- So says economist Michael Darda, chief economist at MKM Partners LP in Greenwich, who is quoted on Bloomberg this morning. According to Darda, “Banks won’t be throwing a lot of loans out there when they fear – rationally – those loans may not be paid back.”

- We’re reminded of the plight of the the unfortunate French ducks who have their livers forcefully fattened to produce foie gras (literally “fatty liver”). The Fed is determined to force feed debt down the throats of already indebted Americans so that said already indebted Americans can go out and spend said debt. The theory being that this “stimulates” the economy. Of course, in the case of the poor ducks, they end up dead.

- Things are so bad that even the Queen of England is pissed. “Why did no one see it coming?” asked Queen Elizabeth during a visit to the London School of Economics this month.

- The clear lack of foresight leading up to this crisis has also left a lot of egg on the face of policy makers, according to an article in the Financial Times. Prime among them is Fed head Ben Bernanke.

In his Senate nomination hearing of 2005, Ben Bernanke, the Federal Reserve chairman, said the US financial system had already benefited from a series of crises that had reinforced its ability to cope with difficult times. “The depths, the liquidity, the flexibility of the financial markets has increased greatly,” he said.

Depths, indeed.

Bernanke’s British counterpart, Bank of England governor Mervyn King, didn’t fare much better. In May, he insisted, “It’s quite possible that at some point we may get an odd quarter or two of negative growth. But recession is not the central projection at all.”

The problem, according to Stephen King, chief economist of HSBC, is that: “Almost all economic models assume that the financial system ‘works’.” Apparently, “economists in general did not foresee how the looser monetary policy of the early part of the decade could lead to an unprecedented credit expansion.” Where were they? On the moon?

- One of the best reads on this crisis is the FDIC’s quarterly list of “troubled banks,” banks at risk of going under thanks to toxic debt. One in four institutions lost money last quarter. Meanwhile, the number of banks on the FDIC’s failure watch list increased from 117 to 171 and the assets of “problem” institutions rose from $78.3bn to $115.6bn. As long as the number of banks on the deathwatch list keeps increasing, it’s difficult to see and end to the current mess.

- Still think the government is going to fix it all like some sort of happy-ending Humpty-Dumpty? How so? What exactly are the federal rescuers doing to solve the problem? This from the Financial Times blog, FT Alphaville:

The biggest problem now though is that “bad loans” just sit where they are – with the banks – quietly impairing balance sheets but not posing an outright threat because of various government support actions. This would be a Japan-like scenario. And it’s one that has quite a lot of currency, not just because of similarities in monetary and fiscal policy. Take the saving of Citi on Monday for example. The $300bn odd of problem assets are still there on Citi’s balance sheet… Citi is still exposed to take significant first losses on them. The government’s actions seem more a sop to shareholders – more specifically the share price – than anything else.

- Today, the last words go to the financial titans at Monty Python’s Flying Circus. It’s about as good an appraisal of the current economic blowup as we’ve come across.

This financial system is no more! It has ceased to be! ‘It’s expired and gone to meet its maker! ‘It’s a stiff! Bereft of life, it rests in peace! If you hadn’t nailed ‘it to the tax payer’s perch it’d be pushing up the daisies! ‘Its metabolic processes are now ‘istory! ‘It’s off the twig! It’s kicked the bucket, it’s shuffled off its mortal coil, run down the curtain and joined the bleedin’ choir indivisible!! THIS IS AN EX-FINANCIAL SYSTEM!!

If America were to put in place a stimulus plan that represented the same proportionate outlay that Beijing’s will for China, we’d be talking about an infusion of nearly $1.83 trillion, or 10.89 times more than the positively puny $168 billion stimulus that went into the hands of U.S. taxpayers last year. And it would probably dwarf anything that President-elect Barack Obama is contemplating right now.

Think of the pile-driver-like effect a stimulus of that size would have on U.S. consumer spending – which, after all, accounts for 70% of what the American economy does. Billions of dollars in loans could be paid off and consumer debt retired. In that sense, such a massive capital infusion could do what U.S. Federal Reserve Chairman Ben S. Bernanke and his Bailout Boys can’t achieve. The Beijing-like infusion would provide a needed recapitalization of the financial markets – without rewarding those who got us into this mess in the first place. Most important of all, it would help the folks who are caught in the middle – us consumers.
What makes this particularly ironic is that the nature and composition of China’s stimulus program suggests that Beijing’s communist government understands consumer psychology and capitalist financial markets better than Western governments do right now – particularly the psychology.

For example, because of the credit crisis and relentless coverage of the flagging economy, consumers are scared stiff at the moment. And understandably so. They see factory orders declining and jobless claims spiking to their highest levels in 25 years. They read the news that retail stalwart Wal-Mart Stores Inc. (NYSE:WMT) – is lowering expectations. So consumers opt to hoard money out of fear, rather than spend it, and that’s what really kicks a recession into gear.

So what will China’s stimulus package do that ours won’t?

