The rise of the new energy world order

By Michael T Klare

Oil at US$110 a barrel. Gasoline at $3.35 (or more) per gallon. Diesel fuel at $4 per gallon. Independent truckers forced off the road. Home heating oil rising to unconscionable price levels. Jet fuel so expensive that three low-cost airlines stopped flying in the past few weeks. This is just a taste of the latest energy news, signaling a profound change in how all of us, in this country and around the world, are going to live - trends that, so far as anyone can predict, will only become more pronounced as energy supplies dwindle and the global struggle over their allocation intensifies.

Energy of all sorts was once hugely abundant, making possible the worldwide economic expansion of the past six decades. This expansion benefited the United States above all - along with its "First World" allies in Europe and the Pacific. Recently, however, a select group of former "Third World" countries - China and India


in particular - have sought to participate in this energy bonanza by industrializing their economies and selling a wide range of goods to international markets. This, in turn, has led to an unprecedented spurt in global energy consumption - a 47% rise in the past 20 years alone, according to the US Department of Energy (DoE).

An increase of this sort would not be a matter of deep anxiety if the world's primary energy suppliers were capable of producing the needed additional fuels. Instead, we face a frightening reality: a marked slowdown in the expansion of global energy supplies just as demand rises precipitously. These supplies are not exactly disappearing - though that will occur sooner or later - but they are not growing fast enough to satisfy soaring global demand.

The combination of rising demand, the emergence of powerful new energy consumers, and the contraction of the global energy supply is demolishing the energy-abundant world we are familiar with and creating in its place a new world order. Think of it as rising powers/shrinking planet.

This new world order will be characterized by fierce international competition for dwindling stocks of oil, natural gas, coal and uranium, as well as by a tidal shift in power and wealth from energy-deficit states like China, Japan and the United States to energy-surplus states like Russia, Saudi Arabia and Venezuela. In the process, the lives of everyone will be affected in one way or another - with poor and middle-class consumers in the energy-deficit states experiencing the harshest effects. That's most of us and our children, in case you hadn't quite taken it in.

Here, in a nutshell, are five key forces in this new world order which will change our planet:


Intense competition between older and newer economic powers for available supplies of energy. Until very recently, the mature industrial powers of Europe, Asia and North America consumed the lion's share of energy and left the dregs for the developing world. As recently as 1990, the members of the Organization of Economic Cooperation and Development (OECD), the club of the world's richest nations, consumed approximately 57% of world energy; the Soviet Union/Warsaw Pact bloc, 14%; and only 29% was left to the developing world. But that ratio is changing: with strong economic growth in the developing countries, a greater proportion of the world's energy is being consumed by them. By 2010, the developing world's share of energy use is expected to reach 40% and, if current trends persist, 47% by 2030.

China plays a critical role in all this. The Chinese alone are projected to consume 17% of world energy by 2015, and 20% by 2025 - by which time, if trend lines continue, it will have overtaken the United States as the world's leading energy consumer. India, which, in 2004, accounted for 3.4% of world energy use, is projected to reach 4.4% by 2025, while consumption in other rapidly industrializing nations like Brazil, Indonesia, Malaysia, Thailand and Turkey is expected to grow as well.

These rising economic dynamos will have to compete with the mature economic powers for access to remaining untapped reserves of exportable energy - in many cases, bought up long ago by the private energy firms of the mature powers like Exxon Mobil, Chevron, BP, Total of France and Royal Dutch Shell. Of necessity, the new contenders have developed a potent strategy for competing with the Western "majors": they've created state-owned companies of their own and fashioned strategic alliances with the national oil companies that now control oil and gas reserves in many of the major energy-producing nations.

China's Sinopec, for example, has established a strategic alliance with Saudi Aramco, the nationalized giant once owned by Chevron and Exxon Mobil, to explore for natural gas in Saudi Arabia and market Saudi crude oil in China. Likewise, the China National Petroleum Corporation (CNPC) will collaborate with Gazprom, the massive state-controlled Russian natural gas monopoly, to build pipelines and deliver Russian gas to China. Several of these state-owned firms, including CNPC and India's Oil and Natural Gas Corporation, are now set to collaborate with Petroleos de Venezuela SA in developing the extra-heavy crude of the Orinoco belt once controlled by Chevron. In this new stage of energy competition, the advantages long enjoyed by Western energy majors has been eroded by vigorous, state-backed upstarts from the developing world.

The insufficiency of primary energy supplies. The capacity of the global energy industry to satisfy demand is shrinking. By all accounts, the global supply of oil will expand for perhaps another half decade before reaching a peak and beginning to decline, while supplies of natural gas, coal and uranium will probably grow for another decade or two before peaking and commencing their own inevitable declines. In the meantime, global supplies of these existing fuels will prove incapable of reaching the elevated levels demanded.

Take oil. The US DoE claims that world oil demand, expected to reach 117.6 million barrels per day in 2030, will be matched by a supply that - miracle of miracles - will hit exactly 117.7 million barrels (including petroleum liquids derived from allied substances like natural gas and Canadian tar sands) at the same time. Most energy professionals, however, consider this estimate highly unrealistic. "One hundred million barrels is now in my view an optimistic case," the chief executive officer of Total, Christophe de Margerie, typically told a London oil conference in October 2007. "It is not my view; it is the industry view, or the view of those who like to speak clearly, honestly, and [are] not just trying to please people."

Similarly, the authors of the Medium-Term Oil Market Report, published in July 2007 by the International Energy Agency, an affiliate of the Organization for Economic Cooperation and Development, concluded that world oil output might hit 96 million barrels per day by 2012, but was unlikely to go much beyond that as a dearth of new discoveries made future growth impossible.

Daily business-page headlines point to a vortex of clashing trends: worldwide demand will continue to grow as hundred of millions of newly-affluent Chinese and Indian consumers line up to purchase their first automobile (some selling for as little as $2,500); key older "elephant" oil fields like Ghawar in Saudi Arabia and Canterell in Mexico are already in decline or expected to be so soon; and the rate of new oil-field discoveries plunges year after year. So expect global energy shortages and high prices to be a constant source of hardship.

The painfully slow development of energy alternatives. It has long been evident to policymakers that new sources of energy are desperately needed to compensate for the eventual disappearance of existing fuels as well as to slow the buildup of climate-changing "greenhouse gases" in the atmosphere. In fact, wind and solar power have gained significant footholds in some parts of the world. A number of other innovative energy solutions have already been developed and even tested out in university and corporate laboratories. But these alternatives, which now contribute only a tiny percentage of the world's net fuel supply, are simply not being developed fast enough to avert the multifaceted global energy catastrophe that lies ahead.

According to the DoE, renewable fuels, including wind, solar and hydropower (along with "traditional" fuels like firewood and dung), supplied but 7.4% of global energy in 2004; biofuels added another 0.3%. Meanwhile, fossil fuels - oil, coal and natural gas - supplied 86% of world energy, nuclear power another 6%. Based on current rates of development and investment, the DoE offers the following dismal projection: In 2030, fossil fuels will still account for exactly the same share of world energy as in 2004. The expected increase in renewables and biofuels is so slight - a mere 8.1% - as to be virtually meaningless.

In global warming terms, the implications are nothing short of catastrophic: Rising reliance on coal (especially in China, India and the United States) means that global emissions of carbon dioxide are projected to rise by 59% over the next quarter-century, from 26.9 billion metric tons to 42.9 billion tons. The meaning of this is simple. If these figures hold, there is no hope of averting the worst effects of climate change.

When it comes to global energy supplies, the implications are nearly as dire. To meet soaring energy demand, we would need a massive influx of alternative fuels, which would mean equally massive investment - in the trillions of dollars - to ensure that the newest possibilities move rapidly from laboratory to full-scale commercial production; but that, sad to say, is not in the cards.

Instead, the major energy firms (backed by lavish US government subsidies and tax breaks) are putting their mega-windfall profits from rising energy prices into vastly expensive (and environmentally questionable) schemes to extract oil and gas from Alaska and the Arctic, or to drill in the deep and difficult waters of the Gulf of Mexico and the Atlantic Ocean. The result? A few more barrels of oil or cubic feet of natural gas at exorbitant prices (with accompanying ecological damage), while non-petroleum alternatives limp along pitifully.

A steady migration of power and wealth from energy-deficit to energy-surplus nations: There are few countries - perhaps a dozen altogether - with enough oil, gas, coal and uranium (or some combination thereof) to meet their own energy needs and provide significant surpluses for export. Not surprisingly, such states will be able to extract increasingly beneficial terms from the much wider pool of energy-deficit nations dependent on them for vital supplies of energy. These terms, primarily of a financial nature, will result in growing mountains of petrodollars being accumulated by the leading oil producers, but will also include political and military concessions.

In the case of oil and natural gas, the major energy-surplus states can be counted on two hands. Ten oil-rich states possess 82.2% of the world's proven reserves. In order of importance, they are: Saudi Arabia, Iran, Iraq, Kuwait, the United Arab Emirates, Venezuela, Russia, Libya, Kazakhstan and Nigeria. The possession of natural gas is even more concentrated. Three countries - Russia, Iran and Qatar - harbor an astonishing 55.8% of the world supply. All of these countries are in an enviable position to cash in on the dramatic rise in global energy prices and to extract from potential customers whatever political concessions they deem important.

The transfer of wealth alone is already mind-boggling. The oil-exporting countries collected an estimated $970 billion from the importing countries in 2006, and the take for 2007, when finally calculated, is expected to be far higher. A substantial fraction of these dollars, yen and euros have been deposited in sovereign wealth funds (SWFs), giant investment accounts owned by the oil states and deployed for the acquisition of valuable assets around the world.

In recent months, the Persian Gulf SWFs have been taking advantage of the financial crisis in the United States to purchase large stakes in strategic sectors of its economy. In November 2007, for example, the Abu Dhabi Investment Authority (ADIA) acquired a $7.5 billion stake in Citigroup, America's largest bank holding company; in January, Citigroup sold an even larger share, worth $12.5 billion, to the Kuwait Investment Authority (KIA) and several other Middle Eastern investors, including Prince Walid bin Talal of Saudi Arabia. The managers of ADIA and KIA insist that they do not intend to use their newly-acquired stakes in Citigroup and other US banks and corporations to influence US economic or foreign policy, but it is hard to imagine that a financial shift of this magnitude, which can only gain momentum in the decades ahead, will not translate into some form of political leverage.

