The great interest rate rip off part 1

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BBC NEWS | Business | House prices 'will keep falling'

 

House prices in the UK and the US are likely to fall for another two years, the chairman of one of the world's most powerful banks has warned.

Sir Win Bischoff of Citigroup told BBC Business Editor Robert Peston he expects it will take two years for the markets to "stabilise".

Sir Win also expected the credit crunch - fraught conditions in financial markets - to continue through 2009.

Citigroup lost $2.5bn (£1.25bn) in the three months to the end of June 2008.

The figures were less than analysts had been expecting.

Nonetheless, the announcement took cumulative losses at the bank, until recently the world's largest, to $17bn (£8.5bn) over the previous nine months.

 

He didn't say how much they would fall in the next 2 years though???

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BBC NEWS | Business | Oil price drop in volatile market

 

The price of oil has recorded its biggest weekly drop, slipping under $130 a barrel on Friday.

Crude prices have fallen more than 11% over the past four days, knocking $15 off a barrel of oil in that period.

Fears of high prices weakening the US economy set oil off on one of the biggest weekly falls since 1983.

Sweet crude for August delivery fell 41 cents to settle at $128.88 in New York - far off the record of more than $147, reached one week ago.

A key reason for this week's decline was evidence of falling demand for gasoline in the US, despite it being the peak summer driving season, analysts said.

Another key factor was the easing of tensions in the Middle East and Nigeria, both major production points for crude.

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Alistair Darling rethink as gloom deepens and public borrowing surges - Times Online

 

Alistair Darling admitted yesterday that the Treasury’s fiscal rules are under review as fears over rapidly worsening government finances were fuelled by a surge in borrowing to levels not seen since the end of the Second World War.

In the latest confirmation that the public finances are sliding into the red at an alarming pace, net government borrowing over the past quarter, the first of the new financial year, leapt to £24.7 billion.

The startling figure was up by two thirds from the £14.7 billion for the same time last year and a record high for this period.

In grim reading for the Chancellor, borrowing last month alone jumped to £9.2 billion, drastically up by almost £3 billion, or nearly 50 per cent, from the same month last year, and also setting a record for any June.

 

It's time to abandon the stupid ideas we don't need like ID cards.

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Threat from lack of gas capacity, expert says - Times Online

 

A lack of adequate gas storage has left Britain's energy market like a “house of cards”, more vulnerable to supply shocks than any other country in Western Europe, according to a leading energy analyst.

Four years after becoming a net gas importer, Britain still has one of the lowest levels of gas storage capacity in Europe - enough to supply consumers for about two weeks. That is equivalent to about 4 per cent of annual demand, compared with 20 per cent in both France and Germany.

John Hall, an energy analyst, said that this acute shortage was a key factor creating volatility in Britain's wholesale gas market, which in turn is resulting in bigger bills.

“Without more storage the UK is terribly vulnerable to supply disruptions,” Mr Hall said, adding that the situation was exacerbating tension in Britain's gas market, the third-largest in the world after America and Russia.

Perhaps an interest rate rises would help?

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Boom times for American pawnbrokers as rich hit hard times - Times Online

 

“I need $3,000,” Tito Vazquez, 45, says as he looks at his gleaming Harley-Davidson motorcycle. “But the economy's a mess right now and my credit cards are all maxed out.”

Which brings him here, to Collateral Lender, a few blocks east of ultra-posh Rodeo Drive, in Beverly Hills. In short, it is a pawn shop. Like most pawn shops in Los Angeles - home to not one but two failed mortgage lenders, Countrywide Financial and IndyMac Bank - it is doing a roaring trade.

For Mr Vazquez, that is not good news: Collateral Lender has so many Harleys it does not have room for any more. The manager sends him to another broker in a different part of town, where with a bit of luck he will be able to get a short-term $3,000 float using his “hog” as collateral. The state-regulated interest rate is likely to be about 7 per cent, although pawn shops have a knack of getting around this by charging other fees.

“I know I'll be coming right back for my Harley,” says Mr Vazquez, who lives an hour from Beverly Hills and needs the cash to pursue an urgent “business opportunity”. “If I wasn't coming back that would be different. I've pawned this bike a few times.”

 

The recent boom in America's pawnbroking business has come as something as a surprise - not least to the brokers. During the economic go-go years of the mid-2000s, the concept of lending money against items such as electric guitars, gold watches and family heirlooms seemed to have been made obsolete by 0 per cent interest rates, lax credit checks and the instant liquidity offered by the likes of eBay and craigslist.

