland Empire have become breeding grounds for mosquitoes, which can transmit the sometimes deadly West Nile virus, Riverside County officials say.

'Trickle-Down Effect'

But it is not just homeowners who are hit by the foreclosure wave. People who rent now find themselves in a tighter, more expensive market as demand rises from families who lost homes, said Jean Beil, senior vice president for programs and services at Catholic Charities USA.

"Folks who would have been in a house before are now in an apartment and folks that would have been in an apartment, now can't afford it," said Beil. "It has a trickle-down effect."

For cities, foreclosures can trigger a range of short-term costs, like added policing, inspection and code enforcement. These expenses can be significant, said Lt. Scott Patterson with the San Bernardino Police Department, but the larger concern is that vacant properties lower home values and in the long-run, decrease tax revenues.

And it all comes at a time when municipalities are ill-equipped to respond. High foreclosure rates and declining home values are sapping property tax revenues, a key source of local funding to tackle such problems.

Earlier this month, U.S. President George W. Bush rolled out a plan to slow foreclosures by freezing the interest rates on some loans. But for many in these parts, the intervention is too little and too late.

Ken Sawa, CEO of Catholic Charities in San Bernardino and Riverside counties, said his organization is overwhelmed and ill-equipped to handle the volume of people seeking help.

"We feel helpless," said Sawa. "Obviously, it's a local problem because it's in our backyard, but the solution is not local."

No wonder everyone is afraid of the future now in the United States. Even in the better times we were products of what Seaton calls “the unhappiness factory.” And now we are about to lose our comforts and the dignity that comes from just making ends meet and having a roof over one’s head. Next week we will look more closely at just how the unhappiness factory of capitalism works.

Signs of the Economic Apocalypse, 12-17-07

From Sott.net:



Gold closed at 798.00 dollars an ounce Friday, down 0.3% from $800.20 at the close of the previous week. The dollar closed at 0.6930 euros Friday, up 1.6% from 0.6822 at the close of the previous Friday. That put the euro at 1.4430 dollars compared to 1.4658 the Friday before. Gold in euros would be 553.01 euros an ounce, up 1.3% from 545.91 for the week. Oil closed at 91.41 dollars a barrel Friday, up 3.5% from $88.28 at the close of the week before. Oil in euros would be 63.35 euros a barrel, up 5.2% from 60.23 for the week. The gold/oil ratio closed at 8.73 Friday, down 3.8% from 9.06 at the end of the week before. In U.S. stocks, the Dow closed at 13,339.85 Friday, down 2.1% from 13,625.58 for the week. The NASDAQ closed at 2,635.74 Friday, down 2.7% from 2,706.16 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.23%, up 12 basis points from 4.11 for the week.

Last week was an eventful one for financial markets. The U.S. Federal Reserve Board cut interest rates by a quarter point, sending stocks down (traders wanted a half point cut). According to insiders, banks are in a state of panic. Analysts increasingly predict that the United States will fall into recession in 2008, and, to make it worse, inflation is rising, leading to fears of stagflation, fears that were voiced by none other than Alan Greenspan. Greenspan, formerly a hero, now haunts the world economy like the ghost of an unwelcome houseguest.

First the rate cut:

US stocks plunge on Federal Reserve rate cut announcement

Barry Grey

12 December 2007

US stocks plummeted Tuesday after the Federal Reserve Board announced a quarter-point cut in short-term interest rates and indicated in an accompanying statement that it remained concerned over the potential for an inflationary surge.

The sharply negative reaction on Wall Street, which was looking for a half-point cut in interest rates and a statement clearly giving primacy to the risks of recession and a meltdown on financial markets above inflation concerns, is a measure of the near-panic gripping big investors and some of the largest banks in the US and Europe over the implosion of the US housing market and resulting crisis on credit markets.

Immediately after the Federal Reserve Board’s Federal Open Market Committee announced its decision, at 2:15 PM Eastern Standard Time, all of the major New York stock indexes began to plunge. By the end of trading, the Dow Jones Industrial Average had fallen 294.26 points, a drop of 2.1 percent. The Nasdaq Composite Index declined by 66.60 points, down 2.5 percent, and the Standard & Poor’s 500 Index fell 38.31 points, a 2.5 percent decline.