In the case of Russia, which has risen from the ashes of the Soviet Union as the world's first energy superpower, it already has. Russia is now the world's leading supplier of natural gas, the second largest supplier of oil and a major producer of coal and uranium. Though many of these assets were briefly privatized during the reign of Boris Yeltsin, President Vladimir Putin has brought most of them back under state control - in some cases by exceedingly questionable legal means.

He then used these assets in campaigns to bribe or coerce former Soviet republics on Russia's periphery reliant on it for the bulk of their oil and gas supplies. European Union countries have sometimes expressed dismay at Putin's tactics, but they, too, are dependent on Russian energy supplies, and so have learned to mute their protests to accommodate growing Russian power in Eurasia. Consider Russia a model for the new energy world order.

A growing risk of conflict. Throughout history, major shifts in power have normally been accompanied by violence - in some cases, protracted violent upheavals. Either states at the pinnacle of power have struggled to prevent the loss of their privileged status, or challengers have fought to topple those at the top of the heap. Will that happen now? Will energy-deficit states launch campaigns to wrest the oil and gas reserves of surplus states from their control - the George W Bush administration's war in Iraq might already be thought of as one such attempt or to eliminate competitors among their deficit-state rivals?

The high costs and risks of modern warfare are well known and there is a widespread perception that energy problems can best be solved through economic means, not military ones. Nevertheless, the major powers are employing military means in their efforts to gain advantage in the global struggle for energy, and no one should be deluded on the subject. These endeavors could easily enough lead to unintended escalation and conflict.

One conspicuous use of military means in the pursuit of energy is obviously the regular transfer of arms and military-support services by the major energy-importing states to their principal suppliers. Both the United States and China, for example, have stepped up their deliveries of arms and equipment to oil-producing states like Angola, Nigeria and Sudan in Africa and, in the Caspian Sea basin, Azerbaijan, Kazakhstan and Kyrgyzstan. The United States has placed particular emphasis on suppressing the armed insurgency in the vital Niger Delta region of Nigeria, where most of the country's oil is produced; Beijing has emphasized arms aid to Sudan, where Chinese-led oil operations are threatened by insurgencies in both the South and Darfur.

Russia is also using arms transfers as an instrument in its efforts to gain influence in the major oil- and gas-producing regions of the Caspian Sea basin and the Persian Gulf. Its urge is not to procure energy for its own use, but to dominate the flow of energy to others. In particular, Moscow seeks a monopoly on the transportation of Central Asian gas to Europe via Gazprom's vast pipeline network; it also wants to tap into Iran's mammoth gas fields, further cementing Russia's control over the trade in natural gas.

The danger, of course, is that such endeavors, multiplied over time, will provoke regional arms races, exacerbate regional tensions and increase the danger of great-power involvement in any local conflicts that erupt. History has all too many examples of such miscalculations leading to wars that spiral out of control. Think of the years leading up to World War I. In fact, Central Asia and the Caspian today, with their multiple ethnic disorders and great-power rivalries, bear more than a glancing resemblance to the Balkans in the years leading up to 1914.

What this adds up to is simple and sobering: the end of the world as you've known it. In the new, energy-centric world we have all now entered, the price of oil will dominate our lives and power will reside in the hands of those who control its global distribution.

In this new world order, energy will govern our lives in new ways and on a daily basis. It will determine when, and for what purposes, we use our cars; how high (or low) we turn our thermostats; when, where, or even if, we travel; increasingly, what foods we eat (given that the price of producing and distributing many meats and vegetables is profoundly affected by the cost of oil or the allure of growing corn for ethanol); for some of us, where to live; for others, what businesses we engage in; for all of us, when and under what circumstances we go to war or avoid foreign entanglements that could end in war.

This leads to a final observation: the most pressing decision facing the next president and Congress may be how best to accelerate the transition from a fossil-fuel-based energy system to a system based on climate-friendly energy alternatives.

Michael T Klare is a professor of peace and world security studies at Hampshire College and the author of Resource Wars and Blood and Oil. Consider this essay a preview of his newest book, Rising Powers, Shrinking Planet: The New Geopolitics of Energy, which has just been published by Metropolitan Books.

The Black Death of financial collapse

By James Cumes

The financial and economic crisis now upon us is by far the most menacing of the past century - even more so than the Great Depression of the 1930s. It is not just a "subprime" crisis; it is systemic - affecting the entire financial system. It is also global, affecting various countries in various ways but affecting them all. In achieving a certain "globalization", we have been uniquely successful in globalizing collapse, chaos and misery. It is a globalization which, in our short-sighted negligence, we never envisaged.

In this crisis, even a country such as Australia is no more than a subordinate, neo-colonial, financial and economic dependency. In essence, we have reverted to what we were before and during the Great Depression of the 1930s, when Whitehall, Westminster and the Bank of England played the tune to which we jigged. Then, from 1945 to 1969, for the first time, we played our own tune of full employment and stable economic growth. Wild radicals such as minister Eddie Ward in the governments of John Curtin (1941-45) and Ben Chifley (1945-49) warned us to be wary of Wall Street.

The cynics might now say that Eddie, who died in 1963, was right. After 1969, we forgot his warning. Indeed, the Americans themselves forgot to guard against the chicaneries of Wall Street, where eternal vigilance should always be the watchword. They forgot what the mania of Wall Street can do to the reality of Main Street; and we shared their amnesia.

From 1969 and especially from 1971, when the United States cut the dollar link with gold, Australia surrendered any worthwhile independence in its economic and financial thinking. We swallowed American financial and economic formulae, whether we were academics or policymakers, industrial entrepreneurs, banks or providers of "financial services."

We did not entirely switch off tunes played by Britain, the more so as its prime minister Margaret Thatcher formed her slapstick band with US president Ronald Reagan to drum up support for "free" markets, "free" trade, privatization, globalization and the free flow of almost everything, including speculative capital in unqualified pursuit of private profit. Corporation and consumer greed marched in step towards global disaster.

Rational economics based on real investment, productivity and production died in favor of speculative and often Ponzi pretensions. The cowboy junk-bond merchants of the 1980s metamorphosed into respectable, mostly young and usually idolized financial wizards who "perfected" sophisticated, highly complex credit devices. From the 1990s, these highly leveraged instruments took the form of derivatives, private-equity, hedge-fund and mortgage securities, abbreviated to CDOs, SIVs and the rest.

Allied with "free" markets, deregulation and the uninhibited flow of all kinds of finance, those financial devices destroyed industries and the jobs that go with them. With casual indifference, they also destroyed the self-reliant working and middle classes until then typical of robust free-enterprise economies.

Theirs was not Joseph Schumpeter's "creative destruction" but wholesale destruction of their own economies and, eventually, their own financial "system". They destroyed personal savings and created massive indebtedness. They undermined the power and security of the United States itself as they "outsourced" real economic strength and stability to countries especially in Asia.

The Asian Tigers, China and others grew into "powerhouses" whose creation, historically, would otherwise have taken them generations. Our eminently creditable aim of peaceful change through development of developing economies was distorted, largely through negligent inadvertence, into financial, economic and social self-destruction. Looming global collapse, with political and strategic uncertainties, are our inevitable legacy.

Consumerism rages, industry gutted

The speculative, Ponzi mania spread especially to Anglo-Saxon countries and to other developed countries in lesser degree. Australia took to "free" markets, "free" trade, free-floating currencies, deregulation, privatization, globalization, derivatives, hedge funds, private equity, wildcat mortgages and leverage-without-limit as a duck to water. Consumerism raged. Industry was gutted. Debts ballooned. The value of the currency fell at home and abroad. Despite low-cost imports, inflation flourished. In 2008, the Australian dollar can perhaps buy as much in real terms as five or 10 cents did in 1969.

A situation in which real public and private investment was replaced by "ownership investment", massive leverage and speculative finance, in which consumption grew and debts spread, could not persist, except so long as ever more money flooded in to support the insupportable. Once the flood slowed or stopped, a Ponzi-type collapse was inevitable.

But few saw it that way. Warren Buffet belatedly called derivatives weapons of mass destruction; but most saw the financial devices as belonging to a "new era". They represented a "new paradigm". Far from being a threat to stable growth in a stable financial system, they "spread risk" and made everyone more secure and of course more wealthy.

The wealth effect was a particular feature of the residential mortgage business. Funds were available from many new banking and non-banking sources, including hedge funds and private equity, as well as pension and mutual funds; and sources that, in their magnitudes, were new, such as the carry trade. Funds marketed wholesale and retail mortgages. Liability could be shifted even or especially for debt in the deepest sense sub-prime. Mortgages also enabled homeowners to expand consumption through mortgage-equity withdrawals (MEW).

In a real sense, MEWs were symptomatic of multitudes of individuals - and, in effect, whole societies - high-living it off their capital. That enabled a process of growth that was both irresistible and inherently unsustainable.

However, the Ponzi scheme to shame all others may yet be waiting to deliver its coup de grace. One commentator has drawn attention to "the bad news [which] is the US$500 trillion derivatives market". He says that "This is an area that the general public does not even know exists. Few professionals understand this market. There is no regulation as government just let it go ... and go it did. You must expect a 5% default problem. That is a $25 trillion number ... It can create insolvent institutions all over the world ... It is the making of the first global depression. The world is not ready."

Unprepared for depression

Australia is not ready either. Prime Minister Kevin Rudd told us late in March that Australia's economic prospects remain "sound, strong and good". The Reserve Bank of Australia shares that view. Eerily, they echo US President Herbert Hoover in 1929 immediately before the stock market crash of that year.

Australia's situation contains some positive features. High commodity prices, it can be argued, are likely to persist, even though volatile, at least in the short term. A member of Iceland's central bank board recently said that "fears of a meltdown in my sub-arctic homeland are vastly overblown. True, the current account deficit was 16% of GDP last year, but that's an improvement from more than 25% in 2006. And while net private-sector debt is about 120% of GDP, there is virtually no public debt in Iceland. This is largely the result of unparalleled political stability and continuity."

