IMF warns over parallels to Great Depression

The International Monetary Fund has warned of "worrisome parallels" between the current global crisis and the Great Depression, despite the unprecedented steps already taken by central banks and governments worldwide.

This recession is likely to be "unusually long and severe, and the recovery sluggish," said the Fund, releasing two advance chapters from its World Economic Outlook. However, it warned there is a risk that it could spiral down into a full-blown slump unless further action is taken to stop "feedback effects" gathering force.

Dominique Strauss-Kahn, head of the IMF, said millions of people risk being pushed back into poverty as the economic storm ravages the most vulnerable countries. "The human consequences could be absolutely devastating. This is a truly global crisis, and nobody is escaping," he said.

"The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today."

Mr Strauss-Kahn called for a urgent action to "cleanse banks" of toxic assets and for further fiscal stimulus beyond the 2pc of global GDP already agreed. The snag is that high-debt countries may have hit the limits already.

"The impact becomes negative for debt levels that exceed 60pc of GDP," said the Fund.

While no countries were named, this would raise questions about Japan, Germany, France, Italy and ultimately Britain and the US after their bank rescues.

The IMF said the US is at the epicentre of this crisis just as it was in the Depression, setting the two episodes apart from normal downturns. However, the risks are greater this time. "While the credit boom in the 1920s was largely spec­ific to the US, the boom during 2004-2007 was global, with increased leverage and risk-taking in advanced economies and many emerging economies. Levels of integration are now much higher than during the inter-war period, so US financial shocks have a larger impact," it said.

The IMF said the global financial system is still under acute stress, with output tumbling and inflation falling towards zero in key nations. "The risks of debt deflation have increased," it said.

Abrupt halts in capital flows can have "dire consequences" for emerging economies, it said. Eastern Europe has already suffered the effects, with a 17.6pc fall in industrial production in February. The region is highly vulnerable to the credit crunch since it owes more than 50pc of its GDP to Western banks.

Synchronised world recessions striking all major regions are "historically rare" events, the Fund said. They last one and a half times as long typical downturns, and are followed by painfully slow recoveries.

Source: Telegraph

London office vacancy rate soars to over 10 million square feet

Approximately 11.9pc of City offices are vacant – equivalent to 10 large city towers – up by a tenth already in 2009 and more than double the 5.2pc prior to the onset of the credit crisis in 2007, as increasing numbers of businesses collapse or downsize.

It is first time since 2004 that empty office space has breached the 10m sq ft mark, according to research by property agent NB Real Estate.

The slump is placing immense pressure on rents, which have now fallen 27pc in the past year from an average of £65 per sq ft to £47.50.

Increasing supply through the completion of new developments is hastening the fall in rents, although the situation is even more dire in the West End. The failure of a large number of hedge funds, many of which are based in the area, has pushed rents down 37.5pc to £75 per sq ft.

Alan Dornford, managing director of markets at NB Real Estate, said: "Sentiment-wise this has probably been the toughest quarter in the leasing market.

"Many landlords have been aggressively adjusting the rents they quote but in isolation this will not stimulate a recovery. A broader recovery relies on confidence returning to the employment market."

Source: Telegraph

Gordon Brown's House Price Boom and Bust

Have a look below at what we all know but Gordon Brown is hoping we forget!

George Soros Forecasts Housing Crash and Price Inflation

George Soros recently made two predictions. First, commercial real estate will decline by 30% in the United States. "It is inevitable, it is written, everybody knows it, there are already some transactions which reflect and anticipate it, so we know, they will drop at least 30 percent." Second, when banks finally begin to lend, the swollen monetary base will lead to serious price inflation. He called this "an explosion of inflation."

These two predictions seem to be in opposition to each other. A fall of 30% in commercial real estate would surely place downward price pressure on the American economy. Local banks are more heavily invested in commercial real estate than residential. Fannie Mae and Freddie Mac created the housing boom. The government and the Federal Reserve System are trying to bring the boom back to life by buying the debt of these two agencies, using FED fiat money. Mortgage rates are now under 5%. Still, the residential real estate market continues to fall.

COMMERCIAL REAL ESTATE

Commercial real estate's future value is ultimately a function of the net revenues it can generate. The economy continues to remain in recession. The expectation of national unemployment in the 9% range is now conventional. As consumers shift spending from discretionary to non-discretionary goods and services, existing businesses that cater to discretionary spending will come under intense pressure. Some are going to go out of business. They will cancel their leases.

I had a taste of this recently. My wife and I went to lunch downtown in our little community. It is the county seat. The county has recently opened a large, modern facility several miles from the town square. The old buildings are still occupied by the county, but not with the same high concentration of employees.

We headed for a great little Mexican restaurant. It was gone. Next door, a 2,700 square foot facility was empty. Another empty office was three doors down. There used to be a sandwich shop down the street. Gone.

This has happened in less than two months. Businesses that were doing fine are gone forever. The owners should have seen this coming, but owners are optimistic. They think, "It won't happen to me." But it does.

Every owner should have gone shopping for a new location as soon as the county announced the new building. I assume that was at least five years ago. Maybe it was more. Those store fronts should be occupied today by businesses that are not dependent on walk-in traffic from county employees. The rent should have fallen as soon as the leases ran out in the year that the new facility was approved. But this is never how it works. The existing renters did not perceive that their business plans were doomed. They pretended that the flow of customers would not change, despite the fact that the customers would no longer be within walking distance.

On the door of the sandwich shop was a forlorn note announcing the closing and thanking the customers for their loyalty. Loyalty? When? For how long? What percentage of customers? Most of the ex-customers will never read that sign. They won't go downtown again. If they do, they will not stay long enough to buy a sandwich.

Now the owners of all that space are facing a disaster. We are in a recession. Banks will not lend to small start-up businesses. The landlords had bet their future on rental income from small businesses that catered to the county's employees. Now they must find completely different types of renters. The rental space is no longer prime. They should have canceled leases, year by year, on every business that was county employee–dependent. The recession would have hit, but they would now have a cushion. They have no cushion.

People see things coming. They ought to understand that new market conditions will force major plan revisions. Bankruptcy is one of those plan revisions. But people assume that whatever trends are good will continue, while trends that are negative will evaporate. Their optimism leads them into business. Then it leads them out.

