Global Economy

svinayak · Post by **svinayak** » 19 Jan 2009 23:10

http://news.google.com/nwshp?tab=wn&ncl ... en&topic=b

Brown Tightens Grip on Banks as Recession Worsens
Bloomberg - 1 hour ago
By Gonzalo Vina and John Fraher Jan. 19 (Bloomberg) -- Prime Minister Gordon Brown’s government tightened its grip on Britain’s financial system, ...

Bank plan 'will save companies'
BBC News, UK - 52 minutes ago
The latest government measures to encourage banks to raise their lending levels are vital to help protect jobs, Prime Minister Gordon Brown has said. ...

The UK's Giant Bank-Bailout Gamble
Wall Street Journal - 1 hour ago
By SIMON NIXON With its latest bank bailout scheme, the UK government has gone headfirst into the credit default swap business -- one of the very products ...

Sterling and gilts fall after UK unveils bank plan
Reuters - 45 minutes ago
LONDON, Jan 19 (Reuters) - UK government bonds and the pound fell on Monday, while stocks tumbled after British Prime Minister Gordon Brown unveiled new ...

HIGHLIGHTS-Britain steps in to rescue banks again
Forbes, NY - 1 hour ago
LONDON, Jan 19 (Reuters) - Britain unveiled a second support package on Monday for struggling banks to try and get lending flowing again in an economy ...

Tanaji · Post by **Tanaji** » 20 Jan 2009 15:17

At Nortel there is no severance, no warning notice period and probably no compensation for earned leave. People who did get laid off before the Chapter 11 filing are not getting their severance either, since Nortel doesnt do lump sum severance payments but staggered ones. Some of them have their pension plans seized as well (not 401K though). In short, the employees past and present are screwed royally.

Singha · Post by **Singha** » 20 Jan 2009 15:37

glad I got out in 1998 after padding my resume with its brandname

svinayak · Post by **svinayak** » 21 Jan 2009 01:16

Roubini Predicts U.S. Losses May Reach $3.6 Trillion (Update1)
http://www.bloomberg.com/apps/news?pid= ... refer=home

By Henry Meyer and Ayesha Daya

Jan. 20 (Bloomberg) -- U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

Losses and writedowns at financial companies worldwide have risen to more than $1 trillion since the U.S. subprime mortgage market collapsed in 2007, according to data compiled by Bloomberg.

President Barack Obama will have to use as much as $1 trillion of public funds to shore up the capitalization of the banking sector, following the $350 billion injection by the Bush administration, Roubini told Bloomberg News. Congress last year approved a $700 billion rescue fund, of which half remains to be disbursed.

Bank of America Corp., the largest U.S. bank by assets, posted a quarterly loss of $1.79 billion last week, its first since 1991, and received $138 billion in emergency government funds. Citigroup Inc. posted an $8.29 billion fourth-quarter loss, completing its worst year, and plans to split in two under Chief Executive Officer Vikram Pandit’s plan to rebuild a capital base eroded by the credit crisis.

‘Bankrupt’ System

“The problems of Citi, Bank of America and others suggest the system is bankrupt,” Roubini said. “In Europe, it’s the same thing.”

Stocks in Europe, Canada and Brazil dropped yesterday on speculation government efforts to shore up the financial industry will fail to stem the deepening global recession. The U.K.’s Royal Bank of Scotland Group Plc said it expects to post a loss of as much as 28 billion pounds ($41 billion) for 2008 and the government got ready to raise its stake in the lender.

Oil prices will trade between $30 and $40 a barrel all year, Roubini predicted.

“I see commodities falling overall another 15-20 percent,” Roubini said. “This outlook for commodity prices is beneficial for oil importers, it’s going to imply that economic recovery might occur faster, but from the point of view of oil exporters, this will be very negative.”

Oil has tumbled 77 percent from its July high of $147.27 as the global economy sinks into recession, straining the budgets of crude exporters. Saudi Arabia, Oman and Dubai, the second- largest sheikdom in the United Arab Emirates, have said they will post budget deficits this year.

Crude oil for February delivery fell to $32.70, down 10.4 percent from last week’s close and the lowest since Dec. 19, on the New York Mercantile Exchange today. The contract traded at $33.37 a barrel at 10:45 a.m. London time.

To contact the reporters on this story: Henry Meyer in Dubai at [email protected] Daya in Dubai [email protected]
Last Updated: January 20, 2009 06:51 EST

Singha · Post by **Singha** » 21 Jan 2009 01:24

edinburghnews.scotsman.com - UK is following its master in printing more notes

I think they should dump
the pound in favour of the pakistani rupee.

Bank of England gets licence to print cash

Move announced as part of bailout while RBS shares decline

Published Date: 20 January 2009
By GARETH EDWARDS

THE Treasury has given the Bank of England the power to print new money as an "unconventional weapon" to tackle the recession.

The move, announced as part of the wider banking bailout, came as fears grew that the financial crisis could see the Royal Bank of Scotland nationalised "within days" after it announced it would unveil the biggest losses in corporate history.

News of the expected £28 billion losses from RBS saw a further £9bn wiped off its value yesterday, as its shares plunged 66 per cent to just 11.6p.

The shockwave from the announcement threatened to derail the Government's second banking bail-out, with the newly created Lloyds Banking Group – formed by the takeover of the Halifax Bank of Scotland by Lloyds TSB – seeing more than a third wiped off its value on its first day of trading on the Stock Market.

Shares in the country's biggest bank fell almost 34 per cent and while the company insisted its capital position remained robust, analysts said they were cautious about the bank's prospects.

The group is already 43 per cent owned by the Government and a city source said it was impossible to rule out further cash injections.

Barclays and HSBC were also hit by heavy share losses yesterday.

The share collapse came just hours after Prime Minister Gordon Brown and Chancellor Alistair Darling had unveiled a further rescue package for British banks that could see an additional £350bn of taxpayers money pumped into the system, on top of the £500bn announced last October.

The main aims of the deal are to provide £200bn insurance for banks against "toxic" debts, which could see the Government taking shares in more banks.

