The Teeming Brain

GENERAL COMMENT FROM CARDIN:

Bernankenstein and the Economonster from Hell

Okay, so that’s a silly title for this week’s comment. But I still like it.

For one thing, I’m hugely fond of the Hammer Horror films from Britain’s Hammer Studios back in the 1950s-1970s. All of their horror series started out strong — the Dracula movies starring Christopher Lee, the Frankenstein movies starring Peter Cushing, and all the rest — and then degenerated into camp. But it was deliciously fun camp.

The last and, as it is generally thought (with some serious disagreement), the worst of their Frankenstein series was 1974’s Frankenstein and the Monster from Hell. Personally, I’m quite fond of it.

And that brings me to the other thing that made my silly title seem appropriate for this week’s comment. It’s entirely possible and quite possibly viable to picture Ben Bernanke as a metaphorical Frankenstein who is battling a monster of his own creation as he fights to save the American economy and financial economy from total implosion. Well, okay, so he didn’t create the monster himself. He had lots of help from the Bush administration, Alan Greenspan, the Clinton administration, the Reagan administration, and every other proponent, defender, and enabler of economic neoliberalism over the past three to four decades. But we can take the liberty of symbolically collapsing or centering the Frankenstein image on Bernanke, since he’s the current star of the show.

And when we do that, we can see that America’s hyperfinancialized economy has indeed become a monster. This is an image that various pundits and commentators have used in recent months. The shadow banking system, which everybody now knows and talks about thanks to a flood of articles and reports (where were these journalists when we really needed them, before the crisis exploded?), has taken on its own life and smashed or flooded through or around the safeguards and protections that were set up during and after the Great Depression to prevent its happening again. And now we’re in exactly the same spot, updated, of course, with some modifications and specifics that are peculiar to the modern milieu.

The really interesting question is whether we should conceive of Bernanke as fighting against the monster or fighting to save the monster. His recent actions give support to both views. I mean, if we want to look at it in terms of an economy or financial system that’s dying, then we can say that Bernanke has been trying to shock it back to life. He has stimulated it with lightning-like liquidity injections, newfangled borrowing options, a new form of bailout, and more. And yet the monster still looks like it’s dying.

Or we can look at the situation as if Bernanke is fighting against the Economonster from Hell. In this view, he has thrown everything at the monster but the proverbial kitchen sink, including several exotic weapons stored in some back closet or custom designed for this particular battle. And still it just keeps coming.

Read the following excerpts very carefully. The markets may have calmed down a little over the past one and two weeks but the fundamental problem is still there and just getting worse. The Economonster is still on the rampage and Bernankenstein is still frantically trying to contain his filthy daemon.

* * * * *

Here Come the Modern 1930s

Thomas Au, Guest Commentary at PrudentBear.com, March 26

Former Fed Chairman Alan Greenspan, one of the major architects of the current crisis finally “fessed up” the other day when he referred to the current crisis as the “most wrenching since the end of the Second World War.” But the end of the Second World War marked the start of the boom times in America (at least for those who lived to tell the tale) so he must really be referring to the crisis since the beginning of the Second World War, which would be the late 1930s. And this decade is basically where we’re now at.

The modern 1930s are the logical consequence of the “New Economy” of the past decade, just as the original was a logical consequence of the “Roaring Twenties.” In each case, technology and leverage combined to create a potent but ultimately poisonous brew of wildly inflated asset prices. In essence, greedy CEOs (and investment managers) said, “we brought you the new economy, please cash us out now.” And a gullible American public affirmed this by bidding up prices to insane levels, expecting to share, rather than subsidize, the wealth of the selling shareholders. First the tech companies, then the financial intermediaries were then caught in traps of their own making, and escaped as sorely crippled entities, if they survived at all. But by this time, the more privileged players had “taken their money and run.”

….In deciding whether or not we are headed toward depression, one needs to look at the substance of economic events, as opposed to the form. Some examples of the substance: 1) A post-war record level of home foreclosures headed to 1930s levels fueled by a similarly record collapse of home prices. 2) Several major “runs on banks” as investors begin to wake up to the fact that a lot of what passes for collateral is in fact worth very little. 3) A panicked Fed trying to head off a financial panic by simultaneously lowering interest rates and injecting money into the system.

And what’s worse, we are only in the early stages of the crisis.

….Some take comfort in the fact that we haven’t yet seen soup lines, or 25% unemployment. But soup lines are merely an unnecessary (and hopefully unrepeated) appendage of the above. And anecdotal evidence suggests that many welfare agencies are now stretched to the absolute limit, meaning that new soup lines will appear if the system is tested just a bit more. And unemployment hasn’t risen because companies have so far chosen to cut health care and pension contributions rather than lay off workers. One can easily get to the 1930s 25% unemployment with a 0% headline unemployment rate — by assuming that half the work force will be “temps” working half time without fringe benefits.

But perhaps one of the better definitions of the modern 1930s was given in a previous article on this site — a two decade pullback in the American standard of living to the 1980s (the original took American consumption back to the 1910s). Such a pullback seems inevitable from the deleveraging and loss of wealth that is now taking place. Moreover, such a retreat would last for an extended period of time. That’s because we had the best of all possible worlds (relative to the true state of the global economy) for most of the past decade and half. The next decade and half will probably see the worst of all such worlds.

* * * * *

A recipe for disaster

Dave Cohen, Energy Bulletin, March 26

Signs of an economic meltdown are springing up all around us. The U.S. is almost certainly in a recession now, but the worst is yet to come. The full consumer price index has risen at a 6.8% annual rate in the last 3 months just as GDP growth has likely entered negative territory, raising the Specter of Stagflation. Americans have not faced such dire straits in 25 years.

When the New York Times feels compelled to reassure us that the chances of a full-blown 1930’s-style depression are low, you know something is up. See Depression You Say? Check Those Safety Nets, March 23, 2008. The Bear Stearns debacle, a classic run on the bank, took most observers by surprise. This point was brought home to me personally when Standard & Poors downgraded National City’s outlook from ’stable’ to ‘negative’ last week, “citing risk from the shaky housing and mortgage markets.” National City is my bank. Deposits are insured, of course, but that didn’t make me feel any better somehow.

….Over the next year we’re going to learn a lot about global oil demand and prices. We’re also going to learn whether American consumption is still the sine qua non of global economic health it once was. Regardless of the outcome, Americans are in for a tough time.

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U.S. Ponders: How Deep Is Economic Abyss?

Yahoo! Finance (AP wire piece), March 23)

For months, Americans have been subjected to a sort of economic water torture — a maddening drip of bad news about jobs, gas prices, sagging home values, creeping inflation, the slouching dollar and a stock market in bumpy descent.

Then came Bear Stearns. One of the five largest U.S. investment banks nearly collapsed in a single day before the government propped it up by backing emergency loans and a rival stepped in to buy it for a paltry $2 per share.

To the drumbeat of signs that seemed to foretell a traditional recession, this added a nightmarish specter — an old-style run on the bank, customers clamoring to pull their cash, a stately Wall Street firm brought to its knees.

The combination has forced the economy to the forefront of the national conversation in a way it has not been since the go-go 1990s, and for entirely opposite reasons.

As economists and Wall Street types grope for historical perspective — which is another way of saying a road map out of this mess — Americans are nervously wondering about retirement savings, interest rates, jobs that had seemed safe.

They are surveying the economic landscape and asking: Just how bad is it? They are peering over the edge and asking: How far down? And the scariest part of all? No one can say for sure.

….On top of an economy that was already groaning under the weight of a downturn, Bear Stearns came down like an anvil. It tied together so much of what’s wrong with today’s economy — the housing crash, the credit crunch and a loss of confidence among investors and consumers alike.

Understanding how things got so bad means rewinding to the start of the housing boom…..Economists and market historians seem to agree that this is more than a typical, cyclical slump. And the X-factor that sets it apart — determining how deep the wounds from the mortgage mess really are — also makes it impossible to map the path of the downturn.

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Economic downturn worsens in March

MarketWatch, March 30

Markets may be stabilizing, but the news on the economy is getting worse. The coming week will see more dismal headlines on employment, construction and manufacturing, economists said.

“The indicators on the economy will point in the direction of pronounced weakness in domestic demand,” wrote Global Insight economists Nigel Gault and Brian Bethune.

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Deep impact: U.S. Fed has crossed the Rubicon and “recreated the financial universe”

The Washington Post, March 28

[Cardin comments: This is truly a cat-out-of-bag moment. As the opening line below states, "the Federal Reserve, long the guardian of the nation's banks, has redefined its role to also become protector and overseer of Wall Street." The fact that such an ad hoc redefinition was necessary, the fact that Bernanke and the Fed were forced, in the words of The New York Times last week, to "make policy on the fly" by saving Wall Street, all for the purpose of saving the nation's financial system from a sudden and complete collapse in the grand tradition of 1929 and afterward -- this fact, these facts, shout out the dirty little not-so-secret that everybody now has to face and that many of us have already been facing for some years now: that the U.S. as a nation has sold its soul completely and without reservation to the gods of finance capitalism.

Plain old capitalism is one thing, and it's not a bad thing at all. But this particular type is positively insane, this dizzy Faustian/Frankensteinian economic monster that's internally driven by utter, abandoned greed and externally framed and enabled by neoliberal assumptions that inevitably focus the whole system toward the evolution of bloated megacorporations that effectively wield more power than nations and governments, not to mention average individuals. It's this truth of America's pact with the devil, so to speak, that recent economic and financial events, along with the Fed's actions, have rendered undeniably evident and plain for all to see. Whether we'll pull back from it remains to be seen. But the scope and scale at which this wholesale transformation of America has taken place naturally makes one doubtful that any real retreat or alteration can happen without serious turmoil, especially considering that the change also inheres in the rest of the world during this great era of economic globalization, which really means simply the exporting of America's neoliberal economic philosophy abroad.]

