China suggests U.S. dollar should be banished from international trade

The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, the official newspaper of China's ruling Communist Party says.

The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.

A few days later, Russian Prime Minister Vladimir Putin proposed that Russia and China ditch the dollar and gradually switch over to national currency payments in their bilateral trade, expected to total $50 billion in 2008. Chinese Prime Minister Wen Jiabao described strengthening bilateral relations as "strategic."

Dollar to be replaced by Chinese currency as the world's "reserve currency"?

The Bush administration and the EU have called for an economic summit to be held by the 20 largest economies sometime after the presidential elections, to create another Bretton Woods wherein control of the global economic system was delivered to those same nations. It's likely, however, that the outcome will turn out considerably different than anticipated.

Already, under China's leadership, 12 Asian nations have agreed to set up an 80-billion-dollar fund to protect their economies from currency-runs, capital flight or other financial disruptions. China has the world's largest reserves at $1.9 trillion followed by Japan at more than $1 trillion. Clearly the two richest nations will set the agenda and play a central role in deciding how best to deal with the global recession.

Thailand's Deputy Prime Minister, Olarn Chaipravat, told Bloomberg News: "The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese yuan, to be the rightful and anointed convertible currency of the world."

The 56 Trillion Dollar U.S. Deficit

The former U.S. Comptroller General, David Walker, interviewed by Bill Maher, highlights some astounding numbers that add to the scope of the financial crisis:

The U.S. deficit is actually more like 56 Trillion dollars!

The share of this debt works out to $480,000 for each U.S. household!

Watch the 6 Minute Video

IMF: World on brink of financial collapse

The global financial system is on the brink of a systemic meltdown despite interventions by the US and Europe to stabilize markets, the head of the International Monetary Fund says.

Even with unprecedented actions in major economies, including co-ordinated central bank rate cuts, IMF Managing Director Dominique Strauss-Kahn said those measures had so far failed to calm the situation.

He said the financial crisis had deepened and was now affecting many more parts of the global financial system, including emerging markets, which until now had been shielded from the crisis.

Strauss-Kahn said conditions were likely to remain very difficult, restraining global growth prospects, while credit conditions are set to get tougher and constrain the ability of banks and companies to access funding.

[Reuters]

IMF: “Most dangerous shock in mature financial markets since the 1930s”

The International Monetary Fund, in a World Economic Outlook released today, predicted the United States - the epicenter of the financial meltdown - will continue to lose traction, adding, "The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s." (AP)

Economic equivalent to cardiac arrest

On Wall Street, the panic drove the Dow Jones Industrial Average slipping below the key psychological level of 10,000 for the first time since 2004. The mild euphoria that greeted the passage of the $700 billion bail-out of Wall Street(*) on Friday evaporated as traders digested the more bad news from Europe.

The UK stock market has suffered its worst one-day fall in history as the banking crisis intensified. The FTSE's tumble was mirrored across Europe, as markets in France, Germany, Italy and Spain all recorded heavy falls.

Here's how Nouriel Roubini sees it: "It is now clear that the US financial system - and now even the system of financing of the corporate sector - is now in cardiac arrest and at a risk of a systemic financial meltdown. I don’t use these words lightly...The Commercial paper market is shut down...Corporations have no access to long or short term credit markets. Brokers are increasingly not dealing with each other. The interbank market is seizing up."

(*) BTW, has anyone even attempted to explain how Secretary of the Treasury Henry Paulson expects to recapitalize the banks--which are loaded up with $2.4 trillion in mortgage-related investments—with the relatively paltry $700 billion from the so-called rescue plan?

Bailout raises the U.S. national debt to $11.315 trillion

Last July, President Bush signed legislation that raised the debt ceiling to $10.615 trillion.

Today he signed the financial bailout legislation passed by the Senate last night that raises the debt ceiling to $11.315 trillion.

Under the Bush Administration, the gross national debt as a percentage of the gross domestic product has hit a 50-year high. The following chart illustrates the trend nicely.



Bush did three things to skyrocket the debt from $5.7 trillion to $10 trillion:
1. He lowered taxes on the rich (by far the biggest item).
2. He invaded Iraq and Afghan-Pakistan.
3. He did not regulate an out-of-control Wall Street.

[ZFacts.com]

Bank Bailouts underway in Europe

Monday's stock market plummet posted the first post-$1 trillion day ever, another ominous record set.

