The great interest rate rip off part 1

interestrateripoff · July 16, 2008

BBC NEWS | Business | Bank accounts 'not working well'

Personal current accounts are not working well for consumers, the Office of Fair Trading (OFT) has said.
The OFT said the £8bn industry was not clear enough, with many consumers not knowing their account's interest rate or what they paid in bank charges.

The complexity of the market meant that consumers were less likely to switch banks, the watchdog said.

But the banking industry body said the OFT's figures did not reflect the true costs banks faced in offering accounts.

But working very well for the banks.

interestrateripoff · July 16, 2008

BBC NEWS | Business | UK jobless level increases again

Unemployment in the UK rose by 12,000 to 1.62 million in the three months to May, the Office for National Statistics (ONS) has said.
The rate of unemployment was 5.2%, unchanged on the previous quarter.

The number claiming unemployment benefit rose by 15,500 in June to 840,100 - the biggest jump since December 1992.

Employers have cut jobs in the face of rising energy costs, falling consumer confidence and a property slump.

This is probably just the start of the unemployment numbers.

interestrateripoff · July 16, 2008

BBC NEWS | Business | US inflation rate at 17-year high

US inflation accelerated at its fastest pace in 17 years in June, official figures have shown, driven higher by surging energy prices
Consumer prices were 5% higher than a year ago and rose 1.1% on a monthly basis, the Labor Department said.

Federal Reserve boss Ben Bernanke has warned that the threat of rising inflation has intensified recently.

Minutes from the Fed's latest meeting on interest rates indicated the next move in borrowing costs could be up.

It faces the dilemma of having to stem the rise in inflation while not further choking an economy under serious strain.

Bernanke has no room to do anything he's screwed either way. Raise interest rates and kill the banks the US defaults, the alternative theory is he keeps interest rates low and inflation kills the economy America defaults.

Good choice to have.

interestrateripoff · July 16, 2008

BBC NEWS | Business | Zimbabwe inflation at 2,200,000%

Zimbabwe's annual rate of inflation has surged to 2,200,000%, official figures have shown.
The figure is the first official assessment of prices in the troubled African nation since February, when the rate of inflation stood at 165,000%.

Zimbabwe, once one of the richest countries in Africa, has descended into economic chaos largely blamed on the policies of President Robert Mugabe.

Mr Mugabe was re-elected last month in a controversial one-man race.

The opposition party, the Movement for Democratic Change (MDC), pulled out of the run-off election, saying its supporters were being attacked and killed.

Rising costs are forcing retailers to increase prices a number of times a day for goods purchased with billion dollar bank notes and the number of people falling into poverty is on the rise.

In May, the central bank issued a 500m Zimbabwe dollar banknote, worth US$2 at the time of issue, to try to ease cash shortages amid the world's highest rate of inflation.

This is in stark contrast with the situation at independence in 1980 when one Zimbabwe dollar was worth more than US$1.

I suppose inflation here could be worse.

interestrateripoff · July 16, 2008

Interest rate cut on cards as gloom deepens - Telegraph

Investors are betting that the Bank of England's next move in interest rates will be down rather than up for the first time since May.
In an acknowledgement that Britain is now staring recession in the face, money markets priced in a 40pc chance that the Monetary Policy Committee will cut borrowing costs by a quarter of a percentage point early next year.

The critical turnaround came on a day when oil prices plunged at the fastest rate in three years and share prices in London fell sharply.

The BoE is screwed just like the Fed.

interestrateripoff · July 16, 2008

Gordon Brown is too busy blaming others when he should be taking action - Telegraph

The credit crunch started in the City. But it has now spread to every home and business in Britain.
Whether it's the families facing negative equity, companies which are cutting back or the pain millions feel at the check-outs, there can be little doubt of the difficult situation we face.

And, in this time of uncertainty, people are rightly asking politicians: what's your plan?

More at the link.

interestrateripoff · July 16, 2008

It’s worse than we feared and there’s more pain to come, but it will pass | Gerard Baker - Times Online

The spectacle of customers queueing outside a small California bank on Monday to withdraw their deposits was unsettling enough for an American public already traumatised by a year-long financial crisis.
But there were two things about the collapse of IndyMac, a lender based in Pasadena, just outside Los Angeles, that were especially troubling.

The first was that, as the federal authorities moved in to rescue the failed lender, they revealed that they had for some time been compiling a lengthy list of banks around the country that, because of their mounting difficulties, had been placed on a kind of death watch.