For starters, Beijing’s stimulus is designed to encourage spending, rather than reward malfeasance, as our bailout plan is doing. Further, there’s no buying up of bad debt. Instead, there’s an implied recapitalization that will take place through growth. But most importantly, Beijing is sending an ultra-clear message to its people – we will be here for you and we will help you directly – and that’s stoked the confidence in every Chinese contact I’ve talked to since the plan was announced.

And that uptick in confidence is warranted, given all that China is planning, including:

• Improved environmental-protection projects, including new sewage and waste treatment projects.
• More low-rent and affordable-housing projects.
• Distributed healthcare projects, including hospitals, clinics and medical equipment, particularly in the historically ignored rural regions.
• New highways that will more than double China’s navigable area and that will account for nearly 40 million new jobs in the next 24 months.
• New railways and railway-related projects, which will create 6 million jobs during 2009 alone and more after that.

Beijing’s stimulus is geared toward creating 3.0% to 5.0% gross domestic product (GDP) growth to augment the 3.0% domestic-consumption activity, for a total 2009 target growth rate of at least 7.0%.

While China’s stimulus is designed to create valuable growth, the U.S. package is simply concerned with plugging leaks. China’s package is forward-looking, while ours is not.

Clearly though, the effects won’t be immediate and Beijing knows that. And that’s why, based on historical trends, we expect it to be about six months before the money really begins to work its way through the system. Look for an uptick in Chinese demand in late 2009, and acceleration in 2010.

Look, also, for the worldwide ripple effects, particularly for commodities producers and exporters that do business with China, and the infrastructure providers. This package will stop many of these sector skids, and we can look to see them rebound in earnest once demand kicks in and the Renminbi (yuan) start to flow.

Let’s hope that the rest of the world gets the message. Washington’s current bailout plan isn’t large enough to restart the global markets and it sure as heck isn’t large enough to recharge investor psychology.

But China’s plan is. And that’s what Washington should be looking at.

Source: The One Global Market Where There are Gains Behind the Gloom

- Of course a depression is what they used to call a recession. Then came the Great Depression. After that, economists and politicians stopped using the word for fear of jinxing the economy. Now, a depression means a severe and protracted recession.

- Bush may be right about the chances of the US slumping into a depression. Part of the problem is that it’s not only the US that’s suffering a bout of economic woes. Japan’s economy, the world’s second largest, has just officially entered its first recession since 2001. Third-quarter growth fell 0.1% after a second-quarter drop of 0.9%. The euro area is also in recession. A 0.2% drop in growth there in the third-quarter followed a similar second-quarter fall.

- Lucky the leaders of the G20 nations are on the case. The pols from the  world’s 20 largest economies have promised to work together to achieve “needed reforms” in the world’s financial systems. US stock futures reacted poorly to the G20 pledge. Economists at UBS probably summed it up best, calling the G20 statement “a bland recitation of past policy initiatives, coupled with comments that were blindingly obvious.”

- We wish the G20 good luck in their endeavors. Unfortunately, however, we don’t hold much hope that their efforts will avert further pain. The G20, just like the Bush administration, is focused on reinflation measures, without addressing the underlying cancer eating away at the global economy: 40 years of monetary policy indulgence. As Doug Noland writes at PrudentBear.com,

There is little prospect that the direction of global policymaking will engender the return of stability anytime soon.  As [Judy] Shelton adeptly notes [in an op-ed piece in the WSJ], “In the absence of a rational monetary system, investment responds to the perverse incentives of paper profits.” …

The global abandonment of any semblance of monetary or fiscal discipline is a hallmark of this extraordinary period of bursting Bubbles.  Stable “money” may be the key – but it’s also nowhere to be seen.

- Meanwhile, bankruptcies continue to rise back in good ol’ US of A. The NYT reports that the number of personal bankruptcy filings “jumped nearly 8% in October from September, after marching steadily upward for the last two years … Filings totaled 108,595, surpassing 100,000 for the first time since a law that made it more difficult — and often twice as expensive — to file for bankruptcy took effect in 2005.” This means an average of 4,936 Americans filed for bankruptcy each business day last month.”

- And it’s not just America’s citizens who are facing bankruptcy; whole states are facing going under. The NYT also has a report on the massive deficits eating away at some of the country’s biggest state governments.

Two short months ago lawmakers in California struggled to close a $15 billion hole in the state budget. It was among the biggest deficits in state history. Now the state faces an additional $11 billion shortfall and may be unable to pay its bills this spring.

The astonishing decline in revenues is without modern precedent here, but California is hardly alone. A majority of states — many with budgets already full of deep cuts and dependent on raiding rainy-day funds or tax increases — are scrambling to find ways to get through the rest of the year without hacking apart vital services or raising taxes …

In Michigan, to reduce overtime costs, fewer streets will be salted this winter. In Ohio, where the unemployment rate is above 7 percent, the state may need a federal loan for the first time in 26 years to cover unemployment costs. In Nevada, which is almost totally dependent on sales taxes and gambling revenues, a health administrator said the state may be unable to pay claims in a few months.

- Such problems are just the tip of the iceberg, according to perma-bear NYU economics professor NourielRoubini . There are at least 20 reasons why Bush may actually be talking sense when he says the US faces a depression greater than the Great Depression. Here’s a quick rundown, courtesy of NakedCapitalism.com:

· The US consumer is shopped-out having spent for the last few years well above its means.