In Europe, Dutch-Belgian banking giant Fortis NV has been partially nationalized with a 11.2 billion euros ($16.4 billion) rescue from the governments of Belgium, the Netherlands and Luxembourg, after investor confidence in the bank disappeared. The Belgian government also announced morning a €6.4 billion ($9.2 billion) plan to rescue faltering bank Dexia, which ran up huge losses in its U.S. operations.

The British government nationalized mortgage lender Bradford & Bingley, taking over the bank's 50 billion pound ($91 billion) mortgage and loan books, the second bank nationalized by the British government. In a similar move, the Icelandic government bought a 75 percent stake in Glitnir, the country's third largest bank, for 600 million euros ($878 million). In Germany, the country's second biggest commercial property lender, Hypo Real Estate Holding AG, secured a multibillion euro line of credit from several banks.

The Irish government said it would guarantee all deposits in Irish banks following a massive drop in the value of Irish bank stocks.

Meanwhile, the Bank of Japan has pumped 20 trillion yen ($192.3 billion) into money markets, amid an effort among the world's central banks to calm worries about a global financial crisis.

Record Dow plunge as bailout bill defeated

In a stunning vote that shocked the capital and worldwide markets, Congress defeated a $700 billion emergency rescue for the nation's financial system, ignoring urgent warnings from President Bush and congressional leaders of both parties that the economy could nosedive without it.

The Dow Jones industrials plunged nearly 800 points, the most ever for a single day. The 777-point decline for the day surpassed the 684-point drop on the first trading day after the Sept. 11, 2001, terror attacks.

[AP]

Ron Paul on the bailout package

Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.

The bailout package that is about to be rammed down Congress’ throat is not just economically foolish. It is downright sinister. ... It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder.

Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China! "This is welfare for the rich," he said. "This is socialism for the rich. It’s bailing out the financiers, the banks, the Wall Streeters."

The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!

[From an article by Republican member of Congress Ron Paul, LewRockwell]

WaMu becomes biggest bank to fail in US history

As the debate over a $700 billion bank bailout rages on in Washington, one of the nation's largest banks — Washington Mutual Inc. — has collapsed under the weight of its enormous bad bets on the mortgage market.

The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.

WaMu, founded in 1889, is the largest bank to fail by far in the country's history.

[AP]

$1,000,000,000,000: The astonishing cost of US government's desperate bid to rid the economy of toxic debt

Business insiders fear the total cost of the bail-out could rise to as much as $1 trillion or $1,000,000,000,000.The plan would give the government broad powers to buy the bad debt of any US financial institutions for the next two years.

The move is part of the largest financial bail-out since the Great Depression and the sum involved is equivalent to almost one third of the British economy.

It also would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion! [What tax payers owed when the debt was "only" 9 Trillion]

[Excerpt of an article by Kate Foster, The Scotsman]

"Days away from a complete meltdown of our financial system"

On Friday morning, Senator Christopher Dodd, the head of the Senate Banking Committee, interviewed on ABC's “Good Morning America.”, revealed that just hours earlier at an emergency meeting convened by Secretary of the Treasury Henry Paulson and Federal Reserve chairman Ben Bernanke, lawmakers were told that "We’re literally maybe days away from a complete meltdown of our financial system.” Dodd added somberly, that in his three decades of serving in public office, he had "never heard language like this.”

The system is at the breaking point, and despite Wall Street's elation from the proposed $1 trillion dollar bailout to remove toxic mortgage-backed debt from banks balance sheets, the market is still correcting in what has become a vicious downward cycle. This cycle will persist until the bad debts are accounted for and written off for or until the exhausted dollar-system collapses altogether. Either way, the volatility and violent dislocations will continue for the foreseeable future.

The problems cannot be resolved by shifting the debts of the banks onto the taxpayer. That's an illusion. By adding another $1 or $2 trillion dollars to the National Debt, Paulson is just ensuring that interest rates will go up, real estate will crash, unemployment will soar, and foreign central banks will abandon the dollar.

No one has any idea of the magnitude of the deleveraging ahead or the size of the debts that will have to be written down. That's because 30 years of deregulation has allowed a parallel financial system to arise in which over $500 trillion dollars in derivatives are traded without any government supervision or accounting. These counterparty transactions are interwoven throughout the entire "regulated" system in a way that poses a clear and present danger to the broader economy.

The Federal Reserve has lost control of the system. The market is driving interest rates now, and the market is terrified.

[Excerpt of a commentary by Mike Whitney]

As rotten foundations crumble

From pubs in London to bars in New York, everyone is asking the same question: Why is this financial crisis different? The answer is simple albeit not sexy. The rot has set in.