Australia's situation may not be as dire as Iceland's; or indeed as dire as that of the United States or New Zealand; but all three of us have some negatives like those of Iceland.

Like all booms of such size and speculative character, the Australian housing boom must soon demand payment of its account. From their peak, prices could fall 30% to 50%. Industry researcher BIS Shrapnel does not agree; but we must expect that our housing boom, even more robust than the American, will collapse along the same general lines as the bust occurring right now in the United States.

The high "unaffordability" of housing for the average home-seeker, as distinct from speculator, suggests that the bust will be savage. The real-estate, building and associated industries will suffer severely, with massive job losses. Simultaneously, profitable investment opportunities elsewhere may have vanished with the widespread collapse of the "financial services industry".

How likely is such a collapse? So far, although some non-banking financial institutions have gone to the wall, the four major banks have seemed largely immune. "The take-up of the Australian economy is still good," Rudd said last week in New York. Australia had "limited exposure" to the subprime mortgage woes that erupted in the United States last year, he said. "We have excellent balance sheets in terms of our principal corporates and the banks themselves ... The default rate in Australia is minuscule by Organization for Economic Cooperation and Development standards."

We don't know how far banks and other potentially exposed institutions have concealed their liabilities and to what extent and how soon they will be forced to reveal whatever bad news there is. Within this broad question, we also do not know how far they are exposed to losses from the massive and still largely mysterious menace of derivatives.

In some measure, Australia's major banks have certainly been involved in the wide range of structured securities - CDOs, SIVs, and the rest. A report on April 4, 2008, that local councils in New South Wales have lost US$200 million and perhaps up to $400 million on investments in CDOs is a worrying sign that other and even bigger losses may yet be revealed in a variety of institutions, including banks. It seems scarcely credible that an economy which, for so many years, has absorbed so much of American theory and practice - so much of the American financial character - can be wholly immune from the penalties inflicted on its American model.

The subprime crisis first hit the United States after a housing about-turn that began as far back as 2005 or 2006. An unequivocal downturn in housing in Australia has yet to check in; but non-bank lenders are already withdrawing from the market. Wholesale mortgage lenders are closing shop, perhaps as a prelude to a sharp housing decline.

The carry trade which has presumably provided funds for mortgages and other financial services in Australia has been volatile for some time. If it unwinds completely, that could not only intensify mortgage problems but also impact on Australia's external balances.

Our deficits have so far tended to persist at a less healthy level than the commodity boom might have encouraged us to hope. Our aggregate private overseas debt is said to amount to the order of half a trillion dollars. Against that background, the current depreciation of the United States dollar might foreshadow what awaits our own currency.

Lagging impact

Economic and financial change in the United States tends to have a lagging impact on Australia. An acute awareness of the severity of our crisis may consequently not emerge before the second half of 2008.

When it does, what will the Rudd government do? Currently, it seems as unaware of the magnitude of the challenge it faces as the James Scullin government was in 1929. So the present government might become just as bewildered as Scullin and stagger just as blindly and ineffectually when they are called on to act. In the 1930s, we listened to the likes of Otto Niemeyer of the British Treasury who was also a director of the Bank of England. Will the Rudd government this time listen to the Americans and the likes of US Federal Reserve chairman Ben Bernanke? If they do, catastrophic outcomes might not be in short supply.

Our only real hope lies in clear, independent thinking by those not too steeped in the flawed policies responsible for our current crisis. We must see clearly that fundamental, comprehensive financial and economic reform is imperative. We must adapt that fundamental reform to our own needs, as the John Curtin and Ben Chifley governments did between 1941 and 1949. As we did then, we must simultaneously try to guide the international community out of the calamitous course that has evolved since 1969, and return it to the goal of stable, peaceful, global change which, as a primary objective, we pursued between 1945 and 1969.

While we embark on this journey, a high level of political volatility in Canberra is inevitable. Rudd might succeed; but the Labor Party and government might split two or three ways as they did between 1929 and 1932. Another Joe Lyons, prime minister from 1932 to 1939, might emerge. Whoever he might be, the odds are that he will be even less likely to find quick or easy solutions than Lyons was during the long and bitter years of depression. Those years ended only in the even deeper tragedy of world war.

-----------------------------------------------

James Cumes is a former Australian ambassador to the European Union and Australian representative at the United Nations. He is the author of among other works The Human Mirror: The Narcissistic Imperative in Human Behaviour.

Greenspan is a sociopath or liar

"Former Federal Reserve Chairman Alan Greenspan told CNBC that he had little to do with the housing bubble or credit crisis despite criticism that the Fed kept interest rates too low under his watch.


RE: Greenspan on exotic mortgage alternatives, 2004 TheWolf NEW 4/8/2008 5:23:47 PM
February 23, 2004, Chairman Greenspan spoke to the Credit Union National Association 2004:

"Fixed-rate mortgages seem unduly expensive to households in other countries. One possible reason is that these mortgages effectively charge homeowners high fees for protection against rising interest rates and for the right to refinance.

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."

RE: Greenspan on exotic mortgage alternatives, 2004 taichi NEW 4/8/2008 5:33:37 PM
Alan Greenspan, praising subprime lending in a speech on April 8, 2005:

"With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . .

As we reflect on the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. . . . This fact underscores the importance of our roles as policymakers, researchers, bankers and consumer advocates in fostering constructive innovation that is both responsive to market demand and beneficial to consumers."


RE: Greenspan on Glass-Steagall 1999 TheWolf NEW 4/8/2008 5:34:53 PM
Testifying before the House Committee on Banking and Financial Services, February 11, 1999, Greenspan declared,

“we support, as we have for many years, major revisions, such as those included in H.R. 10, to the Glass-Steagall Act and the Bank Holding Company Act to remove the legislative barriers against the integration of banking, insurance, and securities activities. There is virtual unanimity among all concerned--private and public alike--that these barriers should be removed. The technologically driven proliferation of new financial products that enable risk unbundling have been increasingly combining the characteristics of banking, insurance, and securities products into single financial instruments.”

RE: Greenspan on exotic mortgage alternatives, 2004 TheWolf NEW 4/8/2008 5:40:57 PM
Feb 23, 2004 Greenspan gems...continued

"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country … With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. … Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s."

RE: from his "autobiography" pencilneck NEW 4/8/2008 5:59:54 PM
page 230

"The gains were especially dramatic among Hispanics and blacks, as increasing affluence as well as government encouragement of subprime mortgage programs enabled many members of minority groups to become first-time home buyers."

I don't think history will view him as well as he views himself.

Analogies to 1929 abound according to some

April 6, 2008

Elaine Meinel Supkis


Time to read old newspapers about the Great Depression. The mirror this holds up to us today is nearly exact. The Federal Reserve is lending money to Wall Street SPECULATORS, not just to bankers! The sums they are handing out like candy to a big fat baby has shot upwards and is now nearly $40 A DAY and I bet, will be $100 billion A DAY next week until these pirates unload all the useless paper they hold. And the Fed has stationed officers in these pirate coves to see if they will cheat us. HAHAHA. Gads, laugh to death, eh? The Fed's fools will be thwarted, of course. Break out the Champagne, everyone. Party time with Miz Risky!


Wall Street brokerages borrowing $38.1 billion a day from Federal Reserve
Big Wall Street investment companies are stepping up their borrowing a bit from the Federal Reserve’s unprecedented emergency lending program.

The Federal Reserve reports Thursday that those firms averaged $38.1 billion in daily borrowing over the past week from the new lending program. That compared with $32.9 billion in the previous week and $13.4 billion in the first week the lending facility opened.

The program, which began on March 17, is part of the Fed’s effort to aid the financial system.

The Fed, for the first time, agreed to let big investment houses temporarily get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, will continue for at least six months. It was the broadest use of the Fed’s lending authority since the 1930s.


Time to review history: the Great Crash of 1929. It always pays to read old newspapers. More than one person has noticed how we seem bent on repeating the Great Depression, chapter and verse. What is really grim is that we are running on exactly the same time schedule, too. Last winter we saw global hesitation in trade the last week of February and the first week of March. This was explained away, at the time. But I said it was due to a near ending of the Japanese carry trade. This is the ultimate source of most global inflationary processes as the Bank of Japan keeps interest rates so low compared to Japanese inflation, it is literally giving away money but ONLY to exporters and foreign borrowing.


Between this source of infinite liquidity which feeds off of US red ink overspending and the continuing need in the US for funny money churned out by this process, we saw the investing world creating many, many bubbles in their efforts to park this easy lending where it would make infinite profits, effortlessly. The Great Depression was preceded by a similar process. The US was the world's biggest creditor nation and like Japan, was churning out huge loans...overseas as well as at home. The money this created flowed back into the US as Europe concentrated on building up their industries for imperial expansions while needing lots of US farm products to feed increasing populations. So the US farmer produced heroic amounts of produce which was shipped post-haste, to Europe.


When Germany finally gave up paying war reparations since they were cut out of world markets by England and France who were anxious to have maximum trade for manufactured goods. The US had already cut off our markets to this flood of English and French goods. This was necessary or we would have been de-industrialized by 1940 instead, we had an extra 60 years of industrial might before self-destructing today.


So on this grim note, let's look at past headlines in the New York Times:


January 18, 1929: LOANS TO BROKERS RISE $71,000,000
Reserve Bank Reports Total of $5,384,000,000 for Week, Only $10,000,000 Below Record. $90,000,000 DROP FOR CITY The Out-of-Town Institutions and "Others" Responsible for Gain-- Decline in Bills Discounted.

An increase of $71,000,000 in brokers' loans for the week ended Wednesday, the result entirely of expanded operations by out-of-town banks and the miscellaneous group of lenders classed as "others," was ...


March 6, 1929: Advising Caution.
The Watchful "Pools." Banks Withdraw Loans. Bonds Dwindling Fast. Brokers' Loans Are Reduced. Stocks for Bonds.