· The US consumer is saving-less as the already low household savings rate at the beginning of this decade went to zero/negative by 2006 and has now to raise to more sustainable levels.

· The US consumer is debt burdened with the debt to disposable income having increased from 70% in the early 1990s to 100% in 2000 and to 140% in 2008.

· Not only debt ratios are high and rising but debt servicing ratios are also high and rising having gone from 11% in 2000 to almost 15% now as the interest rate on mortgages and consumer debt is resetting at higher levels.

· The value of housing wealth is now sharply falling by over $6 trillion as home price depreciation will soon be 30% and reach a cumulative fall of over 40% by 2010. Recent estimates of this wealth effect suggest that the effect may be closer to 12-14% rather than the historical 5-7%….

· Mortgage equity withdrawal (MEW) is collapsing from $700 billion annualized in 2005 to less than $20 billion in Q2 of this year. Thus, with falling housing wealth and collapsing MEH US households cannot use their homes anymore as ATM machines borrowing against them.

· The value of the equity wealth of US households has fallen by almost 50%, another ugly wealth effect on consumption.

· The credit crunch is becoming more severe as the recent Q2 flow of funds data and the Fed Loan Officers’ Survey suggests: it is spreading from sub-prime to near prime to prime mortgages and home equity loans; and from mortgages to credit cards, auto loans and student loans. Both the price and the quantity of credit are sharply tightening.

· Consumer confidence is down to levels not seen since the 1973-75 and 1980-82 recessions.

· Real wage growth and real income growth has been stagnant in the last few years as income and wealth inequality has been rising. And now with GDP and real incomes falling real consumption will fall sharply.

· The Fed is reaching the zero-bound on interest rates as the economy gets close to deflation given the slack in goods, labor and commodity markets. Deflation means that consumers will postpone consumption as future prices are lower than current prices, as real rates are positive and rising and as debt deflation increases the real value of the households nominal debts

· Employment has been falling for 10 months in a row and the rate of job losses is now accelerating… In this cycle job losses have been so far “only” slightly over 1 million while labor market conditions are severely worsening based on all forward looking indicators…Massive job losses and concerns about job losses will further dampen current and expected income and further contract consumption.

· Tax rebates of over $100 billion failed to stimulate real consumption earlier in 2008. Only 25% of the tax rebate was spent as US consumers are worried about jobs and need to use funds to pay their credit card and mortgage….another general tax rebate would be as ineffective as the first one in boosting consumption.

· The 1990-91 and 2001 recessions were not global; this time around the IMF is forecasting a global recession for 2009.

· The recent rise in inflation – that is only now slowing down – reduced real incomes even further for lower income households who spend more than the average households on gas, transportation, energy and food. The recent sharp fall in gasoline and energy prices will increase real incomes by a modest amount (about $150 billion) but the losses of real disposable income and thus falling consumption from other sources (wealth, income, debt servicing ratios) are much larger and more significant.

· The trade weighted fall in the value of the U.S. dollar since 2002 has worsened the terms of trade of the US and reduced further real disposable income and the purchasing power of US consumers over foreign goods.

· With consumption being over 71% of GDP a sharp and persistent contraction of consumption all the way through at least Q4 of 2009 implies a more severe recession than otherwise. Consumption did not fall even a single quarter in the 2001 recession and one has to go back to 1990-91 to see a single quarter of negative consumption growth…

· Monetary easing will not stimulate durable consumption and demand for residential housing as demand for such capital goods becomes interest rate insensitive when there is a glut of capital goods; monetary policy becomes like pushing on a string. In the previous recession the Fed cut the Fed Funds rate from 6.5% to 1% and long rates fell by 200bps. In spite of that capex spending of the corporate sector fell by 4% of GDP between 2000 and 2004 as there was a glut of tech capital goods and it took years to work out such a glut. Today there is a glut of housing, consumer durables and autos/motor vehicles; so it will take years to work out this glut…

· While policy rates are sharply falling the nominal and real rates faced by households are rising rather than falling…. together with less availability of credit are severely dampening the ability of households to borrow and spend.

· To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollar. If all of this adjustment were to occur in 12 months GDP would contract directly by 7% and indirectly (including the further collapse of residential and corporate capex spending in a severe recession) by 10%, an exemplification of the Keynesian “paradox of thrift”. If such an adjustment were to occur over 24 months rather than 12 months you would still have negative GDP growth of 5% for two years in a row with a cumulative fall in GDP from its peak of 10% (note that in the worst US recession since WWII such cumulative fall in GDP was only 3.7% in 1957-58). One can thus only hope that this adjustment of consumption and savings rates occurs only slowly over time – four years rather than two. Even in that scenario the cumulative fall of GDP could be of the order of 4-5%, i.e. the worst US recession since WWII. Note that the cumulative fall in GDP in the 2001 recession was only 0.4% and in the 1990-9 recession was only 1.3%. So, the current recession may end up being three times as long and at least three times as deep (in terms of output contraction) than the last two and worse than any other post WWII recession.