The world's investment banks are basically houses built on pillars of money. Sometimes those pillars are cash, often bonds; these days pillars are made up of derivatives, swaps, options and other frighteningly complex instruments.

But these pillars are the strength that supports not only the bank itself, but also its debts and liabilities. What has happened is that the rot has got into the pillars and no-one noticed. If they were wooden it would be worms. The very financial instruments that make up the core of the banks are questionable.

No-one can say for certain how much these instruments are worth, if anything. No-one knows if counterparties to deals are financially secure and will be around tomorrow. The very structure became doubtful.

[CNN]

Fear grips the market

The Federal Reserve gave a two-year, $85 billion loan to American International Group Inc. (AIG) in exchange for a nearly 80 percent stake in the insurer. Wall Street had feared that the conglomerate, which has its tentacles in various financial services industries in 130 countries around the world, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy.

However, Wall Street stumbled again even after the government bail out.
"People are scared to death," said Bill Stone, chief investment strategist for PNC Wealth Management. "Who would have imagined that AIG would have gotten into this position?"

He said the fear gripping the market reflects investors' concerns that AIG wasn't able to find a lifeline in the private sector and that Wall Street is now fretting about what other institutions could falter.

The two independent Wall Street investment banks left standing — Goldman Sachs Group Inc. and Morgan Stanley — remain under scrutiny, as does Washington Mutual Inc., the country's largest thrift bank.

[AP]

The slow-motion run on retail banks

With the "financial storm of the century" hitting financial institutions, many Americans are worried about the safety of their bank deposits. While the FDIC insures individual accounts up to $100,000, the reaction to IndyMac's failure this summer -- lines outside retail branches -- shows Americans have limited faith in the Federal Deposit Insurance Corp., which guarantees individual accounts up to $100,000.

Americans are justified to be worried, says Nouriel Roubini, of NYU's Stern School and RGE Monitor, who notes there is already a "slow-motion run on retail banks" occurring nationwide.

That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.

Roubini is one of the few market watchers to correctly predict the severity of this ongoing credit crisis. If nothing else, he says people with accounts exceeding $100,000 in value should spread their money - and the risk - among different firms.

Lehman Brothers: tectonic shifts under the foundations of the U.S. financial system

Three of the top five U.S. investment banks have now fallen victim to the credit crunch.

The demise of Lehman Brothers, the fire sale of Merrill Lynch - the next potential domino in the chain - and news that insurer AIG is asking the Federal Reserve for emergency funding, has sent shock waves around the world.

These really are seismic events. As one commentator put it: “Tectonic plates are shifting under the foundations of the U.S. financial system,” and we’re all likely to feel the ground shake.

Foreigners, not the US Mortgage Market, drove the Fannie - Freddie Bailout

In an interview with The Washington Times, Council on Foreign Relations Geo-Economics Fellow Brad Setser said of the federal bailout of the Fannie-and-Freddie debt: “I suspect this is the first case where foreign central banks [ie China, Japan, Europe, the Middle East and Russia] exercised their leverage as creditors to push the U.S. government to make a policy decision that protected their interests.”

The problem is that the U.S. government has established what could be a costly and ill-advised precedent - the bailout. First it was The Bear Stearns Cos., now it’s Fannie Mae and Freddie Mac, and tomorrow it could be Lehman Brothers Holdings Inc.

FreedomWorks, a conservative non-profit organization that’s based in Washington, characterized the Fannie Mae/Freddie Mac bailout as a deal by politicians that’s nothing more than a transfer of “possibly hundreds of billions of U.S. tax dollars to sophisticated investors and governments overseas.”

[Excerpt of an article by William Patalon III, Money Morning]

Lehman Brothers, 4th largest US investment bank losses hit world stocks

World stocks have slipped after Lehman Brothers, the fourth largest US investment bank, reported a massive third-quarter loss of about $4 billion. Lehman had already reported losses of $2.4 billion in the second quarter.

The investment bank has already taken $7 billion in credit-related write-downs and losses since the start of the global credit crisis.

No plans for an injection of fresh capital into the bank have been released after a Korean firm backed out of investing.