It takes a systematic act of will to follow the implications of an irreversible trend. The trend of traffic was obvious, given the new county building, but existing renters refused to extrapolate the trend. They did not devote time and effort to overcoming this trend by starting over elsewhere, while they still had working capital. Instead, they just sat.

What is true of a business owner is also true for most employees and most investors.

THE REAL ESTATE FALL-OUT

How many investors had heard of subprime mortgages in 2005? Of those who did, how many of them knew of the packaging of these mortgages? How many knew that the credit-rating services were rating as AAA packages that are today being sold at 30 cents on the dollar? How many knew that these packages were being bought by hedge finds with borrowed money at leverage of 30-to-1? On and on it went.

The fall-out was not perceived by regulatory agencies, the entire investment banking industry, commercial banks, Federal Reserve economists, and European bankers who decided that 30-to-1 was too conservative.

We are now in a recession the likes of which nobody has ever seen. The fall-out continues to fall out. Investors think that the problem is solved. Then two more appear.

Soros' words ought to be accurate: "It is inevitable, it is written, everybody knows it, there are already some transactions which reflect and anticipate it, so we know. . . ." They are not accurate. The phrase, "so we know," is wrong. "We" do not know.

The typical bankers who lent 60% of their depositors' money to commercial real estate projects are in the same situation as the landlords of the now-empty space in my town square were two years ago. They did nothing to protect themselves when they might have been able to. They sat, just as their lease-holders sat. They all knew that the courthouse was going to be run at quarter staff. But they did not perceive that the departure of the employees would bankrupt business after business.

Local bankers are sitting there, hoping for the best. They are not in emergency mode, preparing for the departure of their tenants. Their tenants will be forced by market conditions to close their doors.

The market is relentless. It will have its way. The reality of falling traffic and lower purchases will make itself felt, as surely as it made itself felt last Christmas. The discounting began as soon as the shopping season did. Yet hope remained. The press kept saying that things were slow, but that business owners hoped for a buying spree in the final days. It never materialized. It was wishful thinking.

Consider this fall-out. Banks will find that borrowers cease paying. Developers are going under now. Abandoned, 70% completed strip malls testify to the spreading crisis. Empty large anchor stores no longer provide the overflow foot traffic for the shops that once profited from the anchor business, which now has departed. Properties like this line every main drag in the country. Has the local Circuit City building been rented to a new customer in your town? It hasn't in mine.

This is truly a case of falling dominoes. At this point, there is nothing that the borrowers can do, other than to hope, pray, and delay. The banks that lent to them must cut back on new loans, either now or when the defaults force the change.

Companies with good credit and years of reliable repayment now face the prospect of their banks calling the loans. The banks will refuse to roll over these loans. They will have no choice. Their capital will be gone. It is gone now, but they have not yet written down the losses. They will not be able to delay much longer unless the Financial Accounting Standards Board revises FAS 157 in the next week (which it may do).

Because the initial phase of this recession has been related closely to residential real estate, which was marketed nationally by Freddie and Fannie, most local businessmen have not faced the problem of collapsed bank capital. Their lenders have continued to roll over their lines of credit. This is about to end.

I remember the situation in Texas in 1985, when oil fell and the real estate bubble collapsed. Good businesses that had long worked with a local bank found that the local bank had been absorbed by a distant national bank. The local staff had either departed or had handcuffs put on them by a national committee that knew nothing of local conditions. Businesses that had depended on a long tradition of borrowing and repaying found that they were facing bankruptcy.

A line of credit today is considered a permanent operating condition. Businesses no more plan to pay off these loans than the U.S. Treasury expects to pay off its lines of credit. The name of the game in both markets is rollover. The Treasury can play this game because it has China and the Federal Reserve to keep the money flowing. A local business does not.

Soros makes a public statement about 30% losses in commercial real estate, and it does not get top billing. It is just more noise. Soros is very rich. He made his money in leveraged currency futures markets, the toughest market there is. If he says there will be a 30% decline, plan for this.

But how can you? If you run a business, you can pay your bank to sign an agreement to supply credit. That is worth the money, I think. It will give you a source of capital, if your accounts receivable really do become accounts paid. Your customers are using you as their line of credit. You will find it difficult to speed up collections. You will find it impossible to get them to pay cash up front.

Your employer may need a different client base, but it cannot get it in a recessionary economy. The competition for such clients is fierce.

PRICE INFLATION

Soros also predicted explosive price inflation. He has looked at the monetary base of the Federal Reserve. What else could he conclude? When banks pull their excess reserves out of Federal Reserve accounts that pay 0% to .25%, and they start lending – to anyone, on any terms – the fractional reserve process will begin.

Soros knows currencies better than any other public figure. He has become rich from his ability to predict and even trigger major currency devaluations. Central bankers insist that everything is fine; Soros takes a position on the other side of the trade; and the central bank capitulates. It hands him a billion or more dollars' worth of profits. He goes on to bigger fish to fry.

He could have said this: "It is inevitable, it is written, everybody knows it, there are already some transactions which reflect and anticipate it, so we know, that prices in dollars will rise at east [xx] percent." He didn't.

The public does not perceive any of this. It has no idea what the monetary base is, or what this has to do with M1. People just struggle to stay ahead of the recession's fall-out. They have so little money to spend that is not committed to paying monthly bills that changes in their plans are marginal. They cannot fund major changes.

We do not see panic yet. We see hope that the Obama Administration's weekly new policies will work. If the earlier ones had any chance of working, why are new ones announced each week?

Investors want to believe that the Federal Reserve and the Treasury can extricate the economy from the broad disaster that Federal Reserve policy and Treasury policy created under Greenspan. They expect the Treasury's revolving door of experts from the Council on Foreign Relations to get it right this time. They take the official assurances at face value. There is no FAS 157 governing official pronouncements from Geithner or Summers or Bernanke. There is nothing that compels pundits to write down their statements at face value to something markedly less. There is no mark-to-market accounting for political pronouncements.

Soros says we will experience falling commercial property prices and rising general prices. If he believes this, then he has to be making an assumption: the present bailout plans of both the Treasury and the Federal Reserve will not reach the local banks and the local real estate markets. He is saying that Wall Street and Main Street are not in synch. Main street is where consumers meet sellers and work out deals. He is saying that Main Street's businesses will not be able to avoid consumers that refuse to buy.