The deal will also force banks to agree to increase new lending, with the Government trying to free-up the money markets to help keep businesses afloat.

Concerns were raised about how the Government would pay for the bail-out however, and some clues to that may have emerged in the announcement from the treasury.

It stated that the Bank of England would set up a new facility, allowing it to buy up to £50bn of high-quality corporate assets, including corporate bonds and commercial paper, that could also be used to boost the supply of money.

This would only be done "should the monetary policy committee conclude that this would be a useful additional tool for meeting the inflation target", and the MPC are understood to be considering the move.

The policy of printing money, also known as "quantitative easing", is a dangerous one however – most recently it has led to hyperinflation in Zimbabwe, which earlier this month printed the world's first trillion dollar note, worth roughly £20 – and both Bank of England and Treasury officials are extremely cautious about the plan.

Shadow Chancellor George Osborne said it was "the last resort for governments that have run out of other options".

ramana · Post by **ramana** » 21 Jan 2009 05:21

Recall John Snow or someone had psoted the number of steps that follow a financial crisis and one of them was hyperinflation. I didnt understand at that time. But now its clear.

Bank of England gets licence to print cash

So UK is @ pounds 850 B. They are in bigger mess than US per captia

John Snow · Post by **John Snow** » 21 Jan 2009 05:27

I said that ramana garu

ramana · Post by **ramana** » 21 Jan 2009 11:34

Can you say that again for its coming to pass!

John Snow · Post by **John Snow** » 21 Jan 2009 11:45

This is what I had said earlier not in so many words
**

Anybody Remember Curving (In US Schools aka universities) ?

That is what is going to happen next, because of money printing machines being over worked, and keeping the unemployment at politically correct levels, there will be stagflation and then hyperinflation in the world most consuming economies. There will be corresponding deliberate downward pressure (dumping) on the developing world economies as they compete to export to keep their own economies operating at reasonable production and employment levels.

The least efficient will fall out because the developing economies cant print currencies like the US and EU/ Not so great Britain.

Also manufacturing will become viable in US once the deflation and correction in consuming comes about (because of productivity gains)
IMO.

Also no more than 6 to 8 auto companies will survive world wide

Singha · Post by **Singha** » 21 Jan 2009 11:52

there is already talk that US is becoming competitive as a "nearshore" BPO
option because unemployment is high and wages are quite low in the interior. you have millions of reasonably educated people who speak english , need no accent training and work in close time zone.

ramana · Post by **ramana** » 21 Jan 2009 11:57

No-NO. It was more older than this and it listed the various steps one of the last few steps was massive unemployment and hyperinflation.

Maybe have to search this thread for it.

Vipul · Post by **Vipul** » 21 Jan 2009 20:22

German economy to shrink 2.25% in 2009.

European Commission expects GDP to shrink by 1.8 per cent in 2009 news.

SwamyG · Post by **SwamyG** » 21 Jan 2009 21:10

There will be corresponding deliberate downward pressure (dumping) on the developing world economies as they compete to export to keep their own economies operating at reasonable production and employment levels.

China will be impacted more than India. It also goes without saying that traction needs to be gained in the Indian domestic industries.

SwamyG · Post by **SwamyG** » 21 Jan 2009 21:14

Nortel has filed for bankruptcy.

12 tech giants that might not survive 2009Some were already thinking that Nortel will not survive by 2009.

CalvinH · Post by **CalvinH** » 22 Jan 2009 07:17

ramana wrote:No-NO. It was more older than this and it listed the various steps one of the last few steps was massive unemployment and hyperinflation.

Maybe have to search this thread for it.

I remember it too. Here are the last few steps if I recall correctly.

1. Banks/industries are bailed out by the government or someone by supplying money
2. Banks/FI instead of circulating money keeps the money with them
3. Massive lay off happens

amdavadi · Post by **amdavadi** » 22 Jan 2009 07:41

12 tech giants that might not survive 2009.Some were already thinking that Nortel will not survive by 2009.

I better start looking for a new employer. I have been hearing rumors about them not able to make it past 09.

ramana · Post by **ramana** » 22 Jan 2009 07:45

Suraj, With all this doom and gloom in the G-8 where does India stay regarding the RAND and Goldman Sachs estimates? Is it earlier or later?

Thanks,

ramana

darshan · Post by **darshan** » 22 Jan 2009 12:32

I am deeply concerned for the future of Arizona State University. ASU has taken its share of budget cuts to help the state deal with its revenue shortfall -- and we are prepared to do more. But Senate Appropriations Chair Russell Pearce and House Appropriations Chair John Kavanagh, without considering the full array of options, have singled out education for the largest cuts. Their plan would reverse all of the progress ASU has made and set the institution back a decade or more.

ASU has already taken more than $37 million in state funding cuts and prepared for further reductions by eliminating a total of 500 staff positions and 200 faculty associate positions. We have disestablished schools and merged academic departments while managing to preserve academic quality.

On top of these cuts, the Pearce and Kavanagh proposal would require ASU to cut another $70 million, or 35% of our remaining state funding, in less than five months. Another cut of $155 million is proposed for FY10. Three of our past legislative initiatives -- the research infrastructure bill of 2004, the Polytechnic campus construction package of 2006 and the SPEED construction stimulus bill of 2008 – would be defunded. The cuts to our base budget are both cumulative and permanent and to put them into perspective, they are equal to:

· A base General Fund budget reduction of nearly 40% from the FY08 level; or

· Doubling the number of ASU students without state funding to 40,000; or

· Cumulatively reducing per student funding by almost $3,200;

To deal with cuts of this magnitude, we would need to:

· Layoff thousands more employees;

· Have a massive furlough of all remaining employees for two weeks or longer;

· Increase tuition and fees; (replacing the cuts by raising tuition alone would require a tuition rate of almost $11,000 for Arizona residents)

· Close academic programs.

· Close a campus or possibly two.

Our Legislature has failed to live up to its constitutionally mandated responsibility to fund education. Borrowing funds, running a budget deficit (which Arizona is constitutionally allowed to do for one year) and raising taxes are not politically popular. But the alternative will be even less popular – creating for Arizona a Third World education and economic infrastructure.

