Central bankers cannot stop this contagion
By Wolfgang Münchau
Published: March 10 2008

http://www.ft.com/cms/s/0/85abf1bc-ee44-11dc-a5c1-0000779fd2ac.html

Sounds exciting. Let the future start now.

Two banks have failed so far this year, both in Missouri, one on January 25, and one of them on Friday. Is that enough to turn that prediction into a "bold" one (I would say 'no')? There were three bank failures in 2007, and none in 2005-2006. (source: http://www.fdic.gov/bank/individual/failed/banklist.html)

New York Times, By Paul Krugman, March 10

Friday’s employment report — which was so weak that it had many economists declaring that we’re already in a recession — was bad news. But it was actually less disturbing than what’s going on in the financial markets.

The scariest thing I’ve read recently is a speech given last week by Tim Geithner, the president of the Federal Reserve Bank of New York. Mr. Geithner came as close as a Fed official can to saying that we’re in the midst of a financial meltdown.

To understand the gravity of the situation, you have to know what the Fed did last summer, and again last fall.

As late as August the favorite buzzword of financial officials was “contained”: problems in subprime mortgages, we were assured, wouldn’t spread to other financial markets or to the economy as a whole.

Soon afterward, however, a full-fledged financial panic began. Investors pulled hundreds of billions of dollars out of asset-backed commercial paper, a little-known but important market that has taken over a lot of the work banks used to do. This de facto bank run sent shock waves through the financial system.

No reason I can see for oil price to fall though. The three largest contributors to growing oil demand are Russia, Middle Eastern Countries, India and then China. The three top are effectively decoupled from impact by OECD. AND all three actively subsidize the price of energy so that the price their citizens pay for fuel oil and gasoline are about 1/4 its actual cost. In other words, there is no supply demand price feedback in these countries.

OECD oil demand has been declining for three years, and will simply continue that trend. The declines are more than taken up by the gains in Russia, Middle East and India. So no bail out from demand destruction this time. It is the Great Shrinking of the United States right off the world stage. We should be a full fledged banana republic by 2010.

One I heard advocated this morning was to increase the amount of securitzation in the loan market to inject more liquidity. Nothing like gasoline on a fire to make life interesting.

This is an odd time--inflation is running high, yet the amount of liquidity is way down. We might be better off to go with asset depreciation rather than incur the specter of stagflation.

Ian, how about North of the Border?

...hasn't stopped the British from driving and it won't stop us. Then there's this:

Riots, hoarding, panic: signs of times to come

The spectre of food shortages is casting a shadow across the globe, causing riots in Africa, consumer protests in Europe and panic in food-importing countries. In a world of increasing affluence, the hoarding of rice and wheat has begun. The President of the Philippines made an unprecedented call last week to the Vietnamese Prime Minister, requesting that he promise to supply a quantity of rice.

The personal appeal by Gloria Arroyo to Nguyen Tan Dung for a guarantee was a highly unusual intervention and highlighted the Philippines’ dependence on food imports, rice in particular.

“This is a wake-up call,” said Robert Zeigler, who heads the International Rice Research Institute. “We have a crisis brewing in rice supply.” Half of the planet depends on rice but stocks are at their lowest since the mid1970s when Bangladesh suffered a terrible famine. Rice production will fall this year below the global consumption level of 430 million tonnes.

Street protests and rioting in West Africa towards the end of last year were a harbinger of bigger problems, the World Food Programme said. The global information and early warning system of the Food and Agricultural Organisation (FAO) has monitored outbreaks of rioting in Mexico, Morocco, Uzbekistan, Yemen, Guinea, Mauritania and Senegal. There have also been protests in Jakarta, the Indonesian capital, over government price increases.Population pressure and increased wealth are mainly to blame for the resurgence of food insecurity. More people are eating meat and dairy products in Asia, which increases the demand on the animal-feed industry. Milk powder prices rose from $2,000 to $4,800 per tonne last year as rising consumption of milk products in Asia coincided with shortages in the Western world. Drought in Australia has worsened the problem as have government policies in Europe and America to increase the use of biofuels.

I did inhale.

Ian - Kudos for a damn fine missive!! A grave pivotal factor in all of this is staggering, unalloyed corruption. Everything from deliberately abtruse CDOs, to compromised Rating Agenies to bought & paid-for economists. The extent of corruption, much of which has been noted here, is breathtaking!

Ian, how do we break the stranglehold of the "Gangs of New York", et al?