Main Street today is where businesses that boomed under Greenspan now operate. That world is gone. Consumers will still spend money, but they will not spend it on the same products as before. Main Street's businesses that rely on discretionary spending to keep their doors open will not be able to survive.

Soros is saying what Ludwig von Mises and Austrian School economists have been saying for over nine decades. The issue is relative prices. The general price level can rise, but specific consumers, businesses, and sectors will not benefit. In short, the economy is not like the ebb and flow of the tides. All ships don't rise and fall together.

Donald Trump did fine when the Federal Reserve's real estate bubble was expanding. Investors thought he would make all those Atlantic City casinos keep them rich. They were wrong. Three of the casinos filed for Chapter 11 protection in February. The problems? Leverage. Recession. A change in taste by gamblers who were discretionary gamblers. They stopped gambling.

People who make money under one set of conditions lose money when these conditions change. Soros is predicting two seemingly rival sets of conditions: falling commercial real estate and rising prices. Those who are heavily invested in commercial real estate will take a hit before mass inflation arrives.

The recovery phase will bring monetary inflation: the multiplication of the monetary base. That will do the renters of busted businesses no good. It may bail out owners of these properties if they can keep the banks from foreclosing. It's a race against time.

CONCLUSION

The world needs capital, not more digits. The Treasury and the Federal Reserve can rearrange digits and interest rates. Investors and borrowers will follow the money. The planners can lure investors and consumers into one or another market by means of the flow of borrowed and newly created digits. But by undermining the information sent by prices, the digit-masters lure investors and buyers into debt traps. As surely as Donald Trump and his investors failed to adopt an exit strategy to deal with Bernanke's tight money policies, 2006–2007, so will investors and borrowers fail to adopt a survival strategy for the next wave of price inflation.

The destruction of capital through bad investing is the legacy of tax policies, monetary policies, and subsidy policies of government and its ally, the central bank. All over the world, this unholy alliance has destroyed capital. There is no good reason, in theory or practice, that indicates that these digit masters will get it right this time.

Donald Trump is smart. His bondholders are smart. Central bankers are smart. But they are not smarter that the assembled knowledge of a free market that is not being distorted by bureaucratic monetary policy. If the government would pay the salaries of every Federal Reserve employee, sending them all home and freezing current assets forever, the economy would become productive after a sharp, fearsome depression. That is not going to happen. The digital deception will go on.

Don't be deceived. The system is rigged against you.

Source: Market Oracle

Big Banks Pull off The Ultimate Bait & Switch

We’re not quite as healthy as we thought we were. Oops.

J.P. Morgan Chase Chief Executive James Dimon said…that March was a little
tougher than the first two months of the year….Bank of America…CEO Kenneth Lewis also said that March had been a tougher month for his bank.

Convenient that they decided to dump this information on Friday afternoon, and at the close of a very good week.

Readers may recall that a few weeks ago, those two CEOs—along with Citi’s Vikram
Pandit—said the first two months of the year had been very good:

Pandit, March 10th: “We are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007.”

Dimon, March 11th: “Jamie Dimon, the chief executive of JPMorgan Chase,
said Wednesday that the bank was profitable in January and February…”

Lewis, March 12th: “We have been profitable for the first two months of
the year,” Lewis told reporters after a speech in Boston today

This was possibly the most nakedly self-serving bullshit the big bank CEOs have offered to date. (”bullshit” being a technical term of course, see Harry Frankfurt)

By February, it was understood that the big banks are all insolvent, certainly Citi and BofA. To deal with them, consensus among the cognoscenti was finally tending to a proper recapitalization: wiping out shareholders and forcing losses onto creditors via debt-for-equity swaps. Call it nationalization, call it preprivatization, call it FDIC receivership, it was clear that losses had to be recognized and by those to whom they properly belong: investors across the banks’ capital structure.

But no one really wanted to do this, not in Congress and certainly not in the Obama administration, where Timmy Geithner has made clear that his priority isn’t a cleansed banking sector, it’s a privately-owned one. For obvious reasons the banks don’t like this solution either. So they offered up their self-serving b.s. regarding January and February, buying just enough time for Congress/Bernanke to badger FASB into changing mark-to-market rules and for Geithner to roll out his private-public partnership plan.

Now whatever losses the banks can’t hide with revised accounting treatments, they can simply fob off on taxpayers via the partnerships. They got what they always wanted: A bad bank! An entity that will actually absorb losses from the asset side of the balance sheet! Shareholders and creditors don’t have to worry about further writedowns, not the ones that can’t be hidden anyway. Taxpayers will pick up the check!

Even better, the Geithner plan is so ridiculously complex—and public disclosure is likely to be so minimal—that toxic asset transfers are likely to happen largely out of view. Maybe Treasury will have to increase its borrowing substantially in order to fund the losses, but by that point everyone will be celebrating that banks have started lending again. Hooray!

By the way, are there ANY substantial protections to prevent banks from gaming this plan? What’s to stop them from acting as the equity investors in the partnerships, ponying up a sliver of equity to effect a transfer of toxic assets from their own balance sheets to the public’s? The FDIC’s FAQ for the legacy loans program doesn’t even address this particular Q. Is it not being frequently asked?*

This is all of a piece. The longer CEO/policy-maker collusion can delay loss recognition, the more time they have to invent ridiculous leverage schemes (more money printing! more government borrowing to fund “stimulus”! more FDIC “guarantees”!) to inflate those losses away…and to continue looting the public’s wealth.

But losses aren’t going away. Trading smaller private liabilities for larger public liabilities in order to artificially inflate asset prices does nothing to repair the economy’s aggregate balance sheet. At the end of the day, we’re still just lending more and more against a dwindling pool of real equity. The unwind is coming. Adding more leverage to delay it will only increase the pain.

Source: Rolfe Winkler

The One Quadrillion Bubble

The financial wizards of the world have helped to build a $1 Quadrillion derivatives bubble as our Governments and regulators have failed us miserably.

Myron Scholes, the godfather of the credit default swap, says blow 'em all up

Myron Scholes, whose Black-Scholes option pricing model provided the intellectual underpinning for modern derivatives markets, thinks one particular derivatives market—that for credit default swaps—is due for a Red Adair style rescue. Or a Fred Adair style rescue.

Red Adair put out oil well fires by setting off gigantic explosions at the wellhead. "My belief is that the Fred Adair solution is to blow up or burn the OTC market in credit default swaps," Scholes said this morning. What that means, he elaborated, is that regulators should "try to close all contracts at mid-market prices" and then start up the market anew with clearer rules and shorter-duration contracts.