The sharp fall on the markets came despite the fact that Tuesday’s rate cuts marked the third consecutive reduction in interest rates by the Fed since the credit crisis erupted last August. Since then, the US central bank has slashed rates by a full point, the greatest easing of borrowing costs since the recession of 2001.

The Fed cut its target federal funds rate, the overnight rate at which banks lend money to one another, from 4.5 percent to 4.25 percent. At the same time, it reduced the so-called discount rate, at which the Fed directly lends money to banks, from 4.75 percent to 4.5 percent.

These moves are aimed at cheapening the cost of loans and pumping liquidity into the credit markets. They come at a time when major banks and investment houses in both the US and Europe are reeling from massive losses resulting from the collapse of assets linked to US subprime home loans.

The depression in US home sales and prices and soaring mortgage delinquencies and foreclosures of homes purchased with high-interest subprime loans have undermined the stability of banking giants that leveraged such loans into a multi-trillion-dollar edifice of highly profitable securities that were sold to banks and other investors around the world.

According to an article in Monday’s Wall Street Journal, “Over the past decade, Wall Street built a market for more than $2 trillion in securities sold globally and backed by loans to US homeowners.” That market has come crashing down—as it was destined to do, since it was built on the most speculative and unstable of foundations.

Facing huge losses from the collapse of these investments, and unable to determine the real value of exotic securities derived from dividing up, bundling, repackaging and reselling loans—many to subprime borrowers with shaky credit, to other investors and financial institutions—the banks have sharply cut back their lending to consumers and businesses. Lending is down, its cost is rising and the result is a credit crunch that is driving the US economy into recession, with dire consequences for the global economy.

This crisis is an expression of the increasingly parasitic and speculative character of American and world capitalism. It effects are rapidly spreading throughout the US economy, with job growth slowing, consumer spending falling off, US corporate profits tending downward and rising delinquencies on all forms of consumer credit—from home loans to auto loans and credit card payments.

Most analysts are now forecasting minimal or negative economic growth in the US for the current quarter, and some are predicting the economy will fall into recession in 2008. On Monday, Morgan Stanley became the first major Wall Street bank to predict a US recession next year.

Last week, the Bush administration announced a scheme for mortgage lenders, servicers and investors to voluntarily agree to freeze interest rates for a small minority of the estimated 2 million subprime borrowers whose adjustable-rate loans are scheduled to reset sharply higher over the next 18 months.

The plan, which will do little to relieve the suffering of millions of Americans who fell victim to predatory lending practices during the housing boom, is above all aimed at buying time for the big banks and mortgage companies and reassuring financial markets that a full-scale collapse will be averted. There is, however, little likelihood that it will prevent a deepening of the credit crunch and stave off an economic downturn that could prove severe and protracted.

The Wall Street Journal carried a front-page article Monday headlined “US Mortgage Crisis Rivals S&L Meltdown,” referring to the US savings and loans collapse of the late 1980s and early 1990s that ended with a multi-billion-dollar government bailout of Wall Street. The article had a sub-headline that read: “Toll of Economic Shocks May Linger for Years; A Global Credit Crunch.”

The Journal wrote that an examination of the current crisis “shows that it is comparable to some of the biggest financial disasters of the past half-century.”

Developments this week appear to vindicate that prognosis. The Zurich-based banking giant UBS, the world’s largest provider of banking services to the wealthy, announced Monday that it was writing down the value of its subprime assets by an additional $10 billion. The bank had already taken a $4.4 billion third-quarter write-down. It issued a statement that the “ultimate value of our subprime holdings... remains unknowable.”

UBS said it would post a loss for the fourth quarter and possibly for the year as a whole. It further said it had received an $11.5 billion investment from a fund owned by Singapore and an unnamed Middle Eastern investor, equivalent to selling as much as 12.4 percent of the company in return for a cash bailout.

With the announcement, UBS became the biggest casualty outside of the US of the American housing slump, but banks in other countries, such as Britain and Germany, have also been hit by the fallout from the US housing and credit crisis.