We can use this deficit as an excuse to take a chainsaw to vital public services or we can work our way out of our current budget problems -- exploring every option -- without sacrificing our future. To that end, I will make ASU’s economic and financial expertise available to our state leaders.

You can read more about our budget situation and the Legislature’s constitutional responsibility to fund education at http://asu.edu/budgetcuts

. I welcome your constructive feedback at [email protected].

Michael M. Crow

President

http://president.asu.edu

Singha · Post by **Singha** » 22 Jan 2009 13:13

how about reducing or eliminating the vastly lower fees that in-state residents pay?

ajay_ijn · Post by **ajay_ijn** » 22 Jan 2009 22:10

Russian economy estimated to grow at 0.2% in 2009 (assuming oil at $41): Russian minister
Russian economy also contracted in December and October.

So BRIC becomes BIC atleast untill oil prices remain below $50.

Prasad · Post by **Prasad** » 23 Jan 2009 01:38

Singha wrote:how about reducing or eliminating the vastly lower fees that in-state residents pay?

I think the difference comes close to 13K dollahs(compared to non-residents). The economy being what it is right now, I'm not sure if they'd hike the in-state fees and cause it to go out of reach of more people. But then I'm no economist to figure it all out.

darshan · Post by **darshan** » 23 Jan 2009 08:06

pandyan wrote:eat crow for lunch was the popular slogan...

darshan - tu EE kerayaya?

I could not figure out what kerayaya means but it probably means student. If that is so then yes I am EE student.

Yogi_G · Post by **Yogi_G** » 25 Jan 2009 09:14

All, will the next decade see the reduction of the middle easter oil states to unstable and financially weak countries. I know many other countries in other regions already fit this bill but my question is more on the oil states such as KSA and Kuwait. With the onset of alternative fuel technologies and the financial weaking of US, will the petro dollar and the financial affluence of these oil economies decline to a point where they collapse since they have no established industrial base worth mentioning....?

I shudder at the thought considering the Jihadi onslaught it can result in...

Singha · Post by **Singha** » 25 Jan 2009 09:39

they will turn on themselves first...islam always does when the core is weakened.

in UAE, abu dhabi is the only oil rich. kuwait and iraq have manageable pop's / oil wealth. yemen has nothing and is already in the darkness. oman, qatar are so-so US/UK protectorates and base renters. KSA has had a pop explosion and things are not too good looking ahead...

the thing is the arab peninsula has never a high civilization in the past. babylon and persia can do well if right conditions are there. india and china are doing ok. egypt also has a civilization base and does well when right conditions - like in western univs. if the poison of religion of peace is removed egypt, iraq and iran have the human resources and civilizational memory to do good.

arab peninsula had nothing and will have nothing...its all artificial based on easy oil money.

Satya_anveshi · Post by **Satya_anveshi** » 25 Jan 2009 10:09

I am amazed at the mute response from public in the greatest "democracy." People paid $5 per gallon when the crude was hovered over $130. When GOTUS used to make (shrill) demands to OPEC to increase production, it made some sense.

Now when crude is going down and gas prices are following (as recently as month ago, national avg went down below $1.4). Now although Crude is trading pretty much in the same range (40s), national avg went up to $1.8.

a. why should GOTUS intervening (I thought I read a report on this) to decrease production while prices are going down?
b. Why did gas prices go up although the crude is hovering at about the same price as last month or so? Is there a clear case of collusion among the players - an illegal activity?

I am not sure how it is in India and elsewhere but the above relates to US.

Kakkaji · Post by **Kakkaji** » 25 Jan 2009 21:05

Kakkaji wrote:
Singha wrote:how about reducing or eliminating the vastly lower fees that in-state residents pay?

And have the State legislators get the Governor to fire you from the job?

As you very well know the State Universities, funded by state taxes, are meant to provide cheap college education to children of state taxpayers. Raising that fees drastically is as feasible politically as raising fees in Delhi University where IIRC, the current tuition fees is the equivalent of what middle-class kids in Delhi spend on soft drinks with their restaurant meals.

However, the fees are being raised gradually. In Georgia, they recently tacked on an extra $100 per semester. After some hullaballoo, the noise died down. Now the chief of state higher education is saying either raise fees or reduce the intake of students (it has increased by >30% over the last 10 years with state budgetary support rising only marginally). Immediately the newspapers and the state congresspersons jumped on him. There is a political fight going on. People are hoping the education support of Obama's stimulus plan will plug the gap.

All the broplems and solutions come out of boliteeksh.

svinayak · Post by **svinayak** » 26 Jan 2009 23:16

http://www.marketwatch.com/news/story/s ... TNMostRead

New homes get smaller
Say goodbye to McMansions, Americans are buying 'right-sized' homes
By Amy Hoak, MarketWatch
Last update: 8:14 p.m. EST Jan. 24, 2009
Comments: 536
LAS VEGAS (MarketWatch) -- These days, a bigger home isn't always a better one: Recent research suggests that homes being built today are getting smaller.
The average size of homes started in the third quarter of 2008 was 2,438 square feet, down from 2,629 square feet in the second quarter, according to the U.S. Census Bureau. Similarly, the median size of homes started in the third quarter was 2,090, down from 2,291. The statistics confirm what the housing industry has suspected for a while