This was at a conference at New York University occasioned by a new collection of papers on how to fix the financial system, authored by a bunch of NYU Stern School faculty. Scholes kept saying Fred Adair. Sometimes he'd notice and correct himself, sometimes he wouldn't. The FT's John Gapper, who was on a panel with Scholes, finally speculated that this was because the government response to the financial crisis has been such an unwieldy mix of Fred Astaire (dancing around the problems) and Red Adair (doing something to fix them). Scholes did not disagree.

The blow-up-the-CDSes option is intriguing, and I'm going to check in with Scholes later to see if he wishes to elaborate. But for now, a few more notes from the panel, which was moderated by Paul Volcker and also featured NYU finance professor Matt Richardson:

Some would say Scholes is partly to blame for this whole mess, and Volcker dropped a couple of hints in that direction. Scholes didn't exactly accept responsibility, but neither did he give a blindered, Chicago-style defense. For one thing, he cited John Maynard Keynes—still a nonperson to many of Scholes's fellow Chicago Ph.Ds—arguing that we're currently stuck in a situation where the financial system needs to deleverage, but its current deleveraging is causing asset values to plummet, meaning that it's not succeeding in deleveraging at all (that is, debt is down, but so is the value of everybody's capital, so leverage ratios aren't declining). For another, he seemed to agree with one of the main criticisms of the Wall Street risk models that evolved in part from Black-Scholes—that they have some ability to capture the risks faced by one investor operating in a financial market that the investor is too small to influence, but aren't much good at capturing the risks faced by the entire market. "Risk aggregation is not linear," he said. "It's nonlinear." (This is what Chapter 13 of The Myth of the Rational Market is about. Doesn't that sound exciting?)

As the moderator, Volcker didn't say all that much. He did talk for a bit, though, about how "maybe we ought to have a two-tier financial system," with a heavily regulated "core part that I will for purposes of simplicity call commercial banking" and a less-regulated outer realm of hedge funds, proprietary trading desks, and such. Hmmm, said Gapper, that "reminds me of something I once heard of called the Glass-Steagall Act." This Glass-Steagall revivalism is happening all over. I'm even beginning to feel the spirit. But Gapper had an interesting question: "If you wanted to set up a new Glass-Steagall, where would you draw the line?"

Scholes finally got his free-market Chicago dander up over the possibility of synchronized global financial regulation—something that Volcker has been advocating as chairman of the Group of Thirty project on financial reform—sparking this entertaining exchange:

Scholes: If we internationalize everything, we end up with rules that stifle freedom and innovation. Mr. Sarkozy and others say our system has failed and we should adopt theirs. Do we want to become French?

Volcker: I'm not an acolyte of Mr. Sarkozy.

Gapper: Actually, the French banks are big derivatives users.

Volcker: The U.S. is no longer in a position to dictate to the rest of the world.

Source: Time

The Geithner Plan FAQ

Q: What is the Geithner Plan?
A: The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off--in either case at an immense profit.

Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?
A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

Q: Where does the trillion dollars come from?
A: $150 billion comes from the TARP in the form of equity, $820 billion from the FDIC in the form of debt, and $30 billion from the hedge fund and pension fund managers who will be hired to make the investments and run the program's operations.

Q: Why is the government making hedge and pension fund managers kick in $30 billion?
A: So that they have skin in the game, and so do not take excessive risks with the taxpayers' money because their own money is on the line as well.

Q: Why then should hedge and pension fund managers agree to run this?
A: Because they stand to make a fortune when markets recover or when the acquired toxic assets are held to maturity: they make the full equity returns on their $30 billion invested--which is leveraged up to $1 trillion with government money.

Q: Why isn't this just a massive giveaway to yet another set of financiers?
A: The private managers put in $30 billion and the government puts in $970 billion. If we were investing in a normal hedge fund, we would have to pay the managers 2% of the capital and 20% of the profits every year. In this case, the private managers' returns can be thought of as (a) a share of the portfolio's total return proportional to their 3% contribution, plus (b) a "management incentive fee" of (i) 0% of the capital value and (ii) between 0% (if the portfolio returns 3% per year) and 9% (if the portfolio returns 10% per year)--much less than hedge-fund managers typically charge. the Treasury is only paying 0% of the capital value and 17% of the profits every year.

Q: Why do we think that the government will get value from its hiring these hedge and pension fund managers to operate this program?
A: They do get 17% of the equity return. 17% of the return on equity on a $1 trillion portfolio that is leveraged 5-1 is incentive.

Q: So the Treasury is doing this to make money?
A: No: making money is a sidelight. The Treasury is doing this to reduce unemployment.

Q: How does having the U.S. government invest $1 trillion in the world's largest hedge fund operations reduce unemployment?
A: At the moment, those businesses that ought to be expanding and hiring cannot profitably expand and hire because the terms on which they can finance expansion are so lousy. The terms on which they can finance expansion are so lazy because existing financial asset prices are so low. Existing financial asset prices are so low because risk and information discounts have soared. Risk and information discounts have collapsed because the supply of assets is high and the tolerance of financial intermediaries for holding assets that are risky or that might have information-revelation problems are low.

Q: So?
A: So if we are going to boost asset prices to levels at which those firms that ought to be expanding can get finance, we are going to have to shrink the supply of risky assets that our private-sector financial intermediaries have to hold. The government buys up $1 trillion of financial assets, and lo and behold the private sector has to hold $1 trillion less of risky and information-impacted assets. Their price goes up. Supply and demand.

Q: And firms that ought to be expanding can then get financing on good terms again, and so they hire, and unemployment drops?
A: No. Our guess is that we would need to take $4 trillion out of the market and off the supply that private financial intermediaries must hold in order to move financial asset prices to where they need to be in order to unfreeze credit markets, and make it profitable for those businesses that should be hiring and expanding to actually hire and expand.

Q: Oh.
A: But all is not lost. This is not all the administration is doing. This plan consumes $150 billion of second-tranche TARP money and leverages it to take $1 trillion in risky assets off the private sector's books. And the Federal Reserve is taking an additional $1 trillion of risky debt off the private sector's books and replacing it with cash through its program of quantitative easing. And there is the fiscal boost program. And there is a potential second-round stimulus in September. And there is still $200 billion more left in the TARP to be used in other ways.
Think of it this way: the Fed's and the Treasury's announcements in the past week are what we think will be half of what we need to do the job. And if it turns out that we are right, more programs and plans will be on the way.