“That UBS, long known as a conservative lender, could take such a financial hit suggests that the wave of industry write-downs, which so far total about $50 billion, may be far from over,” wrote the Wall Street Journal.

Just two weeks ago, Citigroup, the largest US bank, agreed to sell a $7.5 billion stake, 4.9 percent of the company, to the Abu Dhabi Investment Authority in order to shore up its capital base, after announcing write-downs of $8 billion to $11 billion related to bad subprime investments. The bank had already disclosed $5.9 billion in write-downs.

Merrill Lynch, which has $20.9 billion in remaining exposure to subprime-linked investments, may also need to take a further write-down, as could Morgan Stanley, according to analysts. Merrill already disclosed a third quarter write-down of $7.9 billion. Morgan Stanley has announced subprime-linked losses of $3.7 billion in the first two months of the fourth quarter, which could increase, based on its $6 billion in remaining subprime exposure.

Washington Mutual, the largest US savings and loan bank, this week widened its expected fourth quarter loss to $1.5-$1.6 billion due to deteriorating credit and mortgage markets. The S&L said it would abandon subprime lending entirely, close 190 of its 336 home loan center and sales offices as well as 9 loan and processing call centers, and cut 3,150 jobs. It also announced it would cut its dividend 73 percent to 15 cents a share.

Bank of America announced it was liquidating a money market fund for institutional investors that was worth $40 billion only a few months ago but now has only some $12 billion in assets. The bank said the losses were related to the subprime mortgage crisis.
Meanwhile, Fannie Mae, the US government-sponsored mortgage company, predicted house prices would continue to fall for two or three more years, with no normalization until 2010.

Wall Street is clamoring for a bailout by the Fed, in the form of drastic interest rate cuts, with scant concern for the medium- and longer-term implications for the status of the dollar and the position of American capitalism in the global economy. The Fed is attempting to balance the threat of a US banking collapse with the dangers arising from soaring energy, food and commodity prices and the relentless fall of the dollar on world currency markets.

The dollar has already lost a quarter of its value against all other currencies since 2002 and 40 percent against the euro, and further interest rate cuts can only push the US currency lower. The position of the dollar, which has been further undermined by the current US housing and credit crisis, is a barometer of the declining relative strength of American capitalism on the world market.

Gerard Lyons, chief economist at Standard Chartered in London, published a column in the December 7 Financial Times entitled “The Middle East Must Loosen its Ties to the Dollar.” In the article, he recommended that the oil-rich Persian Gulf regimes sharply revalue their currencies and cease pegging them to the dollar. He wrote: “The region should shift from the dollar peg to managing exchange rates against a basket of currencies of the countries with which they trade. The dollar would form a big part of this basket, but so too would the euro and Asian currencies. Over time, the dollar’s weight would fall.”

Commenting Tuesday on the bailout of UBS by Singapore and a Middle East investor, he said it was a “reflection of the current fragile state of the financial sector in the West” and “a further sign of how the balance of the world economy is changing.”

Greenspan urges policymakers to stand firm on inflation and let the chips fall where they may, even if it means an economic depression (he doesn’t use that word, of course).

Greenspan sees early signs of U.S. stagflation

December 16, 2007

WASHINGTON (Reuters) - The U.S. economy is showing early signs of stagflation as growth threatens to stall while food and energy prices soar, former U.S. Federal Reserve Chairman Alan Greenspan said on Sunday.

In an interview on ABC's "This Week with George Stephanopoulos," Greenspan said low inflation was a major contributor to economic growth and prices must be held in check.

"We are beginning to get not stagflation, but the early symptoms of it," Greenspan said.

"Fundamentally, inflation must be suppressed," he added. "It's critically important that the Federal Reserve is allowed politically to do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer-term period."

The U.S. central bank has lowered its benchmark interest rate three times since mid-September as a housing downturn, tightening credit conditions, and steep food and energy prices threaten to push the U.S. economy into recession.

But cutting rates can have the unwanted side effect of pushing up prices, so the Fed finds itself in a tricky position of trying to revive growth without spurring inflation.