.
"We've been hearing for a long time 'Why is the home size not declining?'" said Gopal Ahluwalia, vice president of economic research for the National Association of Home Builders. He spoke about the trend at the International Builders' Show, held in Las Vegas this week. Anecdotally, he had heard smaller homes were being built as housing prices tumbled and the economy began to weaken. Still, "we never had data to back it up," he said.
Gayle Butler, editor-in-chief of Better Homes and Gardens, said for many homeowners, it is not so much a matter of downsizing as "right-sizing," giving up big homes with unused space and buying a home that better fits their needs.
"Either by necessity or choice, they're willing to take a step back from the McMansions," she said at the Builders' Show. In fact, according to a survey conducted by the magazine, 32% of participants said they expected their new home to be either somewhat smaller or much smaller than the one they already live in, she said. The magazine's online study involved 733 potential new-home buyers.
Builders are responding to those consumer desires. According to the National Association of Home Builders, 88% of builders surveyed in January said that they are building or planning to build a larger share of smaller homes. Eighty-nine percent said they're planning on building more lower-priced models.
As homes get smaller, home-owners are looking to economize the space they do have. Butler says she is seeing more interest in "Wii-sized spaces" -- family rooms that are flexible enough to accommodate a variety of activities, from video games to fitness systems. Outdoor spaces aren't being wasted either, and outdoor kitchens and entertaining areas continue to rise in popularity, she said.
According to the Better Homes and Gardens study, top priorities in a new home include an affordable price, natural light and comfortable family gathering places. The era of super-sizing may be ending, Butler said, with buyers looking for a home that is "right-sized, organized and economized."
Other consumer housing trends include:

*
Fewer luxuries. Consumers say they need fewer luxuries in their next home, Butler said. Twenty percent or more of the participants in the survey viewed upgraded landscaping, upgraded finishes such as granite countertops, and luxurious master suites as less important in their next home, she said. High ceilings in main living areas were less important to 35% of those surveyed. There are also fewer fireplaces in new homes: While 62% of new homes completed in 1991 had at least one fireplace in it, 51% had a fireplace in 2007, according to Census statistics.
*
Green elements. Ninety percent of those who participated in the Better Homes and Gardens survey said they're planning to have energy-efficient heating and cooling systems in their next home and 31% plan to have geo-thermal heat, Butler said. There has also been increased interest in home gardens, with more people wanting to know where their food is grown, said Robin Avni, senior director and consumer strategist for the firm Iconoculture, a cultural trend research firm. "The green theme touches everything in the home, from the food we look to consume, our health concerns in the home, building -- even our furnishings in the home," Avni said.
*
Getting organized. With smaller spaces, organization systems are continuing their popularity. More entryways are being outfitted for storage, and homeowners often want more functional use of wall space, Butler said. Sixty-nine percent of those surveyed by the magazine said no-space-wasted design and ample storage will take on more importance in their next home.
*
Practical appliances. Although sales of appliances have been down, freezer sales have been up. The reason: More people are shopping for bargains and freezing what they won't use right away. "Appliance sales have taken a hit ... except the freezer. Which is really all about going back to basics, a very practical kind of living," Avni said. "If you look at your parents and your grandparents, they used to have a freezer -- they used to buy stuff on sale and put it in the freezer and use it for later. It wasn't just run out and buy something that day."
End of Story

Amy Hoak is a MarketWatch reporter based in Chicago.

ramana · Post by **ramana** » 27 Jan 2009 03:09

The Euro wont be around in 20 years: Jim Rogers

Suraj, key assesment is PRC will be #1 in 20 years. How does that fit in the RAND and BRIC reports?

Chinmayanand · Post by **Chinmayanand** » 27 Jan 2009 03:16

The key question is , after tech bubble , housing bubble...where is the next bubble?Americans live from one bubble to another.
The most probable and possible is " Alternate Energy".Nuclear,solar,wind...one of the most important requisites for a bubble is the support of the US govt, and if you hear Obama, there is a clue...time to short-list alternate energy stocks....
a good read

SwamyG · Post by **SwamyG** » 27 Jan 2009 03:27

First the alternate energy stocks have to raise very very high to form part of a bubble before it can even burst. Some Solar stocks are high, but they have taken a hit these days. So if what you say is going to happen, then we have to wait for those stocks to take off.

CalvinH · Post by **CalvinH** » 27 Jan 2009 03:39

The layoffs in January 2009 alone are now 203,720 including 68000 layoffs announced today by different companies. clicky

ramana · Post by **ramana** » 27 Jan 2009 03:51

One thing folks need to keep in mind is this si about the fifth to sixth recession in last thirty years- 1974(First Oil shock), 1979-1982(Second Oil shock and fall of Shah of Iran), 1988(Savings and Loan scandal), 1992 (end of Cold War), 1999- 2001(Dot.com bust), 2001 to 2003 (9/11 shock) and 2008- onwards) sub-prime primary shockleading to collapse of the financial system.

So there have been periodic shocks to the economy and they have recovered. This time the whole realted economcies are in doldrums. In 2001 recession S&P was ~ 760 and now its mid 800s. Its shallower than last time. And they got the stimulus and the bailouts lined up which wasnt there last time.

Chinmayanand · Post by **Chinmayanand** » 27 Jan 2009 04:10

The next bubble:Priming the markets for tomorrow's big crash

A financial bubbleis a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. Bubbles were once very rare—one every hundred years or so was enough to motivate politicians, bearing the post-bubble ire of their newly destitute citizenry, to enact legislation that would prevent subsequent occurrences. After the dust settled from the 1720 crash of the South Sea Bubble, for instance, British Parliament passed the Bubble Act to forbid “raising or pretending to raise a transferable stock.” For a century this law did much to prevent the formation of new speculative swellings.

Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitiztion, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.

That the Internet and housing hyperinflations transpired within a period of ten years, each creating trillions of dollars in fake wealth, is, I believe, only the beginning. There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle.

Such transformations do not take place overnight. After World War I, Wall Street wrote checks to finance new companies that were trying to turn wartime inventions, such as refrigeration and radio, into consumer products. The consumers of the rising middle class were ready to buy but lacked funds, so the banking system accommodated them with new forms of credit, notably the installment plan. Following a brief recession in 1921, federal policy accommodated progress by keeping interest rates below the rate of inflation. Pundits hailed a “new era” of prosperity until Black Tuesday, October 29, 1929.

The crash, the Great Depression, and World War II were a brutal education for government, academia, corporate America, Wall Street, and the press. For the next sixty years, that chastened generation managed to keep the fog of false hopes and bad credit at bay. Economist John Maynard Keynes emerged as the pied piper of a new school of economics that promised continuous economic growth without end. Keynes’s doctrine: When a business cycle peaks and starts its downward slide, one must increase federal spending, cut

taxes, and lower short-term interest rates to increase the money supply and expand credit. The demand stimulated by deficit spending and cheap money will thereby prevent a recession. In 1932 this set of economic gambits was dubbed “reflation.”