Q: This sounds very different from the headline of the Andrews, Dash, and Bowley article in the New York Times this morning: "Toxic Asset Plan Foresees Big Subsidies for Investors."
A: You are surprised, after the past decade, to see a New York Times story with a misleading headline?

Q: No.
A: The plan I have just described to you is the plan that was described to Andrews, Dash, and Bowley. They write of "coax[ing] investors to form partnerships with the government" and "taxpayers... would pay for the bulk of the purchases..."--that's the $30 billion from the private managers and the $150 billion from the TARP that makes up the equity tranche of the program. They write of "the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money..."--that's the debt slice of the program. They write that "the government will provide the overwhelming bulk of the money — possibly more than 95 percent..."--that is true, but they don't say that the government gets 80% of the equity profits and what it is owed the FDIC on the debt tranche. That what Andrews, Dash, and Bowley say sounds different is a big problem: they did not explain the plan very well. Deborah Solomon in the Wall Street Journal does, I think, much better. David Cho in tomorrow morning's Washington Post is in the middle.

Coming to a bank near you: the 9% mortgage

If, like me, you’re holding out for cheaper fixed mortgage deals, last week’s review of the global banking crisis by Lord Turner, chairman of the Financial Services Authority, showed just how long a waiting game it could be.

Buried in the report was a startling figure: mortgage rates can stay high for six to nine years after the onset of a banking crisis.

Turner wants banks to hold much more capital to prevent the failures of Northern Rock, Bradford & Bingley and Halifax Bank of Scotland from being repeated.

A laudable aim, of course, but this being the banking sector, customers will ultimately pay. Holding more capital increases banks’ costs, which are in turn passed on to you and me in the form of a wider spread between the rates paid on our savings and the rates charged on our debt.

Indeed, the margins on tracker mortgages are now so fat that the 9% mortgage may not be far off. Nationwide building society has the biggest margin on a tracker mortgage, according to brokers.

Its two-year deal for those with a deposit of at least 15% is 4.58 percentage points above Bank rate, or 5.08%; its three-year deal has a margin of 4.53 points, or 5.03%.

These rates are pretty poor with Bank rate at just 0.5%, so imagine how bad they’d look if interest rates were back at a more “normal” level of, say, 4%. That would give you pay rates of 8.58% and 8.53% respectively.

It may seem odd to be thinking about higher interest rates when the country is set to fall into deflation on Tuesday, but rate rises could be closer than we think.

Investors are at their most optimistic about the global economy since December 2005, according to the latest survey of fund managers from investment bank Merrill Lynch.

For the first time in more than three years, investors are not predicting lower global growth over the next 12 months, thanks largely to renewed optimism about China.

Indeed, last week saw a strong rally in all the assets you would normally associate with stronger growth — and therefore higher interest rates. Oil soared 7% in one day alone, breaking the $50 level, while copper surged to a four-month high.

Having shamelessly widened the spread between mortgage rates and the cost of funding as interest rates have come down, banks are unlikely to close the gap again as rates head back up — as Turner’s report highlighted.

The best two-year fix, from First Direct at 2.99%, is currently 0.8 points above the cost of funding; six months ago, the margin was only 0.24 points, according to figures from Savills Private Finance.

The best tracker — 2.89% from First Direct — is 1.1 points higher than wholesale rates.

So should you be locking into a fix now to protect yourself from these big tracker margins? Melanie Bien at Savills thinks so — but for five years, not two. Abbey, part of Spanish giant Santander, is offering a five-year deal at 3.95% with a £995 fee — if you have 40% equity. “Anything at below 5% for a five-year fix is pretty attractive,” said Bien.

Ray Boulger over at rival John Charcol gives a politician’s answer. If you’re buying a property, he would also lock into a fix now — particularly if you have a relatively small deposit. If you play the waiting game on a tracker and house prices fall further, you may find you don’t have enough equity when you try to switch to a fix in a year or so. If you’re an existing homeowner on your lender’s standard variable rate, however, he says there is no need to rush as the chances are the SVR is lower than the current fixed rates.

There are big dangers with this approach, though — when rates eventually rise, they may do so quickly. “If \ are to avert inflation, interest rates will need to be raised earlier into any upturn and more rapidly than in the 2003-5 period,” said Max King, economist at Investec.

Work out how much more you’d pay on a fix, compare it with what you were paying before interest rates started falling, and if it’s a price you’re willing to pay for long-term security, then it’s time to fix.

Source: Kathryn Cooper Times Online

China in threat to shatter hopes of G20 summit deal

China may scupper hopes of a landmark deal at the G20 summit in London by opposing new rules for the world's financial system designed to prevent a repeat of the current crisis.

As the Prime Minister played down differences between the United States and Europe over whether EU nations should spend more to combat the recession, China emerged as a possible stumbling block to an agreement at the 2 April meeting.

One proposal – backed at yesterday's summit of EU leaders in Brussels – is for tougher global financial regulation including a crackdown on tax havens, hedge funds and private equity firms and an end to pay and bonuses which encourage excessive risk-taking. But Jose Manuel Barroso, president of the European Commission, said: "The main problem will come from other countries, like China for example, that don't have the culture of a common setting of rules."

Mr Brown insisted China was playing a constructive part in the G20 negotiations. "Any suggestion that China does not want a positive outcome for the G20 discussions is wrong," he said. But he admitted he would need further "private discussions" with Premier Wen Jiabao before the meeting. British officials were puzzled by Mr Barroso's intervention, pointing out that China had showed it could abide by international rules by joining the World Trade Organisation.

The Prime Minister said the EU talks had "laid the foundations" for a successful London summit after its 27 leaders closed ranks to avoid sending a negative signal to the financial markets. He said: "We have also agreed on the importance of doing what is necessary to restore jobs and growth by the fiscal actions we take.

"We are agreed on the importance of maintaining vital public investment at this time as we respond to the current crisis and strengthen our economies for the future."

Although the EU rebuffed US calls for a further economic stimulus now, some leaders made clear in private talks they have not ruled out action in future if necessary. They do not want to be seen by voters as being "bounced" into policy changes by demands from Washington, the EU or the G20.