- But W. didn’t stop there. Apart from wanting governments to be “smarter” (who doesn’t?), he called for called for leaders to recognize that “government intervention is not a cure-all” for economic problems. So what was Fannie and Freddie all about? Or Hank Paulson’s Troubled Assets Relief Program. Or the bailout of AIG? If government is not a cure-all, then why has Bush orchestrated the biggest government intervention in the free markets in history? Is he really that unaware of what he’s saying? Isn’t he the one who thinks the problem started because Wall Street “got drunk.” Surely, he meant this was a bad thing that needed to be prevented in the future. Should the practice of issuing “liar loans” and “ninja loans” have been allowed to thrive unregulated? Should this be allowed to continue in the future?

- The irony of Bush’s stance didn’t escape his audience. Grant Aldonas, a former senior trade official in the Bush administration now with the Center for Strategic and International Studies, said, “The disabling of capitalism has already begun and he’s the one who started it,” Aldonas said. “It rings hollow for an awful lot of people, not only in the marketplace but for world leaders abroad. . . . They are the ones who are going to have the leverage at the table.”

- As Bush shares his economic wisdom with the world, the economy he presided over for the last eight years is in the midst of the deepest and most dangerous funk since the Great Depression. “The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself,” former Goldman Sachs chairman John Whitehead, told Reuters Global Finance Summit this week. Whitehead is no perma-bull. He’s a former Wall Street player and Reagan administration insider. But he is deeply pessimistic about the future of the US economy. This from Reuters:

Whitehead warned the country’s financial strength is at risk due to the sweeping demand for tax relief and a long list of major government spending plans.

“I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America,” said Whitehead, who served as chairman of the Lower Manhattan Development Corp after the World Trade Center was destroyed during the September 11, 2001 attacks.

Whitehead, who helped make Goldman a top-tier Wall Street firm and led its international expansion, left in 1984 to become a deputy secretary of state under Ronald Reagan.

He warned that the country’s record deficit is poised to balloon as the public calls on government for more support.

“Before I go to sleep at night, I wonder if tomorrow is the day Moody’s and S&P will announce a downgrade of U.S. government bonds,” he said. “Eventually U.S. government bonds would no longer be the triple-A credit that they’ve always been.”

There are at least ten “trillion dollar problems,” facing the United States, he said, including social security, expanding health insurance, rebuilding infrastructure and increased spending on green energy. At the same time, the public does not want to pay for it.

“The public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs — all very costly and all done by the government,” he said.

Large deficits can weaken the country’s credit and increase its borrowing costs, which already constitute a significant part of funding to cover expenses. Whitehead said it could take “several years” for the current problems to be resolved.

Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes.

“I just want to get people thinking about this, and to realize this is a road to disaster,” said Whitehead. “I’ve always been a positive person and optimistic, but I don’t see a solution here.”

- This is perhaps a worst-case scenario. But it is on well worth considering. The problem right now is that even the best-case scenario is dire. The Paris-based Organization for Economic Cooperation and Development (OECD) says global economic output will shrink 1.4% this quarter for the 30 nations that make up its membership – and keep contracting until the middle of next year. According to the Los Angeles Times:

That would mean the developed world has entered a slump expected to last at least three quarters; two consecutive quarters is a common definition of recession. For all of 2009, these economies are expected to contract 0.3%.

Additionally, the U.S. economy is forecast to fall 2.8% in the fourth quarter, after a 0.3% drop in the third quarter, and then shrink 0.9% in 2009. Japan’s economy is expected to shrink by 0.1% next year and the Euro area by 0.5%.

That would be the first time since 1974-75, when they were suffering from the Arab oil embargo and a severe bear market for stocks, that the U.S., Europe and Japan had fallen into recession around the same time.

- According to NYU economics professor an economist du jour Nouriel Roubini, the US economic slump will be more severe:

The U.S. will experience its most severe recession since World War II, much worse and longer and deeper than even the 1974-1975 and 1980-1982 recessions. The recession will continue until at least the end of 2009 for a cumulative gross domestic product drop of over 4%; the unemployment rate will likely reach 9%. The U.S. consumer is shopped-out, saving less and debt-burdened: This will be the worst consumer recession in decades.

Roubini also contends that the probability of a worse, multi-year L-shaped recession (as in Japan in the 1990s) is rising. He also warns that “even if the economy were to exit a recession by the end of 2009, the recovery could be so weak because of the impairment of the financial system and the credit mechanism that it may feel like a recession even if the economy is technically out of the recession.”

- The rate of job losses in America is certainly playing ball with the deep recession theories. Today’s job loss shocker: Sun Microsystems announcement that it will slash 5,000 to 6,000 jobs, some  15% to 18% of its workforce

- It’s also the kind of recession where big companies take big hits to their balance sheets. Bloomberg reports that Freddie Mac’s [NYSE:FRE] third-quarter net loss “widened to $25.3 billion, or $19.44 a share, after writing down tax assets and providing for bad mortgages and securities.”

- Here’s the breakdown, from CreditSights, a research firm in New York and London, as reported in Forbes magazine.