The first Keynesian reflation was botched. To be fair, it was perhaps impractical under the gold standard, for by the time the Federal Reserve made its attempt to ameliorate matters, debt was already out of control.Banks failed, credit contracted, and GDP shrank. The economy was running in reverse and refused to respond to Keynesian inducements. In 1933, President Franklin D. Roosevelt called in gold and repriced it, hoping to test Keynes’s theory that monetary inflation stimulates demand. The economy began to expand. But it was World War II that brought real recovery, as a highly effective, demand-generating, deficit-and-debt-financed public-works project for the United States. The war did what a flawed application of Keynes’s theories could not.

A few weeks after D-Day, the allies met at the Mount Washington Hotel in Bretton Woods, New Hampshire, to determine the future of the international monetary system. It wasn’t much of a negotiation. Western economies were in ruins, and the international monetary system had been in disarray since the start of the Great Depression. The United States, now the dominant economic and military power, successfully pushed to peg the currencies of member nations to the dollar and to make dollars redeemable in American gold.

Americans could now spend as wisely or foolishly as our government policy decreed and, regardless of the needs of other nations holding dollars as reserves, print as many dollars as desired. But by the second quarter of 1971, the U.S. balance of merchandise trade had run up a deficit of $3.8 billion (adjusted for inflation)—an admittedly tiny sum compared with the deficit of $204 billion in the second quarter of 2007, but until that time the United States had run only surpluses. Members of the Bretton Woods system, most famously French President General Charles de Gaulle, worried that the United States intended to repay the money borrowed to cover its trade gap with depreciated dollars. Opposed to the exercise of such “exorbitant privilege,” de Gaulle demanded payment in gold. With the balance of payments so greatly out of balance, newly elected President Richard Nixon faced a run on the U.S. gold supply, and his solution was novel: unilaterally end the U.S. legal obligation to redeem dollars with gold; in other words, default.

More than a decade of economic and financial-market chaos followed, as the dollar remained the international currency but traded without an absolute measure of value. Inflation rose not just in the United States but around the world, grinding down the worth of many securities and brokerage firms. The Federal Reserve pushed interest rates into double digits, setting off two global recessions, and new international standards and methods for measuring inflation and floating exchange rates were established to replace the gold standard. After 1975, the United States would never again post an annual merchandise trade surplus. Such high-value, finished-goods-producing industries as steel and automobiles were no longer dominant. The new economy belonged to finance, insurance, and real estate—FIRE.

FIRE is a credit-financed, asset-price-inflation machine organized around one tenet: that the value of one’s assets, which used to fluctuate in response to the business cycle and the financial markets, now goes in only one direction, up, with no more than occasional short-term reversals. With FIRE leading the way, the United States, free of the international gold standard’s limitations, now had great flexibility to finance its deficits with its own currency. This was “exorbitant privilege” on steroids. Massive external debts built up as trade partners to the United States, especially the oil-producing nations and Japan, balanced their trade surpluses with the purchase of U.S. financial assets.The process of financing our deficit with private and public foreign funds became self-reinforcing, for if any of the largest holders of our debt reduced their holdings, the trade value of the dollar would fall—and with that, the value of their remaining holdings would be decreased. Worse, if not enough U.S. financial assets were purchased, the United States would be less able to finance its imports. It’s the old rule about bank debt, applied to international deficit finance: if you owe the banks $3 billion, the bank owns you. But if you owe the banks $10 trillion, you own the banks.

The FIRE sector’s power grew unchecked as the old manufacturing economy declined. The root of the 1920s bubble, it was believed, had been the conflicts of interest among banks and securities firms, but in the 1990s, under the leadership of Alan Greenspan at the Federal Reserve, banking and securities markets were deregulated. In 1999, the Glass-Steagall Act of 1933, which regulated banks and markets, was repealed, while a servile federal interest-rate policy helped move things along. As FIRE rose in power, so did a new generation of politicians, bankers, economists, and journalists willing to invent creative justifications for the system, as well as for the projects— ranging from the housing bubble to the Iraq war— that it financed. The high-water mark of such truckling might be the publication of the Cato Institute report “America’s Record Trade Deficit: A Symbol of Strength.” Freedom had become slavery; persistent deficits had become economic power.

The bubble machine often starts with a new invention or discovery. The Mosaic graphical Web browser, released in 1993, began to transform the Internet into a set of linked pages. Suddenly websites were easy to create and even easier to consume. Industry lobbyists stepped in, pushing for deregulation and special tax incentives. By 1995, the Internet had been thrown open to the profiteers; four years later a sales-tax moratorium was issued, opening the floodgates for e-commerce. Such legislation does not cause a bubble, but no bubble has ever occurred in its absence.

Total market value: NASDAQ. 11% annual growth derived from pre-bubble valuation (peak occurred March 10, 2000, when the NASDAQ traded as high as 5132.52 and closed the day at 5048.62)

I had a front-row seat to the Internet-stock mania of the late 1990s as managing director of Osborn Capital, a “seed stage” venture-capital firm founded by Jeffrey Osborn,with positions on the boards of more than half a dozen technology companies. I observed otherwise rational men and women fall under the influence of a fast-flowing and, it was widely believed, risk-free flood of money. Logic and historical precedent were pushed aside. I remember a managing partner of one firm telling me with certainty that if the company in which we’d invested failed, at least it had “hard assets,” meaning the notoriously depreciation-prone computer equipment the company had received in exchange for stock. A year after the bubble collapsed, of course, the market was flooded with such hard assets.

Deregulation had built the church, and seed money was needed to grow the flock. The mechanics of financing vary with each bubble, but what matters is that the system be able to support astronomical flows of funds and generate trillions of dollars’ worth of new securities. For the Internet, the seed money came from venture capital. At first, Internet startups were merely one part of a spectrum of enterprise-software and other technology industries into which venture capitalists put their money. Then a few startups like Netscape went public, netting massive returns. Such liquidity events came faster and faster. A loop was formed: profits from IPO investments poured back into new venture funds, then into new start-ups, then back out again as IPOs, with the original investment multiplied many times over, then finally back into new venture-capital funds.