Copper stocks were in the lead early yesterday in a day of mixed trading in which there was alternate strength and weakness. News of the proposed retirement by the Anaconda Copper Company of its bonds and a strong metal market gave a filip to the metal issues, and most of this ...


Note that metal prices were up. Not gold, of course, this was government-regulated by England, France and the US. Why did the banks withdraw the loans?


March 26, 1929: STOCK PRICES BREAK HEAVILY AS MONEY SOARS TO 14 PER CENT
Tightening of Country's Credit Causes One of Broadest Drops in Exchange's History. 90 ISSUES AT YEAR'S LOW Expectation of Drastic Action by Reserve Board a Factor in Liquidation. 5,862,210 SHARES TRADED Radio and International T.& T. Go Up Against the Tide--Wall Street Expects a Rally. STORK PRICES BREAK AS MONEY SOARS $25,000,000 Call Money Withdrawn. Decline of Last Seven Days. Wall Street Looks for Rally. Recessions From 1929 Highs. Radio Common Up 4 . TIGHTEST CREDIT IN 9 YEARS. Call Rate Goes to 14 Per Cent as Banks Withdraw Funds. Seasonal Increases in Demand. PRICES BREAK ON CURB. Liquidation Extends to All Parts of the List. CALL HUNDREDS OF MARGINS Brokers Issue Demands by Wire-- Say Accounts Are Satisfactory. CHICAGO BORROWERS AIDED. Corporations and Individuals Lend to Banks and Brokers. COAST WITHDRAWING FUNDS. Bankers Say Movement Is to Meet Quarterly Dividends.

Tightening of the strings on the country's supply of credit, a development foreshadowed last week, but not considered seriously by speculators in the stock market, brought about yesterday one of the sharpest declines in securities that has ever taken place on the Exchange.


The rising use of Federal Reserve buying of Treasuries and then reselling bonds ended up feeding Wall Street speculators. The differentials between European, South American and US money values was used in virtually the same way it is being used today only the currency in trouble was not the dollar but the POUND. Britain's eternal imperialist wars was bankrupting the nation. No matter how much they exported goods, the cost of imperial overreach coupled with the tremendous debts from the Great War was finishing off the British economy. The Brits don't think about the 1929 Great Depression as this singular thing. This is because their Great Depression began in 1919! They were in a continuous Great Depression. One that ran all the way until the late 1950's. Indeed, the war production of WWII was the only ray of light in that long, dark tunnel as yet another world empire slid off the cliff and into the dark deeps of total economic ruin.


Let's go back to the headlines: The Federal Reserve began to tighten up the money supply by raising interest rates in order to stop first, the housing bubbles in Florida and California [hahaha]. But this brought in a flood of gold from England and pounds were pounded by the international traders. The high interest rates attracted money from overseas which poured in and this helped fuel our stock markets. The Fed was new at this game and didn't understand quite how they were digging a channel for more money to flood into the system rather than building dikes to keep out the flood of money seeking some way of gaining ground.


April 15, 1929: W.C. DURANT DEMANDS RESERVE BOARD KEEP HANDS OFF BUSINESS
In Attack Over Radio, He Says It Wields Autocratic Power Over the Stock Market. PREDICTS FIGHT TO CURB IT Says of 500 Industrialists He Queried, 463 Replied and Only 12 Backed Its Policy. WANTS 3% BANK RATE And the Restoration of $700,000,000 Drawn From Market--Upholds Mitchell Action as Patriotic. Predicts Nation-wide Fight.

Suggests Three Steps Now. ASKS BOARD TO KEEP HANDS OFF BUSINESS Text of Mr. Durant's Speech. Submitted Question to Leaders. First Real Test in 1931 Called Money Terms Outrageous. Charges Creation of Panic. He Quotes Authorities. Wants 3 Per Cent Bank Rate. Sees Board Alone Responsible. Sees Move to Destroy Credit. Hails Foes of Board's Policy.

William C. Durant made an outspoken attack last night on the Federal Reserve Board for its efforts to curb speculation through restriction of brokers' loans.


As usual, the brokers wanted infinite money. Every time the Fed or the government tried to restrict endless lending in the new carry trade system that WWI created with the huge financial overspending by the three major European empires, this infuriated speculators. They LOVED to speculate using cheap money from this massive bubble of military overspending on wars! They needed more, not less, wild war money debts flowing like crazy though the banking systems of the world! As with today, any attempt to slow down or stop this madness causes great fury. President Carter is still remembered as a 'bad' President because he managed to slow down the financial collapse of our banking system due to too much red ink flowing. Reagan is regarded as a great President for resuming this monstrous super bubble system.


May 16, 1929: THE CREDIT SITUATION
Reserve Bank Lends Indirectly on Security Collateral. PROFITS IN SUGAR. Suggestion That the Consumer Pay $134,000,000 More Is Not Well Taken. Improving the Parks.


Inflation redoubles because the financial speculators were rewarded with a resumption of free funny money. The stock market took off like a rocket. So did other systems in pretty much the same way as today. Gold was totally government controlled in price but NOT the pound! So speculators began to buy British gold at the government set price and then move it to the US where the dollar was stronger so the same gold at the same 'price' bought more. And they bought stocks.


September 30, 1929: SEES SUPPORT HERE FOR BRITISH GOLD
Bank of America Declares Continued Inflow From LondonIs Undesirable.SHIFT IN AUTUMN FUNDSNew York Will Handle Most of the Seasonal Financing, BankReview Predicts.

Efforts of the Bank of England to stop the flow of gold from London, which movement, since mid-June, has amounted to about $150,000,000, and to improve the position of sterling exchange in foreign markets are likely to receive some support from...


Note that by the end of September, London had to take measures before the entire Treasury was emptied out. Indeed, their solution was the exact same one the US used in identical circumstances: they decoupled gold from the pound. The effort to strengthen the pound was similar to the US efforts: rising interest rates. Note that all stock market bubbles pop due to rising interest rates. The Dot Com bubble, for example, was popped this way. The present bubble was popped when rates rose from 1% to 6%. It is now being dropped like a proverbial rock, of course. In order to restart wild speculative buying.


October 6, 1929: Sharp Week-End Recovery in Stocks, Trading Large
Sterling Holds Strong. The recovery in prices, whose failure to appear during the earlier days of the week had caused some consternation in Wall Steet, came yesterday. The day's advance of active individual stocks ranged from 5 to 10 points, with even larger gains in a few closely held stocks.


Even though it was obvious that the entire banking system of Europe was under tremendous stress because the Germans could not pay their war indemnities, the status quo flow of funds was reasserted thanks to the US and England cooperating to strengthen the pound. Just like this last fall when the G7 worked very hard to keep the status quo running a little longer, so it was then. Too many people were sucking at the teats of the System for them to let it dry up. They wanted desperately for the British Empire to continue its rule of the world banking systems. It wanted to keep the System flowing effortlessly even if it meant taking buckets of red ink and hauling it uphill.


October 24, 1929: Where the Blow Was Hardest.
Margin Calls. Causes of the Day's Decline. Will the Market Be Supported? Back to Work. Railroad Shares Suffer. "It's An Ill Wind."

In the most sweeping and farreaching decline of the year, and one which was made on a tremendous volume of liquidation, the market crumbled yesterday afternoon, most stocks breaking through the "old low prices" of the October break and some to the year's minimum points


Just like this year: stocks fell in the Fall to the same point where they were before the big debt-fueled run up.


October 27, 1929: OUTLOOK FOR CREDIT BELIEVED CLEARED
Great Drop in Brokers' Loans Expected as Result of Break in Stocks. FUNDS FREED FOR BUSINESS Economists Believe Large Supply of Cheaper Money May Stimulate Hesitant Industries.

With the collapse of the stock market last week, in the opinion of bankers, the chief factor of uncertainty in the credit outlook was removed. Attempts earlier in the year to obtain the release of some part of the billions of dollars tied up in speculative loans had been frustrated by the irresistible bull movement of securities.


Incredible, isn't it? The EXACT same solutions used back then are being used today! Exactly! How can anyone miss this? Note how they talk about 'irresistible bull...securities'. The demand for more and more and more loans drove up interest rates. The Fed decided to fix this mess by using every tool possible to make lending cheaper. But back then, this failed. Just like it will fail today.


I went to the biography of the Federal Reserve Chairman from the Great Depression, Mr. Eugene Black.


History of the Atlanta Federal Reserve Office:
The Sixth District economy was building up steam in 1928. Credit demand was strong, and rediscounts surged to $1.3 million that year, easily the most credit activity the Bank had seen since 1921. Interest rates moved up rapidly between February and July, as the discount rate was raised from 3.5 percent to 5 percent, and rates on commercial loans went as high as 6 percent. Rediscounts continued to rise in 1929.

Reining in stock speculation
Concern spread in 1929 about bank lending to stock speculators. A rush among investors to capitalize on rising stock prices was driving up interest rates and making it difficult to stop credit from flowing to Wall Street. The Board in Washington wanted member banks to restrict their lending to local businesses and not “export” money to New York, especially if they were rediscounting with the Fed. Even early in the year, the Fed wanted to avoid financing the stock speculation of 1929.

Chairman Oscar Newton, the Mississippi banker who had succeeded Joseph McCord in 1925, noted that Sixth District member bank loans to New York brokers and dealers dropped from $28 million to $22.5 million between October and December 1928. The Atlanta Bank evidently succeeded in persuading member banks to stop such lending because Black was able to report in August 1929 that only two member banks that were borrowing from the Fed were lending on call in New York, and then only a total of $334,000.

Jitters in Florida

As early as May of that year, Black was urging caution in extending credit to member banks and sounding rather unlike Wellborn: “We are giving close study to credit conditions in our territory and are endeavoring to protect the bank in all lendings to member banks. . . . In the case of any bank in a weakened or extended condition, we are protecting our bank by the requirement of additional collateral. In the case of some banks we are declining any rediscounts because of the impaired capital of such banks. . . .”

Florida remained particularly touchy. The failure in July of a bank in Tampa set off bank runs in Gainesville and St. Augustine and led the banks in St. Petersburg and Orlando to invoke their right to require 60-day notice for withdrawals from savings accounts. Black and his deputy rushed to the Tampa area with $6 million in cash to turn back runs on two member banks there in October.