The scarier thing was that IndyMac was not even on the list.

interestrateripoff · July 16, 2008

Bloomberg.com: Opinion

July 16 (Bloomberg) -- There is no longer much dispute that the U.K. is heading for a recession later this year. The economic news gets gloomier by the day, and with prices still rising fast, there is little prospect of the Bank of England heading off the coming storm with reductions in interest rates.
Already the job losses are starting to mount. Homebuilders Redrow Plc and Bovis Homes Group Plc have announced they will cut 40 percent of their staff. Wolseley Plc, the world's biggest distributor of plumbing and heating equipment, has a hiring freeze in place after firing 400 employees in the U.K. during the second half of last year. Plenty more workers will lose their jobs before a recovery takes place.

The real problem isn't the economic decline, which is part of a normal business cycle. Britain is in no shape to face a recession. Consumers and government are up to their eyes in debt, the economy is becoming less competitive, and the country has placed itself in the wrong industries. The underlying weakness of the U.K. economy is about to be cruelly exposed.

``The U.K. is a classic case of financial over-stretch,'' says Stuart Thomson, who manages 23 billion pounds ($46 billion) in bonds at Resolution Investment Management Ltd. in Glasgow, Scotland. ``We have been living on the edge with very little for a rainy day. We expect to see the economy come crashing back down to Earth.''

More positive thoughts.

interestrateripoff · July 16, 2008

Bloomberg.com: Worldwide

July 16 (Bloomberg) -- Crude oil futures fell more than $4 a barrel in New York after a surprise increase in U.S. inventories and as a slowing U.S. economy sapped demand for energy.
Supplies rose 2.95 million barrels to 296.9 million barrels last week, an Energy Department report showed. Stockpiles were forecast to drop 2.2 million barrels, according a Bloomberg News survey. Fuel demand averaged 20.3 million barrels a day in the past four weeks, down 2 percent from 2007, the department said.

``The inventory numbers are starting to reflect the bad macro-economic news,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``Not only did we get a surprise build in crude-oil stocks, the products were also up nicely.''

Crude oil for August delivery fell $4.16, or 3 percent, to $134.58 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Prices are heading for the biggest two-day drop since January 2007.

Oil today fell as low as $132 a barrel, more than 10 percent below the record of $147.27 reached on July 11. A drop of that magnitude is commonly referred to as a correction.

interestrateripoff · July 16, 2008

Bloomberg.com: Worldwide

July 16 (Bloomberg) -- Crude oil futures fell more than $4 a barrel in New York after a surprise increase in U.S. inventories and as a slowing U.S. economy sapped demand for energy.
Supplies rose 2.95 million barrels to 296.9 million barrels last week, an Energy Department report showed. Stockpiles were forecast to drop 2.2 million barrels, according a Bloomberg News survey. Fuel demand averaged 20.3 million barrels a day in the past four weeks, down 2 percent from 2007, the department said.

``The inventory numbers are starting to reflect the bad macro-economic news,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``Not only did we get a surprise build in crude-oil stocks, the products were also up nicely.''

Crude oil for August delivery fell $4.16, or 3 percent, to $134.58 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Prices are heading for the biggest two-day drop since January 2007.

Oil today fell as low as $132 a barrel, more than 10 percent below the record of $147.27 reached on July 11. A drop of that magnitude is commonly referred to as a correction.

interestrateripoff · July 16, 2008

The root of this financial crisis, and why you must buy gold now - Money Week

Whether it's Northern Rock, Fannie Mae, Freddie Mac, Indy Mac, the Labour Government, the State of California, or whoever is going to run into trouble next week, the sirens are blaring, 'global financial emergency'.
So it's little wonder that gold has rallied sharply in the past week or so, to more than $970. But what is it about gold that actually makes people want to own it when the financial system is in turmoil? Investors say it's a hedge against inflation; it's the anti-dollar; or they just see that everyone else is buying it, so they pile in afterwards.

But what is the point of owning a lump of metal that doesn't pay a dividend, isn't edible and actually costs you money to keep safe? To understand why gold is the ultimate safe haven in this financial crisis, we have to get to the root of our current problem. And that's money…

How it all started: a brief history of money

Why do we need money at all? The barter system had plenty of attractions – it can't be taxed, for one thing. But it's inefficient. Say I sell spades, and you sell dressing gowns. For any deal to happen you must want a spade at just the moment I happen to want a dressing gown. So even the most primitive societies developed some kind of payment system, or money, that was accepted by everyone in exchange for goods and services.