The media stood by cheering, carrying breathless profiles of wunderkinder in their early twenties who had just made their first hundred million dollars; business publications grew thick with advertisements. The media barely questioned the fine points of the new theology. Skeptics were occasionally interviewed by journalists, but in general the public was exposed to constant reiterations of the one true faith. Government stood back—after all, there was little incentive for lawmakers to intervene. Members of Congress, who influence the agencies that oversee market-regulation functions, have never been unfriendly to windfall tax revenues, and the FIRE sector has very deep pockets. According to the donation-tracking website opensecrets.org, FIRE gave $146 million in political donations for the 2008 election cycle alone, and since 1990 more than $1.9 billion—nearly double what lawyers and lobbyists have donated, and more than triple the donations from organized labor.

Part of my job was to watch for the end-time, to maximize gains and guard the firm against sudden losses when the bubble finally popped. In March 2000, the signal arrived. One of our companies was investigating the timing of an IPO; the management team was hoping for April 2000. The representatives of one of the investment banks we talked to gave us a surprisingly specific recommendation that ran counter to advice offered by banks during the IPO-driven cycle of the preceding five years: they warned the company not to go public in April. We took the advice in the context of other indicators as a clear sign of a top, and over the next few months we liquidated stocks in public companies that we held as a result of earlier IPOs. Shortly thereafter, millions of investors with unrealized gains in mutual funds sold stock to raise enough cash to pay taxes on their capital gains. The mass selling set off a panic, and the bubble popped.

In a bubble, fictitious value goes away when market participants lose faith in the religion—when their false beliefs are destroyed as quickly as they had been formed. Since the early 1980s, the free-market orthodoxy of the Chicago School has driven policy on the upward slope of an economic boom, but we’re all Keynesians on the way down: rate cuts by the Federal Reserve, tax cuts by Congress, deficit spending, and dollar depreciation are deployed in heroic proportions.

The technology industry represents only a small fraction of the U.S. economy, but the effects of layoffs, cutbacks, and the collapsing stock market rippled through the economy and produced a brief national recession in the early part of 2001, despite a concerted effort by the Federal Reserve and Congress to avoid it. This left in its wake a crucial dilemma: how to counter the loss of that $7 trillion in fictitious value built up during the bubble.

The Internet boom had been a matter of abstract electrons and monetized eyeballs—castles in the sky translated into rising share prices. The new boom was in McMansions on the ground—wood and nails, granite countertops. The price-inflation process was traditional as well: there was way too much mortgage money chasing not enough housing. At the bubble’s peak, $12 trillion in fictitious value had been created, a sum greater even than the national debt.

Total market value: Real estate. Actual market value from “Federal Reserve Flow of Funds Accounts of the United States.” Historical trend from Robert J. Schiller, Irrational Exuberance.

We certainly should have known better. Historically, the price of American homes has risen at a rate similar to the annual rate of inflation. As the Yale economist Robert Shiller has pointed out, since 1890, discounting the housing boom after World War II, that rate has been about 3.3 percent. Why, then, did housing prices suddenly begin to hyperinflate? Changes in the reserve requirements of U.S. banks, and the creation in 1994 of special “sweep” accounts, which link commercial checking and investment accounts, allowed banks greater liquidity—which meant that they could offer more credit. This was the formative stage of the bubble. Then, from 2001 to 2002, in the wake of the dot-com crash, the Federal Reserve Funds Rate was reduced from 6 percent to 1.24 percent, leading to similar cuts in the London Interbank Offered Rate that banks use to set some adjustable-rate mortgage (ARM) rates. These drastically lowered ARM rates meant that in the United States the monthly cost of a mortgage on a $500,000 home fell to roughly the monthly cost of a mortgage on a $250,000 home purchased two years earlier. Demand skyrocketed, though home builders would need years to gear up their production.

With more credit available than there was housing stock, prices predictably, and rapidly, rose. All that was needed for hypergrowth was a supply of new capital. For the Internet boom this money had been provided by the IPO system and the venture capitalists; for the housing bubble, starting around 2003, it came from securitized debt.

To “securitize” is to make a new security out of a pool of existing bonds, bringing together similar financial instruments, like loans or mortgages, in order to create something more predictable, less risk-laden, than the sum of its parts. Many such “pass-thru” securities, backed by mortgages, were set up to allow banks to serve almost purely as middlemen, so that if a few homeowners defaulted but the rest continued to pay, the bank that sold the security would itself suffer

little—or at least far less than if it held the mortgages directly. In theory, risks that used to concentrate on a bank’s balance sheet had been safely spread far and wide across the financial markets among well-financed and experienced institutional investors.
The U.S. mortgage crisis has been labeled a “subprime mortgage crisis,” but subprime mortgages were only a sideshow that appeared late, as the housing-bubble credit machine ran out of creditworthy borrowers. The main event was the hyperinflation of home prices. Risks are embedded in price and lurk as defaults. Even after the faith that supported a bubble recedes, false beliefs continue to obscure cause and effect as the crisis unfolds.

Consider the chemical industry of forty years ago, back when such pollutants as PCBs were dumped into the air and water with little or no regulation. For years, the mantra of the industry was “the solution to pollution is dilution.” Mixing toxins with vast quantities of air and water was supposed to neutralize them. Many decades later, with our plagues of hermaphrodite frogs, poisoned ground water, and mysterious cancers, the mistake in that logic is plain. Modern bankers, however, have carried this mistake into the world of finance. As more and more loans with a high risk of default were made from the late 1990s to the summer of 2007, the shared level of credit risk increased throughout the global financial system.