No longer. With America's banks refusing to lend money even to wealthy customers there is now an overwhelming demand for an alternative. In Beverly Hills, where keeping up appearances is all-important, Collateral Lender is only too happy to help. “We have a special entrance for celebrities or high-profile individuals around the back so they don't have to use the front door,” the manager, a former jeweller who asks to be identified only as Pete (“for security reasons”), says. “We talk to 'em on a very private basis. The bottom line is that we're here to help people out.”

Until recently, he adds, there was a 1969 Rolls-Royce in the store.

Unlike most pawn shops, which deal typically in loans of less than $100, Collateral Lender frequently doles out floats in the tens of thousands, all of it underwritten with the kind of objects that can be found only in the wealthiest enclaves of Los Angeles. Brokers typically make money either by buying items and reselling them, or by lending 50 per cent of the value of items left as collateral. If the borrower defaults, the collateral is sold to cover the cost, although Pete insists this rarely happens.

 

The global economy appears to be on very shaky ground.

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Right of households to rubbish bin collection by councils to be abolished - Telegraph

 

The government is to give councils the power to refuse to collect rubbish if home owners fail to abide by draconian rules which may include leaving bins in the right place, sticking to weight restrictions and following strict recycling policies.

 

Labour is quietly pushing the new rules through parliament without any debate after it proposed amendments to a 130-year-old law which has, until now, made it a statutory duty of local authorities to collect household waste.

 

There are fears that the changes to the law will lead to large increases in fly-tipping, bonfires of noxious substances and rat infestations around uncollected waste. Despite this, there will no reduction in council tax for home owners.

 

The Conservatives described the plans as "disgraceful", adding that bin men will now be able to use "any excuse not to empty your bin".

 

Many Labour MPs fear the changes will add to a growing backlash against the government which has seen them slump in the polls.

 

Ian Gibson, a Labour MP who sits on the parliamentary committee which is scrutinising the changes, said: "It is a British way of life to have your bins emptied once a week. Taking that away is like losing your birthright."

 

Phil Woolas, the environment minister, quietly added an amendment to section 46 of the Environmental Protection Act 1990 earlier this month which now states: "A waste collection authority is not obliged to collect household waste that is placed for collection in contravention of a requirement under this section."

Town halls will be free to set their own rules on what constitutes a "contravention" of waste collection policies.

 

Councils could refuse to empty bins that are too far from a curb, are not placed directly outside a gate or are put out on the street too early.

 

So the public health risks of not emptying the bins is going to be completely ignored. I suppose it will take an outbreak of something like Botulism for the govt then to realise how stupid this idea is.

 

Empting bins is not a right it's for public health.

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http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/07/19/cndeficit119.xml

 

Alistair Darling may see his budget deficit balloon to a record £100bn in the coming year as a potential recession bites, experts have warned.

The alert was sounded as the public finances lurched deep into the red in the first solid sign that the economic downturn is now weighing heavily on the Government's accounts.

 

Revenues from income tax, National Insurance, corporation tax, VAT and stamp duty have suddenly dried up as the credit crisis and downturn in the housing market hit the economy, the figures showed.

 

It came as the Chancellor confirmed that his closely watched borrowing rules are "under review", with many speculating that he is poised either to scrap or loosen them.

 

To be paid back out of future tax raises.

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Analysts cut earning forecasts for Next - Telegraph

 

Next, the clothing and homewares retailer, saw analysts' earning forecasts trimmed yesterday after JP Morgan, the investment bank, said that trading conditions would remain tough next year and beyond.

 

JP Morgan also estimates that like-for-like sales at the retailer will remain in negative territory until the end of the 2010 financial year. The bank expects Next, which starts its summer sale today, to announce a 5pc fall in second-quarter like-for-like sales at the end of this month.

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Week's job cuts total hits 3,800 as Kier plans 350 redundancies - Telegraph

 

A miserable week for job losses was made worse yesterday by the news of a further 770 cuts across Britain.

 

More than 3,800 jobs have been shed in the past seven days as UK businesses struggle to cope with the economic slowdown, a housing market slump and soaring energy costs.

 

Kier became the latest housebuilder and construction services group to announce it was cutting staff. In a trading update, the company said it planned to axe 350 jobs in its residential division - a 60pc cut in the headcount - to reduce costs.

 

"Conditions for our property business have continued to deteriorate over the past few months as yields have continued to shift upwards and occupier demand has slowed," the company said in a statement.

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Confirmed: the lunatics are running the asylum - Telegraph

 

On Tuesday we speculated whether, by the end of this week, we would be any closer to answering the looming economic question: hard or soft landing?

 

We were anticipating a raft of scheduled news announcements that looked like being decisive. We were not disappointed. Sitting here reflecting on the week's events, it seems to me the future is clearer. The deterioration in the UK economy revealed by the week's events is at a pace and on a scale that suggests a recession is unavoidable. This situation will be compounded by public finances in disarray and which cannot come to our rescue, even if there was the political will to do so.