Last week, U.S. data showed that wholesale inflation rose at the highest rate in 34 years, while consumer prices rose the most in more than two years.

Greenspan repeated his assessment that the probability of a U.S. recession had moved up toward 50 percent but noted that corporate America's debt levels were in good shape, which should help cushion the blow from tightening credit terms.

"The real story is, with the extraordinary credit problems we're confronting, why the probabilities (of recession) are not 60 percent or 70 percent," he said.

"Because of the decline in long-term interest rates for a protracted period of time, American business was able to fund a significant part of its short-term liabilities and take out low-cost, long-term debt, so the credit needs have not been all that large," he said.

Greenspan has drawn some criticism for keeping the trendsetting federal funds rate at a low 1 percent from June 2003 through June 2004, which some argue contributed to a housing bubble that is now bursting spectacularly.

Greenspan said real estate prices will stabilize only when the overhang of unsold new-construction homes begins to ease, and estimated that financial losses could be in the range of $200 billion to $400 billion as securities tied to failing subprime mortgages lose value.

He warned against any sort of government bailout plan for homeowners that interfered with the normal functioning of markets for home prices or interest rates, saying it would "drag this process out indefinitely." Offering cash to stricken homeowners instead would cause less long-term damage, he said.

"It's only when the markets are perceived to have exhausted themselves on the downside that they turn," he said. "Trying to prevent them from going down just merely prolongs the agony."

So the man who more than anyone else caused all this pain, the man who announced as Federal Reserve Chair that variable rate mortgages were a sensible option, now says that nothing should be done to help the victims. Not surprising, I guess, coming from one whose hero is the philosopher of psychopathic individualism, Ayn Rand. While Greenspan abhors any bailing out of average people facing eviction from their homes, he and other central bankers are always ready to bail out their fellow bankers. Only they don’t call it bailing out, they call it “providing liquidity.” The problem we face now is that, as Paul Krugman put it, this is not a liquidity crisis it is a solvency crisis.

After the money's gone

Paul Krugman

December 14, 2007

Princeton, New Jersey -- On Wednesday, the U.S. Federal Reserve announced plans to lend $40 billion to banks. By my count, it's the fourth high-profile attempt to rescue the financial system since things started falling apart about five months ago. Maybe this one will do the trick, but I wouldn't count on it.

In past financial crises - the stock market crash of 1987, the aftermath of Russia's default in 1998 - the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn't working.

Why not? Because the problem with the markets isn't just a lack of liquidity - there's also a fundamental problem of solvency.

Let me explain the difference with a hypothetical example.
Suppose that there's a nasty rumor about the First Bank of Pottersville: People say that the bank made a huge loan to the president's brother-in-law, who squandered the money on a failed business venture.

Even if the rumor is false, it can break the bank. If everyone, believing that the bank is about to go bust, demands their money out at the same time, the bank would have to raise cash by selling off assets at fire-sale prices - and it may indeed go bust even though it didn't really make that bum loan.
And because loss of confidence can be a self-fulfilling prophecy, even depositors who don't believe the rumor would join in the bank run, trying to get their money out while they can.

But the Fed can come to the rescue. If the rumor is false, the bank has enough assets to cover its debts; all it lacks is liquidity - the ability to raise cash on short notice. And the Fed can solve that problem by giving the bank a temporary loan, tiding it over until things calm down.

Matters are very different, however, if the rumor is true: The bank really did make a big bad loan. Then the problem isn't how to restore confidence; it's how to deal with the fact that the bank is really, truly insolvent, that is, busted.

My story about a basically sound bank beset by a crisis of confidence, which can be rescued with a temporary loan from the Fed, is more or less what happened to the financial system as a whole in 1998. Russia's default led to the collapse of the giant hedge fund Long Term Capital Management, and for a few weeks there was panic in the markets.

But when all was said and done, not that much money had been lost; a temporary expansion of credit by the Fed gave everyone time to regain their nerve, and the crisis soon passed.

In August, the Fed tried again to do what it did in 1998, and at first it seemed to work. But then the crisis of confidence came back, worse than ever. And the reason is that this time the financial system - both banks and, probably even more important, nonbank financial institutions - made a lot of loans that are likely to go very, very bad.