Think of that enormous risk as ecomonic poison. In theory, those risk pollutants have been diluted in the oceanic vastness of the world’s debt markets; thanks to the magic of securitization, they are made nontoxic and so pose no systemic risk. In reality, credit pollutants pose the same kind of threat to our economy as chemical toxins do to our environment. Like their chemical counterparts, they tend to concentrate in the weakest and most vulnerable parts of the financial system, and that’s where the toxic effects show up first: the subprime mortgage market collapse is essentially the Love Canal of our ongoing risk-pollution disaster.

Read the front page of any business publication today and you can see the mess bubbling up. In the United States, Merrill Lynch took a $7.9 billion hit from its mortgage investments and experienced its first quarterly loss since 2001; Morgan Stanley, Bear Stearns, Citigroup, along with many other U.S. banks, have all suffered major losses. The Royal Bank of

Scotland Group was forced to write down $3 billion on credit-related securities and leveraged loans, and Japan’s Norinchukin Bank suffered $357 million in subprime-related losses in the six months prior to September 2007. Even more of this pollution will become manifest as home prices continue to fall.

The metaphor is not lost on those touched by debt pollution. In December 2007, Chip Mason of Legg Mason, one of the world’s largest money managers, said that the U.S. Treasury should put $20 billion into a “structured investment vehicles superfund” to boost investor confidence.

As more and more risk pollution rises to the surface, credit will continue to contract, and the FIRE economy—which depends on the free flow of credit—will experience its first near-death experience since the sector rose to power in the early 1980s. Because all asset hyperinflations revert to the mean, we can expect housing prices to decline roughly 38 percent from their peak as they return to something closer to the historical rate of monetary inflation. If the rate of decline stabilizes at between 6 and 7 percent each year, the correction has about six years to go before things stabilize, leaving the FIRE economy in need of $12 trillion. Where will that money be found?

Bubbles are to the industries that host them what clear-cutting is to forest management. After several years of recession, the affected industry will eventually grow back, but slowly—the NASDAQ, for example, at 5,048 in March 2000, had recovered only half of its peak value going into 2007. When those trillions of dollars first die and go to money heaven, the whole economy grieves.

The housing bubble has left us in dire shape, worse than after the technology-stock bubble, when the Federal Reserve Funds Rate was 6 percent, the dollar was at a multi-decade peak, the federal government was running a surplus, and tax rates were relatively high, making reflation—interest-rate cuts, dollar depreciation, increased government spending, and tax cuts—relatively painless. Now the Funds Rate is only 4.5 percent, the dollar is at multi-decade lows, the federal budget is in deficit, and tax cuts are still in effect. The chronic trade deficit, the sudden depreciation of our currency, and the lack of foreign buyers willing to purchase its debt will require the United States government to print new money simply to fund its own operations and pay its 22 million employees.

Our economy is in serious trouble. Both the production-consumption sector and the FIRE sector know that a debt-deflation Armageddon is nigh, and both are praying for a timely miracle, a new bubble to keep the economy from slipping into a depression.

We have learned that the industry in any given bubble must support hundreds or thousands of separate firms financed by not billions but trillions of dollars in new securities that Wall Street will create and sell. Like housing in the late 1990s, this sector of the economy must already be formed and growing even as the previous bubble deflates. For those investing in that sector, legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review. Finally, the industry must be popular, its name on the lips of government policymakers and journalists. It should be familiar to those who watch television news or read newspapers.

There are a number of plausible candidates for the next bubble, but only a few meet all the criteria. Health care must expand to meet the needs of the aging baby boomers, but there is as yet no enabling government legislation to make way for a health-care bubble; the same holds true of the pharmaceutical industry, which could hyperinflate only if the Food and Drug Administration was gutted of its power. A second technology boom—under the rubric “Web 2.0”—is based on improvements to existing technology rather than any new discovery. The capital-intensive biotechnology industry will not inflate, as it requires too much specialized intelligence.

There is one industry that fits the bill: alternative energy, the development of more energy-efficient products, along with viable alternatives to oil, including wind, solar, and geothermal power, along with the use of nuclear energy to produce sustainable oil substitutes, such as liquefied hydrogen from water. Indeed, the next bubble is already being branded. Wired magazine, returning to its roots in boosterism, put ethanol on the cover of its October 2007 issue, advising its readers to forget oil; NBC had a “Green Week” in November 2007, with themed shows beating away at an ecological message and Al Gore making a guest appearance on the sitcom 30 Rock. Improbably, Gore threatens to become the poster boy for the new new new economy: he has joined the legendary venture-capital firm Kleiner Perkins Caufield & Byers, which assisted at the births of Amazon.com and Google, to oversee the “climate change solutions group,” thus providing a massive dose of Nobel Prize–winning credibility that will be most useful when its first alternative-energy investments are taken public before a credulous mob. Other ventures—Lazard Capital Markets, Generation Investment Management, Nth Power, EnerTech Capital, and Battery Ventures—are funding an array of startups working on improvements to solar cells, to biofuels production, to batteries, to “energy management” software, and so on.

Total market value: Alternative energy and infrastructure. Estimated fictitious value of next bubble compared with previous bubbles

The candidates for the 2008 presidential election, notably Obama, Clinton, Romney, and McCain, now invoke “energy security” in their stump speeches and on their websites. Previously, “energy independence” was more common, and perhaps this change in terminology is a hint that a portion of the Homeland Security budget will be allocated for alternative energy, a potential boon for startups and for FIRE.

More valuable than campaign rhetoric, however, is legislation. The Energy Policy Act of 2005, a massive bill known to morning commuters for extending daylight savings time, contained provisions guaranteeing loans for alternative-energy businesses, including nuclear-power technology. The bill authorizes $200 million annually for clean-coal initiatives, repeals the current 160-acre cap on coal leases, offers subsidies for wind energy and other alternative-energy producers, and promises $50 million annually, over the life of the bill, for a biomass grant program.

Loan guarantees for “innovative technologies” such as advanced nuclear-reactor designs are also at hand; a kindler, gentler nuclear industry appears to be imminent. The Price-Anderson Nuclear Industries Indemnity Act has been extended through 2025; the secretary of energy was ordered to implement the 2001 nuclear power “roadmap,” and $1.25 billion was set aside by the Department of Energy to develop a nuclear reactor that will generate both electricity and hydrogen. The future of transportation may be neither solar- nor ethanol-powered but instead rely on numerous small nuclear power plants generating electricity and, for local transportation, hydrogen. At the state and local levels, related bills have been passed or are under consideration.