 

The full extent of the US property crisis was finally confirmed by the deteriorating state of the Fannie Mae and Freddie Mac mortgage insurers. The US government has stepped in to support them while announcing emergency measures to curb traders shorting their exposed shares.

 

The rather poor outlook for the property market here was confirmed by Alliance & Leicester's rapid surrender of its independence to Santander, the Spanish banking group.

 

Fears of recession were reflected in markets around the world. Even oil got the message. On Tuesday it fell at its fastest rate since 1991, losing $9 a barrel at one stage. At the same time the dollar fell, the FTSE 100 fell and European economic confidence fell, with Germany's outlook the worst on record. All of this against a backdrop of the Bank of England's inflation report which told us that the Consumer Price Index has hit 3.8pc, ahead of already poor expectations.

 

Wednesday came and went with confirmation of the one thing that optimists have been dreading - a jump in unemployment. The claimant count jolted up by 15,500 in June, the biggest rate of gain since 1992. Jobless figures are low but now on the rise, like home repossession. There's little point comparing their low levels now with the high levels reached during the last recession. Those previously high numbers were reached at the bottom of the crater. We're still on the lip.Throughout this crunch week we've had the now regular drip, drip, drip of job losses. It's been a theme of June and July. A few hundred here, a few hundred there but the trend is clear.

A slightly eccentric respite arrived on Thursday with the IMF's declaration that it was upgrading its forecasts for UK for this year and next, despite all indications to the contrary. And then yesterday came perhaps the worst news. The UK budget deficit increased to its widest level since a war-torn country started measuring how much the government was spending versus how much it was earning in taxes in 1946. The gap in the public finances was £24.4bn, and that was only for the first three months of the year.

Labour has led us into recession already in the red. To fund spending commitments and the extra spending bound to come in a recession from rising dole claims, they're going to have to borrow even more. And, of course, as they borrow more their income will fall as tax revenues decline along with economic activity. Their fiscal "rules" will be broken which is why the Treasury has been looking at rewriting the "rules" to give them the headroom to borrow the extra cash they need.

My memories are still fresh of interviewing Alistair Darling in No.11 Downing Street last September, the day before the Northern Rock disaster first became apparent. He lectured me about the dangers of excessive lending and borrowing. His very words were: "They [borrowers] need to ask themselves, 'can I repay this?' and lenders need to ask themselves, 'If it goes wrong can I get it back?' People do need to think long and hard about this. One of the by-products of the current situation is that, not just at a high level but right across the piece, people will be a bit more cautious."

Will they? Well yes, we will because as taxpayers and consumers we'll be forced to. But who's going to force the Government to stop its reckless and irresponsible behaviour? The salvation of the ballot box in 2010 is still a dangerously long time away as far as the deteriorating health of the economy is concerned. This week has confirmed many things, including the fact the lunatics really are running the asylum and clearing up the mess is going to be absolutely ghastly.

 

Darling knows he won't have to pay the money back as he won't be in charge after the next election so he doesn't care.

 

So when taxes go up the rich will leave whilst we pay it off. Then when taxes get cut they will return.

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How to beat 60% rise in gas prices? Wear two jumpers, says energy boss - Business News, Business - The Independent

 

One of the UK's biggest energy suppliers came under fire yesterday after one of its senior executives said consumers struggling with record-high gas prices should keep warm by putting on two jumpers.

Charities for the aged and consumer groups reacted angrily at the comments made by Jake Ulrich, the managing director of Centrica, which owns British Gas. Mr Ulrich made his comments after a report commissioned by his firm warned that household gas bills could rise by 66 per cent over the next two years. That could see some families receiving a £1,000 bill for their gas alone.

British Gas customers have already seen a 15 per cent rise in their gas bill this year, adding an average of £130 to their bills. There were protests from the firm's customers in February, after Centrica posted increased profits of £571m for 2007.

Mr Ulrich said: "I think people will change the temperature they keep the house. I hate to go back to the Jimmy Carter days in the US, but maybe it's two jumpers instead of one."

Gordon Lishman, director general of Age Concern, said: "The millions of pensioners affected by fuel poverty will need much more than an extra jumper to stay warm and well this winter. It is unacceptable that older people could be putting their health at risk because they don't feel they can afford to heat their home adequately. Far more radical action is needed from both the Government and energy companies if the poorest and most vulnerable pensioners are to be protected."

 

Perhaps a better solution is to be a CEO of a energy company, that way you have a big fat salary and it doesn't matter what the price does.