The Fed

• $1 trillion in overnight or short-term loans since March to primary dealers through its emergency discount window*
• $1.8 trillion in loans to primary dealers through the Fed’s term auction facility since in January*
• $29 billion in Bear Stearns debt
• $60 billion of credit available to American International Group
• $22.5 billion to set up a special purpose vehicle to manage some of AIG’s residential mortgage-backed securities
• $30 billion of a second fund to hold $70 billion of multi-sector collaterized debt obligations on which AIG wrote credit default swaps

The Treasury Department

• $700 billion raised in the Emergency Economic Stabilization Act
• $50 billion to guarantee money market funds against losses
• $40 billion direct capital injection into AIG
• $200 billion to back the government conservatorship of Fannie Mae  and Freddie Mac

The FDIC

• $1.5 trillion to guarantee senior unsecured bank debt

* A portion of the funds lent in these two programs has already been repaid; the totals represent what has been made available.

According to the Forbes article, “Not included in the total are the Fed’s long-existing discount window lending to commercial banks, the mortgage modification plan announced by regulators on Tuesday, support for the Federal Home Loan Banks and a myriad of other programs.”

As Milton Friedman put it, “Nothing is so permanent as a temporary government program.”

- Despite the amount of money involved in the Troubled Assets Relief Program (TARP) set up under the rushed-through, pork-laden Emergency Economic Stabilization Act, The Washington Post reports that “no formal action has been taken to fill the independent oversight posts established by Congress when it approved the bailout to prevent corruption and government waste. Nor has the first monitoring report required by lawmakers been completed, though the initial deadline has passed.” Why is this not a surprise?

- There are plenty more bailouts in the pipeline, of course. We wouldn’t be surprised if the US government is less than half way through throwing taxpayers’ money at corporate America. On of the big factors in pushing up the bailout toll will be a Democratic controlled government come January 20, 2009. Democrats are already pushing the Bush administration to bailout out the auto industry. According to the the WSJ, “Democrats in Congress pushed ahead with proposals to bail out Detroit’s faltering auto makers, but the Bush administration signaled its reluctance to go along without significant restructuring to cure the companies’ competitive ills.

- Not the they brilliant bailout plan from Hank Paulson and the Bushies has done any good so far. According to The New York Times, “The Treasury Department on Wednesday officially abandoned the original strategy behind its $700 billion effort to rescue the financial system, as administration officials acknowledged that banks and financial institutions were as unwilling as ever to lend to consumers.”

- The NYT says Paulson is now considering shifting the focus of the bailout from financial institution and lenders to consumers:

But with a little more than two months left before President Bush leaves office, Treasury Secretary Henry M. Paulson Jr. is hoping to put in place a major new lending program that would be run by the Federal Reserve and aimed at unlocking the frozen consumer credit market.

The program, still in the planning stages, would for the first time use bailout funds specifically to help consumers instead of banks, savings and loans and Wall Street firms.

Treasury officials said they hoped to invest about $50 billion from the bailout fund into the new loan facility, with the aim of helping companies that issue credit cards, make student loans and finance car purchases.

As envisioned, the Treasury would put up about 5 percent of the money that a company would use for lending and private investors would put up perhaps 20 times that much by buying bonds issued by the new program.

- Mr. Market hasn’t taken too kindly to Paulson’s newfound concern for the strugging American consumer. AP reports that “An increasingly despondent Wall Street fell for the third straight session Wednesday as investors absorbed another series of dismal corporate reports and news that the government won’t buy banks’ soured mortgage assets after all.” The Dow dropped more than 410 points. All the major indexes lost more than 4%.

- The FT reports that “several financial stocks hit new bottoms and the sector sank 6.9% overall after Hank Paulson … reversed course on its plan to mop up the illiquid assets.”

- Get used it. Bloomberg reports that “the U.S. downturn will be the longest in three decades, and the drought in consumer spending may be the worst ever.” At best, says Bloomberg, we’re going to get the deepest U.S. recession since 1981. At worst, there’s a chance it’ll be the worst postwar recession. We think both predictions are optimistic.

- Henry Blodget at Clusterstock says this will turn the US Treasury Department into the world’s biggest private equity firm, which is actually a good idea:

These potential changes are actually positive, but they still don’t address the elephant in the room: writedowns.

Historically, the most successful financial system bailouts have done two things:

• Recapitalized banks (by injecting capital)
• Forced banks to write down asset values to nuclear winter levels, thus staving off the need for future writedowns (and, in so doing, encourage private investment).

It is hard to believe that, say, Citigroup has written down its $546 billion of on-balance sheet consumer assets to nuclear-winter levels, let alone the off-balance sheet ones. Thus, any new investor will likely get its equity wiped out by future writedowns and additional capital. This is a major deterrent to investing in Citigroup.

The new TARP modifications will deal with this to some extent by forcing financial institutions to raise private capital alongside the government money. Private investors, presumably, will be more concerned about preserving their capital than the government will be and therefore won’t invest unless the banks have written their assets down appropriately.

Forcing banks to raise private capital will also get the government out of the business of picking winners, which has created the potential for unfairness, corruption, and a whole host of perceived improprieties, as well stoked the fires of senators like Chuck Schumer who complain that the taxpayer money is only going to healthy companies, not the ones who need it most.