[Aljazeera.net]

US Treasury adopts orphans Fannie Mae and Freddie Mac

The U.S. government announced plans to place the two mortgage giants, Fannie Mae and Freddie Mac, under “conservatorship” (aka as bankruptcy), the most sweeping government intervention into the financial markets in American history. If these two companies are nationalized, it will add $5.3 trillion dollars to the nation's balance sheet. (And considering the $5.3 trillion in mortgages that Fannie-Freddie own or guarantee, the impact is actually thirteen times greater than the Bear Stearns' failure)

When the U.S. military spends money abroad to fight the New Cold War, these dollars are recycled increasingly into U.S. mortgage-backed securities, because there is no other market large enough to absorb the sums involved. The central banks of China, Japan and Korea are major holders of these securities. Remember, we do not permit foreigners – especially Asians – to buy high-tech, “national security” or key infrastructure.

The Treasury therefore has given informal assurances to foreign governments that they will guarantee at least the dollar value of the money their central banks are recycling. A failure to provide investment guarantees to foreigners would thwart the continuation of U.S. overseas military spending.

The best that this weekend’s bailout can do is to postpone the losses on bad mortgage debts. But this is a far cry from actually restoring the ability of debtors to pay. It is pure hypocrisy for Wall Street’s Hank Paulson to claim that all this is being done to “help home owners.” They are vehicles off whom to make money, not the beneficiaries. They are at the bottom of an increasingly carnivorous and extractive financial food chain.

[Excerpt of interview with Michael Hudson, former Wall Street economist]

$200 billion Interest alone on the enormous U.S. debt

The U.S. government is like anyone with a nearly maxed out credit card: the more debt the country accrues, the more it must pay in interest, which makes it harder to run down the original debt.

And the picture gets worse when the rates go up. That could happen to Uncle Sam if those who buy U.S. debt grow concerned about the country's ability to pay what it owes, or because inflation starts to erode the value of bond yields.

The end result: "Taxpayers have to pay more and more on the national credit card," says Robert Bixby, executive director of a deficit watchdog group, adding that the country paid $200 billion in debt interest last year alone.

Washington is also charging the cost of the wars in Iraq and Afghanistan to its national credit card. So far, the government has spent between $700 billion and $800 billion since 2001.

So exactly how much is a Trillion Dollars?

Dr. Nouriel Roubini of the New York University's Stern School of Business, suggests that the losses of the American financial system will grow to more than $1 trillion.

So exactly how much is a trillion dollars?

That's one million times $1 million. Or one thousand times $1 billion.

An amount that is equal to all the assets of all American banks.

Read more

The American Economy: Give or take a trillion dollars

We've been reading a lot in the press where a “trillion dollars” or so is tossed around:

The Bush administration revealed America's budget deficit will climb to a record high of more than half-a-Trillion dollars.

As of February ’08, the meltdown in the US subprime real-estate market has led to a global loss of 7.7 trillion dollars in stock-market value.

In order to bail out Fanny Mae and Freddy Mac, Congress increased the national debt by a whopping $800 billion sending it over the $10 trillion mark for the first time in history!

The U.S. annual gross domestic product is about $15 trillion.

Since the passage of NAFTA and the creation of the World Trade Organization in 1994, America’s massive trade deficits has surpassed $5 trillion.

Foreigners own $2.5 trillion more of American assets than Americans own of foreign assets.

There are roughly $6 trillion in US dollar-backed assets around the world which could be quickly dumped if foreign holders of US dollars start selling their paper on the open market.

The non-partisan Government Accountability Office that says the U.S. government faces a $53 Trillion shortfall to cover the costs of promised benefits in its entitlement programs: Medicare, Medicaid and Social Security.

Meanwhile, the U.S.’s national debt is expanding by about $1.4 billion a day -- or nearly $1 million a minute.

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]

IMF predicts no end in sight to credit crisis

The International Monetary Fund (IMF) says there's no end in sight to the credit crisis gripping world financial markets.

The IMF has a particularly gloomy assessment of the US economy, and it came on the same day as the Bush administration revealed America's budget deficit will climb to a record high of more than half-a-Trillion dollars.

[Australian Broadcasting Corporation]

The Dodgy Asset behind the U.S. Dollar

Last Friday, after the market had closed, the FDIC shut down two more banks, First Heritage Bank and First National Bank. (The FDIC now operates like a stealth paramilitary unit, deploying its shock troops on the weekends.)

The new Fannie Mae and Freddie Mac bailout package that was passed into law on Saturday provides Paulson with $300 billion of taxpayer dollars to shore up the faltering mortgage behemoths.

In order to accomplish this, Congress increased the national debt by a whopping $800 billion sending it over the $10 trillion mark for the first time in history! (Naturally, Congress buried this little tidbit of information deep in the 600 pages of legislation.)

The Fed has already spent more than $300 billion to prop up the teetering banking system in the last year alone, plus buying the toxic bonds from Bear Stearns in the JP Morgan acquisition.

