Krugman Trashes Geithner's Bank Plan

Over the weekend The Times and other newspapers reported leaked details about the Obama administration’s bank rescue plan, which is to be officially released this week. If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.

This is more than disappointing. In fact, it fills me with a sense of despair.
After all, we’ve just been through the firestorm over the A.I.G. bonuses, during which administration officials claimed that they knew nothing, couldn’t do anything, and anyway it was someone else’s fault. Meanwhile, the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.

And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.
It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.

Let’s talk for a moment about the economics of the situation.

Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets.

As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.

That’s what Sweden did in the early 1990s. It’s also what we ourselves did after the savings and loan debacle of the Reagan years. And there’s no reason we can’t do the same thing now.

But the Obama administration, like the Bush administration, apparently wants an easier way out. The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.

And so the plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.

But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

The likely cost to taxpayers aside, there’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive.

But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

You might say, why not try the plan and see what happens? One answer is that time is wasting: every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost.
Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place.

All is not lost: the public wants Mr. Obama to succeed, which means that he can still rescue his bank rescue plan. But time is running out.

Source: New York Times

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.

The Obama Deception

The Obama Deception is the latest documentary film from talk-show host anti-Globalist activist Alex Jones. Watch in full high quality video.

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

The Federal Reserve: The Greatest Scam in History

We first posted this article on 13th August 2007 when it appeared to us that the US Dollar along with the economy was heading into such dangerous waters that gold would be the beneficiary. At the time gold was trading at around $670/oz and it closed yesterday at $960 for a gain of $290 or 43.2%. Yesterday was the first time that we have seen the ‘ C ‘ word used as the Federal Reserve announced that it would be buying back $300 billion in longer-term Treasuries in order to assist the economic recovery. This move to buy these Treasuries is regarded by many as a last resort or a sign of panic as the turmoil in the financial markets reaches a crisis point.

Gold was languishing at the $890/oz level just prior to the announcement and then within the hour it rocketed to the $950/oz level as the news of the Feds action spread. Whether it be an article on Market Watch or a mention on the BBC World Service, news travels fast these days to every corner of the planet and investors react accordingly with startling results. A new government and a New Fed , not really, just more of the same but in increasingly larger doses. Todays action will turn out to be a defining moment for the US Dollar and recorded by historians as the beginning of its demise. Unfortunately the worst is yet to come so steel yourself for a force ten storm.

On 4th October 2008 we updated our original essay with the following excerpts;
If we fast forward to time now and read any newspaper the headlines are dominated with the fire fighting actions being implemented by the Federal Reserve with bankers and politicians in tow. From these bailouts we can only conclude that the dilution of paper money will continue with the pace of dilution accelerating, resulting in massive inflation and propelling the precious metals to higher ground. If you have the time, please read this article and then take a look at what's happening around you and then find the time to question what you are doing and why you are doing it. Being too busy to organise your own affairs is a poor excuse. Just switch the television off for a couple of nights and clear your head, the way forward for you personally will become apparent.

The Federal Reserve: The Greatest Scam In History?

This is the original essay posted on 13th August 2007

The Federal Reserve was created in 1913-1914 in order to bring stability to the economy and yet almost every major crash, including the great depression, can be attributed to the Federal Reserve. We are going to take a look at the history of the Fed and what prominent historical figures have said about the organisation.

Firstly, from 1837-1862 there was a system of national banks in the USA but then in 1913-1914 a consortium of 12 privately held banks got together and formed the Federal Reserve Bank, an entity that is not part of the US government. These banks then purchased notes from the US Mint for printing costs and lent them out through member banks charging interest.

The Federal Reserve came into being after its supporters paid for the Presidential campaign of US President Woodrow Wilson. Wilson signed the bill that transferred the US currency to twelve regional private banks Wilson regretted his decision later saying:
“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.”

In 1933 President Roosevelt confiscated citizens gold and handed it to the Federal Reserve. At the very moment when Americans have needed to protect their wealth the most, the best store of wealth ever created, gold, was confiscated from American citizens and given to a un-elected conglomerate of private banks.