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Hamish McRae: We may be close to bottom of bear market but US remains a concern - Hamish McRae, Business Comment - The Independent

 

There has, of course, been a sudden downward lurch in financial sentiment over the past few days, reflected in the fall of both equities and in the dollar, but there has been very little parallel evidence of worsening economic conditions. So, is this just another example of markets catching up with what was already known or is there something new and more sinister going on? I think it is mostly the former; but there is a danger of the latter.

Start with share prices, which have bombed. Here in the UK, they have fallen to such an extent that a yield gap has opened up: the prospective dividend yield on the FTSE 100 is now higher than on ten-year gilts. This has not happened for any length of time since the late 1950s, though it has nudged higher for a few weeks from time to time. Before the late 1950s, in fact right back through the 19th century, equities generally gave a higher yield than gilts on the grounds that they carried higher risk. Then, as people became aware of the great inflation of the second half of the last century, yields on fixed interest securities rose to compensate for the loss of real capital value, while yields on shares fell because people reckoned to get part of their total return in the form of a rising share price. The result: the reverse yield gap became the norm.

But during the early 2000s, inflation remained low and bond yields fell; meanwhile, we had the last bear market in equities and briefly in 2003 we went back to a yield gap again. But the crossover lasted only a few weeks and actually was a signal for the next bull market, the one that ended last year. So a question: is this crossover the signal that markets have caught up with the toils and troubles ahead and we are therefore close to the bottom of this bear market? Or, alternatively, will the forthcoming downturn cut company earnings so much that further falls will be in store?

 

More at the link.

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Jeremy Warner's Outlook: Now there's a surprise. Government is being forced to suspend its fiscal rules - Jeremy Warner, Business Comment - The Independent

 

Just when you thought things couldn't get any worse for our beleaguered Prime Minister, along comes the news that he's being forced to ditch the rules on which he built his reputation as the Iron Chancellor.

On the face of it, this might not seem like much of a story, as it has been obvious for a long time that the rules were a busted flush. The public finances were in a bad enough state before Mr Brown even left the Treasury, but since moving into Number 10 he seems to have thrown caution to the wind, and in the manner of Labour leaders of old has taken to chucking public money around all over the place.

In the last three months alone, he's compensated those disadvant-aged by the abolition of the 10p income tax rate and abandoned a planned increase in fuel duties. As yesterday's public borrowing figures only too vividly demonstrate, he can ill afford such largesse. As things stand, he would either have to raise taxes, cut spending or both to meet his rules, thereby deepening what already feels like a serious economic downturn.

Few people will be discussing the end of the "sustainable investment rule" in the pub tonight. It is admittedly a somewhat dry old subject. But everyone will understand that getting rid of it is another humiliating blow to credibility for a politician who built his career around "prudence".

 

Brown is useless.

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Bloomberg.com: Worldwide

 

July 19 (Bloomberg) -- The Federal Reserve shouldn't wait for housing and financial markets to stabilize before it begins raising interest rates, central bank policy maker Gary Stern said.

``We're pretty well-positioned for the downside risks we might encounter from here,'' Stern, president of the Federal Reserve Bank of Minneapolis, said in an interview yesterday. ``I worry a little bit more about the prospects for inflation.''

The comments by Stern, a voter on the rate-setting Federal Open Market Committee this year, reinforced traders' forecasts for a rate increase by year-end. Stern indicated that Treasury Secretary Henry Paulson's rescue plan for Fannie Mae and Freddie Mac will help prevent a deeper housing and economic slump.

``We can't wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on and so forth, before we reverse course,'' said Stern, 63, the Fed's longest-serving policy maker. ``Our actions will affect the economy in the future, not at the moment.''

The bank president compared the credit crunch to the one in the early 1990s, which restrained economic growth for almost three years. That's a more sanguine assessment than others have. The International Monetary Fund has said it's the worst financial shock since the Great Depression. Former Fed Chairman Alan Greenspan said it's the most intense in more than half a century.

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CBS News Video - Top Stories and Video News Clips at CBSNews.com

 

Record High For Late Payments There's more evidence of America's downward economic spiral as credit card delinquencies have reached a dangerously high level. Anthony Mason reports.

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Mish's Global Economic Trend Analysis: Deflation is in the Cards

 

Yes Readers, that is correct. The answer to the "Great Flation Question" is DEFLATION. I am not going to wimp out and say "stagflation", and rest assured it is not "inflation" which means that the "hyper-inflation" that many see coming is totally laughable.

 

Before we build the deflation case, I think it's time for a new feature. We will call this feature the "Laugh of the Week". I will be loose with this. There might be three a week or none a week depending on how I feel. The first must see laugh of the week is The Reverse Revolution! by Mark Fiore.

 

The Case for Deflation: Background History

 

To understand the case for deflation we must turn back the hands of time.