- Of course, this isn’t stopping a lobbyist frenzy at the Treasury Department. The New York Times reports that the department “is under siege by an army of hired guns for banks, savings and loan associations and insurers – as well as for improbable candidates like a Hispanic business group representing plumbing and home-heating specialists. That last group wants the Treasury to hire its members as contractors to take care of houses that the government may end up owning through buying distressed mortgages.”

- Despite commodities traders’ brief surge in optimism over China’s $586 billion bailout, oil is down below $59 a barrel – a new 18-month low.

- Gold isn’t faring much better. An ounce of the stuff is now selling for $733 this morning.

- For those of you worrying that were experiencing another depression, David Levy in Institutional Investor says we’ll get one, all right, but it will be “contained” by government intervention. The following extract was picked up by Kedrosky at Infectious Greed:

Without the government’s containment the economy would indeed ace another Great Depression, but fortunately, nothing so dire will occur. The government will prevent a collapse of the financial system and partially buffer the damage to the economy, containing the depression. The government will succeed not because it is wise about economic affairs or because it won’t make mistakes. Rather, it will have no choice but to keep patching holes in the financial sector, and its sheer size and presence guarantee a sizable fiscal stabilization. The government has virtually unlimited power to intervene to protect the basic functioning of the financial system, and in an emergency can spend whatever is necessary. Although government solutions will not fix the fundamental problems that will cause the depression, they will limit the financial fallout. By the end of the contained depression, the government will likely have committed trillions between rescue operations and running huge deficits. And although some may complain about the price tag, it will be a bargain for enabling us to avoid another Great Depression.

- Levy’s theory is predicated on the rather absurd notion that the US has “virtually unlimited power to intervene to protect the basic functioning of the financial system.” According to a report on CNBC that “virtually unlimited power” might be a lot more limited than Levy imagines.

The United States may be on course to lose its ‘AAA’ rating due to the large amount of debt it has accumulated, according to Martin Hennecke, senior manager of private clients at Tyche.

“The U.S. might really have to look at a default on the bankruptcy reorganization of the present financial system” and the bankruptcy of the government is not out of the realm of possibility, Hennecke said.

“In the United States there is already a funding crisis, and they will have to sell a lot more bonds next year to fund the bailout packages that have already been signed off,” Hennecke told CNBC.

In order to solve or stem the economic slowdown, Hennecke suggested the US would have to radically reduce spending across all sectors and recall all its troops from around the world.

- The wrangling between Bush and Obama comes in the wake of news that GM’s shares tumbled to 1946 prices, closing down 23% to $3.36, as analysts downgraded the stock on worries it would soon run out of cash and shareholders would be wiped out by any federal bailout.

- GM has 263,000 workers worldwide. If it does go under, that’s a hell of a lot of people joining dole queues.

- This, of course, would have disastrous consequences in the US, where unemployment rates are spiraling. If you take the U6 count of unemployed, which includes “marginally attached” workers and those who are employed part time for economic reasons, unemployment in the US is now at 11.1%, up from 7.9% last year at this time.  According to Karl Denninger on The Market Ticker:

While this is not in “Depression” territory the trend is especially bad, the revisions are stunning, and we haven’t even had an official recession declared yet.  With more than one in ten people who want a full-time job unable to get and hold one along with the rest of the economic outlook things are definitely getting worse and the only light I see in the tunnel is an oncoming bullet train.

- Or take this humdinger from John Crudele in the New York Post:

Each month Washington adds many thousands of jobs that it believes – but can’t prove – are being created by newly formed companies.

The logic behind this calculation – which is called the birth/death model – is as simple as it is extraordinary: even in a horrible job market and during a credit crunch as we have today, Washington believes courageous entrepreneurs are forming businesses and hiring people.

The October report – the one that reported the 240,000 loss of jobs – includes a guess that 71,000 of these uncountable, new-company jobs were created.

Included in those 71,000 made-up jobs are 7,000 that were supposed to have been created in construction and 13,000 in “financial activities.”

- Job losses are also reaching alarming rates in China. Paul Kedrosky on InfectiousGreed.com notes that 2.7 million job losses in Guangdong province alone in last seven months.

- Even more worrying is the impact China’s $586 billion bailout plan could have on the US Treasury market. To finance its plan, China “could have sell its holdings of U.S. Treasury and agency securities or slow its rate of accumulation in these securities,” according to MarketWatch.

China holds roughly $1 trillion of U.S. securities, including $541 billion of US Treasurys and $200 billion in agency securities, according to Miller Tabak.

Massive selling of those securities, at a time when the US government is already expected to issue large amounts of debt to finance its own economic stimulus measures, could further raise borrowing costs, such as mortgage rates, which are benchmarked to bond yields.

There’s only $60 billion left of the first $350 billion tranche of what was once known as the Trash Asset Removal Plan (and is now known as the only pot of available money in the world). So many companies of all shapes, sizes, and flavors are demanding cash that Treasury can barely process the requests. Congress will presumably order the Treasury to immediately begin doling out the second $350 billion, which, a few months ago, was seen as a sort of “just in case” reserve fund. No more.