Now, the Treasury has been authorized by Congress to buy an "unlimited amount" of Fannie and Freddie shares at their own discretion. They are presently exchanging Fannie and Freddie securities for US Treasury's, which means that the dollar is now backed by dodgy mortgage-backed sludge (MBS) for which there is no market. According to Rep Ron Paul, "This is the asset (MBS) which now backs up our currency. An asset that no one else wants. If they were to dump these securities on the market today, the value of these stocks would go straight to 0. But that is literally the asset that is behind our currency. It is a very serious situation."

[Excerpts of an article by Mike Whitney]

Ross Perot: “We are running out of time”

Ross Perot is jumping back into the political fray, this time with a stern warning that the country better start paying attention to the national debt.

"Not since the Great Depression have we seen an economic crisis of the magnitude that we are facing today," he says.

The former presidential candidate has reemerged with a Web site spotlighting the soaring budget deficit: more than $9.3 trillion and growing.

He says the purpose of the site, which is not affiliated with any political party, is "to provide accurate information to every citizen about the serious economic problems facing our country."

[CNN]

Note: Mr. Perot points out that 9.3 trillion dollar bills placed end-to-end would reach the moon and back 1,900 times.

So How Bad is the Damage?

The demise of Indymac is expected to cost the FDIC around $8 billion of its meager $53 billion of reserves.

Four or five bank failures of equal size and the FDIC will be underwater, which is a serious problem since even conservative estimates expect bank failures to run into the hundreds.

But Indymac is small potatoes compared to the liabilities of the two mortgage behemoths, Fannie Mae and Freddie Mac. As the housing bubble continues to fizzle; Fannie and Freddie could face losses of $500 billion or more.

Investors are not charitable organizations

The United States has been financing itself by leaning heavily on foreigners, particularly China, Japan and the oil-rich nations of the Persian Gulf.

Obviously, this is going to come to an end. Foreigners are not charitable organizations, and they're going to demand that we pay them back.

No single country owning large amounts of dollar-based investments is inclined to dump them abruptly; nobody aims to start a panic. But fears have begun to grow that one day a country may get spooked that another is about to dump its dollars--and that could trigger pre-emptive panic selling.

The U.S. government offers its rescue of the Fannie Mae and Freddie Mac mortgage companies, and foreigners keep stocking the government's coffers. But all the while, the debt mounts along with the costs of an ultimate day of reckoning. Debate grows about the wisdom of leaning on foreign credit, and about how much longer Americans will retain the privilege of spending and investing money that isn't really theirs.

[Excerpt of an article by Peter S. Goodman, NY Times]

The unsettling void of the U.S. economy

To calm markets, the government last weekend hurriedly put together a rescue package for Fannie and Freddie that, if used, could cost as much as $300 billion. The urgent need for a rescue--together with another round of billion-dollar write-offs on Wall Street--has unnerved economists and investors.

"I was a relative optimist, but I've certainly become more pessimistic," said Alan S. Blinder, an economist at Princeton, and a former vice chairman of the board of governors at the Federal Reserve. "The financial system looks substantially worse now than it did a month ago."

Mr. Blinder added, this is like the Great Depression. "We haven't seen this kind of travail in the financial markets since the 1930s," he said.

More than two years ago, Nouriel Roubini, an economist at the Stern School of Business at New York University, said that the housing bubble would give way to a financial crisis and a recession. He was widely dismissed as an attention-seeking Chicken Little. Now, Mr. Roubini says the worst is yet to come, because the account-squaring has so far been confined mostly to bad mortgages, leaving other areas remaining--credit cards, auto loans, corporate and municipal debt. “We're not even a third of the way there."

Where will the banks raise the huge sums needed to replenish the capital they have apparently lost? And what will happen if they cannot? The answers to these questions are unknown, an unsettling void that holds much of the economy at a standstill.

[Excerpt of an article by Peter S. Goodman, NY Times]

US faces global funding crisis

Merrill Lynch has warned that the United States could face a foreign "financing crisis" within months as the full consequences of the Fannie Mae and Freddie Mac mortgage debacle spread through the world. Britain and other Anglo-Saxon deficit states could face a similar retreat by foreign investors.

Merrill Lynch said foreign governments had added $241 billion of US agency debt over the past year alone. China holds around $400bn, Russia $150bn and Saudi Arabia and other Gulf states at least $200bn.

Brian Bethune, chief financial economist at Global Insight, said the US Treasury had two or three days to put real money behind its rescue plan for Fannie and Freddie or face a dangerous crisis that could spiral out of control.