The year is 1914. WWI was breaking out in Europe and the US stayed out of it for three years. As a result of being a "safe haven" gold poured into the United States and US gold reserves rose 64% as Europe exchanged its gold for American goods. By the time the US entered the war much of Europe was ravaged. The US escaped unharmed. After the war ended the US trade surplus remained high and allies began repaying their war debts.

 

The US experienced rapid credit expansion as a result of the surge in gold reserves. Between 1914 and 1920 the US doubled its expansion of credit. During those war years, investment in machinery and equipment rose by 205% and the value of durable goods output increased in excess of 250% This surge in capacity led to general oversupply of goods by 1926. During the second half of the "roaring 20's" credit expanded at moderate rate but the damage had already been done. The economy was no longer able to profitably invest in equipment so increasing amounts of money poured into the stock markets. The bubble finally burst in 1929 when profit growth (earnings) could not keep pace with rising stock market valuations. Share prices plunged, credit contracted, and bankruptcies proliferated.

 

Fast forward to 1980. Following the collapse of the Bretton Woods agreement in 1971 with Nixon closing the "gold convertibility window" coupled with huge output expansion in Japan, Japanese currency reserves increased 260% between 1985 an 1988. Those dollars triggered a lending boom in Japan as well as incredible property bubbles and stock market bubbles. In 1989 the Nikkei index peaked above 38,000. Just as in the US in the late 1920's, earnings could not keep pace with market valuations and share prices started plunging. Japan repeatedly tried to stabilize the markets with injections of liquidity but Japanese property values plunged for 18 consecutive years and are still falling at the time of this writing. Japan peaked in 1989 and may just now finally be coming out of it.

 

............

 

The Mish top ten reasons why deflation is inevitable:

1) Enormous consumer debt

2) Falling wages

3) Global wage arbitrage

4) Credit expansion that can not be maintained

5) Mal-investments

6) Over capacity

7) A world-wide housing bubble

8) A re-inflated stock market bubble

9) The normal business cycle

10) Past history

Continues at the link.

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http://www.nytimes.com/2008/07/19/business/economy/19econ.html?_r=1&hp&oref=slogin

 

You have heard that Fannie and Freddie, their gentle names notwithstanding, may cripple the financial system without a large infusion of taxpayer money. You have gleaned that jobs are disappearing, housing prices are plummeting, and paychecks are effectively shrinking as food and energy prices soar. You have noted the disturbing talk of crisis hovering over Wall Street.

Something has clearly gone wrong with the economy. But how bad are things, really? And how bad might they get before better days return? Even to many economists who recently thought the gloom was overblown, the situation looks grim. The economy is in the midst of a very rough patch. The worst is probably still ahead.

Job losses will probably accelerate through this year and into 2009, and the job market will probably stay weak even longer. Home prices will probably keep falling, shrinking household wealth and eroding spending power.

“The open question is whether we’re in for a bad couple of years, or a bad decade,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund, now a professor at Harvard.

 

Is this a recession?

Officially, no. The economy is not in recession until a panel at a private institution called the National Bureau of Economic Research says so. Unofficially, many economists think a recession started six or seven months ago, even as the economy has continued to expand — albeit at a tepid pace.

Many assume that if the economy expands at all, then it isn’t a recession, but that’s not true. The bureau defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months.” If enough people lose their jobs, factories stop making things, stores stop selling things, and less money lands in people’s pockets, it is probably a recession.

Whatever it is called, it is a painful time for tens of millions of people. Indeed, this may turn out to be the most wrenching downturn since the two recessions in the early 1980s; almost surely worse than the recession that ended the technology bubble at the beginning of this decade; perhaps worse than the downturn of the early 1990s that followed the last dip in real estate prices.

 

The US has a different definition of recession, for us it's 2 quarters of negative growth.

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washingtonpost.com

 

When Fannie Mae and Freddie Mac's stock prices plunged and rumors of their insolvency swirled, the presidential campaigns of Sens. John McCain and Barack Obama released terse statements about the mortgage giants, then went nearly silent.

Their responses made sense in political and economic terms. The risks of intervening in the firms' rescue are high, the rewards are scant, and the tentacles of the government-sponsored enterprises reach into both campaigns.

"You see a consensus developing that the current system is unsustainable," said David C. John, a senior research fellow at the conservative Heritage Foundation. "But actually saying what has to happen next is a little bit scary if you're in a campaign, especially if some of your most prominent supporters have such deep ties to these entities."

Rick Davis, McCain's campaign manager, was president of the Homeownership Alliance, which advocates the expansion of homeownership through low-interest mortgages funded by Fannie and Freddie. Arthur B. Culvahouse Jr., who is heading McCain's vice presidential vetting panel, was a lobbyist for Fannie Mae. Mark Buse, a longtime McCain aide, lobbied for Freddie Mac before returning to McCain's Senate staff.