When the bill for the Federal Reserve was being considered, some brave politicians spoke out against its creation calling it “the strangest, most dangerous advantage ever placed in the hands of a special privilege class by any Government that ever existed” and Congressman Victor Murdock said, “I do not blind myself to the fact that this measure will not be effectual as a remedy for a great national evil – the concentrated control of credit.”

It even appears that one of the most important and most respected figures in American history disagrees with the Federal Reserve saying, “If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.”

Jefferson also said, “I sincerely believe the banking institutions having the issuing power of money are more dangerous to liberty than standing armies” “Paper is poverty… it is only the ghost of money, and not money itself.”

Source: Bob Kirtley

America's Next Catastrophe is Brewing In Mexico

As if there were not enough things to worry about for the US, what with a dying economy, a spend happy neo-Marxist government in power, a stalemated war in Iraq and a loosing war in Afghanistan, here comes one more issue and the one that may create the final perfect storm: Mexico. As I predicted , dear readers, Mexico is in the process of total collapse. The drug war violence has spun out of control so quickly that it is now a civil war and unlike the small time civil war with Mexico's southern Indians the Zapatistas, this one has the potential to topple the state government in very short order.

The American Department of Defense has come out with an estimate that the two largest mafia cartels field, between them, over 100,000 foot soldiers. Now, these are not just gang bangers and lowlifes, alright they are lowlifes, but many are former Mexican army and some even US trained special forces. To make maters worse, they are armed with heavy weapons, everything short of tanks and fighter planes. Regular large scale gun battles, involving grenades and RPGs are a common, almost daily occurrence in Mexico.

Last year, death tolls doubled to over 7 thousand killed in these battles and various murders and retaliations. This year is on par to double again, as the cartels (mafias), military and various other groups, battle it out. Add to this the recent addition of vigilantes attacking in the night, often tied to quieter, smaller cartels and you are living in absolute chaos. The death rate, last year, was higher than that of Afghanistan and Iraq put together. Further, the favorite forms of murder, are extremely brutal. Beheadings are the norm. This must hail back to the old Aztec customs.

Another favorite is to hang a tire around the victim's neck, douse it in gasoline and set it on fire. Amputations, mass murders, rapes, massacres of whole families and dissolving the living and screaming victims in acid are all the new norm of Mexico. So could this get worse? Well, it is. The two main cartels, who between them have over 100,000 soldiers, are forming an alliance.

Is the US government worried about this?

Yes, but not enough. Besides this report, only the voices of governor Perry of Texas and the sheriff of Phoenix, Arizona, have come out loud enough to catch regional attention. The nation as a whole, remains blind and dumb to reality. Pictures of ostriches now come to mind.

Perry, in his frustration with his masters in DC, has called on 1,000 state guard (a form of militia) to take to the border, to protect a border that his police and the federal border patrol are not capable of dealing with. Drugs and guns flow both ways.

Phoenix , Arizona has the new distinct "honor" of being the 2nd kidnapping capital of the world, second only to Mexico and the victim of the same gangs. As a matter of fact, the US FBI (Federal Bureau of Investigations) in 2007, admitted that gangs in America numbered over 100,000 strong. Thus one can easily believe that there are at least, in reality, 150 to 200,000 gang members and almost half have direct ties to Mexico. Can the US army deal with this? Hardly, not in its present stretched out form, all over the world.

But there is worse to come.

By summer of this year, Mexico will enter a full blown war with large scale gun battles in most of the cities. Most civil wars push out refugees. If even 10% of the 110 million living in Mexico, start running north, that will collapse the governments of the American border states, already bankrupt from the Bank Panic of 2008 and the Economic Collapse of 2009. Most civil wars actually push out closer to 30-40% of a population, thus anywhere between 30-50 million people could head north.

But it gets even worse. A large chunk of the former US industry is located in northern Mexico, already in the war zone. US companies suffering in the present economic climate, will further sink or collapse with the loss of these facilities and their closing will force even more economic and war refugees north. A large percentage of the US fruits and vegetables also come from Mexico, as does US oil . It is not difficult to imagine that small groups of Mexican bandits could easily take to the water in speed boats and begin raid the various oil platforms, freighters and cruise ships sailing in the Gulf of Mexico and the southern Caribbean Seas. Somalia has already proven how effective this is.