Fannie and Freddie - the world's two biggest financial institutions - make up almost half the $12 trillion US mortgage industry. But that understates their vital importance at this juncture. They are now serving as lender of last resort to the housing market, providing 80pc of all new home loans.

Roughly $1.5 trillion of Fannie and Freddie AAA-rated debt - as well as other US "government-sponsored enterprises" - is now in foreign hands. The great unknown is whether foreign patience will snap as losses mount and the dollar slides.

[The Telegraph]

US inflation rate at 17-year high

This past month, US inflation accelerated at its fastest pace in 17 years, official figures have shown, driven higher by surging energy prices

In his second day of congressional testimony on Wednesday, Fed boss Ben Bernanke said inflation was too high and it was a key objective for the central bank to bring it down. Many analysts now believe that the central bank may have to leave borrowing costs on hold, or even increase them, as it tries to steer a faltering economy through turbulent times.

Gary Thayer, from Wachovia Securities, says that the Fed is facing a tricky balancing act. "This increases concern that the Fed is not going to be able to lower interest rates if the economy remains weak."

But he added: "And as long as the economy remains weak, it will be hard for the Fed to raise rates to fight inflation."

[BBC News]

Financial Collapse Edging Closer?

The financial crisis in the United States and worldwide entered a new phase this week, as Fannie Mae and Freddie Mac, the two huge US home-loan institutions, began what appears to be a "death spiral" similar to that which claimed Bear Stearns four months ago.

In 1933, about a quarter of US banks failed, [but things were more solid] because US banks in the 1920s had been relatively conservative in their lending, with many banks requiring a 50% down payment for home mortgage loans, for example. The main problem in 1932-33 was quite simply liquidity; the Fed failed to supply adequate reserves to the banking system, so crises of confidence in individual banks led to panic withdrawals of deposits that caused the banks themselves to fail.

This time around, the problem is the opposite.

Fannie and Freddie are probably toast. Federal Reserve Board chairman Ben Bernanke's statement that the two companies can discount paper with the Fed may prolong the inevitable, but also increases its likely huge cost to taxpayers.

A total collapse of the US financial system, while not inevitable, is a contingency which should now be planned for.

[Excerpt of an article by Martin Hutchinson, a retired international merchant banker, writing in the Asia Times]

IndyMac bank second largest bank failure in US history

The Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) “took control of Pasadena-based IndyMac Bank on Friday in what regulators called the second-largest bank failure in U.S. history.” The bank has succumbed to “huge losses from defaulted mortgages made at the height of the housing boom”:

As the bank was shuttering offices and laying off employees nervous … depositors were pulling out $100 million a day. The bank’s stock price had plummeted to less than $1 as analysts predicted the company’s imminent demise.

The takeover of IndyMac came amid rampant speculation that the federal government would also have to take over lenders Fannie Mae and Freddie Mac, which together stand behind almost half of the nation’s mortgage debt.

Meanwhile Forbes reports that the FDIC is monitoring 90 institutions with assets of $26 billion that it has identified as troubled.

Greenspan confirms U.S. economy on brink of extended recession

Former U.S. Federal Reserve Chairman Alan Greenspan, when asked if the U.S. economy was in recession, said: "We are on the brink".

"A rebound at this stage is not something I think is in the immediate outlook," he added.

[Reuters]

The Recession is only just beginning

This will be a different kind of recession -- a recession with an overlay of inflation. That combo puts the Federal Reserve in a Catch-22 -- whatever it does to solve one problem only makes the other worse.

[For the past year] we've seen a fairly consistent pattern to the economic mood swings. Every three months or so, there's a round of bad news about housing, followed by warnings of more bank write-offs and then a string of disappointing corporate earnings reports. Eventually, things stabilize and there are hints that the worst may be behind us. Stocks regain some of their lost ground, bonds fall and then -- bam -- the whole cycle starts again.

The last hope for a second-half rebound began to fade earlier this month when Lehman Brothers reported that it wasn't as immune to the credit-market downturn as it had led everyone to believe. It could be the next Bear Stearns. Since then, there has been a steady drumbeat of worrisome news from nearly every sector of the economy.

Like the rain-swollen waters of the Mississippi River, this sudden surge of downbeat news has now overflowed the banks of economic policy and broken through the levees of consumer and investor confidence. At this point, there's not much to do but flee to safety, rescue those in trouble and let nature take its course. And don't let anyone fool you: It will be a while before things return to normal.