It's easy to get lost in the details of subprime mortgages, resets, collateralized debt obligations, and so on. But there are two important facts that may give you a sense of just how big the problem is.

First, the United States had an enormous housing bubble in the middle of this decade. To restore a historically normal ratio of housing prices to rents or incomes, average home prices would have to fall about 30 percent from their current levels.

Second, there was a tremendous amount of borrowing into the bubble, as new home buyers purchased houses with little or no money down, and as people who already owned houses refinanced their mortgages as a way of converting rising home prices into cash.

As home prices come back down to earth, many of these borrowers will find themselves with negative equity - owing more than their houses are worth. Negative equity, in turn, often leads to foreclosures and big losses for lenders.
And the numbers are huge. The financial blog Calculated Risk, using data from First American CoreLogic, estimates that if home prices fall 20 percent there will be 13.7 million homeowners with negative equity.

If prices fall 30 percent, that number would rise to more than 20 million.

That translates into a lot of losses, and explains why liquidity has dried up. What's going on in the markets isn't an irrational panic. It's a wholly rational panic, because there's a lot of bad debt out there, and you don't know how much of that bad debt is held by the guy who wants to borrow your money.

How will it all end? Markets won't start functioning normally until investors are reasonably sure that they know where the bodies - I mean, the bad debts - are buried. And that probably won't happen until house prices have finished falling and financial institutions have come clean about all their losses. All of this will probably take years.

Meanwhile, anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed.

Meanwhile, the housing crisis shows no signs of ending.

U.S. Housing Crash Deepens in 2008 After Record Drop

Daniel Taub

Dec. 14 (Bloomberg) -- For U.S. homeowners, builders, bankers and realtors, the crash of 2007 will only get worse in 2008.

Everyone from mortgage-finance company Fannie Mae to Lehman Brothers Holdings Inc. expects declines next year. Existing home sales will drop 12 percent and existing home prices will fall 4.5 percent, Washington-based Fannie Mae says. Lehman analysts estimate almost 1 million mortgage loans will default in 2008, up from about 300,000 this year.

“We’re only halfway through the housing shock,” said Ethan Harris, chief U.S. economist at New York-based Lehman, the fourth- biggest U.S. securities firm by market value. “It’s just a matter of time before the weakness spreads to the rest of the economy.”

The housing market collapse has been anything but the “soft landing” that Federal Reserve Bank of San Francisco President Janet Yellen and David Lereah, former chief economist at the National Association of Realtors in Chicago, predicted for real estate at the start of 2007.

Median home prices declined in the U.S. this year, the first annual drop since the Great Depression, according to forecasts from the National Association of Realtors.

“I’m not going to sit here and tell you it’s going to turn real strong next year,” said Jim Gillespie, chief executive officer of Coldwell Banker Real Estate LLC, the largest U.S. residential brokerage, according to Franchise Times. “It’s not going to turn real strong next year.”

‘Let the House Go’

Analysts at New York-based CreditSights Inc. predict housing won’t rebound until “2009, at best.” Moody’s Economy.com Inc., the economic forecasting unit of Moody’s Corp. in New York, says home sales will hit bottom next year, declining 40 percent from their peak. And U.S. Treasury Secretary Henry Paulson’s plan to slow foreclosures won’t help those who already are facing the loss of their homes, like C.W. and Sandy Hicks of Las Vegas.

The Hickses refinanced the mortgage on their four-bedroom, 1,300-square foot home two years ago. Their $237,000 adjustable- rate loan resets every month, and now their monthly payment has jumped 50 percent to $2,700. The couple can’t afford it.

“It looks like we’re going to have to let the house go,” said C.W. Hicks, 65, a long-haul truck driver who has kept working past retirement age to help pay medical bills for his wife Sandy, 59, who has heart problems. “I guess we’ll try to rent a house or something.”

The Hickses aren’t the only ones grappling with the consequences of this year’s housing market. The number of Americans behind on their mortgage payments rose to a 20-year high in the third quarter, the Washington-based Mortgage Bankers Association said earlier this month.