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IMF Admits Bankruptcy; Wall Street Alternatives a Fraud

 

Admitting that the debts of its post-1971 floating rate financial casino cannot be paid, the International Monetary Fund (IMF) has called for new laws allowing countries with unpayable debts, to seek bankruptcy protection under the IMF to avoid "chaotic default." "There remains a gaping hole" in the financial system, IMF First Deputy Managing Director Anne Krueger told the National Economists Club in Washington on Nov. 26: "We lack incentives to help countries with unsustainable debts resolve them promptly and in an orderly way." There are "too many countries with insurmountable debt problems." With the 1990s mushrooming of the bond market, each debt now has too many creditors to coordinate, allowing uncooperative "vulture" creditors to create panic. Agreed rules for international bankruptcy, Krueger said, could to prevent "unnecessarily heavy costs" for "the international community."

This is a "dramatic admission that the IMF system has failed," EIR Editor Lyndon LaRouche said on Nov. 28. The same day, the nation of Argentina with $120 billion in foreign debt, was declared bankrupt by creditors, and Japan's banks, the world's largest with almost $3 trillion in assets, were declared "crippled" by Moody's and Standard & Poor's debt raters.

The IMF plan, in fact, is a confession, not a plan. It is one of many Anglo-American schemes now popping up, with one, panicky aim: to convince angry leaders in Asia, Ibero-America, Russia, and elsewhere, to "stay on the IMF ship Titanic." Promising "IMF reform," Wall Street spokesmen like former Federal Reserve Chairman Paul Volcker and Lazard Fr@ageres banker Felix Rohatyn—and Wall Street's "critics" like former World Bank chief economist Joseph Stiglitz and Harvard's Jeffrey Sachs—have recently hosted a profusion of conferences, committees, and new institutes to "fix the system." A group of well-meaning Third World scholars convened by Volcker and former U.S. Treasury official C. Fred Bergsten, for example, released a 48-page report on IMF reform Nov. 5, "Rebuilding the International Financial Architecture." A new Center for Global Development "dedicated to reducing global poverty and inequality," featuring Stiglitz and Sachs, was founded in Washington on Nov. 27.

 

I wonder if this idea will return?

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Watchdogs warn of soaring fuel poverty | Money | The Guardian

 

Consumer watchdogs last night called on energy companies to do more to protect vulnerable people from the worst effects of rising gas and electricity prices.

They predicted the number of households suffering fuel poverty would rise by around 50% to more than 6m following warnings that gas bills alone could soar by the same figure beyond £1,000 a year within a few years.

The National Consumer Council (NCC) said suppliers should offer more low-cost "social tariffs", with discounts and rebates, to families on low incomes, older people and those with long-term illness, while Energywatch called for EU-wide action to break a historic link between oil and gas prices which threatened "catastrophic" increases for consumers, businesses and the wider economy.

The imminence of the £1,000-plus annual gas bill, if oil prices remained at $140 a barrel, came from analysts Eclipse Energy in a report commissioned by Centrica, parent company of British Gas. Further oil price rises could send gas bills even higher and a similar impact was expected on electricity prices.

 

The way things are going most of the country will need these tariffs.

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Water | A soluble problem | Economist.com

 

SO WORLD markets are short of oil, and supplies of food are running thin. The prices of all sorts of basic commodities are soaring, and now there may also be reason for many to worry about the most fundamental of necessities—water. Some experts believe so, at least, and they are spreading doom-laden warnings of a Malthusian crisis in the world’s water supply.

Goldman Sachs, an investment bank which likes to ponder the future of the world, recently suggested that a global lack of water could prove to be a bigger threat to mankind than rising food prices or the depletion of energy resources. Sir Nicholas Stern, who reviewed the economics of climate change in a big report for the British government in 2006, is worried too. He points to some big local problems, for example in the Himalayas, where melting glaciers risk disrupting supplies of usable water in the region, just as many underground aquifers are drying up. He argues that water—at least the fresh sort—is not a renewable resource, and because it is not priced properly it has been “mined” without restraint.

 

Global water consumption is doubling every 20 years says Goldman Scahs. According to Sir Nicholas, in many places supplies are running short as rising consumption cannot be matched by fresh rainfall. As a result, suggests Goldman Sachs, the price of water is bound to rise: bad news for the poor and thirsty, but an opportunity for investors. The excited bank even suggests that water might be considered to be the “petroleum for the next century”.

It expects profits to be made less from selling the stuff directly, and more from investments in infrastructure and new technology. The bank estimates that America alone needs to spend around $1 trillion on new pipes and waste-water plants by 2020. It estimates that the higher-tech side of the industry—for example in desalination efforts, or ultraviolet disinfection—is now worth $425 billion dollars, globally.