[Excerpt of an article by Steven Pearlstein, Washington Post]

The Weakened State of the Dollar

Who Insures the Insurers?

The Federal Deposit Insurance Corporation (FDIC) insures bank accounts up to $100,000. The FDIC holds about a penny in reserve (in T-bills) for every dollar worth of insured deposits.

Who insures the T-bills? The Federal Reserve System. Who insures the Federal Reserve System? No one. It doesn't need insurance. It can create money.

Then who insures the purchasing power of the dollar? The central banks of the world, which hold dollars as legal reserves for their own currencies.

What happens if they decide not to add to their holdings of dollars?

[What we can look forward to includes:] rising prices for imported goods, rising domestic interest rates because foreign central banks are not buying Treasury debt any longer, unemployment, bankruptcies, defaults.

And when the checks from Washington no longer buy much of anything, the great political transformation will begin.

[Excerpt of an article by Gary North]

Soros: “Worst financial crisis since the 1930s”

George Soros, the legendary financier and philanthropist, has written a new book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.

Mr. Soros’ opening sentence summarizes his sense of urgency about the turmoil in the financial world, where he is one of the most successful and enduring of investors:

“We are in the midst of the worst financial crisis since the 1930s.”

Wall Street Investment Banks Now Borrowing $38.1 billion Daily

As an update on my March 29th posting, Wall Street investment companies are stepping up their borrowing a bit from the Federal Reserve’s unprecedented emergency lending program.

The Federal Reserve reports Thursday that those firms averaged $38.1 billion in daily borrowing over the past week from the new lending program!

That compared with $32.9 billion in the previous week and $13.4 billion in the first week the lending facility opened.

On Abolishing the Federal Reserve

As discussion is underway to give further, sweeping financial oversight to the Federal Reserve, reflect for a moment on this excerpt of a speech by Congressman Ron Paul to the U.S. House of Representatives (September 10, 2002)

Since the creation of the Federal Reserve, middle and working-class Americans have been victimized by a boom-and-bust monetary policy.

From the Great Depression, to the stagflation of the seventies, to the burst of the dotcom bubble, every economic downturn suffered by the country over the last 80 years can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial "boom" followed by a recession or depression when the Fed-created bubble bursts.

Though the Federal Reserve policy harms the average American, it benefits those in a position to take advantage of the cycles in monetary policy. Federal Reserve policies also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state.

Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy.

I urge my colleagues to stand up for working Americans by putting an end to the manipulation of the money supply which erodes Americans' standard of living, enlarges big government, and enriches well-connected elites, by cosponsoring my legislation to abolish the Federal Reserve.

Investment Banks Borrowing Billions

Big Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans, the central bank reported. Investment houses can put up a range of collateral, including investment-grade mortgage backed securities.

The Fed debuted a separate lending facility where Wall Street firms can borrow Treasury securities and put up risky home-loan packages as collateral.

Those firms averaged $32.9 billion in daily borrowing over the past week from the new lending facility, compared with $13.4 billion the previous week. The program, which began last Monday, is part of the Fed's effort to aid the financial system, and the broadest use of the Fed's lending authority since the 1930s.

The Fed also said it would make as much as $200 billion worth of Treasuries available through weekly auctions that started Thursday.

[Excerpt of an article by Jeannine Aversa, AP]

Note: A “billion” is a difficult number to comprehend. The next time you hear of loans or debts in the “billions”, or consider how much a billion is.

Derivatives, the ticking bomb

“Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." –Warren Buffet, 2002

A Derivative is an investment that derives its value from another more fundamental investment, as a commitment to buy a bond for a certain sum on a certain date. In recent years, there was a five-fold growth of derivatives, from $100 to $516 trillion. The new derivatives bubble was fueled by five key economic and political trends:

1. Sarbanes-Oxley increased corporate disclosures and government oversight

2. Federal Reserve's cheap money policies created the subprime-housing boom

3. War budgets burdened the U.S. Treasury and future entitlements programs

4. Trade deficits with China and others destroyed the value of the U.S. dollar

5. Oil and commodity rich nations demanding equity payments rather than debt

To grasp how significant this five-fold bubble increase is, let's put that $516 Trillion in the context of some other domestic and international monetary data:

• U.S. annual gross domestic product is about $15 trillion
• Current proposed U.S. federal budget is $3 trillion
• U.S. government's legal debt is $9 trillion
• World's GDPs for all nations is approximately $50 trillion
• Total value of the world's real estate is estimated at about $75 trillion
• Total value of world's stock and bond markets is more than $100 trillion

[By Paul B. Farrel, MarketWatch]

Derivatives and the Shadow Banking System

The Federal Reserve has not only taken 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.