In the past two weeks, the Federal Reserve, long the guardian of the nation’s banks, has redefined its role to also become protector and overseer of Wall Street.

With its March 14 decision to make a special loan to Bear Stearns and a decision two days later to become an emergency lender to all of the major investment firms, the central bank abandoned 75 years of precedent under which it offered direct backing only to traditional banks.

Inside the Fed and out, there is a realization that those moves amounted to crossing the Rubicon, setting the stage for deeper involvement in the little-regulated markets for capital that have come to dominate the financial world.

Leaders of the central bank had no master plan when they took those actions, no long-term strategy for taking on a more assertive role regulating Wall Street. They were focused on the immediate crisis in world financial markets. But they now recognize that a broader role may be the result of the unprecedented intervention and are being forced to consider whether it makes sense to expand the scope of their formal powers over the investment industry.

“This will redefine the Fed’s role,” said Charles Geisst, a Manhattan College finance professor who wrote a history of Wall Street. “We have to realize that central banking now takes into its orbit everything in the financial system in one way or another. Whether we like it or not, they’ve recreated the financial universe.”

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The end of capitalism as we know it?

The U.K. Independent, March 23

The Western world is in an economic crisis similar in scale to the oil shock of 1973. What we are seeing is nothing less than the unravelling of neo-liberalism — the dominant economic and ideological model of the last 30 years.

The disintegration of Anglo-Saxon-inspired markets has come about largely because of the confluence of two tendencies of the “free market”: speculation and monopoly capitalism. Contrary to received opinion, free markets — unless subject to civil regulation, asset distribution and persistent intervention — always tend to monopoly.

Similarly, there is nothing inherently efficient about free markets — they do not of themselves promote sound investment or wise management. Rather, when markets are conceived wholly in terms of price and return, and when asset wealth and the leverage that this provides becomes as concentrated as it was in the 19th century (which is a scenario we are approaching), then markets encourage nothing other than gambling masking itself as sound investment.

….This incalculable level of speculation is abetted by the huge concentration of wealth that has occurred since 1973. Why? Because if markets tend to monopoly then smaller groups of people control larger amounts of assets. The latest figures demonstrate this admirably: the richest 10 per cent of the UK population increased their share of the nation’s marketable wealth (excluding housing) from 57 per cent in 1976 to 71 per cent in 2003. Over the same period, the speculative capital that could be deployed or inves-ted by the bottom 50 per cent of the British population fell from 12 per cent to just 1 per cent. Indeed, the wealthiest 1 per cent of the population, on current government figures, now control more than a third of all the marketable wealth — and this ignores the vast sums held in offshore tax havens.

The New Economics Foundation has shown that global growth has not aided the poor. In the 1980s, for every $100 of world growth, the poorest 20 per cent received $2.20; by 2001, they received only 60 cents. Clearly neo-liberal growth disproportionately benefits the rich and further impoverishes the poor.

Real wage increases in the top 13 countries of the Organisation for Economic Cooperation and Development (OECD) have been below the rate of inflation since about 1970 — a situation compounded in Britain as the measure of inflation massively underestimates the real cost of living.

Thus wage earners — rather than asset owners — have faced a 35-year downward pressure on their standard of living. Indeed, the golden age for the salaried worker, as a share of GDP, was between 1945 and 1973 — and not this vaunted age of liberalisation.

The trouble is that nobody in power recognises this crisis for what it is — an asset insolvency crisis brought about by massive debt leverage. Neo-liberals are still reacting as if the emergency was one of liquidity. They are wrong. Governments should bail out not banks and speculators but the customers who now have every reason to fear for the future.

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Perilous and historic times: Rescue of Bear Stearns marks liberalisation’s limit

Martin Wolf, Financial Times, March 25

Remember Friday March 14 2008: it was the day the dream of global free-market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over. It showed in deeds its agreement with the remark by Joseph Ackermann, chief executive of Deutsche Bank, that “I no longer believe in the market’s self-healing power”. Deregulation has reached its limits.

….Yet the extension of the Fed’s safety net to investment banks is not the only reason this crisis must mark a turning-point in attitudes to financial liberalisation. So, too, is the mess in the US (and perhaps quite soon several other developed countries’) housing markets. Ben Bernanke, Fed chairman, famously understated, described much of the subprime mortgage lending of recent years as “neither responsible nor prudent” in a speech whose details make one’s hair stand on end [Fostering Sustainable Homeownership, March 14, 2008]. This is Fed-speak for “criminal and crazy”. Again, this must not happen again, particularly since the losses imposed on the financial system by such lending could yet prove enormous.

….“Some say the world will end in fire, Some say in ice.” Harvard’s Kenneth Rogoff recently quoted Robert Frost’s words in describing the dangers of financial ruin (fire) and inflation (ice) confronting us. These are perilous times. They are also historic times. The US is showing the limits of deregulation. Managing this unavoidable shift, without throwing away what has been gained in the past three decades, is a huge challenge. So is getting through the deleveraging ahead in anything like one piece. But we must start in the right place, by recognising that even the recent past is a foreign country.

GENERAL COMMENT FROM CARDIN:

Is this THE END?

We’re all familiar with the stereotypical cartoon figure of the ragged, shaggy prophet wearing a sandwich board with the blaring painted message, “The end is near!” By all rights, that prophet ought to be wandering the sidewalks of Wall Street at this very moment in order to highlight the question in everybody’s minds: Is this really the end?

Of course, given present circumstances the question can be taken in one of two general ways.

The first way is, “Is this THE END of the financial and economic crisis?” This version is prompted by the pervasive cheering throughout the mainstream financial news media over the weekend as pundits, analysts, and television program hosts have breathed a collective sigh of relief and announced that the Fed’s dramatic save of Bear Stearns (with the help of JPMorgan), along with their other massive and unprecedented moves to stave off collapse, have apparently done the trick. The Fed has stanched the bleeding, saved the patient, saved the day. That is, they have stabilized the market and brought a finish to the crisis that has been spreading since last summer. True, there are still a few loose ends to tie up. The foreclosure crisis is still mounting, real estate values are still falling, unemployment numbers are still slightly up and rising, manufacturing is down, the dollar still has a challenge ahead of it, etc. But in its heart — according to this popular version of things — the beast has been slain. Team Bernanke successfully located and isolated the problem, triangulated the monster, and hurled a nuclear bomb into its jagged maw. What’s left are mere post-mortem tremors, plus a few of the monster’s lesser minions still scampering around and causing minor mischief. But the mop-up is in process, and we have seen THE END of the main problem.

That’s one version. The second way to take the question of “the end” is to ask, “Is this THE END of life as we know it?” This version is prompted by several factors and leads to several insights and suspicions that are much less pat and comforting. It notices that those various factors that the previous version frames as “loose ends” are actually valves and chambers of the monster’s beating heart, which is still vigorously pumping blood. It also notices that this new hope that the crisis is at an end makes the horrific and fundamental mistake of assuming a return to normal is what we all want and need, when in fact the new “normal” of the past five, 10, and 40 years of America’s financial and economic history — the rise of a “shadow banking system” that managed to get around safeguards implemented in the Depression era and provided a place for sheer speculative greed to run wild, free of all restraint, regulation, and responsibility — is what created this epochal mess in the first place. It notices that beyond the obvious loose ends there lies a field of additional problems that threaten our very economic foundations, including America’s effective bankruptcy as detailed by former comptroller general David Walker for the past several years, the mounting, mind-blowing bill from two apparently permanent wars, and the psychological and economic infantilization of the American populace as we have come to rely on being plugged into a debt-based economic system like hairless adult babies sucking milk from the tit of Mother Matrix, so that what we assume — with a fierce and largely unacknowledged sense of entitlement — is just “normal,” is just “the way things are,” is actually a monstrous overreach that has led to our living beyond our means at the expense of other people and nations. Maybe global economics doesn’t have to be a zero sum game. Maybe it doesn’t have to be the case that a person or people can only have something by taking it from someone else. Maybe everybody can be equally enriched and empowered. But not the way we’re currently playing the game. And the piper will one day call us to pay. That day has arrived.

Finally, the second version of the question notices that there’s a lot more wrong with the current financial and economic environment than just the mess made from financial derivatives, bad mortgages, a real estate bubble, and so on. It notices that these are all, ultimately, symptoms of a much deeper, wider, and more intractable problem that underlies everything. The larger issue is the problem of basic human hubris, greed, and heedlessness as interacting with the fact of our fossil fuel endowment. We have been empowered and enabled (in the sense of enabling a neurosis or personality disorder) to scale Promethean heights of global civilizational excess by our use and mastery of fossil fuels. And this is about to come to an end. The underlying cause of all the acute current financial/economic woes is energy-related. And that’s not going to be neutralized by any surprise moves from the Fed or any other central bank on planet earth.

So . . . is this THE END? Regarding the acute financial and economic crisis facing America right now, the answer is a definite maybe. We’ll find out over the next few weeks and months. There may be a lull in the panic that exploded openly in recent weeks. Financial markets may zoom up. The real estate freefall and mortgage crisis may be addressed in some direct fashion. Or maybe not. New and shocking troubles may erupt tomorrow, or next week, or next month. We just can’t know yet if it’s the end, despite what many in the mainstream media are saying.

One thing we can know, however, is that it’s not the end of the wider problem. Two definite answers are as follows:

YES, it’s the end of life as we know it. Even within the parameters of the banking and financial system as it presently exists, everything is different now, because those parameters have been exploded by what Team Bernanke has been forced to do by the magnitude of the current crisis. This will result in real changes in life on the ground, everyday life for you, me, and everybody else. And in the wider sense of those profound problems based on peak oil, America’s national bankruptcy, etc. . .