Money has to have two qualities. It must be portable and it must have a purchasing power that lasts, so it can be used at a later stage. Shells, cocoa beans, even feathers have been used over the years as money. At one stage Roman soldiers were paid in salt, from where we derive the word, 'salary'. These early forms of money were 'commodity money'.

Gold and silver were widely used. Their rarity gave them value – a great deal of worth could be stored in a single gold coin – as did their immutability. Gold doesn't tarnish. You could dig up a gold coin buried in the ground a thousand years ago and it would be more or less intact. And just as gold preserves over time, so does its purchasing power. An ounce of gold would have bought a Roman Senator a jolly decent toga and perhaps a pair of sandals; today the sterling equivalent (£500 or so) would buy your local MP a respectable suit and shoes.

To facilitate trade, gold was turned into coins of a certified weight and purity by goldsmiths. The goldsmiths, who had built vaults to store their gold safely, also began to store the gold of their fellow townsmen, issuing a certificate as receipt for the gold deposited. Over time these certificates were used in the marketplace as if they were the gold itself. World trade had slowly moved from a 'commodity money' to a 'representative money'.

Seeing that very few depositors ever removed their actual gold, instead using their certificates for trade, goldsmiths realised they could make money by lending out certificates against depositors' gold. Despite the inherent duplicity in the scheme – lending what is not yours to lend - it worked. The depositors did not lose anything. As long as there was no bank run, their gold was all still safe in the goldsmith's vault.

Depositors, however, soon wanted their share. Rather than taking back their gold, the depositors simply demanded that the goldsmith, now in effect their banker, pay them a share of the interest. The goldsmith paid one rate on deposits and then lent at a higher rate.

But in times of panic some borrowers would demand their real gold back, instead of the paper certificates. Before long, you had the dreaded run on the bank, with the banker not having enough gold and silver to redeem all the paper he had put out. It would have been straightforward to outlaw this new lending practice, but the large volumes of credit the bankers had created had become vital to the success of European commercial expansion, so, instead, the practice was legalised and regulated. The monetary system had moved on from representative to debt.

Bankers agreed limits on the amount of loan money that could be lent out, limits still much larger than the amount of gold and silver on deposit. Usually the ratio was nine loaned units to one actual unit in gold and these regulations were enforced by surprise inspections. It was also arranged that, in the event of a run, central banks would support local banks with emergency gold. Only if there were runs on a lot of banks simultaneously would the bankers' credit bubble burst and the system come crashing down.

The root of our current financial crisis

Over the twentieth century, this fractional reserve system, where you need only hold a fraction of the money you lend out, became the dominant money system of the world. But, at the same time, the fraction of gold backing the paper money steadily shrunk. With the Bretton Woods agreement of 1944, which established monetary order between the major industrial nations after World War Two, the USA was the only nation left with a currency backed by gold, and the dollar became the global reserve currency. But in 1971, under pressure from the French, who were demanding gold instead of dollars, and faced with the rising cost of the Vietnam War, President Nixon removed this backing. Now, for the first time in history, no currency on the planet, nor any small fraction of any currency, was backed by anything tangible. The basic nature of money had changed again.

We were now in an era where money is money by government edict - by the law. In the past, people had the choice to refuse privately created bank credit notes, but now legal tender laws declare that citizens must accept this government-edict money – or fiat currency - as payment. Their value is determined by how they trade against other fiat currencies on international currency markets. Belief in the integrity and competence of the central banks and government that issue a currency is essential to its success.

And that's where the problem lies. As Winston Churchill put it: "All previous attempts to base money solely on intangibles such as credit or government edict or fiat have ended in inflationary panic and disaster."

Sound familiar? The greatest credit expansion in history was only made possible under this post-1971 system of currency by government decree. But now it's unravelling. Fears over Fannie and Freddie and the integrity of the US banking system are pushing the dollar – the world's reserve currency - down to record lows against the euro (it's even fallen against the pound, which shows just how bad the market fears things could get).

Investors are losing faith in the most important form of paper money in the world. What will take its place? One thing's for sure – even if we don't return to a commodity-backed currency, for as long as the financial turmoil continues, gold, the oldest and most consistent money in history, is likely to be a benefactor. If you don't own any. I suggest you get down to your local coin shop and buy some.