 

Without water all life dies.

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Fannie Mae and Freddie Mac | End of illusions | Economist.com

 

THERE is a story about a science professor giving a public lecture on the solar system. An elderly lady interrupts to claim that, contrary to his assertions about gravity, the world travels through the universe on the back of a giant turtle. “But what supports the turtle?” retorts the professor. “You can’t trick me,” says the woman. “It’s turtles all the way down.”

The American financial system has started to look as logical as “turtles all the way down” this week. Only six months ago, politicians were counting on Fannie Mae and Freddie Mac, the country’s mortgage giants, to bolster the housing market by buying more mortgages. Now the rescuers themselves have needed rescuing.

 

After a headlong plunge in the two firms’ share prices (see chart 1), Hank Paulson, the treasury secretary, felt obliged to make an emergency announcement on July 13th. He will seek Congress’s approval for extending the Treasury’s credit lines to the pair and even buying their shares if necessary. Separately, the Federal Reserve said Fannie and Freddie could get financing at its discount window, a privilege previously available only to banks.

The absurdity of this situation was highlighted by the way the discount window works. The Fed does not just accept any old assets as collateral; it wants assets that are “safe”. As well as Treasury bonds, it is willing to accept paper issued by “government-sponsored enterprises” (GSEs). But the two most prominent GSEs are Fannie Mae and Freddie Mac. In theory, therefore, the two companies could issue their own debt and exchange it for loans from the government—the equivalent of having access to the printing press.

Absurd or not, the rescue package notched up one immediate success. Freddie Mac was able to raise $3 billion in short-term finance on July 14th. But the deal did little to help the share price of either company or indeed of banks, where sentiment was dented by the collapse of IndyMac, a mortgage lender (see article). The next day Moody’s, a rating agency, downgraded both the financial strength and the preferred stock of Fannie and Freddie, making a capital-raising exercise look even more difficult. As a sign of its concern, the Securities and Exchange Commission, America’s leading financial regulator, weighed in with rules restricting the short-selling of shares in Fannie and Freddie.

 

The whole affair has raised questions about the giant twins. They were set up (see article) to provide liquidity for the housing market by buying mortgages from the banks. They repackaged these loans and used them as collateral for bonds called mortgage-backed securities; they guaranteed buyers of those securities against default.

This model was based on the ability of investors to see through one illusion and boosted by their willingness to believe in another. The illusion that investors saw through was the official line that debt issued by Fannie and Freddie was not backed by the government. No one believed this. Investors felt that the government would not let Fannie and Freddie fail; they have just been proved right.

The belief in the implicit government guarantee allowed the pair to borrow cheaply. This made their model work. They could earn more on the mortgages they bought than they paid to raise money in the markets. Had Fannie and Freddie been hedge funds, this strategy would have been known as a “carry trade”.

It also allowed Fannie and Freddie to operate with tiny amounts of capital. The two groups had core capital (as defined by their regulator) of $83.2 billion at the end of 2007 (see chart 2); this supported around $5.2 trillion of debt and guarantees, a gearing ratio of 65 to one. According to CreditSights, a research group, Fannie and Freddie were counterparties in $2.3 trillion-worth of derivative transactions, related to their hedging activities.

There is no way a private bank would be allowed to have such a highly geared balance sheet, nor would it qualify for the highest AAA credit rating. In a speech to Congress in 2004, Alan Greenspan, then the chairman of the Fed, said: “Without the expectation of government support in a crisis, such leverage would not be possible without a significantly higher cost of debt.” The likelihood of “extraordinary support” from the government is cited by Standard & Poor’s (S&P), a rating agency, in explaining its rating of the firms’ debt.

The illusion investors fell for was the idea that American house prices would not fall across the country. This bolstered the twins’ creditworthiness. Although the two organisations have suffered from regional busts in the past, house prices have not fallen nationally on an annual basis since Fannie was founded in 1938.

 

It was always an accident waiting to happen.

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High-street bank HBOS faces rights issue disaster - Times Online

 

THE high-street bank HBOS will tomorrow admit to one of the most disastrous rights issues in corporate history when it concedes that as few as 10% of its investors took up its £4 billion share offer.

Its two underwriters, Morgan Stanley and Dresdner, will have to place £3.6 billion of shares over the course of Monday or Tuesday.

If they are unable to place the shares at the rights-issue price of 275p or above, they will be forced to take them on to their own balance sheets.

The two investment banks are thought to have sub-under-written about 40% of the issue but it still means they could be left with £1 billion worth of shares each.

 

Barclays said on Friday that only 19% of its investors took part in its £4.5 billion placing.