You took the word out of my mouth, Ian. Not because I can claim your economic knowledge, but because you have voiced all my hopes in your last two paragraphs. The system in which we live and which we have created for ourselves - over here in Europe as much as in America - is so rotten, it needs a fresh start.

Excerpt from today's entry at Clusterfuck Nation

http://www.kunstler.com/

...

Well it was a bad week on the money scene in what is sure to be a worsening year. Paul Krugman and his fellow club members can pretend that the hallucinated finance economy is not really flying to pieces. After all, he / they are trying to avert panic. But, as noted previously in this space, the only thing we have to fear is not fear itself. We have to fear the consequences of actions by a banking leadership that has shown the grossest irresponsibility (and an American public that has been conditioned to expect a steady diet of getting something for nothing).
The US faces a pretty stark choice right now: it can let the losers take their losses -- both the big institutions who created and traded in fraudulent securities, and all the "little guys" who borrowed too much money trying to get rich quick, or trying to live like the millionaires they see on TV. We can let them go down, and suffer the consequences of their bad choices (and maybe prosecute some of the culpable bankers and corporate executives), OR, in an effort to let these losers off the hook we can wreck the whole machinery of capital by making our medium-of-exchange worthless.
The people in charge -- both in and out of government -- can't face the losses, so for now they've apparently decided to wreck the currency. The dollar has lost two percent of its value against the Euro just in recent weeks, as cheap loans from the Fed pour into the black hole on Wall Street (never to be seen again). Other soft-pedalers in the media claim that the financial markets have "already priced in" yet another expected .75-point interest rate drop by the Fed this week, but I'm confident that such a move will only accelerate the dollar's vanishing act.
I'll admit, it's hard to believe what's going on in the American finance sector. But incredulity in the face of a rare catastrophe isn't the same as pretending that it's not happening. A whole flock of black swans is flying in front of the sun. Don't expect to work on your tan this month.

I did inhale.

C'mon, we all know this one.

Quit bailing out the banks, quit creating easy money. It ain't helping. Let's hear that tightening the belts speech and get on with it.

I have a theory: I noticed, while on vacation in Europe last September, an Italian newspaper headline saying oil cost 86 Euro per barrel. A Euro, last Sept, cost $1.41 so, all things being equal, a barrel of oil should cost about $121 back then. My prediction here is based on that idea plus increasing demand and decreasing supply. My belief is that the Europeans are succeeding in equalizing the Euro with the petro-dollar. It is a hidden conflict that the Europeans are winning even though they know they have to take some damage to their own financial markets. Also, I wonder about Russia's place in all in this.

Ian:
You have had company in these dire predictions and not all of that company is "liberal". The author of "the bear's lair", whom I read via Asia Times, pointed out last November that the Fed was at the end of its tightrope.

I think you should also bold "Same thing with unemployment numbers."...S-P pointed us to a NYTimes piece last week on just how irrelevant the standard way of reporting jobless figures has ALWAYS been. And it becomes even less relevant as self employment is forced on more and more of us by the dissolution of opportunities our fiscal profligacy has spawned. Marginal self employment in most cases...marginal economy after a while.

its a big economy but that does not mean it is not flacid, riddled with leaks and been pawning its real assets or letting them rust.
Debt is like body fat, a small amount may be healthy and a lot is definitely the prelude to a diseased end.

on the relation of oil to the dollar, I think the shrunken and shrinking power of the us economy relative to other economies weakens the simple supply-demand logic that used to dominate that relationship. We just aren't the ones to command a price in our own currency any more.

Foreigners' US visits, spending break records in 2007
Posted: 11 March 2008 0906 hrs

WASHINGTON - International visitors flocked to the United States in record numbers last year and spent an all-time high of 122 billion dollars, the government said Monday.

US Commerce Secretary Carlos Gutierrez announced that 2007 set a record for international tourism as 56.7 million international visitors pumped 122.7 billion dollars into the economy, supporting 8.5 million American jobs.

"This is yet another record-breaking year for the US travel and tourism industry and another year in which it produced a healthy trade surplus," Gutierrez said in a statement.

Spending by international travelers while in the US, including passenger fares, is defined as a US export.

The 2007 spending by international visitors represented a nearly 14 percent increase over the prior record set in 2006 and a 53 percent increase from the low numbers following the September 11, 2001 terror attacks.

The number of visitors last year marked an increase of 11 percent over 2006 and broke the prior record set in 2000 of 51.2 million visitors.

More than half of the international visitors came to America from neighbouring Canada and Mexico, the country's partners in the North American Free Trade Agreement.