Interesting article.

interestrateripoff · July 16, 2008

Who will pull out of the euro first? - Money Week

Who will pull out of the euro first? Ireland, Spain or Italy? It might sound a bit far fetched to some people but actions speak louder than words. In Germany, savers are drawing money out of the bank and demanding that the euro notes are German euro notes. Is this a sign that some Europeans are starting to worry about the validity of their currency?
Each member of the Eurozone prints its own banknotes, according to its economic weight, and the notes are numbered in such a way as to make their country of origin identifiable. According to Ambrose Evans-Pritchard in the UK's Telegraph newspaper, Germans are avoiding notes with serial numbers from Italy, Spain, Portugal and Ireland, instead demanding notes with German numbers that start with an 'X'.

It may seem unusual to still think of the euro as a combination of different currencies but the same approach is applied to the government bonds issued by each Eurozone country. For instance, 10-year bonds issued by the Italian government are yielding 5.034%, compared to 4.422% for German 10-year bonds. French bonds are offering just 4.636%, compared to 5.089% for Greek bonds. It is the financial strength of these countries that effectively combines to underpin the stability of the euro currency but there are clearly some variations in the governments doing the underpinning. However, a default on interest payments on government bonds would have a devastating effect on the currency and it is unlikely it would be allowed to happen in the Eurozone: the ECB would most likely step in.

But in the same way that investors are applying different ratings to government bonds from different issuers, German consumers are now applying the same approach to bank notes from different issues. In a world where currencies are no longer backed by hard assets such as gold, and rely completely on public confidence, it is not inconceivable that one country's people might panic and stop accepting notes that are issued by another country. It might be wrong to do this, purely as a result of a lack of understanding of how the euro is supported by the combined strength of the Eurozone members, but crowd mentality is a powerful force and if people think they are at risk of losing all their money, they will react to save their skins. A run on the notes of a specific country is not totally inconceivable.

The most likely trigger for a run on a currency formed through monetary union is if the chances of one country dropping out were to increase significantly. There have been some weak rumours already about Italy dropping out of the euro but nothing that has caused a tangible effect. However, the economic problems that some countries are experiencing are only going to get worse and investors need to be looking ahead. We could be on the verge of the greatest stress test the euro currency has ever undergone during its short life.

Over the past few years there has been massive expansion of the financial system in Spain, Ireland and Greece. Low interest rates, combined with a big increase in the number of available financial products on offer such as mortgages and personal loans, has propelled a huge and unprecedented take up in credit in these countries. Borrowing has been available on a scale never seen before. Effectively the interest rate set by the ECB was too low for these high growth countries, having been kept down to support the much larger economy of struggling Germany, and this fuelled a boom in construction, housing and consumer spending.

As I keep saying there's too much diversity to have a single interest rate.

interestrateripoff · July 16, 2008

Morgan Stanley sees credit crisis extending into 2009 | News | Reuters

(Reuters) - Analysts at Morgan Stanley said the credit crisis fallout would extend into 2009, and that mortgage asset overhangs will drive additional write-downs as brokers struggle to de-risk their balance sheets.
"Risk management failures stemming from the credit crisis will continue to weigh on the group as brokers try to draw down illiquid assets, deleverage balance sheets, and fortify liquidity and capital positions," analysts Patrick Pinschmidt and Avi Ghosh said.

They initiated coverage of the U.S. brokers' sector with an "in-line" view, and said they favour U.S. brokers over U.S. large-cap banks and European universal banks.

I think it will last a lot longer than 2009.

interestrateripoff · July 16, 2008

If all else fails, then maybe it's time to ditch the euro - David McWilliams, Columnists - Independent.ie

Is it time to think the unthinkable? With banks shares in free-fall, lending collapsing and bad debts rising by the hour, what can we do? Now that the slowdown has spread well beyond houses and construction -- evidenced by falling retail sales, rapidly rising unemployment and faltering tax revenues -- is there an option out there, which, although dramatic, might be plausible in the context of the recession the country is facing?
What we are talking about here is pulling out of the euro. It might never happen, but it is worth considering how and why this might come to pass.

Now that the hollow platitudes of the "soft landing" merchants have been exposed as nothing more than cynical sales pitches, while the various paid PR men who rabbitted on about our "fundamentals" were obviously talking through their posteriors, it's time to replace catchphrases with hard thinking.