Such activity would become all too common before the Depression hit bottom, but in 1929 it was novel and experimental. About the efforts to slow savings withdrawals, Black noted, “We are watching this drastic measure with these banks in an effort to learn whether such a step can be successful with a commercial bank.” There certainly was concern about what Black called “general unrest among the depositors in a large number of Florida banks,” but there was no reason to see the problem as anything other than local and temporary. After all, the trouble in Florida stemmed from the appearance that spring of the Mediterranean fruit fly. To fight the fruit fly, the Florida Citrus Exchange had slapped an embargo on fruit and vegetable shipments, which left many growers unable to repay loans.


Since helicopters didn't exist nor did computers, Black had to use the trains, He couldn't call on the phone and tell them to manufacture money on the spot by adding a bunch of numbers to their bottom line. Back then, the Fed was still paranoid about money being seen as non-existent. They had to show some paper, at least. And handle that with greatest care. The alterations they made a year earlier to the standard dollar bills was to eliminate much of the text on the bills that talked about the various laws and regulations concerning the manufacturing and handling of paper fiat bills. It was eliminated, in other words. And people noticed this. Suspicious people would look at the smaller, newer bills and think, 'Hell, there isn't any of that stuff about Section 23A by the OCC on this bill.' Heh. Actually, they did notice. And this was a worry for the Fed. When money began to vanish as all the loans to all the speculators vanished in a tsunami of bankruptcies beginning in the Fall of 1929, people clung to the paper bills since at least, they were REAL. Unlike loans that were totted up on some ledger. And they bought more and more goods as deflation spread its dark negative energy wings.

Here is a Wall Street Journal debate back when rising interest rates broke the crazy Dot Com Bubble markets:


April 10, 2000: Margin Calls: Should the Fed Step In?
Yes, It may Avert Disaster

By Robert Shiller

The stock market is in its most dramatic boom ever. Despite last week's declines in tech stocks, the Standard & Poor's composite price-earnings ratio (real prices divided by the 120-month average of trailing real earnings) stands at 46. Until the present boom, the highest it had ever been (the data go back to 1871) was 33, in September 1929 -- the month before the crash. The dividend yield on the Standard & Poor's index stands at 1.1%, the lowest ever. The previous low was 2.6% in January 1973, just before the 1973-74 crash. Margin debt is soaring; it has increased 87% in the past year.

In the midst of this record-breaking boom, the Federal Reserve Board remains silent about the speculative level of the market, neither commenting that the market is too high nor using its powers over margin requirements to dampen the markets. This inaction is unfortunate. Distortions of saving and investing behavior, driven by the public's illusion of stock-market wealth, are rampant, and the risks of economic dislocations and massive wealth redistribution are very serious if the market continues to soar and then crashes.

There are, of course, some who assert that the market is rationally high because of new technology that makes the outlook for future corporate profits very bright. But people have hailed "new eras" before -- in 1901, they cited the formation of giant corporations that would supposedly produce economics of scale; in 1929, it was electrification, chain stores and the spread of automobiles; in 1973, advancing productivity and technology. All of these "new eras" turned out not to be so revolutionary after all, and odds are today's market won't be any different.


This economist was begging Greenspan to intervene and stop the NASDAQ collapse. He is correct to note that margin debt was taking off. Once upon a time, our regulators forbade such margins because they correctly saw that it was going to cause another bubble/bust like the Great Depression. But discontent with this severity meant it was loosened greatly to the vanishing point and of course, instantly, we got a massive margin-fed bubble. Once the game of using debts to place bets at the Wall Street casino took off, it doubled every year, a classic sign of a bubble. Let's look at Mr. Bartlett's side of this debate:


April 10, 2000: No, Meddling Makes Things Worse

By Bruce Bartlett
Federal Reserve Chairman Alan Greenspan has expressed concern about the level of margin debt, which has rocketed upward since October. In February it hit $265.2 billion, up 45% in just four months. Anecdotal evidence suggests that much of this increase came from increased borrowing through online brokers and was channeled into the high-flying Nasdaq. As long as that market kept rising, it was a win-win situation for everyone. Investors achieved higher gains by leveraging their investments, while online brokers made much of their profit from margin loans.

Congress in 1934 gave the Fed power to control initial margin requirements, in the belief that margin calls had been largely responsible for making the 1929 stock market crash so severe. At that time margin debt equaled 30% of the market's value. Between 1934 and 1974 the margin requirement was changed 22 times. But for the past 26 years it has been fixed at 50%, meaning that investors may borrow no more than half the purchase price of equities directly front their broker. (The margin requirement has been as high as 100%, meaning no margin debt at all was allowed.}


This guy wanted no controls or requirements. As did many of the money bags handing out goodies to politicians. When the Dot Com bubble burst, they all went howling to Greenspan to save them. And Greenspan also wanted to reward Bush, a family buddy. So he waited in the wings until Bush took the oaf [sic] of office and then began to shower money down upon their heads. The interest rates on loans collapsed. Taxes on earnings in stocks nearly vanished. Money flowed into the system at a crazy rate. 9/11 simply was viewed as a great excuse to extend and deepen this rescue operation. Astute people such as a number of us online bloggers, warned that this would be very dangerous and would spawn many bubbles that would grow out of control.


As usual, we were right. So let's go back to today's news:


Federal Reserve staff move into offices of investment banks to monitor activities
The US Federal Reserve has sent staff into some of Wall Street’s biggest firms and its New York branch is gathering evidence on key traders’ activities as America’s central bank raises its scrutiny of risk to an unprecedented level.

Fed staff have set up shop in Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns to monitor their financial condition just days after Henry Paulson, the US Treasury Secretary, proposed that the Fed become the financial industry’s “risk czar”.

This is the first time in more than a decade that the Fed has put staff in securities firms and is a response, in part, to its decision to extend to investment banks the “discount window” of cheap loans traditionally offered only to the commercial banks. The Fed argues that if it is to act as lender of last resort to the securities firms, it should keep a closer eye on their activities.


HAHAHA. The simple action of dropping interest rates to Bank of Japan levels isn't enough! Now, the Fed itself is lending not to banks but directly...to the speculators!!!! AAARRRGHHH. This is pure, total insanity. They are parking agents in brokerages to insure what? That not ALL this loot is flowing directly into the greedy mouths of the pirates? No, it will take a pious round about route! HAHAHA. Gads! I think I will go mad. Grrrr. Note how pirate Henry Gollum Sachs Paulson suggests the Fed be a 'risk czar.' HAHAHA. Like in, 'YOU move OUR risks to the American People!'


As I keep saying, all these 'rescues' are not for you or me. They are to keep a flotilla of pirate ships afloat. I just learned that Hill and Bill Clinton used offshore pirate coves to enrich themselves and evade taxes. We had so many pirates running for President this year, we shouldn't have given them all American flag pins, we should have demanded they wear eye patches and a dead parrot!-


And how is Bernanke going to 'keep an eye' on these desperadoes? Eh? Note, he doesn't say. Do the agents sit in on phone calls? HAHAHA. HAHAHA. Laughing to death hurts. Are they sitting the meetings like vultures, Watchers, sitting there, behind the chairman, taking notes and glaring? HAHAHA. Right. I can picture that.


Nope. Otherwise, they would hire me. I could look into the books. I love doing that. And poke in the desks and play 'spy for the CIA' as I did as a child when I used to practice the dark art of becoming invisible and walking through walls. Actually, if a child is silent, it is easy to be invisible to adults. Except if you stare at them like a vulture. Then they jerk and look over. Heh.


Here is a recent speech from Mishkin of the Fed.


Governor Frederic S. Mishkin
At the Princeton University Center for Economic Policy Studies Dinner, New York, New York
Starting in the 1970s, the economics profession began to recognize that the evolution of economic activity and inflation--and hence the design of optimal monetary policy--depends crucially on how households, firms, and financial market investors form their expectations regarding the future course of policy.3 This recognition of the central role of expectations in macroeconomic outcomes led to the discovery of the time-inconsistency problem, a concept that sounds highfalutin but is actually quite intuitive.4

This problem arises whenever the possibility of short-run gains creates a temptation to renege on an existing plan, even though following that plan would produce a better outcome over the longer run. In essence, if a good long-run plan will not be followed consistently over time because the short-run gains of deviating from the plan are too tempting, then that plan is said to be time-inconsistent. In such a setting, the time-consistent policy is to reoptimize every period, whereas the preferable alternative would be to establish a firm commitment to the optimal long-run plan.

To take a common example that illustrates the time-inconsistency problem, someone may make a New Year’s resolution about starting a diet. At some point thereafter, however, it becomes hard to resist having a little bit of Rocky Road ice cream, and then a bit more, and pretty soon the weight begins to pile back on.

The time-inconsistency problem arises in the context of monetary policy, because there is a temptation to give a short-run boost to economic output and employment by pursuing a course of policy that is more expansionary than firms or workers had initially expected.5 Nevertheless, if the economy is already at full employment, then this boost is merely transitory: As economic activity rises above its sustainable level, wages and prices begin to rise, and the private sector's inflation expectations start to pick up. Of course, the central bank must eventually remove the policy stimulus to avoid a continuous upward spiral of inflation. At that point, economic activity drops back to a sustainable level. However, inflation settles in at a permanently higher rate because prospects of future monetary expansions become embedded in expectations, and hence in wage and price adjustments, and the higher average inflation rate generates undesirable economic distortions.6 Thus, failing to address the time-inconsistency problem poses the risk of ending up with a higher average inflation rate, with detrimental long-run consequences for economic efficiency and the general standard of living.

As my mother often told me when I was growing up, "The road to hell is paved with good intentions." Similarly, discretionary monetary policy, even though well intended, can lead to poor economic outcomes.


Well, he comes close to talking about the Outer Darkness. The easy road suddenly turns and becomes extremely painful, you know. This 'time-inconsistency problem' is funny as hell. Always, the politicians want the easy road. They want money to flow. They hate time which isn't on their side. They are anxious about the next election! They need lots of pirate loot. Note how this foolish Fed man worries that wages will rise. Since when? The unions are dead. Wages have been FALLING and falling for many years even with the fake inflation statistics used by the fake Federal Reservists.