Lender, Homebuilder Woes

“The whole thing has deteriorated faster and further than we or anyone else had anticipated,” said Ron Muhlenkamp, president of Wexford, Pennsylvania-based Muhlenkamp & Co., which has about $2.5 billion under management and holds shares of mortgage lender Countrywide Financial Corp. and homebuilder Ryland Group Inc.

Not true, Mr. Muhlenkamp. Many of us saw this coming a mile away.

The five biggest U.S. homebuilders by revenue, led by Miami- based Lennar Corp., recorded writedowns and charges totaling about $7.5 billion this year for land that plunged in value.

Mortgage companies, including Irvine, California-based New Century Financial Corp., the second-largest subprime lender in 2006, have filed for bankruptcy protection after borrowers unable to repay their loans defaulted.

H&R Block Inc. of Kansas City, Missouri, shut Option One this month after plans to sell the subprime home-lending unit fell apart, and U.S. regulators ordered Santa Monica, California-based Fremont General Corp. to stop selling subprime mortgages, loans given to people with poor or limited credit histories or high debt levels.

O’Neal, Prince Fall

Bank and brokerage writedowns and losses related to subprime loans totaled more than $80 billion. Citigroup Inc., the biggest U.S. bank by assets, last month said it would write down the value of subprime mortgages and collateralized debt obligations -- securities backed by bonds and loans -- by $8 billion to $11 billion. At Merrill Lynch & Co., writedowns on mortgage-related investments and corporate loans have cost the world’s biggest brokerage $8.4 billion. Both companies are based in New York.

The losses led to the ouster of Merrill Chief Executive Officer Stan O’Neal and the resignation of Citigroup CEO Charles O. “Chuck” Prince III. O’Neal’s exit came after he said as late as July that “not even a sharp downturn in one market today necessarily portends financial disaster in another, and we’re seeing this play out today in the subprime market…”

“I know we weren’t predicting things would get this bad,” said Frank Liantonio, executive vice president for global capital markets at New York-based Cushman & Wakefield Inc., the largest closely held real estate services provider. “There were some signs there, but I don’t think anyone anticipated the level of dislocation that was actually created.”

They need to stop saying that no one anticipated this! Maybe no one living in whatever bubble these people live in saw it coming, but this crisis was the easiest thing to predict.

Now, however, the mainstream media is jumping on the bearish bandwagon with pieces like the following from the Los Angeles Times on the attractiveness of gold as an investment:

Buy yourself gold for portfolio protection?

Tom Petruno, Los Angeles Times

December 16, 2007

Financial advisors often try to discourage clients from such investments, but some individuals consider the metal to be insurance against the U.S. dollar. Learn four common ways to invest, and the pros and cons of each.

Gold is one holiday gift that has kept on giving for the last seven years.

The metal's market price, which last month surged above $800 an ounce for the first time in nearly three decades, has risen every year since 2000.

It has trounced the U.S. stock market in that period, rocketing 190%, compared with a 26% total return for the Standard & Poor's 500 index. After mostly being out of favor in the 1980s and 1990s, gold has found a new, and global, investor audience -- including the emerging rich in booming Asian economies.

Fresh interest in gold also has spawned an array of gold-related securities, providing more options for people who want to own the metal without having to take physical possession of it. Yet professional financial advisors often try to discourage their clients from gold investing in any form. Many say they don't believe it has a place in a modern portfolio. In part, gold and other precious metals -- platinum and silver -- suffer from their long-standing image as havens for survivalists, conspiracy theorists and flakes."

That's for the guys we don't want as clients," said Michael Glowacki, head of financial planning firm Glowacki Group in West Los Angeles.

Some fans of gold, however, say the bad rap is outdated and ignores the metal's powerful performance in this decade.

Martine Pham, a 45-year-old Bay Area investor, says she likes gold as a way to protect her purchasing power if the U.S. dollar continues to lose value, deepening its slide of the last six years.

But she also says she was drawn to the commodity in recent years by basic investment analysis."

If you just look at it based on supply and demand, I could make a good fundamental case for the price to go up," Pham said.

Some individual investors say they simply consider gold to be a modest bit of insurance for their portfolios of stocks and bonds."