All of this would require a large amount resources that the US no longer has to spare and will push the Americans into a grave political crisis.

Stay tooned, dear readers, this is starting to get ugly.

Source: Stanislav Mishin & Pravda

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

Obama Deficits To Be Much Higher Than Expected

The White House has estimated that the Obama budget will produce deficits of about $6.9 trillion over 10 years. But a powerful congressional office that is due to file its budgetary estimate on Friday will report a uch larger deficit.

The Congressional Budget Office has warned the White House in advance of Friday's estimate that the deficit projections will outpace the White House estimate, perhaps by as much as 20%, Politico reports. Democrats expect that the CBO projections will add around $1.5 trillion more to the Obama deficit.

One of the things pushing up the deficit is a lowered baseline for economic performance over the next few years. In addition, some spending programs may be viewed as more costly than earlier anticipated.

"In 2014, at which point the White House projects a deficit of $570 billion, it’s now expected that CBO will show a number in excess of $700 billion," Politico reports. "Five years later, in 2019, Obama’s budget concedes that the deficit will have widened to $712 billion; Democrats expect CBO to put the number over $1 trillion."

Source: John Carney @ Business Insider

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.

Strict Islamic Courts Open in Pakistan's Swat valley

Islamic courts have started functioning in the Taliban stronghold of Swat in northwestern Pakistan as per a peace deal signed by the
government with militants in the restive region a month ago.

The courts, which follow a strict religious law, came into existence after Tehreek-e-Nifaz-e-Shariat Muhammadi (TNSM) chief Sufi Muhammad, with whom the NWFP government had signed the ceasefire agreement, insisted the opening of sharia courts, officials said.

"Seven Islamic courts had begun functioning in the valley on Tuesday," Malakand Commissioner Syed Muhammad Javed said.

However, the Qazis (judges) who did not have a proper degree in Islamic law would not be allowed to work in the religious courts and they will be transferred out of the district, he said.

A senior lawyer, on condition of anonymity, said judges without proper Islamic training had stopped going to courts with the imposition of sharia law.

Meanwhile, the qazi courts' legal standing remained somewhat dubious as President Asif Ali Zardari has not yet signed the Nizam-e-Adl (Shari) Regulation, 2009.

"We hope the president will sign the 2009 regulations within a few days. However, we are continuing with the 1999 regulations as they are still in force," officials of the Law Department told Daily Times on condition of anonymity.

The NWFP government agreed to impose the Nizam-e-Adl (Sharia) Regulation, 2009 in Swat after TNSM chief Sufi Muhammad promised peace in the region if the district were placed under Islamic law.

Source: Times of India

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

UK Economy to Contract in 2010

BRITAIN is the only major country whose economy will SHRINK next year, a damning forecast said last night.

The International Monetary Fund predicts a 0.2 reduction. But it expects the US economy to grow by the same amount, the Eurozone by 0.1 per cent, Asia by 5.8 per cent and Latin America by 2.3 per cent.

The forecast is a blow to PM Gordon Brown. But Ministers will say it shows the UK recovering from this year’s estimated 3.8 per cent shrinkage.

Shadow chancellor George Osborne said: “This forecast is further evidence that Gordon Brown’s economic model is fundamentally broken and his policies on the recession aren’t working.”

Source: GEORGE PASCOE-WATSON

$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!

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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

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Max Keiser on 5 Live with Rachel Burden ; G20 meeting

Max Keiser discusses the upcoming G20 and the implications for us in the UK should they agreee on creating a global "Bad Bank".

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

United States Economic Collapse Facing Its Weimar Moment

In early 1919, Germany put in place a new government to begin rebuilding the country after its crushing defeat in World War I. But the right-wing forces that had led the country into the War and lost the War conspired even before it was over to destroy the new government, the "Weimar Republic." They succeeded.

The U.S. faces a similar "Weimar Moment." The devastating collapse of the economy after eight years of Republican rule has left the leadership, policies, and ideology of the right utterly discredited. But, as was the case with Germany in 1919, Republicans do not intend to allow the new government to succeed. They will do everything they can to undermine it. If they are successful, the U.S. may yet go the way of Weimar Germany.

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