Last week as investors were making up their minds whether to subscribe for equity in HBOS, shares in the UK banking sector plunged on fresh concerns over the viability of some of America’s big banks.

Shares in HBOS dropped to 254p, well below the rights-issue price, providing little incentive for institutional investors to take part. It is thought that many retail investors, who account for 25% of the group’s investor base, shunned the issue.

It is expected that the low take-up will encourage regulators to shorten the time taken to conduct a rights issue.

When HBOS originally announced its rights issue two and a half months ago, it was seen as being heavily discounted against a share price that was then standing at 500p.

 

So HBOS bought into B&B yet can't even raise the money itself!!!!

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Looming Recession: Real Estate Crisis Threatens Spanish Economy - International - SPIEGEL ONLINE - News

 

Spain's economy is in trouble. Rising property values earlier this decade lured many Spaniards into the market. Now that the bubble has burst, the crisis is quickly spreading through the country's economy.

"I'll give you a good price," the man, who introduces himself on the phone as José, promises potential buyers. José has a flat in Seseña, a small town of 12,000 around 40 minutes by car from Madrid. Now, he wants to get rid of it -- regardless of the financial hit he might take. The real estate agent who sold him the property insisted it was a safe investment for the future. But those promises dissolved into thin air not long after José had signed the contract.

In total, 13,500 flats were supposed to be built in the new housing development where José's apartment is located -- homes for 50,000 people. Yet, only halfway through the building project, the plug was pulled. Several unfinished apartment blocks now blight the landscape. In the end, only 5,000 apartments were completed and a mere 750 people moved in.

And those who did move here now want to leave -- José's isn't the only balcony boasting a "For Sale" sign. He had hoped to be able to rent out the apartment to pay of his mortgage. But despite advertising his apartment for months in various publications, no one showed any interest.

Seseña, which until recently was the very symbol of the Spanish economic miracle, suddenly stands for something very different: the collapse of the building industry, one of the Spanish economy's key sectors. The golden years of the real estate business are now well and truly over.

Crisis Sparks Discount Battles

What is worse, however, is that the crisis has by now infected the entire country. Nowhere else in Europe in the last decade did the construction sector boom as it did in Spain: Real estate prices shot up by as much as 500 percent. The country invested in property, betting that prices would rise and rise. But, now the bubble has burst and the losers are those who did not sell in time.

.............

 

On top of that, banks have tended to liberally hand out loans. And because of the seemingly guaranteed property price rises, many mortgage providers did not require deposits.

This has resulted in a high number of mortgage defaults. So far, the €6.1 billion ($9.7 billion) currently outstanding accounts for a mere 1 percent of home loans. But experts predict that the percentage will increase fivefold by the end of the year. Should that happen, the reserves kept by credit institutes will evaporate. "The number of holes in the balance sheets frightens me," Miguel Blesa, President of Spain's biggest savings bank Caja Madrid, said recently.

..............

Now these policies have come home to roost. In total, Spaniards have borrowed the equivalent of their country's gross domestic product. Mortgages make up 60 percent of the debt.

Those who do not pay their wages into the same bank as they got their mortgage from can expect a call soon. Worried lenders are inquiring in a friendly but firm manner, if it would not be possible for them to pay their wages into an account that secures their loans. Other banks -- especially Deutsche Bank -- are trying to reduce the share of bad debt by holding on to solvent customers by offering them favorable conditions.

The dramatic developments have only slowly started to register at Spain's most important address: For a long time Prime Minister José Luis Rodríguez Zapatero shirked away from calling it a crisis -- and that despite economists saying Spain's economy had slipped into recession in the second quarter of the year. "Difficult conditions," "complex situation" or "fall in the rate of growth" is how Zapatero characterized the developments. The opposition in parliament jeered that the prime minister spent more time looking up synonyms for crisis than confronting the mounting problems.

 

I still think Mystic Mervi is gambling that the UK isn't the worst and when others go under it will somehow save us.

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Housing market action held back to autumn - Times Online

 

THE Treasury is ready to come forward with a package of measures to stabilise the housing market, but no action is expected until the autumn.

A Treasury-commissioned report by Sir James Crosby, the former HBOS chief executive, is set to be published this week but officials have indicated that it will be only an assessment of the situation.

In meetings with housing industry bodies, Treasury officials have indicated their willingness to consider a range of options to deal with the crisis, including a stamp-duty holiday and action to help kickstart the market in new mortgage-backed securities. They have also said that they are cautious about acting too quickly, for fear of getting it wrong. Officials cite early pressure from the industry for the setting up of US-style government-sponsored mortgage guarantee bodies.

The problems of Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) have killed off such ideas.

 

I wonder how much he's been paid for this garbage, his former bank is on the brink of collapse and he's advising the govt....