. . . in that wider sense, NO, the current shift doesn’t mark the end of anything. Nothing’s over. The real storm hasn’t even hit yet. In fact, this is only the beginning.

* * * * *

Partying Like It’s 1929

Paul Krugman, The New York Times, March 21

[Cardin comments: I advise clicking through to read the full article, even though I've provided copious chunks of it below. Krugman gives a nicely concise recounting of how we got to where we are now, and how it mirrors in marvelous fashion the precise shape of the buildup to the Great Depression 80 years ago, along with a beginner's guide to what banks do and how they fit into the overall economy.

Of purely personal interest (to me) is that in his opening three or four sentences, Krugman casts Ben Bernanke in the role of a superhero fighting against the evil villain known as Collapse. This explicitly recalls my own narrative analysis of the economic situation in last week's installment of "Headlines from the meltdown," where I spoke of Ben "Skywalker" Bernanke's attempts to blow up the Death Star of economic collapse. Ah, well. Great minds and all that. Maybe Krugman's been reading me. I mean, after all, I did beat him to the punch by five days.]

If Ben Bernanke manages to save the financial system from collapse, he will — rightly — be praised for his heroic efforts.

But what we should be asking is: How did we get here? Why does the financial system need salvation? Why do mild-mannered economists have to become superheroes? The answer, at a fundamental level, is that we’re paying the price for willful amnesia. We chose to forget what happened in the 1930s — and having refused to learn from history, we’re repeating it.

Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931. This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure.

As the decades passed, however, that lesson was forgotten — and now we’re relearning it, the hard way.

….[In the wake of the 1930s disaster] Congress tried to make sure it would never happen again by creating a system of regulations and guarantees that provided a safety net for the financial system. And we all lived happily for a while — but not for ever after. Wall Street chafed at regulations that limited risk, but also limited potential profits. And little by little it wriggled free — partly by persuading politicians to relax the rules, but mainly by creating a “shadow banking system” that relied on complex financial arrangements to bypass regulations designed to ensure that banking was safe.

….As the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players in this system seemed to offer better deals than conventional banks. Meanwhile, those who worried about the fact that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned.

In fact, however, we were partying like it was 1929 — and now it’s 1930.

The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.

Mr. Bernanke and his colleagues at the Fed are doing all they can to end that vicious circle. We can only hope that they succeed. Otherwise, the next few years will be very unpleasant — not another Great Depression, hopefully, but surely the worst slump we’ve seen in decades.

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Fed’s extraordinary actions underscore severity of situation

Bloomberg, March 18

[Cardin comments: This is indeed the paradox or dilemma of the hour, isn't it? Even if the actions and comments of Bernanke, the Fed, Bush, Paulson, or anybody else may be exactly what's needed from a practical standpoint, the very fact that they're saying and doing such extraordinary things underscores and even exacerbates the crisis because this is a game in which perception and confidence are, if not everything, then a great deal of the thing.

So: In late 2007 the Fed coordinates with other central banks around the world to inject huge amounts of liquidity into banking systems around the world. People watching this think and say, "Wow, the situation must have been really serious." Then in January the Fed takes the unusual action of making an emergency rate cut very shortly before a regularly scheduled meeting. This staves off an imminent market crash but leads to water cooler conversations along the lines of, "Wow, did you see what the Fed did? The situation must be really serious." Then the Fed makes another rate cut at that next meeting, which leads to even more water cooler conversation: "Holy crap, how serious is this situation?" From January to mid-March the Fed draws repeatedly from a bag of tricks both new and old, coming up with sometimes dazzling saves and maneuvers including new liquidity injections and the acceptance of mortgage debt as collateral for epic loans. The water cooler conversation begins to adopt an incredulous tone: "Are you seeing all this? Am I awake? What the hell's going on?!" Then, over the weekend of March 14-16, Bear Stearns collapses and the Fed helps engineer a bailout, inaugurating its new era of "making policy on the fly," as the New York Times puts it, by breaking its rule of not lending to investment banks. The Fed also makes the first weekend rate cut since 1979, which the press universally and correctly describes as "an extraordinarily rare move."

The clear implication is that the severity of the current crisis is itself extraordinary. Water cooler conversation now devolves to the level of, "What the --?!" followed by a terrified whimper and a mutual huddling together for comfort.]

Federal Reserve Chairman Ben S. Bernanke may be readying the deepest interest-rate cut in a generation as the central bank struggles to prevent a meltdown in financial markets and a recession. ….The severity of the crisis was underscored by the Fed’s emergency action on the evening of March 16, the first weekend policy shift since 1979. A week ago, the debate among economists was whether the Fed would cut by 50 basis points or 75 basis points.

….Bernanke has failed to calm the turmoil, which his predecessor Alan Greenspan calls the “most wrenching” since the end of World War II, even after lowering the overnight rate five times since September and committing to pump an unprecedented $400 billion in cash and securities into the banking system.

….Harvard University economist Martin Feldstein, a member of the committee that officially declares when a recession has started, said last week that he believed a recession was under way and it could be the most severe since World War II.

….”Things are still very fragile” [said Stephen Stanley, chief economist at RBS Greenwich Capital Markets Inc. and a former member of the Richmond Fed staff]. “We are in a situation where credit tightening has started to feed on itself, and it has real economic implications.”

….Fed Governor Frederic Mishkin said March 4 that the economy may face an “adverse feedback loop,” where tightening credit and a declining economy create a cycle that leads to further deteriorating conditions. The FOMC discussed that possibility during the January meeting, according to its minutes. “The overriding concern is the condition of the financial markets.” said William Ford, former president of the Federal Reserve Bank of Atlanta and now chairman of the finance department at Middle Tennessee State University. “They are fighting a financial panic and want to preserve orderly markets.”

* * * * *

What Created This Monster?

The New York Times, March 23

[Cardin comments: This long investigative article provides a great overview of how the financial system arrived at its present system of catastrophic overreach and disarray. Two other good ones are "The Bear Trap" (Time, March 21) and "What Went Wrong" (the Economist, March 22).]

The Federal Reserve not only taken has action unprecedented since the Great Depression — by lending money directly to major investment banks — but also has put taxpayers on the hook for billions of dollars in questionable trades these same bankers made when the good times were rolling.

“Bear Stearns has made it obvious that things have gone too far,” says Mr. Gross, who plans to use some of his cash to bargain-shop. “The investment community has morphed into something beyond banks and something beyond regulation. We call it the shadow banking system.”

It is the private trading of complex instruments that lurk in the financial shadows that worries regulators and Wall Street and that have created stresses in the broader economy. Economic downturns and panics have occurred before, of course. Few, however, have posed such a serious threat to the entire financial system that regulators have responded as if they were confronting a potential epidemic.

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Citigroup says the Great Unwind has begun [!!]

MarketWatch, March 19

[Cardin comments: Um, don't look now, but this is either nuts or shocking. Or both. The strategists at Citigroup have acknowledged the onset of the "great unwind," that is, the deleveraging of the economy as people and businesses everywhere flee en masse from the epic circumstance of multi-layered indebtedness that has come to seem normal over the course of many years. That means they recommend avoiding "companies and countries that have grown to rely too much on borrowed money." Country-wise, that means the U.S., as they explicitly state (see below). Company-wise, that means entities like -- themselves! They don't state that explicitly, but the meaning's there.]

The Great Unwind has begun, Citigroup Inc. strategists warned on Wednesday. As markets and economies de-leverage across the globe, investors should avoid companies and countries that have grown to rely too much on borrowed money, they said. That means favoring public-equity markets over hedge funds, private-equity and real estate, while leaning toward emerging market countries and away from developed nations like the U.S., the bank’s global equity strategy team advised. Within equity markets, the financial-services should be avoided because it’s still over-leveraged, while other companies have stronger balance sheets, the strategists said.

….Leveraged economies, like the U.S., should also be avoided, in favor of emerging market countries, which have reduced borrowing, the bank advised. With less capital sloshing around the world, and the dollar falling, the U.S. may have to compete more to finance its deficits. “The U.S. shows up as the world’s greatest consumer of external capital,” Citi noted. So it “has the most to lose as this capital becomes less freely available.”

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Worries That the Good Times Were Just a Mirage

The New York Times, Jan. 23

So, how bad could this get?

Until a few months ago, it was accepted wisdom that the American economy functioned far more smoothly than in the past. Economic expansions lasted longer, and recessions were both shorter and milder. Inflation had been tamed. The spreading of financial risk, across institutions and around the world, had reduced the odds of a crisis.

Back in 2004, Ben Bernanke, then a Federal Reserve governor, borrowed a phrase from an academic research paper to give these happy developments a name: “the great moderation.”

These days, though, the great moderation isn’t looking quite so great — or so moderate.

The recent financial turmoil has many causes, but they are tied to a basic fear that some of the economic successes of the last generation may yet turn out to be a mirage.….The great moderation now seems to have depended — in part — on a huge speculative bubble, first in stocks and then real estate, that hid the economy’s rough edges. Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn’t go bad. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak.

Now, some worry, comes the payback.

…[I]t’s hard not to believe that the economy will pay a price for the speculative binge of the last two decades, either by going through a tough recession or an extended period of disappointing growth. As is already happening, banks will become less willing to lend money, households will become less willing to spend money they don’t have and investors will become more alert to risk.

Welcome to the new moderation.

* * * * *

Europe idle as U.S. battles meltdown

Ambrose Evans-Pritchard, The U.K. Telegraph, March 18

The US Federal Reserve has resorted to the nuclear option in its ever-more depleted arsenal, invoking a Depression-era clause to shoulder the risk of losses stemming from the collapse of Bear Stearns, and to lend money directly to broker dealers.

