British economy in bad shape, at “60-year low”

The UK is facing the worst economic conditions for 60 years and the current crisis will be "more profound and long-lasting" than expected, British finance minister Alistair Darling warned Saturday.

Darling's comments are the Government's grimmest assessment yet of the situation, and come after a Bank of England policymaker warned that unemployment could hit two million by Christmas, the UK's Press Association reported.

Darling said that the economic conditions faced by the UK and the rest of the world "are arguably the worst they've been in 60 years," adding: "I think it's going to be more profound and long-lasting than people thought."

[CNN]

Foreign spigot being turned off to the U.S.

Fannie and Freddie have always borrowed at preferential rates. Mortgages are borrowed and bundled, which transformed mortgages into investments for banks, corporations and governments all over the world.

International investment is the foundation on which our home ownership was built. Well over US $1 trillion of our mortgages have been sold to foreign investors this way in the recent past. Over the past few years America has been borrowing over 50% of the world's internationally available savings.

Today we learn that the Bank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae and Freddie Mac by a quarter since the end of June. The sale by China’s fourth largest commercial bank is a sign of nervousness among foreign buyers of Fannie and Freddie’s bonds and guaranteed securities. Asian investors in particular have become net sellers of agency debt, said analysts.

This weekend, the Group of Twenty developed and advanced developing countries will be holding a preparatory meeting in Brazil. Although the crisis at Fannie Mae and Freddie Mac is not on the agenda, there is speculation that Treasury officials could informally encourage big holders of agency debt and mortgage-backed securities not to scale back their investments.

Treasury may have to bail out FDIC

The Federal Deposit Insurance Corp (FDIC) might have to borrow money from the Treasury Department to see it through an expected wave of bank failures. The borrowing could be needed to cover reimbursing depositors immediately after the failure of a bank.

"I would not rule out the possibility that at some point we may need to tap into (short-term) lines of credit with the Treasury for working capital, not to cover our losses," Chairman Sheila Bair said in an interview with the Wall Street Journal.

In a bid to replenish the $45.2 billion fund, Bair had said that the FDIC will consider a plan in October to raise the premium rates banks pay into the fund, a move that will further squeeze the industry.

The last time the FDIC borrowed funds from the Treasury was at nearly the tail end of the savings-and-loan crisis in the early 1990s after thousands of banks were shuttered.

The fact that the agency is considering the option again, after the collapse of just nine banks this year, illustrates the concern among Washington regulators about the weakness of the U.S. banking system in the wake of the credit crisis.

[Reuters]

Freddie and Fannie Failure World Catastrophe, Yu Says

U.S. mortgage finance companies Fannie Mae’s shares closed on Friday at $5, down from almost $70 a year ago. Freddie Mac fell to $2.61, which is down from about $65.

A failure of Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank. “If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said. “If it is not the end of the world, it is the end of the current international financial system.''

“The seriousness of such failures could be beyond the stretch of people's imagination,'' said Yu, a professor at the Institute of World Economics & Politics at the Chinese Academy of Social Sciences in Beijing.

China's $376 billion of long-term U.S. agency debt is mostly in Fannie and Freddie assets. The Chinese government probably holds the bulk of that amount.

[Bloomberg.com]

A Tectonic Shift in the Global Economy

As of today, there should be no remaining doubts as to the tectonic shift in the global economy -- the world's largest and most profitable bank is Chinese.

While banks in North America and Europe are still counting massive credit crunch losses, Industrial and Commercial Bank of China (ICBC) has surged ahead of its international competitors thanks to a booming domestic economy that has dramatically boosted profits. ICBC’s half yearly earnings jumped an astonishing 57% to US$9.4-billion, up from US$5.9-billion last year. Lending, investment banking and wealth management all saw significant increases as the Chinese economy continued to outpace much of the rest of the world.

The results catapult ICBC ahead of international global powerhouse HSBC PLC -- the most profitable bank in the world last year -- where earnings fell 29% in the first six months of 2008.

The rise of ICBC is matched by China's other leading banks. (Among them China Citic Bank Corp, China Merchants Bank, and China Construction Bank)

The fortunes of the Chinese banking industry, which has been relatively insulated from the global credit crunch, contrasts sharply with slashed profits at banks on Wall Street and [Canada’s] Bay Street and across Europe.

"China may still grow significantly faster than developed economies for at least another one or two decades," said JP Morgan's Hong Kong-based bank analyst Samuel Chen in a recent report.

[Excerpt of an article by Duncan Mavin, The Financial Post]

Large U.S. Bank Collapse Seen Ahead

The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said on Tuesday.

"The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'," he told a financial conference.

"We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," said Rogoff, who is an economics professor at Harvard University and was the International Monetary Fund's chief economist from 2001 to 2004.

"Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson said -- these giant mortgage guarantee agencies are not going to exist in their present form in a few years."

[Reuters]

The perfect storm leading to a global recession

Recent developments suggest that all G7 economies are already in recession or close to tipping into one.

When they reach it, there will be a sharp slowdown in Brazil, Russia, India, and China and other emerging markets.

Elsewhere, Japan is contracting, too.