The EU meeting agreed to call on the G20 nations to double to £344bn the emergency funds made available for the International Monetary Fund (IMF) to bail out countries during the crisis. EU leaders pledged to contribute an extra £69bn in loans to the IMF.

Source: The Independent

UK will have the worst deficit in Western world, warns IMF

Britain is now tumbling towards the biggest budget deficit in the Western world, the International Monetary Fund has warned.

Next year the Treasury will have to borrow a record 11pc of gross domestic product as it fights the crisis – equating to more than £150bn and far more than has ever been borrowed before in British history, according to a devastating new assessment by the Fund. The assessment coincided with the publication of official figures showing a further deterioration in the public finances during February as the recession ate further into tax revenues.

The IMF also confirmed, as had been leaked earlier this week, that it now expects the world economy to shrink this year for the first time since the Second World War. It also expects the UK to endure a more severe and longer-lasting contraction than almost any other major economy.

However, it is its analysis on the state of Britain's accounts that will cause the most consternation in Whitehall and beyond. The Fund predicted that the UK's government borrowing balance would reach 9.5pc of GDP this year, before rising to 11pc of GDP next year. This is greater even than the US, which is embarking on the biggest fiscal spending spree in history, despite the fact that Gordon Brown has been unable to carry out any major tax cuts or spending increases of his own, save for the temporary cut in VAT.

The parlous state of Britain's finances is due instead to the billions of pounds of taxes lost because of the collapse of the financial services industry, and to the extra costs associated with higher unemployment. The Treasury's figures showed that in February the budget deficit reached £9bn, taking the total deficit for the first 11 months of the fiscal year to a record £75.2bn – more than triple last year's total.

The IMF projections will further increase the resistance within the Treasury to prospective tax cuts which, it is thought, are being pushed for by Number 10. Moreover, they do not take into account losses associated with the various bail-outs of the financial system.
Shadow Chancellor George Osborne said: "These dreadful figures show how the Labour government has given us the worst public finances in the developed world.
"The figures also show Britain simply cannot afford a further discretionary fiscal stimulus – our automatic stabilisers are already amongst the biggest in the world."

Updating its forecasts for world economic growth, the Fund said the global economy could shrink by as much as 1pc this year – the biggest contraction in more than 60 years. Britain's recession is expected to last until next year, in contrary to Alistair Darling's forecast that the economy will start to grow as soon as this summer.

Source: Edmund Conway, Telegraph

US is Already Bankrupt: Analyst

Technically, the U.S. is already bankrupt because it has a debt that is almost four times the size of its economy, says Puru Saxena, CEO of Puru Saxena Wealth Management. He tells CNBC’s Amanda Drury & Sri Jegarajah that the U.S. is at risk of hyperinflation.

United States Now Printing Money

Mike Shedlock writes that the US is now in the middle of a grand experiment.

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.

Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.

Read Full Article

$1 Trillion "Run on Britain" Disclosed

The Independent ran a piece that seems to have fallen through the cracks: based on the latest statistical release from bank of England, the period between the end of the spring and the end of 2008 saw a $1 trillion exodus of "monies held in the UK on behalf of foreign investors."

Some $597.5bn was lost to the banks in the last quarter of last year alone, after a modest positive inflow in the summer, but a massive $682.5bn haemorrhaged in the second quarter of 2008 – a record. About 15 per cent of the monies held by foreigners in the UK were withdrawn over the period, leaving about $6 trillion. This is by far the largest withdrawal of foreign funds from the UK in recent decades – about 10 times what might flow out during a "normal" quarter.

The Independent concludes correctly "The revelation will fuel fears that the UK's reputation as a safe place to hold funds is being fatally compromised by the acute crisis in the banking system and a general trend to financial protectionism internationally."

While one could argue that there is little downside at this point in British capital markets, a full blown downgrade of its sovereign credit rating which many speculate could be mere days away would only perpetuate the capital outflows and terminally destabilize the eurozone (of which the UK along with Germany are unfortunately the strongest members). The article continues:

The Bank of England said that there had been a large fall in deposits from the United States, Switzerland, offshore centres such as Jersey and the Cayman Islands, and from Russia.

Paranoia that the UK could follow Iceland into effective national insolvency and jibes about "Reykjavik on Thames" will find an unwelcome substantiation in these statistics – which also show that stricken British banks are having to repatriate similar sums back to Britain. This is scant consolation for the authorities, however, as it means the UK and sterling are, like some emerging markets and currencies, suffering from a flight of capital. By contrast some financial centres and currencies – notably the US dollar and the Swiss franc – are enjoying a boost as "safe havens" in a troubled world.

Of course a strong dollar tends to do miracles for the trade balance of the U.S., however as the last time the U.S. exported any actual relevant products (let alone those fabulous Detroit moving contraptions) was some time in the 20th century, this is likely the last thing on economists minds in a world where the U.S., whose CDS trades at an 8% implied probability of default in 5 years, is considered the safest haven.

Source: Tyler Durden

FSA To Cap Mortgages to Three Times Salaries

The FSA will be annoucing new measures this week which will cap the amount an individual can borrow to buy a home to 3 times their salary. They will also ban the 100% mortgage! The average house price in the UK will have to fall significantly further before homes are within the reach of the average man and woman on the street.

Full Story Here

The Federal Reserve is Bankrupt - And BTW So is the Bank of England

How Did It Happen and What are the Ugly Consequences?

The Federal Reserve is bankrupt for all intents and purposes. The same goes for the Bank of England! This article will focus largely on the Fed, because the Fed is the "financial land-mine".

How long can someone who has stepped on a landmine, remain standing – hours, days? Eventually, when he is exhausted and his legs give way, the mine will just explode!

The shadow banking system has not only stepped on the land-mine, it is carrying such a heavy load (trillions of toxic wastes) that sooner or later it will tilt, give way and trigger off the land-mine!

In a recent article, I referred to the remarks of British Prime Minister Gordon Brown and President Obama calling for the shadow banking system to be outlawed.

Even if the call was genuine, it is too late. The land-mine has been triggered and the explosion cannot be averted under any circumstances.

The only issue is the extent of the damage to the global economy and how long it will take for the world to recover from this fiasco – a financial madness that has no precedent. The great depression is "Mary Poppins" in comparison!