It is the first time since the Great Depression that the Fed has stepped in directly to absorb credit losses, crossing a line deemed unthinkable just months ago. The dramatic late-night move on Sunday required dredging up Article 13 (3) of the Federal Reserve Act, which allows the Fed to shower money on almost anybody it wishes by a vote of five governors in “unusual and exigent circumstances”.

The Fed also took the extraordinary step of cutting the Discount Rate a quarter point to 3.25pc just two days before its scheduled policy meeting in Washington, a move underscoring the high drama of the crisis. The markets have priced in an emergency 100 basis point cut in the key Fed funds rate to 2pc today.

“These are massive, unprecedented actions,” said Hank Calenti, from RBC Capital Markets. “Their gravity is likely to scare the markets to death, but the Fed is trying to inhibit a margin-meltdown.”

Bernard Connolly, global strategist at Banque AIG, said invoking a 1930s-era emergency clause was a “very big deal”. “We have moved one step closer to the direct purchase of assets by the US authorities. I’m afraid this has horrible implications but it may be the only way to avoid a serious risk of Depression. This is a Greek Tragedy set in motion by Alan Greenspan a long time ago,” he said.

….The Fed’s hyperactive coups are in stark contrast to the wait-and-see policy of the European Central Bank, which has held rates steady at 4pc since the credit crunch began — despite a jump in the (market-driven) three-month Euribor rate used to price mortgages. Dominique Strauss-Kahn, the head of the International Monetary Fund, suggested yesterday that Europe had misjudged the severity of the crisis that now threatens to engulf the world economy. “Obviously the financial market crisis is now more serious and more global than a week ago,” he said. “It will have significant implications for many countries. At this time, the priority for European governments should be containing the economic damage from the financial market crisis.”

* * * * *

Pessimistic economic forecast wasn’t pessimistic enough

Martin Hutchinson, The Bear’s Lair (at Prudent Bear), March 17

On August 27, 2006 this column suggested that US house prices would fall by 15% nationwide, peak to trough. On March 11, 2007 this column suggested that the total bad debt loss from the mortgage crisis would be about $1 trillion. At a meeting at the American Enterprise Institute Wednesday, it became clear that in both cases I was not pessimistic enough. Sorry!

….This is not a pretty picture. The losses to come are probably large enough to wipe out the banking system, and the interconnected network caused by modern finance is sufficiently fragile that the failure of any one major house, if carried out through normal bankruptcy processes, would be sufficient to bring down the world economy as a whole.

It is as if the US power grid had been installed without fail-safe mechanisms, so that a local outage caused by a snowstorm in Vermont or a hurricane in Florida could cascade through the whole system and wipe out power service for the entire United States. Needless to say, failsafe mechanisms have been put in place precisely to prevent such an occurrence. When we dig ourselves out from what seems likely to be an unprecedented banking system catastrophe, we will no doubt design similar mechanisms to prevent contagion throughout the banking system. They will destroy much legitimate business, just as did the 1933 Glass-Steagall Act, which de-capitalized the investment banks, making it almost impossible for companies to raise debt and equity capital for the remainder of the 1930s.

The barriers to new business caused by the new control regulations will be the last but by no means the least of the enormous costs imposed on mankind by the crack-brained alchemists of modern finance.

* * * * *

Slump Moves from Wall Street to Main Street

The New York Times, March 21

In Seattle, sales at a long-established hardware store, Pacific Supply, are suddenly dipping. In Oklahoma City, couples planning their weddings are demonstrating uncustomary thrift, forgoing Dungeness crab and special linens. And in many cities, the registers at department stores like Nordstrom on the higher end and J. C. Penney in the middle are ringing less often.

With Wall Street caught in a credit crisis that has captured headlines, the forces assailing the economy are now spreading beyond areas hit hardest by the boom-turned-bust in real estate like California, Florida and Nevada. Now, the downturn is seeping into new parts of the country, to communities that seemed insulated only months ago.

The broadening of the slowdown, the plunge in home prices and near-paralysis in the financial system are fueling worries that what most economists now see as an inevitable recession could end up being especially painful.

….“It’s not hard to construct very dark scenarios, primarily because the financial system is in disarray, and it’s not clear how to get it all back together again,” said Mark Zandi, chief economist at Moody’s Economy.com.

To be sure, there are many places where talk of recession still seems as out of place as a diner trying to score a table at a trendy Los Angeles restaurant without reservations on a Saturday night. First-class cabins of airplanes are jammed. So are spas, cigar bars and children’s clothing boutiques selling upscale dresses. Unemployment, meanwhile, still remains at a relatively low 4.8 percent.

But even after the Federal Reserve’s extraordinary efforts to prevent the collapse of Bear Stearns from spreading to other financial institutions, the danger still lurks that banks will grow even tighter with their funds and will starve the economy of capital.

….For now, there are still pockets of prosperity across the country. Farmers are enjoying record crop prices as the adoption of ethanol makes corn a way to fill gas tanks, and as rising incomes in China, India and elsewhere spell growing demand for meat. The weak dollar is helping exporters and retailers that cater to foreign tourists.

Eastern Mountain Sports, the outdoor clothing dealer, says sales increased by one-third this month compared with the year before at its store in SoHo. “A lot of that is Europeans coming over,” said Will Manzer, the company’s president.

With oil selling at approximately $100 a barrel, the Taste of Texas Steakhouse in Houston — a popular spot for events held by BP, Shell and Exxon Mobil — is reveling in days of plenty.

….For the country as a whole, recent data shows that the economy is deteriorating at an accelerating rate. From September to January, average home prices fell 6 percent compared with a year earlier. Consumer confidence has been plummeting. The private sector shed 26,000 jobs in January and 101,000 in February, while those out of work have stayed jobless longer, according to the Labor Department.

Now, the broader discomfort is filtering into cities and towns that only recently seemed beyond reach.

* * * * *

Government’s lies cannot change the truth of a nasty economic situation

Richard Benson, Guest Commentary at Prudent Bear, March 19

No one can ever be too rich, too thin, or too beautiful. We would all like to look into a mirror that tells us that. But in tough economic times like these when inflation is raging, unemployment is climbing, and the economy is falling apart, our government is forced to look into the mirror and create a magical image by reassuring the American people that everything is just fine with the economy, when it’s really not. So how exactly do they go about doing this?

When the government releases economic statistics for prices and employment, a magic mirror is used to make numbers look much better than they really are. Both the Democrats and Republicans use this smoky mirror when they control the Presidency, and neither party dares to glance into it in fear it may shatter from the reflection. Washington is a company town and a political machine that spends trillions of our tax dollars to mislead the public. Sad, but true!

….The paternalistic government view that creating phony economic statistics is really good for the American people may be fine for the masses, but it’s not fine for me. And since it appears that the economy is far worse off than the government lets on, I’ll continue looking in my mirror and believe I can never be too rich, too thin or too beautiful. After all, it’s only an image and what harm is there in believing? But when it comes to investing my money, I plan to stay short emerging markets in China, and I’m doing this because America’s main export to the rest of the world (in the coming year) will be its big ugly recession. Yes, it’s true, we’re in a recession, but that won’t stop the government from using magical smoky mirrors to conceal it.

GENERAL COMMENT FROM CARDIN:

We just entered Act Three of a three-act economic disaster movie

It’s illuminating to consider the unfolding economic disaster in narrative terms. That is, it’s illuminating to look at it as a story, because although life isn’t stories (an insight that post-modern theory has helpfully established), you can still get your bearings sometimes by pretending that it is. When we apply this approach to current events, it becomes evident that we ought to be bracing ourselves for some really momentous stuff to go down in the very near future. In fact, we’ve been experiencing momentous events for several weeks now. And in purely narrative terms, the financial and economic developments of the past week (March 9-15) seemed like the beginning of the story’s final act, with the run on Bear Stearns and the accompanying joint government and private bailout signaling the beginning of the story’s final stretch.

Three-Act Structure

Think of the situation as a movie. Most movies are written according to a narrative pattern known as three-act structure. Each act follows certain guidelines and serves a specific function. Act One introduces the characters, establishes the setting, and basically lays the groundwork for the ensuing story to be told. It ends with a reversal or “plot point” that throws a wrench in the protagonist’s life and forces him or her to take action and struggle through conflict on the way to achieving some goal. Act Two forms the main body of the movie and shows the protagonist fighting past various obstacles on the way to achieving that goal. In this act we typically learn backstory about the characters and their situation. Like Act One, Act Two ends with a reversal that knocks the protagonist down and makes him and the viewer fear utter defeat. This sends the story off in a new direction — that is, Act Three — that shows the climactic final confrontation between the protagonist and the antagonist, followed by a period of resolution that shows how everybody and everything turned out in the end.

Three-act structure is basically a formula for telling an exciting story. And our unfolding real-life economic drama is nothing if not exciting (which may may or may not compensate for the fact that it’s damned scary, too).

Examples of three-act structure

A brief example of a real movie may help to make clear the current economic narrative scenario. The original Star Wars movie (Episode IV: A New Hope) proceeds according to three-act structure as follows:

Act One — There’s a battle in space. Two robots escape bearing a secret message and arrive on a desert planet where young Luke Skywalker lives with his aunt and uncle. He dreams of escaping his boring life and experiencing adventure. He meets the robots and discovers their secret message. He goes to wise old Ben Kenobi in the desert to find out what it means. It turns out the message was sent by a princess and intended for Ben.

–> Reversal/plot point for Act One: Luke returns home to find his aunt and uncle murdered and his home destroyed by bad guys who came looking for the robots. He’s devastated.

Act Two: Ben, Luke, and the robots hire a captain and a ship and leave the desert planet to save the princess. They encounter lots of adventures and end up aboard a space station owned by the bad guys. We learn more about the main characters through all these events.

–> Reversal/plot point for Act Two: Ben faces off against the main bad guy and is killed. Luke is devastated.