Over the last decade, the biggest Wall Street banks and brokerage firms created a dizzying array of innovative products that experts now acknowledge are hard to understand and even harder to value.

One of the fastest-growing and most lucrative businesses on Wall Street in the past decade has been in derivatives. It is a stealth market that relies on trades conducted by phone between Wall Street dealer desks, away from open securities exchanges. How much changes hands or who holds what is ultimately unknown to analysts, investors and regulators.

Used unwisely --when greed and the urge to gamble with borrowed money overtake sensible risk-taking --derivatives can become Wall Street's version of nitroglycerin.

Even the people running Wall Street firms didn't really understand what they were buying and selling, says Byron Wien, a 40-year veteran of the stock market who is now the chief investment strategist of Pequot Capital, a hedge fund.

[Excerpt of an article by Nelson D. Schwartz and Julie Creswell, NY Times News Service]

Federal Reserve's boldest action since Great Depression

The Federal Reserve is the only U.S. institution with the authority and ability to create money out of thin air. And the FED has taken its boldest action since the Great Depression, invoking rarely used powers in an effort to contain a panic threatening to undermine the economy.

Because of the Fed's direct influence over interest rates, the money supply, and the larger economy, some have called the Fed chairman the second most powerful job in Washington after the president.

But the Fed's moves are raising questions about its regulatory powers. In one remarkable week, the Fed:
--engineered the fire sale of bankruptcy-headed Bear Stearns Cos. to J.P. Morgan Chase & Co. with a $30 billion loan.
--offered emergency loans to other securities dealers under terms normally reserved for regulated banks.
--slashed a key short-term interest rate by three quarters of a percentage point, to 2.25 percent. The cut was sixth since September.

These steps followed moves to lend $100 billion in cash to banks, and $200 billion in Treasury bonds to cash-strapped investment banks.

"I spent 35 years on Wall Street, have been a Fed watcher for a long time and I have never seen the potential for a more severe credit crisis than this one," said David Jones, chief economist at DMJ Advisors and a former Wall Street economist.

[AP]

When the Bear Stearns fantasy turned into a nightmare

We had a conversation yesterday with a source who is very close to the Bear Stearns situation.

"What went wrong?" we wanted to know. "How could this group of very smart accountants, lawyers, and investment pros have been so wrong about what they had in their own portfolios?"

One day, they think they have a stock worth $30...a few hours later, they sell it for $2--making the whole company worth less than a quarter of the value of their headquarters building. If they had thought it wasn't worth $30, they would have unloaded it then. Instead, they held until forced to turn it over for practically nothing.

"Well" said our source, "They have no reliable way of knowing what their 'assets' are worth. They're not marked to market; they're marked to whatever fantasy they have in their heads at the moment. When the fantasy was positive, the assets were worth something. When the fantasy turned into a nightmare, they panicked and wanted to get rid of them in the worst possible way.

"And the really scary thing is that the other financial institutions are in much the same situation. They don't really know what they have...or what it is worth. There are almost certainly some more horror stories that will be coming out.”

[Excerpt of an article by Bill Bonner, The Daily Reckoning]

Stiglitz: U.S. Financial Crisis Worst since the 30’s

The current financial crisis is the worst the world has seen since the Great Depression of the 1930s and the US Federal Reserve move to cut interest rates will not make much difference, the Nobel Prize winning economist Joseph Stiglitz said on Wednesday.

Stiglitz, who won the Nobel Prize in economics in 2001, is a former chief of the World Bank and chaired former US president Bill Clinton's council of economic advisers.

He said the main problem is the fact that an estimated 2 million Americans are going to lose their homes because they could not repay mortgages which exceed the value of their property, as house prices fell dramatically. "As people walk away from their mortgages there will be more and more defaults - that undermines the whole financial system," he said.

Stiglitz said the Bush administration was bailing out banks, but accused it of refusing to do anything to help poor people stay in their homes which would stabilise the housing market. "It's very easy to do something about it," he said, suggesting the administration could give assistance to write down mortgages to about 90 per cent of the value of a house which would enable people to stay in their properties.

[Of the Iraqi War, Stiglitz said:] "They didn't want Americans to know exactly how bad the war was for the economy so they flooded it with liquidity, they looked the other way with regulations and they deliberately, I think, postponed the problem into the future and now we're paying the price."

[The Economic Times]