In a worst-case scenario, you might be glad you had it," said Orvis Adams, an 82-year-old Los Alamitos investor who said his gold holdings amounted to less than 2% of his total investment mix.

If you're thinking about adding gold to your portfolio, how best to do it?

Here's a primer on the pros and cons of four common ways to invest in gold:

Gold bullion

Coins and bars from government or private mints are the classic way to own the metal itself -- and also the most cumbersome.

Coin dealers like to say that nothing compares to the weighty feel of real gold, one of the heaviest of the elements.

There's a "warm, fuzzy feeling" people get when they hold a gold coin in their hand, said Ken Edwards, a partner at California Numismatic Investments in Inglewood.

That's part of the marketing, of course. And government mints have tried to outdo one another in the last two decades in designing coins to catch the public's eye -- and bring in revenue from mint sales.

Thirty years ago the South African Krugerrand had the global gold coin market largely to itself. Now, the Krugerrand competes with the American Eagle, the Chinese Panda, the Canadian Maple Leaf and other government-minted coins.

One current favorite of some coin dealers is the Austrian Philharmonic, which on one side is adorned with the images of musical instruments including the harp and the violin.

Ultimately, gold is gold: The value of a minted coin depends mostly on its weight and the market price of the metal, plus the dealer commission (the markup or markdown, depending on whether you're buying or selling).

Dealer commissions typically range from 2% to 4.5%, depending on the coin. So it's worth shopping around.

The benchmark price of gold in New York futures markets Friday was $793.30 an ounce.

For 1-ounce coins, California Numismatics on Friday quoted a selling price of $826 for the American Eagle, $821 for the Canadian Maple Leaf and $816 for the Krugerrand.

All of the coins contain 1 ounce of gold. But some, including the Krugerrand, contain small amounts of alloys, such as copper, to add strength (because gold is relatively soft). Others, including the Maple Leaf and the relatively new American Buffalo, are virtually pure gold.

It's a matter of personal preference, Edwards says. "Some people just prefer solid gold."

Some investors also prefer gold bars to coins. The bars, in sizes as small as 1 gram, also are produced by government and private mints.

Michael Carabini, who manages gold dealer Monex Precious Metals in Newport Beach, sells bars and coins. But he recommends coins for most investors because they are easier to sell, he says."

The liquidity is better with coins," he said, in part because they're easily recognizable around the world.

Besides 1-ounce gold coins, some mints produce smaller sizes, down to one-tenth of an ounce.

But you may pay a bigger percentage premium to buy smaller coins, and dealers may charge a bigger markdown when you sell, compared with 1-ounce coins. The reason: Smaller coins trade less frequently.

"On a typical day, I'll trade 100 times more 1-ounce coins than smaller coins," Edwards said.

Even so, smaller coins may make sense for some investors, Carabini said. For example, if your plan is to eventually split the coins among heirs, smaller sizes could make that easier.

Thinking about your exit strategy is important for another reason: The tax man isn't friendly to bullion. Hard assets like gold coins are subject to a higher long-term federal capital gains tax rate when you sell -- 28% versus a top rate of 15% for securities such as stocks.

For some investors, the biggest potential drawback to owning coins or bars is the need to store them somewhere secure. Under the mattress isn't recommended -- not at about $800 an ounce for something so easily fenced.

Storage will cost you money, whether you use a bank safe deposit box, a home safe or a safekeeping program offered by some gold dealers.

Monex, for example, charges $5.50 a month to store 20 ounces of gold, Carabini said.

Gold certificates

These programs allow an investor to hold gold in certificate form. The certificate represents ownership either in gold held specifically for you or a stake in a pool of gold with other investors.

The firm that issues the certificate handles the safekeeping and typically is obligated to produce the gold upon demand or redeem it for cash.

When investor Martine Pham decided she wanted to own physical gold two years ago, she said, she considered buying coins but didn't want to deal with storing them herself.

She bought into the certificate program of GoldMoney, a Britain-based gold certificate company. The company stores its gold in vaults in London and Zurich, Switzerland.

She chose the program over others, Pham said, because of the ease of transferring funds. GoldMoney promises 24-hour access to its program.