Supporting this alternative-energy bubble will be a boom in infrastructure—transportation and communications systems, water, and power. In its 2005 report card, the American Society of Civil Engineers called for $1.6 trillion to be spent over five years to bring the United States back up to code, giving America a grade of “D.” Decades of neglect have put us trillions of dollars away from an “A.” After last August’s bridge collapse in Minnesota, it took only a week for libertarian Robert Poole, director of transportation studies for the Reason Foundation, to renew the call for “highway public-private partnerships funded by tolls,” and for Hillary Clinton to put forth a multibillion-dollar “Rebuild America” plan.

Of course, alternative energy and the improvement of our infrastructure are both necessary for our national well-being; and therein lies the danger: hyperinflations, in the long run, are always destructive. Since the 1970s, U.S. dependence on foreign energy supplies has become a major economic and security liability, and our superannuated roadways are the nation’s circulatory system. Without the efficient transit of gasoline-powered trucks laden with goods across our highways there would be no Wal-Mart, no other big-box stores, no morning FedEx deliveries. Without “energy security” and repairs to our “crumbling infrastructure,” our very competitiveness is at stake. Luckily, Al Gore will be making principled venture capital investments on our behalf.

The next bubble must be large enough to recover the losses from the housing bubble collapse. How bad will it be? Some rough calculations: the gross market value of all enterprises needed to develop hydroelectric power, geothermal energy, nuclear energy, wind farms, solar power, and hydrogen-powered fuel-cell technology—and the infrastructure to support it—is somewhere between $2 trillion and $4 trillion; assuming the bubble can get started, the hyperinflated fictitious value could add another $12 trillion. In a hyperinflation, infrastructure upgrades will accelerate, with plenty of opportunity for big government contractors fleeing the declining market in Iraq. Thus, we can expect to see the creation of another $8 trillion in fictitious value, which gives us an estimate of $20 trillion in speculative wealth, money that inevitably will be employed to increase share prices rather than to deliver “energy security.” When the bubble finally bursts, we will be left to mop up after yet another devastated industry. FIRE, meanwhile, will already be engineering its next opportunity. Given the current state of our economy, the only thing worse than a new bubble would be its absence.

vsudhir · Post by **vsudhir** » 27 Jan 2009 04:21

Ramana garu,

So there have been periodic shocks to the economy and they have recovered. This time the whole realted economcies are in doldrums. In 2001 recession S&P was ~ 760 and now its mid 800s. Its shallower than last time. And they got the stimulus and the bailouts lined up which wasnt there last time.

This crisis is qualitatively different from previous ones. They were cases where one room in a building caught fire and sent alarms blazing. This one though is a forest fire - the entire ecosystem is threatened. Haven't heard folks call doomsday scenarios in previous recessions as regularly and as seriously as they do now - for example, how many times was the S&L crisis compared with the great depression in 1988-89?

My concern remains that as economic dislocation and attendent civil unrest spikes around the world, the temptation to create diversionary wars can only rise. Also, wars for resources, for market access and imposing social order using emergency provisions loom on the horizon. JM2Ps, of course.

ramana · Post by **ramana** » 27 Jan 2009 04:52

X-posted...

ramana wrote:Suraj, Vina et al, How do we use statistics after a black swan? Statistics assume tomorrow will be like yestrday. Howeve in between a catstrophe occurs and all things fall down. Yet WS experts/ANALysts keep comparing earnigs to year ago when they should re-baseline and look at today! How do these experts make their predictions?

So what Eric Janszen is saying is that we should re-baseline and go by historical trend. The $12T lost is the non-existent bubble money. By feeding bailouts we convert non-existent wealth into real debt.

Nandu · Post by **Nandu** » 27 Jan 2009 05:36

Is the massive borrowing, by the federal government, and by the banks from the federal reserve, to try and reverse this meltdown, sustainable.

One article by a guy who has been prescient on the meltdown. http://online.wsj.com/article/SB123266988914308217.html

On blog entry with two dramatic graphs. http://eastcoasteconomics.wordpress.com ... borrowing/

Satya_anveshi · Post by **Satya_anveshi** » 27 Jan 2009 07:31

That is what I said a few days ago - When you regress this debt to repay debt cycle, you will *very soon* reach a situation where Chinese are going to ask for Las Vegas or may be even California. Saudis will be happy with letting them take care of Israel to renown all their debt. What else US will do? It could do reverse on Saudis and so it all will become a matter internal to their economy

vsudhir · Post by **vsudhir** » 27 Jan 2009 07:57

Satya_anveshi wrote:That is what I said a few days ago - When you regress this debt to repay debt cycle, you will *very soon* reach a situation where Chinese are going to ask for Las Vegas or may be even California. Saudis will be happy with letting them take care of Israel to renown all their debt. What else US will do? It could do reverse on Saudis and so it all will become a matter internal to their economy

PRC asking for California seems almost like a joke before you remember that unkil had indeed 'purchased' Alaska from Czarist Russia and Lousiana (pretty much most of the midwest and the deep souoth in present day US) from France.

Heh, mebbe we could do a deal with TSP for their relinquishing the Northern Areas....

Satya_anveshi · Post by **Satya_anveshi** » 27 Jan 2009 11:39

If we accept no taxation without representation then no representation without taxation must also be accepted. That should do in Geithner for the job. Interesting to see what happens.

Hiten · Post by **Hiten** » 27 Jan 2009 16:05

looks like fired employees ending up watching one too many muvee

Netflix 4Q profit up 45 pct, defying recession

Netflix Inc.'s fourth-quarter profit climbed 45 percent to surpass analysts' estimates Monday, propelled by the widening appeal of its relatively inexpensive DVD rental and Internet streaming service during a budget-crimping recession.

somebody is counting its blessing this recessions