Excluding Canada and Mexico, overseas arrivals totaled 23.9 million, up 10 percent from 2006.

However, international visitation levels were eight percent lower than the record year of 2000, the Commerce Department noted.

The Travel Industry Association highlighted that weakness, saying the number of visits should be higher because of the declining value of the dollar, which makes travel in the US relatively cheaper.

"America is the world travel bargain, and yet two million fewer travelers visited the United States in 2007 than in 2000," Roger Dow, president and chief executive of the industry group, said in a statement.

"In the current economic environment, the United States should be setting overseas travel records rather than inching back to pre-9/11 standards," he said.

bit more

And we put that army boot in our economic mouth a lot sooner than we had any positive effects, especially noticeable in Canada.

I didn't mean to be cavalier in my earlier comment. Although my point was sarcastic, what I was really meaning to say is, if something bad is going to happen, if the shit truly is going to go down like this - then let's get it over with. Let's pay the price now so the recovery will come sooner. This is part of the confusion some Republicans have about us Democrats on Iraq - they think we want to lose, or at least that is the talking point, when really we don't want to draw out the loss. They understand victory or surrender while we conceptualize mitigating defeat. A depression will force an end to bad economic habits.

There is little guidance history can provide for what is likely to happen with the collapse of both the financial markets and the devaluation of the currency. Financial schemes have collapsed before and currencies have been debased or devalued but seldom at the same time and never with a currency used internationally as a reserve currency supporting diverse other currencies. There are few economic controls or tools capable of addressing such a situation now facing the international community, hitherto, the scope necessary was on a national scale, the few international treaties extent are not actually capable of meeting the requisite policies needed to regain control of the economic system in any meaningful way, they were never designed for that purpose.

Once, capital was primarily derived from savings of the community. This source was eclipsed when corporations which had gained control of some market, either by economic monopolizing or by economic oligarchy, by such means were able to meet their capital needs out of current income, making as a result, the value of their shares a speculative function of perception, e.g. what the bottom line was for the latest period. Management was further able to isolate the ownership function of stockholders from effective oversight of the corporation, and became the major motive entity directing the corporations activities. Fortuitously, this development coincided with a "simplification" of the tax code which allowed the compensation of management to be multiplied manyfold without the drawback of having to meet serious tax liabilities that had before attended such income. With this, the financial games began, and continue to this day.

Attention must be given to the historical development of the modern corporation, most of which occurred in the mid to late nineteenth century as a means to obtain and control the capital necessary for the development of the western frontier and the industrialization of the country (US). Much of the capital came from European sources through the sale of stock representing "ownership" of the corporation. The corporate "creators" kept the ability to manage and control the corporation tightly held amongst a few corporate officials who benefited mightily. It is instructive to observe one of the early "great" fortunes, that of John Jacob Astor, who seemed to die in an unincorporated state (iirc), and much of the fortune lost to estate taxation, a fate that was much the concern of the new wealth created from and after the civil war. It is instructive also that the early legal development of the Trust as a mechanism to maintain wealth and the control of the corporate generator of the wealth. Foundations too were used as a mechanism to maintain the fortunes of their founders and control of the underlying source of economic production. The history of the Rockefellers, or Mellons, or Carnegie, or Du Ponts illuminate brilliantly this development. What the corporation was originally can still be found in Ireland where the corporation (without death) appears as the local government of towns, cities, counties and is referred to as "The Corporation". Back to the story, needless to say, most of the economic means of production of economic goods is tied up, under lock and key, of the Corporations, Trusts, or Foundations that own and control the economy.

One last thing to observe, the ability, experience, knowledge, and skills necessary to manage an organization are learned, these are not "gifts" one is born with. These skills are of even more importance when it comes to large organizations. Traditionally, the military is the institution that has been the source of and developer of such personnel who become highly desired personnel to fill governmental positions managing large governmental organizations. It is no coincidence that so many Presidents were military General Officers. When corporations were being built to national scale, the corporation became the training place for management personnel and were able to place these personnel into top management of government, taking with them their business background and objectives as the military brought their martial background with them. Presently the government is completely managed by the products of business management and perform their duties in a manner benefiting their corporate sponsors. The future requires a new source of management skill development and training outside the fields of business and the military.

If a rational attempt is to be made to resolve the current situation, these are some of the factors that must be considered if a workable outcome is to be had. FDR was unique, his experience and position were unique, his point of view was unique. FDR will not happen again, unfortunately. But he does stand as exemplar, a template, for what is needed.