– Yesterday, the Dow surged 11%. It was the second-largest gain in the the history of the index (all 112 years of it). Before you pop the champagne corks, it’s worth remembering that despite yesterday’s show-off surge Dow indsutrials are still 36% off their October 2007 record close. That puts U.S. blue chips deep in bear territory.

– While analysts desperately pour over their charts and numbers in search for a bottom in stocks, economists are on the lookout for a turnaround in the U.S. economy. It’s not looking promising. This from the WSJ:

The current downturn is shaping up to be worse than the recessions of 1990-91 and 2001 and the prolonged downturn that ended in 1982. Banks are cutting back on lending, consumers are spending less, companies are shedding jobs amid sinking profits, and the housing bust that triggered the slide persists.

According to the paper, economists are focusing on five key indicators: 1) interbank lending rates such as Libor; 2) house prices; 3) consumer confidence; 4) jobs; and 5) stock prices. So far, only interbank lending rates, which have been greatly boosted by government bailout money, are showing signs of recovery.

– Take consumer confidence. Yesterday, the NYT reported that the Conference Board measure of consumer confidence, a widely wathced measure, “plunged to its lowest reading on record in October as Americans reported fewer jobs and smaller incomes and curtailed plans for major purchases like cars and appliances.”

– Or take U.S. housing, which to a large extent influences how American shoppers feel about spending. (The more money their house is worth, the more money they are willing to spread around.) According to AP:

Home prices tumbled by the sharpest annual rate ever in August, with little indication of a turnaround in sight, a closely watched index showed Tuesday.

The Standard & Poor’s/Case-Shiller 20-city housing index dropped a record 16.6 percent from August last year, the largest drop since its inception in 2000. The 10-city index plunged 17.7 percent, its biggest decline in its 21-year history.

– Another great way to measure economic woes is the so-called “misery index.” According to Infectious Greed blogger Paul Kedrosky, “The Peterson Institute has brought back the ‘misery index’, a combination of the inflation rate and the level of unemployment, and added to it a measure of asset price declines. The upshot? The modified misery index is now at record highs.”

– At least the government’s on the case. Cafe Hayek blogger Don Boudreaux argues, however, that this could actually be sinking the markets, rather than helping:

We now have proof that government is a god that failed — a poverty-inducing and economically destructive institution that humankind should finally learn must be kept on an extraordinarily tight leash, lest it wreak havoc in the lives and on the fortunes of innocent parties.

The facts are crystal clear.  Since the March 24 promise by the Fed to guarantee $29 billion worth of mortgage securities held by Bear, Stearns, the Dow has fallen 34 percent (as of mid-day on October 28, 2008).  Since the September 8th announcement by the U.S. Treasury Department that it will take over Fannie Mae and Freddie Mac, the Dow has shed 28 percent.  Since the October 3 enactment of Uncle Sam’s massive bailout bill, the Dow is down 20 percent.

Our instincts say Don is right. The problem with this argument, however, is that cause and correlation are two different beasts. Are the markets plunging because of the government bailouts or are they simply plunging after after the government bailouts?

– Eric Roseman on ContrarianProfits says Swiss money manager Felix Zulauf attributes America avoiding worse pain to the recent bailouts:

Zulauf believes we’re entering a soft economic depression. If not for the government’s backstops on October 13 to prevent further stock and credit market seizures, a depression would have followed. Zualauf is convinced the markets would have crashed.

Zulauf may believe in the power of government to positively influence the markets, but his outlook isn’t exactly rosy for U.S. stocks:

His prediction of a severe recession will take the S&P 500 Index down all the way to 550, possibly 500, or 35% lower from current levels. Stocks have already plunged 40% from their October 2007 highs. Zulauf is adamant: “U.S. stocks are still not cheap. The S&P 500 Index trades at 1.7 times book-value and the Dow more than 3.5 times book. This is still expensive.

– U.S. stock futures are pointing higher this morning ahead of a widely anticipated cut in key lending rates by the Fed. Futures traders expects the Fed to bring rates down a half-point to 1%. “S&P 500 futures climbed 32.4 points to 867.10 and Nasdaq 100 futures rose 44 points to 1,206.00. Dow industrial futures rose 300 points,” according to MarketWatch.

– Traders across the globe appear to have snapped out of their funk also. Japan’s Nikkei index is up 7%, Hong Kong’s Hang Seng is up 14%, and London’s FTSE is up 2% as of 5:40AM EDT.

– Gold is up in London this morning as stocks rally. So far this month, traders have knocked 14% off the price of gold as they sold assets to raise cash. “Gold for immediate delivery gained $14.92, or 2 percent, to $745.72 an ounce as of 8:56 a.m. in London,” according to Bloomberg.

– Oil edged up toward $64 this morning. The black goo is also tracking the recovery in European and Asian stock markets.

– “U.S. 10-year Treasuries fell the most in almost three weeks as stocks rallied and the U.S. government prepared a record $34 billion note sale to help pay for bank rescues,” reports Bloomberg.