The Fed has no 'long range plans.' If they did, they wouldn't be making one bubble after another or making the Super Bubble, would they? They would talk about the budget deficit AND the trade deficit AND the dollar's woes all the time, not nearly never. They NEVER connect ANY of the things we are doing wrong when discussing ANY plans for ANY future! They just refuse to do this. This is why they can't talk about inflation and how cheap prices is directly connected to free trade, not the Fed's interest rates. And how this is connected to the collapse in wages, not inflation in wages. Wages are falling through the floor in nearly all previously unionized industries. The dire effects are not yet felt due to the remaining union members who are rapidly being bought out. Their economic distress still isn't huge only because they are getting huge payouts. But in 10 years, there will be no workers in the US except at the lowest possible wages.


THAT is what is the cause of Great Depressions: workers can't buy anything and money is dear. And everyone is denied loans because of low wages, not the reverse. And this is our future, alas, thanks to our government working with PIRATES to destroy the American Dream. Thanks a trillion, guys.

Carter endorses Obama --- Great for McCain

He didn't pander to fantasy like the raygun, he demanded morality in US foriegn policy, what a creep, he made a real asshole of himself building poor people houses on a cooperative basis with Habitat for humanity and stooped to talking about the downside of Israeli policy just because he sponsored the Camp David Accords. What a hide! He promoted energy efficiency and lifting price controls on domestic oil when he shoulda been planning world domination.

He collected all these worthless awards:

LL.D. (honoris causa) Morehouse College, 1972; Morris Brown College, 1972; University of Notre Dame, 1977; Emory University, 1979; Kwansei Gakuin University, 1981; Georgia Southwestern College, 1981; New York Law School, 1985; Bates College, 1985; Centre College, 1987; Creighton University, 1987; University of Pennsylvania, 1998
D.E. (honoris causa) Georgia Institute of Technology, 1979
Ph.D (honoris causa) Weizmann Institute of Science, 1980; Tel Aviv University, 1983; Haifa University, 1987
D.H.L. (honoris causa) Central Connecticut State University, 1985; Trinity College, 1998
Doctor (honoris causa) G.O.C. University, 1995
Silver Buffalo Award, Boy Scouts of America, 1978
Gold medal, International Institute for Human Rights, 1979
International Mediation medal, American Arbitration Association, 1979
Martin Luther King, Jr. Nonviolent Peace Prize, 1979
International Human Rights Award, Synagogue Council of America, 1979
Conservationist of the Year Award, 1979
Harry S. Truman Public Service Award, 1981
Ansel Adams Conservation Award, Wilderness Society, 1982
Human Rights Award, International League for Human Rights, 1983
World Methodist Peace Award, 1985
Albert Schweitzer Prize for Humanitarianism, 1987
Edwin C. Whitehead Award, National Center for Health Education, 1989
Jefferson Award, American Institute of Public Service, 1990
Liberty Medal, National Constitution Center, 1990
Spirit of America Award, National Council for the Social Studies, 1990
Physicians for Social Responsibility Award, 1991 Aristotle Prize, Alexander S. Onassis Foundation, 1991
W. Averell Harriman Democracy Award, National Democratic Institute for International Affairs, 1992
Spark M. Matsunaga Medal of Peace, US Institute of Peace, 1993
Humanitarian Award, CARE International, 1993
Conservationist of the Year Medal, National Wildlife Federation, 1993
Rotary Award for World Understanding, 1994
J. William Fulbright Prize for International Understanding, 1994
National Civil Rights Museum Freedom Award, 1994
UNESCO Félix Houphouët-Boigny Peace Prize, 1994
Great Cross of the Order of Vasco Nunéz de Balboa, Panama, 1995
Bishop John T. Walker Distinguished Humanitarian Award, Africare, 1996
Humanitarian of the Year, GQ Awards, 1996
Kiwanis International Humanitarian Award, 1996
Indira Gandhi Prize for Peace, Disarmament and Development, 1997
Jimmy and Rosalynn Carter Awards for Humanitarian Contributions to the Health of Humankind, National Foundation for Infectious Diseases, 1997
United Nations Human Rights Award, 1998
The Hoover Medal, 1998
International Child Survival Award, UNICEF Atlanta, 1999
William Penn Mott, Jr., Park Leadership Award, National Parks Conservation Association, 2000
Grammy Award for Best Spoken Word Album, National Academy of Recording Arts and Sciences, 2007
Berkeley Medal, University of California campus, May 2, 2007
Freedom of the City of Newcastle upon Tyne, England[17] awarded on the occasion of his visit to the city (6 May 1977)[18]
Honorary Fellow of Royal College of Surgeons in Ireland (conferred on the 18 June 2007)
Honorary Fellow of Mansfield College, Oxford (conferred on the 21 June 2007)

And then to prove his complete ignorance, didn't go off to work for a hedge fund and wasted his time writing 27 books.

what a looser, Obama is doomed getting his endorsment, how can that compare with the maestro's endorsement of McCain, who recently decided to bone up on economics 101 by starting with the autobiography of that same Central Banker, such mutual love is indomitable. Greenspan, after all was voted central banker of the year by the milky way bankers association.

McCain is a shoe in, for sure.

RE: Raygun: bigger deficit than all before combined...... PulpLogger NEW 4/7/2008 3:26:18 AM
...and started media ownership conglomeration.

RE: Yes that was Brilliant aussiebear NEW 4/7/2008 3:45:43 AM
Reagan stressed tested budget deficits and proved they don't matter, giving endless scope for the wonders to come, who could have a problem with that. I'm sure McCain will draw on that legacy and ensure the triumph of US hegemony for the next thousand years. If anyone mentions anything unpleasant he nuke em while spittle and invective fill the airways, McCain will let everyone know who is boss. hooray! I'm so glad you guys have such a sterling candidate to do battle with that looser Obama who only has been endorsed by self interested types like Carter, Volker these nonentities:

National political figures
Jeffrey Bader, former U.S. Ambassador to Namibia and Fmr. Assistant US Trade Representative for Asia[92]
Henri Barkey, former member of U.S. Department of State Policy Planning and Professor of Lehigh University[92]
David Birenbaum, former U.S. Ambassador to the U.N. for Management and Reform[92]
Esther Brimmer, former member of U.S. Department of State Policy Planning[92]
Art Brown, former National Intelligence Officer for East Asia and Chief of CIA's East Asian Operations Division[92]
Mark Brzezinski, former Director of European Affairs of National Security Council[92]
Joseph Cirincione, Vice President for National Security and International Policy at the Center for American Progress[92]
Bonnie Cohen, former Undersecretary of State for Management[92]
Ivo H. Daalder, former Director, European Affairs, National Security Council[92]
Alice Dear, former U.S. Executive Director of African Development Bank[92]
Michael Froman, Chief of Staff and Deputy Assistant Secretary at the Department of Treasury and National Security Council Staff Member[92]
Tony Gambino, former Mission Director, USAID, Democratic Republic of the Congo[92]
Tobi Gati, former Assistant Secretary of State for Intelligence and Research; Senior Director for Russia, Ukraine and Eurasian Affairs, National Security Council[92]
Robert S. Gelbard, former Presidential Envoy for the Balkans; Assistant Secretary of State for International Narcotics and Law Enforcement; Ambassador to Indonesia; and Ambassador to Bolivia[92]
John J. Gibbons, former federal appeals court judge[137]
Matthew Goodman, former Director for Asian Affairs, National Security Council[92]
Philip Gordon, former Director, European Affairs, National Security Council[92]
Scott Gould, former Assistant Secretary of Commerce for Management[92]
Scott Gration, former Director for Strategy, Policy and Planning, U.S. European Command[92]
John Holum, former Director of ACDA and Undersecretary State for Arms Control and International Security[92]
Vicki Huddleston, former Deputy Assistant Secretary of State and Ambassador to Mali and Madagascar, Chief of Mission to Cuba and Ethiopia[92]
Paul Igasaki, fmr. Vice Chair and Commissioner of the U.S. Equal Employment Opportunity Commission[129]
David Lipton, former Under Secretary of Treasury for International Affairs[92]
Frank Loy, former Undersecretary of State for Global Affairs[92]
Donald McHenry, former United States Ambassador to the United Nations[92]
Norman Mineta, former U.S. Rep. (D-CA), mayor of San Jose, United States Secretary of Transportation and United States Secretary of Commerce[87]
Newton N. Minow, former Chairman of the Federal Communications Commission[138]
Alfred H. Moses, former United States Ambassador to Romania[92]
Nick Rey, former United States Ambassador to Poland[92]
Witney Schneidman, former Deputy Assistant Secretary of State for African Affairs[92]
Dan Shapiro, former Director, National Security Council[92]
Mona Sutphen, former Special Assistant to the National Security Advisor[92]
Jim Vermillion, former Mission Director, USAID, Nicaragua[92]
Paul Volcker, former Chairman of the Federal Reserve[139]
Patricia Wald, former Chief Judge for the United States Court of Appeals for the District of Columbia Circuit[140]

McCain must win.

RE: Yes that was Brilliant TheWOlf NEW 4/7/2008 5:00:21 AM
Carter, last honest US president.

Ridiculed for preaching conservation by fredeed type sheeple.