Other companies offering certificate programs include EverBank in Jacksonville, Fla., and the Perth Mint in Australia.

It's worth shopping around to compare minimums and fees for the programs. GoldMoney says that it has no minimum investment and that its storage and insurance fee is a flat one-tenth of a gram of gold per month (about $2.60), regardless of the amount of gold owned.

EverBank has a $5,000 minimum for pooled accounts but doesn't charge a storage fee on them.Also compare purchase and sales fees. The Perth Mint charges a commission of 1.75% on purchases. EverBank charges 0.75%.

Exchange-traded funds

These funds provide a simple way for investors to ride a rally in gold's price -- or bet on a price decline.

Shares of the funds, the streetTracks Gold Trust (ticker symbol: GLD) and its rival, the Ishares Comex Gold Trust (IAU), trade on the New York and American stock exchanges, respectively.

A central idea behind the funds is that their daily price changes closely track changes in the price of bullion. That's because the funds' shares are backed by the metal itself, held in storage.

StreetTracks Gold Trust, created in 2004, has a market capitalization of nearly $16 billion. Ishares Comex Gold Trust, created in 2005, has a market cap of $1.4 billion.

Both stocks trade for about one-tenth the market price of bullion. On Friday, for example, the streetTracks Gold Trust closed at $78.50 a share. It's up 24% this year, compared with a 25% rise in the New York futures price for bullion.

The funds also can be used to bet on a falling gold price, because they can be "shorted" -- meaning, the shares can be borrowed from a brokerage and sold, with the expectation that the price will drop and the borrowed stock can be repaid later with shares bought at a lower price.

One potential drawback of the funds: You'll have to pay a trading commission each time you buy or sell.

And the stocks pay no cash dividends because gold itself doesn't generate any income.

Also, the Internal Revenue Service considers these a direct investment in gold, which means they're subject to the 28% hard-asset long-term capital gains tax instead of the 15% maximum on most stocks.

Some investors who prefer owning physical gold point to another potential negative with gold securities: When the stock market was closed for four days in 2001 after the terrorist attacks, owners of gold securities had no way to sell what they owned, or buy more.

Larry Heim, who operates a business in Portland, Ore., that buys gold bullion for clients, said he didn't recommend gold securities for that reason. "I don't want to take that risk," he said.

Mining stocks and fundsShares of gold mining companies and mutual funds that invest in them offer a way to buy into the business of gold as opposed to just the metal itself.

The performance of a gold mining stock may be tied in part to the metal's price performance, but in the long run the stock's rise or fall may well depend more on how well the business is managed.

Consider: The price of gold is up 25% this year. Shares of Barrick Gold Corp., one of the industry's titans, are up 24%. Shares of the much smaller Yamana Gold Inc. are down 5%.

In general, gold mining stocks are "notoriously volatile," warns Katherine Yang, an analyst at investment research firm Morningstar Inc. in Chicago.

The point being, if you're going to buy a gold stock, you ought to be prepared to do some homework -- and cross your fingers.

Overall, a Philadelphia Stock Exchange index of 16 major gold mining stocks is up nearly 17% this year after rising 11% last year and 29% in 2005.

Some mining-stock experts worry that a broad slide on Wall Street could drag mining stocks down as well for a while, even if the price of gold holds up.

"We could be coming up on a time when mining stocks could decouple from the price of the metal," said Frank Barbera, who writes the Gold Stock Technician newsletter in Los Angeles.

Decoupling could occur, he said, if a stock market plunge drives investors to sell their winners as well as their losers. In sharp market declines, "you sell what you can," Barbera said.

But longer term, he said, he favors smaller mining companies that could be takeover targets if the industry continues to consolidate and the metal's price continues to rise.

Investors who want to own a basket of mining stocks can pick from more than a dozen mutual funds that focus on gold stocks."

For people who aren't that interested but want some exposure, that's probably the way to go," Barbera said.

But as with any mutual funds, shop around. Some gold funds charge high management fees that will dent your returns.Morningstar's two favorite fund picks are American Century Global Gold and the Vanguard Precious Metals and Mining fund.