The idea of a central bank going bankrupt is not that outlandish. I am by no means the first author who has given this stark warning. What underlies this crisis (which I initially examined in an article in December 2006) is the potential collapse of the global banking system, specifically the Shadow Money-Lenders.

Nouriel Roubini, the New York University professor said:

"The process of socialising the private losses from this crisis has moved many of the liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case, the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued."

Please read the underlined words again. "Sovereign bank" means central bank. When a central bank "cracks" i.e. becomes insolvent, "all hell breaks lose", because as the professor correctly pointed out, "any government guarantees will ring hollow and will be useless".

If a central bank goes belly up, it is as good as the government going bankrupt. Period!

Read Entire Article Here

Source: Matthias Chang - Market Oracle

Gordon Brown and Bernard Madoff are separated by a single detail – Bernie's pleading guilty

What's the difference between Bernard Madoff and Gordon Brown? Answer: one has drained fortunes from gullible victims, plundering their income and savings to create an illusion of prosperity. The other is going to jail.

Mr Madoff has thrown in the towel. His Ponzi scheme, whereby he needed to suck in ever greater quantities of other people's money in order to maintain a semblance of competence, collapsed under the weight of undeliverable expectations. Nobody knows for sure how much has gone missing, but Wall Street scribes are calling it a $65 billion fraud.

Not bad for peddling fresh air. It is, however, a nickel-and-dime swindle when set alongside the 12-year con trick perpetrated by Mr Brown on British taxpayers. That, too, has been a form of Ponzi, but with many more zeroes and little chance of the mastermind ending his days in what Americans call Crowbar Hotel.

Source: PoliticoUK Blog

Read in Full Here

Will Global Quantitative Credit Easing Work?

New fears as credit markets tighten

“The credit markets are seizing up again amid new anxieties about the global financial system.“The fear and uncertainty that sent stocks to 12-year lows is now roiling the market for corporate bonds and loans, which have given back much of the gains they chalked up earlier in the year.

“Short-term credit markets are still performing better than they did last year thanks to government programs to buy commercial paper and guarantee short-term debt. But Libor, the London interbank offered rate, a common benchmark interest rate, has crept up over the past weeks, from 1.1% in mid-January to 1.3% on Friday, reflecting banks' concerns about being paid back for even short-term loans. It is still well below its peak of 4.8% last October.

“This time around, the economy is slipping deeper into a recession, and bond investors worry the government's repeated modifications to its financial-rescue packages are undermining the very foundations of bond investing: the right of creditors to claim their assets first if a borrower defaults. Without this assurance, bonds of even the most stalwart institutions are much riskier to own.

“After what seemed like the beginning of a thawing of debt markets early in the year, sentiment has deteriorated, analysts say. The markets remain open only to the strongest companies. A rally in US Treasury bonds last week reflects another bout of flight-to-quality buying. Junk bonds now yield 19 percentage points more than safe Treasury bonds, up from a 16-point spread in February, according to Merrill Lynch. The spread is still narrower than the 21-percentage-point premium reached last December, but any widening shows investors are becoming more fearful.

“Part of the problem is that investors are still waiting for key details from the government about its plans to bolster US banks and unfreeze the credit markets. After launching a $1 trillion program to kick-start consumer lending last week, the Obama administration is considering creating multiple investment funds to purchase bad loans and other distressed assets. The intent of the funds is to stabilize the prices of good assets and restore investor confidence.

“Without more clarity from the government on its bailout plans, the market could continue to drop, say analysts. That would further harm the economy and the institutions the government hopes to help, compounding its task of shoring up the financial system.”

Source: Wall Street Journal

Credit Card Cancer Spreading Through the Economy

We in the UK share the same disease as we also face massive credit card debt!

Peter Schiff writes:

This week, with his pronouncement that "credit is the lifeblood of a healthy economy," President Obama reiterated what has been one of his most common themes in diagnosing our economic problem. The president has relied on this bedrock belief to propose policies that place the restoration of credit as the highest priority. However, despite his seemingly earnest intentions, the president and his economic advisors have misdiagnosed the ailment. Savings, not credit, is the lifeblood of a healthy economy. When not used properly credit can be like a cancer that sickens an otherwise healthy economy.

What everyone seems to have forgotten at this point is that credit does not come from thin air. Even in a system in which bank reserves are leveraged many times, someone has to put savings in a bank for the bank to turn around and make a loan. As a result, the bedrock is the savings, which allows for the credit to flow. Credit extended without adequate savings inevitably leads an economy into disaster.

The primary mechanism that has injected credit where it does not belong is the massive credit card industry that has developed in the United States over the last generation. The ease with which these cards may be obtained and the degree to which Americans now rely on them for routine purchases has created a culture of credit that simply has no precedent in a healthy economy. Until this culture has been reformed, America's fight to restore economic vitality will be a lost cause.

However, this week a much discussed opinion piece in the Wall Street Journal by top banking analyst Meredith Whitney, indicated that many Americans besides the president are still looking toward credit as the means of economic salvation. In her piece, Ms. Whitney writes,

"...Undeniably, consumers look at their unused credit balances as a "what if" reserve. "What if" my kid needs braces? "What if" my dog gets sick? "What if" I lose one of my jobs? This unused credit portion has grown to be relied on as a source of liquidity and a liquidity management tool for many U.S. consumers. If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively."

In order to keep the economy functioning, Ms. Whitney asks the credit card providers and the federal government to keep credit lines open, so that millions of Americans can keep on spending. However, while such actions would certainly keep our phony economy propped up a while longer, it would further weaken the very foundation upon which a real economy will eventually have to be rebuilt.

Without a doubt, Americans, and all other people for that matter, benefit from having access to "rainy day money." But Americans should be saving for a rainy day, not adopting the attitude that if it rains I'll whip out my credit card. If Americans need to pay for a suddenly ill dog, to straighten their kid's teeth, or to pull them through a period of unemployment, they should save some of their present earnings.

But saving money requires a reduction in spending, and that is something that modern economists, within and without the Administration, cannot abide. A drop in spending will create a sharper contraction in our economy - which is now comprised of 70% consumer spending. But this is no reason to discourage the process. The option to go into debt in the event of an emergency is no substitute for building personal savings for such events. Not only does such a strategy jeopardize the solvency of individuals or families when they are at their most vulnerable, but it deprives society of badly needed savings.