This G7 recession will lead to a sharp growth slowdown in emerging markets and likely tip the overall global economy into a recession

[Excerpt of an article by Nouriel Roubini, Professor of Economics at the Stern School of Business, New York University]

European economies crumbling

The economies of Germany, France and Italy all contracted in the first quarter and may now be in full recession, shattering assumptions that Europe would prove able to shrug off the effects of the credit crunch.

The picture is darkening so fast in Spain that Prime Minister Jose Luis Zapatero cancelled holidays and called his cabinet back to Madrid for the first emergency session of its kind since the Franco dictatorship.

Growth has turned negative in Ireland, Denmark, Latvia, and Estonia, while grinding to a halt in Sweden and The Netherlands.

The oil shock over the early summer appears to have had a dramatic effect on the heavy industries of Japan and Germany.

Spain’s finance minister Pedro Solbes says “The economic situation is worse than we all predicted.”

[The Telegraph]

If OPEC Dumps the U.S. Dollar

Iranian President Mahmoud Ahmadinejad dropped a bombshell. He stated on the record at a rare gathering of the heads of the Organization of Petroleum Exporting Countries [OPEC] that member nations have expressed a real interest in converting their cash reserves from the beleaguered U.S. greenback to the European euro. More specifically, Ahmadinejad referred to the U.S. dollar as "a worthless piece of paper."

What makes their posturing so troublesome, however, is that for the first time there was no rebuttal, or reassuring commentary from Saudi Arabia and other key U.S. petrodollar supporters, in response.

Instead, OPEC members formed a working group to study the dollar’s effect on oil prices and to "investigate the possibility of a currency basket" as a means of offsetting declining dollar-based reserves.

Many OPEC countries presently peg their own currencies to the dollar. Should that change, this could result in dramatically higher oil prices as the bigger players squeeze the smaller producers out and the dollar falls even further in response. How high will crude oil soar? $197 a barrel is possible.

[Seeking Alpha]

Top Budget Committee Republican: U.S. Headed Toward Bankruptcy

The ranking Republican on the House Budget Committee, Rep. Paul Ryan (R-Wis.), said the U.S. government is headed toward bankruptcy if it stays on its current fiscal course.

To back up this claim, Ryan cited an estimate by the non-partisan Government Accountability Office that says the government faces a $53 Trillion shortfall to cover the costs of promised benefits in its entitlement programs: Medicare, Medicaid and Social Security.

Ryan said that to deal with this situation the government must either reform the entitlement programs or eventually impose massive tax increases on American workers. “By the time my three children – who are three, five and six years old—are my age, the federal government will have to tax 40 cents out of every dollar made in America just to pay the bills for the federal government at that time,” he said.

“What [the Congressional Budget Office] told me was really startling,” said Ryan. “They said that the current low rate, the 10-percent bracket for low-income Americans, would have to go up to 25 percent. The middle-income tax rate for middle-income Americans would have to go up to 66 percent, and the top rate, which is what small businesses pay, would have to go to 88 percent.

“And if you did that, all experts conclude, you would literally crash the American economy.”

[CNSnews]

Britain's second largest bank posts largest six-month loss in British banking history

Britain's second largest bank, Royal Bank of Scotland, reported the largest six-month loss in British banking history. (802 million pounds or $1.5 billion after taxes.)

The Edinburgh-based bank was forced into the red largely by 5.9 billion pounds ($11.4 billion) worth of write-downs arising from its exposure to the international credit crisis.

[AP]

A second, far larger wave of U.S. mortgage defaults is building

The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is building with alarming speed. With the U.S. economy struggling, homeowners with better credit are now falling behind on their payments in growing numbers. The problems in the broader market may not peak for another year or two, analysts said.

"Subprime was the tip of the iceberg," said Thomas Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. "Prime will be far bigger in its impact."

Delinquencies in prime and alt-A loans are particularly challenging for banks because they hold more such loans on their books than they do subprime mortgages.

[International Herald Tribune]

U.S. job losses at hit four-year high

The nation's employers continue to put jobs on the chopping block at a steep rate as the economy struggles, according to latest reports.

The unemployment rate in the US has climbed to a four-year high of 5.7 per cent in July after employers shed 51,000 jobs.

So far, the US economy has lost a total of 463,000 jobs this year.

An outplacement consultancy firm says that planned job cuts announced by employers in July jumped 26% from the figure announced in June. That's up 141% from a year ago.

This news comes as car-manufacturing company General Motors posted losses of $15.5 Billion, filing a report showing its third-worst quarterly loss in its history in the second quarter.

Additionally, Federal regulators closed Florida's First Priority Bank, marking the eighth bank failure of the year.

Vicious Economic Cycle

Wall Street's titans face huge losses ahead, and informed insiders assume a far larger federal bailout will be needed--after the election. No one wants to upset voters by talking about it now.

The bailouts are rewarding the very people and institutions whose reckless behavior caused this financial mess. Yet government demands nothing from them in return--like new rules for prudent behavior and explicit obligations to serve the national interest.

The largest banks and brokerages have already lost enormously, but lending portfolios must shrink a lot more--at least $1 trillion, some estimate.

The gravest danger is that the national economy will weaken further and spiral downward into a negative cycle that feeds on itself: consumers stop buying, banks stop lending, producing companies cut their workforces. That feeds more defaulted loan losses back into the banking system's balance sheets. This vicious cycle is essentially what led to the Great Depression after the stock market crash of 1929.

[Excerpt of an article by William Greider, The Nation]