Kevin McKern

Retail rumour from US Big Retail

I have worked retail for several years. I am in mid-level store management right now. I don't want to say exactly what company I work for, but it is in the top 3 largest. I work at a store in a major city.
There have been some crazy things going on recently. The changes that we are being asked me make per corporates direction makes me think that the people at the top think something VERY big is going to be happening to the economy soon. I don't think the media or the government is giving us the full details of what is actually going on, but I think the CEO's and others at the top are fully aware and are making plans.
For one thing I check sales every day. At the store level we usually compare what sales are today compared to sales for the same day, week, month, and year last year. Sales at our store, our district, and company wide have taken a HUGE drop compared to the same time last year. When I looked at them today my store and every store in our district was down over 30% for the same time last year. The company as a whole is also in the negative for the same time last year. (but not as much, but it gets lower every day).
Honestly at my store I could say that we have done everything in our power at the store level to increase sales, but it just isn't happening. Departments like electronics are literally almost completely empty the entire day. The only departments that actually are getting sales are consumables, health, and chemicals. Just walking the store these are the only departments I ever even see people in ever since christmas ended.
Sometimes I will cover the service desk so a team member can take a lunch/break. When I do I sometimes process peoples credit card payments which lets me see how much they owe and how much they are paying. There are tons of people with THOUSANDS of dollars on their card only making minimum payments. These balances are usually at interest rates over 20%. Then there are people bringing in checks for the full amount, but they are BALANCE TRANSFER checks.... they are just moving it to other cards.
But that isn't what really worries me. What worries me is the changes corporate is making. I have worked here for years, and in the last 4 months I have seen more changes than all that time combined.
We are getting emails all the time from corporate telling us to reduce costs anyway we can. We recently got one telling us to start pulling fluorescent light bulbs, that we don't need all of them in order to provide illumination.... and those bulbs barely use any power.
Corporate has instructed all stores to lower the AC. It has been lowered enough to the point we get complaints from team members and customers.
Corporate has sent us emails telling us to make sure we fill bags to the absolute possibly maximum. They are not even sending us large bags anymore to some stores.
Corporate has recently eliminated (what I would estimate based on how many positions we lost vs the thousands of stores we have) several thousand management positions at *all levels* of management at stores.
This NEVER APPEARED ON THE NEWS! I suspect because it was not a traditional lay off. What corporate basically told us was "Your position is eliminated, but you are not laid off. Once you quit/get your self fired/whatever your position just won't be filled again" So we are basically slowly losing jobs as people company wide quit, get fired, etc.... but the jobs are never filled again. So basically we are cutting jobs, but the way it is being done is preventing it from getting reported in the media or tracked by the government as job losses.
No non-management positions have been eliminated, instead hours have been cut for them.
Raises this year have also been lowered in amount compared to in previous years. They have been lowered enough that corporate is keeping it a secret until we have to tell team members.
The company is also buying less. Our distribution centers are sending us, for example, 3 of a certain item when normally we would get 50.... and they don't send us more until those sell. I have not been able to keep departments full of product despite contacting corporate and asking for more because we are being sent such small amounts of product.
We have had trucks cancelled all the time now simply because we sold so little that they can't justify sending so few items to a store.
People are simply NOT buying things. They are not buying anything that isn't a consumable basically. I asked our pricing team to do a store mark down and lower the price on almost all of our TVs by 30-50%. We still have not sold a single one in over a week after! Our TVs were not priced very high to begin with.
Our pricing team is also being sent price increase changes from corporate in huge numbers. I am talking entire aisles of product for them to raise the prices on. The other day we got a STACK of pages of product to increase prices on. We thought it HAD to be a mistake because that has simply never happened before. We have emailed corporate asking if it was a mistake... we have not heard back yet, but I suspect it was not.
Many stores are now changing to non-overnight stores. They will be closed overnight and ALL power except in office areas will be cut overnight to save on costs.
There have even been changes to job descriptions recently. Corporate is basically giving job dutys to people at lower levels which used to be reserved for people at higher levels. Even some management tasks are being given to people in non-management positions. Basically they are paying people less to do what people used to get paid more to do.
Things are NOT looking pretty right now. I can tell you from a consumer spending point of view something is definantely going on.... All these changes tell me the people at the top are trying to brace for something big that is going to be happening to the economy.

Where is the Money? Let’s Get it Back!

Summary
Media revelations are unfolding daily regarding losses in the U.S. mortgage market. These losses are not a new phenomenon. Rather, they represent the latest phase in an ongoing tradition of institutionalized fraud in the U.S. mortgage system and the federal credit system that directly and indirectly guarantees it. An understanding of this history can mobilize public support for reforms that address root causes by reversing the profitability enjoyed by those responsible.

Where is the Money? Let’s Get it Back!
by Catherine Austin Fitts

Large banks now claim recent losses in the US mortgage market totaling over $100 billion. While amounting to only a small percentage of banking profits over the last decade, this is still a lot of money. It may pale by comparison, however, to the losses the banks’ customers, the communities drained by predatory lending and investment practices and the citizens who stand behind the federal credit may incur.

Municipalities from Australia to Montana are reporting losses on U.S. mortgage and structured investments sold to them by the banks. (1) (2) Just as small towns in the Norwegian Arctic Circle reported losses of $167 million on investments packaged by Citicorp, Citicorp’s departing CEO exited his job with a $100 million compensation package.


The City of Baltimore is suing Wells Fargo. The City of Cleveland is suing them as well, as part of the city’s suit against 21 Wall Street banks, a veritable who’s who of U.S. mortgage lending and securities, including JP Morgan Chase, Citicorp and Goldman Sachs, arguably the most prestigious member banks of the New York Federal Reserve Bank, the depository for the U.S. government.

According to the Baltimore lawsuit, nearly 450,000 properties were in some stage of foreclosure during the third quarter of 2007. The Baltimore lawsuit cites a recent study of Chicago communities in which it was estimated that each foreclosure is responsible for an average decline of approximately 1% in value of each single-family home within a quarter of a mile.

While the financial community holds its breath waiting for pension fund annual reports to disclose what may be the most significant losses, the stock market continues to drop, evaporating the wealth of millions of investors in America and around the world.

The state pension fund lawsuits over stock portfolio losses have begun. The Ohio Public Employees Retirement System is suing Freddie Mac, and Norfolk County Retirement and the New York City and State Pension Funds are suing Countrywide. Ultimately, pension stock portfolio losses will be insignificant compared to the fixed income portfolio losses expected to wipe out billions in retirement savings.

The last time the U.S. media exposed mortgage fraud of this magnitude was in 1989. In April of that year, I was appointed Assistant Secretary of Housing/FHA Commissioner at the U.S. Department of Housing and Urban Development (HUD) only to find that the FHA single family mortgage insurance fund, required by law to be financially sustainable, was losing $11 MM a day and that the combined FHA mortgage insurance funds had lost $2 billion in the Texas region alone over the prior year. The mortgage fraud at HUD, one of the largest issuers of mortgage securities in the world, was so bad that Secretary of Treasury Nicholas Brady privately tried to dissuade me from joining the agency, saying “You can’t go to HUD — HUD is a sewer.”

The HUD losses were a drop in the bucket compared to the losses on the savings and loan institutions, ultimately costing U.S. taxpayers an estimated $500 billion by the time the clean-up was through in the mid 90’s. This estimate did not include the subtle and more expensive inflation borne by ordinary citizens, resulting from allowing the large financial institutions to use the federal credit to borrow inexpensively in the short-term markets and reinvest in long-term U.S. Treasury and agency securities, helping some of them dig out of the losses and resulting in windfall profits to the industry across the board.

Policymakers encouraged those of us leading the last clean-up to fashion reforms such that mortgage fraud on this systemic scale “could never happen again.” And so significant financial reforms were legislated and instituted.

First and foremost, were laws requiring federal agencies and credit programs to produce audited financial statements. As a significant amount of the US mortgage market enjoys direct or indirect support of federal credit programs, such an audit requirement should ensure that any problems in the housing finance system are illuminated early on. Part of this reform, so-called “paygo,” (The equivalent of “loan loss reserves” required of private lenders) would make it prohibitively expensive for Congress to extend federal credit to support a new bubble.

Second, were administrative steps to ensure transparency of federal mortgage credit and spending by county and zip code. The most effective internal control is knowledgeable citizens, watching the use of government resources on their home turf. With easy access to data about government resources expended locally, communities could assess the performance of their tax-supported housing and mortgage resources contiguous to the areas in which they live, work and vote for political representation. Without access to such “place based” financial information, it is difficult to hold our legislative representatives accountable.

What happened? Beginning in 1995, numerous government agencies and the US Treasury began annual announcements declining to publish audited financial statements. In the process of explaining itself, HUD announced “undocumentable adjustments” to balance its books in 1998 and 1999 of $17 billion and $59 billion, declining to give a total for the undocumentable adjustments in 2000. In the process, the Office of Management and Budget solved the loan loss reserve problem by cooking the assumptions used to estimate costs, thus permitting issuance of greater amounts of mortgage credit with lax terms and conditions. Things got so bad that the chief of staff to the chair of the Senate Appropriations Subcommittee in 2000 confessed to me “HUD is being run as a criminal enterprise.” The myths that there was a budget surplus during the Clinton Administration or that the housing bubble began after the Clintons left office represent the partisan fantasies of Americans desperately searching for ways to avoid facing the real risks before us.

Even more money was missing at the Department of Defense (DOD). On September 10, 2001, Secretary of Defense Donald Rumsfeld conceded, “According to some estimates, we cannot track $2.3 trillion in transactions.”




By 2003, more than $4 trillion of “undocumentable adjustments” had been reported at HUD, DOD and NASA alone. Since then the federal government fails to account for additional billions each year as the U.S. commitment in Iraq leads to unprecedented spending with third party contractors, many under “no bid” contracts and without meaningful contracting supervision. Finally, after years of manipulation in the precious metals markets, serious concerns are growing about the status of the US gold stores. Has our gold gone missing as well?

In the 2007 Financial Report, the U.S. Comptroller General stated “Certain material weaknesses in financial reporting and other limitations on the scope of our work resulted in conditions that, for the 11th consecutive year, prevented us from expressing an opinion on the financial statements…”

Meantime, efforts to bring local transparency to government mortgage programs and credit have been stopped, destroyed or reduced to ineffective window dressing. (See articles: Where is the Collateral? and So, Where is the Collateral?.) The average American has little understanding of the government resources and credit programs around them.

So our earlier reforms failed to prevent billions in subsequent mortgage fraud losses and the disappearance of trillions from US government accounts. Why? What have we learned from this failure, which would suggest lasting reforms?

If your public company were operating outside its bylaws and U.S. Securities and Exchange Commission regulations requiring audited financial statements, at some point your bank would refuse to effect your banking transactions and stop selling your securities to their customers. This means if $4 trillion is missing from the U.S. government, the federal depository and its member banks are complicit, if not responsible.