Act Three: The good guys regroup on a moon, join some other good guys, and launch an assault on the bad guys’ space station.

–> Dramatic climax: Luke successfully blows up the space station.

–> Resolution: Luke and the others are celebrated as heroes. Everybody lives happily ever after.

Notice how the hero, Luke Skywalker, is utterly defeated and devastated at the end of each act, and this devastation and reversal leads directly to the next act. Think of almost any movie and you’ll find the same pattern at work. For instance, a couple of nights ago I watched High Crimes with Ashley Judd, James Caviezel, and Morgan Freeman. Act One depicts the blissful married life of Judd and Caviezel, which is shattered when he’s arrested by the FBI and charged with a war crime. Judd is devastated. Act Two follows the attempts of Judd’s character, who is an attorney, to exonerate her husband, aided by Freeman’s character. It ends when she and Freeman are run off the road by the bad guys. She’s seriously injured, resulting in a miscarried pregnancy. She’s devastated. Act Three shows her picking herself up, dusting herself off, an carrying on to completion, resulting in the climactic moment when we find out the legal fate of her husband. (In this particular movie, there’s a “twist” and a second dramatic climax after the apparent climax in the courtroom.)

The current crisis as a three-act story

So the point is established. Three-act storytelling structure follows a specific pattern and ends each act with a reversal or crisis. So what do we see when we apply it to the unfolding economic crisis? Things might be divided up as follows, with Ben Bernanke cast as the protagonist (for narrative reasons) and the specter of economic collapse as the antagonist:

Act One: The American people are going their happy way, living the high life, borrowing money on the ever-inflating value of their homes, buying vehicles and high-tech gadgetry, eating out at an ever-proliferating array of restaurants, driving everywhere, and generally having a great time. Bernanke is the new captain of their economic life.

–> Plot point/reversal for Act One: The credit markets seize up in the summer of 2007 due to the subprime mortgage crisis. In tandem with other economic and financial developments, this kicks off the widespread recognition that a real systemic crisis is either probable or already afoot. Players in the financial market are devastated.

Act Two: Bernanke and other central bankers around the world go into crisis management mode, fighting the ugly specter of recession or, at worst, depression or outright economic collapse. From August 2007 until mid-March 2008 they adopt various tactics in response to various general and specific problems, using massive liquidity injections plus a few other tricks both old and completely new to battle the bad guy. The mainstream press begin filling in the backstory for the increasingly confused populace, running many stories that detail the buildup to the mortgage and housing crises. Additional problems crop up or come to the fore: oil, water, food, national debt. More backstory is provided as the media begin to examine the way the groundwork for this disaster has been laid over a period of decades. The U.S. and global stock markets almost crash in January but Bernanke and the others step in and save the day through dramatic rate cuts. Inflation accelerates. Home foreclosures accelerate. Consumer spending slows. The judgments of the bond ratings agencies are called into question. Municipal governments start to feel financially threatened. The U.S. government works out a stimulus plan for the public. Credit of all kinds begins to dry up. Bernanke warns of impending bank failures. Bush speaks several times to the nation about the economy. There’s an increasing sense of impending disaster. A couple of small banks fail. Hedge funds and investment banks are threatened. Pundits and analysts call it the worst crisis since the Great Depression. Etc., etc., etc. During the week of March 9-15, it looks like a national and global stock meltdown is happening again. Bernanke steps in with a massive two-part, $400 billion save. The markets shoot up by a staggering amount. Then they lose momentum almost immediately and come back down. Everybody wonders what’s going to happen.

–> Plot point/reversal for Act Two: There’s an all-out run on major investment bank Bear Stearns. It’s obvious that none of the damage is contained and all of it is worse and more extensive than most players and commentators have been letting on. Everyone is devastated.

Act Three: The New York Fed and JPMorgan bail out Bear Stearns, after which. . .

. . . after which, we don’t know. We’ll find out what happens beginning this week. But it’s obvious that the narrative feel of what’s happening places the Bear Stearns run and bailout in the position of a reversal/plot point that heralds the start of a new act. Because as has been prominently pointed out in many stories in the press over the past couple of days, right up until Bear Stearns announced it was in complete crisis, it was publicly denying that there were any problems. And the failure of such a major institution is one of the shoes that everybody has been expecting to see drop. Transitions between narrative acts are all about major negative events that cause major shifts in direction, mood, and tone. And that’s what happened last week.

So what’s left? Obviously, the big “final battle,” the narrative climax, is what we’re waiting for, followed by the resolution or final outcome. Will Ben “Skywalker” Bernanke blow up the Death Star of economic collapse? (Note in the stories catalogued below that this is exactly what the Fed is fighting, despite ongoing claims from various quarters that the foe is a mere recession.) Will he be hailed as the conquering hero, and will the American people live happily ever after? Or will the climax show the bad guy winning — as does happen in some dark-toned movies — and will the resolution involve a descent into some sort of economic devastation? Only time will tell.

Of course, life isn’t really a movie or a story. That’s the realization we should return to after such a speculative analysis. Stories have definite beginnings and endings, whereas real life doesn’t. There will be no “final outcome” like in a movie, since life will go on in some form or other with no ultimate fade to black or final chapter. But maybe the three-act analysis can give us a bearing on how to regard and what to expect from current events.

* * * * *

U.S. faces greatest economic threat since Great Depression, possible ‘perfect storm’

Bloomberg, March 12

Mortimer Zuckerman, co-founder of Boston Properties Inc., the largest U.S. office real estate investment trust, said the U.S. economy is in a recession and there’s no sign of a recovery.

“We are looking at the worst set of macroeconomic conditions since the Great Depression,” Zuckerman said in an interview with Bloomberg Television. “I don’t know where the bottom is. The federal government’s going to have to do a lot more to contain what I think is the potential of a perfect storm.”

* * * * *

Fear of a U.S. economic collapse

The New York Post, March 15

A tsunami of fear slammed the financial world yesterday as one of Wall Street’s biggest investment banks teetered on the brink of collapse and the federal government was forced to engineer an unprecedented rescue.

Stocks were pummeled across all sectors, with the Dow Jones industrial average swinging wildly, falling as much as 360 points between the day’s highs and lows.

….The panic struck trading desks early in the morning when the Federal Reserve announced that it was invoking a procedure from the Great Depression to save Wall Street giant Bear Stearns from going belly-up.

The near-collapse of the investment bank served as another reminder to investors that the global credit crisis continues to wreak havoc on the economy.

….The government essentially stepped in to provide desperately needed access to cash for Bear, which has been pummeled over concerns about its large holdings tied to the battered US housing market.

….[Y]esterday’s meltdown now has US and global markets bracing for another shoe to drop.

Harvard University economist Martin Feldstein further sounded alarms yesterday, saying: “I believe the US economy is now in recession,” and that it could “become the worst recession we have seen in the postwar period.”

* * * * *

Bear Stearns event highlights financial dominoes poised to fall

The New York Times, March 15

The Federal Reserve’s unusual decision to provide emergency assistance to Bear Stearns underscores a long-building concern that one failure could spread across the financial system.

Wall Street firms like Bear Stearns conduct business with many individuals, corporations, financial companies, pension funds and hedge funds. They also do billions of dollars of business with each other every day, borrowing and lending securities at a dizzying pace and fueling the wheels of capitalism.

The sudden collapse of a major player could not only shake client confidence in the entire system, but also make it difficult for sound institutions to conduct business as usual. Hedge funds that rely on Bear to finance their trading and hold their securities would be stranded; investors who wrote financial contracts with Bear would be at risk; markets that depended on Bear to buy and sell securities would screech to a halt, if they were not already halted.

….“You get to where people can’t trade with each other,” said James L. Melcher, president of Balestra Capital, a hedge fund based in New York. “If the Fed hadn’t acted this morning and Bear did default on its obligations, then that could have triggered a very widespread panic and potentially a collapse of the financial system.”

* * * * *

Fed takes boldest action since the Depression to rescue U.S. mortgage industry

Ambrose Evans-Pritchard, The London Telegraph, March 12

The US Federal Reserve has taken the boldest action since the 1930s, accepting $200bn of housing debt as collateral to prevent an implosion of the mortgage finance industry and head off a full-blown economic crisis.

The Bank of England, the key European central banks, and the Bank of Canada all joined in a co-ordinated move with a mix of policies to halt the dowward spiral in the credit markets, expanding on the “shock and awe” tactics used late last year.

The Fed’s dramatic step came after an emergency conference call by governors on Monday night. It followed the melt-down of the US chartered agencies — Fannie Mae, Freddie Mac, and other lenders — which together guarantee 60pc of the entire US home loan market. Fannie Mae’s share price fell 19pc in panic trading on Monday after Barron’s magazine said it may need a rescue package.

“The agency crisis was a Tsunami event,” said Tim Bond, global strategist at Barclays Capital.

The market was starting to question the solvency of bodies that stand at the top of the credit pile. These agencies together wrap or insure $6 trillion of mortgages. They cannot be allowed to fail because it would cause a financial disaster. The fact that this sector has blown up has caught everybody’s attention in Washington,” he said.

….It is a ground-breaking move for the Fed to accept mortgage collateral, even if the debt is theoretically ‘AAA-grade’ debt. The Fed is not allowed to buy mortgage bonds outright, but it can achieve a similar effect by letting banks roll over collateral indefinitely.

….Bernard Connolly, global strategist at Banque AIG, said the Fed action may help calm the markets for now, but it cannot solve the root problem of eroded of bank capital.

“There is the risk of a very damaging credit contraction. We face the most serious global crisis since the Great Depression. But this time at least the North American central banks are doing their best to stop it spreading to the real economy,” he said.

The emergency actions appear to have been co-ordinated by the Fed’s top two figures, Ben Bernanke and Donald Kohn, working closely with the Bank of Canada’s Mark Carney. “We should be thankful that we have people in charge who appreciate the gravity of the situation,” said Mr Connolly.