– Don Boudreaux at the Cafe Hayek blog heaps more misery on the head of former Fed head Alan Greenspan by way of a letter to the WSJ. Well put, Don…

To the Editor:

Alan Greenspan now blames deregulation for today’s financial turmoil (”Greenspan Admits Error to Hostile House Panel,” October 24).  Whatever deregulation there was, and whatever its merits or demerits, there is one crucial financial instrument – dollars – that throughout was supplied by an utterly unjustifiable state monopoly – the Fed.  Unfortunately, this decidedly unfree-market arrangement draws little attention.

Skepticism is advisable when the former head of a government-created and protected monopoly blames the market for using that monopoly’s output unwisely.  Would the demand for mortgage-backed securities have been as frothy as it was if Mr. Greenspan’s Fed had not created so much new money?  Would the demand for owner-occupied housing itself have been so intense?  Because money plays a common and vital role in all of these transactions – and because Mr. Greenspan’s Fed kept pumping dollars into the economy with no way to know what the ‘correct’ supply is – you’ll pardon my inability to give credence to Mr. Greenspan’s latest pronouncements.

Sincerely,
Donald J. Boudreaux

– Friday’s improvement in U.S. existing home sales data is no doubt having a positive effect on the markets. New home sales were up 2.7% from their 17-year low in September. The question is: Will the uptrend hold? This from Rob Parenteau, the new editor of the Richebacher Letter, as quoted in The 5. Min Forecast.

We have to wonder whether this [improvement in housing] will hold in the months ahead. Layoffs are mounting across many industries and the prospect of further foreclosures weighing on the market must be rising.

Initial unemployment claims are pushing through the prior two recession highs. As personal income growth slows, household debt servicing is bound to become even more problematic, barring a much lower mortgage rate environment.

While the money markets seizing up was the clear-and-present danger, the attempt to reel in mortgage rates must be the next policy priority. Beyond that, perhaps with a stabilization in the equity market from oversold conditions, value players may start to arbitrage corporate bond yields in. Without this type of sequencing, a lower fed funds rate does not mean much beyond some possible psychological relief for equity investors.

Refi activity remains well below its peak rate level back in February, and the longer it takes to get mortgage rates down, the more homeowners will be unable to refi as home values fall below mortgage loan values. Surprisingly, bank real estate loan activity has not fallen off a cliff, although that is mostly because households are still tapping home equity lines of credit, while mortgage loans for purchases have gone flat.

– Saudi Arabia, meanwhile, has announced it will pour $2.3 billion in loans to low-income borrowers.

– There are also signs of trouble in boom town Dubai. The WSJ reports that real-estate brokers there say they are seeing signs of “price weakness” there. We can only presume this is real-estate broker speak for “Nobody’s buying.”

– Over the weekend, “Dr. Doom,” aka New York University economics professor Nouriel Roubini, told The Times that the world economy was “at a breaking point” and that global stock markets are now “essentially in free fall” and “are reaching the point of sheer panic.” On Thursday, Roubini predicted hundreds of hedge funds would go bust and stock markets would soon be forced to shut down in order to stem the panic selling. On Friday, NYSE circuit breakers triggered a temporary halt on futures trading after futures droped 550 points. It was the first time the NYSE had to halt trading since 1997.

– U.S. stock futures are in the ditch again today. MarketWatch reports that “S&P 500 futures fell 34.3 points to 831.70 and Nasdaq 100 futures fell 43 points to 1,148.50. Dow industrial futures dropped 246 points.”

– Newsweek is calling it a “full-blown crisis.”

Last week seemed to be the nail in the coffin of “decoupling,” a theory that said increasingly savvy and solvent emerging markets would no longer march in economic tandem with more-developed nations. As the global financial crisis deepened, South Korea announced a $130 billion bailout for credit-starved banks and companies, Ukraine canceled elections amid a growing national crisis over frozen credit markets and a plummeting currency, and Pakistan asked the International Monetary Fund to arrange emergency financing amid the country’s worsening economic meltdown. All this came after a torrent of ratings and outlook downgrades by agencies like Fitch and Moody’s on former shooting stars such as India, Vietnam, Hungary and Argentina.

So much for emerging markets saving the world from recession.

– Bloomberg reports today that “equity indexes in India, China and the Philippines tumbled more than 6 percent, while Indonesia’s rupiah fell 4.4 percent versus the dollar, leading developing nations’ currencies lower.”

– Oil prices are at 17-month lows. A barrel of oil is now selling for below $62 a barrel in Asia, despite OPEC’s announced cut in supply.

– Gold is also down in Asian trader this morning as investors seek cash. Bloomberg reports that “gold for immediate delivery fell as much as 1.5 percent to $723.78 an ounce, and was at $725.28 at 3:22 p.m. in Singapore.”

– What worries us here at ContrarianProfits more than the rout in stock and commodities prices is the steadily growing belief that government intervention is the way to ‘fix’ the financial markets. The common wisdom, according to a great essay by Larry White picked up by the Cafe Hayek blog, is now as follows: “No. 1: Banking and financial markets are inherently unstable. No. 2: Government intervention into banking and financial markets can only stabilize (never destabilize).” In fact, says White, the opposite is true. “Over the broad sweep of history, banking systems with few legal restrictions have been more stable than systems with more intervention.“