Currently, with so many financially strapped Americans looking to draw on their credit lines, the fallacy of this 'savings substitute' is easily revealed. With lenders' capital depleted, and falling home prices, and rising unemployment putting borrowers at greater risk of default, credit is naturally harder to come by. Had only a small percentage of borrowers needed to access their credit card "rainy day funds" there would have been no credit crisis. But with a deluge drenching so many at once, there was simply not enough credit umbrellas to go around. Had Americans actually been saving money instead, everyone would have his own umbrella and would not now be looking to borrow someone else's.

Most importantly, as savers bank their earnings into "rainy day funds," in addition to earning interest, those savings are available to businesses to make capital investments, produce goods and services, and provide employment. Without access to those savings, such investments cannot be made, and society is worse off as a result.

The Banking Crisis, What Really Happened from 2001 to 2007

All magic tricks have at there core simple devices to perform the illusion; mirrors, sleight of hand and misdirection. Money is a store of wealth or its worthless paper. In an electronic world it's a byte. The wealth was spent and the money gone well before late 2007 and it was spent by bankers on themselves. The rest is misdirection. The idea that Bankers create wealth or can bring productivity to the economic cycle is an illusion.

2001-2007

It is important to remember that before 2001 absolutely no UK bank had any exposure to “wholesale lending markets” a euphemism for the collective of international banks”. These “new” borrowers were – Bradford and Bingley, Northern Rock and Halifax amongst many others. I shall call them “new banks”. The phenomenon of new borrowers entering the market was replicated all over the world i.e. Indy Mac, Countrywide and WAMU.

By 2007 these new banks in the UK had borrowed a staggering 600 billion from the “wholesale lending markets”. The new Banks simply paid interest overnight a “price” for borrowing - the price they paid for that money “interest” was a reflection of there credit risk not there underlying asset portfolio. So with a strong share price therefore came easy borrowing as there was sufficient collateral to pay the overnight rate (share price plus depositors cash) .If a fall in the share price would occur it would indicate increased counter party risk and therefore an increase in the interest “price” charged to borrow the money. A share price drop would lead to an increase in the insurance premium to be paid to cover the fall in share price and an additional premium for default by a lender of the loan. Insurers made big profits and created ever more exotic derivatives linking in foreign exchange movements – as the pound rose so did share prices.

A precarious game indeed begun based around share prices being the leading indicator of creditworthiness (not what they were actually doing with the money). The cost of money was low if the share price of the borrower was high. A New banking paradigm arose the more you borrowed led to more loans led to increased share price led to lower cost of borrowing led to higher pound. And so the great “housing bubble” “debt bubble” was orchestrated and conceived simply around overnight borrowing and the Yen carry trade. Did I mention who was buying those shares in the new banks? Yes you got it the very same “investment banks” who were lending it money. The money was on a merry go round! The investment banks were printing bytes and paying themselves for that with the wealth of savings in those new institutions (the pre demutualization savings) until all the savings were gone to pay interest on fabricated byte money.

As we know by 2007 there simply wasn't enough money coming in (being deposited even with high interest rates) to pay the overnight interest on the money they had borrowed - the borrowers stared to default. A set of interest hikes aimed at slowing the housing market and inflation simply burst the housing bubble everyone was spending money servicing debt and no one was saving. The banks had simply run out of wealth to steal.

All our collective savings in the main retail bank in the UK were essentially therefore pledged as security along with the share stock and being used to pay overnight interest. You will notice therefore that the 600 billion the banks lent and borrowed to each other NEVER EXISTED only the savings and interest did which was spent paying interest and insuring the loans. It is all hidden in one big paper mountain to hide the simple fact that all banks savings had been used to pay themselves bonuses and purchase insurance backed loans which are as we now know in freefall default. Loans made essentially against the share price and credit rating of the bank. There is simply no way any insurer no matter how large can cover those bets hence AIG failure, bailout and second failure. People ask me where did the money go – my reply where did the money come from. It came from the electronic banking system (leverage) not the real economy – it is therefore and was always fabricated obligations – any sensible person in Banking knew that insurance backed lending was at its heart a con ceit.

You are about to get very very angry

The Financial Times economics editor Martin Wolf warned in Friday's column of the dangers of our present course. He said:

"If large institutions are too big and interconnected to fail... then talk of maintaining them as “commercial” operations... is a sick joke. Such banks are not commercial operations; they are expensive wards of the state and must be treated as such. “

The government received in exchange for 600 billion of real assets (our future tax receivables) worthless paper created by investment banks through creative accounting and structured products. Those structured products were sold by and to the Banks but were essentially derived loans using our savings and leveraged through a carousel of interbank trading based on nothing more than credit ratings created by the S&P –which were of course supposedly insured to make those loans look real and the money actually exist. The UK Government has just borrowed 600 billion from the Bank of England which it has handed to the Banks which has allowed the banks to cover our deposits “savings” and stopped a run on the banks.

The banks have simply replaced the money they took from us and leveraged in “the wholesale money markets”– with our “future” tax money. The Bankers have then added insult to injury and charge us to borrow our own money via credit cards/loans/mortgages between 5% - 20%. The Bank receives 600 billion of “Real Goods” from us the people to repay the loans. If you add interest its another 600 billion (over 30 years - a working life ). The bank therefore received 1.2 Trillion and that's before quantative easing is put into the system.

Mr Wolf I have an answer for you. You simply have it all wrong it is the state that serves the bank not the other way around – the state can fail but the bank cant. The bankers have now what they always wanted an apparatus to tax the citizenary for the benefit of the banks.
Of that 600 billion borrowed from the “Investment Banks” a staggering 80% went to overseas borrowers only 20% went into the UK housing market. As the carousel turned ever so slowly between 2001-7 the international banks owners took, salary, commissions, bonuses, dividends in the billions and we built them there jets houses and yachts. This little ruse was so successful it was repeated all over the western banking system. Make a loan no matter how risky and insure and heh presto a profit and insurance backed lending was borne. Where did the money come from – “the wholesale money market”. There is no such thing but what there was is the ability to print bytes into the system by creating structured products.

And if you are American reading this and don't believe you are in the largest fraud in history. AIG just gave 50 billion USD from the USA tax payer to crony banks such as Deutch Bank , Goldman Sachs and HSBC. Enough money to give universal health care to every American. Who owns AIG the state does. Who owns the state the banks do. Look how high congress jumped….

By Submission

Market Oracle