The travails at Fannie Mae and Freddie Mac — once rock-solid institutions — had combined in a deadly cocktail with a fresh wave of panic over the solvency of the investment banks with heavy exposure to sub-prime debt.

* * * * *

The Fed’s in a desperate race with spectre of collapse

The London Telegraph, March 12

[Cardin comments: The final sentence of the second paragraph below hits the nail right on the head, with gusto: "How much further can the central banks go to support a system that is so obviously broken?" I think it was James Howard Kunstler, but it may have been somebody else, who a few months ago drew a comparison between current attempts to prop up the economy and Weekend at Bernie's, the movie in which two losers try to cover up the death of their boss by propping him up in various poses and costumes. Right now I can't think of a more apt comparison. I mean, sure, this latest Fed action plus whatever new actions they take in the future may stave off an explicit meltdown, perhaps for quite some time. I can see the current Twilight Zone-ish, limbo-like economic environment lasting indefinitely as the "body" is posed in various ways and dolled up in various guises. But even if an all-out crash that could be undeniably named as such never occurs, it seems certain that what will emerge on the other side of the current turmoil will be a drastically changed economic and financial environment -- so drastically changed, in fact, that it will represent an entirely new world.

The thing is, the psychology and practical exigencies of the corner we've painted ourselves into by putting all of our eggs, and then some, into the "basket" of the current hyper-financialized, debt-based economy may well prevent us and our leaders from collectively admitting the truth. And this kind of denial on a mass scale has never been and can never be a good thing, since "life on the ground" still presents itself baldly to us and our psyches, even if we only recognize it subconsciously through the obscuring haze of countervailing ideology and doublespeak. And this creates massive cognitive dissonance, resulting in massive social, cultural, and political disruption, resulting in our making still more shortsighted, foolish choices on a national scale.

Or, to boil it down to simpler form: We and our leaders may well be fooling ourselves into still further and maybe worse problems by clinging to our lies and self-deceptions, as represented by current Fed and other actions that are apparently intended to kickstart and reinflate the financial markets back to what they were. These attempts to stabilize our present economy are like propping up a corpse. History doesn't provide much encouragement to think we will abandon this tactic until reality forces us to do so.

For an alternative opinion, see the Pearlstein piece immediately below.]

The Fed, with its latest $200bn offer of cheap cash, has provided yet more state aid for errant hedge funds and another Washington-backed bail-out for Wall Street bankers. The Bank of England joined in again, further shedding any notion of being wary of moral hazard. But as the bail-outs are getting bigger, then clearly the problems causing them must be getting bigger.

The Fed has saved the day again, but it will only be for a day or so. It was Friday remember when it had to pump $200bn of cash into the system. Yesterday it was offering to lend a similar amount to try and soak up some of the toxic debt out there which has left the lending markets hamstrung. How much further can the central banks go to support a system that is so obviously broken?

Arguably, having come this far, Mervyn King and Ben Bernanke have breached the point of no return. There is no going back. The US certainly is now relying on its central bank to keep its most important credit markets open, its equity markets from plunging and bring a veneer of normality to financial life. Traditional supports, such as confidence in normal commercial debt repayment, have been knocked away as institutions are engaged in a desperate dash for cash.

We have not seen anything like it since the decade of the Great Depression. Melodramatic as that might sound, it is a fact but a fact that markets seem unwilling to accept. While the Fed is willing to slash rates and hope, and pump liquidity into the system, markets will remain optimistic. But it is a race to the bottom. The Fed hoping it reaches the finishing line first and restores confidence returns before a bank goes bust. But the spectre of a collapse is neck and neck with Bernanke and it’s still anyone’s guess which will win.

* * * * *

The Fed is fighting the most serious financial market crisis since the Great Depression

Steven Pearlstein, The Washington Post, March 12

[Cardin comments: Pearlstein's general opinion of the Fed's actions is obviously contra the one I gave in the comment above. He argues that the "Fed's goal has not been to impede that process [i.e., the current de-leveraging], simply to make sure that it proceeds in an orderly fashion.” I’m open to the possibility that he’s right, and that this really is the best and wisest course to take. The upshot, of course, is that regardless of such differences of opinion, parties from all quarters are publicly recognizing that this massive de-leveraging is in fact taking place. The resulting political, social, and economic ramifications cannot help but be massive and profound.]

Forget all that nonsense about the Bernanke Fed being too timid or behind the curve. In the face of what is turning into the most serious financial market crisis since the Great Depression, the Fed has been more aggressive and more creative in using its limitless balance sheet — in effect, its ability to print money — than at any time in history.

We can argue till the cows come home about whether this is a bailout for Wall Street. It is — but only to the extent that it is also a bailout for all of us, meant to prevent a financial and economic meltdown that drags everyone down with it. In broad strokes, we’re going through a massive “de-leveraging” of the economy, wringing out trillions of dollars of debt that had artificially driven up the price of real estate and financial assets, and, more generally, allowed Americans to live beyond their means. The Fed’s goal has not been to impede that process, simply to make sure that it proceeds in an orderly fashion. But even that has required central bank intervention that is unprecedented in scale and scope. And despite yesterday’s huge rally in the stock market, Fed officials warn that this de-leveraging is nowhere near finished.

….It’s anyone’s guess how long this credit crunch will last, but the chances are that we’ll have several more market meltdowns and Fed rescues before it’s over, probably in the fall. Until then, the dollar will continue to get hammered and stocks will continue their fitful decline. And if the last two financially induced recessions are any guide, it will be well into 2009 before the economy hits bottom, followed a couple of years of slow growth and “jobless” recovery.

* * * * *

Treasury secretary Paulson admits two decades of deregulation have failed

MarketWatch, March 13

[Cardin comments: It's just astonishing, really, to hear how much the swelling tide of comments from major government figures and mainstream economists, analysts, pundits, and investors has come to sound like the warnings that were only coming from a select few observers as recently as a few months ago. Paulson is now openly calling for a complete overhaul of the mortgage derivatives market and decrying the "excessive complexity" that has rendered that market so complex, confusing, and flat-out opaque that nobody can figure out what to make of it or how to deal with all the fallout from the epic misinvestment in it. Gee, haven't Warren Buffett and James Howard Kunstler and Peter Schiff and Marc Faber and Nouriel Roubini and several others been preaching that same sermon for quite some time, often to the accompaniment of scorn from their peers and apparent ignore-ance by government regulators? I'm telling you, it shouldn't be this fun to watch these things happening. But sometimes it just is.]

You know things are very very bad on Wall Street when a guy like Henry Paulson — Treasury secretary, solid Republican, and former Goldman Sachs CEO — joins the crowd calling for more regulation over the financial markets.

Paulson spared no one in his criticism Thursday of the excesses of deregulation that has now created the worst global financial crisis in a generation, threatening the health of the U.S. economy, the savings of millions of Americans, and the survival of some of the biggest financial institutions in the world.

Wall Street and Washington both failed big time, he said. Wall Street invented new ways to make money by selling securities so complicated that no one could really follow which shell the pea was under. Fortunes were made on the paper Wall Street sold.

At the same time, Washington’s watchdogs were dozing, tranquilized by the false assurance that Wall Street would police its own. It’s been obvious for years now that Wall Street could not be trusted, and finally official Washington agrees.

* * * * *

Victims of Our Own Good Fortune

The Daily Reckoning, March 12

The big picture still shows the same scene: America is getting poorer. Its money buys less stuff. Its working people earn less money. Its assets are worth less than they used to be.

“This thing is not about a recession or not a recession…and it’s not about inflation or deflation. It’s about re-pricing the U.S.A., downward. Sell America…sell its money…sell its stocks…sell its property…sell its politics…sell its economy…sell its I.O.Us. Sell it all,” said a friend over the weekend. “It’s clear to me that America’s best days are behind it. The United States has had a disproportionate share of everything for too long — stock market valuations…the world’s savings…the world’s energy…the world’s calories…the world’s military power. That’s what is changing. The world is readjusting…it’s not getting out of balance; it’s getting back in balance. It will be a world where the United States plays less of a role…and takes less of the world’s resources.”

….America has enjoyed an extraordinary run of luck. She had cheap energy…history’s most powerful military…and the world’s reserve currency. Now she has the world’s biggest debts…its highest deficits…and the most colossal financial problem ever. In short, it has passed its I.O.Us out all over town and now owes more money to more people than anyone ever did. It now has more financial commitments any nation has ever had (with a financing gap of $60 trillion — not including the cost of the Iraq War…which is expected to be as much as $5 trillion)…and has a competitive disadvantage against much of the rest of the globe. Asians make things cheaper. Europe makes them better.

How did such nice people get themselves into such a mess? Are Americans stupider than other people? Are they lazier? More reckless…more feckless? Nah…we’re just victims of our own good fortune. We had it too good for too long. A unique set of circumstances allowed Americans to borrow and spend more than anyone ever could before…and so they did.

* * * * *

Economists now admitting $100 oil DOES hurt

CNNMoney.com, March 7

Five months ago many economists said high oil prices wouldn’t hurt the economy — now they’re choking on their words.

Back in October, when oil prices were near $90 a barrel and the economy was still humming along economists said high oil prices shouldn’t cut into economic growth. The economy used oil more efficiently than it did in the 1970s, and spending on gas was just a small percent of people’s budget, the experts said.

Fast forward to March and you’ve got a sputtering economy, and economists saying $105 oil deserves a big part of the blame.

Even the White House is beginning to sound more pessimistic [!], predicting Friday that the the economy could contract.

….Of course, high oil prices are not the only thing weighing on consumer spending, which accounts for about two-thirds of all U.S. economic activity. Declining home values mean people can’t access cash through a home equity loan or profit from higher sale prices. In addition, the economy is shedding jobs, and unemployed people tend to spend less money.