Our problem is pretty straightforward. If a Martian economist landed in Ireland, he'd see straight away that Ireland is caught in a currency arrangement which will make our recession much deeper than necessary. This is an economic fact, not a political slogan. The euro is now part of the problem, not part of the solution.

In economic history, no sovereign country has faced a property downturn, inspired by a ridiculous credit binge, resulting in such huge personal debts without devaluing its currency.

Look at what is happening in the UK and the US. Both countries find themselves in the same bind as we do. They thought that they could get rich by buying and selling houses to each other using other people's money.

Once this ponzi scheme has been revealed, they let their currency fall. This allows them to recharge their exporting sector, making it more competitive and, more significantly, it gives them the opportunity to inflate their debts away.

Are the cracks appearing?

interestrateripoff · July 16, 2008

Alex Jones' Infowars: There's a war on for your mind!

The following text is drawn from the Associated Press report by Jeannine Aversa, “Fed to Rescue Fannie Mae, Freddie Mac.”

The plan, unveiled Sunday, is intended to signal the government is prepared to take all necessary steps to prevent the credit market troubles that erupted last year with losses from subprime mortgages from engulfing financial markets.

Yes, what is a government for, if not to save us from the impending disaster that its own policies have produced? Thank heavens for the government!

The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies “should such lending prove necessary.” They would pay 2.25 percent for any borrowed funds—the same rate given to commercial banks and big Wall Street firms.

We may take it as a given that “such lending [will] prove necessary”; otherwise, these frantically fashioned keystone-cops high jinks will serve no purpose.

Note, further, however, that lending at 2.25 percent when the rate of inflation is at least twice that great means that the lender is giving away money. The real interest rate on such a loan is negative.

Worse, because the Fed itself is the lender, the loan will take the form of newly created money—that is, the loan will be pure inflation, a hidden tax on all assets denominated in dollar units, including dollar balances themselves.

The Fed said this should help the companies’ ability to “promote the availability of home mortgage credit during a period of stress in financial markets.”

Of course, the government always seeks to promote a noble purpose. And what could be more noble than pulling some leading crony capitalists away from the brink over which their own actions amply warrant their plunging? Our saviors protest, however, that the government’s every action aims only at helping the little guy. It’s music to the ears of the booboisie.

Pure genius

interestrateripoff · July 16, 2008

Jul 16, 2008 Fannie Mae Freddie Mac and US Mortgage Debt F. William Engdahl 321gold

The announcement by US Treasury Secretary Henry Paulson together with Federal Reserve chief Bernanke, that the US Government will bailout the two largest guarantors of housing mortgage debt - the Fannie Mae and Freddie Mac - far from calming financial markets, has confirmed what we have said repeatedly in this space: The Financial Tsunami which began in August 2007 in the relatively small "sub-prime" high risk US mortgage securitization market, far from being over, is only gathering momentum. As with the Tsunami which devastated Asia in wave after terrifying wave in December 2004, the financial Tsunami we are witnessing is a low-amplitude, long-wave phenomenon of trillions of dollars of financial securities being unwound, defaulted on, dumped on the market. But the scale of the latest wave to hit, the collapse of confidence in the two Government-Sponsored Entities, Freddie Mac and Fannie Mae, is a harbinger of worse to come in what will be the most devastating financial and economic catastrophe in United States history. The impact will be felt globally.
The Royal Bank of Scotland, one of the largest financial institutions in the EU has warned its clients "A very nasty period is soon to be upon us - be prepared." They expect the S&P-500 index of US stocks, one of the broadest stock indices in Wall Street used by hedge funds, banks, pension funds could lose almost 23% by September as in their term, "all the chickens come home to roost" from the excesses of the US-led securitization revolution that took hold after the dot.com bubble burst and Greenspan lowered US interest rates to levels not sustained since the 1930's Great Depression.

This all will be seen in history as the disastrous Alan Greenspan "Revolution in Finance," - the experiment in Asset Backed Securitization, a mad attempt to bundle risk in loans, "securitize" them in new bonds, insure them via specialized insurers called "monoline" insurers (they only insured financial risks in bonds), rate them thereby via Moody's and S&P as AAA, highest grade. All that was done so that pension funds and banks around the world would assume they were high quality debt paying even higher interest than safe US Government bonds.

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