We don’t need new laws for each new crisis. We need enforcement of existing laws. What we also don’t need are bank depositories and government payment and accounting contractors who will proceed with trillions of banking transactions and government securities sales while basic provisions of the U.S. constitution and laws governing federal financial management are blatantly ignored.

In 1989, we failed to identify what money, credit and assets had been stolen and to get them back. Billions of dollars in profits remained in the pockets of the conspirators and their co-conspirators - the investors, strategic partners and offshore backers to whom they funneled it. Rather than hold people and institutions accountable and achieve restitution, we plowed additional back door profits into the financial institutions and allowed them to continue in their role as member banks and shareholders of the New York Federal Reserve Bank, depository to the US Treasury.

These institutions continued to provide a wide number of important services to federal, state and local government and pension funds, ensuring their access to extraordinary amounts of revenues, assets and critical inside market information. We continued to accord them, their investors and the politicians they funded the prestige and power traditionally reserved for a society’s most trusted stewards and fiduciaries. By so doing, we legitimized and institutionalized mortgage and financial fraudsters on a global scale. (1) (2) (3)

Trillions of dollars are missing. Where did it go? Who has it? Let’s act on what we learned the last time around – “Crime that pays is crime that stays.” This time, let’s ask and answer the right question: “Where is the money and how do we get it back?”

Fear of a Black Swan

Risk guru Nassim Taleb talks about why Wall Street fails to anticipate disaster.
By Eric Gelman, assistant managing editor
(Fortune Magazine) --

In two bestselling books, "Fooled by Randomness" and "The Black Swan," Nassim Nicholas Taleb has explored the ways people misunderstand randomness and risk. At the heart of his thinking is the idea of a "Black Swan" - an unlikely but not impossible catastrophe that no one ever seems to plan for. In an e-mail and telephone exchange with Fortune's Eric Gelman that began with Taleb in the Yucatán for the equinox, the New York City-based former trader turned scholar and essayist expounds on the role of Black Swans in the current market crisis.

What is a Black Swan?

What I call a Black Swan is a surprise event - like the discovery of the black bird in Australia, which was unpredictable because swans in the Old World were all white. But unlike the bird, my Black Swan carries large consequences.

There are two types of businesses: those that are exposed to Black Swans and those that are relatively insulated from them - not because Black Swans cannot occur, but because their impact is not going to be monstrous. Your dentist's income will not disappear on a single day: No single event will carry big consequences for her. But trading profits can all be lost by a single transaction. So some businesses are insulated, some (like technology) are exposed to positive Black Swans, and others are exposed to negative ones.

Most people seem to have been caught off-guard by the subprime crisis, yet such an event was not only predictable but also inevitable. It was a Black Swan, yes?

The Black Swan is a matter of perspective. A turkey is fed for 1,000 days - every day lulling it more and more into the feeling that the human feeders are acting in its best interest. Except that on the 1,001st day, the butcher shows up and there is a surprise. The surprise is for the turkey, not the butcher. Anyone who knows anything about the history of banking (or remembers the 1982 Latin American debt crisis or the 1990s savings and loan collapse) will tell you that the subprime crisis was so bound to happen. Banks are exposed to such blowups. Bankers have been the turkey, historically.

So I call these crises "gray swans." I've been telling anyone willing to listen that banks have a tendency to sit on time bombs while convincing themselves that they are conservative and nonvolatile.

I gather you don't have a lot of respect for the effectiveness of Wall Street's "risk management."

It is the "science" of risk management that effectively turned everyone involved into a turkey. If the Food and Drug Administration monitored the business of risk management as rigorously as it monitored drugs, many of these "scientists" would be arrested for endangering us. We replaced so much experience and common sense with "models" that work worse than astrology, because they assume that the Black Swan does not exist.

Trying to model something that escapes modelization is the heart of the problem. We like models because they do not require experience and can be taught by a 33-year-old assistant professor. Sometimes you need to say, "No model is better than a faulty model" - like no medicine is better than the advice of an unqualified doctor, and no drug is better than any drug.

The idea that catastrophe can strike without warning does not seem particularly hard to understand. Why doesn't Wall Street ever seem to allow for that possibility? And why doesn't it learn from past catastrophes?

Let me blame business schools and the financial economics establishment - they have a vested interest in promoting models and devaluing common sense.

I worked on Wall Street for close to two decades in trading and risk management of derivatives. I noticed that while portfolio models got worse and worse in tracking reality, their use kept increasing as if nothing was happening. Why? Because in the past 15 years business schools accelerated their teaching of portfolio theory as a replacement for our experiences. It looks like science, and they have been brainwashing more than 100,000 students a year. There is no way my experiences can be transmitted to the next generation because of these schools. We've had fiascoes in finance that they need to neglect because they contradict their models. The problem may also be the Nobel in economics that gave a stamp to these junky theories. Someone needs to make the Nobel committee account for this, for the damage to society - and I hope to do so.

Banks thought they were hedging their bets in the mortgage market. Clearly they were wrong. Would there have been a way to participate in the mortgage bond market in a prudent way?

Of course, in a less leveraged manner. But greed pushes bankers to take the maximum amount of "hidden risks" - those risks that do not show on a regular basis because the models miss it, but end up causing blowups. Banking is a very treacherous business because you don't realize it is risky until it is too late. It is like calm waters that deliver huge storms.

You can tell that there will be another blow-up, another Black Swan, but you can't tell me where it will occur - or can you?

I don't know where it may occur. But if you look at balance sheets and contingent liabilities, it is easy to know who may be exposed to negative ones and who may be exposed to positive ones. Furthermore, some banks and hedge funds are more resistant than others to the Black Swan - we need to discriminate between them.

Is there any way to prevent drastic shocks to the financial system?

Occasional blowups are good if they are small and recurrent. When you live in Manhattan, you notice the quality of the food is high because restaurants are rapidly punished for their mistakes. But unfortunately we have been experiencing the opposite: rare but deep and systemic blowups.

Is there something fundamentally wrong with the structure of the U.S. financial system? What can be done to fix it?

In the past, the financial world had a very diversified ecology: banks going bust on a steady basis. They were not all homogeneous.

Today the entire banking system is dominated by a few monster banks, and almost all have the same exposures. So the system became less and less volatile while becoming riskier and riskier. So we moved from the more resilient ecology to a more concentrated architecture. I used to say, "You trade with a bank, you end up trading with J.P. Morgan (JPM, Fortune 500)." Well, it turned out to be true with the Bear Stearns (BSC, Fortune 500) rescue.

Did your personal portfolio benefit or suffer from the subprime crisis?

I prefer not to answer that, as I am trying to avoid talking about my nonintellectual activities.

Soros Sees Additional Market Declines After Temporary Reprieve

By Katherine Burton

April 3 (Bloomberg) -- Billionaire George Soros called the current financial crisis the worst since the Great Depression and said markets will fall more this year after a brief rebound.

''We had a good bottom,'' Soros said yesterday in an interview in New York, referring to the rally in stocks and the dollar after JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. on March 17. ''This will probably not prove to be the final bottom,'' he said, adding the rebound may last six weeks to three months as the U.S. moves closer to a recession.

Last summer, worried about market disruptions that started with rising subprime-mortgage defaults, Soros, 77, returned to a more active role in managing the $17 billion Quantum Endowment Fund, whose profits pay for his philanthropic projects. Quantum returned an average of 30 percent a year before Soros started using outside managers in 2000 for much of his money.

He also decided to write a book, his 10th, ''The New Paradigm for Financial Markets'' (Public Affairs, 2008). Released today online, the book explains the causes of the current meltdown, a crisis he says has been in the making since 1980, and the trades he put in place this year to protect his wealth, much of it in Quantum.

Soros has bet on declines in the dollar, 10-year Treasuries and U.S. and European stocks. He expected foreign currencies to rise, as well as Chinese and Indian equities. The latter bet helped Quantum return 32 percent in 2007. Quantum's returns this year have ranged from up 3 percent to down 3 percent.

'Heightened Uncertainty'

The euro has climbed 7.5 percent against the dollar this year and the Japanese yen has gained 9.1 percent. These and other currencies may continue to strengthen, he said.

''There is an increasing unwillingness to hold dollars, though there's a lack of suitable alternatives,'' he said. ''It's a period of heightened uncertainty.''

Federal Reserve officials dropped their benchmark interest rate 2 percentage points this year to 2.25 percent, and Soros doesn't see that they can lower the rate much further, given the weak dollar.

''We are close to the limit,'' he said.

As for his wagers on developing markets, Soros hasn't abandoned his holdings in India, even with the 22 percent drop in the benchmark Indian index this year.

''The fundamentals remain good,'' he said. He is less certain about what will happen to Chinese H shares, which trade in Hong Kong.

Credit-Default Swaps

Credit default swaps -- a way to bet on the creditworthiness of a company -- may be the next crisis area because the market is unregulated, and it's impossible to know whether counterparties can meet their obligations in the event of a bond default. The market has a notional value of about $45 trillion -- or about half the total wealth of U.S. households.

Soros recommends the creation of an exchange with a sound capital structure and strict margin requirements, where current and future contracts could be traded.

The cause of the current troubles dates back to 1980, when U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher came to power, Soros said. It was during this time that borrowing ballooned and regulation of banks and financial markets became less stringent. These leaders, Soros said, believed that markets are self-correcting, meaning that if prices get out of whack, they will eventually revert to historical norms. Instead, this laissez-faire attitude created the current housing bubble, which in turn led to the seizing up of credit markets and the demise of Bear Stearns, Soros said.

To avoid a super-bubble in the future, Soros said banks must control their own borrowing. They must also curtail lending to clients such as hedge funds by demanding greater collateral and margin requirements on loans.

Asked if such moves would make it impossible to achieve returns like those of his pre-2000 days, Soros laughed.

''Since I'm designing these regulations, they would not hurt me,'' he said. ''We made direction bets but we haven't used leverage'' like the $25-to-$1 borrowing that brought down John Meriwether's Long-Term Capital Management LLC in 1998.