“On its own, $100 oil wouldn’t pull the economy into recession,” said Beth Ann Bovino, a senior economist at Standard and Poor’s. “But given the other factors, it’s just another shoe to drop.”

* * * * *

Traders panicking as financial markets have become ‘utterly unhinged’

Bloomberg.com, March 6

The markets have become “utterly unhinged,” William O’Donnell, a UBS AG government bond strategist in Stamford, Connecticut, wrote in a note to clients today. A lack of liquidity has “led to stunning air-pockets in price levels.”

Investors are realizing that banks have little room to make new investments amid rising losses and a flood of unwanted assets, said Scott Simon, head of mortgage-backed bonds at Pacific Investment Management Co. The world’s top banks have reported more than $181 billion in asset writedowns and losses, been stuck with $160 billion of leveraged buyout loans, and bailed out $159 billion of structured investment vehicles.

“Everything is telling you the financial system is broken,” Simon, whose Newport Beach, California-based unit of Allianz SE manages the world’s largest bond fund, said in a telephone interview today. “Everybody’s in de-levering mode.”

….”The single biggest concern right now is who’s the next hedge fund to blow up, and how big are they,” Arthur Frank, the New York-based head of mortgage-backed-securities research at Deutsche Bank AG, said in an interview today. “The more the market widens, the more likely it is that another leveraged player has to sell, so it does feed on itself.”

….”Traders are putting their phones down and backing slowly away from their desks,” O’Donnell said today in a telephone interview. “Relatively little” agency mortgage-backed securities are being traded, Pimco’s Simon said.

* * * * *

Krugman: Third wave of financial panic now hitting

The New York Times, March 8

The financial crisis seems to have entered its third wave. Panic in August, then partial recovery thanks to lots of money thrown at the system by the Fed. Renewed panic late fall, then partial recovery thanks to even more money thrown in, especially the Temporary Auction Facility. And panic has set in yet again.

….If foreign exchange intervention works, it’s usually because of the “slap in the face” effect: the markets are getting hysterical, and intervention gives them a chance to come to their senses.

And the problem now becomes obvious. This is now the third time Ben & co. have tried slapping the market in the face — and panic keeps coming back. So maybe the markets aren’t hysterical — maybe they’re just facing reality. And in that case the markets don’t need a slap in the face, they need more fundamental treatment — and maybe triage.

* * * * *

The peak oil crisis: the last spiral?

Tom Whipple, Falls Church News-Press, March 13

Events are moving faster and faster. Equity markets and the dollar are dropping. Oil, gas, diesel and commodities are surging as the investment of last resort.

Margin calls are endangering the financial system. Real estate values and markets are falling. Exotic debt obligations are turning worthless by the billions. Central bankers have started the printing presses and are injecting unprecedented billions of “liquidity” into their banking systems in what so far seems to be a futile effort.

….What is largely ignored in all the discussion of economic recovery is that world oil production is likely to start its final decline somewhere in the next 36 to 48 months. Once this becomes evident, prices will start moving much, much higher and shortages will develop. In an environment such as this, recovery from a recession will be far more difficult and is likely to be measured in decades rather than months.

….There is much heated debate over whether and how soon there will be a “techno-fix” for the decline of oil — wind, wave, and solar power, electric transport and much lower energy consumption. The factors bearing on how the various techno-fixes will play out are so numerous and interdependent that it is impossible to make much of a judgment about when or whether they will come in sufficient quantities to continue with anything resembling current civilization.

* * * * *

A Global Need for Bread That Farms Can’t Fill

The New York Times, March 9

Everywhere, the cost of food is rising sharply. Whether the world is in for a long period of continued increases has become one of the most urgent issues in economics.

Many factors are contributing to the rise, but the biggest is runaway demand. In recent years, the world’s developing countries have been growing about 7 percent a year, an unusually rapid rate by historical standards.

The high growth rate means hundreds of millions of people are, for the first time, getting access to the basics of life, including a better diet. That jump in demand is helping to drive up the prices of agricultural commodities.

Farmers the world over are producing flat-out. American agricultural exports are expected to increase 23 percent this year to $101 billion, a record. The world’s grain stockpiles have fallen to the lowest levels in decades.

“Everyone wants to eat like an American on this globe,” said Daniel W. Basse of the AgResource Company, a Chicago consultancy. “But if they do, we’re going to need another two or three globes to grow it all.”

In contrast to a run-up in the 1990s, investors this time are betting — as they buy and sell contracts for future delivery of food commodities — that scarcity and high prices will last for years.

If that comes to pass, it is likely to present big problems in managing the American economy. Rising food prices in the United States are already helping to fuel inflation reminiscent of the 1970s.

And the increases could become an even bigger problem overseas. The increases that have already occurred are depriving poor people of food, setting off social unrest and even spurring riots in some countries.

* * * * *

Foreclosure crisis sends shockwave across America’s cities

USA Today, March 10

The mortgage foreclosure crisis has caused a drop in cities’ revenues, a spike in crime, more homelessness and an increase in vacant properties, a survey of elected local officials out today shows.

About two-thirds of 211 officials surveyed by the National League of Cities reported an increase in foreclosures in their cities in the past year, according to the online and e-mail questionnaire. A third of them reported a drop in revenues and an increase in abandoned and vacant properties and urban blight.

….The ills of foreclosures are dominating the agenda of the league’s meeting with congressional lawmakers in Washington, D.C., this week to secure federal funding for local initiatives.

“The American dream for individuals has now become the nightmare for cities,” says James Mitchell, a Charlotte councilman and head of the group’s National Black Caucus of Local Elected Officials.

* * * * *

Stagflation, inflation, or just the end of your way of life?

Craig Harris, 321Gold, March 14

The US is currently in what I like to call a period of “decay”. It is in a period of decay in every possible way. If you live in the real world like I do, it is evident. If you consume a diet of the corporate media cheerleading squad, then you don’t live in the real world and it could be difficult for us to communicate during the rest of this essay. We’ve got people charged with cleaning up the corrupt broken system going out with an $80,000 hooker bill and being replaced by a blind man. The current El Presidente is a wind-up doll for a bunch that should all be in orange jumpsuits. It would be comical if it weren’t so sad to watch it all go down. It is a modern day tragedy being played out in real time in the context of a giant government/corporate media theatre production.

….That’s one reason I don’t write a lot publicly these days. It is becoming increasingly difficult for people who live in the real world to communicate with those who don’t, and there is an increasing number of those who don’t just simply because most people believe what they are told and the lies they are being told are now monumental. Astronomical in size. That’s one of those universal rules about human beings; the majority will always go along with whatever you tell them. That’s just the way it always has been and always will be. All good propagandists know that.

For those who do think for themselves and live in the real world however, everything that is happening today has been entirely predictable and even expected. I mean, the corporate media will say “no one ever saw this” or “they never saw that” and really the case is they just choose not to have those people appear.

….It’s not going to be over any time soon. The big question in my mind is whether the whole thing is about to go kaput or if we are just going to witness a continuous decay as the wealth shifts into a very small percentage of the population… as the middle class flames out.

….So in the real world right now, we have a situation where the banks are bankrupt, the government is bankrupt, the people are bankrupt, and the cure for this is to lower interest rates and create more money (debt) by pushing a button… diluting the value of the money further and causing everything we have going on now. It all makes sense here in the real world. All the pieces to the puzzle fit and none don’t.

….The country has lost its way and is increasingly operating at the whim of the corporate lobbyists and special interests that own the politicians as the stench of it all starts to smell so foul that even the corporate media disinformation campaign can’t convince your lying eyes. It is not what it appears to be. It is Rome circa 400’s. It has already bankrupted itself policing an unsustainably large global empire. You have to live through the decline.

I seem to have hit a winning streak with my movie choices lately. So much so, in fact, that I’m really starting to think in terms a new golden age in American filmmaking, or at least in films that are achieving wide release in American theatres. Yes, that might seem to run counter to my generalized diagnosis of mass entertainment culture’s death spiral into a dystopian dark age, which I have explored at length here at The Teeming Brain. But in fact I don’t think these two viewpoints are mutually exclusive. I am left with a bit of a philosophical dilemma, though, since I can’t decide whether these great movies are worth the gargantuan entertainment culture of excess that gives rise to them.

Movies that I have really loved lately– some in recent days, some in recent weeks and months — and that have really impressed me with their maturity, intelligence, artistic quality, and emotional depth include The Assassination of Jesse James by the Coward Robert Ford, The Brave One, Munich, The Lookout, The Constant Gardener, Blood Diamond, 3:10 to Yuma, Babel, and Syriana. I’ve watched a couple of them more than once. And I can’t help sensing in their collective presence a kind of “hot streak,” a whiff of the creative momentum or running energy that indicates a real upsurge of excitement and artistic vision in the culture that’s giving rise to them. These movies are achieving wide theatre releases and easy access plus prominence in the DVD market. The same thing, minus the DVDs, happened in Hollywood in the 1970s, when a streak of genius-level movies found their way into America’s collective consciousness. Dare we let ourselves think that something comparable is happening today?

Anybody who pays attention to entertainment industry news is aware that there’s been increasing talk over the past few years of a new era of responsible and “important” filmmaking. The current issue of Time, for example, which sits beside me as I type these words, carries an article titled “Can a Film Change the World?” which the contents page describes by saying, “Hollywood wants to change the world — but can films make a difference?” Films like Babel and Syriana, with their global scope, multiple languages, multiple storylines, and nonlinear narrative approach are cited especially often in the current press as examples of this new “important” cinema. But these qualities aren’t the sine qua non of the recent streak of filmic fire. 3:10 to Yuma, for example, feels almost classical with its straightforward narrative approach and American old West setting. But it carries the same creative energy, intelligence, and sense of being “in the zone” that one finds in Babel etc. So what exactly is up? Not just “message” films but more conventional ones, too, seem to be on a hot streak.

Normally I would wax cynical about claims of an important new era in filmmaking, since I would find myself unable to divorce my thinking about these films, and also my experience of watching them, from my knowledge of the rancid culture of greed, excess, narcissism, and corruption that is the modern entertainment industry. But damned if the movies I’ve named, along with a few others, haven’t blown right through this attitudinal wall. I trust my own judgment here. I can aver without a whiff of self-importance that I am an uncommonly sensitive and informed watcher of movies. Both my academic training and, more importantly, my personal emotional/intellectual leanings have brought this about. And I’m convinced that something important is going on at the movies. When a film carries the power of, for example, The Assassination of Jesse James, which literally left me on the verge of tears at its emotionally devastating conclusion, then I know something’s really afoot. All art forms cycle through fallow and fertile periods. Presently we seem to be in the early or perhaps early middle stages of a particularly exciting example of the latter.

What all of this really leads me to ponder at length is the question of whether the films are worth the entertainment culture that gives rise to them. Does the artistic success of a movie like Jesse James or Syriana somehow “redeem” the fact that its very existence is predicated on the existence of the entertainment business with its excesses? Thinking about the matter in light of one of my favorite subjects, peak oil, does the artistic success of Syriana or any other movie somehow redeem the fact of the gargantuan energy investment that’s required for it to exist at all? Entertainment has always been a business and a culture as prone to corruption as politics. This goes back farther than the existence of Hollywood or the United States. But like everything else, entertainment operates today at a higher level of sprawl and consequence than it ever did before. The scope and stakes of every movie are so high, and the level of effort and coordination among filmmakers and businessmen so mind-bogglingly intense and complex, that it’s a miracle any movie gets made at all. This raises the question of whether it’s ultimately worth it, of whether there can be anything virtuous about devoting so much to the producing of entertainment on such a massive scale, regardless of the relative inherent worth of the final product.

Should we celebrate the artistic successes that arise out of modern cinema culture? Should we praise the George Clooneys, Alejandro Gonzalezes, Steven Soderberghs, Brad Pitts, and Jodie Fosters who manage the miracle of conjuring something worthwhile out of the steaming flux of the show business world? Or should we instead support the downsizing of the whole thing? Is there perhaps something inherently wrong with life in the movie industry being conducted at its current level, and with the American and other publics investing such enormous amounts of time, money, and attention in the whole thing? Can any movie, even one of the current crop of great ones, ultimately be worth what it takes to get it made?

In case you haven’t noticed, I’m glossing over a few distinctions that really ought to be drawn. In particular I’m equating movies with entertainment, which is to conflate a necessary distinction between entertainment (the attempt to arouse emotion) and art (the expression of emotion). Some movies may be pure entertainment and some art, while some are both. All have their place. But recognizing this distinction can be helpful in the issue I’m considering, because I’ve been talking as if all movies are intended as entertainment, and this just may not be true. The current crop of “important” films appear to be intended at least partly as a cinematic form of social activism. And that may cast a whole different light on the matter.

But for now I’m riding roughshod over it all because my thoughts are still unformed. One of the few things I’m certain of is the power and beauty I sense these recent films. So for a while, at least, I’ll just enjoy the rush and let the thoughts sort themselves out on their own schedule.

General comment from Cardin: Primed and ready to blow

Beware the coming week. If you’ve kept even one eye and ear on any news outlet, you’ve seen a swelling flurry of events and stories indicating that the excrement is starting to sail toward the propeller at high speed in multiple clumps. Several clumps have of course already hit and have served as the source of the ongoing financial and economic scare since last summer. But now the mother load of dung is sailing toward those whirling blades.

I’ve thought all along that March-April was the most likely window for when some really interesting events would start to go down. The barrage of heady headlines over the past week would seem to indicate that I (and also the much smarter people who have shared the same judgment with me) have been correct. The Fed just made over $200 billion more available to the banks in what looks distinctly like a panicky move. A small bank south of Kansas City, MO failed last week and was taken over by the FDIC. (And guess what? It was the second bank of the year to fail; the first was in Kansas City itself. Weird, no?) The Dow and all other American — and also world! — stock indices were sharply down for the second week running. The Fed is waffling about the possibility of another dramatic rate cut at their next meeting. The report last week on the loss of 63,000 U.S. jobs blew everybody’s minds. Amidst it all, Ambrose Evans-Pritchard, the widely respected business and financial reporter at the International Herald Tribune, wrote a piece last week, linked to below, about how the U.S. Fed’s rescue mission has failed. He has of course been covering this unfolding drama right from the start. Now he ends this latest piece with a confession worthy of extended rumination: “For the first time since this Greek tragedy began, I am now really frightened.”

Stay tuned.

* * * * *

Economist John Williams predicts ‘worst business cycle since the Great Depression’

CNN, March 1

[Cardin comments: You can either click the link above to watch the video at the YouTube site or watch it below. The appearance of this type of piece with its explicit warning of imminent economic havoc represents the breaking of a metaphorical dam. Before cutting to the interview with John Williams, the economist who runs ShadowStats.com, the CNN correspondent Greg Hunter begins with this intro, which is right on the money in its recounting of recent false predictions by Bernanke, Paulson, and Bush:

"A year ago, Ben Bernanke, the head of the Fed, Hank Paulson, the head of the Treasury, even the president said the subprime crisis was going to be contained. There are 9 million houses under water now. Experts say that number could easily double, 15 to 20 million houses could be under water in a year or two. That's not contained.

"So, when you hear Ben Bernanke this week talk about how we are not in a recession. We don't see a recession. The president, same song. Not in a recession. Not going to be in a recession. It makes you wonder. Are these guys going to be wrong in the future? Here is what John Williams of Shadowstats.com says about what's coming down the road. "

What is "coming down the road," according to Williams in the brief interview that follows, is "a severe recession" representing "the worst business cycle I have seen since the Great Depression." When the video returns to Hunter in the studio, he may be overstating things when he claims that Williams is therefore predicting an inflationary depression. But this type of coverage on CNN is still significant, as is the fact of Williams' outlook, given that he is very widely respected in the financial world for his accurate moves and predictions.]

* * * * *

Markets may be indicating ‘absolute disaster’ for U.S.

John Authers, The Financial Times, March 6

[Cardin comments: This is a short video segment featuring John Authers, investment editor at the Financial Times, explaining why current market movements suggest the possibility of all-out disaster for the U.S. economy. Click the link to watch the two-minute video. I've transcribed his opening and closing comments below.]

Welcome from New York, where a lot of people are very scared. We’ve had another day of quite dramatic extremes on the markets. The Euro is at a new all-time high against the dollar. Sterling is back above two dollars here in the states. Stocks have been falling, and financial stocks are at a new low for the year. All of that sounds bad enough but what I’d like to take you through is the very scary implications when we put the judgments of different markets together.

[Authers shows and explains a few charts tracking S & P performance, loss of international confidence in the U.S. dollar, rising gold prices, and gold prices compared to U.S. home values. All of the numbers are awful for the U.S.]

….On face value, what the markets are telling us that the U.S. is heading for absolute disaster. The alternative explanation is that people have gotten very scared and the markets are overdone. Let’s hope that the latter is correct.

* * * * *

International experts foresee collapse of U.S. economy

Bert Hielema, Belleville Intelligencer (Ontario), Feb. 29

Now the bad news pops up everywhere.

Harry Koza in the Globe and Mail quotes Bernard Connelly, the global strategist at Banque AIG in London, who claims that the likelihood of a Great Depression is growing by the day.

Martin Wolf, celebrated columnist of the U.K.-based Financial Times, cites Dr. Nouriel Roubini of the New York University’s Stern School of Business, who, in 12 steps, outlines how the losses of the American financial system will grow to more than $1 trillion — that’s one million times $1 million. That amount is equal to all the assets of all American banks.

….The most frightening forecast so far comes from the Global Europe Anticipation Bulletin (GEAB), available for 200 euros — about $300 — for 16 issues annually. Its prediction is quite specific.

….”The end of the third quarter of 2008 (thus late September, a mere seven months from now) will be marked by a new tipping point in the unfolding of the global systemic crisis.

“At that time indeed, the cumulated impact of the various sequences of the crisis will reach its maximum strength and affect decisively the very heart of the systems concerned, on the front line of which (is) the United States, epicentre of the current crisis.

“In the United States, this new tipping point will translate into — get this — a collapse of the real economy, (the) final socio-economic stage of the serial bursting of the housing and financial bubbles and of the pursuance of the U.S. dollar fall. The collapse of U.S. real economy means the virtual freeze of the American economic machinery: private and public bankruptcies in large numbers, companies and public services closing down.”

The report goes on to say that we are entering a period for which there is no historic precedent. Any comparisons with previous situations in our modern economy are invalid.

We are not experiencing a “remake” of the 1929 crisis nor a repetition of the 1970s oil crises or 1987 stock market crisis.

What we will have, instead, is truly a global momentous threat — a true turning point affecting the entire planet and questioning the very foundations of the international system upon which the world was organized in the last decades.

The report emphasizes that it is, first and foremost, in the United States where this historic happening is taking an unprecedented shape (the authors call it “Very Great U.S. Depression”).

….Concerning stock markets, the GEAB anticipates that international stocks would plummet by 40 to 80 per cent depending where in the world they are located, all affected in the course of the year 2008 by the collapse of the real economy in the U.S. by the end of summer.

The European authors of this report — it appears simultaneously in French, German and English — state that they simply and without prejudice try to describe in advance the consequences of the ominous trends at play in this 21st-century world, and to share these with their readers, so that they can take the proper means to protect themselves from